WELLPOINT HEALTH NETWORKS INC /CA/, S-3/A, 1996-10-30

WELLPOINT HEALTH NETWORKS INC /CA/
S-3/A, 1996-10-30
HOSPITAL & MEDICAL SERVICE PLANS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996

REGISTRATION NO. 333-14885

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

WELLPOINT HEALTH NETWORKS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
CALIFORNIA 95-3760980
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(818) 703-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

------------------------

THOMAS C. GEISER, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
WELLPOINT HEALTH NETWORKS INC.
21555 OXNARD STREET
WOODLAND HILLS, CALIFORNIA 91367
(818) 703-4000
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)

------------------------

COPIES TO:

<TABLE>
<S> <C>
WILLIAM L. HUDSON, ESQ. GARY OLSON, ESQ.
BROBECK, PHLEGER & HARRISON LLP LATHAM & WATKINS
ONE MARKET, SPEAR STREET TOWER 633 WEST FIFTH STREET, SUITE 4000
SAN FRANCISCO, CA 94105 LOS ANGELES, CA 90071
(415) 442-0900 (213) 485-1234
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 30, 1996

PROSPECTUS
- -----------------

13,000,000 SHARES

LOGO

COMMON STOCK
------------------------

All of the 13,000,000 shares of Common Stock of WellPoint Health Networks
Inc. ("WellPoint" or the "Company") offered hereby are being sold by the
California HealthCare Foundation (the "Foundation" or "Selling Shareholder").
See "Selling Shareholder." The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholder. Of the 13,000,000 shares of
Common Stock being offered hereby, 10,400,000 shares (the "U.S. Shares") are
being offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters and 2,600,000 shares (the "International Shares") are being offered
outside the United States and Canada (the "International Offering" and, together
with the U.S. Offering, the "Offerings") by the International Managers. The
price to public and underwriting discount per share are identical for both
Offerings and the closings for both Offerings are conditioned upon each other.
See "Underwriting." The Common Stock of the Company is traded on the New York
Stock Exchange under the symbol "WLP." On October 29, 1996, the last sale price
of the Common Stock, as reported on the New York Stock Exchange was $31 5/8 per
share. See "Price Range of Common Stock."

As of September 30, 1996, the Foundation owned 53,360,000 shares of the
Company's Common Stock (the "Common Stock"), representing approximately 80.3% of
the total shares of Common Stock outstanding. Following the Offerings, the
Foundation will own 40,360,000 shares of the Company's Common Stock, which will
represent approximately 60.7% of the outstanding shares (or, if the
over-allotment option is exercised in full, 38,410,000 shares of the Company's
Common Stock, which will represent approximately 57.8% of the outstanding
shares). The Company's Articles of Incorporation prohibit any person or entity
or affiliated persons or entities (other than the Foundation) from beneficially
owning more than one share less than 5% of the outstanding voting securities of
the Company. See "Description of Capital Stock."

SEE "RISK FACTORS" ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) SHAREHOLDER(2)
<S> <C> <C> <C>
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Per Share...................... $ $ $
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Total(3)....................... $ $ $
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</TABLE>

(1) The Company and the Selling Shareholder have agreed to indemnify the several
U.S. Underwriters and International Managers (collectively, the
"Underwriters") against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Excludes expenses payable by the Company, estimated at $ .
(3) The Selling Shareholder has granted to the U.S. Underwriters and the
International Managers a 30-day option to purchase an aggregate of 1,560,000
and 390,000 additional shares, respectively, of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such additional shares
are purchased, the total Price to Public, Underwriting Discount, and
Proceeds to Selling Shareholder will be $ , $ and $ ,
respectively.
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in New York, New York
on or about , 1996.
------------------------
MERRILL LYNCH & CO. SALOMON BROTHERS INC

BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO.
INCORPORATED
------------------------

The date of this Prospectus is , 1996.
<PAGE> 3

DOCUMENTS INCORPORATED BY REFERENCE

The following documents of the Company's predecessor, WellPoint Health
Networks Inc., a Delaware corporation ("Old WellPoint"), filed with the
Commission are incorporated herein by reference:

(i) Old WellPoint's Annual Report on Form 10-K (File No. 1-11628) for
the year ended December 31, 1995;

(ii) Old WellPoint's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996; and

(iii) Old WellPoint's Current Reports on Form 8-K filed January 9,
1996, February 26, 1996, March 8, 1996 and April 12, 1996.

The following documents of the Company filed with the Commission (File No.
1-14340) are incorporated herein by reference:

(i) the Company's Current Report on Form 8-K filed June 3, 1996,
Amendment No. 1 on Form 8-K/A filed June 24, 1996, Current Report on Form
8-K filed October 4, 1996, and Current Report on Form 8-K filed October 25,
1996;

(ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as amended by Amendment No. 1 on Form 10-Q/A; and

(iii) the Company's Registration Statement on Form 8-B filed May 20,
1996.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
after the date of this Prospectus and prior to the termination of the offering
of the Common Stock offered hereby shall be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.

The Company will provide, without charge to any person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any document incorporated by reference herein, other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
in such document. Requests should be directed to 21555 Oxnard Street, Woodland
Hills, California 91367 Attention: Secretary. The Company's telephone number is
(818) 703-4000.

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the consolidated financial statements
and notes thereto, appearing elsewhere in this Prospectus. Unless the context
otherwise indicates, references in this Prospectus to the "Company" or
"WellPoint" are to WellPoint Health Networks Inc. and its subsidiaries. Except
as set forth in the consolidated financial statements or where otherwise noted
herein, the information contained in this Prospectus (i) assumes no exercise of
the Underwriters' over-allotment option and (ii) assumes the reduction in shares
outstanding as a result of the Company's May 1996 Recapitalization described
under "The Company -- Recent Recapitalization."

THE COMPANY

The Company is one of the nation's largest publicly traded managed health
care companies with approximately 4.2 million medical members, 11.9 million
pharmacy members and 1.5 million dental members as of June 30, 1996. The Company
offers a diversified mix of managed care products, including health maintenance
organizations ("HMO"), preferred provider organizations ("PPO"),
point-of-service ("POS") and other hybrid plans. The Company's managed care
plans incorporate a full range of financial incentives and cost controls for
both members and providers. The Company also provides a broad array of specialty
managed care products, including pharmacy, dental, life, integrated workers'
compensation, preventive care, disability, behavioral health, COBRA and flexible
benefits account administration. In addition, the Company offers managed care
services for self-funded employers, including underwriting, actuarial services,
network access, medical cost management, claims processing and administrative
services. By developing a diversified mix of products and services, the Company
is able to meet the needs of a broad range of individuals, employer groups and
their employees. The Company's operations, with the exception of specialty
products, are organized into two internal business units with a geographic
focus. The Company markets its products in California under the name Blue Cross
of California and outside of California under the name UNICARE.

Blue Cross of California. The Company's primary market for its managed
care products is California. The Company holds the exclusive right in California
to market its products under the Blue Cross name and mark. The Company is
diversified in its California customer base, with extensive membership among
small employer groups, individuals and large employer groups, and a growing
presence in the Medicare and Medicaid markets. Membership in WellPoint's HMO
plan, CaliforniaCare, has grown to approximately 940,000 members as of June 30,
1996 from 123,000 members as of December 31, 1987, a compound annual growth rate
of approximately 27% over the last eight and one-half years. For the two-year
period ended June 30, 1996, the compound annual growth rate was 21%. As of June
30, 1996, the HMO network included approximately 24,500 primary care and
specialist physicians and approximately 400 hospitals throughout California.
There were approximately 2.2 million members, including administrative service
members, enrolled in WellPoint's California PPO health care plans as of June 30,
1996, approximately 50% of whom were individuals or employees of small groups.
The PPO network included approximately 40,100 primary care and specialty
physicians and 420 hospitals as of such date. WellPoint's large membership base
allows it to provide for the delivery of health care services at lower cost than
traditional health insurance companies, primarily due to its provider network
arrangements that specify favorable rates and incorporate utilization management
and other cost-control measures.

Geographic Expansion Strategy -- UNICARE. The Company believes that its
success in the highly competitive California managed care market is attributable
to its broad range of managed care products which target the specific needs and
demands of different customer segments. An important element of the Company's
geographic expansion strategy is to replicate its success in California in
motivating traditional indemnity members to select from the Company's broad
range of managed care products. As of June 30, 1996, the Company had
approximately 1.1 million members enrolled in its UNICARE health plans. The
Company's acquisition strategy focuses on large employer group plans which offer
indemnity and other health care products that are less intensively managed than
the Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic

3
<PAGE> 5

locations outside of California. The Company believes that such newly acquired
members will provide it with sufficient scale to begin development of
proprietary provider network systems in key geographic areas. The Company
intends to use these new networks to introduce individual, small group and
senior products, which have historically been more profitable for the Company in
California than large group products.

The Company acquired the Life and Health Benefits Management Division
("MMHD") of Massachusetts Mutual Life Insurance Company ("MassMutual") in March
1996 (the "MMHD Acquisition"). The acquired MMHD operations, which have been
renamed UNICARE Life & Health Insurance Co., focus on the large employer group
market (employers with 250 to 3,000 employees) and provide administrative
services, PPO and indemnity insurance products to members in 50 states. Most of
the Company's current UNICARE members were previously MMHD members. On October
10, 1996, the Company signed a definitive agreement to purchase certain portions
of the Group Benefits Operations (the "GBO Operations") of John Hancock Mutual
Life Insurance Company ("John Hancock"). The GBO Operations target the "jumbo"
employer segment (employers with 3,000 or more employees) and currently provide
administrative services, PPO and indemnity insurance products. This transaction,
which is subject to regulatory approvals and other closing conditions, is
currently expected to close in January 1997.

Specialty Managed Health Care Plans. The Company offers pharmacy, dental,
workers' compensation and other managed health care plans through its specialty
managed care networks. As of June 30, 1996, WellPoint's pharmacy plans served
approximately 11.9 million risk and non-risk members and had approximately
42,000 participating pharmacies. The Company's dental products (which included a
dental HMO and PPO) served approximately 1.5 million members. The Company is
expanding its specialty managed care business by marketing these plans to its
existing HMO, PPO and POS members, as well as using these specialty products to
attract new members. WellPoint also markets these specialty products on a
stand-alone basis to other health plans.

In May 1996, the Company completed a recapitalization (the
"Recapitalization") with its former majority shareholder, Blue Cross of
California ("BCC"). See "The Company -- Recent Recapitalization."

Recent Development -- Results of Operations for Quarter Ended September 30,
1996. The Company had total revenues of $1,130.7 million for the quarter ended
September 30, 1996, as compared to $771.8 million for the same period in 1995.
The Company's net income for the quarter ended September 30, 1996 was $45.1
million or $0.68 per share, as compared to $51.8 million or $0.78 per share
during the quarter ended September 30, 1995. Net income for the third quarter of
1996 included the net after-tax impact of $8.9 million, or $0.13 per share, in
interest expense, lower investment income and other costs associated with the
Recapitalization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

4
<PAGE> 6

THE OFFERINGS

<TABLE>
<S> <C>
Common Stock offered by the
Selling Shareholder:
U.S. Offering.............................. 10,400,000 shares
International Offering..................... 2,600,000 shares
Total.............................. 13,000,000 shares
Common Stock to be outstanding
after the Offerings........................ 66,484,298 shares(1)
Common Stock to be owned by the Selling
Shareholder after the Offerings............ 40,360,000 shares(2)
Use of Proceeds.............................. The Company will not receive any proceeds
from the sale of shares offered hereby. See
"Use of Proceeds."
New York Stock Exchange symbol............... WLP
</TABLE>

- ---------------

(1) Excludes approximately 3,050,485 shares of Common Stock subject to
outstanding options granted by the Company under certain stock option plans,
of which 144,858 were exercisable as of September 30, 1996.

(2) Assumes that the over-allotment options in an aggregate amount of 1,950,000
shares granted to the Underwriters are not exercised. If such over-allotment
options are exercised in full, the Selling Shareholder will own 38,410,000
shares of Common Stock after the Offerings.

5
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth for the periods indicated selected
historical and pro forma consolidated financial and operating data for the
Company. For the years ended December 31, 1991 and 1992, WellPoint's business
was conducted by BCC. In accordance with generally accepted accounting
principles, the assets and liabilities of WellPoint's business for such periods
have been reflected in its financial statements on the basis of BCC's historical
cost. The selected historical consolidated financial and operating data presents
WellPoint's financial position and results of operations for such periods as if
it had been operating as a separate stand-alone entity. For the years ended
December 31, 1991 through 1995 and as of December 31, 1995, the selected
historical consolidated financial data does not include the commercial
operations of BCC (the "BCC Commercial Operations"). Information as of December
31, 1995 and for each of the three years ended December 31, 1995 has been
derived from the Consolidated Financial Statements of WellPoint contained
herein, which have been audited by Coopers & Lybrand L.L.P., independent public
accountants for WellPoint, whose report appears elsewhere in this Prospectus.
Information for the years ended December 31, 1991 and 1992 has been derived from
WellPoint's audited consolidated financial statements. The selected historical
financial data presented for the six months ended June 30, 1995 and 1996 has
been derived from WellPoint's unaudited consolidated financial statements and
contains all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of this information. The operating results for
the six months ended June 30, 1996 are not necessarily indicative of the
operating results to be expected for the full year. The unaudited pro forma
income statement data for the year ended December 31, 1995 and the six months
ended June 30, 1996 give effect to the MMHD Acquisition, the Recapitalization
(including the acquisition of the BCC Commercial Operations) and the pending
acquisition of the GBO Operations as if each such transaction had been
consummated as of the beginning of each period presented. The unaudited pro
forma balance sheet data at June 30, 1996 gives effect to the acquisition of the
GBO Operations as if such transaction had been consummated as of such date.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------- ----------------------------------
1995 1996
1991 1992 1993 1994 1995 PRO FORMA 1995 1996(7) PRO FORMA
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............. $1,926,724 $2,275,155 $2,449,175 $2,791,672 $3,107,079 $5,141,325 $1,556,588 $1,883,041 $2,641,015
Operating expenses:
Operating expenses
(excluding
nonrecurring
costs)........... 1,698,896 1,983,641 2,133,245 2,431,643 2,734,541 4,772,476 1,357,557 1,678,230 2,447,031
Nonrecurring
costs............ -- -- -- -- 57,074(5) 57,074(5) -- -- --
Operating income..... 227,828 291,514 315,930 360,029 315,464 311,775 199,031 204,811 193,984
Interest
expense(1)......... -- -- -- -- -- 68,265 -- 10,923 33,929
Income before
extraordinary gain
and cumulative
effect of
accounting
changes............ 140,489 174,758 186,644 213,170 179,989 145,959 114,910 109,885 95,510
Net income........... 159,699 174,758 165,384 213,170 179,989 145,959 114,910 109,885 95,510
Earnings per
share(2):
Income before
extraordinary
gain and
cumulative effect
of accounting
changes.......... $2.12 $2.63 $2.81 $3.21 $2.71 $2.20 $1.73 $1.66 $1.44
Net income......... 2.41 2.63 2.49 3.21 2.71(6) 2.20(6) 1.73 1.66 1.44
OPERATING
STATISTICS(3):
Loss ratio........... 74.3% 73.6% 73.0% 72.8% 75.6% 74.8% 76.3%
Selling expense
ratio.............. 5.7 5.9 6.2 6.3 6.4 6.4 6.0
General and
administrative
expense ratio...... 12.0 12.1 11.2 12.5 11.6 11.5 13.0
Net income ratio..... 8.6 8.0 7.0 7.9 6.1 7.7 6.1
Number of medical
members at end of
period(4).......... 1,938,000 2,162,000 2,322,000 2,617,000 2,797,000 2,772,000 4,244,000
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -----------------------
1995 ACTUAL PRO FORMA
---------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................................................... $2,679,257 $3,322,203 $4,165,939
Stockholders' equity............................................................... 1,670,226 761,253 761,253
</TABLE>

- ---------------
(1) Interest expense for the pro forma income statement data gives effect to the
debt issued with respect to the MMHD Acquisition, the payment of a special
dividend in connection with the Recapitalization and the pending acquisition
of the GBO Operations as if the transactions had been consummated at the
beginning of each period presented. The income statement data for the period
ended June 30, 1996 includes the actual interest expense incurred with
respect to the completed transactions.
(2) Earnings per share for all periods presented prior to 1996 have been
recomputed using 66,366,500 shares, the number of shares outstanding
immediately following completion of the Recapitalization. Earnings per share
for the six months ended June 30, 1996 has been calculated using such
66,366,500 shares, plus the weighted average number of shares issued since
the Recapitalization.
(3) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue combined.
(4) Membership numbers are approximate and include some estimates based upon the
number of contracts at the relevant date and an actuarial estimate of the
number of members represented by each contract.
(5) This charge included $29.8 million of costs, primarily professional fees,
associated with the proposed recapitalization of the Company and the
terminated acquisition of Health Systems International, Inc. and $27.3
million for the impairment of the Company's pharmaceutical benefits
management business.
(6) Earnings per share for the year ended December 31, 1995 includes
nonrecurring costs of $0.52 per share.

