Exhibit 13


                         QUARTERLY FINANCIAL INFORMATION
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                          Quarters ended
(In thousands, except per share data)             March 31            June 30       September 30      December 31
===========================================================================================================================
<S> <C>
1997
Total revenues                                      $511,764          510,041           524,115          517,700
Operating income (1)                                   2,076            4,084             6,260            8,105
Income before income taxes                            44,498           23,155            42,747           34,270
Net income                                            29,233           15,342            27,966           22,512
Net income after Demutualization
   and IPO (2)                                        13,162           15,342            27,966           22,512
Earnings per share (2)
   Basic and diluted net income after
      Demutualization and IPO                           0.31             0.36              0.66             0.53
Pro forma earnings per share (3)
   Basic and diluted pro forma net income               0.68             0.36              0.66             0.53
   Basic pro forma net income, excluding
      realized gains and extraordinary
      items (4)                                         0.29             0.32              0.38             0.41
   Diluted pro forma net income, excluding
      realized gains and extraordinary
      items (4)                                         0.29             0.32              0.38             0.40

1996
Total revenues                                      $470,207          487,018           483,217          482,098
Operating income (1)                                   4,407            3,583             2,160            3,763
Income before gain on sale of
   subsidiary, income taxes and
   extraordinary items                                30,814           34,329            29,773           25,719
Income before extraordinary items                     25,389           28,391            87,887           54,847
Net income (loss)                                     23,150           24,042           (91,805)          50,307
Pro forma earnings per share (3)
   Basic and diluted pro forma income
      before extraordinary items                        0.45             0.51              0.44             1.33
   Basic and diluted pro forma net income
      (loss)                                            0.40             0.41             (3.81)            1.23
   Basic and diluted pro forma net income,
      excluding realized gains and
      extraordinary items (4)                           0.22             0.22              0.19             0.24
</TABLE>

(1) Operating income is defined as premium and fee revenues and other revenues
less medical and other benefit costs and selling, general and administrative
expenses.

(2) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public Offering
(IPO).

(3) Pro forma per share data gives effect to the Demutualization and IPO as if
they had taken place on January 1, 1996. See note 1 to the consolidated
financial statements for the pro forma assumptions used.  In addition, the 1997
and 1996 pro forma per share data has been restated to comply with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.

(4) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro forma
after-tax amounts for net realized gains, extraordinary items and the gain on
sale of a subsidiary in 1996.



                                  TRIGON 21 1997

<PAGE>
               SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data
and operating statistics)                           1997          1996          1995         1994         1993
===========================================================================================================================
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues
   Premium and fee revenues
      Commercial                                  $1,431,114    1,320,596    1,157,899    1,081,820    1,050,157
      Federal Employee Program                       377,722      356,741      329,243      303,250      279,058
      Amounts attributable
         to self-funded
         arrangements                              1,062,101    1,077,478      981,741      908,234      905,529
      Less: amounts attributable
         to claims under
         self-funded
         arrangements                               (961,588)    (988,353)    (897,954)    (827,869)    (815,488)
---------------------------------------------------------------------------------------------------------------------------
                                                   1,909,349    1,766,462    1,570,929    1,465,435    1,419,256
   Investment income                                  74,684       47,312       45,861       39,962       34,279
   Net realized gains                                 54,063       59,410       52,976       12,793       26,199
   Other revenues                                     25,524       49,356       55,176       45,467       30,555
---------------------------------------------------------------------------------------------------------------------------
      Total revenues                               2,063,620    1,922,540    1,724,942    1,563,657    1,510,289
---------------------------------------------------------------------------------------------------------------------------
Expenses
   Medical and other
     benefit costs
      Commercial                                   1,194,641    1,086,388      959,328      802,666      795,921
      Federal Employee Program                       359,915      339,143      312,222      283,645      262,295
---------------------------------------------------------------------------------------------------------------------------
                                                   1,554,556    1,425,531    1,271,550    1,086,311    1,058,216
   Selling, general and
      administrative expenses                        359,792      376,374      346,353      322,391      308,412
   Interest expense                                    4,602           --           --           --           --
   Copayment refund program                               --           --       47,073       36,432           --
---------------------------------------------------------------------------------------------------------------------------
      Total expenses                               1,918,950    1,801,905    1,664,976    1,445,134    1,366,628
---------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes, cumulative effects of
   changes in accounting principles and extraordinary
   items                                             144,670      120,635       59,966      118,523      143,661
Gain on sale of subsidiary                                --       62,253           --           --           --
---------------------------------------------------------------------------------------------------------------------------
Income before income taxes,
   cumulative effects of
   changes in accounting
   principles and
   extraordinary items                               144,670      182,888       59,966      118,523      143,661
Income tax expense (benefit)                          49,617      (13,626)       8,264       24,564       35,803
---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects
   of changes in accounting
   principles and extraordinary
   items                                              95,053      196,514       51,702       93,959      107,858
Cumulative effects of changes
   in accounting principles,
   net of income taxes                                    --           --           --           --        8,126
Extraordinary items, net of
   income taxes                                           --     (190,820)      (4,707)        (644)          --
---------------------------------------------------------------------------------------------------------------------------
Net income                                        $   95,053        5,694       46,995       93,315      115,984
===========================================================================================================================
</TABLE>


                                  TRIGON 22 1997

<PAGE>

<TABLE>
<CAPTION>
Years Ended December 31,                            1997         1996         1995          1994          1993
===========================================================================================================================
<S> <C>
Net income after Demutualization
   and IPO (1)                                     $  78,982             --           --           --           --

Earnings per share (1)
   Basic net income after
      Demutualization and IPO                            $      1.87       --          --           --           --
   Diluted net income
      after Demutualization
      and IPO                                            $      1.86       --          --           --           --

Pro forma earnings per share (2)
   Basic and diluted pro forma
      income before
      extraordinary items                                $      2.23     2.73         0.84          --           --
   Basic and diluted pro
      forma net income (loss)                             $      2.23      (1.77)      0.73          --           --
   Basic and diluted pro forma
      net income, excluding
      realized gains and
      extraordinary items (3)                             $      1.40      0.87        0.75          --           --

OPERATING STATISTICS
Medical loss ratio
   Commercial                                             83.5%        82.3%        82.9%        74.2%        75.8%
   Federal Employee Program                               95.3%        95.1%        94.8%        93.5%        94.0%

Selling, general and administrative
   expense ratio (4)                                      12.4%        13.4%        13.7%        13.8%        13.6%
Operating margin (5)                                       1.1%         0.8%         0.5%         7.0%         5.9%


December 31,                                        1997         1996         1995          1994          1993
===========================================================================================================================
BALANCE SHEET DATA
Cash and investments                              $1,370,868    1,213,902    1,119,652    1,001,571      940,914
Total assets                                       1,928,820    1,833,148    1,565,331    1,403,104    1,266,952
Obligation for Commonwealth
   Payment                                                --      175,000           --           --           --
Long-term debt                                        90,147        4,880        4,145           --           --
Total surplus                                             --      739,780      740,071      655,875      606,146
Total shareholders' equity                           958,737           --           --           --           --
</TABLE>
(1) Reflects net income and net income per share for the period after February
5, 1997, the effective date of the Demutualization and Initial Public Offering
(IPO).

(2) The pro forma per share data gives effect to the Demutualization and IPO as
if they had taken place on January 1, 1995. See note 1 to the consolidated
financial statements for the pro forma assumptions used.  In addition, the 1996
and 1995 pro forma per share data has been restated to comply with Statement of
Financial Accounting Standards No. 128, Earnings Per Share.

(3) Pro forma net income excluding realized gains and extraordinary items per
share is calculated as pro forma net income per share excluding the pro forma
after-tax amounts for net realized gains, extraordinary items, the gain on sale
of a subsidiary in 1996 and the costs incurred under the 1995 Copayment Program.

(4) The selling, general and administrative expense ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains.

(5) The operating margin ratio is calculated by dividing operating income by
premium and fee revenues. Operating income is defined as premium and fee
revenues and other revenues less medical and other benefit costs and selling,
general and administrative expenses.

                                  TRIGON 23 1997

<PAGE>

                   MANAGEMENT'S ANALYSIS OF OPERATING RESULTS
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES

GENERAL
Substantially all of the revenues of Trigon Healthcare, Inc. and subsidiaries
(collectively, Trigon or the Company) are generated from premiums and fees
received for health care services provided to its members and from investment
income. Trigon's expenses are primarily related to health care services provided
which consist of payments to physicians, hospitals and other providers. A
portion of medical costs expense for each period consists of an actuarial
estimate of claims incurred but not reported to Trigon during the period. The
Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs.
   The Company offers a diversified mix of managed care products, including
health maintenance organizations (HMO), preferred provider organizations (PPO),
point-of-service (POS) and traditional indemnity products with access to the
Company's participating provider network (PAR). The Company also provides a
broad array of Medicare supplement plans as well as specialty products including
pharmacy, dental, life, worker's compensation, preventive care, disability,
behavioral health, COBRA and flexible benefits account administration.
   The Company participates in the Federal Employee Program (FEP), a national
contract with the U.S. Office of Personnel Management (OPM), to provide benefits
through its PPO network for approximately 207,000 federal employees and their
dependents living in Virginia. FEP revenues represent the reimbursement by OPM
of medical costs incurred including the actual cost of administering the
program, as well as a performance-based share of the national program's overall
profit.
   Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the customers bear all or a portion of the underwriting risk.


ENROLLMENT
The following table sets forth the Company's enrollment data by network:
<TABLE>
<CAPTION>
As of December 31,     1997         1996        1995
========================================================================
<S> <C>
Commercial:
  HMO                  255,548     219,866     166,536
  PPO                  263,828     230,675     212,322
  PAR                  192,825     236,383     296,716
  Medicaid HMO          35,488      28,306       6,357
  Medicare Supplement  125,686     128,015     129,252
  Non-Virginia          64,143      49,251      19,857
------------------------------------------------------------------------
   Subtotal            937,518     892,496     831,040
Self-funded/ASO        679,667     700,482     705,459
Federal Employee
  Program              207,457     197,241     198,561
------------------------------------------------------------------------
Fully insured and self-
  funded enrollment  1,824,642   1,790,219   1,735,060
Processed for other
  Blue Cross and Blue
  Shield Plans (ASO)    15,728      70,330      64,558
------------------------------------------------------------------------
Total                1,840,370   1,860,549   1,799,618
========================================================================
</TABLE>

PREMIUM AND PREMIUM EQUIVALENTS BY
NETWORK SYSTEM
The following table sets forth the Company's premium and premium equivalents by
network (in thousands):

<TABLE>
<CAPTION>
Years ended December 31, 1997        1996        1995
=============================================================================
<S> <C>
Commercial:
  HMO               $  410,723     320,217     181,052
  PPO                  374,514     328,291     271,252
  PAR                  352,630     410,074     485,412
  Medicare
   Supplement          212,516     204,438     204,668
  Non-Virginia          80,731      57,576      15,515
-----------------------------------------------------------------------------
  Subtotal           1,431,114   1,320,596   1,157,899
Self-funded/ASO      1,062,101   1,077,478     981,741
Federal Employee
  Program              377,722     356,741     329,243
-----------------------------------------------------------------------------
Total               $2,870,937   2,754,815   2,468,883
=============================================================================

