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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 001-13083

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

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

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

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

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

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

| |  | Title of each class           |  |  |  | Outstanding at November 6, 2001 |  | 
| |  | ----------------------------- |  |  |  | ------------------------------- |  | 
| |  | Common Stock, $0.01 par value |  |  |  | 63,766,101 shares               |  | 

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WellPoint Health Networks Inc.  Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2001  Table Of Contents

|           |         |                                                                                                        |                                                                                       | Page
|---------- | ------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ----
|PART I.    |         | FINANCIAL INFORMATION                                                                                  |                                                                                       |     
|           | ITEM 1. |                                                                                                        | Financial Statements                                                                  |     
|           |         | Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                             |                                                                                       | 1   
|           |         | Consolidated Income Statements for the Quarter and Nine Months Ended September 30, 2001 and 2000       |                                                                                       | 2   
|           |         | Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2001 |                                                                                       | 3   
|           |         | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000            |                                                                                       | 4   
|           |         | Notes to Consolidated Financial Statements                                                             |                                                                                       | 5   
|           | ITEM 2. |                                                                                                        | Management's Discussion and Analysis of Financial Condition and Results of Operations |     
|           | ITEM 3. |                                                                                                        | Quantitative and Qualitative Disclosures About Market Risk                            |     
|PART II.   |         | OTHER INFORMATION                                                                                      |                                                                                       |     
|           | ITEM 6. |                                                                                                        | Exhibits and Reports on Form 8-K                                                      |     
|SIGNATURES |         | 35                                                                                                    

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ITEM 1.Financial Statements

WellPoint Health Networks Inc.Consolidated Balance Sheets  (Unaudited)

|(In thousands, except share data)                |                                                                                                                            | September 30,
2001         |                                            | December 31,
2000 |          
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | ---------
|ASSETS                                           |                                                                                                                           
|Current Assets:                                  |                                                                                                                            |                            |                                            |                   |          
|                                                 | Cash and cash equivalents                                                                                                  |                            | $                                          | 530,376           |          
|                                                 | Investment securities, at market value                                                                                     |                            |                                            | 3,933,673         |          
|                                                 | Receivables, net                                                                                                           |                            |                                            | 983,154           |          
|                                                 | Deferred tax assets                                                                                                        |                            |                                            | 75,588            |          
|                                                 | Other current assets                                                                                                       |                            |                                            | 90,724            |          
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            | Total Current Assets       |                                            |                   | 5,613,515
|Property and equipment, net                      |                                                                                                                            |                            | 213,796                                    |                   |          
|Intangible assets, net                           |                                                                                                                            |                            | 437,347                                    |                   |          
|Goodwill, net                                    |                                                                                                                            |                            | 717,932                                    |                   |          
|Long-term investments, at market value           |                                                                                                                            |                            | 120,093                                    |                   |          
|Deferred tax assets                              |                                                                                                                            |                            | 19,298                                     |                   |          
|Other non-current assets                         |                                                                                                                            |                            | 100,957                                    |                   |          
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            | Total Assets               |                                            | $                 | 7,222,938
|                                                 |                                                                                                                            |                            |                                            |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY             |                                                                                                                           
|Current Liabilities:                             |                                                                                                                            |                            |                                            |                   |          
|                                                 | Medical claims payable                                                                                                     |                            | $                                          | 1,812,910         |          
|                                                 | Reserves for future policy benefits                                                                                        |                            |                                            | 66,100            |          
|                                                 | Unearned premiums                                                                                                          |                            |                                            | 273,034           |          
|                                                 | Accounts payable and accrued expenses                                                                                      |                            |                                            | 821,569           |          
|                                                 | Experience rated and other refunds                                                                                         |                            |                                            | 244,531           |          
|                                                 | Income taxes payable                                                                                                       |                            |                                            | 127,152           |          
|                                                 | Other current liabilities                                                                                                  |                            |                                            | 545,671           |          
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            | Total Current Liabilities  |                                            |                   | 3,890,967
|Accrued postretirement benefits                  |                                                                                                                            |                            | 87,794                                     |                   |          
|Reserves for future policy benefits, non-current |                                                                                                                            |                            | 227,151                                    |                   |          
|Long-term debt                                   |                                                                                                                            |                            | 887,151                                    |                   |          
|Other non-current liabilities                    |                                                                                                                            |                            | 106,445                                    |                   |          
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            | Total Liabilities          |                                            |                   | 5,199,508
|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, 71,390,971 issued at September 30, 2001 and December 31, 2000 |                            |                                            | 714               |          
|                                                 | Treasury stock, at cost, 7,754,468 and 8,566,399 shares at September 30, 2001 and December 31, 2000, respectively          |                            |                                            | (483,807          | )        
|                                                 | Additional paid-in capital                                                                                                 |                            |                                            | 996,365           |          
|                                                 | Retained earnings                                                                                                          |                            |                                            | 1,441,287         |          
|                                                 | Accumulated other comprehensive income                                                                                     |                            |                                            | 68,871            |          
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            | Total Stockholders' Equity |                                            |                   | 2,023,430
|                                                 |                                                                                                                            |                            |                                            |                   |          
|                                                 |                                                                                                                            |                            | Total Liabilities and Stockholders' Equity |                   | $        
|                                                 |                                                                                                                            |                            |                                            |                   |          

See the accompanying notes to the consolidated financial statements.

1

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WellPoint Health Networks Inc.Consolidated Income Statements  (Unaudited)

|                                                  |                                         | Three Months Ended September 30, |           | Nine Months Ended September 30,
|------------------------------------------------- | --------------------------------------- | -------------------------------- | --------- | -------------------------------
|
|
|Revenues:                                         |                                         |                                  |           |                                
|                                                  | Premium revenue                         |                                  | $         | 3,025,184                      
|                                                  | Management services revenue             |                                  |           | 156,191                        
|                                                  | Investment income                       |                                  |           | 64,097                         
|                                                  |                                         |                                  |           |                                
|                                                  |                                         |                                  | 3,245,472 |                                
|Operating Expenses:                               |                                         |                                  |           |                                
|                                                  | Health care services and other benefits |                                  |           | 2,471,152                      
|                                                  | Selling expense                         |                                  |           | 127,277                        
|                                                  | General and administrative expense      |                                  |           | 429,234                        
|                                                  |                                         |                                  |           |                                
|                                                  |                                         |                                  | 3,027,663 |                                
|                                                  |                                         |                                  |           |                                
|Operating Income                                  |                                         |                                  | 217,809   |                                
|                                                  | Interest expense                        |                                  |           | 14,590                         
|                                                  | Other expense, net                      |                                  |           | 19,399                         
|                                                  |                                         |                                  |           |                                
|Income before Provision for Income Taxes          |                                         |                                  | 183,820   |                                
|                                                  | Provision for income taxes              |                                  |           | 75,374                         
|                                                  |                                         |                                  |           |                                
|Net Income                                        |                                         | $                                | 108,446   |                                
|                                                  |                                         |                                  |           |                                
|Earnings Per Share                                |                                         | $                                | 1.70      |                                
|                                                  |                                         |                                  |           |                                
|Earnings Per Share Assuming Full Dilution         |                                         | $                                | 1.64      |                                
|                                                  |                                         |                                  |           |                                
|Weighted Average Shares Outstanding               |                                         |                                  | 63,605    |                                
|                                                  |                                         |                                  |           |                                
|Fully Diluted Weighted Average Shares Outstanding |                                         |                                  | 66,456    |                                
|                                                  |                                         |                                  |           |                                

See
the accompanying notes to the consolidated financial statements.

2

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

|                                                                |                                        |                                                                         |   | Common Stock |        |  |   |     |  |       |   |   |         
|--------------------------------------------------------------- | -------------------------------------- | ----------------------------------------------------------------------- | - | ------------ | ------ |  | - | --- |  | ----- | - | - | --------
|
|
|
|Balance as of December 31, 2000                                 |                                        | $                                                                       |  |              | 71,391 |  | $ | 714 |  | 8,566 |   | $ | (536,524
|Stock grants to employees and directors                         |                                        |                                                                         |   |              |        |  |   |     |  | (12   | ) |   | 757     
|Stock issued for employee stock option and stock purchase plans |                                        |                                                                         |   |              |        |  |   |     |  | (875  | ) |   | 59,393  
|Stock repurchased, at cost                                      |                                        |                                                                         |   |              |        |  |   |     |  | 75    |   |   | (7,433  
|Net losses from treasury stock reissued                         |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|Comprehensive income                                            |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|                                                                | Net income                             |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|                                                                | Other comprehensive income, net of tax |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|                                                                |                                        | Change in unrealized valuation adjustment on
Investment securities, net |   |              |        |  |   |     |  |       |   |   |         
|                                                                |                                        | Cash flow hedges, net                                                   |   |              |        |  |   |     |  |       |   |   |         
|                                                                |                                        | Foreign currency adjustments, net                                       |   |              |        |  |   |     |  |       |   |   |         
|                                                                |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|Total comprehensive income                                      |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|                                                                |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         
|Balance as of September 30, 2001                                |                                        | $                                                                       |  |              | 71,391 |  | $ | 714 |  | 7,754 |   | $ | (483,807
|                                                                |                                        |                                                                         |   |              |        |  |   |     |  |       |   |   |         

See the accompanying notes to the consolidated financial statements.