(7) On May 20, 1996, the Company completed the Recapitalization, including the
payment of a special dividend in the aggregate amount of $995.0 million,
which was financed in part by the incurrence of $775.0 million in
indebtedness. On March 31, 1996, the Company completed the MMHD Acquisition.

6
<PAGE> 8

CAUTIONARY DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS

Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" such as statements concerning
potential or future loss ratios and administrative expense ratios, certain
statements contained in "Business" such as the Company's geographic expansion
and other business strategies, the effect of recent health care reform
legislation and small group membership growth, and other statements contained
herein regarding matters that are not historical facts are forward-looking
statements (as such term is defined in the Securities Act of 1933, as amended
(the "Securities Act")). Such statements involve a number of risks and
uncertainties which may cause actual results to differ from those projected.
Factors that can cause actual results to differ materially include, but are not
limited to, those discussed herein under "Risk Factors" and in other documents
filed from time to time by the Company with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to update these forward-looking statements as a result
of any events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.

HEALTH CARE COSTS AND PREMIUM PRICING PRESSURES

WellPoint's profitability will depend in large part on accurately
predicting health care costs and on its ability to control future health care
costs through underwriting criteria, utilization management, product design and
negotiation of favorable provider contracts. The aging of the population and
other demographic characteristics and advances in medical technology continue to
contribute to rising health care costs. Government-imposed limitations on
Medicare and Medicaid reimbursement have also caused the private sector to bear
a greater share of increasing health care costs. Changes in health care
practices, inflation, new technologies, clusters of high-cost cases, changes in
the regulatory environment and numerous other factors affecting the cost of
health care are beyond any health plan's control and may adversely affect
WellPoint's ability to predict and control health care costs as well as
WellPoint's financial condition or results of operations. See
"Business -- Managed Health Care Industry Overview" and "Business -- Government
Regulation."

In addition to the challenge of controlling health care costs, the Company
faces pressure to contain premium prices. Employer-sponsored and
government-sponsored programs are subject to renegotiation as payors seek to
control their costs. Fiscal concerns regarding the continued viability of
programs such as Medicare and Medicaid may cause decreasing reimbursement rates
for government-sponsored programs. WellPoint's financial condition or results of
operations would be adversely affected by any limitation on the Company's
ability to increase or maintain its premium levels.

HEALTH CARE REGULATIONS; LEGISLATIVE REFORM

WellPoint's operations are subject to substantial regulation by Federal,
state and local agencies. WellPoint offers its managed health care plans in
California principally through subsidiaries whose businesses are subject to
regulation by the California Department of Corporations (the "DOC") under the
Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act"). In
addition, due in part to the MMHD Acquisition in March 1996, as well as
previously existing Company operations, the Company is subject to regulation by
the Departments of Insurance in California and various other states. There can
be no assurance that any future regulatory action by the DOC or any such other
agencies will not have a material adverse effect on the profitability or
marketability of WellPoint's health plans or on its financial condition or
results of operations. See "Business -- Government Regulation." Because of the
Company's participation in

7
<PAGE> 9

government-sponsored programs such as Medicaid and Medicare, changes in
government regulations or policy with respect to, among other things,
reimbursement levels, could also adversely affect WellPoint's financial
condition or results of operations.

In August 1996, the President signed into law the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). The HIPAA contains the
following key provisions: (i) guaranteed access to health insurance for
businesses with 50 or fewer employees; (ii) guaranteed access to health
insurance for individuals who lose group coverage; and (iii) protections for
individuals with pre-existing medical conditions. In September 1996, the
President signed maternity length of stay and mental health parity measures into
law. The maternity stay provision requires insurers to cover the cost of a
48-hour hospital stay following delivery and a 96-hour stay following a
Caesarian section. The mental health parity provision will require insurance
plans that provide mental health benefits to set the same level of yearly and
lifetime coverage for mental health benefits as for physical ones. These
measures will take effect January 1, 1998. In addition, numerous proposals have
been introduced in, or are being considered by, the United States Congress and
state legislatures relating to health care reform. There can be no assurance
that compliance with recently enacted or future legislation will not have a
material adverse impact on WellPoint's claims expense, its financial condition
or results of operations.

INTEGRATION OF RECENT ACQUISITIONS; GEOGRAPHIC EXPANSION STRATEGY

A significant component of the Company's business strategy is to diversify
into new geographic markets, particularly through strategic acquisitions. The
Company completed the MMHD Acquisition in March 1996. In October 1996, the
Company signed a definitive agreement to purchase the GBO Operations of John
Hancock. This acquisition, which is subject to regulatory approvals and other
closing conditions, is currently scheduled to close in January 1997. However,
there can be no assurances that such conditions will be satisfied or that such
acquisition will be consummated. Further, the consolidation of the acquired MMHD
operations and the GBO Operations into the operations of the Company will
require a significant amount of management time and could result in a diversion
of management resources from other matters. The success of these acquisitions
will also require the integration of a significant number of employees into the
Company's existing operations. No assurances can be given regarding the ultimate
success of the integration of these acquisitions into the Company's business,
due in part to the large size and multi-state nature of their businesses.

Both the acquired MMHD operations and the GBO Operations have substantial
indemnity-based insurance operations, with a significant number of members
outside of California. Each of these operations experienced varying
profitability or losses in recent periods. In addition, the Company expects that
it will experience material membership attrition as it pursues its strategy of
motivating traditional indemnity health insurance members to select managed care
products. A significant percentage of the members of the acquired MMHD
operations and the GBO Operations are in geographic areas where managed care
health plans are less prevalent and have not gained as great acceptance as in
California. See "Business -- Managed Health Care Industry Overview." There can
be no assurances that a sufficient number of these members will accept the
managed care health plans offered by the Company or that the Company will be
able to develop satisfactory provider networks in these geographic areas. The
development of such networks will require considerable expenditures by the
Company. The availability of funds for these expenditures will be dependent
upon, among other things, the continued profitability of the Company's
California-based business.

As the Company pursues its geographic expansion strategy, the Company's
market share is not as significant and its provider networks are not as
extensive as in California, and the Company will not have the benefit of the
Blue Cross mark, all of which are important components of its success in that
state. After an initial transition period, the Company will also no longer have
the benefit of the MassMutual or John Hancock trade names under which these
operations were previously conducted. There can be no assurance that the absence
of one or more of these elements will not adversely affect the success of the
Company's geographic expansion strategy.

8
<PAGE> 10

COMPETITION

Managed health care organizations, such as the Company, operate in a highly
competitive environment and in an industry that is currently subject to
significant changes from business consolidations, new strategic alliances,
legislative reform, aggressive marketing practices by other managed health care
organizations and market pressures brought about by a better informed and better
organized customer base, particularly among large employers. This environment
has produced and will likely continue to produce significant pressures on the
profitability of managed health care companies. The Company believes that
factors affecting the selection of a managed health care plan include price,
size of provider networks, quality of service and reputation (which may be
affected by accreditation by voluntary organizations such as the National
Committee on Quality Assurance ("NCQA")). The Company is currently in litigation
with NCQA regarding certain matters. See "Business -- Legal Proceedings."

The Company's current operations remain heavily concentrated in California,
where the managed health care industry is highly competitive on both a regional
and statewide basis. In addition, the managed health care industry in California
has undergone significant changes in recent years, including substantial
consolidation as a result of completed and pending transactions. Outside of
California, the Company faces substantial competition in all markets in which it
operates from other regional and national companies, many of whom have (or due
to future consolidation, may have) significantly greater financial and other
resources and market share than the Company. If competition were to further
increase in such markets, WellPoint's financial condition or results of
operations could be materially adversely affected. See
"Business -- Competition."

A substantial portion of WellPoint's California business is in the
individual and small employer group market, where the loss ratio is
significantly lower than in the large employer group market. The individual and
small employer group business constituted approximately 46% and 42% of
WellPoint's total premium revenue for the year ended December 31, 1995 and the
six months ended June 30, 1996, respectively. WellPoint has experienced
increasing competition in the individual and small employer group market over
the past several years, which has contributed to an increase in WellPoint's loss
ratio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

BLUE CROSS MARK

The Company is party to a license agreement (the "License Agreement") with
the Blue Cross/Blue Shield Association ("BCBSA") which entitles WellPoint and
certain of its subsidiaries to use the Blue Cross mark in California. The
License Agreement contains certain requirements and restrictions regarding
ownership of the Company's Common Stock and compliance with certain financial
ratios and operating requirements. Upon the occurrence of any event causing
termination of the License Agreement, WellPoint would cease to have the right to
use the Blue Cross mark in California and the BCBSA could thereafter issue a
license to use the Blue Cross mark in California to another entity, which would
adversely affect WellPoint's financial condition or results of operations. See
"Business -- Service Marks."

NEED FOR SUBORDINATED DEBT TO MEET ANTICIPATED BCBSA CAPITAL REQUIREMENTS

The Company is required to maintain minimum tangible net equity ("TNE") by
the Company's primary regulator, the DOC, and is required to meet minimum
capital requirements prescribed by the BCBSA. In measuring its capital for the
BCBSA, the Company is required by the BCBSA to use the method prescribed by the
DOC regulations. The failure to meet a specified level (the "Minimum BCBSA
Capital") of the BCBSA's base capital requirement can subject the Company to
certain corrective actions, while the failure to meet a lower specified level of
capital can result in a termination of the License Agreement. As of September
30, 1996, the Company's TNE (and thus its capital for purposes of the BCBSA) was
approximately $284.0 million and the Minimum BCBSA Capital was approximately
$247.4 million. The Minimum BCBSA Capital requirement, which is more restrictive
than the DOC's minimum capital requirements, is scheduled to increase for all
BCBSA licensees effective December 31, 1996. In addition, the acquisition of the
GBO Operations will cause a decrease in the Company's capital for purposes of
the BCBSA requirements, because goodwill associated with the acquisition must be
excluded from TNE (and thus from capital as calculated for the BCBSA). As a
result, the Company must increase its capital to maintain compliance with the
Minimum BCBSA Capital requirement.

9
<PAGE> 11

To address an anticipated shortfall in the Company's capital under the
BCBSA's more stringent requirements, WellPoint has received a commitment letter
(the "Commitment Letter") from Bank of America NT&SA for the provision of a $200
million subordinated debt facility (the "Subordinated Debt Facility"). The DOC
regulations permit the Company to include in TNE (and thus in capital for BCBSA
purposes) the amount of any indebtedness which is subordinated to the Company's
obligation to maintain the DOC's required minimum TNE (approximately $20 million
as of September 30, 1996). Pursuant to the terms of the Commitment Letter, it is
expected that the Subordinated Debt Facility will contain certain financial
ratio and other requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company believes that
borrowings under the Subordinated Debt Facility will qualify as TNE and that the
Company's resulting capital will exceed the Minimum BCBSA Capital requirement,
both at December 31, 1996 and upon completion of the acquisition of the GBO
Operations.

The Company intends promptly to negotiate the terms of definitive
documentation related to the Subordinated Debt Facility substantially as
described above or to take other appropriate actions so that the Company will
meet the Minimum BCBSA Capital requirements at December 31, 1996 and after
acquisition of the GBO Operations. However, there can be no assurance that the
Company will be able to conclude the Subordinated Debt Facility or other
qualifying transaction prior to December 31, 1996. All outstanding indebtedness
under the Subordinated Credit Facility will be due December 31, 1998. There can
be no assurances that the Company will generate sufficient cash flow from
operations for repayment of this indebtedness.

EVOLVING THEORIES OF RECOVERY

WellPoint, like HMOs and health insurers generally, excludes certain health
care services from coverage under its HMO, PPO and other plans. In the ordinary
course of its business, WellPoint is subject to the claims of its members
arising out of decisions to restrict treatment or to restrict reimbursement for
certain services. The loss of even one such claim, if it were to result in a
significant punitive damage award, could have a material adverse effect on
WellPoint's financial condition or results of operations. In addition, the risk
of potential liability under punitive damage theories may significantly increase
the difficulty of obtaining reasonable settlements of coverage claims. However,
the financial and operational impact that such evolving theories of recovery
will have on the managed care industry generally, or WellPoint in particular, is
presently unknown.

EFFECT OF OWNERSHIP AND TRANSFER RESTRICTIONS ON FUTURE CHANGES OF CONTROL

The ownership and transfer restrictions contained in the WellPoint Articles
of Incorporation provide that no person or entity or affiliated group of persons
or entities (other than the Foundation) may beneficially own more than one share
less than 5% of the outstanding voting securities of the Company (the "Ownership
Limit"). See "Description of Capital Stock." The ownership and transfer
restrictions can generally not be amended without the affirmative vote of at
least 75% of each class of the outstanding shares of voting capital stock
represented and voting at a duly held meeting of the shareholders at which a
quorum is present. Accordingly, the ownership and transfer restrictions, as well
as requirements under the License Agreement, may have the effect of discouraging
or even preventing a merger or business combination, a tender offer or similar
extraordinary transaction involving WellPoint. See "-- Future Sales of Common
Stock; Principal Shareholder" and "Description of Capital Stock."