</TABLE>


                                  TRIGON 24 1997


<PAGE>

              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Premium and fee revenues increased 8.1% to $1,909.3 million in 1997 from
$1,766.5 million in 1996. The increase is due to a combination of commercial
rate increases and enrollment growth in the Company's HMO and PPO networks,
offset by expected declines in PAR network enrollment. Commercial HMO revenues
increased 28.3% to $410.7 million in 1997 from $320.2 million in 1996. The $90.5
million increase in commercial HMO revenues is a result of increased enrollment
attributable to a shift in members from PAR and PPO networks into the HMO
networks and from enrollment of new HMO members as well as an increase of 4.3%
in the average revenue per member. Commercial PPO revenues grew to $374.5
million in 1997 from $328.3 million in 1996, an increase of 14.1%, driven by
enrollment growth. Commercial PAR revenues declined to $352.6 million in 1997
from $410.1 million in 1996 primarily as a result of the transition of members
to the more tightly managed HMO and PPO networks. The full year impact of the
Mid-South acquisition increased premium and fee revenues $21.8 million, with
Mid-South revenues increasing to $74.7 million in 1997 from $52.9 million for
the period from February 29, 1996 (the date of the acquisition) through December
31, 1996. Overall, premium revenues on a per member per month basis for the
Company's commercial business increased 2.8% to $128.84 for 1997 from $125.33
for 1996. FEP revenues increased 5.9% to $377.7 million in 1997 from $356.7
million in 1996 primarily as a result of increased medical costs reimbursed by
OPM and a 5.2% increase in enrollment. Net revenues from self-funded
arrangements increased 12.8% to $100.5 million in 1997 from $89.1 million in
1996. The improvement is a result of higher administrative fees and favorable
stop loss settlements.
   Total enrollment declined to 1,840,370 as of December 31, 1997 from 1,860,549
as of December 31, 1996. The 20,179 decline was the net result of an increase of
45,022 members in commercial business mainly from HMO and PPO network growth,
FEP enrollment growth of 10,216 members offset by a decline of 75,417
self-funded/ASO members. Specifically, commercial enrollment increased 5.0% to
937,518 members as of December 31, 1997 from 892,496 members as of December 31,
1996. Enrollment in the HMO networks as of December 31, 1997 increased 17.3%
over the prior year and accounts for 31.0% of the Company's commercial
enrollment. Enrollment in the PPO networks increased 14.4% over the prior year
and accounts for 28.1% of the Company's commercial enrollment. The increases in
the HMO and PPO networks were offset by an expected decline of 18.4% for the
Company's PAR network as members migrate into more tightly managed networks and
partially as a result of ceding all student business with approximately 7,900
members. The PAR network enrollment represents 20.6% of the Company's total
commercial enrollment. FEP enrollment increased 5.2% to 207,457 as of December
31, 1997 from 197,241 as of December 31, 1996. The commercial and FEP enrollment
increases were offset by a 75,417 member decrease for self-funded/ASO business.
The decline in self-funded/ASO enrollment reflects the Company's shift away from
no risk, low margin ASO business and the migration of approximately 55,000
national account members from the Company's systems to a new interplan system
where the Company continues to process claims for other Blue Cross and Blue
Shield Plans (ASO).
   Investment income increased 57.9% to $74.7 million in 1997 from
$47.3 million in 1996. Net realized gains decreased 9.0% to $54.1 million
in 1997 from $59.4 million in 1996. The increase in investment income
reflects the continued increase in the overall size of the investment
portfolio over the past year and the Company's strategy to shift a
larger portion of the investment portfolio to fixed income securities. This
portfolio shift is also the primary factor for the net realized gains activity
in 1997.
   Other revenues decreased by 48.3% to $25.5 million in 1997 from $49.4 million
in 1996. The decrease is primarily a result of the sale of the Company's
electronic communication services subsidiary, Health Communication Services,
Inc. (HCS), on December 31, 1996. During 1996, HCS contributed $21.5 million in
other revenues.



                                  TRIGON 25 1997

<PAGE>

              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

   Medical costs increased 9.1% to $1,554.6 million in 1997 from $1,425.5
million in 1996. The $129.0 million increase is primarily the result of overall
commercial enrollment growth, an increase in FEP medical costs reimbursed by
OPM, higher than normal utilization in the Medicare supplement products during
the first half of the year, higher than expected utilization and cost per member
in one of the Company's HMO plans and the full year impact of the Mid-South
acquisition. The medical cost per member per month for the Company's commercial
business increased 4.3% to $107.55 in 1997 from $103.10 in 1996. Combined with a
2.8% increase in commercial premium revenues per member per month, the loss
ratio on commercial business increased to 83.5% in 1997 from 82.3% in 1996. The
increase can be attributed partly to issues at one of the Company's HMO plans
where, during 1997, the Company implemented extensive cost containment actions,
pricing initiatives and processing controls, as well as a change in management,
all aimed at bringing the plan's results to acceptable levels. The Company also
experienced higher than expected Medicare supplement product medical costs in
the first half of the year. The increase was caused by a greater number of
high-dollar claims and higher medical costs driven by physician outpatient
claims and pharmacy utilization. Management is encouraged by the loss ratio
improvement exhibited in the second half of 1997. The commercial loss ratio
averaged 84.1% for the first half of 1997 as compared to 82.9% for the last half
of the year. The improvement reflected improved medical cost levels for the
Company's Medicare supplement products, the impact of actions mentioned above
regarding one of the Company's HMO plans and the overall impact of cost
containment initiatives on the network-based PAR, PPO and HMO businesses. The
Company expects the cost containment initiatives to continue to have a positive
impact on the commercial loss ratio in 1998.


   Selling, general and administrative expenses (SG&A) declined by 4.4% to
$359.8 million in 1997 from $376.4 million in 1996. The SG&A ratio was 12.4% in
1997 as compared to 13.4% in 1996. The decrease is a result of the sale of HCS
on December 31, 1996 which contributed $21.3 million in SG&A expenses in 1996,
along with the impact of Company-wide streamlining and cost
containment activities, including a 10.5% reduction in headcount.
In addition, the Company eliminated the postretirement medical benefit program
for a substantial portion of its employees in the fourth quarter of 1997. The
elimination of this benefit resulted in a one-time curtailment gain of nearly
$4.0 million which was recorded as a reduction to SG&A expenses. The Company
expects that this change will reduce the Company's future annual expenses by
approximately $2.0 million. The decrease in expenses was partially offset by the
full year impact of the Mid-South acquisition, $5.4 million in incremental costs
related to modifying computer software for the year 2000 and other employee
benefit-related accruals.
   Interest expense in 1997 was $4.6 million. There was no interest expense in
1996. Interest expense for 1997 is the result of the $85 million outstanding on
the revolving credit agreement to fund a portion of the payment made to the
Commonwealth of Virginia in February 1997 (Commonwealth Payment) in accordance
with a Plan of Demutualization (Demutualization) and the Initial Public Offering
(IPO).
   Income before income taxes and extraordinary items decreased 20.9% to $144.7
million in 1997 from $182.9 million in 1996. The decrease is primarily
attributable to the sale of HCS resulting in a pretax gain of $62.3 million in
1996. The decrease also reflects a $5.3 million decline in net realized gains
and interest expense of $4.6 million, offset by a $27.4 million increase in
investment income and a $6.6 million improvement in operating income (defined as
income before income taxes and extraordinary items excluding investment income,
net realized gains, gain on sale of subsidiary and interest expense).


                                  TRIGON 26 1997

<PAGE>



              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

   The Company's effective tax rate was 34.3% in 1997 compared to an effective
tax rate benefit of 7.5% in 1996. The effective tax rate benefit for 1996 is
primarily due to a reduction in the valuation allowance on deferred tax assets
caused by the realization of alternative minimum tax credits during 1996 and the
elimination as of September 30, 1996 of the remaining $63.9 million valuation
allowance. Excluding the effects of the elimination of the valuation allowance,
the effective tax rate in 1996 was 27.5% due to the realization of alternative
minimum tax credits during the year.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Premium and fee revenues increased 12.4% to $1,766.5 million in 1996 from
$1,570.9 million in 1995 primarily due to the growth in the Company's HMO and
PPO networks, which was partially offset by declines in PAR network enrollment,
and as a result of the Mid-South acquisition in February 1996. Commercial HMO
revenues grew 76.9% to $320.2 million in 1996 from $181.1 million in 1995. The
$139.1 million increase in commercial HMO revenues is attributable to a shift in
members from PAR and PPO networks into the HMO networks and from enrollment of
new HMO members, the conversion of 38,540 members from self-funded products to
commercial products and a 3.9% increase in the average revenue per member. In
addition, the Priority, Inc. HMO acquisition in May 1995 accounted for
approximately $28.0 million of the increased HMO revenues. Commercial PPO
revenues grew 21.0% to $328.3 million in 1996 from $271.3 million in 1995.
Commercial PAR revenues declined to $410.1 million in 1996 from $485.4 million
in 1995 as a result of groups transitioning into more tightly managed networks.
Commercial revenues for 1996 also include $52.9 million of revenues from
Mid-South, which was acquired on February 29, 1996. Total commercial premium per
member per month increased 1.5% to $125.33 in 1996 from $123.48 in 1995. FEP
revenues increased 8.4% to $356.7 million in 1996 from $329.2 million in 1995 as
a result of increased medical costs reimbursed by OPM.
   Total enrollment increased 3.4% to 1,860,549 as of December 31, 1996 from
1,799,618 as of December 31, 1995. Commercial enrollment increased 7.4% to
892,496 members as of December 31, 1996 from 831,040 members as of December 31,
1995. The increase in commercial enrollment is a result of growth in the HMO
networks of 75,279 members, the Mid-South acquisition which added 49,251 members
and continued growth in the PPO network of 18,353 members, offset by a decrease
of 80,190 members in the PAR network and out of state student and individual
products due to declining enrollment.
   Investment income increased 3.2% to $47.3 million in 1996 from $45.9 million
in 1995. Net realized gains increased 12.1% to $59.4 million in 1996 from $53.0
million in 1995. The increase in investment income is attributable to the
increased size of the investment portfolio. The increase in net realized gains
is due primarily to the sale of investment securities to fund the Mid-South
acquisition as well as the sale of investment securities in an effort to shorten
bond maturity levels.
   Other revenues decreased by 10.5% to $49.4 million in 1996 from $55.2 million
in 1995. Increased revenues generated from health management services were
offset by declining revenues from third party administration of health care
claims. Prior year results also include nonrecurring gains of $5.4 million
related to the sale of joint venture interests and other assets to unrelated
parties. The Company sold its electronic communication services subsidiary, HCS,
on December 31, 1996 and recognized an after tax gain of approximately $40
million as a result of this sale. In 1996, HCS contributed $21.5 million in
other revenues.
   Medical costs increased 12.1% to $1,425.5 million in 1996 from $1,271.6
million in 1995. This increase is primarily the result of enrollment growth in
the HMO's and the Priority and Mid-South acquisitions. The Company's medical
loss ratio on commercial business improved to 82.3% in 1996 from 82.9% in 1995.
The medical cost per member per month for the Company's commercial business
increased 0.8% to $103.10 in 1996 from $102.31 in 1995.



                                  TRIGON 27 1997

<PAGE>



              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

   Selling, general and administrative expenses increased 8.7% to $376.4 million
in 1996 from $346.4 million in 1995. The SG&A expense ratio was 13.4% in 1996 as
compared to 13.7% in 1995. The Company incurred $14.4 million of additional
costs related to increased HMO enrollment including the impact of the Priority
acquisition in 1995. The acquisitions of Mid-South in 1996 and Healthy
Homecomings, Inc. and Healthcare Ventures Associates in 1995 resulted in a $16.9
million increase in 1996. The Company continued to invest in managed care
infrastructure and technology, increasing SG&A $8.5 million, for improved
medical cost data analysis, internally developed managed mental health
capabilities, expansion of appropriateness review, costs associated with
obtaining NCQA accreditation and upgrading systems software for the century date
change. In 1996, the Company incurred one-time charges of $6.1 million for
severance costs, signing bonuses, relocation and employment agreement
adjustments.
   Income before gain on sale of subsidiary, income taxes and extraordinary
items, excluding the effect of the Copayment Program in 1995, increased by 12.7%
to $120.6 million in 1996 from $107.0 million in 1995. The increase is a result
of the effects of the improved medical loss ratio and increased investment
income and net realized gains, partially offset by the decline in other
revenues.
   The Company's effective tax rate for 1996 was a tax benefit of 7.5%. This
rate differs from the 35% statutory federal rate primarily due to a reduction in
the valuation allowance on deferred tax assets caused by the realization of
alternative minimum tax credits during 1996 and the elimination of the remaining
$63.9 million valuation allowance because the Demutualization and IPO made it
more likely than not that the tax credits would be realized. Excluding the
effects of the elimination of the valuation allowance, the effective tax rate
would have been 27.5% for 1996. These items are not recurring and the Company
believes that in the future its effective tax rate reflected in its consolidated
financial statements should approximate the 35% federal statutory rate.



   In 1996, the Company reflected the $175 million obligation to the
Commonwealth of Virginia as required by the Plan of Demutuali-zation as an
extraordinary charge in the consolidated financial statements. The other
extraordinary items represent administrative costs associated with the
Demutualization.

LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are premiums and fees received and
investment income. The primary uses of cash include health care benefit expenses
and capitation payments, brokers' and agents' commissions, administrative
expenses, income taxes and repayment of long-term debt. Trigon generally
receives premium revenues in advance of anticipated claims for related health
care services.
   The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital. Trigon fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates as well as market and economic
conditions. Accordingly, the Company maintains a diversified investment
portfolio consisting both of fixed income and equity securities, with the
objective of reducing risk and maximizing overall return. The fixed income
portfolio includes government and corporate securities, both domestic and
international, with an average quality rating of A as of December 31, 1997. The
portfolio had an average contractual maturity of 8.9 years as of December 31,
1997. A portion of the fixed income portfolio is designated as a short-term
fixed income portfolio and is intended to cover near term cash flow needs and to
serve as a buffer for unanticipated business needs. The equity portfolios
contain readily marketable securities ranging from small growth to
well-established Fortune 500 companies. The international equity portfolio is
diversified by industry, country and currency-related exposure. The Company
enters into foreign currency forward contracts and foreign currency options to
manage its exposure to fluctuations in foreign currency exchange rates on its
international debt and equity investments. The Company also enters into
financial futures contracts for portfolio strategies such as minimizing interest
rate risk and managing portfolio duration. As of December 31, 1997, the equity
portfolio was

                                  TRIGON 28 1997

<PAGE>

              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

10.5% of the total portfolio, down from 27.8% as of December 31, 1996, with the
majority of the shift occurring prior to March 31, 1997. The Company currently
plans to maintain the equity portfolio at levels generally no greater than 15%.
As a result of this shift, the Company experienced lower realized gains in 1997
and expects generally lower realized gains and a more consistent contribution to
income from the investment portfolio in the future.
   Cash provided (used) by operating activities for the years ended December 31,
1997 and 1996 was $(117.0) million and $21.8 million, respectively. The
significant decrease in cash provided by operations in 1997 is primarily due to
the $175 million Commonwealth Payment made in the first quarter of 1997. This
decrease in cash provided by operating activities is offset by increased cash
provided by financing activities.
   Cash used by investing activities increased to $116.3 million for the year
ended December 31, 1997 from $10.1 million for 1996. This increase is primarily
due to investment purchases made with cash flows from net proceeds from the IPO
in February 1997.
   Cash provided (used) by financing activities increased to $208.9 million in
1997 from $(9.5) million in 1996 primarily due to the IPO and borrowing under a
credit agreement.
   Effective February 5, 1997, the Company
completed its conversion from a mutual insurance company to a stock insurance
company in accordance with a Plan of Demutualization. In accordance with the
Demutualization, Blue Cross and Blue Shield of Virginia (Virginia BCBS) changed
its name to Trigon Insurance Company (dba Trigon Blue Cross Blue Shield) and
became a wholly owned subsidiary of Trigon Healthcare, Inc., a holding company.
The membership interests of Virginia BCBS's eligible members were converted into
Class A common stock of Trigon Healthcare, Inc., or, in certain circumstances,
cash. The Plan of Demutualization also required the Company to complete an IPO
of stock simultaneously with the conversion. Accordingly, Trigon Healthcare,
Inc. issued 17.8 million shares of Class A common stock at $13 per share in the
IPO generating net proceeds of $215.2 million. In connection with the
Demutualization, the Company was required to make the $175 million Commonwealth
Payment. The Company used approximately $90 million of the net proceeds and $85
million in borrowings under a revolving credit agreement to fund this payment.
The Company also used approximately $91.1 million of the offering proceeds to
pay certain eligible members cash in lieu of shares of common stock that would
otherwise be issued to such eligible members pursuant to the Demutualization.
   In connection with the Demutualization and IPO, the Company entered into a
$300 million five-year revolving credit agreement with a syndicate of banks. The
credit agreement calls for various borrowing options and rates and requires the
Company to pay a facility fee on a quarterly basis. The credit agreement also
contains certain financial covenants and restrictions including minimum net
worth requirements as well as limitations on dividend payments. As of December
31, 1997, $85 million had been borrowed and remained outstanding under this
credit agreement, the proceeds of which were used to make a portion of the
Commonwealth Payment at the time of the Demutualization and IPO.
   The Company believes that cash flow generated by operations and its cash and
investment balances will be sufficient to fund continuing operations, capital
expenditures and debt repayment costs for the foreseeable future. The nature of
the Company's operations is such that cash receipts are principally premium
revenues typically received up to three months prior to the expected cash
payment for related health care services. The Company's operations are not
capital intensive, and there are currently no commitments for major capital
expenditures to support existing business.
   The Company has developed and is currently executing a comprehensive plan to
prepare the computer systems and application software for the year 2000. Project
completion for the Company's systems and software is scheduled for the end of
1998, allowing adequate time for testing. The Company is using both external and
internal resources for the project. The incremental costs for the project were
$6.8 million through December 31, 1997 and are expected to approximate $20.0
million through 1999. The costs will be expensed as incurred and will be funded
through operating cash flows.






                                  TRIGON 29 1997

<PAGE>


              MANAGEMENT'S ANALYSIS OF OPERATING RESULTS CONTINUED

   In addition, the Company is actively working with hospitals, providers and
others depended upon for electronic commerce in an effort to ensure they are
assessing and correcting any issues relating to the year 2000 which could impact
their ability to conduct business with the Company. Lack of appropriate action
on the part of these third parties could impact the Company's ability to serve
its customers. The Company will continue to monitor the progress of these
entities.

NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, becomes effective for fiscal years beginning after
December 15, 1997, and establishes standards for the reporting and display of
comprehensive income. Comprehensive income includes all changes in equity
resulting from transactions and economic events from nonowner sources. The
standard does not require a specific format for the financial statement but does
require equal prominence with other financial statements and reclassification of
prior year comparative financial statements.
   SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, becomes effective for fiscal years beginning after December 15,
1997. This standard supersedes the current SFAS No. 14 and establishes new
disclosure requirements about products and services, geographic areas and major
customers on an annual and quarterly basis. The standard requires companies to
disclose qualitative and quantitative segment data on the basis that is used by
management for evaluating segment performance and deciding how to allocate
resources.

FORWARD-LOOKING STATEMENTS
Certain statements in this discussion contain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company and its subsidiaries within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
inherent risks and uncertainties, many of which are beyond the control of the
Company, that may cause actual results to differ materially from those
contemplated by such forward-looking statements. Factors that may cause actual
results to differ materially from those contemplated by such forward-looking
statements include, but are not limited to, rising health care costs, business
conditions and competition in the managed care industry, development in health
care reform and other regulatory issues.

                 MARKET PRICES OF COMMON STOCK AND DIVIDEND DATA
The Class A common stock, par value $0.01 per share, is traded on the New York
Stock Exchange under the symbol TGH. The reported high and low closing prices by
quarter from January 31, 1997, the first trading day after the Demutualization
and IPO, to December 31, 1997 were as follows:

<TABLE>
<CAPTION>
1997                               High          Low
=======================================================================

=======================================================================
<S> <C>
First quarter                          $19 1/2      16
Second quarter                          24 1/4      17 3/4
Third quarter                           25 5/16     21
Fourth quarter                          26 13/16    23 1/8
=======================================================================
</TABLE>

The Company has never paid any dividends on its common stock and anticipates
that all earnings in the foreseeable future will be retained to finance the
continuing development of its business. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the Company's earnings, financial condition, capital requirements, the revolving
credit agreement restrictions on dividends and such other factors as the
Company's Board of Directors deems relevant.
   To the extent that the Company determines to pay dividends in the future, the
principal source of funds to pay dividends to shareholders would be dividends
received by the Company from its subsidiaries. The Company is a holding company
and insurance laws and regulations restrict the payment of dividends by health
care insurance companies, such as Trigon Insurance Company, in a holding company
structure.
   As of February 18, 1998, there were 105,841 shareholders of record of the
Company's Class A common stock.

                                  TRIGON 30 1997

<PAGE>

                           CONSOLIDATED BALANCE SHEETS
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, 1997 and 1996
(In thousands, except per share data)                                                     1997           1996
===================================================================================================================
<S> <C>
ASSETS
Current assets
   Cash                                                                                 $    7,010        31,482
   Investment securities, at estimated fair value (note 3)                               1,363,858     1,182,420
   Premiums and other receivables (note 4)                                                 360,941       390,997
   Deferred income taxes (note 10)                                                              --        16,572
   Other                                                                                     7,607        10,035
-------------------------------------------------------------------------------------------------------------------
Total current assets                                                                     1,739,416     1,631,506
-------------------------------------------------------------------------------------------------------------------
Property and equipment, net (note 5)                                                        43,912        49,545
Deferred income taxes (note 10)                                                             45,185        48,170
Goodwill and other intangibles, net (note 18)                                               68,354        76,043
Restricted investments, at estimated fair value (note 3)                                    10,139        11,019
Other assets                                                                                21,814        16,865
-------------------------------------------------------------------------------------------------------------------
Total assets                                                                            $1,928,820     1,833,148
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
   Medical and other benefits payable (note 6)                                          $  412,710       417,797
   Unearned premiums                                                                        93,157        91,164
   Accounts payable and accrued expenses                                                    57,736        84,470
   Deferred income taxes (note 10)                                                           4,298            --
   Other liabilities (note 8)                                                              179,918       198,893
   Obligation for Commonwealth Payment (note 1)                                                 --        87,500
-------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                  747,819       879,824
-------------------------------------------------------------------------------------------------------------------
Obligation for Commonwealth Payment, noncurrent (note 1)                                        --        87,500
Obligations for employee benefits, noncurrent (note 12)                                     59,467        57,679
Medical and other benefits payable, noncurrent (note 6)                                     66,541        59,246
Long-term debt (note 11)                                                                    90,147         4,880
Minority interest in subsidiary                                                              6,109         4,239
-------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                          970,083     1,093,368
-------------------------------------------------------------------------------------------------------------------
Shareholders' equity
   Common stock, $0.01 par; 42,300 shares issued and
      outstanding (notes 1 and 13)                                                             423            --
   Capital in excess of par (note 1)                                                       842,035            --
   Retained earnings (note 1)                                                               78,982       706,259
   Net unrealized gain on investment securities, net of deferred
      income taxes of $20,083 and $18,032 (note 3)                                          37,297        33,521
-------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                                 958,737       739,780
Commitments and contingencies (notes 7 and 21)
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                              $1,928,820     1,833,148
===================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.

                                  TRIGON 31 1997
<PAGE>

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
(In thousands, except per share data)                                      1997           1996            1995
===========================================================================================================================
<S> <C>
REVENUES
   Premium and fee revenues
      Commercial                                                         $1,431,114      1,320,596     1,157,899
      Federal Employee Program                                              377,722        356,741       329,243
      Amounts attributable to self-funded arrangements                    1,062,101      1,077,478       981,741
      Less: amounts attributable to claims under
         self-funded arrangements                                          (961,588)      (988,353)     (897,954)
---------------------------------------------------------------------------------------------------------------------------
                                                                          1,909,349      1,766,462     1,570,929
   Investment income (note 3)                                                74,684         47,312        45,861
   Net realized gains (note 3)                                               54,063         59,410        52,976
   Other revenues (note 9)                                                   25,524         49,356        55,176
---------------------------------------------------------------------------------------------------------------------------
Total revenues                                                            2,063,620      1,922,540     1,724,942
===========================================================================================================================
EXPENSES
   Medical and other benefit costs (note 6)
      Commercial                                                          1,194,641      1,086,388       959,328
      Federal Employee Program                                              359,915        339,143       312,222
---------------------------------------------------------------------------------------------------------------------------
                                                                          1,554,556      1,425,531     1,271,550
   Selling, general and administrative expenses
      (notes 2 and 12)                                                      359,792        376,374       346,353
   Interest expense (note 11)                                                 4,602             --            --
   Copayment refund program (note 19)                                            --             --        47,073
---------------------------------------------------------------------------------------------------------------------------
Total expenses                                                            1,918,950      1,801,905     1,664,976
---------------------------------------------------------------------------------------------------------------------------
Income before gain on sale of subsidiary, income taxes
   and extraordinary items                                                  144,670        120,635        59,966
Gain on sale of subsidiary (note 18)                                             --         62,253            --
---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary items                          144,670        182,888        59,966
   Income tax expense (benefit) (note 10)                                    49,617        (13,626)        8,264
---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items                                            95,053        196,514        51,702
Extraordinary items - demutualization costs and
   Commonwealth Payment, net of income taxes of
   $833 and $2,535 (note 1)                                                      --       (190,820)       (4,707)
---------------------------------------------------------------------------------------------------------------------------
Net income                                                               $   95,053          5,694        46,995
===========================================================================================================================
Net income after Demutualization and IPO (notes 1 and 14)                $   78,982
===========================================================================================================================
Earnings per share (notes 1 and 14)
   Basic net income after Demutualization and IPO                             $1.87
===========================================================================================================================
   Diluted net income after Demutualization and IPO                           $1.86
===========================================================================================================================
Proforma earnings per share (notes 1 and 14) Basic and diluted
   pro forma income before extraordinary items                                $2.23           2.73          0.84
===========================================================================================================================
   Basic and diluted pro forma net income (loss)                              $2.23          (1.77)         0.73
===========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.

                                  TRIGON 32 1997
<PAGE>
                           CONSOLIDATED STATEMENTS OF
                         CHANGES IN SHAREHOLDERS' EQUITY
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                                          Unrealized
                                                                 Capital                gains (losses)    Total
Years ended December 31, 1997, 1996 and 1995         Common     in excess    Retained   on investment  shareholders'
(In thousands)                                        stock      of par      earnings   securities, net  equity
===========================================================================================================================
<S> <C>
BALANCE AT JANUARY 1, 1995                                $--          --      653,570        2,305      655,875
Net income                                                --           --       46,995           --       46,995
Change in unrealized gains (losses) on
   investment securities, net (note 3)                    --           --           --       37,201       37,201
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995                              --           --      700,565       39,506      740,071
Net income                                                --           --        5,694           --        5,694
Change in unrealized gains (losses) on
   investment securities, net (note 3)                    --           --           --       (5,985)      (5,985)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996                              --           --      706,259       33,521      739,780
Net income before Demutualization                         --           --       16,071           --       16,071
Issuance of 24,475 shares to eligible
   policyholders in the Demutualization
   and cash payments to eligible policyholders
   in lieu of shares of common stock                     245      630,941     (722,330)          --      (91,144)
Issuance of 17,825 shares in the
   Initial Public Offering, net of expenses              178      215,027           --           --      215,205
Other, principally Trigon shares purchased by
   consolidated grantor trusts                            --       (3,933)          --           --       (3,933)
Net income after Demutualization                          --           --       78,982           --       78,982
Change in unrealized gains (losses) on
   investment securities, net (note 3)                    --           --           --        3,776        3,776
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                            $423      842,035       78,982       37,297      958,737
===========================================================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.