3

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

|                                                 |                                                                                   | Nine Months Ended September 30,                                          |                                                                  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -----------------------------------------------------------------
|
|
|Cash flows from operating activities:            |                                                                                   |                                                                          |                                                                  
|                                                 | Net Income                                                                        |                                                                          | $                                                                
|                                                 | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                          |                                                                  
|                                                 |                                                                                   | Depreciation and amortization, net of accretion                          |                                                                  
|                                                 |                                                                                   | Loss on sales of assets, net                                             |                                                                  
|                                                 |                                                                                   | Provision (benefit) for deferred income taxes                            |                                                                  
|                                                 |                                                                                   | Amortization of deferred gain on sale of building                        |                                                                  
|                                                 |                                                                                   | Accretion of interest on zero coupon convertible subordinated debentures |                                                                  
|                                                 |                                                                                   | (Increase) decrease in certain assets:                                   |                                                                  
|                                                 |                                                                                   |                                                                          | Receivables, net                                                 
|                                                 |                                                                                   |                                                                          | Other current assets                                             
|                                                 |                                                                                   |                                                                          | Other non-current assets                                         
|                                                 |                                                                                   | Increase (decrease) in certain liabilities:                              |                                                                  
|                                                 |                                                                                   |                                                                          | Medical claims payable                                           
|                                                 |                                                                                   |                                                                          | Reserves for future policy benefits                              
|                                                 |                                                                                   |                                                                          | Unearned premiums                                                
|                                                 |                                                                                   |                                                                          | Accounts payable and accrued expenses                            
|                                                 |                                                                                   |                                                                          | Experience rated and other refunds                               
|                                                 |                                                                                   |                                                                          | Income taxes payable                                             
|                                                 |                                                                                   |                                                                          | Other current liabilities                                        
|                                                 |                                                                                   |                                                                          | Accrued postretirement benefits                                  
|                                                 |                                                                                   |                                                                          | Other non-current liabilities                                    
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|Cash flows from investing activities:            |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          | Investments purchased                                            
|                                                 |                                                                                   |                                                                          | Proceeds from investments sold and matured                       
|                                                 |                                                                                   |                                                                          | Property and equipment purchased                                 
|                                                 |                                                                                   |                                                                          | Proceeds from property and equipment sold                        
|                                                 |                                                                                   |                                                                          | Acquisition of new businesses, net of cash acquired              
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|Cash flows from financing activities:            |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          | Net borrowing of long-term debt under revolving credit facilities
|                                                 |                                                                                   |                                                                          | Net borrowing of long-term debt under 63/8% Notes due 2006       
|                                                 |                                                                                   |                                                                          | Proceeds from issuance of common stock                           
|                                                 |                                                                                   |                                                                          | Common stock repurchased                                         
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|                                                 |                                                                                   |                                                                          |                                                                  
|Net decrease in cash and cash equivalents        |                                                                                   |                                                                          | (36,513                                                          
|Cash and cash equivalents at beginning of period |                                                                                   |                                                                          | 566,889                                                          
|                                                 |                                                                                   |                                                                          |                                                                  
|Cash and cash equivalents at end of period       |                                                                                   | $                                                                        | 530,376                                                          
|                                                 |                                                                                   |                                                                          |                                                                  

See
the accompanying notes to the consolidated financial statements.

4

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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, 2001, WellPoint had approximately 10.0 million medical members and approximately 44.3 million specialty members. The Company offers a broad spectrum of network-based
managed care plans. WellPoint provides these plans to the large and small employer, individual and senior markets. The Company's managed care plans include preferred provider organizations ("PPOs"),
health maintenance organizations ("HMOs"), point-of-service ("POS") plans, other hybrid medical plans and traditional indemnity plans. In addition, the Company offers managed
care services, including underwriting, actuarial service, network access, medical cost management and claims processing. The Company also provides a broad array of specialty and other products and
services including pharmacy, dental, utilization management, life insurance, preventive care, disability, behavioral health, COBRA and flexible benefits account administration. The Company markets its
products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia and in other states primarily under the name UNICARE.
Historically, the Company's primary market for managed care products has been California. The Company holds the exclusive right to market its products under the Blue Cross name and mark in California
and under the Blue Cross Blue Shield name and mark in Georgia.

2.  Basis of Presentation

The accompanying unaudited consolidated financial statements of WellPoint, in the opinion of management, reflect all material adjustments (which are of a
normal recurring nature) necessary for a fair statement of its financial position as of September 30, 2001, the results of its operations for the quarter and nine months ended
September 30, 2001 and 2000, cash flows for the nine months ended September 30, 2001 and 2000 and its changes in stockholders' equity for the nine months ended
September 30, 2001. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full year.

3.  Acquisitions

On March 15, 2001, the Company completed its acquisition of Cerulean Companies, Inc. ("Cerulean"), the parent company of Blue Cross Blue Shield
of Georgia, Inc., which served approximately 1.9 million medical members in the state of Georgia as of March 31, 2001. This acquisition was accounted for under the purchase method
of accounting and accordingly, the consolidated results of operations of the Company include the results of Cerulean from the date of acquisition. The cash purchase price was $700.0 million.

As
a result of the acquisition of Cerulean, the Company estimates that it will incur $114.2 million in expenses primarily related to change in control payments to Cerulean
management and transaction costs. Generally accepted accounting principles require that these expenses, which are not associated with the generation of future revenues and have no future economic
benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired.

Cash
of $200.0 million and debt of $500.0 million were used to purchase net assets with a fair value of approximately $314.2 million. Goodwill and other
intangibles totaling $618.9 million includes $118.9 million of deferred taxes and $114.2 million of the aforementioned assumed liabilities. Goodwill and other intangibles are
being amortized on a straight-line basis over 20 years for goodwill and

5

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ranging from five to 40 years for other intangible assets. The purchase price allocation between goodwill and identifiable intangible assets had not been finalized as of September 30,
2001.

On
March 1, 2000, the Company completed its acquisition of Rush Prudential Health Plans ("Rush Prudential"). Rush Prudential offers a broad array of products and services
ranging from HMO products to traditional PPO products. The acquisition significantly increased the Company's Illinois medical membership to nearly 600,000 members as of March 31, 2000.
Subsequent to the acquisition, the acquired business has been operated as UNICARE Health Plans. The transaction, which was
financed with both cash from operations and debt from the Company's existing revolving credit facility, is valued at approximately $202.6 million. This acquisition was accounted for under the
purchase method of accounting. Cash of $102.6 million and debt totaling $100.0 million were used to purchase net assets with a fair value of approximately $19.4 million, resulting
in goodwill and other intangibles totaling $215.5 million. The resulting goodwill includes $32.3 million of deferred tax liabilities relating to identified intangibles.

On
December 5, 2000, the Company completed its acquisition of a mail order pharmacy fulfillment facility from RxAmerica LLC ("RxAmerica"). RxAmerica is a pharmacy benefits
management joint venture between Albertson's, Inc. and Longs Drugs Stores California, Inc. Subsequent to the acquisition, the business was re-named PrecisionRx. This
acquisition was accounted for under the purchase method of accounting.

In
accordance with the requirements of APB Opinion No. 16, "Business Combinations," the following unaudited pro forma summary presents revenues, net income and per share data
of WellPoint as if the acquisitions of Cerulean, Rush Prudential and Precision Rx had occurred on January 1, 2000. The pro forma information includes the results of operations for the period
prior to the acquisition, adjusted for interest expense on long-term debt incurred to fund the acquisitions, amortization of goodwill and intangible assets and the related income tax
effects.

The
pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations had the Company been a single entity during the
three months and nine months ended September 30, 2001 and 2000, nor is it necessarily indicative of future results of operations. Pro forma earnings per share assuming full dilution is based on
66.5 million and 65.1 million weighted average shares outstanding during the three months ended September 30, 2001 and 2000, respectively. For the nine months ended
September 30, 2001 and 2000, pro forma earnings per share assuming full dilution is based on 66.0 million and 64.9 million weighted average shares outstanding, respectively.

|                   |         | Three Months Ended
September 30, |           | Nine Months Ended
September 30,
|------------------ | ------- | -------------------------------- | --------- | -------------------------------
|
|
|Revenues           |         | $                                | 3,245,472 |                                
|Net Income         |         | $                                | 108,446   |                                
|Earnings Per Share |         |                                  |           |                                
|                   | Basic   |                                  | $         | 1.70                           
|                   | Diluted |                                  | $         | 1.64                           

6

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4.  Long Term Debt

63/8% Notes due 2006

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

The
Notes may be redeemed, in whole or in part, at the Company's option at any time. The redemption price for any Notes redeemed will be equal to the greater of the following amounts:
1) 100% of the principal amount of the Notes being redeemed on the redemption date; and 2) the sum of the present values of the remaining scheduled payments of principal and interest on
the Notes being redeemed on that redemption date (not including any portion of any payments of interest accrued to the redemption date) discounted to the redemption date on a semiannual basis at the
Treasury rate as determined by the 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 Notes to the redemption date.

The
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 Notes. The indenture governing the Notes contains a covenant that limits the Company's ability and that of the Company's subsidiaries to create
liens on Company property or assets to secure certain indebtedness without also securing the Notes.