SUBSTANTIAL INDEBTEDNESS; LEVERAGE

As a result of the Recapitalization and the MMHD Acquisition, the Company
incurred indebtedness of $837.0 million and a decrease in its tangible net worth
of $1.4 billion. The Company's total indebtedness was approximately $747.0
million as of September 30, 1996. This indebtedness will require that a portion
of WellPoint's future cash flow be applied to the payment of interest and
repayment of principal. This indebtedness may adversely affect WellPoint's
ability to finance operations and could limit its ability to pursue business
opportunities that may be in the interest of WellPoint and its shareholders. In
addition, any additional indebtedness, such as borrowings under the Subordinated
Debt Facility, may affect WellPoint's ability to

10
<PAGE> 12

maintain an investment grade rating with respect to its indebtedness or a
favorable claims paying rating, which could have a material adverse effect on
WellPoint's financial condition or results of operations. See "-- Need for
Subordinated Debt to Meet BCBSA Capital Requirements" and "Unaudited Pro Forma
Combined Condensed Financial Statements."

FUTURE SALES OF COMMON STOCK; PRINCIPAL SHAREHOLDER

As of September 30, 1996, the Foundation owned 53,360,000 shares of the
Company's Common Stock, representing approximately 80.3% of the total
outstanding shares. Following the Offerings, the Foundation will own 40,360,000
shares of the Company's Common Stock, which will represent approximately 60.7%
of the total outstanding shares (or, if the over-allotment option is exercised
in full, 38,410,000 shares of the Company's Common Stock which will represent
approximately 57.8% of the total outstanding shares). Such ownership, however,
is subject to the provisions of a voting trust agreement (the "Voting Trust
Agreement") and a voting agreement (the "Voting Agreement"), which may inhibit
or delay changes of control or other significant corporate events. See "The
Company -- Recent Recapitalization," "Relationship with the Foundation" and
"Description of Capital Stock." The Foundation, while not being entitled to
exercise a majority of the outstanding voting power of WellPoint, will by virtue
of the voting power under its control have the ability to exert influence over
shareholder actions, including the sale or merger of WellPoint. In exercising
this voting power, the Foundation may have interests that diverge from those of
WellPoint's other shareholders.

The Company has entered into a registration rights agreement with the
Foundation (the "Registration Rights Agreement"), granting the Foundation
certain demand and "piggyback" registration rights. Sales of WellPoint Common
Stock pursuant to any exercise of such rights may adversely affect the market
price of WellPoint Common Stock. The shares being sold in the Offerings by the
Foundation are being sold pursuant to the exercise of its registration rights.

Sales of substantial amounts of Common Stock in the public market by the
Foundation could adversely affect the market price of the Common Stock. Pursuant
to the undertakings made by BCC in connection with the DOC's approval of the
Recapitalization, the Foundation is required to make certain minimum annual
distributions beginning in 1997. In order to fund required distributions, the
Foundation may periodically sell shares of its WellPoint Common Stock. In
addition, pursuant to the requirements of the BCBSA, the Foundation has agreed
to reduce its voting power in WellPoint to less than 20% within three years of
May 20, 1996 and to less than 5% within five years of such date, either through
sales of shares or by deposit of such shares into the voting trust. See
"Relationship with the Foundation" and "Description of Capital Stock."

CERTAIN TAX ISSUES RELATING TO THE RECAPITALIZATION

In connection with the Recapitalization, BCC received a ruling from the
Internal Revenue Service ("IRS") that, among other things, the conversion of BCC
from non-profit to for-profit status as part of the Recapitalization (the "BCC
Conversion") qualified as a tax-free transaction and that no gain or loss was
recognized by BCC for Federal income tax purposes.

If the ruling were subsequently revoked, modified or not honored by the IRS
(due to a change in law or for any other reason), WellPoint, as the successor to
BCC, could be subject to Federal income tax in an amount equal to the difference
between the value of BCC at the time of the BCC Conversion and BCC's tax basis
in its assets at the time of the BCC Conversion. The potential tax liability to
WellPoint if the BCC Conversion is treated as a taxable transaction is currently
estimated to be approximately $696 million, plus interest (and possibly
penalties). BCC and the Foundation entered into an indemnification agreement
(the "Indemnification Agreement") that provides, with certain exceptions, that
the Foundation will indemnify WellPoint against the net tax liability as a
result of a revocation or modification, in whole or in part, of the ruling by
the IRS or a determination by the IRS that the BCC Conversion constitutes a
taxable transaction for Federal income tax purposes. There can be no assurance
that the Foundation will have sufficient assets to satisfy the liability in
full, in which case WellPoint would bear all or a portion of the cost of the
liability, which could have a material adverse effect on WellPoint's financial
condition. See "Relationship with the Foundation."

11
<PAGE> 13

THE COMPANY

GENERAL

The Company is one of the nation's largest publicly traded managed health
care companies with approximately 4.2 million medical members, 11.9 million
pharmacy members and 1.5 million dental members as of June 30, 1996. The Company
offers a diversified mix of managed care products, including HMOs, PPOs, POS and
other hybrid plans. The Company's managed care plans incorporate a full range of
financial incentives and cost controls for both members and providers. The
Company also provides a broad array of specialty managed care products,
including pharmacy, dental, life, integrated workers' compensation, preventive
care, disability, behavioral health, COBRA and flexible benefits account
administration. In addition, the Company offers managed care services for
self-funded employers, including underwriting, actuarial services, network
access, medical cost management, claims processing and administrative services.
By developing a diversified mix of products and services, the Company is able to
meet the needs of a broad range of individuals, employer groups and their
employees. The Company's operations, with the exception of specialty products,
are organized into two internal business units with a geographic focus. The
Company markets its products in California under the name Blue Cross of
California and outside of California under the name UNICARE.

The Company's primary market for managed care products is California. The
Company holds the exclusive right in California to market its products under the
Blue Cross name and mark. The Company is diversified in its California customer
base, with extensive membership among small employer groups, individuals and
large employer groups, and a growing presence in the Medicare and Medicaid
markets.

Over the past decade, the Company has successfully transitioned
substantially all of its California indemnity health insurance customers to
managed care products. An important element of the Company's geographic
expansion strategy is to replicate this success in other states. The Company's
acquisition strategy focuses on large employer group plans which offer indemnity
and other health insurance products that are less intensively managed than the
Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic
locations outside of California. The Company believes that such acquisitions
will provide its UNICARE operations with sufficient scale to begin development
of proprietary provider network systems in key geographic areas. The Company
intends to use these new networks to introduce individual, small group and
senior products, which have historically been more profitable for the Company in
California than large group plans.

Consistent with the Company's acquisition strategy, on October 10, 1996 the
Company signed a definitive agreement to purchase the GBO Operations from John
Hancock (See "Business -- Recent Development -- Pending Acquisition of the GBO
Operations") and in March 1996 acquired MMHD from MassMutual.

RECENT RECAPITALIZATION

The Company's predecessor, WellPoint Health Networks Inc., a Delaware
corporation ("Old WellPoint"), was organized in 1992 as a public for-profit
subsidiary of BCC, to own and operate substantially all of the managed health
care business of BCC. On May 20, 1996, Old WellPoint and BCC completed the
Recapitalization in order to fulfill BCC's public benefit obligation to the
State of California arising out of the above-described creation of Old
WellPoint. In connection with the Recapitalization, Old WellPoint paid a $10.00
per share special dividend ($995.0 million in the aggregate) of which $800.0
million was donated by BCC to the California Endowment (the "Endowment"), which
together with the Foundation was one of two new foundations created to
facilitate the Recapitalization. After BCC changed its status to a California
for-profit business corporation, Old WellPoint merged with and into BCC (the
"Merger") and the survivor, BCC, changed its name to WellPoint Health Networks
Inc. Old WellPoint's outstanding shares of Class A Common Stock were each
converted into 0.667 shares of Common Stock of the Company. The outstanding
Common Stock of the Company held by the Foundation was exchanged for (i)
53,360,000 shares of the post-Merger Company's Common Stock and (ii) a cash
payment of $235.0 million to reflect the value of the BCC Commercial Operations,
including the Blue Cross mark.

12
<PAGE> 14

In connection with the Recapitalization and pursuant to requirements of the
BCBSA, the Foundation entered into the Voting Trust Agreement and the Voting
Agreement to ensure the continued election of directors nominated by the
Nominating Committee of the Company's Board of Directors and to require the
reduction of holdings by the Foundation of the Company's shares, either through
sales or deposits into the Voting Trust, to less than 20% and 5% of the
outstanding Company Common Stock on and after the third and fifth anniversaries,
respectively, of May 20, 1996. The Company and the Foundation also entered into
the Registration Rights Agreement which, among other things, granted the
Foundation certain demand and "piggyback" registration rights to facilitate the
sale of its holdings of the Company's Common Stock. See "Relationship with the
Foundation."

In addition, in connection with the Recapitalization, the Company entered
into the License Agreement with the BCBSA, which makes the Company the exclusive
licensee of the Blue Cross mark in California. The License Agreement requires
the Company to, among other things, prohibit any person other than the
Foundation from beneficially owning stock in excess of the Ownership Limit,
eliminate cumulative voting and establish a classified Board of Directors. See
"Risk Factors -- Future Sales of Common Stock; Principal Shareholder,"
"Business -- Service Marks" and "Relationship with the Foundation."

Unless the context otherwise requires, all information herein gives effect
to the Merger or Recapitalization. Any references herein to the "Company" or
"WellPoint" prior to the Recapitalization shall mean Old WellPoint.

The Company is a corporation organized under the laws of the State of
California. The Company's principal executive offices are located at 21555
Oxnard Street, Woodland Hills, California 91367 and its telephone number is
(818) 703-4000.

13
<PAGE> 15

USE OF PROCEEDS

All of the shares of Common Stock being offered hereby are owned by the
Foundation. See "Selling Shareholder." The Company will not receive any proceeds
from the sale of shares offered hereby.

DIVIDEND POLICY

The Company currently intends to retain all of its current and future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. In connection with the Recapitalization,
Old WellPoint paid a special dividend of $10.00 per share to the holders of its
Class A and Class B Common Stock. See "The Company -- Recent Recapitalization."
The payment of any future dividends will be at the discretion of the Company's
Board of Directors.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "WLP" since the Company's initial public offering on January
27, 1993. The following table sets forth for the periods indicated the high and
low sale prices for the Common Stock. For periods prior to the consummation of
the Recapitalization on May 20, 1996 the information given below is with respect
to Old WellPoint Class A Common Stock without adjustment for the two-for-three
exchange occurring as part of the Recapitalization. In connection with the
Recapitalization, Old WellPoint paid a special dividend of $10.00 per share to
its stockholders of record as of May 15, 1996. See "The Company -- Recent
Recapitalization."

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
PRE-RECAPITALIZATION:
Year Ended December 31, 1994
First Quarter...................................................... $ 37 $ 29 3/4
Second Quarter..................................................... 34 29 3/8
Third Quarter...................................................... 32 1/2 24 1/4
Fourth Quarter..................................................... 31 1/4 25 7/8
</TABLE>

<TABLE>
<S> <C> <C>
Year Ended December 31, 1995
First Quarter...................................................... $ 37 $ 27
Second Quarter..................................................... 34 3/8 27 3/8
Third Quarter...................................................... 31 27 7/8
Fourth Quarter..................................................... 33 3/8 29 1/8
Year Ended December 31, 1996
First Quarter...................................................... $ 36 $ 31 7/8
Second Quarter (through May 20, 1996).............................. 36 5/8 26
POST-RECAPITALIZATION:
Second Quarter (May 21, 1996 to June 30, 1996)..................... $ 39 1/8 $ 31 1/8
Third Quarter...................................................... 33 3/4 23 3/8
Fourth Quarter (through October 29, 1996).......................... 32 5/8 31
</TABLE>

On October 29, 1996, the closing price on the New York Stock Exchange for
the Company's Common Stock was $31 5/8 per share. As of September 30, 1996,
there were approximately 148 holders of record of Common Stock.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis and (ii) on a pro forma basis to reflect the
acquisition of the GBO Operations and the incurrence and assumption of
additional indebtedness in connection therewith. See "Business -- Recent
Development -- Pending Acquisition of the GBO Operations." This table should be
read in conjunction with the consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
ACTUAL PRO FORMA
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................. $ 809,870 $ 896,808
Stockholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares
authorized, none issued and outstanding............... -- --
Common Stock, $0.01 par value, 300,000,000 shares
authorized, 66,482,298 issued and outstanding,
actual and pro forma.................................. 665 665
Additional paid-in capital............................... 760,859 760,859
Unrealized valuation adjustment.......................... (26,063) (26,063)
Retained earnings........................................ 25,792 25,792
---------- --------
Total stockholders' equity....................... 761,253 761,253
---------- --------
Total capitalization........................ $1,571,123 $ 1,658,061
========== ========
</TABLE>

15
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table sets forth for the periods indicated selected
consolidated financial and operating data for the Company. For the years ended
December 31, 1991 and 1992, WellPoint's business was conducted by BCC. In
accordance with generally accepted accounting principles, the assets and
liabilities of WellPoint's business for such periods have been reflected in its
financial statements on the basis of BCC's historical cost. The selected
historical consolidated financial and operating data presents WellPoint's
financial position and results of operations for such periods as if it had been
operating as a separate stand-alone entity. For the years ended and as of
December 31, 1991 through December 31, 1995 and the six months ended June 30,
1995, the selected historical consolidated financial data does not include the
BCC Commercial Operations. Information as of December 31, 1994 and 1995 and for
each of the three years ended December 31, 1995 has been derived from the
Consolidated Financial Statements of WellPoint contained herein, which have been
audited by Coopers & Lybrand L.L.P., independent public accountants for
WellPoint, whose report appears elsewhere in this Prospectus. Information as of
December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and
1992 have been derived from WellPoint's audited consolidated financial
statements. The selected financial data presented for the six months ended June
30, 1995 and 1996 has been derived from WellPoint's unaudited consolidated
financial statements and contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of this information.
The operating results for the six months ended and as of June 30, 1996 are not
necessarily indicative of the operating results to be expected for the full
year. The following data should be read in conjunction with the accompanying
Consolidated Financial Statements, the related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996(2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Premium revenue.................. $1,844,909 $2,161,216 $2,355,980 $2,647,951 $2,910,622 $1,458,548 $1,748,949
Management services revenue...... 14,317 17,952 18,121 36,274 61,151 28,661 61,663
Investment income................ 67,498 95,987 75,074 107,447 135,306 69,379 72,429
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,926,724 2,275,155 2,449,175 2,791,672 3,107,079 1,556,588 1,883,041
Operating expenses:
Health care services and other
benefits....................... 1,370,974 1,591,725 1,719,853 1,927,954 2,199,953 1,091,004 1,334,738
Selling expense.................. 105,562 128,653 147,097 169,483 190,161 94,999 107,727
General and administrative
expense........................ 222,360 263,263 266,295 334,206 344,427 171,554 235,765
Nonrecurring costs............... -- -- -- -- 57,074(1) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,698,896 1,983,641 2,133,245 2,431,643 2,791,615 1,357,557 1,678,230
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income................... 227,828 291,514 315,930 360,029 315,464 199,031 204,811
Interest expense................... -- -- -- -- -- -- 10,923
Other expense, net................. 2,389 2,419 2,901 8,008 12,677 5,883 9,181
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes, extraordinary gain and
cumulative effect of accounting
changes.......................... 225,439 289,095 313,029 352,021 302,787 193,148 184,707
Provision for income taxes....... 84,950 114,337 126,385 138,851 122,798 78,238 74,822
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary gain
and cumulative effect of
accounting changes............... 140,489 174,758 186,644 213,170 179,989 114,910 109,885
Extraordinary gain -- tax benefit
from utilization of net
operating loss carryforwards... 19,210 -- -- -- -- -- --
Cumulative effect of accounting
changes -- adoption of SFAS
Nos. 106 and 109............... -- -- (21,260) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......................... $ 159,699 $ 174,758 $ 165,384 $ 213,170 $ 179,989 $ 114,910 $ 109,885
========== ========== ========== ========== ========== ========== ==========
</TABLE>

16
<PAGE> 18

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investment securities..... $783,242 $1,039,106 $1,779,495 $1,962,290 $2,244,605 $2,093,881 $1,985,857
Total assets....................... 871,936 1,155,883 1,921,832 2,385,636 2,679,257 2,559,044 3,322,203
Long-term debt..................... -- -- -- -- -- -- 809,870
Stockholders' equity............... 321,725 507,483 1,233,190 1,418,919 1,670,226 1,587,226 761,253
</TABLE>

- ---------------
(1) This charge included $29.8 million of costs, primarily professional fees,
associated with the proposed recapitalization of the Company and the
terminated acquisition of Health Systems International, Inc. and $27.3
million for the impairment of the Company's pharmaceutical benefits
management business.