                                  TRIGON 33 1997
<PAGE>

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
(In thousands)                                                             1997            1996          1995
===========================================================================================================================
<S> <C>
Net cash provided (used) by operating activities
   (note 17)                                                            $  (116,982)        21,819       29,973
---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
   Proceeds from sale of property and equipment
      and other assets                                                          790             45            25
   Capital expenditures                                                      (8,226)       (14,147)      (13,293)
   Investment securities purchased                                       (4,784,150)    (2,759,974)   (2,694,188)
   Proceeds from investment securities sold                               3,897,611      2,585,033     1,531,862
   Maturities of fixed income securities                                    777,626        186,420     1,178,232
   Cash paid for purchase of subsidiaries,
      net of cash acquired                                                       --        (84,497)      (26,762)
   Proceeds from sale of subsidiary                                              --         76,979             --
   Cash paid for other investments                                               --             --        (7,500)
---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities                                      (116,349)       (10,141)      (31,624)
---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
   Proceeds from long-term debt                                              85,439            735         4,145
   Payments on long-term debt                                                  (172)            --            --
   Payments to members in lieu of common stock
      pursuant to Plan of Demutualization                                   (91,144)            --            --
   Net proceeds from issuance of common stock                               215,205             --            --
   Other, principally purchase of Trigon common stock
      by consolidated grantor trusts                                         (3,933)            --            --
   Change in outstanding checks in excess of bank balance                     3,464        (10,194)       15,667
---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities                            208,859         (9,459)       19,812
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                             (24,472)         2,219        18,161
Cash - beginning of year                                                     31,482         29,263        11,102
---------------------------------------------------------------------------------------------------------------------------
Cash - end of year                                                      $     7,010         31,482        29,263
===========================================================================================================================
</TABLE>

See accompanying summary of significant accounting policies and notes to
consolidated financial statements.

                                  TRIGON 34 1997

<PAGE>

                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES

December 31, 1997 and 1996

ORGANIZATION
Trigon Healthcare, Inc. is a stock holding
company formed in 1996 as a wholly owned subsidiary of Blue Cross and Blue
Shield of Virginia (dba Trigon Blue Cross Blue Shield) (Virginia BCBS) for the
purpose of becoming the parent company of Virginia BCBS under a Plan of
Demutualization (Demutualization). In accordance with the Demutualization,
effective February 5, 1997, Virginia BCBS completed its conversion from a mutual
insurance company to a stock insurance company, changed its name to Trigon
Insurance Company (dba Trigon Blue Cross Blue Shield) and became a wholly-owned
subsidiary of Trigon Healthcare, Inc. (Trigon Healthcare, Inc. and subsidiaries
herein collectively referred to as the Company) (note 1).
   Trigon Healthcare, Inc. owns 100% of Trigon Insurance Company, HealthKeepers,
Inc., Physicians Health Plan, Inc., Mid-South Insurance Company, Trigon Health
and Life Insurance Company (formerly Monticello Life Insurance Company),
Healthcare Support Corporation, Trigon Services, Inc., Consolidated Holdings
Corporation, Trigon Administrators, Inc., Health Management Corporation,
Monticello Service Agency, Inc., and Trigon Health Ventures, Inc. Additionally,
Trigon Healthcare, Inc. owns 80% of Priority, Inc. and 51% of Peninsula Health
Care, Inc. Through its subsidiary, Trigon Insurance Company, and other health
maintenance organization (HMO) subsidiaries, the Company is the largest managed
health care company in Virginia, providing approximately 1.8 million customers
with a comprehensive spectrum of managed care products and services provided
primarily through three provider network systems. Trigon Insurance Company also
processes claims for Medicare and participates in a national contract with the
U.S. Office of Personnel Management to provide benefits to Federal employees
within Virginia through the Federal Employee Program (FEP). The various
subsidiaries provide complementary products and services to customers and
non-customers of Trigon Insurance Company including third-party administration
for medical and workers' compensation, life and disability insurance, health
promotion and other products.



   The significant accounting policies and practices followed by the Company are
as follows:

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The Company follows
Statement of Financial Accounting Standards (SFAS) No. 60, Accounting and
Reporting by Insurance Enterprises, as it relates to its insurance business and
Statement of Position 89-5, Financial Accounting and Reporting by Providers of
Prepaid Healthcare Services, as it relates to its HMO business. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes, including
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
   The consolidated financial statements include the accounts of Trigon
Healthcare, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Investments in other companies in which less than a majority interest is held
and where the Company has significant influence over the operating and financial
policies of the investee are accounted for under the equity method.

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



                                  TRIGON 35 1997


<PAGE>

              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

   In addition, the managed care industry is highly competitive in both Virginia
and in other states in the Southeastern and Mid-Atlantic United States where the
Company principally intends to expand. There is no assurance that such
competition will not exert strong pressures on the Company's profitability, its
ability to increase enrollment, or its ability to successfully attain its
expansion plans. Also, there can be no assurance that regulatory initiatives
will not be undertaken at the state or federal level to reform the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform could adversely affect the Company's
profitability.

INVESTMENT SECURITIES
Investment securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. All investment
securities are considered available for sale and are recorded at estimated fair
value, based on quoted market prices. The net unrealized gain or loss on
investment securities, net of deferred income taxes, is included as a separate
component of shareholders' equity. A decline in the fair value of any investment
security below cost, that is deemed other than temporary, is recorded as a
realized loss resulting in a new cost basis for the security. Costs of
investments sold are determined on the first in, first out basis.
   Certain of the Company's investment securities are denominated in foreign
currencies. The Company utilizes forward currency contracts and foreign currency
options to hedge exposure to fluctuations in foreign currency exchange rates.
The forward contracts and options are reflected as investment securities on the
consolidated balance sheets at fair value. Unrealized gains and losses on these
contracts are recorded as a separate component of shareholders' equity along
with the unrealized gains and losses on the securities being hedged. When the
securities hedged by these contracts are sold, realized gains or losses on these
contracts are reflected in the consolidated statements of operations as net
realized gains.


   The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures is limited to that of the market value of the
underlying portfolios. Should this limitation be exceeded, futures contracts are
immediately terminated in order to comply with this restriction. Initial margins
in the form of securities are maintained with the counterparties for these
transactions. Changes in fair value of financial futures, determined on a daily
basis, are recorded as realized gains or losses in the consolidated statements
of operations. Terminations of contracts are accounted for in a similar manner.

SOFTWARE DEVELOPMENT COSTS
The Company expenses as incurred substantially all costs associated with the
development of computer software for internal use, other than the initial
purchase price of software packages.

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, which are 40 to 50 years
for buildings and 3 to 10 years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. Any gain or loss realized
upon retirement or disposal is reflected in selling, general and administrative
expenses.

GOODWILL AND OTHER INTANGIBLES
Costs in excess of fair value of net tangible and identified intangible assets
of businesses acquired are amortized using the straight-line method over periods
from 15 to 25 years. Recoverability is reviewed annually or sooner if events or
changes in circumstances indicate that the carrying amount may exceed fair
value. Recoverability is then determined by comparing the undiscounted net cash
flows of the assets to which the goodwill applies to the net book value
including goodwill of those assets.


                                  TRIGON 36 1997

<PAGE>



              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

   Amortization was $7,689,000, $4,633,000 and $1,399,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Accumulated amortization as of
December 31, 1997 and 1996 was $13,721,000 and $6,032,000, respectively.

MEDICAL AND OTHER BENEFITS PAYABLE
The Company establishes liabilities for claims in process of review and claims
incurred but not reported. These liabilities are based on historical payment
patterns using actuarial techniques. In addition, processing costs are accrued
as operating expenses based on an estimate of the costs necessary to process
these claims. The methods for making these estimates and for establishing the
resulting liabilities are continually reviewed and updated, and any adjustments
resulting therefrom are reflected in current operations. While the ultimate
amount of claims and the related expenses paid are dependent on future
developments, management is of the opinion that the liabilities for claims and
claims processing costs are adequate to cover such claims and expenses.

REVENUES
All of the Company's individual and certain of the Company's group contracts
provide for the individual or the group to be fully insured. Premiums for these
contracts are billed in advance of the respective coverage periods and are
initially recorded as premiums receivable and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.
   Certain other groups have contracts that provide for the group to be at risk
for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability or the group's liability on any one
participant is capped for the year. The Company charges self-funded groups an
administrative fee which is based on the number of members in a group or the
group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.

AGENCY CONTRACTS
As fiscal intermediary and administrative agent for Medicare and other plans,
the Company allocates operating expenses to these lines of business to determine
reimbursement due for services rendered in accordance with the contracts in
force. Claims processed under these arrangements are not included in the
accompanying consolidated statements of operations and the reimbursement of
allocated operating expenses is recorded as a reduction of the Company's
selling, general and administrative expenses.

POSTRETIREMENT/POSTEMPLOYMENT BENEFITS
Pension costs are accrued in accordance with SFAS No. 87, Employers' Accounting
for Pensions, and are funded based on the minimum contribution requirements of
the Employee Retirement Income Security Act of 1974. The actuarial cost method
used is the projected unit credit method.
   The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
   The Company also provides certain
disability related postemployment benefits. These benefits are accrued in
accordance with SFAS No. 112, Employers' Accounting for Postemployment Benefits.
The Company accrues the benefits when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable estimates
of the amounts to be paid.

                                  TRIGON 37 1997


<PAGE>





              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED

STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock-based compensation plans.  Accordingly, no compensation expense has been
recognized for the stock options granted and employee stock purchases.  The
Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting
for Stock Based Compensation.

INCOME TAXES
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. This statement replaces primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if all stock
options and other stock-based awards, as well as convertible securities, were
exercised and converted into common stock. All net income per share amounts for
all periods have been presented and, where appropriate, restated to conform to
SFAS No. 128 requirements.

RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.


                                  TRIGON 38 1997
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES

December 31, 1997 and 1996

Consistent with the financial statement presentation, the following notes
include information related to the consolidated balance sheets as of December
31, 1997 and 1996 and information related to the consolidated statements of
operations and cash flows for each of the years in the three-year period ended
December 31, 1997.

NOTE 1. DEMUTUALIZATION AND IPO AND PRO FORMA FINANCIAL INFORMATION
Effective February 5, 1997, Virginia BCBS (dba Trigon Blue Cross Blue Shield)
completed its conversion from a mutual insurance company to a stock insurance
company in accordance with a Plan of Demutualization (Demutualization). In
accordance with the Demutualization, Virginia BCBS changed its name to Trigon
Insurance Company (dba Trigon Blue Cross Blue Shield) and became a wholly-owned
subsidiary of Trigon Healthcare, Inc. The membership interests of Virginia
BCBS's eligible members were converted into Class A common stock of Trigon
Healthcare, Inc., or, in certain circumstances, cash. The Demutualization also
required the Company to complete an Initial Public Offering (IPO) of stock
simultaneously with the conversion. Accordingly, Trigon Healthcare, Inc. issued
17.8 million shares of Class A common stock at $13 per share in the IPO,
generating net proceeds of $215.2 million. In connection with the
Demutualization, the Company was required to make a payment of $175 million to
the Commonwealth of Virginia (Commonwealth Payment) in February 1997. The
Commonwealth Payment was accrued and reflected as an extraordinary charge in the
consolidated financial statements for 1996. The Company used approximately $90
million of the net proceeds and $85 million in borrowings under a revolving
credit agreement to fund this payment (note 11). The Company also used
approximately $91.1 million of the offering proceeds to pay certain eligible
members cash in lieu of shares of common stock that would otherwise be issued to
such eligible members pursuant to the Demutualization. The statements of changes
in shareholders' equity and the statements of cash flows reflect the
consolidated capitalization effects of the Demutualization and IPO for 1997.