Revolving Credit Facility

Effective as of March 30, 2001, the Company entered into two new unsecured revolving credit facilities allowing aggregate indebtedness of
$1.0 billion. Upon execution of these facilities, the Company terminated its prior $1.0 billion unsecured revolving facility. Borrowings under these facilities (which are generally
referred to collectively in this Quarterly Report on Form 10-Q as the Company's "revolving credit facility") bear interest at rates determined by reference to the bank's base rate
or to the London Inter Bank Offered Rate ("LIBOR") plus a margin determined by reference to the then-current rating of the Company's unsecured long-term debt by specified
rating agencies. One facility, which provides for borrowings of up to $750,000,000, expires as of March 30, 2006, although it may be extended for up to two additional one-year
periods under certain circumstances. The other facility, which provides for
borrowings of up to $250,000,000, expires as of March 30, 2002. Any amount outstanding under this facility as of March 30, 2002 may be converted into a one-year term loan at
the option of the Company. Borrowings under the facilities are made on a committed basis or, in the case of the $750.0 million facility, pursuant to an auction bid process. The
$750.0 million facility also contains sublimits for letters of credit and "swingline" loans. Each credit agreement requires the Company to maintain certain financial ratios and contains
restrictive convenants, including restrictions on the occurrence of additional indebtedness and the granting of certain liens, limitations on acquisitions and investments and limitations on changes in
control. The total amount outstanding under these facilities was $285.0 million as of September 30, 2001. The total amount outstanding under the Company's prior revolving credit facility
was $250.0 million as of December 31, 2000.

7

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Zero Coupon Convertible Subordinated Debentures

On July 2, 1999, the Company issued $299.0 million aggregate principal amount at maturity of zero coupon convertible subordinated debentures due
2019 (the "Debentures"). The proceeds totaled approximately $200.8 million. The Debentures accrue interest at a yield to maturity of 2.0% per year compounded semi-annually. Holders
have the option to convert the Debentures into the Company's common stock at any time prior to maturity at a rate of 6.797 shares per $1,000 principal amount at maturity. In lieu of delivering shares
of common stock upon conversion of any Debentures, the Company may elect to pay cash for the Debentures in an amount equal to the last reported sales price of its common stock on the trading day
preceding the conversion date. The debentures are subordinate in right of payment to all existing and future senior indebtedness.

On
October 6, 1999, the Board of Directors authorized the repurchase of some or all of the Company's Debentures for cash. The Company did not repurchase any Debentures during
the nine months ended September 30, 2001 and year ended December 31, 2000. During the year ended December 31, 1999, the Company repurchased $81.0 million in aggregate
principal amount at maturity of the Company's Debentures at a total purchase price of $49.8 million. The gain on such repurchase is shown on the Company's income statement as an extraordinary
gain, net of applicable tax.

As
of September 30, 2001 and December 31, 2000, the Company had $153.1 million and $150.9 million (based upon the original issue price plus accrued
interest), respectively, of Debentures outstanding.
Accrued interest related to the Debentures was $6.7 million and $3.1 million, respectively, as of September 30, 2001 and December 31, 2000.

8

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5.  Earnings Per Share

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

|                                                                                |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30,
|------------------------------------------------------------------------------- |  | -------------------------------- | ------- | -------------------------------
|
|
|Basic Earnings Per Share Calculation:                                           |  |                                  |         |                                
|Numerator                                                                       |  |                                  |         |                                
|Net Income                                                                      |  | $                                | 108,446 |                                
|                                                                                |  |                                  |         |                                
|Denominator                                                                     |  |                                  |         |                                
|Weighted average shares outstanding                                             |  |                                  | 63,605  |                                
|                                                                                |  |                                  |         |                                
|Earnings Per Share                                                              |  | $                                | 1.70    |                                
|                                                                                |  |                                  |         |                                
|Earnings Per Share Assuming Full Dilution Calculation:                          |  |                                  |         |                                
|Numerator                                                                       |  |                                  |         |                                
|Net Income                                                                      |  | $                                | 108,446 |                                
|Interest expense on zero coupon convertible subordinated debentures, net of tax |  |                                  | 464     |                                
|                                                                                |  |                                  |         |                                
|Adjusted Net Income                                                             |  | $                                | 108,910 |                                
|                                                                                |  |                                  |         |                                
|Denominator                                                                     |  |                                  |         |                                
|Weighted average shares outstanding                                             |  |                                  | 63,605  |                                
|Net effect of dilutive stock options                                            |  |                                  | 1,370   |                                
|Assumed conversion of zero coupon convertible                                   |  |                                  |         |                                
|subordinated debentures                                                         |  |                                  | 1,481   |                                
|                                                                                |  |                                  |         |                                
|Fully diluted weighted average shares outstanding                               |  |                                  | 66,456  |                                
|                                                                                |  |                                  |         |                                
|Earnings Per Share Assuming Full Dilution                                       |  | $                                | 1.64    |                                
|                                                                                |  |                                  |         |                                

9

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6.  Comprehensive Income

The following summarizes comprehensive income reclassification adjustments for the nine months ended September 30, 2001, included in the statement of
changes in stockholders' equity:

(In thousands)

September 30,
2001Investment Securities:Holding gain on investment securities arising during the period (net of tax expense of $18,008)

$
28,167Reclassification adjustment for realized loss on investment securities (net of tax benefit of $690)


(1,080
)27,087Fair Value Hedges:Holding loss related to foreign exchange transactions (net of tax benefit of $625)


(978
)Transition adjustment (net of tax expense of $167)


262Reclassification adjustment related to foreign exchange gain on investment securities (net of tax expense of $290)


454(262
)Cash Flow Hedges:Holding loss related to swap transactions (net of tax benefit of $3,484)


(5,450
)Transition adjustment (net of tax benefit of $2,710)


(4,239
)(9,689
)Net gain recognized in other comprehensive income (net of tax expense of $10,956)

$
17,136


7.  Contingencies

From time to time in the ordinary course of business, the Company and certain of its subsidiaries are parties to various legal proceedings, many of which
involve claims for coverage. 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 reimbursement for certain services. The loss of even one such claim, if it results in a
significant punitive damage award, could have a material adverse effect on the Company. In addition, the risk of potential liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims.

In
June 2000, the California Medical Association filed a lawsuit in U.S. district court in San Francisco against the Company's subsidiary, Blue Cross of California ("BCC"). The
lawsuit alleges that BCC violated the federal Racketeering Influenced and Corrupt Organizations ("RICO") Act through various misrepresentations to and inappropriate actions against health care
providers. In late 1999, a number of class-action lawsuits were brought against several of the Company's competitors alleging, among other things, various misrepresentations regarding their health
plans and breaches of fiduciary obligations to health plan members. In August 2000, the Company was added as a party toShane v. Humana, et al.,a class-action lawsuit brought on behalf of health care providers nationwide. In addition

10

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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 Shanelawsuit and various other pending managed
care class-action lawsuits against other companies before District Court Judge Federico Moreno in the
Southern District of Florida for purposes of the pretrial proceedings. In March 2001, Judge Moreno dismissed the plaintiffs' claims based on violation of the RICO Act, although the dismissal
was made without prejudice to the plaintiffs' ability to subsequently refile their claims. Judge Moreno also dismissed, with prejudice, the plaintiffs' federal prompt pay law claims. On
March 26, 2001, the California Medical Association filed an amended complaint in its lawsuit, alleging, among other things, revised RICO claims and violations of California law. A hearing on
the plaintiffs' motion to certify a class was held in early May 2001. On May 9, 2001, Judge Moreno issued an order requiring that all discovery in the litigation be completed by
December 2001, with the exception of discovery related to expert witnesses, which must 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 financial and operational impact that these and other evolving theories of recovery will have on the managed care industry generally, or
the Company in particular, is at present unknown.

Certain
of such legal proceedings are or may be covered under insurance policies or indemnification agreements. Based upon information presently available, management of the Company
believes that the final outcome of all such proceedings should not have a material adverse effect on the Company's results of operations, cash flows or financial condition.

8.  Business Segment Information

The Company currently has two reportable segments: the Large Employer Group business segment and the Individual and Small Employer Group business segment. The
Large Employer Group and Individual and Small Employer Group segments provide a broad spectrum of network-based health plans, including HMOs, PPOs, POS plans, other hybrid plans and traditional
indemnity products to large and small employers and individuals. The Company's senior and specialty businesses are included in the Corporate and Other segment. The acquired Cerulean business
information has been integrated into the aforementioned customer segments.

The
following tables present segment information for the Large Employer Group and Individual and Small Employer Group for the quarter and nine months ended September 30, 2001
and 2000, respectively.

11

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Quarter Ended September 30, 2001

|                                      |  | Large
Employer
Group |           | Individual and
Small Employer
Group |   | Corporate
and
Other |  | Consolidated
|------------------------------------- |  | -------------------- | --------- | ----------------------------------- | - | ------------------- |  | ------------
|(In thousands)                        |  |                      |           |                                     |   |                     |  |             
|Premium revenue                       |  | $                    | 1,883,228 |                                     | $ | 923,834             |  | $           
|Management services revenue           |  |                      | 129,325   |                                     |   | 25                  |  |             
|                                      |  |                      |           |                                     |   |                     |  |             
|Total revenue from external customers |  |                      | 2,012,553 |                                     |   | 923,859             |  |             
|Intercompany revenues                 |  |                      | 4,665     |                                     |   |                    |  |             
|Segment net income                    |  | $                    | 77,005    |                                     | $ | 25,205              |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             
|Segment assets                        |  | $                    | 3,622,953 |                                     | $ | 1,341,221           |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             