(2) On May 20, 1996, the Company completed the Recapitalization, including the
payment of a special dividend in the aggregate amount of $995.0 million,
which was financed in part by the incurrence of $775.0 million in
indebtedness. On March 31, 1996, the Company completed the MMHD Acquisition.

(3) Earnings per share for all periods presented prior to 1996 have been
recomputed using 66,366,500 shares, the number of shares outstanding
immediately following completion of the Recapitalization. Earnings per share
for the six months ended June 30, 1996 has been calculated using such
66,366,500 shares, plus the weighted average number of shares issued since
the Recapitalization.

(4) The loss ratio represents health care services and other benefits as a
percentage of premium revenue. All other ratios are shown as a percentage of
premium revenue and management services revenue.

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

(6) Earnings per share for the year ended December 31, 1995 includes
nonrecurring costs of $0.52 per share.

17
<PAGE> 19

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following sets forth the unaudited pro forma combined condensed balance
sheet for WellPoint as of June 30, 1996, and unaudited pro forma combined
condensed income statements for the six months ended June 30, 1996 and for the
year ended December 31, 1995. The Unaudited Pro Forma Combined Condensed
Financial Statements include historical amounts of Old WellPoint, adjusted to
reflect the Recapitalization including the acquisition of the BCC Commercial
Operations, and historical amounts of MMHD and the GBO Operations, adjusted to
reflect their acquisition by WellPoint. Reference is made to the notes to the
Unaudited Pro Forma Combined Condensed Financial Statements for a discussion of
such transactions. For the purpose of presenting the unaudited pro forma
combined condensed balance sheet, the Recapitalization and the MMHD Acquisition
are considered to have occurred on their effective dates, and the pending
acquisition of the GBO Operations is considered to have occurred as of June 30,
1996, while the unaudited pro forma combined condensed income statements are
presented on the basis that such transactions occurred as of the beginning of
each period presented.

As further discussed in the notes to the Unaudited Pro Forma Combined
Condensed Financial Statements, the acquisition of the BCC Commercial
Operations, the MMHD Acquisition and the pending acquisition of the GBO
Operations are accounted for using the purchase method of accounting, whereby
the respective assets and liabilities of the BCC Commercial Operations, MMHD and
the GBO Operations are recorded at their estimated fair value.

Certain data and notes normally included in financial statements in
accordance with generally accepted accounting principles have been condensed or
omitted. The unaudited pro forma combined condensed balance sheet is not
necessarily indicative of the financial condition had the pending acquisition of
the GBO Operations been completed as of June 30, 1996. The Unaudited Pro Forma
Combined Condensed Financial Statements are not necessarily indicative of the
results of operations of WellPoint had the Recapitalization (including the
acquisition of the BCC Commercial Operations), the MMHD Acquisition and the
pending acquisition of the GBO Operations actually been completed as of the
dates indicated. In addition, the Unaudited Pro Forma Combined Condensed
Financial Statements are not necessarily indicative of the future financial
condition or results of operations of WellPoint. The pro forma financial
information should be read in conjunction with the historical consolidated
financial statements of the Company, which are included in this Prospectus, and
the historical financial statements of the BCC Commercial Operations, MMHD and
the GBO Operations, which are incorporated by reference herein.

PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
WELLPOINT GBO OPERATIONS ADJUSTMENTS TOTAL
---------- -------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and current investments..................... $1,985,857 $422,224 $ -- $2,408,081
Other current assets............................. 496,488 258,217 -- 754,705
---------- -------- -------- ----------
Total current assets.................... 2,482,345 680,441 -- 3,162,786
Intangible assets................................ 563,931 9,761 127,700(1) 701,392
Other non-current assets......................... 275,927 25,834 -- 301,761
---------- -------- -------- ----------
Total assets............................ $3,322,203 $716,036 $ 127,700 $4,165,939
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Medical claims payable and loss reserves......... $ 866,562 $176,974 $ -- $1,043,536
Unearned premiums................................ 154,113 -- -- 154,113
Experience rated and other refunds............... 133,566 20,939 -- 154,505
Other current liabilities........................ 320,549 125,035 41,000(1) 486,584
---------- -------- -------- ----------
Total current liabilities............... 1,474,790 322,948 41,000 1,838,738
Long-term debt................................... 809,870 238 86,700(2) 896,808
Other non-current liabilities.................... 276,290 392,850 -- 669,140
---------- -------- -------- ----------
Total liabilities....................... 2,560,950 716,036 127,700 3,404,686
Total stockholders' equity....................... 761,253 -- -- 761,253
---------- -------- -------- ----------
Total liabilities and stockholders' equity..... $3,322,203 $716,036 $ 127,700 $4,165,939
========== ======== ======== ==========
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements

18
<PAGE> 20

WELLPOINT HEALTH NETWORKS INC.

PRO FORMA COMBINED CONDENSED INCOME STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
RECAPITALIZATION
AND BCC WELLPOINT
COMMERCIAL POST GBO
WELLPOINT OPERATIONS(3) ADJUSTMENTS RECAPITALIZATION MMHD(8) OPERATIONS ADJUSTMENTS TOTAL
----------- -------------- ------------- ---------------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..........$1,658,270 $ 205,588 $ (9,667)(4) $1,854,191 $ 402,879 $388,318 $(4,373)(9) $2,641,015
Expenses.......... 1,468,810 200,493 2,176(5) 1,671,479 389,810 382,023 3,719(10) 2,447,031
---------- -------- ------- ---------- ---------- -------- ------- ----------
Operating and
other income.... 189,460 5,095 (11,843) 182,712 13,069 6,295 (8,092) 193,984
Interest expense.. -- 9,273 18,618(6) 27,891 1,447 -- 4,591(11) 33,929
---------- -------- ------- ---------- ---------- -------- ------- ----------
Income before
provision
(benefit) for
income taxes.... 189,460 (4,178) (30,461) 154,821 11,622 6,295 (12,683) 160,055
Provision (benefit)
for income taxes 76,368 (1,692) (11,973)(7) 62,703 4,068 2,203 (4,429)(12) 64,545
---------- -------- ------- ---------- ---------- -------- ------- ----------
Net income
(loss)...........$ 113,092 $ (2,486) $(18,488) $ 92,118 $ 7,554 $ 4,092 $(8,254) $ 95,510
========== ========= ======== ========== ========== ======== ======= ==========
Primary and fully
diluted earnings
per share....... $ 1.44
==========
Weighted average
number shares
outstanding..... 66,381(13)
==========
</TABLE>

FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
RECAPITALIZATION
AND BCC WELLPOINT
COMMERCIAL POST GBO
WELLPOINT OPERATIONS ADJUSTMENTS RECAPITALIZATION MMHD OPERATIONS ADJUSTMENTS TOTAL
--------- ----------------- ----------- ---------------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..........$3,107,079 $ 448,493 $ (25,025)(4) $3,530,547 $ 888,542 $739,726 $ (17,490)(9) $5,141,325
Expenses.......... 2,804,292 441,988 5,267(5) 3,251,547 814,675 752,440 10,888(10) 4,829,550
---------- --------- --------- ---------- ---------- -------- --------- ----------
Operating and
other income.... 302,787 6,505 (30,292) 279,000 73,867 (12,714) (28,378) 311,775
Interest expense.. -- -- 56,188(6) 56,188 -- -- 12,077(11) 68,265
---------- --------- --------- ---------- ---------- -------- --------- ----------
Income before
provision
(benefit) for
income taxes.... 302,787 6,505 (86,480) 222,812 73,867 (12,714) (40,455) 243,510
Provision (benefit)
for income taxes 122,798 2,323 (34,882)(7) 90,239 24,385 (4,450) (12,623)(12) 97,551
---------- --------- --------- ---------- ---------- -------- --------- ----------
Net income
(loss)...........$ 179,989 $ 4,182 $ (51,598) $ 132,573 $ 49,482 $ (8,264) $ (27,832) $ 145,959
========== ========= ========= ========== ========== ======== ========= ==========
Primary and fully
diluted earnings
per share....... $ 2.20
==========
Weighted average
number shares
outstanding...... 66,367(13)
==========
</TABLE>

See Notes to Unaudited Pro Forma Combined Condensed Financial Statements

19
<PAGE> 21

WELLPOINT HEALTH NETWORKS INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

On March 31, 1996 the Company completed the MMHD Acquisition.

On May 20, 1996, the Company, BCC and Old WellPoint completed the
Recapitalization, which has been accounted for in the Unaudited Pro Forma
Combined Condensed Financial Statements using the purchase method of accounting,
whereby the respective assets and liabilities of the BCC Commercial Operations
are recorded at their estimated fair market value. In connection with the
Recapitalization, stockholders of Old WellPoint received a cash dividend of
$10.00 per share of Old WellPoint Common Stock ($995.0 million in aggregate),
followed by the Merger of Old WellPoint with and into Converted BCC (thereafter
"WellPoint") with each share of Old WellPoint Common Stock effectively converted
into 0.667 of a share of WellPoint Common Stock. WellPoint paid $235.0 million
in cash for the BCC Commercial Operations, including the value of the Blue Cross
name and mark. The total cash paid in the Recapitalization was $1,230.0 million.

On October 10, 1996, WellPoint executed a definitive agreement to acquire
the GBO Operations for approximately $86.7 million. This transaction is expected
to close in January 1997.

(1) The net increase in intangible assets is a result of the excess of cost
over the fair market value of the net assets of the GBO Operations
(purchase price of $86.7 million) and certain purchase price adjustments
related to the pending acquisition of the GBO Operations.

(2) Reflects the issuance of long-term indebtedness of $86.7 million associated
with the pending acquisition of the GBO Operations.

(3) The historical operating results of the BCC Commercial Operations have been
adjusted for the period from the date of acquisition by WellPoint through
June 30, 1996 in the following manner: (a) WellPoint's revenues have been
increased and the BCC Commercial Operations' revenues have been decreased
by $2.8 million to reflect interest income on cash and investments used by
WellPoint to finance the acquisition of the BCC Commercial Operations and
the payment of a special dividend of $995.0 million; (b) WellPoint's
expenses have been decreased and the BCC Commercial Operations' expenses
have been increased by $0.5 million to reflect amortization of the
intangible assets arising out of the acquisition of the BCC Commercial
Operations; and (c) WellPoint's interest expense has been decreased and the
BCC Commercial Operations' interest expense has been increased by $9.3
million to reflect debt incurred to finance the acquisition of the BCC
Commercial Operations and the payment of a special dividend.

(4) The reduction in revenues reflects the foregone interest, from January 1,
1996 through May 20, 1996 and for the year ended December 31, 1995, at
5.50% per annum on the $455.0 million of cash and investments used to fund
a special dividend and the acquisition of the BCC Commercial Operations.

(5) Reflects the adjustment required to amortize, from January 1, 1996 through
May 20, 1996 and for the year ended December 31, 1995, the intangible
assets of $211.4 million created as a result of the acquisition of the BCC
Commercial Operations on a straight-line basis over 40 years.

(6) Reflects the adjustment required to account for the interest expense (at an
assumed rate of 7.25% per annum), from January 1, 1996 through May 20, 1996
and for the year ended December 31, 1995, on the issuance of $775.0 million
of indebtedness incurred by WellPoint in connection with the payment of a
special dividend in the amount of $995.0 million. An increase in the
assumed interest rate by 0.25% results in additional interest expense of
$1.9 million on an annual basis and reduces earnings per share by $0.03 on
an annual basis.

(7) Reflects the tax effect of the pro forma adjustments to effect the
acquisition of the BCC Commercial Operations and payment of a special
dividend of $995.0 million.

(8) The historical operating results of MMHD have been adjusted for the period
from the date of acquisition through June 30, 1996 in the following manner:
(a) WellPoint's revenues have been

20
<PAGE> 22

increased and MMHD's revenues have been decreased by $4.4 million to
reflect the interest income on cash and investments used by WellPoint to
finance the MMHD Acquisition; and (b) WellPoint's interest expense has been
decreased and MMHD's interest expense has been increased by $1.4 million to
reflect the cost of debt incurred to finance the MMHD Acquisition. The
historical expenses of MMHD include amortization of $3.8 million from the
date of the acquisition to June 30, 1996, reflecting amortization of
intangible assets created as a result of the MMHD Acquisition.

(9) The reduction in revenues reflects the foregone interest at 5.50% per
annum, from January 1, 1996 through March 31, 1996 and for the year ended
December 31, 1995, on the $318.0 million of cash and investments used in
connection with the MMHD Acquisition.

(10) Reflects the adjustments required to amortize the intangible assets of
$232.1 million created as a result of the MMHD Acquisition on a
straight-line basis over 35 years, from January 1, 1996 through March 31,
1996 and for the year ended December 31, 1995, and to amortize the
intangible assets of $127.7 million expected to be created as a result of
the pending acquisition of the GBO Operations on a straight-line basis over
30 years, from January 1, 1996 through June 30, 1996 and for the year ended
December 31, 1995.

(11) Reflects the adjustments required to account for the interest expense (at
an assumed rate of 7.25% per annum), from January 1, 1996 through March 31,
1996 and for the year ended December 31, 1995, on the issuance of $79.9
million of indebtedness incurred by WellPoint in connection with the MMHD
Acquisition, and the interest expense (at an assumed rate of 7.25% per
annum) on the issuance of $86.7 million of indebtedness expected to be
incurred by WellPoint in connection with the pending acquisition of the GBO
Operations for all periods presented. An increase in the assumed interest
rate by 0.25% results in additional interest expense of $0.4 million on an
annual basis and has minimal effect on earnings per share on an annual
basis.

(12) Reflects the tax effect of the pro forma adjustments to effect the MMHD
Acquisition and the pending acquisition of the GBO Operations.

(13) Earnings per share for the year ended December 31, 1995 has been computed
using 66,366,500 shares, the number of shares outstanding immediately
following completion of the Recapitalization. Earnings per share for the
six months ended June 30, 1996 has been calculated using the 66,366,500
shares outstanding plus the weighted average number of shares issued since
the Recapitalization.

21
<PAGE> 23

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Prospectus. See "Cautionary Disclosure Regarding
Forward-Looking Statements."