The following pro forma information for the years ended December 31, 1997, 1996
and 1995 gives effect to the Demutualization and IPO as if they had occurred on
January 1, 1995, consistent with the Company's pro forma presentation in its
Form S-1 filed on January 29, 1997 in connection with its IPO (in thousands):

<TABLE>
<CAPTION>
                          1997         1996        1995
=====================================================================
<S> <C>
As reported
  Income before income
   taxes and
   extraordinary items $144,670     182,888      59,966
  Income tax expense
   (benefit)             49,617     (13,626)      8,264
Pro forma adjustments
  Pro forma interest
   expense                  634       4,943       4,943
  Pro forma income
   tax expense (benefit)   (217)     75,907      10,994
---------------------------------------------------------------------
Pro forma income before
  extraordinary items    94,636     115,664      35,765
  Extraordinary items,
   net of income tax,
   as reported               --    (190,820)     (4,707)
---------------------------------------------------------------------
Pro forma net income
  (loss)               $ 94,636     (75,156)     31,058
=====================================================================
</TABLE>
The pro forma information assumes:
o  interest expense at 5.675% per annum for
   the year ended December 31, 1997 and 5.815% per annum for the years ended
   December 31, 1996 and 1995 on borrowings used to fund a portion of the
   Commonwealth Payment. The interest rate used for 1996 and 1995 reflects the
   weighted average rate in effect for the period the borrowings were
   outstanding during 1997. The pro forma interest expense reflected for the
   year ended December 31, 1997 represents interest expense for the period prior
   to the actual borrowing of funds used to make a portion of the Commonwealth
   Payment. Actual interest expense for the period subsequent to the borrowings
   is included in income before income taxes and extraordinary items. Actual
   interest rates can vary on the current borrowing. A 1/8 percent change in the
   interest rate of the current outstanding borrowings would have changed
   interest expense by approximately $106,000 per annum.



                                  TRIGON 39 1997

<PAGE>



              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

o  adjustment of the effective income tax rate for 1996 and 1995 to the 35
   percent statutory federal rate in conformity with the Company's pro forma
   presentation in its Form S-1 filing.
o  the actual effective income tax rate of 34.3% for 1997. The pro forma income
   tax benefit for the year ended December 31, 1997 represents the income tax
   benefit associated with the pro forma interest expense adjustment.

The pro forma financial information above is used to present comparative
earnings per share amounts for the years ended December 31, 1997, 1996 and 1995
on the consolidated statements of operations (note 14). Net income and net
income per share after Demutualization and IPO on the consolidated statements of
operations reflect net income and net income per share for the period after
February 5, 1997, the effective date of the Demutualization and IPO. NOTE 2.
AGENCY CONTRACTS The Company acts as an administrative agent for processing
claims for certain agencies and other plans. Claims processed for others and the
related reimbursed operating expenses, which are subject to their audit, were as
follows for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
                       1997         1996       1995
===================================================================
<S> <C>
Claims processed for
   Medicare         $3,257,532   2,873,526   2,654,580
   Other plans         106,486      55,480      37,046
-------------------------------------------------------------------
                    $3,364,018   2,929,006   2,691,626
===================================================================
Operating expenses
  reimbursed by
   Medicare         $   12,535      11,634      11,605
   Other plans           3,025       1,376         807
-------------------------------------------------------------------
                    $   15,560      13,010      12,412
===================================================================
</TABLE>






NOTE 3.  INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value
of investment securities as of December 31, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                                   1997
                                                                              Gross         Gross       Estimated
                                                           Amortized       unrealized    unrealized       fair
                                                             cost             gains        losses         value
===========================================================================================================================
<S> <C>
Fixed income
  Domestic
   U.S. Treasury securities and obligations
     of U.S. government agencies                           $  406,921        23,040             14       429,947
   Mortgage-backed obligations of
     U.S. government agencies                                  72,117         1,429             93        73,453
   States and political subdivision securities                 31,914         1,325              7        33,232
   Other mortgage-backed and asset-backed securities          139,504           791            379       139,916
   Domestic corporate bonds                                   388,697        10,410            890       398,217
   Short-term debt securities with maturities of
     less than one year                                        93,561            --             --        93,561
  Foreign
   Debt securities issued by foreign governments               41,066         2,296            490        42,872
   Foreign corporate bonds                                      6,678           298              3         6,973
   Short-term debt securities with maturities of
     less than one year                                         9,214            --             32         9,182
---------------------------------------------------------------------------------------------------------------------------
Total fixed income                                          1,189,672        39,589          1,908     1,227,353
---------------------------------------------------------------------------------------------------------------------------
Equities
  Domestic                                                     68,977        14,922          3,264        80,635
  Foreign                                                      57,476        15,034          8,813        63,697
---------------------------------------------------------------------------------------------------------------------------
Total equities                                                126,453        29,956         12,077       144,332
---------------------------------------------------------------------------------------------------------------------------
Derivative instruments                                            492         2,226            406         2,312
                                                           $1,316,617        71,771         14,391     1,373,997
===========================================================================================================================
Unrestricted                                               $1,306,727        71,515         14,384     1,363,858
Restricted                                                      9,890           256              7        10,139
---------------------------------------------------------------------------------------------------------------------------
                                                           $1,316,617        71,771         14,391     1,373,997
===========================================================================================================================
</TABLE>
                                  TRIGON 40 1997

<PAGE>
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
<TABLE>
<CAPTION>
                                                                                   1996
                                                                               Gross         Gross       Estimated
                                                            Amortized       unrealized    unrealized       fair
                                                              cost             gains        losses         value
===========================================================================================================================
<S> <C>
Fixed income
  Domestic
   U.S. Treasury securities and obligations
     of U.S. government agencies                           $  308,205           478          3,667       305,016
   Mortgage-backed obligations of U.S. government agencies     70,194           977            415        70,756
   Other mortgage-backed and asset-backed securities          156,901           842            231       157,512
   Domestic corporate bonds                                   103,221         1,056            353       103,924
   Short-term debt securities with maturities of
    less than one year                                        164,239            26              7       164,258
  Foreign
   Debt securities issued by foreign governments               38,496         1,941            249        40,188
   Foreign corporate bonds                                      7,082           493             72         7,503
   Short-term debt securities with maturities of less
    than one year                                              11,528             9             51        11,486
---------------------------------------------------------------------------------------------------------------------------
Total fixed income                                            859,866         5,822          5,045       860,643
---------------------------------------------------------------------------------------------------------------------------
Equities
  Domestic                                                    148,111        34,359          2,018       180,452
  Foreign                                                     133,366        26,580          8,662       151,284
---------------------------------------------------------------------------------------------------------------------------
Total equities                                                281,477        60,939         10,680       331,736
---------------------------------------------------------------------------------------------------------------------------
Derivative instruments                                            543           965            448         1,060
                                                           $1,141,886        67,726         16,173     1,193,439
===========================================================================================================================
Unrestricted                                               $1,130,808        67,718         16,106     1,182,420
Restricted                                                     11,078             8             67        11,019
---------------------------------------------------------------------------------------------------------------------------
                                                           $1,141,886        67,726         16,173     1,193,439
===========================================================================================================================
</TABLE>

Short-term investments consist principally of commercial paper and money market
investments.
   Derivative instruments consist of foreign currency forward contracts and
foreign currency options. The Company enters into foreign currency derivative
instruments to hedge exposure to fluctuations in foreign currency exchange
rates. Company policy only permits utilization of these instruments in its
foreign denominated bond and equity portfolios. The counterparties to these
transactions are major financial institutions. The Company may incur a loss with
respect to these transactions to the extent that a counterparty fails to perform
under a contract and exchange rates have changed unfavorably since the inception
of the contract. The Company anticipates that the counterparties will be able to
fully satisfy their obligations under the agreements. The forward contracts
involve the exchange of one currency for another at a future date and typically
have maturities of six months or less. As of December 31, 1997, the Company had
forward contracts outstanding to purchase approximately $3.3 million in foreign
currencies and to sell approximately $35.8 million in foreign currencies
(primarily British Pound, German Mark and Canadian Dollar). The gross unrealized
gains and losses related to these contracts as of December 31, 1997 aggregated
$547,000 and $406,000, respectively. Foreign currency options are contracts that
give the option purchaser the right, but not the obligation, to buy or sell,
within a specific period of time, a financial instrument at a specified price.
Foreign currency options to sell approximately $20.6 million of foreign
currencies (Japanese Yen and German Mark) at set prices were outstanding as of
December 31, 1997. These options generally expire within twelve months. The
gross unrealized gains related to these options as of December 31, 1997
aggregated $1.7 million. There were no gross unrealized losses as of December
31, 1997.

                                  TRIGON 41 1997

<PAGE>


              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

   The Company enters into financial futures contracts for portfolio strategies
such as minimizing interest rate risk and managing portfolio duration. The
notional amount of the futures, $174.8 million as of December 31, 1997, is
limited to that of the market value of the underlying portfolios.
   The amortized cost and estimated fair value of fixed income securities as of
December 31, 1997, by contractual maturity, were as follows (in thousands).
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
                                 Amortized   Estimated
                                   cost     fair value
====================================================================
<S> <C>
Due in one year or less         $  170,100     170,751
Due after one year
  through five years               399,303     402,596
Due after five years
  through ten years                147,257     150,568
Due after ten years                261,391     290,069
Mortgage-backed and
  asset-backed securities          211,621     213,369
---------------------------------------------------------------------
                                $1,189,672   1,227,353
=====================================================================
</TABLE>

Included in investment securities as of December 31, 1997 are $10.1 million, at
estimated fair value, of U.S. Treasury securities held by various states to meet
security deposit requirements related to Trigon Insurance Company, its HMO
subsidiaries, Trigon Health and Life Insurance Company and Mid-South Insurance
Company.
   The major components of investment income for the years ended December 31,
1997, 1996 and 1995 were as follows (in thousands):


<TABLE>
<CAPTION>
                        1997         1996        1995
====================================================================
<S> <C>
Interest on fixed
  income securities    $73,940      36,985      37,789
Interest on short-term
  investments            4,450       8,654       9,764
Dividends                5,340      10,701       7,652
--------------------------------------------------------------------
                        83,730      56,340      55,205
Investment expenses      6,141       5,711       5,757
Group interest credits   2,905       3,317       3,587
--------------------------------------------------------------------
Investment income      $74,684      47,312      45,861
====================================================================
</TABLE>

Gross realized gains and losses for the years ended December 31, 1997, 1996 and
1995 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                        1997         1996        1995
====================================================================
<S> <C>
Gross realized gains
  Fixed income
   securities         $ 21,177      12,697      13,890
  Equity securities     65,837      70,421      58,938
  Derivative
   instruments          14,689       6,659      11,430
--------------------------------------------------------------------
                       101,703      89,777      84,258
--------------------------------------------------------------------
Gross realized losses
  Fixed income
   securities           20,514      10,365       9,081
  Equity securities     20,461      18,834      15,520
  Derivative instruments 6,665       1,168       6,681
--------------------------------------------------------------------
                        47,640      30,367      31,282
--------------------------------------------------------------------
Net realized gains    $ 54,063      59,410      52,976
====================================================================
</TABLE>

Proceeds from the sale of investment securities were $3.9 billion, $2.6 billion
and $1.5 billion during 1997, 1996 and 1995, respectively.
   Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the change in unrealized gains (losses), less deferred
income taxes, for the years ended December 31, 1997, 1996 and 1995 is as follows
(in thousands):

<TABLE>
<CAPTION>
                        1997         1996       1995
====================================================================
<S> <C>
Fixed income securities$ 36,904    (12,284)     31,921
Equity securities      (32,380)      2,943      25,051
Derivative instruments   1,303         146         371
Provision for deferred
  income taxes          (2,051)      3,210     (20,142)
--------------------------------------------------------------------
                      $  3,776      (5,985)     37,201
====================================================================
</TABLE>

NOTE 4.  PREMIUMS AND OTHER RECEIVABLES
Premiums and other receivables as of
December 31, 1997 and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                    1997         1996
====================================================================
<S> <C>
Premiums                          $ 75,265      72,687
Self-funded group receivables      133,613     156,076
Federal Employee Program           123,832     138,213
Investment income receivable        13,026       7,886
Other                               15,205      16,135
--------------------------------------------------------------------
                                  $360,941     390,997
====================================================================
</TABLE>



                                 TRIGON 42 1997

<PAGE>

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 5.  PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 and 1996 were as follows (in
thousands):

<TABLE>
<CAPTION>

                                    1997         1996
====================================================================
<S> <C>
Land and improvements             $  2,971       2,977
Buildings and improvements          36,565      35,721
Furniture and equipment             70,315      69,703
Computer software                   16,247      14,403
====================================================================
                                   126,098     122,804
Less accumulated depreciation
  and amortization                  82,186      73,259
====================================================================
                                  $ 43,912      49,545
====================================================================
</TABLE>

NOTE 6.  MEDICAL AND OTHER BENEFITS PAYABLE
Medical and other benefits payable as of December 31, 1997 and 1996 were as
follows (in thousands):

<TABLE>
<CAPTION>
                                   1997         1996
====================================================================
<S> <C>
Medical and other benefits
  payable - current
  Commercial and FEP
   Claims reported but not paid   $ 29,558      23,715
   Claims incurred but not
    reported                       228,775     226,444
====================================================================
                                   258,333     250,159
  Self-funded
   Claims reported but not paid     18,578      15,383
   Claims incurred but not
    reported                       129,635     151,465
====================================================================
                                   148,213     166,848
Medical and other benefits payable -
  noncurrent (all commercial)       66,541      59,246
====================================================================
                                   473,087     476,253
Liability for claims
 processing costs                   17,939      17,283
Advances to providers              (11,775)    (16,493)
====================================================================
                                   479,251     477,043
Less medical and other benefits
  payable - noncurrent             (66,541)    (59,246)
====================================================================
                                  $412,710     417,797
====================================================================
</TABLE>



A summary of the activity for commercial and FEP medical and other benefits
payable for the years ended December 31, 1997, 1996 and 1995 is as follows (in
thousands):

<TABLE>
<CAPTION>
                       1997         1996        1995
======================================================================
<S> <C>
Medical and other
  benefits payable at
  beginning of year $  476,253     402,476     355,836
Self-funded at
  beginning of year   (166,848)   (141,995)   (134,659)
======================================================================
Balance at beginning
  of year              309,405     260,481     221,177
======================================================================
Liabilities acquired
  with Mid-South            --      38,963          --
Incurred related to
  Current year       1,559,402   1,427,859   1,275,583
  Prior years           (4,846)     (2,328)     (4,033)
======================================================================
Total incurred       1,554,556   1,425,531   1,271,550
======================================================================
Paid related to
  Current year       1,333,880   1,225,103   1,083,170
  Prior years          205,207     190,467     149,076
======================================================================
Total paid           1,539,087   1,415,570   1,232,246
======================================================================
Balance at end
  of year              324,874     309,405     260,481
Self-funded at
  end of year          148,213     166,848     141,995
======================================================================
Medical and other
  benefits payable at
  end of year       $  473,087     476,253     402,476
======================================================================
</TABLE>

The Company uses paid claims and completion factors based on historical payment
patterns to estimate incurred claims. Changes in payment patterns and claims
trends can result in changes to prior years' claims estimates.