Quarter Ended September 30, 2000

|                                      |  | Large
Employer
Group |           | Individual and
Small Employer
Group |   | Corporate
and
Other |  | Consolidated
|------------------------------------- |  | -------------------- | --------- | ----------------------------------- | - | ------------------- |  | ------------
|(In thousands)                        |  |                      |           |                                     |   |                     |  |             
|Premium revenue                       |  | $                    | 1,283,463 |                                     | $ | 762,719             |  | $           
|Management services revenue           |  |                      | 95,444    |                                     |   | 622                 |  |             
|                                      |  |                      |           |                                     |   |                     |  |             
|Total revenue from external customers |  |                      | 1,378,907 |                                     |   | 763,341             |  |             
|Intercompany revenues                 |  |                      | 13,035    |                                     |   | 5,517               |  |             
|Segment net income                    |  | $                    | 70,540    |                                     | $ | 45,982              |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             
|Segment assets                        |  | $                    | 2,193,392 |                                     | $ | 1,024,479           |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             

Nine Months Ended September 30, 2001

|                                      |  | Large
Employer
Group |           | Individual and
Small Employer
Group |   | Corporate
and
Other |  | Consolidated
|------------------------------------- |  | -------------------- | --------- | ----------------------------------- | - | ------------------- |  | ------------
|(In thousands)                        |  |                      |           |                                     |   |                     |  |             
|Premium revenue                       |  | $                    | 5,243,918 |                                     | $ | 2,563,724           |  | $           
|Management services revenue           |  |                      | 366,210   |                                     |   | 260                 |  |             
|                                      |  |                      |           |                                     |   |                     |  |             
|Total revenue from external customers |  |                      | 5,610,128 |                                     |   | 2,563,984           |  |             
|Intercompany revenues                 |  |                      | 14,846    |                                     |   |                    |  |             
|Segment net income                    |  | $                    | 254,445   |                                     | $ | 91,513              |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             

12

---

Nine Months Ended September 30, 2000

|                                      |  | Large
Employer
Group |           | Individual and
Small Employer
Group |   | Corporate
and
Other |  | Consolidated
|------------------------------------- |  | -------------------- | --------- | ----------------------------------- | - | ------------------- |  | ------------
|(In thousands)                        |  |                      |           |                                     |   |                     |  |             
|Premium revenue                       |  | $                    | 3,665,111 |                                     | $ | 2,243,055           |  | $           
|Management services revenue           |  |                      | 282,223   |                                     |   | 2,280               |  |             
|                                      |  |                      |           |                                     |   |                     |  |             
|Total revenue from external customers |  |                      | 3,947,334 |                                     |   | 2,245,335           |  |             
|Intercompany revenues                 |  |                      | 8,447     |                                     |   | 6,017               |  |             
|Segment net income                    |  | $                    | 183,992   |                                     | $ | 138,304             |  | $           
|                                      |  |                      |           |                                     |   |                     |  |             

13

---



9.  Hedging Activities

In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishes the accounting and reporting standards for derivative
instruments and for hedging activities. Upon adoption of SFAS No. 133, all derivatives must be recognized on the balance sheet at their then fair value. Any deferred gains and losses remaining
on the balance sheet under previous hedge-accounting rules must be removed from the balance sheet and all hedging relationships must be designated anew and documented pursuant to the new accounting.
The Company adopted SFAS No. 133 on January 1, 2001.

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

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

The
Company uses interest rate swap agreements and foreign currency contracts to manage interest rate and foreign currency exposures. The principal objective of such contracts is to
minimize the risks and/or costs associated with financial and investing activities. The Company does not use derivative financial instruments for speculative purposes. The counterparties to these
contractual arrangements are major financial institutions with which the Company also has other financial relationships. These counterparties expose the Company to credit loss in the event of
non-performance. However, the Company does not anticipate non-performance by the other parties.

Fair Value Hedges

As part of the Company's investment strategy to diversify its investment portfolio, the Company has invested in certain fixed maturity securities denominated
in foreign currencies. In order to mitigate the
foreign currency risk, the Company has entered into foreign currency derivative instruments. Gains and losses related to such instruments are recognized in the Company's income statement.

The
transition provisions of SFAS No.133, state that any gain or loss previously reported in accumulated other comprehensive income on a derivative that hedged an
available-for-sale security, together with the gain or loss on the related security shall be reclassified to earnings as a cumulative effect type adjustment of both net income
and accumulated other comprehensive income. On January 1, 2001, the Company recorded a transition adjustment as a charge to other income of approximately $0.3 million, net of tax, which
represents a gain of $2.0 million on the available-for-sale bonds related to the Company's foreign exchange contracts partially offset by a loss of $1.7 million
on the related hedges.

For
the nine months ended September 30, 2001, the Company recognized a net loss of $0.6 million, included in other income on the consolidated income statement, which
represented the ineffective portion of all the Company's fair value hedges. All components of each derivative's gain or loss were included in the assessment of hedge effectiveness.

Cash Flow Hedges

The Company uses interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt under its revolving credit facility.
The swap agreements are contracts to exchange variable-rate for fixed-rate interest payments without the exchange of the underlying notional

14

---

amounts. During the nine months ended September 30, 2001, the Company recognized a net loss of $0.1 million reported in other income in the consolidated income statement, which
represents the total ineffectiveness of all cash flow hedges.

The
adoption of SFAS No. 133 resulted in an after-tax reduction in accumulated other comprehensive income of $4.2 million to recognize at fair value all
derivatives that were designated as cash flow hedges as of January 1, 2001.

Events
that are expected to occur over the next 12 months and will necessitate reclassifying the derivative losses into earnings relate primarily to the repricing of variable
rate debt. The Company does not expect that the amounts that will be reclassified will be material to the Company's financial condition or results of operations.

As
of September 30, 2001 the Company had the following interest rate swap agreements in effect (notional amount in thousands):

Notional Amount

Strike Rate

Expiration Date$
150,000

6.99
%
October 17, 2003$
50,000

7.06
%
October 17, 2006


As
of September 30, 2001, the Company had recognized net derivative liabilities of $17.8 million.

10. New Pronouncements

In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141"). SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and
FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." Upon adoption of SFAS No. 141, all business combinations must be accounted for using the
purchase method. The use of the pooling of interests method is now prohibited. The provisions of the new standard apply to all business combinations initiated after June 30, 2001. Based upon
the Company's review of its operations conducted thus far, the Company does not expect that SFAS No. 141 will have a material effect on the financial statements of the Company.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." The new rules change the accounting
methodology for goodwill from a model that amortizes goodwill to one which evaluates it for impairment. Amortization of goodwill, including previously recorded goodwill, will end upon adoption of the
new rules. The new rules also eliminate amortization of other intangibles with indefinite useful lives, but these assets also will be subject to the impairment tests. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Based upon the Company's review of its operations conducted thus far, the accounting impact of SFAS 142 related to goodwill amortization
would increase the Company's net income by $36 million on an annual basis. The Company is currently assessing the effects the other provisions of the new standard will have on its financial
statements.

In
June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS
No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will adopt SFAS No. 143 on January 1, 2003. The provisions
of SFAS No. 143 require companies to record an asset and related liability for the costs associated with the retirement of a long-lived tangible asset if a legal liability to retire
the asset exists. The Company is in the process of analyzing the provisions of SFAS No. 143;

15

---

however, the effect of adoption is not expected to have a significant impact on the Company's financial condition and results of operations.

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company plans to adopt SFAS No. 144 on
January 1, 2002. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of OperationsReporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions," for the disposal of a
segment of business (as previously defined in that opinion). SFAS No. 144 retains the basic principles of SFAS No. 121 for long-lived assets to be disposed of by sale or held
and used and broadens discontinued operations presentation to include a component of an entity that is held for sale or that has been disposed. Components must have operations and cash flows that can
be clearly distinguished from the rest of the entity. The Company is in the process of analyzing the provisions of this statement.

11. Pending Transactions

On October 17, 2001, the Company entered into a definitive agreement with RightCHOICE Managed Care Inc. ("RightCHOICE") to merge in a transaction
valued at $1.3 billion, or $66 per share, for RightCHOICE common stock. Upon completion of this transaction (the "Merger"), RightCHOICE will merge with a wholly owned subsidiary of WellPoint.
RightCHOICE serves 2.8 million members and is the largest managed-care company in Missouri. RightCHOICE does business in Missouri under the name Blue Cross and Blue Shield of
Missouri and through its HealthLink subsidiary. HealthLink provides network rental, administrative services, workers' compensation and other non-underwritten health benefit programs to
approximately 500,000 members in six neighboring states. At the effective time of the Merger, the stockholders of RightCHOICE will receive for each share of RightCHOICE Common Stock either $66 in cash
or 0.6161 shares of WellPoint Common Stock. RightCHOICE stockholders will be able to elect to receive cash or WellPoint Common Stock for any or all of their shares of RightCHOICE Common Stock, subject
to a prorationing mechanism which will provide that 70% of the outstanding RightCHOICE Common Stock will be converted into the right to receive WellPoint Common Stock and 30% of the outstanding
RightCHOICE Common Stock will be converted
into the right to receive cash. The transaction is intended to qualify as a tax-free transaction for RightCHOICE stockholders that elect to receive WellPoint Common Stock. The transaction
is subject to a number of closing conditions including a vote of the RightCHOICE stockholders, approval by the Missouri and Illinois Departments of Insurance and approval by the Blue Cross Blue Shield
Association. Approval by the RightCHOICE stockholders is relatively certain because the Missouri Foundation for Health (the "Foundation"), which owns approximately 57% of the outstanding RightCHOICE
Common Stock, has entered into a Voting and Lockup Agreement with WellPoint, obligating the Foundation to vote in favor of the Merger (subject to certain exceptions). The Company currently expects the
transaction to close during the quarter ending March 31, 2002.