OVERVIEW

WellPoint is one of the nation's largest publicly traded managed health
care companies with approximately 4.2 million medical members, approximately
11.9 million pharmacy members and 1.5 million dental members as of June 30,
1996. The Company offers a diversified mix of managed care products, including
HMOs, PPOs, POS and other hybrid plans. The Company's managed care plans
incorporate a full range of financial incentives and cost controls for both
members and providers. The Company also provides a broad array of specialty
products, including pharmacy, dental, life, integrated workers' compensation,
preventive care, disability, behavioral health, COBRA and flexible benefits
account administration. In addition, the Company provides underwriting,
actuarial service, network access, medical cost management, claims processing
and administrative services to self-funded employers. The Company's primary
market for managed care products is the State of California.

In March 1996, the Company completed the MMHD Acquisition and began the
integration of the acquired large employer group operations into its business.
This acquisition involves traditional group life and health indemnity businesses
which have experienced fluctuations in revenues and net income. In addition, the
MMHD large employer group operations (as well as the BCC Commercial Operations)
have traditionally experienced higher health care services expense as a
percentage of premium revenue (the "loss ratio") than the Company. As a result,
the Company may experience a higher overall loss ratio in future periods. In
addition, there can be no assurance that the Company will be able to
successfully integrate the MMHD Acquisition into its business or take
appropriate measures to control its associated loss ratio.

In October 1996, the Company signed a definitive agreement to purchase the
GBO Operations of John Hancock. Although a majority of the GBO Operations
involve the provision of administrative services to self-funded employer plans,
the indemnity-based portions of the GBO Operations have also experienced a
higher overall loss ratio than the Company's core business. If the acquisition
of the GBO Operations is completed, the Company may experience a higher overall
loss ratio. In addition, the integration of its operations may have an adverse
effect on the Company's financial condition or results of operations. The
Company expects to incur approximately $35 million to $45 million of
restructuring costs relating to this acquisition during 1997, a portion of which
is expected to be reflected in the Company's results of operations. The Company
expects that it will experience material membership attrition as it pursues its
strategy of motivating traditional indemnity health insurance members to select
managed care products. See "Risk Factors -- Geographic Expansion Strategy;
Integration of Recent Acquisitions."

A variety of health care reform measures are currently pending or have been
recently enacted at the federal and state levels. Recent Federal legislation
seeks, among other things, to insure the portability of health coverage and
mandates minimum maternity hospital stays. These and other proposed measures may
have the effect of dramatically altering the regulation of the provision of
health care and of increasing the Company's loss ratio. See "Risk
Factors -- Health Care Regulations; Legislative Reform" and "Business --
Government Regulation."

RESULTS OF OPERATIONS

WellPoint's revenues are generated from premiums earned for health care and
specialty services provided to its members, fees for administrative services,
which include claims processing and access to provider networks for self-insured
employers, and investment income. WellPoint's operating expenses include health
care services and other benefit expenses, consisting primarily of payments for
physicians, hospitals and other

22
<PAGE> 24

providers for health care and specialty products claims, selling expenses for
broker and agent commissions, and general and administrative expenses.

The Company's consolidated results of operations for the six months ended
June 30, 1996 include the results of operations of MMHD and the BCC Commercial
Operations from March 31, 1996 and May 20, 1996, respectively, the effective
date of each acquisition.

RECENT DEVELOPMENT -- RESULTS OF OPERATIONS FOR QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 1996

For the quarter ended September 30, 1996, the Company had total revenues of
$1,130.7 million, as compared to $771.8 million for the quarter ended September
30, 1995. The increase in revenues for the quarter ended September 30, 1996 (and
for the nine-month period then ended) over the corresponding periods in the
prior year was due to the MMHD Acquisition and the acquisition of the BCC
Commercial Operations, which were completed as of March 31, 1996 and May 20,
1996, respectively, as well as, to a lesser extent, growth in the Company's
existing business. The Company's net income for the quarter ended September 30,
1996 was $45.1 million or $0.68 per share, as compared to $51.8 million or $0.78
per share in the comparable period of 1995. Net income for the third quarter of
1996 included the net after-tax impact of $8.9 million, or $0.13 per share, in
interest expense, lower investment income and other costs associated with the
Recapitalization. For the nine-month period ended September 30, 1996, the
Company had total revenues of $3,013.7 million, as compared to $2,328.4 million
in the nine-month period ended September 30, 1995. The Company's net income for
the nine-month period ended September 30, 1996 was $155.0 million or $2.33 per
share, as compared to net income of $166.7 million or $2.51 per share in the
comparable period of 1995. The Company's total medical membership was
approximately 4.4 million as of September 30, 1996, an increase of 57.9% from
the approximately 2.8 million members as of September 30, 1995. The majority of
the increase in medical membership during the one-year period ended September
30, 1996 was attributable to the MMHD Acquisition and the acquisition of the BCC
Commercial Operations and, to a lesser extent, growth in the Company's existing
business.

23
<PAGE> 25

MEDICAL MEMBERSHIP

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

<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------ PERCENT
1995 1996 CHANGE
---------- ---------- -------
<S> <C> <C> <C>
CALIFORNIA
Group Services:
HMO..................................................... 624,006 643,554 3.1%
PPO and Other(a)........................................ 752,636 1,190,155 58.1%
--------- ---------
Total(b)........................................... 1,376,642 1,833,709 33.2%
--------- ---------
Individual, Small Group and Senior:
HMO..................................................... 192,199 246,384 28.2%
PPO and Other........................................... 1,169,121 1,192,525 2.0%
--------- ---------
Total.............................................. 1,361,320 1,438,909 5.7%
--------- ---------
Medi-Cal HMO Programs...................................... 34,103 49,717 45.8%
--------- ---------
Total California Medical Membership(c)....................... 2,772,065 3,322,335 19.9%
--------- ---------
OUT-OF-STATE
Group Services:
HMO..................................................... -- 2,506 N/A
PPO and Other(a)........................................ -- 905,884 N/A
--------- ---------
Total(b)........................................... -- 908,390 N/A
--------- ---------
Individual, Small Group and Senior:
PPO and Other........................................... -- 12,948 N/A
--------- ---------
Total Out-of-State Membership................................ -- 921,338 N/A
--------- ---------
TOTAL MEDICAL MEMBERSHIP..................................... 2,772,065 4,243,673 53.1%
========= =========
Total HMO.................................................. 850,308 942,161 10.8%
Total PPO and Other........................................ 1,921,757 3,301,512 71.8%
--------- ---------
TOTAL MEDICAL MEMBERSHIP..................................... 2,772,065 4,243,673 53.1%
========= =========
</TABLE>

- ---------------
(a) California and Out-of-State include 637,350 and 494,892 management services
members, respectively, at June 30, 1996. Of the 637,350 California
management services members, 82,437 are from the acquired MMHD operations.
California includes 437,204 management services members at June 30, 1995.

(b) At June 30, 1996, total MMHD medical membership was approximately 1,058,000,
of which approximately 152,000 were California members and approximately
906,000 were Out-of-State members.

(c) At June 30, 1996, total BCC Commercial Operations membership was
approximately 270,300, all of which were California members.

24
<PAGE> 26

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

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Premium revenue.................................. 99.2% 98.7% 97.9% 98.1% 96.6%
Management services revenue...................... 0.8 1.3 2.1 1.9 3.4
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
OPERATING EXPENSES:
Health care services and other benefits
(loss ratio).................................. 73.0% 72.8% 75.6% 74.8% 76.3%
Selling expense.................................. 6.2 6.3 6.4 6.4 6.0
General and administrative expense............... 11.2 12.5 11.6 11.5 13.0
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995

Premium revenue increased 19.9% to $1,748.9 million for the six months
ended June 30, 1996 from $1,458.5 million for the six months ended June 30,
1995. Premium revenues of $174.5 million and $24.9 million were attributable to
the MMHD Acquisition and the BCC Commercial Operations, respectively. Also
contributing to increased premium revenues were moderate increases in the
premiums per member. In addition, workers' compensation premium revenues
increased 61.0% from the first six months of 1995 to the first six months of
1996, due to a large increase in the number of insured employer groups,
primarily in the small employer and California school districts workers'
compensation markets. Dental premium revenue increased, largely due to an
increase in membership as a result of the introduction of a new dental PPO. The
increase in premium revenue was partially offset by the conversion of some
members in the Company's PPO Cost Plus product to management services
arrangements in 1995. This conversion was principally due to regulatory actions
taken by the DOC related to licensure requirements.

Management services revenue increased $33.0 million to $61.7 million for
the six months ended June 30, 1996 from $28.7 million for the six months ended
June 30, 1995. The increase was primarily due to $23.3 million of management
services revenue from the acquired MMHD operations. Also contributing to the
increase were new pharmacy and clinical management accounts, revenue from BCC
Commercial Operations and the conversion of PPO Cost Plus members to management
services arrangements. The PPO Cost Plus conversion, which was substantially
completed by December 1995, did not have a material effect on net income.

Investment income increased to $72.4 million for the six months ended June
30, 1996 as compared to $69.4 million for the same period in 1995, due to
increased interest income of $62.4 million as compared to $59.1 million in the
prior year. The increase was primarily due to additional interest of $8.0
million earned on MMHD and BCC Commercial Operations investments. However,
interest income on the Company's investment portfolio, excluding MMHD and the
BCC Commercial Operations, decreased from $59.1 million for the first six months
of 1995 to $54.4 million for the first six months of 1996, due to foregone
interest income on cash and investment balances used for the acquisitions and
the Recapitalization. Lower pretax net gains on the sales of investment
securities in 1996 of $8.9 million as compared to pretax net gains of $10.2
million in the prior year also partially offset the increased interest income.

Health care services and other benefits expense increased 22.3% to $1,334.7
million for the first six months of 1996 from $1,091.0 million for the same
period in 1995. Of the $243.7 million increase, $137.2 million was attributable
to MMHD and $23.2 million was attributable to the BCC Commercial Operations.
Increased health care services also resulted from the Company's new Prudent
Buyer Co-Pay product introduced in January 1996, which replaced deductibles with
co-payments, causing more costs to be absorbed up front compared to the prior
year, from benefit design changes which eliminated deductibles for some pharmacy
products and from membership gains in medical and specialty products. These
increases were

25
<PAGE> 27

partially offset by savings from hospital recontracting and by the effect of the
PPO Cost Plus transfer to management services discussed in the premium revenue
section above. The loss ratio for the first six months of 1996 increased to
76.3% compared to 74.8% in the same period in 1995 due to the PPO benefits
changes described above, an increase in the loss and loss adjustment expense
reserves related to a portion of the Company's workers' compensation business
and the incremental effect of the MMHD Acquisition and the BCC Commercial
Operations on the Company's overall results. The acquired MMHD operations and
the BCC Commercial Operations have traditionally experienced higher loss ratios
than the Company. Additionally, the Company may experience higher loss ratios
during the remainder of 1996 and future periods due to the incremental effect of
MMHD and the BCC Commercial Operations. The increase in the loss ratio was
partially offset by the Company's continuing cost containment efforts, such as
the hospital recontracting program implemented in 1996. The hospital
recontracting program provides incentives to those hospitals that are
successfully controlling costs. See "Business -- The Blue Cross of California
Business." Excluding the acquisitions, the loss ratio on the Company's core
business increased to 75.8% for the six months ended June 30, 1996.

Selling expense consists of commissions paid to outside brokers and agents
representing the Company. Selling expense for the six months ended June 30, 1996
increased 13.4% to $107.7 million compared to $95.0 million for the comparable
period in 1995, corresponding with continued overall premium revenue growth and
an additional $7.1 million in selling expense attributable to the acquired MMHD
operations. The selling expense ratio decreased slightly for the first six
months of 1996 to 6.0% from 6.4% for the prior year, largely due to the
acquisitions of MMHD and the BCC Commercial Operations, which both have a lower
selling expense ratio. Excluding the acquisitions, the selling expense ratio
would have decreased to 6.3% for the six months ended June 30, 1996 from 6.4%
for the comparable period in the prior year.

General and administrative expense for the six months ended June 30, 1996
increased 37.4% to $235.8 million from $171.6 million for the same period in
1995. Of the $64.2 million increase, $51.1 million resulted from the MMHD
Acquisition. The administrative expense ratio increased to 13.0% for the first
six months of 1996 compared to 11.5% in 1995, primarily due to the increased
administrative expense associated with the Company's continued investment in
national expansion and the MMHD Acquisition. The increase was partially offset
by the BCC Commercial Operations' lower administrative expense ratio. Excluding
MMHD, the administrative expense ratio would have been 11.5%, due in part to the
Company's focus on controlling its administrative costs. The acquired MMHD
operations have had a higher administrative expense ratio due to their higher
percentage of management services business.

Interest expense was $10.9 million for the six months ended June 30, 1996.
The Company had no interest expense during the comparable period in 1995. The
interest expense in the period related to $775.0 million drawn under the
Company's revolving credit facility on May 15, 1996 to fund the payment of the
special dividend paid in connection with the Recapitalization, as well as
interest on amounts payable to MassMutual, including the Series A term note
issued in connection with the MMHD Acquisition.

The Company's net income for the six months ended June 30, 1996 was $109.9
million or $1.66 per share compared to $114.9 million or $1.73 per share for the
six months ended June 30, 1995. The number of shares of Common Stock outstanding
for the six months ended June 30, 1996 was 66.4 million. The average number of
shares outstanding for the six months ended June 30, 1995 has been recomputed to
66.4 million, the number of shares outstanding immediately following the
Recapitalization, to give effect to the share exchange that occurred in
connection with the Recapitalization. Earnings per share is determined by
dividing net income by the average number of common shares outstanding.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Premium revenue increased 9.9% to $2.9 billion for the year ended December
31, 1995 from $2.6 billion for the year ended December 31, 1994. This increase
was primarily due to a 4.7% increase in medical members, excluding management
services members, to 2.3 million as of December 31, 1995 from 2.2 million
members as of December 31, 1994. The increase in premium revenue due to
membership growth was partially offset by the conversion of some PPO Cost Plus
members to management services arrangements. This

26
<PAGE> 28

conversion was principally due to regulatory actions taken by the DOC related to
licensure requirements. In addition, increased premium revenues resulted from a
shift to certain HMO products that generated a higher premium per member than
the Company's PPO products and from membership growth in specialty products.

Management services revenue increased $24.9 million to $61.2 million for
the year ended December 31, 1995 from $36.3 million in 1994. The increase was
due to a number of factors, including new pharmacy and clinical management
accounts and the acquisitions of Professional Claims Services, Inc. ("Pro-Serv")
in August 1994 and Affiliated Healthcare Corporation ("AHI") in February 1995.
The conversion of PPO Cost Plus members to management services arrangements also
contributed to the increase. This transfer, which was substantially completed in
December 1995, did not have a material effect on net income.

Investment income increased to $135.3 million for the year ended December
31, 1995 as compared to $107.4 million in 1994, due in part to 1995 pretax net
gains on the sales of investment securities of $15.4 million as compared to
pretax net gains in 1994 of $5.0 million. There were increased sales of
investment securities in 1995 in anticipation of the 1996 cash requirements for
the Recapitalization and the MMHD Acquisition. The increase also reflected a
higher average yield on a larger average portfolio balance, resulting in
interest income of $120.1 million for the year ended December 31, 1995 compared
to $102.0 million for the prior year.