                                  TRIGON 43 1997

<PAGE>



              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 7.  LEASES
The Company has noncancelable operating leases for real estate and equipment
that expire over the next nine years and provide for purchase or renewal
options.  Future minimum lease payments under noncancelable operating leases as
of December 31, 1997 were (in thousands):

<TABLE>
<CAPTION>
Years ending December 31,
==========================================================================
<S> <C>
1998                                           $10,101
1999                                             9,407
2000                                             7,176
2001                                             4,271
2002                                             3,804
Later years through 2006                         6,028
==========================================================================
Total minimum lease payments                   $40,787
==========================================================================
</TABLE>

Total rental expense for operating leases for
the years ended December 31, 1997, 1996 and 1995 was $14,221,000, $13,354,000
and $15,243,000, respectively.

NOTE 8.  OTHER LIABILITIES
Other liabilities as of December 31, 1997 and 1996 were as follows (in
thousands):

<TABLE>
<CAPTION>
                                    1997         1996
==========================================================================
<S> <C>
Outstanding checks in excess
  of bank balance                 $ 43,815      40,351
Member related liabilities           3,783       4,637
Unearned premium reserve -
  Federal Employee Program          74,247      86,841
Self-funded group deposits          17,311      19,244
Current income taxes payable        15,659      29,023
Other                               25,103      18,797
==========================================================================
                                  $179,918     198,893
==========================================================================
</TABLE>

The FEP unearned premium reserve represents the Company's share of the FEP
premium stabilization reserve. These funds are actually held by the Blue Cross
Blue Shield Association on behalf of each Blue Cross and Blue Shield Plan
participating in the Federal Employee Program. An offsetting receivable is
recorded in premiums and other receivables.




NOTE 9.  OTHER REVENUES
Other revenues include those revenues earned by non-core subsidiaries. A summary
by type of revenue for the years ended December 31, 1997, 1996 and 1995 is
included below (in thousands):

<TABLE>
<CAPTION>
                        1997         1996        1995
==========================================================================
<S> <C>
Electronic communication
  services               $  --      21,474      20,583
Employee benefits
  administration         4,346       6,957       9,435
Workers' compensation
  administration         8,877       9,682       9,707
Health management
  services               8,709       9,039       6,970
Other                    3,592       2,204       8,481
==========================================================================
                       $25,524      49,356      55,176
==========================================================================
</TABLE>

Electronic communicaton services revenues relate to Health Communication
Services, Inc. which was sold effective December 31, 1996.

NOTE 10.  INCOME TAXES
Income tax expense (benefit) attributable to income before income taxes and
extraordinary items, substantially all of which is federal, for the years ended
December 31, 1997, 1996 and 1995 consists of (in thousands):

<TABLE>
<CAPTION>
                        1997         1996       1995
==========================================================================
<S> <C>
Current                $28,074      45,857      19,206
Deferred                21,543     (59,483)    (10,942)
==========================================================================
                       $49,617     (13,626)      8,264
==========================================================================
</TABLE>

The differences between the statutory federal income tax rate and the actual tax
rate applied to income before income taxes and extraordinary items for the years
ended December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                          1997        1996        1995
==========================================================================
<S> <C>
Statutory federal
  income tax rate           35.0%       35.0        35.0
Tax exempt investment
  income                    (0.6)       (0.3)       (1.2)
Change in valuation
  allowance                 --         (44.0)      (19.4)
Other, net                  (0.1)        1.8        (0.6)
==========================================================================
Effective tax rate          34.3%       (7.5)       13.8
==========================================================================
</TABLE>


                                  TRIGON 44 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

The components of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                    1997         1996
==========================================================================
<S> <C>
Deferred tax assets
  Employee benefit plans           $22,984      22,880
  Insurance reserves                26,200      27,492
  Alternative minimum tax
   credit carryforward                 943      21,658
  Property and equipment             8,713       6,244
  Other                              2,933       5,055
==========================================================================
Gross deferred tax assets           61,773      83,329
==========================================================================
Deferred tax liabilities
  Investment securities             20,083      18,032
  Other                                803         555
==========================================================================
Gross deferred tax liabilities      20,886      18,587
==========================================================================
Net deferred tax asset             $40,887      64,742
==========================================================================
</TABLE>

Deferred tax assets and liabilities as of December 31, 1997 and 1996 are
presented on the accompanying consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                     1997        1996
==========================================================================
<S> <C>
Deferred tax assets
  Current                            $  --      16,572
  Noncurrent                        45,185      48,170
Deferred tax liabilities - current      --       4,298
==========================================================================
Net deferred tax asset             $40,887      64,742
==========================================================================
</TABLE>

The Company, through its subsidiary Trigon Insurance Company, has qualified for
a federal income tax deduction under IRC Section 833. This deduction is equal to
the amount by which 25% of the sum of claims and expenses exceeds tax basis
adjusted surplus. Prior to 1994, the effect of this deduction was to
significantly reduce regular taxable income and subject the Company to
alternative minimum tax. Because it had been unclear whether the Company would
be subject to the regular tax in the future, the Company had maintained a
valuation allowance with respect to its AMT credits and certain other long-term
assets. The valuation allowance on the deferred tax assets was eliminated during
1996 as it was more likely than not that such assets would be realized.





NOTE 11.  LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 is summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                    1997         1996
=====================================================================
<S> <C>
Revolving credit agreement         $85,000        --
Promissory note, 5%, due
  June 30, 2000                      1,300      1,300
Notes payable, at prime plus 1%      3,039      2,600
Line of credit, at prime               808        980
=====================================================================
                                   $90,147      4,880
=====================================================================
</TABLE>

Simultaneous with the Demutualization and IPO in February 1997, the Company
entered into a $300 million five-year revolving credit agreement with a
syndicate of banks. The credit agreement provides for various borrowing options
and rates and requires the Company to pay a facility fee on a quarterly basis.
The current borrowing terms require a facility fee of .075% per annum based on
the $300 million commitment and bears interest at LIBOR plus a margin, adjusted
monthly. The credit agreement also contains certain financial covenants and
restrictions including minimum net worth requirements as well as limitations on
dividend payments. As of December 31, 1997, $85 million had been borrowed and
remained outstanding under the credit agreement, the proceeds of which were used
to make a portion of the payment to the Commonwealth of Virginia in accordance
with the Demutualization. The weighted average interest rate for the period the
borrowings were outstanding during the year ended December 31, 1997 was 5.841%.
   The promissory note originated in 1995 in connection with the purchase of a
subsidiary. The promissory note requires payment of the principal on June 30,
2000 and bears interest at 5%, payable annually.
   Two HMO subsidiaries entered into notes payable and a line of credit
agreement with their minority shareholders for purposes of maintaining
regulatory minimum net worth requirements. Interest on the notes payable is at
the prime lending rate plus one percent (9.5% as of December 31, 1997). The
notes have no scheduled maturity date and repayment of the notes is subject to
approval by state regulatory authorities. Interest on the line of

                                  TRIGON 45 1997
<PAGE>

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

credit is at the prime lending rate (8.5% as of December 31, 1997). The line of
credit has no scheduled maturity date and repayment is subject to approval by
state regulatory authorities.

NOTE 12.  EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which is funded
through the Blue Cross National Retirement Trust (Trust), a collective
investment trust for the retirement programs of its participating employers. An
employee may become eligible for participation after one year of continuous
service and attainment of age 21.
   The Company's funding policy is to annually contribute amounts to the Trust
sufficient to meet the minimum funding requirements outlined in the Employee
Retirement Income Security Act of 1974, plus any additional amounts the Company
may contribute from time to time. For the years ended December 31, 1997, 1996
and 1995, the Company made contributions to the Trust in the amounts of
$6,154,000, $7,933,000 and $7,716,000, respectively. Assets in the Trust are
primarily equity securities, U.S. Treasury bonds and notes, U.S. government
agency securities, domestic corporate bonds, real estate funds and short-term
investments.
   The following table sets forth the pension plan's funded status as of
December 31, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                    1997        1996
===========================================================================
<S> <C>
Accumulated benefit obligation,
  including vested benefits of
  $74,524  and $59,656           $  86,852      70,183
===========================================================================
Projected benefit obligation for
  service rendered to date         125,579     105,517
Plan assets at fair value         (118,344)    (99,352)
===========================================================================
Excess of projected benefit
  obligation over assets             7,235       6,165
Unrecognized net asset at
  January 1, 1987 being
  recognized over 17 years             673         783
Unrecognized prior service cost       (610)       (697)
Unrecognized net gain                3,779       3,988
===========================================================================
Accrued pension liability        $  11,077      10,239
===========================================================================
</TABLE>




Pension expense for the years ended December 31, 1997, 1996 and 1995 included
the following components (in thousands):

<TABLE>
<CAPTION>
                        1997         1996       1995
=======================================================================
<S> <C>
Service cost - benefits
  earned during
  the year            $  7,159       7,765       6,705
Interest cost on
  projected benefit
  obligation             8,004       7,595       6,507
Actual return on
  plan assets          (18,971)    (13,714)    (12,194)
Net amortization
  and deferral          10,800       7,565       6,926
=======================================================================
Net periodic
  pension expense     $  6,992       9,211       7,944
=======================================================================
</TABLE>

The weighted average discount rate was 7.25% and 7.75% as of December 31, 1997
and 1996, respectively. The expected long-term rate of return on assets was 9.0%
as of December 31, 1997 and 1996. Age-related rates ranging from 3.5% to 7.0%
were used for the rate of increase in future compensation levels as of December
31, 1997 and 1996.
   In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. In October 1997, the
Company amended its postretirement benefit plan by terminating benefits for
substantially all future eligible retirees except those employees who will have
at least 20 years of service and those employees between the ages of 40 and 45
with age plus years of service equal to 55 or more as of January 1, 1998. The
changes in this plan resulted in a curtailment gain of $3,997,000 in the fourth
quarter of 1997 which is included in selling, general and administrative
expenses in the Company's consolidated statements of operations. The plan
amendment also reduced the Company's accumulated postretirement benefit
obligation to $4,589,000 which is being amortized as a reduction to net periodic
postretirement benefit expense over approximately 7.5 years. This postretirement
benefit plan is also funded through the Trust. The Company made a $2,500,000
contribution to the Trust in 1995. No contributions were made in 1997 and 1996.