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

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

16

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General

The Company is one of the nation's largest publicly traded managed health care companies. As of September 30, 2001, WellPoint had approximately
10.0 million medical members and approximately 44.3 million specialty members. As a result of the March 15, 2001 closing of the Cerulean transaction, the Company's medical
membership increased by approximately 1.9 million members. The Company offers a broad spectrum of network-based managed care plans. WellPoint provides these plans to the large and small
employer, individual and senior markets. The Company's managed care plans include HMOs, PPOs, POS plans, other hybrid medical plans and traditional indemnity plans. In addition, the Company offers
managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The Company also provides a broad array of specialty and other
products, including pharmacy, dental, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. The Company
markets its products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia and in other states primarily under the name
UNICARE. Historically, the Company's primary market for managed care products has been California. The Company holds the exclusive right to market its products under the Blue Cross name and mark in
California and under the Blue Cross Blue Shield name and mark in Georgia.

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 ("MMHD") of Massachusetts Mutual Life Insurance Company and the Group Benefits Operations (the "GBO") of John Hancock Mutual Life Insurance Company. The
Cerulean, Rush Prudential and PrecisionRx acquisitions described below are each 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 the
Company's regional expansion strategy, the Company in certain instances 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
January 2001, the Company introduced new benefit plans (known as PlanScape) to all of its individual PPO members in California. All of the Company's existing individual PPO
plans in California were converted into newly designed plans, offering an array of premium levels, deductibles, cost sharing features and out-of-pocket limits. These plan
changes did not affect any of the Company's PPO plans under employer-sponsored arrangements.

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.

Acquisition of Cerulean

On July 9, 1998, the Company entered into an Agreement and Plan of Merger with Cerulean Companies, Inc. ("Cerulean") (See Note 3 to the
Consolidated Financial Statements). On March 15, 2001, the Company completed this transaction, pursuant to which Cerulean has become a wholly owned

17

---

subsidiary of the Company. The transaction, which was financed with cash from operations and debt from the Company's existing revolving credit facility, is valued at approximately
$700.0 million, excluding deferred taxes and assumed liabilities. Cerulean, principally through its Blue Cross and Blue Shield of Georgia subsidiary, offers insured and administrative services
products primarily in the State of Georgia. Cerulean has historically experienced a higher administrative expense ratio than the Company's core businesses due to its higher concentration of
administrative services business. Cerulean has also historically experienced a higher medical loss ratio than the Company's core businesses due to its higher percentage of Large Employer Group
business and fewer managed care offerings. Accordingly, it is expected that Cerulean's higher loss and administrative expense ratios will contribute to an increase in those ratios for the Company.

Acquisition of PrecisionRx

On December 5, 2000, the Company completed its acquisition of a mail order pharmacy fulfillment facility (See Note 3 to the Consolidated
Financial Statements). The facility, located in Fort Worth Texas, now operates under the new name of PrecisionRx. The acquisition was accounted for under the purchase method of accounting.

Acquisition of Rush Prudential

On March 1, 2000, the Company completed its acquisition of Rush Prudential Health Plans ("Rush Prudential") (See Note 3 to the Consolidated
Financial Statements). Rush Prudential offers a broad array of products and services ranging from HMO products to traditional PPO products and has been primarily integrated into the Company's existing
Large Employer Group business. Rush Prudential historically experienced a higher loss ratio than the Company's core business, which may result in an increase in the Company's overall loss ratio. The
acquisition had significantly increased the Company's Illinois medical membership to nearly 600,000 members as of March 31, 2000. Subsequent to the acquisition, the acquired business has been
operated as UNICARE Health Plans. The transaction, which was financed with cash from operations and debt from the Company's existing revolving credit facility, is valued at approximately
$202.6 million, subject to certain post-closing adjustments. This acquisition was accounted for under the purchase method of accounting.

Federal "Patients' Bill of Rights" Legislation

In June 2001, the United States Senate passed a bill that would enact a number of health care reforms (often referred to as the "Patients' Bill of
Rights"). The Senate bill includes a number of provisions generally expanding the rights of health care plan members, such as requiring health plans to allow direct access to
obstetrician/gynecologists and pediatricians and provide timely access to appropriate specialists, the adoption of a "prudent layperson" standard for emergency visits by members and the establishment
of an independent medical review process. In addition, the bill would create liability for any group health plan fiduciary that fails to exercise ordinary care in making any non-medically
reviewable decisions regarding, among other things, covered services, exclusions and limitations, where
such decision is the proximate cause of personal injury or death. The Senate bill would allow members to sue in state or federal court after exhausting independent review procedures (regardless of
whether the health plan's original decision is upheld). Unlimited damages would be available in state court actions (unless state law provides for a maximum amount), while punitive damages amounts in
federal courts would be limited to a maximum of $5 million. Employers would be able to limit liability in certain instances by naming a "designated decision maker." In August 2001, the
United States House of Representatives also adopted a bill that would provide for a number of health care reform measures. The provisions providing patient protections are similar to those contained
in the Senate version of the bill. The House bill also includes a liability provision. Under the House bill, non-economic damages (including punitive damages) in federal court actions
would be limited to

18

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$1.5 million and individual states would be permitted to apply lower maximums in state court actions. In addition, punitive damages would only be available if a health plan failed to comply
with the decision of an independent medical reviewer. The Senate bill would not affect existing state laws that meet or exceed the proposed federal standards, while the House bill would preempt all
state laws in certain instances. The Company is unable to determine which federal health care reform legislation, if any, will be adopted this year or in the future. While the Company's operations in
California, Georgia and Texas are already subject to state laws that have features similar to the proposed federal legislation, any such federal legislation could have a material adverse effect on the
Company's results of operations, financial condition or cash flows.

Other Legislation

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

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 results of operations for the quarter ended September 30, 2001 include a full quarter of earnings for its acquired operations, Rush Prudential, PrecisionRx and
Cerulean. The Company's consolidated results of operations for the nine months ended September 30, 2001 include a full nine months of earnings for Rush Prudential, PrecisionRx and approximately
six and a half months of earnings for Cerulean. The results of operations for the quarter ended September 30, 2000 include a full quarter of earnings for Rush Prudential and the results of
operations for the nine months ended September 30, 2000 include the results of Rush Prudential for the period from March 1, 2000, its date of acquisition.

19

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

|                    |                                                      | Quarter Ended
September 30, |      | Nine Months Ended
September 30, |     
|------------------- | ---------------------------------------------------- | --------------------------- | ---- | ------------------------------- | ----
|
|Operating Revenues: |                                                      |                             |      |                                 |     
|                    | Premium revenue                                      |                             | 95.1 | %                               | 95.0
|                    | Management services revenue                          |                             | 4.9  | %                               | 5.0 
|                    |                                                      |                             |      |                                 |     
|                    |                                                      | 100.0                       | %    | 100.0                           | %   
|Operating Expenses: |                                                      |                             |      |                                 |     
|                    | Health care services and other benefits (loss ratio) |                             | 81.7 | %                               | 80.7
|                    | Selling expense                                      |                             | 4.0  | %                               | 4.4 
|                    | General and administrative expense                   |                             | 13.5 | %                               | 14.1

20

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Membership

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

Medical Membership (a) (b) (c):

|                                     |                      | As of September 30, |                                           |           |          
|------------------------------------ | -------------------- | ------------------- | ----------------------------------------- | --------- | ---------
|
|
|Large Employer Group (d)             |                      |                     |                                           |           |          
|                                     | California           |                     |                                           |           |          
|                                     |                      | HMO                 |                                           | 1,918,297 |          
|                                     |                      | PPO and Other       |                                           | 2,125,406 |          
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total California                          |           | 4,043,703
|                                     |                      |                     |                                           |           |          
|                                     | Texas                |                     | 204,802                                   |           | 194,765  
|                                     | Georgia              |                     | 1,521,551                                 |           | 42,705   
|                                     | Illinois             |                     | 437,740                                   |           | 462,516  
|                                     | Other States         |                     | 1,218,548                                 |           | 1,196,114
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total Large Employer Group                |           | 7,426,344
|                                     |                      |                     |                                           |           |          
|Individual and Small Employer Group  |                      |                     |                                           |           |          
|                                     | California           |                     |                                           |           |          
|                                     |                      | HMO                 |                                           | 323,369   |          
|                                     |                      | PPO and Other       |                                           | 1,253,923 |          
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total California                          |           | 1,577,292
|                                     |                      |                     |                                           |           |          
|                                     | Texas                |                     | 170,933                                   |           | 171,382  
|                                     | Georgia              |                     | 333,069                                   |           | 31,259   
|                                     | Illinois             |                     | 83,449                                    |           | 62,111   
|                                     | Other States         |                     | 83,145                                    |           | 99,514   
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total Individual and Small Employer Group |           | 2,247,888
|                                     |                      |                     |                                           |           |          
|Senior (e)                           |                      |                     |                                           |           |          
|                                     | California           |                     |                                           |           |          
|                                     |                      | HMO                 |                                           | 35,297    |          
|                                     |                      | PPO and Other       |                                           | 179,054   |          
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total California                          |           | 214,351  
|                                     |                      |                     |                                           |           |          
|                                     | Texas                |                     | 321                                       |           | 228      
|                                     | Georgia              |                     | 74,882                                    |           | 915      
|                                     | Illinois             |                     | 11,827                                    |           | 10,047   
|                                     | Other States         |                     | 17,151                                    |           | 9,233    
|                                     |                      |                     |                                           |           |          
|                                     |                      |                     | Total Senior                              |           | 318,532  
|                                     |                      |                     |                                           |           |          
|Total Medical Membership             |                      | 9,992,764           |                                           | 7,742,973 |          
|                                     |                      |                     |                                           |           |          
|Membership by Network (f)            |                      |                     |                                           |           |          
|                                     | Proprietary Networks |                     | 7,856,003                                 |           | 6,016,295
|                                     | Affiliate Networks   |                     | 1,318,843                                 |           | 1,083,485
|                                     | Non-Network          |                     | 817,918                                   |           | 643,193  
|                                     |                      |                     |                                           |           |          
|Total Medical Membership             |                      | 9,992,764           |                                           | 7,742,973 |          
|                                     |                      |                     |                                           |           |          
|Management Services Membership       |                      |                     |                                           |           |          
|                                     | California           |                     | 1,376,364                                 |           | 1,272,171
|                                     | Georgia              |                     | 889,950                                   |           | 24,419   
|                                     | Other States         |                     | 1,172,624                                 |           | 1,222,317
|                                     |                      |                     |                                           |           |          
|Total Management Services Membership |                      | 3,438,938           |                                           | 2,518,907 |          
|                                     |                      |                     |                                           |           |          