Health care services and other benefits expense increased 14.1% to $2.2
billion for the year ended December 31, 1995 from $1.9 billion in 1994. The loss
ratio for 1995 increased to 75.6%, compared to 72.8% in 1994, due to several
factors. Membership as a percentage of total medical membership in the Company's
large group business, which has a higher loss ratio than the Company's small
group and individual business, increased in 1995. In addition, moderately higher
medical cost trends, a continued competitive pricing environment and the
elimination through new regulations of mandatory minimum premiums ("open
rating") in the workers' compensation market also contributed to the higher loss
ratio in 1995.

Selling expense for the year ended December 31, 1995 increased 12.2% to
$190.2 million compared to $169.5 million for 1994, corresponding with continued
overall premium revenue growth. The selling expense ratio increased slightly in
1995 to 6.4% from 6.3% in 1994, largely due to an increase in selling expenses
for the Company's workers' compensation products. The commission rates for the
Company's workers' compensation products increased due to increased competition
resulting from open ratings. Excluding selling expenses for the Company's
workers' compensation products, the selling expense ratio would have decreased
from 6.3% in 1994 to 6.2% in 1995.

General and administrative expense for the year ended December 31, 1995
increased 3.1% to $344.4 million from $334.2 million for 1994 due in part to
increased personnel service costs consistent with the increases in medical and
specialty membership, as well as the acquisition of AHI. The administrative
expense ratio decreased to 11.6% for the year ended December 31, 1995 compared
to 12.5% in 1994, due to a decrease in policyholder dividends resulting from the
open rating environment in the workers' compensation industry. Excluding the
conversion of PPO Cost Plus members to management services, the administrative
expense ratio would have been 11.1% in 1995, reflecting the Company's continued
focus on reducing its administrative costs.

During the fourth quarter of 1995, the operating results of the Company
included charges of $57.1 million ($34.5 million net of a $22.6 million tax
benefit) for nonrecurring costs. Approximately $29.8 million resulted from
costs, primarily professional fees, associated with the proposed
recapitalization of the Company and the proposed acquisition of Health Systems
International which was terminated in December 1995. In addition, the Company
recorded a charge of $27.3 million for the impairment of intangible assets
associated with its pharmaceutical benefits management business based on the
Company's most recent analysis to evaluate impairment of long-lived assets in
accordance with Company policy. The impairment reflected an anticipated
reduction in future claims processing fees. The anticipated reduced fees
resulted from an industry-wide market shift whereby pharmaceutical manufacturing
companies have purchased pharmaceutical benefits management companies to market
their products by reducing claims processing fees. These conditions resulted as
the pharmaceutical companies reduced processing fees to increase market share.

27
<PAGE> 29

A comparative analysis of the Company's 1995 and 1994 results of operations
with and without the 1995 nonrecurring costs is as follows:

<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
PER SHARE PER SHARE
AMOUNT AMOUNT AMOUNT AMOUNT
-------- --------- -------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income before nonrecurring costs, net of
taxes.................................. $214,462 $3.23 $213,170 $3.21
Nonrecurring costs, net of taxes......... 34,473 0.52 -- --
-------- ----- -------- -----
Net income............................... $179,989 $2.71 $213,170 $3.21
======== ===== ======== =====
</TABLE>

WellPoint's net income for the year ended December 31, 1995 was $180.0
million or $2.71 per share compared to $213.2 million or $3.21 per share for
1994. Net income for the year ended December 31, 1995 excluding nonrecurring
costs was $214.5 million or $3.23 per share. The number of shares of Common
Stock outstanding for the years ended December 31, 1995 and 1994 has been
recomputed to 66.4 million, the number of shares outstanding immediately
following the Recapitalization, to give effect to the share exchange that
occurred in connection with the Recapitalization. Earnings per share is
determined by dividing net income by the average number of common shares
outstanding.

YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993

Premium revenue increased 12.4% to $2.6 billion for the year ended December
31, 1994 from $2.4 billion for the year ended December 31, 1993. Excluding the
revenue of $98.1 million from UNICARE Financial Corp. ("UFC"), which was
acquired in January 1994, premium revenue increased 8.2%. This increase was
primarily due to an increase in medical members, excluding management services
members, to 2.2 million members as of December 31, 1994 from 2.1 million members
as of December 31, 1993. Certain HMO membership, which generates a higher
premium per member than PPO products, increased 40.1% over the prior year. In
addition, premium revenue increased as a result of rate restructuring for
individuals and small groups resulting from the implementation of California
Assembly Bill 1672 (Small Group Reform) effective July 1, 1993, with the average
medical premium per member increasing slightly for the year ended December 31,
1994 compared to 1993. Membership in the Company's underwritten PPO business
declined due to a transfer of approximately 145,000 members from the PPO Cost
Plus product to management services arrangements during 1994. This contributed
to the $18.2 million increase in management services revenue for the year ended
December 31, 1994 with a corresponding decrease in premium revenue of $74.1
million. The transfer of members from PPO Cost Plus to management services
arrangements, which was substantially completed in December 1995, corresponded
to group contract renewal dates and did not have a material impact on net
income.

Investment income for the year ended December 31, 1994 increased by $32.4
million from 1993. The increase was due to interest earned on a larger
investment portfolio, $5.0 million of gains recognized on the sales of
investment securities and slightly higher interest rates for 1994.

Health care services and other benefits expense for the year ended December
31, 1994 was $1.9 billion as compared to $1.7 billion for 1993, a 12.1%
increase. Excluding expenses of $61.8 million related to the Company's workers'
compensation products, health care services expense increased 8.5%. This
increase was partially due to the increase in medical members, excluding
management services members. In addition, California legislation and regulatory
actions taken by the DOC in the second quarter of 1994 resulted in additional
benefits for individual and small group members and more medical membership
growth in lower margin products than growth in higher margin products. The
Company's loss ratio for the year ended December 31, 1994 decreased slightly to
72.8% from 73.0% for 1993. This resulted from the Company's continued efforts to
manage the inflationary trend of health care expenses by negotiating favorable
rates with providers and encouraging various managed care techniques such as
utilization management and intervention programs.

28
<PAGE> 30

Selling expense for the year ended December 31, 1994 increased to $169.5
million compared to $147.1 million for 1993, due to continued premium revenue
growth in small employer group and individual businesses which typically have
higher commission-based plans and the inclusion of selling expenses related to
the Company's workers' compensation products.

General and administrative expense for the year ended December 31, 1994
increased to $334.2 million from $266.3 million for 1993, due to the addition of
the UFC and Pro-Serv operations, increased personnel service costs necessitated
in part by the increased medical and specialty membership, policyholder
dividends related to the Company's workers' compensation products and
non-recurring expenses related to the 1994 Northridge earthquake. The
administrative expense ratio increased to 12.5% for the year ended December 31,
1994 compared to 11.2% for 1993. The transfer of business from PPO Cost Plus to
a management services arrangement contributed to the increased administrative
expense ratio for 1994. Excluding the effect of the business transfer from PPO
Cost Plus to management services, results of operations for UFC and Pro-Serv,
and policyholder dividends and earthquake related expenses, the 1994
administrative expense ratio was 11.2%, consistent with 1993. The Company's
workers' compensation subsidiary contributed to a higher administrative expense
ratio since the workers' compensation industry tends to have a higher ratio than
the managed care industry.

WellPoint's net income for the year ended December 31, 1994 was $213.2
million or $3.21 per share. This represented an increase of 14.2% as compared to
income before the cumulative effect of accounting changes of $186.6 million or
$2.81 per share for 1993. This increase was due to medical membership growth of
12.7%, an increase in investment income and specialty membership growth, as well
as individual and small employer group rate increases and small employer group
benefit design changes effective July 1, 1993. The number of shares outstanding
for the years ended December 31, 1994 and 1993 has been recomputed to 66.4
million, the number of shares outstanding immediately following the
Recapitalization, to give effect to the share exchange that occurred in
connection with the Recapitalization. Earnings per share is determined by
dividing net income by the average number of common shares outstanding.

FINANCIAL CONDITION

The Company's consolidated assets increased by $642.9 million to $3,322.2
million as of June 30, 1996. This represents a 24.0% increase from $2,679.3
million as of December 31, 1995 and resulted primarily from the MMHD Acquisition
and the acquisition of the BCC Commercial Operations as well as cash flow
generated from operations. Cash and investments were $2,107.6 million as of June
30, 1996 or 63.4% of total assets.

The Company issued a Series A term note for $62.0 million during the first
quarter of 1996 in connection with the MMHD Acquisition. In addition, the
Company accrued for a Series B term note for an estimated $18.0 million during
the first quarter of 1996. In lieu of issuing the Series B term note, the
Company paid $22.2 million to MassMutual during the third quarter of 1996. Also
outstanding at June 30, 1996 was $730.0 million under the Company's revolving
credit facility incurred for payment of a dividend to the WellPoint stockholders
in connection with the Recapitalization. The Company had no long-term borrowings
outstanding as of December 31, 1995.

Equity totaled $761.3 million as of June 30, 1996, a decrease of $909.0
million from December 31, 1995. The decrease resulted primarily from the $995.0
million dividend to the WellPoint stockholders in connection with the
Recapitalization and a $27.9 million decrease in the unrealized valuation
adjustment on investment securities, net of deferred taxes, due to an increase
in market interest rates in 1996 compared to 1995. The decrease was partially
offset by net income of $109.9 million for the first six months of 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of cash are from premiums received,
management services revenues and investment income. The primary uses of cash
include health care claims, capitation payments, income taxes, repayment of
long-term debt, interest expense, broker and agent commissions and
administrative expenses. The Company receives premium revenue in advance of
anticipated claims for related health care services and

29
<PAGE> 31

other benefits. The Company's investment policies are designed to provide
liquidity, preserve capital and maximize yield. Cash and investment balances
maintained by the Company are sufficient to meet applicable regulatory financial
stability and net worth requirements. As of June 30, 1996, the Company's
investment portfolio consisted primarily of fixed maturity securities (which are
primarily rated "A" or better by rating agencies) and equity securities.

Net cash flow provided by operating activities was $152.7 million for the
six months ended June 30, 1996, compared with $51.3 million for the comparable
period in 1995. The positive cash flow from operations was mainly due to
additional revenue generated through the MMHD Acquisition and the BCC Commercial
Operations as well as increased membership growth in the small group segment
with new product introductions. The cash provided by these activities was
partially offset by an increase in other non-current assets, due to a net $23.6
million that the Company paid in the first quarter of 1996 in connection with a
new lease for the Company's headquarters building. See "Business -- Properties."

Net cash used by investing activities for the first six months of 1996
totaled $480.6 million, compared with net cash provided by investing activities
of $293.2 million for the comparable period in 1995. The decrease resulted
primarily from the MMHD Acquisition during the first quarter of 1996 for a
purchase price of $380.0 million plus an estimated purchase price adjustment of
$18.0 million based on closing equity. The Company issued to MassMutual a Series
A term note for $62.0 million during the first quarter of 1996. Under the terms
of the acquisition agreement for this transaction, the Company was obligated to
issue a Series B term note based upon the results of a post-closing audit. In
August 1996, the Company paid $22.2 million to MassMutual in full satisfaction
of this obligation. MMHD cash acquired was $28.1 million. The net cash used for
the MMHD Acquisition amounted to $300.1 million. From the date of acquisition
through the end of 1997, the Company expects to incur approximately $30 to $40
million of restructuring costs related to this acquisition, a portion of which
is expected to be reflected in the Company's results of operations. In 1995, the
net proceeds from the sale and maturities of investments were invested in highly
liquid securities in anticipation of the cash requirements for the MMHD
Acquisition and the acquisition of the BCC Commercial Operations as well as the
payment of a special dividend to the WellPoint stockholders in connection with
the Recapitalization. Furthermore, the BCC Commercial Operations were acquired
during the second quarter of 1996 for a purchase price of $235.0 million.
Subsidiary cash acquired was $122.7 million, resulting in net cash used for the
acquisition of $112.3 million.

In connection with the Recapitalization, the Company entered into a $1.25
billion unsecured credit facility. Borrowings under the credit facility bear
interest at rates determined by reference to the Bank of America base rate or to
the London Interbank Offered Rate ("LIBOR") plus a margin determined by
reference to the Company's leverage ratio or the then-current rating of the
Company's unsecured long-term debt by specified rating agencies. Borrowings
under the credit facility are made on a committed basis or pursuant to an
auction-bid process. The credit facility expires as of May 15, 2001, although it
may be extended for two additional one-year periods under certain circumstances.
The credit agreement requires that the Company comply with certain minimum net
worth, leverage ratio and fixed charge coverage ratio requirements and contains
certain other customary restrictions, including restrictions on the occurrence
of additional indebtedness and the granting of certain liens, limitations on
acquisitions and investments and limitations on changes in control. The total
amount outstanding under the credit facility was $730.0 million as of June 30,
1996. The indebtedness under the credit facility had a weighted average interest
rate of 5.83% per annum as of such date.

In order to limit its exposure to interest rate increases, in August 1996
the Company entered into a swap agreement with a notional amount of $100.0
million bearing a fixed interest rate of 6.45% and having a maturity date of
August 17, 1999. In September 1996, the Company entered into two additional swap
agreements with notional amounts of $150.0 million each, bearing fixed interest
rates of 6.99% and 7.05%, respectively, and having maturity dates of October 17,
2003 and October 17, 2006, respectively.

The Company has filed a registration statement relating to the issuance of
$1.0 billion of senior or subordinated unsecured indebtedness. As of September
30, 1996, no indebtedness had been issued pursuant to this registration
statement.

30
<PAGE> 32

The Company intends to finance the acquisition of the GBO Operations
through the incurrence of subordinated indebtedness. Pursuant to the terms of
the Commitment Letter between the Company and Bank of America NTS&A, the Company
will be able to make borrowings under the Subordinated Debt Facility between
December 15, 1996 and February 15, 1997 in the aggregate amount of $200.0
million. Such borrowings will bear interest at a rate equal to LIBOR plus a
margin determined by reference to the Company's leverage ratio or the
then-current rating of the Company's unsecured long-term debt by specified
rating agencies. The applicable margin will increase with respect to any
borrowings outstanding as of July 1, 1997. It is expected that the Subordinated
Debt Facility will require compliance with certain financial ratio and other
requirements similar to those in the Company's current credit facility; however,
repayment of borrowings will be subordinated in a manner acceptable to the DOC
to allow borrowings to be counted as TNE. See "Risk Factors -- Need for
Subordinated Debt to Meet Anticipated BCBSA Capital Requirements." The
Subordinated Debt Facility will also require that the proceeds of sales of
Common Stock or subordinated debt issued by the Company be used to repay
outstanding amounts under the Subordinated Debt Facility. All borrowings under
the Subordinated Debt Facility will become due on December 31, 1998.

The Company believes that cash flow generated by operations, its cash and
investment balances, its credit facility, its debt registration statement and
the anticipated subordinated indebtedness will be sufficient to fund continuing
operations, pending acquisitions and other capital requirements for the
foreseeable future.

EXTERNAL INFLUENCES WHICH MAY IMPACT FUTURE OPERATIONS

The health care industry is affected by various external factors, including
rising health care costs, intense price competition, health care reform
(including the recently enacted federal health care reform legislation) and
other regulatory issues. As the Company focuses on its future as a leader in the
health care industry, management continues to monitor these and other factors
that contribute to uncertainty in the health care environment.