                                  TRIGON 46 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

   The following table presents the funded status of the plan including the
accumulated postretirement benefit obligation by type of participant as of
December 31, 1997 and 1996 (in thousands):

<TABLE>
<CAPTION>
                                    1997         1996
=========================================================================
<S> <C>
Retirees                          $  8,331       7,069
Fully eligible active
  plan participants                  3,699       3,825
Other active plan participants      15,699      18,861
=========================================================================
Accumulated postretirement
   benefit obligation               27,729      29,755
Plan assets at fair value          (14,134)    (12,218)
=========================================================================
Excess of accumulated
  postretirement benefit
  obligation over plan assets       13,595      17,537
Unrecognized net gain                6,354       5,646
Unrecognized reduction in
  prior service cost                 5,932       5,772
=========================================================================
Accrued postretirement
  benefit liability               $ 25,881      28,955
=========================================================================
</TABLE>

Postretirement benefit expense for the years ended December 31, 1997, 1996 and
1995 included the following components (in thousands):

<TABLE>
<CAPTION>
                        1997         1996        1995
=========================================================================
<S> <C>
Service cost - benefits
  attributed to service
  during the year      $ 1,948       2,373       2,128
Interest cost on
  accumulated
  postretirement
  benefit obligation     2,004       2,044       1,843
Expected return on
  plan assets           (1,167)     (1,009)       (622)
Amortization of reduction
  in prior service cost   (697)       (661)       (661)
Amortization of gains     (442)        (29)          --
=========================================================================
Net periodic
  postretirement
  benefit expense      $ 1,646       2,718       2,688
=========================================================================
</TABLE>



For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1997 and subsequent years. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rate by
one percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $4,346,000 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
expense would increase by $1,092,000 for the year ended December 31, 1997.
   The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7.75% as of December 31, 1997
and 1996, respectively. The rate of increase in future compensation levels used
in determining the accumulated postretirement benefit obligation was 4.5% as of
December 31, 1997 and ranged from 3.5% to 7.0% as of December 31, 1996. The
expected long term rate of return on assets was 9.0% as of December 31, 1997 and
1996. The Trust holding the plan assets is not subject to federal income taxes.
   The Company also has the Employees' Thrift Plan of Trigon Insurance Company
under which substantially all employees who have completed six months of service
may elect to save up to 16% of their annual earnings on a pretax basis, subject
to certain limits, in the plan. Participants have the option of investing in
stock of Trigon Healthcare, Inc. and several international and domestic
investment funds. The Company contributes an amount equal to 50% of the
participant's contributions limited to 3% of the employee's compensation. The
Company's contributions are fully vested to the participant after three years of
contributing participation. For the years ended December 31, 1997, 1996 and
1995, the Company's contribution to the Employees' Thrift Plan of Trigon
Insurance Company was $3,111,000, $3,418,000 and $3,153,000, respectively.



                                  TRIGON 47 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 13.  CAPITAL STOCK
The Company has authorized 300 million shares of Class A Common Stock, par value
$0.01 per share (Common Stock), of which 42,300,022 shares were issued and
outstanding as of December 31, 1997. Common Stock shares are entitled to one
vote per share. These shares were issued in February 1997 when the Company
completed the Demutualization and IPO described in note 1.
   The Company has also authorized 300 million shares of Class B non-voting
Common Stock, par value $0.01 per share (Non-Voting Common Stock). No shares of
Non-Voting Common Stock were issued and outstanding as of December 31, 1997. The
Non-Voting Common Stock has been authorized in connection with certain ownership
and transfer restrictions included in the Company's amended and restated
articles of incorporation. Non-Voting Common Stock shares are not entitled to
vote on any matter except as otherwise required by law.
   The Company is authorized to issue up to 50 million shares of preferred
stock, no par value per share, in one or more series and to provide the
designations, preferences, limitations and rights of each series.

Shareholder Rights Plan
On July 16, 1997, the Board of Directors adopted a Shareholder Rights Plan
(Rights Plan). Under the Rights Plan, the Board of Directors authorized three
million preferred shares, the Series A Junior Participating Preferred Shares,
and declared a dividend of one preferred share purchase right (Right) on each
outstanding share of Trigon Class A Common Stock. Each Right entitles
shareholders to purchase one one-hundredth of a Series A Junior Participating
Preferred Share at an exercise price of $100, subject to adjustment. Subject to
certain exceptions, the Right will be exercisable only if a person or group
acquires 10% or more of the Company's Common Stock or announces a tender offer
for 10% or more of the Company's outstanding Common Stock. Each holder of a
Right (other than those held by the acquiring person) will then be entitled to
purchase, at the Right's then current exercise price, a number of shares of
Trigon Common Stock having a market value of twice the Right's exercise price.
If the Company is acquired in a merger or other business combination transaction
which has not been approved by the Board of Directors, each Right will entitle
its holder to purchase, at the Right's then current exercise price, a number of
shares of the acquiring company's Common Stock having a market value of twice
the Right's exercise price.
   The date of record for the dividend distribution was July 29, 1997. The
Rights will expire in 2007 and are redeemable by action of the Board of
Directors at a price of $.001 per Right at any time prior to becoming
exercisable.

Common Stock Held by Grantor Trusts
The Company has several grantor trusts which were established to fund future
obligations under certain compensation and benefit plans. These grantor trusts
are consolidated for financial reporting purposes with the Company. Beginning in
the third quarter of 1997, shares of the Company's Common Stock were purchased
in the open market by these grantor trusts. The purchase price of the shares
held by the grantor trusts is shown as a reduction to capital in excess of par
in the consolidated balance sheets.

Stock Option Plans and Stock Purchase Plan
The 1997 Stock Incentive Plan (Incentive Plan), as approved by the Company's
shareholders, provides for the granting of stock options, restricted stock
awards, performance stock awards, stock appreciation rights and cash performance
awards to employees. The Company has reserved 3.55 million shares of its common
stock for issuance under the Incentive Plan. Awards are granted by a committee
appointed by the Board of Directors. Options vest and expire over terms as set
by the committee at the time of grant. In accordance with the Incentive Plan,
options to purchase shares at an amount equal to the fair market value of the
stock at the date of grant were granted to eligible employees during 1997. These
options generally vest at the end of one or three years, with certain grants
vesting on a pro-rata basis over three years, depending on an employee's years
of service, and in all cases expire 10 years from date of grant.


                                  TRIGON 48 1997

<PAGE>




              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

   In addition, the shareholders of the Company approved the 1997 Non-Employee
Directors Stock Incentive Plan (Non-Employee Plan). In accordance with the terms
of the Non-Employee Plan, options to purchase 10,000 shares at an amount equal
to the fair market value of the stock at the date of grant were granted to each
of the Company's 16 non-employee directors. Under the Non-Employee Plan,
newly-elected non-employee directors are granted nonqualified stock options to
purchase 10,000 shares of common stock on the date of the first annual meeting
of shareholders at which the director is elected. In addition, each eligible
director will automatically be granted options to purchase 5,000 shares of
common stock as of the date of each subsequent annual meeting of shareholders.
All options are granted at the fair market value on the date of grant and become
exercisable on a pro-rata basis over a three-year period. All options expire 10
years from the date of grant. The Company has reserved 550,000 shares of its
common stock for issuance under the Non-Employee Plan.
   A summary of the activity in the stock option plans for the year ended
December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                                               Weighted
                                                Average
                                Number of      Exercise
                                  Options        Price
=====================================================================
<S> <C>
Balance at January 1, 1997              --        $   --
Granted                          2,180,982          21.96
Exercised                               --          --
Forfeited                          108,628          22.13
=====================================================================
Balance at December 31, 1997     2,072,354         $21.95
=====================================================================
Options exercisable at
  December 31, 1997                     --        $   --
=====================================================================
</TABLE>







The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
                           Options Outstanding                                             Options Exercisable
                                              Weighted
                                               Average       Weighted                                    Weighted
                                              Remaining       Average                                     Average
    Range of                   Number        Contractual     Exercise                       Number       Exercise
 Exercise Prices             Outstanding        Life           Price                      Exercisable      Price
===========================================================================================================================
<S> <C>
$18.125 - 25.25               2,072,354               9.45 years  $21.95                      --            --
===========================================================================================================================
</TABLE>

   As of December 31, 1997, 2,027,646 shares were available for future grant.
   The Company's shareholders approved the Company's 1997 Employee Stock
Purchase Plan (Stock Purchase Plan). The Stock Purchase Plan provides employees
of the Company an opportunity to purchase the Company's common stock through
payroll deductions. The Company has reserved one million shares of its common
stock for issuance under the Stock Purchase Plan. Shares needed to satisfy the
needs of the Stock Purchase Plan may be newly issued by the Company or acquired
by purchase at the expense of the Company on the open market or in private
transactions. Eligible employees may purchase up to $25,000 in fair value
annually of the Company's common stock at 85% of the lower of the fair value on
the first or last trading day of each calendar quarter. Employee contributions
to the Stock Purchase Plan were approximately $749,000 for the year ended
December 31, 1997. Pursuant to the Stock Purchase Plan, 23,971 shares of the
Company's stock were purchased on the open market and issued to employees for
the year ended December 31, 1997 and 15,026 shares were pending purchase as of
December 31,1997.
   The pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its stock-based compensation under the fair value method of that Statement. The
fair value for the stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997:

<TABLE>
<CAPTION>
======================================================================
<S> <C>
Risk-free interest rate                              5.54%
Volatility factor                                   37.40%
Dividend yield                                       --
Weighted average expected life                       5 years
======================================================================
</TABLE>


                                  TRIGON 49 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock option grants have characteristics significantly different
from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock option grants.
   For purposes of pro forma disclosures,
compensation expense is increased for the
estimated fair value of the options amortized over the options' vesting periods
and for the difference between the market price of the stock and the discounted
purchase price of the shares on the purchase date for the employee stock
purchases. The Company's pro forma information for 1997 is as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                 As Reported  Pro Forma
========================================================================
<S> <C>
Net income                         $95,053      91,372
Net income after
  Demutualization and IPO           78,982      75,718
Earnings per share
  Basic net income after
   Demutualization and IPO            1.87        1.79
  Diluted net income after
   Demutualization and IPO            1.86        1.79
Pro forma earnings per share
  Basic and diluted pro forma
   net income                         2.23        2.16
Weighted average fair value of
  options granted during the year     --          9.16
Weighted average fair value of
  employee stock purchases
  during the year                     --           5.82
========================================================================
</TABLE>

NOTE 14.  NET INCOME AND PRO FORMA NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the period after the Demutualization and IPO through December 31, 1997
(in thousands, except per share data):



<TABLE>
<CAPTION>


========================================================================
<S> <C>
Numerator for basic and diluted
   earnings per share - net income             $78,982
========================================================================
Denominator
  Denominator for basic earnings per share -
   weighted average shares                      42,300
   Effect of dilutive securities - employee
     and director stock options                     80
========================================================================
  Denominator for diluted earnings per share    42,380
========================================================================
Basic net income per share                       $1.87
========================================================================
Diluted net income per share                     $1.86
========================================================================
</TABLE>

The following table sets forth the computation of basic and diluted pro forma
earnings per share for the years ended December 31, 1997, 1996 and 1995 (in
thousands, except per share data):

<TABLE>
<CAPTION>
                           1997         1996        1995
===========================================================================
<S> <C>
Numerator for basic
 and diluted pro forma
 earnings per share
 (note 1)
   Pro forma income
     before extraordinary
     items                $94,636     115,664      35,765
   Extraordinary items,
     net of income tax,
     as reported               --    (190,820)     (4,707)
---------------------------------------------------------------------------
   Pro forma net income
     (loss)               $94,636     (75,156)     31,058
===========================================================================
Denominator
  Denominator for basic
   pro forma earnings per
   share - weighted
   average shares          42,300      42,300      42,300
  Effect of dilutive
   securities - employee
   and director stock
   options                     73          --          --
---------------------------------------------------------------------------
  Denominator for
   diluted pro forma
   earnings per share      42,373      42,300      42,300
===========================================================================
Basic and diluted
  earnings per share
   Pro forma income
     before extraordinary
     items                  $2.23        2.73        0.84
   Extraordinary items,
     net of income tax,
     as reported              --        (4.50)      (0.11)
---------------------------------------------------------------------------
   Pro forma net income
     (loss)                 $2.23       (1.77)       0.73
===========================================================================
</TABLE>


                                  TRIGON 50 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

The pro forma weighted average shares outstanding gives effect to the
Demutualization and IPO as if they had occurred on January 1, 1995, consistent
with the Company's pro forma presentation in its Form S-1 filed on January 29,
1997, in connection with its IPO (note 1).