21

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---

Specialty Membership

As of September 30,Percent
Change2001

2000Pharmacy

31,925,513

27,808,491

14.8
%Dental

2,642,554

2,223,482

18.8
%Utilization Management

1,798,896

2,114,175

-14.9
%Life

2,299,043

1,992,818

15.4
%Disability

545,625

561,146

-2.8
%Behavioral Health (a)

5,094,286

3,274,074

55.6
%


---

22

---



Comparison of Results for the Quarter Ended September 30, 2001 to the Quarter Ended September 30, 2000

The following table depicts premium revenue by business segment:

Quarter Ended September 30,(In thousands)2001

2000Large Employer Group

$
1,883,228

$
1,283,463Individual and Small Employer Group


923,834


762,719Corporate and Other


218,122


138,457Consolidated

$
3,025,184

$
2,184,639


Premium
revenue increased 38.5%, or $840.6 million, to $3,025.2 million for the quarter ended September 30, 2001 from $2,184.6 million for the quarter
ended September 30, 2000. The increase was primarily due to $576.3 million of premium revenue related to the Cerulean acquisition, representing 68.6% of the increase. Excluding Cerulean,
premium revenue would have increased 12.1% for the quarter ended September 30, 2001. The increase excluding Cerulean was primarily due to an increase in insured member months of approximately
4.8% primarily in the Large Employer Group business segment, and the implementation of price increases overall, partially offset by a slight decline in insured member months in the Individual and
Small Employer Group business segment.

The
following table depicts management services revenue by business segment:

Quarter Ended September 30,(In thousands)2001

2000Large Employer Group

$
129,325

$
95,444Individual and Small Employer Group


25


622Corporate and Other


26,841


19,310Consolidated

$
156,191

$
115,376


Management
services revenue increased 35.4%, or $40.8 million, to $156.2 million for the quarter ended September 30, 2001 from $115.4 million for the
quarter ended September 30, 2000. The increase was primarily due to $38.6 million of management services revenue from the Cerulean acquisition, representing 94.6% of the increase.
Excluding Cerulean, management services revenue would have increased 1.9% for the quarter ended September 30, 2001.

Investment
income was $64.1 million the quarter ended September 30, 2001 compared to $53.3 million for the quarter ended September 30, 2000, an increase of
$10.8 million or 20.3%. The Cerulean acquisition accounted for $6.3 million of the increase. Excluding Cerulean, investment income would have increased $4.5 million or 8.4%. The
increase excluding Cerulean was primarily due to net interest and dividend income, which increased $2.6 million to $53.8 million for the quarter ended September 30, 2001 in
comparison to $51.2 million for the quarter ended September 30, 2000. This increase resulted from higher average investment balances in the third quarter of 2001 versus the third quarter
of 2000.

The
loss ratio attributable to managed care and related products for the quarter ended September 30, 2001 increased to 81.7% compared to 80.7% for the quarter ended
September 30, 2000. The acquired Cerulean business has traditionally experienced a higher loss ratio than the Company's core businesses due to its higher percentage of Large Employer Group
business and fewer managed care offerings. Excluding Cerulean, the loss ratio increased slightly to 80.9% for the quarter ended September 30, 2001.

23

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Selling expense consists of commissions paid to outside brokers and agents representing the Company. The selling expense ratio for the quarter ended September 30, 2001
decreased to 4.0% compared to 4.4% for the quarter ended September 30, 2000. The acquired Cerulean business has traditionally experienced a lower selling expense ratio due primarily to its
lower percentage of Individual and Small Employer Group business. Excluding Cerulean, the selling expense ratio would have remained unchanged at 4.4% for the quarter ended September 30, 2001.

The
administrative expense ratio decreased to 13.5% for the quarter ended September 30, 2001 from 14.1% for the quarter ended September 30, 2000. The acquired Cerulean
business has historically experienced a higher administrative expense ratio than the Company's core businesses due to its higher percentage of administrative services business. Excluding Cerulean, the
administrative expense ratio would have been 13.3% for the quarter ended September 30, 2001. The lower administrative expense ratio in the third quarter 2001, excluding Cerulean, is primarily
attributable to savings from the integration of information systems centers related to acquired businesses onto the Company's information systems platform, economies of scale associated with premium
revenue growth in relation to fixed corporate administrative expenses in addition to technology investments made by the Company (e.g., electronic claims submission, internet self-service
and interactive voice response).

Interest
expense increased $8.9 million to $14.6 million for the quarter ended September 30, 2001, compared to $5.7 million for the quarter ended
September 30, 2000. The increase in interest expense was related to the higher average debt balance for the quarter ended September 30, 2001 in comparison to the quarter ended
September 30, 2000, primarily due to the Cerulean acquisition. The weighted average interest rate for all debt for the quarter ended September 30, 2001, including the fees associated
with the Company's borrowings and interest rate swap agreements, was 6.04%.

The
Company's net income for the quarter ended September 30, 2001 was $108.4 million, compared to $89.5 million for the quarter ended September 30, 2000.
Earnings per share totaled $1.70 and $1.43 for the quarter ended September 30, 2001 and 2000, respectively. Earnings per share assuming full dilution totaled $1.64 and $1.38 for the quarter
ended September 30, 2001 and 2000, respectively.

Earnings
per share for the quarter ended September 30, 2001 is based upon weighted average shares outstanding of 63.6 million shares, excluding potential common stock,
and 66.5 million shares, assuming full dilution. Earnings per share for the quarter ended September 30, 2000 is based on 62.5 million shares, excluding potential common stock, and
65.1 million shares, assuming full dilution. The increase in weighted average shares outstanding primarily resulted from the issuance of shares related to the Company's employee stock option
and purchase plans.

Comparison of Results for the Nine Months Ended September 30, 2001 to the Nine Months Ended September 30, 2000

The following table depicts premium revenue by business segment:

Nine Months Ended September 30,(In thousands)2001

2000Large Employer Group

$
5,243,918

$
3,665,111Individual and Small Employer Group


2,563,724


2,243,055Other


576,737


399,580Consolidated

$
8,384,379

$
6,307,746


Premium
revenue increased 32.9%, or $2,076.7 million, to $8,384.4 million for the nine months ended September 30, 2001 from $6,307.7 million for the nine
months ended September 30, 2000. The

24

---

increase was primarily due to $1,297.2 million of premium revenue related to the Cerulean and Rush Prudential acquisitions, representing 62.5% of the increase. Excluding acquisitions, premium
revenue would have increased 12.4% for the nine months ended September 30, 2001. The increase excluding acquisitions was primarily due to an increase in insured member months of approximately
7.0% primarily in the Large Employer Group business segment, and the implementation of price increases overall.

The
following table depicts management services revenue by business segment:

Nine Months Ended September 30,(In thousands)2001

2000Large Employer Group

$
366,210

$
282,223Individual and Small Employer Group


260


2,280Other


77,736


52,216Consolidated

$
444,206

$
336,719


Management
services revenue increased 31.9%, or $107.5 million, to $444.2 million for the nine months ended September 30, 2001 from $336.7 million for the
nine months ended September 30, 2000. The increase was primarily due to $85.6 million of management services revenue related to the Cerulean and Rush Prudential acquisitions,
representing 79.6% of the increase. Excluding acquisitions, management services revenue would have increased 6.5% for the nine months ended September 30, 2001. The increase excluding
acquisitions was primarily due to an increase in pharmacy benefit management services revenues.

Investment
income was $177.7 million for the nine months ended September 30, 2001 compared to $142.9 million for the nine months ended September 30, 2000,
an increase of $34.8 million or 24.4%. The Cerulean and Rush Prudential acquisitions represented $16.0 million, or 46.0%, of the increase. Excluding acquisitions, investment income would
have increased $18.8 million or 13.2%. The increase excluding acquisitions was primarily due to net interest and dividend income, which increased $12.7 million to $163.8 million
for the nine months ended September 30, 2001 in comparison to $151.1 million for the nine months ended September 30, 2000. This increase resulted from higher average investment
balances during the nine months ended September 30, 2001 versus 2000. Additionally, an increase in net realized gains, excluding acquisitions, of $7.0 million also contributed to the
increase in net investment income. (See "Liquidity and Capital Resources").

The
loss ratio attributable to managed care and related products for the nine months ended September 30, 2001 increased to 81.4% compared to 80.8% for the nine months ended
September 30, 2000. The acquired Cerulean business has traditionally experienced a higher loss ratio than the Company's core businesses due to its higher percentage of Large Employer Group
business and fewer managed care offerings. Excluding the Cerulean and Rush Prudential acquisitions, the loss ratio would have remained unchanged at 80.8% for the nine months ended September 30,
2001.