The Company's future results will depend in large part on accurately
predicting health care costs and upon its ability to control future health care
costs through underwriting criteria, utilization management and negotiation of
favorable provider contracts. The aging of the population and other demographic
characteristics and advances in medical technology continue to contribute to
rising health care costs. Changes in health care practices, inflation, new
technologies and numerous other factors affecting the delivery and cost of
health care, many of which are beyond the control of the Company, may adversely
affect the Company's ability to predict and control health care costs and
claims.

The Company operates primarily in a single industry segment, managed health
care. The two primary business activities within the segment ((a) managed care
products and (b) management services products, including specialty managed care
services) are marketed through two internal business units which are organized
on a geographic basis, Blue Cross of California and UNICARE. See "Business." The
geographic business units are divided further into individual and small
employers versus larger employers because of the distinctive differences in the
focus needed in targeting each of these markets. The combined cost ratios
(medical costs and expenses) for the small group and individual businesses and
the large group business vary due primarily to the differing mix between managed
care and management services products and different distribution costs. A
greater percentage of small group and individual membership is comprised of
higher risk managed care products, which tend to be more profitable than the
lower risk managed care and management services products as a result of higher
deductibles and co-payments and increased profit margins generally associated
with higher underwriting risks. The group services membership is comprised
primarily of capitated managed care products and management services products
which result in lower margins as a result of the lower level of underwriting
risk related to the capitated products and the non-risk nature of the management
services products. However, over the past three years, margin erosion has been
greater in the individual and small group business than in the large group
business primarily as a result of higher medical cost trends, slower growth in
membership, product mix change and greater competitive pressure on premium
increases. The spread between the profitability of the individual and small
group business and large group business in California was 7.7% for the six
months ended June 30, 1996 and 8.3% for the six months ended June 30, 1995. For
the years ended December 31, 1995, 1994 and 1993, the spread between the two
units was 6.5%, 9.4% and 10.7%, respectively.

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<PAGE> 33

BUSINESS

GENERAL

The Company is one of the nation's largest publicly traded managed health
care companies with approximately 4.2 million medical members, 11.9 million
pharmacy members and 1.5 million dental members as of June 30, 1996. The Company
offers a diversified mix of managed care products, including HMOs, PPOs, POS and
other hybrid plans. The Company's managed care plans incorporate a full range of
financial incentives and cost controls for both members and providers. The
Company also provides a broad array of specialty managed care products,
including pharmacy, dental, life, workers' compensation, preventive care,
disability, behavioral health, COBRA and flexible benefits account
administration. In addition, the Company offers managed care services for
self-funded employers, including underwriting, actuarial services, network
access, medical cost management, claims processing and administrative services.
By developing a diversified mix of products and services, the Company is able to
meet the needs of a broad range of individuals, employer groups and their
employees. The Company's operations, with the exception of specialty products,
are organized into two internal business units with a geographic focus. The
Company markets its products in California under the name Blue Cross of
California and outside of California under the name UNICARE.

Over the past decade, the Company has successfully transitioned
substantially all of its California indemnity health insurance customers to
managed care products. An important element of the Company's geographic
expansion strategy is to replicate its success in California in motivating
traditional indemnity members to transition to the Company's managed care
products. The Company's acquisition strategy focuses on large employer group
plans which offer indemnity and other health insurance products that are less
intensively managed than the Company's current products. In addition, the
Company focuses on acquiring businesses that provide significant concentrations
of members in strategic locations outside of California. The Company believes
that such acquisitions will provide its UNICARE operations with sufficient scale
to begin development of proprietary provider network systems in key geographic
areas. The Company intends to use these new networks to introduce individual,
small group and senior products, which have historically been more profitable
for the Company than large group plans.

RECENT DEVELOPMENT -- PENDING ACQUISITION OF THE GBO OPERATIONS

On October 10, 1996, the Company signed a definitive agreement to purchase
the GBO Operations of John Hancock. The purchase price for the acquisition is
$86.7 million, subject to adjustment upon completion of a post-closing audit.
The closing of the acquisition, which is subject to a number of conditions
including regulatory approvals, is expected to occur in January 1997.

As of September 30, 1996, the GBO Operations provided benefits to
approximately 1.4 million medical members, a majority of which are in health
plans that are self-funded by employers. The GBO Operations offer managed
indemnity and PPO plans, and also provide life, dental and disability coverage
to a variety of employer groups. The GBO Operations focus on the largest
employer groups, the so-called "jumbo" accounts with greater than 3,000
employees. Approximately two-thirds of the GBO members are located in
California, Texas, Georgia, the Mid-Atlantic/Washington, D.C. area,
Massachusetts, the New York/Tri-State area, Ohio, Illinois and Michigan. The
pending acquisition of the GBO Operations also includes Cost Care, Inc. ("CCI"),
a wholly owned subsidiary of John Hancock, which provides utilization review
services. The Company believes that the GBO Operations, when integrated into its
UNICARE business, will give the Company increased membership concentration in
key geographic areas and create a base for expanding its network models.

32
<PAGE> 34

MANAGED HEALTH CARE INDUSTRY OVERVIEW

The market for health care in the United States was more than one trillion
dollars in 1995. An increasing focus on costs has spurred the growth of HMO,
PPO, POS and other forms of managed care plans as alternatives to traditional
indemnity health insurance. In 1995, approximately 112 million people, 43% of
the United States population, were provided health coverage by some type of
managed care plan, representing a 12% increase from 1994.

Typically, HMO and PPO, as well as hybrid plans (such as POS plans),
develop networks of health care providers by entering into contracts with
hospitals, physicians and other providers to deliver health care at favorable
rates that incorporate health care utilization management, network
credentialing, quality assurance and other cost control measures. HMO, PPO and
POS members generally are charged periodic, prepaid premiums, and co-payments or
deductibles. PPOs, POS plans and a number of HMOs allow out-of-network usage,
typically at substantially higher out-of-pocket costs to members. HMO members
generally select one primary care physician from a network who is responsible
for coordinating health care services for the member, while PPOs generally allow
members to select physicians from a network of providers. Hybrid plans, such as
POS plans, typically involve the selection of primary care physicians similar to
HMOs, but allow members to choose non-network providers at higher out-of-pocket
costs, similar to PPOs.

The California Market. California is the nation's most populous state. The
desire of employers for a range of health care choices that promote effective
cost controls and quality care has led to substantial market acceptance of
managed health care in California. Although the total penetration of managed
health care companies in California is higher than the national average, the
Company believes that the large number of people in California that have no
health insurance or are covered by traditional indemnity health insurance
presents growth opportunities in both the individual and small employer group
market and the large employer group market.

While the Company is a market leader in offering managed health care plans
to individuals and small employer groups in California, the Company has
experienced increased competition in this market over the last several years.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- External Influences Which May Impact Future Operations." However,
the Company believes that there will continue to be opportunities for growth in
its small group membership because small employers are the primary source of job
growth in California. WellPoint's large group business, which historically
lagged the performance of its small group and individual business, has
experienced favorable growth since 1994 with the rebound of the California
economy and the enhancement of the Company's reputation for customer service and
value, especially among established companies.

Other States. The acceptance of managed health care solutions varies
widely outside California. In many states, members are typically offered a
spectrum of health care choices which are more focused on traditional indemnity
health insurance than in California. Indemnity insurance usually allows members
substantial freedom of choice in selecting health care providers but without
financial incentives or cost-control measures typical of managed care plans.
Health care providers are reimbursed on a retrospective basis and there are few,
if any, incentives or measures to control health care costs. Indemnity insurance
plans typically require annual deductible obligations of members. Upon
satisfaction of the deductible, the member is reimbursed for health care
expenses on a full or partial basis of the indicated charges. PPO coverage
offered by health plans outside of California is often typified by broad-based,
third-party provider networks which do not incorporate the provider selectivity
or discounts typical of the Company's proprietary provider networks in
California. The Company believes the higher costs generally associated with such
third-party PPO networks and traditional indemnity health insurance will
continue to cause employers and members to seek out managed health care
solutions like those offered by the Company in California which have proven
successful in controlling costs.

STRATEGY

Over the past decade, the Company has established a leading position in the
California managed care market by developing a full range of managed care
products, implementing a proprietary provider network

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system and successfully motivating its indemnity members to transition to the
Company's managed care products. The Company intends to address the future
growth of its business by continuing its successful strategy in California and
replicating this strategy in other states with a focus on the following key
elements:

Offering a Broad Line of Innovative Products. The Company offers its
customers a full range of managed care health plans, including HMO, PPO and POS
plans, and a broad array of specialty products. The Company's product offerings
and organizational structure are targeted to address the differing needs of
specific market segments. Management believes that WellPoint has been an
innovator in the design of new products, such as its Prudent Buyer Co-Pay
product, which replaces traditional PPO deductibles with HMO-like co-payment
obligations while retaining the member choice typical of PPO plans, and its
CaliforniaCare Saver HMO product, which introduces deductible obligations for
certain hospital and outpatient benefits. In 1994, the Company introduced
UNICARE Integrated, its integrated workers' compensation and benefits product.
As customers demand more flexibility in their managed care plans, WellPoint
believes its broad product line and product innovation will continue to provide
the Company with a competitive advantage in attracting new members.

Motivating Membership to Select More Intensively Managed Plans. The
Company markets a continuum of managed health care plans while providing
incentives to members to select more intensively managed plans. Such plans are
typically offered at a lower cost to members in exchange for additional
cost-control measures, such as limited flexibility in choosing non-network
providers. For example, the Company's Prudent Buyer Classic and UNICARE Classic
POS plans incorporate highly credentialed provider networks that are more
exclusive than typical PPO networks, while allowing members to select
specialists without preauthorization from a primary care physician. The Company
believes that it is better able to predict and control its health care costs as
members select more intensively managed health care plans.

Pursuing Growth in Specific Customer Segments. The Company focuses on
pursuing the most favorable opportunities for membership expansion. The Company
remains a leader in California in serving small employer groups despite
increased competition, and serves the large employer group market. The Company
is also pursuing growth opportunities in the Medicare market, which includes
converting Medigap insurance members to Medicare risk products and introducing
its Medicare Select PPO products to the senior community. In addition, WellPoint
has been awarded Medicaid contracts in nine California counties. The Company
intends to expand its national business among all customer segments through
selected acquisitions and start-up operations.

Expanding Geographically through Acquisitions in Selected Markets. An
important element of the Company's geographic expansion strategy is to replicate
its success in California in motivating traditional indemnity members to select
from the Company's broad range of managed care products. The Company's
acquisition strategy focuses on large employer group plans which offer indemnity
and other health care products that are less intensively managed than the
Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic
locations outside of California. The Company believes that such newly acquired
members will provide it with sufficient scale to begin development of
proprietary provider network systems in key geographic areas. The Company
intends to use these networks to introduce individual, small group and senior
plans, which have historically been more profitable for the Company in
California than large group products. With the acquisition in March 1996 of the
MMHD large employer group business and upon completion of the pending
acquisition of the GBO Operations, the Company will have significantly expanded
its operations outside of California. The Company believes that its experience
in California in motivating its indemnity members to select managed care
products will enhance its ability to introduce managed products to its acquired
businesses, including those of MMHD and the GBO Operations.

Expanding Geographically through Start-up Operations in Selected
Markets. The Company intends to commence start-up operations where it can
cost-effectively develop individual and small-group operations in new geographic
markets and where it can draw upon its acquired membership as a platform to
develop complementary provider network systems. The Company has commenced
start-up activities in Texas, Georgia and the greater Washington, D.C.
metropolitan area. The Company also believes that the development of new

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proprietary provider networks will enhance the profitability of its acquired
businesses by facilitating the transition of large group segments into more
intensively managed health care products.

Expanding Specialty Managed Health Care Plans. The Company continues to
develop its specialty managed health care businesses, including dental,
pharmacy, integrated workers' compensation, disability insurance and mental
health services. One of the key elements of the Company's strategy is to
continue marketing these plans to its existing HMO, PPO and POS members, as well
as using these specialty products to attract new members. WellPoint also markets
these specialty products on a stand-alone basis to other health plans.

Capitalizing on the Blue Cross Brand Name. In California, the Company
operates under the Blue Cross trade name, a well-recognized brand for marketing
health care coverage. The brand name has been particularly useful in the
individual and small employer group markets, and is expected to assist in
marketing the Company's California Medicare products to seniors. In addition,
the Company currently provides pharmacy benefit management services to other
Blue Cross/Blue Shield entities and intends to market additional specialty
products to and pursue other relationships with Blue Cross/Blue Shield plans in
the future.

THE BLUE CROSS OF CALIFORNIA BUSINESS

Due in part to the MMHD Acquisition, the Company's operations, with the
exception of specialty products, are organized into two internal business units
with a geographic focus. The Blue Cross of California Business unit contains the
Company's California operations.

Marketing and Products

WellPoint's products are marketed in California under the Blue Cross mark
through four major business divisions focusing on specific customer segments:
Group Services ("GS"), Individual and Small Group Services ("ISG"), Senior
Services and Medi-Cal. GS provides products to large employers with 51 or more
employees, educational and public entities, federal employee health and benefit
programs and national employers; ISG provides products to individual purchasers
and small groups and products for state-run programs including high risk and
underserved markets. Senior Services provides the Company's Medicare risk
products and supplemental coverage for Medicare recipients. The Medi-Cal
division provides products for Medicaid recipients. Each business unit is
responsible for enrolling, underwriting and servicing its respective customers.
Sales representatives are generally assigned to a specific geographic region of
California to allow WellPoint to tailor its marketing efforts to the particular
health care needs of each regional market. Each business unit also uses
advertising, public relations, promotion and marketing research to support its
efforts. Consistent with the Company's focus on providing a continuum of
products, the Company believes that having distinct units segmented by employer
size and geographic region better enables it to develop plans and services to
meet the needs of specific markets. The GS sales staff markets WellPoint's
managed health care plans to large employers in California by working with a
broker or consultant to develop a package of managed health care benefits
specifically tailored to meet the employer's needs. ISG markets WellPoint's
managed health care plans in California primarily through 29 sales managers in
both Comprehensive Integrated Marketing Services, Inc. ("CIMS"), a wholly owned
subsidiary of the Company, and ISG's sales department, who oversee approximately
19,600 independent brokers.

HMO Plans. The Company offers a variety of HMO products to its
CaliforniaCare members. CaliforniaCare members are generally charged periodic,
prepaid premiums that do not vary based on the amount of services rendered, as
well as modest copayments (small per-visit charges). Members choose a primary
care physician from the HMO network who is responsible for coordinating health
care services for the member. Certain plans permit members to receive health
care services from providers that are not a part of WellPoint's HMO network at a
substantial out-of-pocket cost to members which includes a deductible and higher
copayment obligations. To enhance the marketability of its plans, in 1996 the
Company introduced its CaliforniaCare Saver HMO product, which introduces
deductible obligations for certain hospital and outpatient benefits.

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PPO Plans. The Company's PPO products are designed to address the specific
needs of different customer segments. The Company's PPO plans require periodic,
prepaid premiums and have copayment obligations for services rendered by network
providers that are often similar to the copayment obligations of its HMO plans.
Unlike WellPoint's HMO plans, members are not required to select a physician who
is responsible for coordinating their care and may be subject to annual
deductible requirements. PPO members have the option to receive health care
services from providers that are not a part of the network, typically at
substantially higher out-of-pocket costs to members. To improve the
attractiveness of its PPO Plans to small groups and individual buyers, in 1996
the Company introduced its Prudent Buyer Co-Pay product, which replaces annual
deductible obligations with HMO-like co-payments while maintaining the member
choice typical of PPO plans.