NOTE 15.  STATUTORY FINANCIAL INFORMATION
Trigon Insurance Company is required to file financial statements with, and is
subject to audit by, the Commonwealth of Virginia, Bureau of Insurance. Such
financial statements are prepared in accordance with statutory accounting
practices prescribed or permitted by the Commonwealth of Virginia, Bureau of
Insurance which differ from generally accepted accounting principles under which
the accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves and certain claims reserves recognized
under statutory accounting as well as certain assets (primarily property and
equipment) and deferred income taxes not recognized under statutory accounting
practices. While the Bureau of Insurance has the authority to permit insurers to
deviate from prescribed statutory accounting practices, Trigon Insurance Company
has not received, nor requested, approval to adopt any such deviations. In
accordance with the Insurance Code of Virginia (Code), Trigon Insurance
Company's statutory surplus may be reduced by Category 2 investments that exceed
a specified threshold. Category 2 investments consist primarily of domestic
equity investments that exceed a specified percentage of admitted assets and
foreign denominated investments. As of December 31, 1995, this reduction in
statutory surplus due to excess Category 2 investments approximated $92.0
million. There were no excess Category 2 investments as of December 31, 1997 and
1996.
   Trigon Insurance Company's statutory surplus and net income were (in
thousands):

<TABLE>
<CAPTION>
Statutory surplus at:
<S> <C>
  December 31, 1997 (unaudited)               $617,578
  December 31, 1996                            618,999

Statutory net income for the years ended:
  December 31, 1997 (unaudited)               $123,272
  December 31, 1996                             97,143
  December 31, 1995                             82,910

</TABLE>
Trigon Insurance Company is required by
the Commonwealth of Virginia, Bureau of Insurance to maintain statutory capital
and surplus of at least $4.0 million.
   Under the Code, an insurance company may pay a dividend without prior
permission of the Commonwealth of Virginia, Bureau of Insurance to the extent
that such dividend together with other dividends or distributions within the
preceding 12 months does not exceed the lesser of: (i) 10% of the insurer's
statutory surplus as of the immediately preceding December 31, or (ii) the net
statutory gain from operations (excluding realized gains on investments) for the
12-month period ended the immediately preceding December 31. Trigon Insurance
Company may pay $61.8 million to the Company in cash dividends after certain
dates during 1998 without prior permission. During 1997, Trigon Insurance
Company received permission from the Bureau ofInsurance to pay a $238.7 million
dividend to its parent company, Trigon Healthcare, Inc., consisting of $188.7
million in stock of a wholly-owned subsidiary and $50 million in cash. This
dividend was effected on July 31, 1997.
   In addition, the Commonwealth of Virginia adopted the National Association of
Insurance Commissioners (NAIC) Risk Based Capital Act in 1995. Under this Act, a
company's risk based capital (RBC) is calculated by applying certain factors to
various asset, premium and reserve items. If a company's calculated RBC falls
below certain thresholds, regulatory intervention or oversight is required.
Trigon Insurance Company's RBC level as calculated in accordance with the NAIC
RBC Instructions exceeded all RBC thresholds as of December 31, 1997.
   Mid-South Insurance Company, Trigon Health and Life Insurance Company and the
Company's HMO subsidiaries are also required to file statutory financial
statements in each of the states in which they are licensed.


                                  TRIGON 51 1997

<PAGE>



              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 16.  SUPPLEMENTARY FINANCIAL DATA

A reconciliation of net income - statutory basis for the years ended December
31, 1997, 1996 and 1995 and capital and surplus - statutory basis as of December
31, 1997 and 1996 as reported by Trigon Insurance Company to regulatory
authorities to net income and shareholders' equity excluding unrealized
gains/losses as reported in the accompanying consolidated financial statements
follows (in thousands):

<TABLE>
<CAPTION>
                                                                           Unaudited
                                                                             1997           1996           1995
===========================================================================================================================
<S> <C>
Trigon Insurance Company net income - statutory basis                      $123,272         97,143        82,910
Add (deduct)
  Parent operations                                                             850       (175,000)           --
  Differences in investment carrying values                                 (10,808)        (3,972)      (14,132)
  Deferred income taxes                                                     (19,155)        58,548          (260)
  Adjustments to claim reserves                                               7,177         22,392            --
  Coinsurance refund program, net of taxes                                       --             --       (35,931)
  Other                                                                      (6,283)         6,583        14,408
===========================================================================================================================
Net income -GAAP basis                                                     $ 95,053          5,694        46,995
===========================================================================================================================

                                                                                         Unaudited
                                                                                           1997            1996
===========================================================================================================================
Trigon Insurance Company capital and surplus - statutory basis                            $617,578       618,999
Add (deduct)
  Parent equity                                                                            177,473      (175,000)
  Differences in investment carrying values                                                  8,896        59,130
  Employee benefit liabilities                                                             (37,974)      (39,298)
  Asset valuation reserve                                                                   43,883       115,395
  Deferred income taxes                                                                     53,213        72,369
  Non-admitted assets                                                                       29,996        33,045
  Additional claim reserves                                                                 19,669        12,492
  Other                                                                                      8,706         9,127
===========================================================================================================================
Shareholders' equity excluding unrealized gains/losses - GAAP basis                       $921,440       706,259
===========================================================================================================================
</TABLE>

The differences between statutory and GAAP for Mid-South Insurance Company,
Trigon Health and Life Insurance Company and the Company's HMO subsidiaries were
not significant to the consolidated totals above. The differences for these
subsidiaries relate primarily to differences in investment carrying values,
asset valuation reserve, deferred income taxes and non-admitted assets.



                                  TRIGON 52 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 17.  ADDITIONAL CASH FLOW INFORMATION
The reconciliation of net income to net cash provided by operating activities
and supplemental disclosures of cash flow information for the years ended
December 31, 1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                            1997            1996            1995
===========================================================================================================================
<S> <C>
Net income                                                                $  95,053          5,694        46,995
Adjustments to reconcile net income to net cash provided (used) by
  operating activities, net of effects from purchase of subsidiaries
   Depreciation and amortization                                             20,242         19,971        14,578
   Accretion of discounts and amortization of premiums, net                 (11,819)        (1,315)       (3,618)
   Change in allowance for doubtful accounts receivable                         826            402           468
   (Increase) decrease in premiums and other receivables                     29,238        (59,999)       (5,989)
   Increase in other assets                                                  (3,882)        (3,740)       (2,531)
   Increase in medical and other benefits payable                             2,208         31,147        68,945
   Increase (decrease) in unearned premiums                                   1,993         (6,888)       (5,252)
   Increase (decrease) in accounts payable and accrued expenses             (26,734)        (7,672)        4,106
   Increase (decrease) in other liabilities                                 (20,384)        44,930       (26,919)
   Change in deferred income taxes                                           21,804        (60,678)       (8,030)
   Increase (decrease) in obligation for Commonwealth Payment              (175,000)       175,000            --
   Increase (decrease) in minority interest                                   1,870            285          (703)
   Increase in obligations for employee benefits                              1,788          6,131           784
   Gain on the sale of subsidiary                                                --        (62,253)           --
   (Gain) loss on disposal of property and equipment and other assets          (122)           214           115
   Realized investment gains, net                                           (54,063)       (59,410)      (52,976)
===========================================================================================================================
Net cash provided (used) by operating activities                          $(116,982)        21,819        29,973
===========================================================================================================================
Cash paid during the year for
  Interest                                                                $   9,014          4,326        15,390
  Income taxes                                                               40,137         18,900        20,061
===========================================================================================================================
</TABLE>
NOTE 18.  ACQUISITION AND DISPOSITION ACTIVITY
Acquisitions
In February 1996, the Company purchased all of the outstanding shares of
Mid-South Insurance Company (Mid-South) for approximately $85.6 million.
Mid-South is a Fayetteville, North Carolina based life and health insurance
company. The acquisition was accounted for as a purchase and, accordingly, the
results of operations of Mid-South are included in the consolidated financial
statements since the date of acquisition. Goodwill and other intangible assets
arising from the transaction amounted to $56.7 million and are being amortized
over periods not exceeding 25 years. No pro forma information has been provided
since Mid-South's results of operations prior to the Company's acquisition were
not material to the Company.
   In November 1995, the Company paid $5.5 million for a 50% interest in Primary
Care First, L.L.C. (PCF) and related assets. PCF was formed for the purpose of
managing and developing primary care physician networks in the Richmond and
South Hampton Roads areas of Virginia. The Company has also committed to provide
up to $3.5 million to PCF for development of additional primary care physician
networks. The Company funded $1,050,000 during 1996 and no amounts during 1997.
This investment is accounted for under the equity method and is included in
other assets. The excess of the Company's cost over its underlying equity in PCF
and related assets amounted to $5.5 million and are being amortized over 15
years.
   In May 1995, the Company acquired 80% of the outstanding stock of Priority
Health Care, Inc. (subsequently renamed Priority, Inc.) (Priority) for
approximately $24.2 million including acquisition-related costs. The acquisition
was accounted for as a purchase and, accordingly, the results of operations of
Priority are included in the consolidated financial statements since the date of
acquisition. Goodwill arising from the acquisition amounted to $21.1 million and
is being amortized over 15 years. No pro forma information has been provided
since Priority's results of operations prior to the Company's acquisition were
not material to the Company.


                                  TRIGON 53 1997

<PAGE>





              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

Disposition
Effective December 31, 1996, the Company sold its subsidiary, Health
Communications Services (HCS), for $77.0 million cash. The Company recorded a
pre-tax and after-tax gain on the sale of HCS of $62.3 million and $40.0
million, respectively. The Company's earnings and cash flows reflect the
operations of HCS through December 31, 1996.

NOTE 19.  COPAYMENT REFUND PROGRAM
The Company conducted a Copayment Refund Program (Copayment Program) in
accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund. Refunds
represented the difference between the member's original coinsurance payment,
which had been based on the facility's undiscounted charges, and an adjusted
coinsurance payment calculated using the Company's average discount percentage
at the facility. The Company changed its methodology on January 1, 1994, to
calculate coinsurance payments using the average percentage discount. Costs
incurred under the Copayment Program included refunds, interest and
administrative costs associated with the Copayment Program that the Company
would not otherwise have incurred. In addition, the Company agreed to pay a $5
million civil forfeiture to the Commonwealth of Virginia which has been included
in the cost of the Copayment Program. The cost of the Copayment Program in 1994
was $36.4 million or $30.0 million, net of income taxes.
   The Virginia General Assembly enacted
legislation, effective July 1, 1994, that requires all insurers and HMOs to
calculate coinsurance payments on the basis of their negotiated reimbursement
rates with facilities.
   In accordance with an agreement with the State Corporation Commission dated
November 17, 1995, the Company re-opened the Copayment Program. As part of the
re-opening of the Copayment Program, the Company mailed refunds to approximately
300,000 members who had not filed a claim under the original program and for
whom the Company had an address. In addition, the Company announced that it had
determined that there were approximately 200,000 former members for whom the
Company did not have an address. Any amounts not paid by December 31, 1996 were
escheated to the Commonwealth of Virginia as unclaimed property in April 1997.
The cost of the re-opening of the Copayment Program in 1995 was $47.1 million or
$40.6 million, net of income taxes.

NOTE 20.  DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The carrying amounts of cash, premiums and other receivables, other current
assets, medical and other benefits payable, unearned premiums, accounts payable
and accrued expenses and other current liabilities approximate fair value
because of the short-term nature of these instruments. The carrying amount of
long-term debt with variable interest rates approximates fair value. The fair
values of investment securities are estimated based on quoted market prices.
   Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of investment securities and premiums
receivable. All of the investment securities are managed within established
guidelines which limit the amounts which may be invested with one issue. The
Company primarily conducts business within the Commonwealth of Virginia;
therefore premiums receivable are concentrated with companies and individuals
within Virginia.



                                  TRIGON 54 1997
<PAGE>


              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

NOTE 21.  LEGAL AND REGULATORY PROCEEDINGS
The Company is the defendant in three lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was obligated to
credit each self-funded plan with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plans. Collectively, the suits seek $1.3 million in compensatory damages
plus unspecified punitive and other damages. The Company is also presently the
subject of four other claims by self-funded employer groups related to the
Company's past practices regarding provider discounts, some of which involve
larger amounts of withheld discounts. The Company is communicating with these
groups, and lawsuits have not been filed in connection with these claims. The
Company believes that additional discount-related claims may be made against it.
Although the ultimate outcome of such claims and litigation cannot be estimated,
the Company believes that the discount-related claims and litigation brought by
these self-funded employer groups will not have a material adverse effect on the
consolidated financial condition of the Company or the Company's results of
operations in any particular period.
   The Company and certain of its subsidiaries are involved in other various
legal actions occurring in the normal course of business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company management, after consultation with counsel responsible for such
litigation, the outcome of those actions is not expected to have a material
adverse effect on the consolidated financial condition of the Company.


                                  TRIGON 55 1997

<PAGE>

               INDEPENDENT AUDITORS' REPORT AND MANAGEMENT REPORT
                    TRIGON HEALTHCARE, INC. AND SUBSIDIARIES


INDEPENDENT AUDITORS' REPORT

The Board of Directors
Trigon Healthcare, Inc.:

We have audited the accompanying consolidated balance sheets of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trigon
Healthcare, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.


/s/ KPMG PEAT MARWICK LLP


Richmond, Virginia
February 4, 1998




MANAGEMENT REPORT

The management of Trigon Healthcare, Inc. is responsible for the integrity and
objectivity of the consolidated financial statements. These statements have been
prepared in accordance with generally accepted accounting principles and include
some amounts that are based on management's best estimates and judgment.
   The accounting systems and controls of the Company are designed to provide
reasonable assurance that financial records are reliable for use in preparing
financial statements and that assets are safeguarded. Management believes that
the Company's system of internal controls for the year ended December 31, 1997
was effective and adequate to accomplish the above described objectives.
   The Board of Directors appoints to the Audit Committee members who are
neither officers nor employees of the Company. The committee meets periodically
with management, the internal auditors and the independent auditors to review
financial reports, internal accounting controls and the scope and results of
audit efforts. Both the internal auditors and the independent auditors have full
and free access to the Audit Committee, with and without management
representation.


/s/ THOMAS G. SNEAD, JR.

Thomas G. Snead, Jr.
President and
Chief Operating Officer





/s/ THOMAS R. BYRD

Thomas R. Byrd
Senior Vice President
and Chief Financial Officer


                                  TRIGON 56 1997