The
selling expense ratio for the nine months ended September 30, 2001 decreased to 4.1% compared to 4.4% for the nine months ended September 30, 2000. The acquired
Cerulean business has traditionally experienced a lower selling expense ratio due primarily to its lower percentage of Individual and Small Employer Group business. Excluding the Cerulean and Rush
Prudential acquisitions, the selling expense ratio would have remained unchanged for the nine months ended September 30, 2001.

The
administrative expense ratio decreased slightly to 13.8% for the nine months ended September 30, 2001 from 14.0% for the nine months ended September 30, 2000. The
acquired Cerulean and Rush Prudential acquisitions have historically experienced higher administrative expense

25

---

ratios than the Company's core businesses due to a higher percentage of administrative services business. Excluding acquisitions, the administrative expense ratio would have been 13.7%. The decline
excluding acquisitions is primarily attributable to savings from the integration of information systems centers related to acquired businesses onto the Company's information systems platform,
economies of scale associated with premium revenue growth in relation to fixed corporate administrative expenses in addition to technology investments made by the Company (e.g., electronic claims
submission, internet self-service and interactive voice response).

Interest
expense increased $17.9 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. The increase in
interest expense was related to the higher average debt balance for the nine months ended September 30, 2001 in comparison to the nine months ended September 30, 2000, primarily due to
the Cerulean acquisition. The weighted average interest rate for all debt for the nine months ended September 30, 2001, including the fees associated with the Company's borrowings and interest
rate swap agreements, was 6.64%.

The
Company's net income for the nine months ended September 30, 2001 was $304.9 million, compared to $252.8 million for the nine months ended
September 30, 2000. Earnings per share totaled $4.81 and $4.04 for the nine months ended September 30, 2001 and 2000, respectively. Earnings per share assuming full dilution totaled
$4.64 and $3.91 for the nine months ended September 30, 2001 and 2000, respectively.

Earnings
per share for the nine months ended September 30, 2001 is based upon weighted average shares outstanding of 63.3 million, excluding potential common stock, and
66.0 million shares, assuming full dilution. Earnings per share for the nine months ended September 30, 2000 is based on 62.5 million shares, excluding potential common stock, and
64.9 million shares, assuming full dilution. The increase in weighted average shares outstanding primarily resulted from the issuance of shares related to the Company's employee stock option
and purchase plans.

Financial Condition

The Company's consolidated assets increased by $1,718.2 million, or 31.2%, from $5,504.7 million as of December 31, 2000 to
$7,222.9 million as of September 30, 2001. The increase in total assets was primarily due to the acquisition of Cerulean, which accounted for $1,073.9 million or 62.5% of the
increase. Excluding Cerulean, the increase in total assets was primarily due to growth in cash and investments of $503.6 million or 78.2%. Cash and investments totaled $4.6 billion as of
September 30, 2001, or 63.5% of total assets.

Overall
claims liabilities increased $214.0 million, or 11.3%, from $1,892.2 million as of December 31, 2000 to $2,106.2 million as of September 30,
2001. This increase is primarily due to the Cerulean acquisition.

As
of September 30, 2001, the Company's long-term indebtedness was $887.1 million, of which $153.1 million was related to the Company's Zero Coupon
Convertible Subordinated Debentures (the "Debentures"), $285.0 million was related to the Company's revolving credit facility and $449.0 million was related to the Company's
63/8% Notes due 2006. (See Note 4 to the Consolidated Financial Statements). As a result of the Cerulean acquisition, the Company incurred $500.0 million of indebtedness
under its revolving credit facility. During the quarter ended June 30, 2001, the Company utilized the proceeds from the aforementioned 63/8% Notes to reduce the outstanding
balance of the Company's revolving credit facility. As of December 31, 2000, the Company's long-term indebtedness was $400.9 million, of which $250.0 million was
related to the Company's revolving credit facility and $150.9 million was related to the Debentures.

Stockholders'
equity totaled $2,023.4 million as of September 30, 2001, an increase of $379.0 million from $1,644.4 million as of December 31, 2000.
The increase was primarily due to net

26

---

income of $304.9 million for the nine months ended September 30, 2001 in addition to $64.4 million of net proceeds from the reissuance of treasury stock related to the Company's
employee stock option and purchase plans, in addition to an increase in other comprehensive income of $17.1 million, primarily related to an increase in net unrealized gains on investment
securities. (See Note 6 to the Consolidated Financial Statements). During the third quarter of 2001, the Company purchased 75,000 shares of its common stock which reduced the stockholders'
equity by approximately $7.4 million.

Liquidity and Capital Resources

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

The
Company generally receives premium revenue in advance of anticipated claims for related health care services and other benefits. The Company's investment policies are designed to
provide liquidity, preserve capital and maximize yield. Cash and investment balances maintained by the Company are sufficient to meet applicable regulatory financial stability and net worth
requirements, including license requirements of the Blue Cross Blue Shield Association. As of September 30, 2001, the Company's investment portfolio consisted primarily of investment grade
fixed-maturity securities.

Cash
flow provided by operating activities was $445.7 million for the nine months ended September 30, 2001, compared with $386.9 million for the nine months ended
September 30, 2000. Cash flow from operations for the nine months ended September 30, 2001 was due primarily to net income of $304.9 million, increases in accounts payable and
accrued expenses due to the timing of other operating liability payments and an increase in income tax payable. These items were partially offset by an increase in accounts receivable of
$119.3 million, which was primarily related to the timing of collection of large customer receivables in the normal course of business.

Net
cash used in investing activities for the nine months ended September 30, 2001 totaled $1,023.2 million, compared with $415.0 million for the nine months
ended September 30, 2000. The cash used in the first nine months of 2001 was attributable primarily to the purchase of investments of $3.2 billion, property and equipment, net of sales
proceeds of $59.3 million and the purchase of Cerulean net of acquired cash of $556.2 million. Proceeds from investments sold and matured totaled $2.8 billion, partially
offsetting the aforementioned purchases.

Net
cash provided by financing activities totaled $541.0 million in the first nine months of 2001 compared to net cash used in financing activities of $68.0 million in
the nine months ended September 30, 2000. The increase was primarily related to additional debt incurred to finance the Cerulean acquisition of $500.0 million, in addition to the receipt
of proceeds from the issuance of stock related to the Company's employee stock option and purchase programs of $64.4 million.

Effective
as of March 30, 2001, the Company entered into two new unsecured revolving credit facilities allowing aggregate indebtedness of $1.0 billion. Upon execution of
these facilities, the Company terminated its prior $1.0 billion unsecured revolving facility. Borrowings under these facilities (which are generally referred to collectively in this Quarterly
Report on Form 10-Q as the Company's "revolving credit facility") bear interest at rates determined by reference to the bank's base rate or to the London
Inter Bank Offered Rate ("LIBOR") plus a margin determined by reference to the then-current rating of the Company's unsecured long-term debt by specified rating agencies. One
facility, which provides for borrowings of up to $750,000,000, expires as of March 30, 2006, although it may be extended for up to two additional one-year periods under certain
circumstances. The other facility, which provides for borrowings of up to $250,000,000, expires as of March 30, 2002. Any amount

27

---

outstanding under this facility as of March 30, 2002 may be converted into a one-year term loan at the option of the Company. Borrowings under the facilities are made on a committed
basis or, in the case of the $750.0 million facility, pursuant to an auction bid process. The $750.0 million facility also contains sublimits for letters of credit and "swingline" loans.
Each credit agreement requires the Company to maintain certain financial ratios and contains restrictive convenants, including restrictions on the occurrence of additional indebtedness and the
granting of certain liens, limitations on acquisitions and investments and limitations on changes in control (See Note 4 to the Consolidated Financial Statements). The total amount outstanding
under these facilities was $285.0 million as of September 30, 2001. The total amount outstanding under the Company's prior revolving credit facility was $250.0 million as of
December 31, 2000.

As
a part of a hedging strategy to limit its exposure to variable interest rate increases, the Company entered into interest rate swap agreements in order to reduce the volatility of
interest expense resulting from changes in interest rates. The swap agreements are contracts to exchange variable-rate interest payments (weighted average rate for the nine months ended
September 30, 2001 of 5.27%) for fixed-rate interest payments (weighted average rate for the nine months ended September 30, 2001 of 7.35%) without the exchange of the
underlying notional amounts. As of September 30, 2001, 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.

The
Company has entered into foreign currency forward exchange contracts for each of the fixed maturity securities on hand as of September 30, 2001 denominated in foreign
currencies in order to hedge asset positions with respect to currency fluctuations related to these securities. Subsequent to the implementation of SFAS No. 133, all gains and losses from both
effective and ineffective forward exchange contracts will be reflected in investment income offset by the related gains and losses on the Company's available-for-sale foreign
securities (See Note 9 to the Consolidated Financial Statements). In addition, the Company has entered into forward exchange contracts to hedge the foreign currency risk between the trade date
and the settlement date when a foreign currency denominated bond is purchased. Gains and losses from these contracts are recognized in income.

Certain
of the Company's subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory agencies, including the California Department of Managed
Health Care and the Departments of Insurance in various states. As of September 30, 2001 (or the most recent date with respect to which compliance is required), those subsidiaries of the
Company were in compliance with all minimum capital requirements.

In
July 1996, the Company filed a registration statement relating to the issuance of $1.0 billion of senior or subordinated unsecured indebtedness. On June 15,
2001, the Company issued $450.0 million aggregate principal amount at maturity of 63/8% Notes due June 15, 2006 (the "Notes") under this registration statement. The net
proceeds of this offering totaled approximately $449.0 million. The net proceeds from the sale of the Notes were used for repayment of indebtedness under the Company's revolving credit
facilities. The Notes bear interest at a rate of 63/8% per annum, payable semi-annually in arrears on June 15 and December 15 of each year commencing
December 15, 2001. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

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

28

---

their respective successors), plus 25 basis points. In each case, the redemption price will also include accrued and unpaid interest on the Notes to the redemption date.

The
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 Notes. The indenture governing the Notes contains a covenant that limits the Company's ability and that of the Company's subsidiaries to create
liens on Company property or assets to secure certain indebtedness without also securing the Notes.

The
Company currently expects that its pending merger with RightCHOICE will be consummated during the quarter ending March 31, 2002. In connection with the payment of the cash
consideration for such transaction, the Company currently expects to incur debt of approximately $300 million. The remaining cash consideration of approximately $74.7 million will be
funded from the Company's operating cash. (See also Note 11 of the Notes to the Consolidated Financial Statements and "Factors That May Affect Future Results of Operations.")

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

Factors That May Affect Future Results of Operations

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

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

Completion
of the Company's pending transaction with RightCHOICE is contingent upon, among other things, receipt of necessary approvals from certain federal and state agencies on or
before June 30, 2002. Broad latitude in administering the applicable regulations is given to the agencies from which WellPoint and RightCHOICE must seek these approvals. There can be no
assurance that the Company will obtain these approvals. As a condition to approval of the transaction, regulatory agencies

29

---

may impose requirements or limitations or costs on the way that the combined company conducts business after consummation of the transaction. If the Company or RightCHOICE 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 Company's ability to integrate the
operations of RightCHOICE with those of the Company, and could result in a material adverse effect on the Company's revenues or results of operations.

The
Company intends to incur debt to finance some or all of the cash payments to be made to RightCHOICE stockholders in connection with the pending acquisition. In addition, the
Company has made significant purchases of treasury stock over the last three years and may in the future use excess cash as well as additional borrowings to repurchase the Company's Common Stock to
offset shares issued in connection with the transaction. In March 2001, the Company incurred significant indebtedness to fund its acquisition of Cerulean. Upon completion of the merger with
RightCHOICE, the Company could incur significant additional indebtedness to fund not only the cash portion of the transaction, but to fund any further repurchases of WellPoint Common Stock. This
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 cash flow to service the indebtedness. This indebtedness, as well as any indebtedness the Company may incur in the future, may adversely affect the Company's ability to finance its
operations and could limit its 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 five 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 MMHD, GBO, Rush Prudential and
Cerulean, the Company has continued to work extensively on the integration of these businesses. Upon completion of the RightCHOICE transaction, the Company intends to promptly begin integration of its
business. However, there can be no assurances regarding the ultimate success of the Company's integration efforts or regarding the ability of the Company to maintain or improve the results of
operations of the businesses of completed or pending transactions as the Company pursues its strategy of motivating the acquired members to select managed care products. In order to implement this
business strategy, the Company has incurred and will, among other things, need to continue to incur considerable expenditures for provider networks, distribution channels and information systems in
addition to the costs associated with the integration of these acquisitions. The integration of these complex businesses may result in, among other things, temporary increases in claims inventory or
other service-related issues that may negatively affect the Company's relationship with its customers and contribute to increased attrition of such customers. The Company's results of operations could
be adversely affected in the event that the Company experiences such problems or is otherwise unable to implement fully its expansion strategy.

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

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

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punitive damage theories may increase significantly the difficulty of obtaining reasonable settlements of coverage claims.

In
June 2000, the California Medical Association filed a lawsuit in U.S. district court in San Francisco against BCC. The lawsuit alleges that BCC violated the RICO Act through
various misrepresentations to and inappropriate actions against health care providers. In late 1999, a number of class-action lawsuits were brought against several of the Company's competitors
alleging, among other things, various misrepresentations regarding their health plans and breaches of fiduciary obligations to health plan members. In August 2000, the Company was added as a
party toShane v. Humana, et al., a class-action lawsuit brought on behalf of health care providers nationwide. In addition to the RICO claims brought
in the California Medical Association lawsuit, this lawsuit also alleges violations of ERISA, federal and state "prompt pay" regulations and certain common law claims. In October 2000, the
federal Judicial Panel on Multidistrict Litigation issued an order consolidating the California Medical Association lawsuit, the Shane lawsuit and various other pending managed care class-action
lawsuits against other companies before District Court Judge Federico Moreno in the Southern District of Florida for purposes of the pretrial proceedings. In March 2001, Judge Moreno dismissed
the plaintiffs' claims based on violation of the RICO Act, although the dismissal was made without prejudice to the plaintiffs' ability to subsequently refile their claims. Judge Moreno also
dismissed, with prejudice, the plaintiffs' federal prompt pay law claims. On March 26, 2001, the California Medical Association filed an amended complaint in its lawsuit, alleging, among other
things, revised RICO claims and violations of California law. A hearing on the plaintiffs' motion to certify a class was held in early May 2001. On May 9, 2001, Judge Moreno issued an
order requiring that all discovery in the litigation be completed by December 2001, with the exception of discovery related to expert witnesses, which must be completed by March 15,
2002. In June 2001, the federal Eleventh Circuit Court of Appeals 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 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 large part on accurately predicting health care costs incurred on existing business and upon the Company's ability to control future health
care costs through product and benefit design, underwriting criteria, utilization management and negotiation of favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation, inflation, new pharmaceuticals/ technologies, clusters of high-cost cases, the regulatory environment and
numerous other factors are beyond the control of any health plan provider and may adversely affect the Company's ability to predict and control health care costs and claims, as well as the Company's
financial condition, results of operations or cash flows. In addition, actual or expected economic downturns could negatively affect the Company's results of operations as employers terminate existing
employees or employees increase their utilization of medical care in anticipation of a loss of employer paid benefits. Periodic renegotiations of hospital and other provider contracts coupled with
continued consolidation of physician, hospital and other provider groups may result in increased health care costs and limit the Company's ability to negotiate favorable rates. In recent years, large
physician practice management companies have experienced extreme financial difficulties, including bankruptcy, which may subject the Company to increased credit risk related to provider groups and
cause the Company to incur duplicative claims expense. Additionally, the Company faces competitive pressure to contain premium
prices. Fiscal concerns regarding the continued viability of government-sponsored programs such as Medicare and Medicaid may cause decreasing reimbursement rates for these programs. Any limitation on
the Company's ability to increase or maintain its premium levels, design products, implement underwriting criteria or negotiate competitive provider contracts may adversely affect the Company's
financial condition or results of operations.

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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 could adversely affect the Company's
financial condition, cash flows or results of operations. Additional increases in competition (including competition from market entrants offering Internet-based products and services), could
adversely affect the Company's financial condition.

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 critical 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 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.

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 conducts business as a mail order
pharmacy. The pharmacy business is subject to extensive federal, state and local regulations, which are in many instances different from those under which the Company 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

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addition, pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other health care products. Although the Company intends to maintain professional liability
and errors and omissions liability insurance, there can be no assurances that the coverage limits under such insurance programs will be adequate to protect against future claims or that the Company
will be able to maintain insurance on acceptable terms in the future.

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

ITEM 3.Quantitative and Qualitative Disclosures About Market Risk

There
have been no material changes in market risk from that disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

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PART II OTHER INFORMATION

ITEM 6.Exhibits and Reports on Form 8-K



2.01

Amended and Restated Recapitalization Agreement dated as of March 31, 1995 by and among the Registrant, Blue Cross of California, Western Health Partnership and Western Foundation for Health Improvement, incorporated
by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 dated April 8, 19962.02

Amended and Restated Agreement and Plan of Merger dated as of November 29, 2000, by and among Cerulean Companies, Inc., the Registrant and Water Polo Acquisition Corp., incorporated by reference to Exhibit 2.01 of the Registrant's
Current Report on Form 8-K dated March 15, 20013.01

Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on August 5, 1997.3.02

Bylaws of the Registrant, incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, Registration No. 333-907914.01

Specimen of common stock certificate of WellPoint Health Networks Inc., incorporated by reference to Exhibit 4.4 of Registrant's Registration Statement on Form 8-B, Registration No. 001-130834.02

Restated Certificate of Incorporation of the Registrant (included in Exhibit 3.01)4.03

Bylaws of the Registrant (included in Exhibit 3.02)4.04

Indenture dated as of July 2, 1999 by and between the Registrant and The Bank of New York, as trustee (including the form of Debenture attached as Exhibit A thereto), incorporated by reference to Exhibit 4.04 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.4.05

Amended and Restated Indenture dated as of June 8, 2001 by and between the Registrant and The Bank of New York, as trustee, incorporated by reference to Exhibit 4.05 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.4.06

Form of 63/8% Note due 2006, incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated June 12, 2001.




On
July 10, 2001, the Company filed a Current Report on Form 8-K which reported that the Company's subsidiary Blue Cross of California ("BCC") intended to
modify its incentive compensation mechanisms with participating medical groups serving members of BCC's health maintenance organization.

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SIGNATURES

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

|                       |  | WELLPOINT HEALTH NETWORKS INC.Registrant
|---------------------- |  | ----------------------------------------
|                       |  |                                         
|Date: November 9, 2001 |  | By:                                     
|                       |  |                                         
|Date: November 9, 2001 |  | By:                                     
|                       |  |                                         
|Date: November 9, 2001 |  | By:                                     

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