Senior Plans. WellPoint offers numerous Medicare supplemental plans, which
typically pay the difference between health care costs incurred and amounts paid
by Medicare using existing PPO and HMO provider networks. One such product is
Medicare Select, a PPO-based product that offers supplemental Medicare coverage.
WellPoint also offers Medicare Select II, a hybrid product which allows seniors
over the age of 65 to maintain their full Medicare benefits for any
out-of-network benefits while enrolled in a supplemental plan that allows them
to choose their own physician with a nominal copayment. As of June 30, 1996, the
Medicare supplemental plans served approximately 164,000 members. WellPoint also
offers Senior CaliforniaCare, an HMO plan operating in a defined geographic
area, under a Medicare risk contract with the Health Care Financing
Administration ("HCFA"). This contract entitles WellPoint to a fixed per-member
premium and is subject to adjustment annually by HCFA based on certain
demographic information relating to the Medicare population and the cost of
providing health care in a particular geographic area. In addition to physician
care, hospitalization and other benefits covered by Medicare, the benefits under
this plan include prescription drugs, routine physical exams, hearing tests,
immunizations, eye examinations, counseling and health education services.

Medicaid Plans. The California Department of Health Services ("DHS")
administers Medi-Cal, California's Medicaid program. WellPoint has been awarded
contracts to administer Medi-Cal managed care programs in several California
counties. Under these programs, WellPoint provides health care coverage to
Medi-Cal program members and DHS pays WellPoint a fixed payment per member per
month. As of June 30, 1996, more than 49,700 members were enrolled in
WellPoint's managed care programs in Sacramento, Orange, Riverside and San
Bernardino counties. DHS has also awarded Medi-Cal managed care contracts to
WellPoint in San Francisco, Alameda, Santa Clara, Fresno and Kern counties.
Enrollment in Alameda and San Francisco counties commenced in the third quarter
of 1996. WellPoint has also been approved for plan partnership with the Local
Initiative Health Authority for Los Angeles County.

Managed Health Care Networks and Provider Relations

WellPoint's extensive managed health care provider networks enable it to
offer a comprehensive array of managed health care plans throughout California.
These networks include its HMO, PPO, POS and specialty managed care networks. In
establishing these networks, WellPoint enters into contracts with qualified
providers in each geographic area to serve its members. These provider
relationships are monitored regularly in order to control the cost of health
care while providing access to quality providers. As a result of this network
monitoring process as well as member and provider financial incentives,
WellPoint reduces or eliminates the need to use out-of-network providers that
are not subject to WellPoint's cost and performance controls.

WellPoint uses its large California membership to negotiate provider
contracts at favorable rates that require utilization management and other
cost-control measures. Pursuant to these contracts, providers are paid either a
specific monthly amount (known as a capitation payment) or on the basis of a
fixed fee schedule. In selecting providers for its networks, WellPoint uses its
credentialing programs to evaluate the applicant's professional qualifications
and experience, including license status, malpractice claims history and
hospital affiliations. In addition, the applicant's ability to satisfy expected
enrollment demands is evaluated. Providers in WellPoint's California networks
are periodically audited for the appropriateness and quality of medical
treatment.

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The following is a more detailed description of the principal features of
WellPoint's California HMO and PPO networks.

HMO Network. Membership in WellPoint's HMO plan, CaliforniaCare, has grown
to approximately 940,000 members as of June 30, 1996 from 123,000 members as of
December 31, 1987, a compound annual growth rate of approximately 27% over the
last eight and one half years. For the two-year period ended June 30, 1996 the
compound annual growth rate was 21%. As of June 30, 1996, the HMO network
included approximately 24,500 primary care and specialist physicians and
approximately 400 hospitals throughout California. The physician network of
participating medical groups ("PMGs") is comprised of both multi-specialty
medical group practices and individual practice associations.

WellPoint's HMO network has contracts with hospitals, physicians and other
health care providers for reduced rates. Substantially all physicians in the HMO
network are reimbursed on a capitated basis and have financial incentives to
control health care costs. These arrangements specify fixed payments to
providers and may result in a marginally higher medical loss ratio than a
non-capitated arrangement, but significantly reduce risk to WellPoint.
Generally, HMO network hospital provider contracts are on a nonexclusive basis
and provide for a per diem (fixed fee schedule where the daily rate is based on
the type of service), which is substantially below the hospitals' standard
billing rates.

Contractual arrangements with PMGs typically include provisions under which
WellPoint provides limited stop-loss protection. If the PMG's actual charges for
medical services provided to a member exceed an agreed-upon threshold amount,
WellPoint will pay the group a portion of the excess amount. Provider rates are
generally negotiated annually with PMGs and hospitals. To encourage PMGs to
contain costs for claims for non-capitated services such as inpatient hospital,
outpatient surgery, hemodialysis, emergency room, skilled nursing facility,
ambulance, home health and alternative birthing center services, WellPoint's PMG
agreements provide for a settlement payment to the PMG based upon the PMG's
effective utilization of such non-capitated services and compliance with quality
criteria. Amounts that remain in the pool after payment of such claims are
shared between WellPoint and the PMGs.

PPO Network. The PPO network, WellPoint's largest network, included
approximately 40,100 physicians and 420 hospitals throughout California as of
June 30, 1996. There were approximately 2.2 million members (including
administrative services members) enrolled in WellPoint's California PPO health
care plans as of such date, approximately 50% of whom were individuals or
employees of small groups.

The cost control methods used by WellPoint for its PPO plans are
substantially similar to those WellPoint uses for its HMO plans. WellPoint
endeavors to manage and control costs for its PPO plans by negotiating favorable
arrangements with physicians, hospitals and other providers, which include
utilization management and other cost control measures. In addition, WellPoint
controls costs through pricing and product design decisions intended to
influence the behavior of both providers and members.

Like WellPoint's HMO plans, WellPoint's PPO plans provide for the delivery
of specified health care services to members by contracting with physicians,
hospitals and other providers. PPO network hospital provider contracts are on a
nonexclusive basis and are generally paid per diems that provide for rates that
are substantially below the hospitals' standard billing rates. Physician
provider contracts are also on a nonexclusive basis and specify fixed fee
schedules that are significantly below standard billing rates. WellPoint is able
to obtain prices for hospitals and physician services significantly below
standard billing rates because of the volume of business it offers to health
care providers that are part of its network. Provider rates are generally
negotiated on an annual or multi-year basis with hospitals. In 1996, the Company
concluded an extensive recontracting process with hospitals in its provider
network, whereby certain hospitals that demonstrated designated quality and
other criteria were given a preferred status in exchange for, among other
things, lower negotiated rates. Provider rates for physicians in the Company's
PPO network are set from time to time by the Company. When considering whether
to contract with a provider for its PPO network, WellPoint conducts a
credentialing program to evaluate the applicant's professional experience,
including licensure and malpractice claims history, hospital affiliations and
ability to satisfy anticipated enrollment demands. Providers in

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WellPoint's PPO networks (as well as in its HMO networks) are regularly audited
for the appropriateness and quality of medical treatment.

Utilization Management. WellPoint also manages health care costs in its
provider networks by adopting utilization management systems and guidelines that
are intended to reduce unnecessary procedures, admissions and other medical
costs. The utilization management systems seek to ensure that medical services
provided are based on medical necessity and that all final decisions are made by
physicians. In its HMO, WellPoint permits PMGs to oversee case utilization
management for their particular medical group under these guidelines. Currently,
substantially all of the PMGs in WellPoint's HMO network have established
committees to oversee utilization management. The medical group must approve in
advance non-emergency hospital admissions and, after a patient is admitted, the
PMG monitors the patient's length of stay to ensure that it is not longer than
is medically appropriate. The PMG also monitors the amount and types of services
it provides to HMO members. For its PPO network, WellPoint uses treatment
guidelines, requires pre-admission approvals of hospital stays and concurrent
review of all admissions and retrospectively reviews physician practice
patterns. Utilization management also includes an outpatient program, with
pre-authorization and retrospective review, ongoing supervision of inpatient and
outpatient care of members, case management and discharge planning capacity.
Review of practice patterns may result in modifications and refinements to the
PPO plan offerings, treatment guidelines and network contractual arrangements.

In addition, WellPoint manages health care costs by reviewing monthly cost
and utilization trends within its provider networks. Cases are reviewed in the
aggregate to identify a high volume of a particular type of service to determine
whether costs for these treatments can be more effectively managed. In addition,
the highest cost services are identified to determine if costs in the aggregate
can be reduced by using new, cost-effective technologies or by creating
additional networks, such as networks of ambulatory care centers, to reduce
provider costs.

Underwriting. In establishing premium rates for its health care plans,
WellPoint uses underwriting criteria based upon its accumulated actuarial data,
with adjustments for factors such as claims experience, member mix and industry
differences to evaluate anticipated health care costs. WellPoint's underwriting
practices in the individual and small group market are subject to California
legislation affecting the individual and small employer group market. See
"-- Government Regulation."

Quality Management. Quality management for the Company's California HMO is
overseen by the Company's Quality Management Department and is designed to
ensure that necessary care is provided by qualified personnel. Quality
management encompasses plan level quality performance, physician credentialing,
provider and member grievance monitoring and resolution, medical group auditing,
monitoring medical group compliance with CaliforniaCare standards for medical
records and medical offices, physician peer review and an active quality
management committee.

THE UNICARE BUSINESS

The Company believes that its success in the highly competitive California
managed care market is attributable to its broad range of managed care products
which target the differing needs of specific market segments. The Company's
acquisition strategy has focused on large employer group plans which offer
indemnity and other health care products that are less intensively managed than
the Company's current products. In addition, the Company focuses on acquiring
businesses that provide significant concentrations of members in strategic
locations outside of California. The Company believes that such newly acquired
members will provide it with sufficient scale to begin development of
proprietary provider network systems in key geographic areas. The Company
intends to use these new networks to introduce individual, small group and
senior products, which have historically been more profitable for the Company in
California than large group products. As of June 30, 1996, the Company had
approximately 1.1 million members enrolled in its UNICARE health plans.

The Company believes that it possesses a competency with respect to the
management and migration of indemnity-based business to managed care products.
Starting in 1986, and led by the Company's current

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management team, the Company's predecessor converted substantially all of its
California indemnity business to managed care. The Company believes that its
success in California in motivating its indemnity members to select its managed
care products will enhance its ability to introduce similar products to acquired
businesses.

Marketing and Products

WellPoint's products are marketed outside of California under the UNICARE
brand name through business units which are organized on a customer-segment
basis. The large employer group business acquired in the MMHD Acquisition has a
national focus as a result of the multi-state needs of employers in its customer
segment. Other business units, such as those focusing on the individual and
small employer group, senior and Medicaid markets, have a more regional focus as
a result of the more localized nature of customers in this segment. Upon
completion of the acquisition of the GBO Operations, UNICARE will gain
membership in the "jumbo" account market. Similar to the Company's Blue Cross of
California business, each UNICARE business unit is responsible for marketing,
enrolling, underwriting and servicing its specific customers.

Outside of California, the Company offers PPO products that use third-party
provider networks as well as traditional fee-for-service products. As WellPoint
develops proprietary provider network systems in these geographic areas, the
Company intends to offer more intensively managed products to the existing
members of acquired businesses and to new individual, small group and senior
customers outside California.

Managed Health Care Networks and Provider Relations

Due to the recent development of the Company's national operations, the
Company's relations with health care providers outside of California are more
varied than in California. The Company currently contracts with a number of
third-party networks which generally lack the provider selectivity and discounts
typical of the Company's California networks. One of the Company's strategies
for the expansion of its UNICARE operations is to build proprietary provider
network systems similar to those offered in California, which provide a full
continuum of managed-care products to various customer segments. As the Company
expands its out-of-state operations, it intends to build or acquire such network
operations and, over time, to replace or supplement the current third-party
network arrangements.

The Company offers managed health care products and services in Texas
through certain subsidiaries. A subsidiary of AHI, UNICARE of Texas Health
Plans, Inc., also is currently licensed as an HMO in the Houston area. This HMO
began marketing operations to large employer groups in October 1996. The Company
expects to begin marketing the HMO product in the individual and small group
markets in the first quarter of 1997. The Company has developed an HMO network
of approximately 3,700 primary care and specialist physicians and 53 hospitals
in the Houston area. The Company intends to seek approval to extend this HMO
product to the Dallas, Austin, San Antonio, Corpus Christi and Beaumont
metropolitan areas. The Company has commenced start-up activities in Georgia and
intends to begin building HMO and PPO networks in the greater Atlanta and
Savannah areas. The Company currently expects that it will begin commercial
marketing operations in Georgia in the second half of 1997.

As part of the MMHD Acquisition, the Company also acquired majority
ownership interests in a start-up HMO, National Capital Health Plan ("NCHP"),
and an existing PPO, National Capital Preferred Provider Organization ("NCPPO").
Both entities operate in the greater Washington, D.C. metropolitan area and are
joint ventures with local health care providers. The NCPPO network includes
approximately 5,100 primary care and specialist physicians and 42 hospitals.
WellPoint anticipates that NCHP will commence commercial operations in April
1997.

Utilization Management. For the Company's UNICARE business, utilization
management is provided both by UNICARE employees and employees of third-party
provider networks. As part of the acquisition of the GBO Operations, the Company
will also acquire CCI, which provides utilization review services. The Company
expects that over time CCI will become the primary platform for the provision of
utilization review services to UNICARE members.

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Underwriting. As with the Company's California operations, the UNICARE
underwriting activities use criteria based upon accumulated actuarial data, with
adjustments for factors such as claims experience, member mix and industry
differences to evaluate anticipated health care costs. Due to the administrative
services only component of the Company's national membership, more than 50% of
the UNICARE business involves no underwriting risk to the Company. Because
UNICARE's members are in every state, the Company's underwriting practices,
especially in the individual and small group market, are subject to a variety of
legislative and regulatory requirements and restrictions. See "-- Government
Regulation."

SPECIALTY MANAGED HEALTH CARE PLANS

WellPoint offers a variety of specialty managed health care services.
WellPoint believes that these specialty networks and plans complement and
facilitate WellPoint's marketing of its HMO, PPO and POS plans and give it a
competitive advantage in attracting employer groups and other members that are
increasingly seeking a wider variety of options and services. One of WellPoint's
strategies is to expand its specialty managed care business by marketing these
plans to the approximately 4.2 million members of its medical plans, as well as
using these specialty products to attract new members. WellPoint also markets
these specialty products on a stand-alone basis to other health plans.

Pharmacy Products

WellPoint offers pharmacy services to its California members through its
subsidiary WellPoint Pharmacy Plan and offers pharmacy benefit management
services nationwide through Pro-Serv. WellPoint Pharmacy Plan and Pro-Serv
incorporate features such as drug formularies (a WellPoint-developed listing of
preferred, cost-effective drugs), a pharmacy network, and maintenance of a
prescription drug database and mail order capabilities. Moreover, pharmacy
benefit management services provided by WellPoint Pharmacy Plan and Pro-Serv
include management of drug utilization through outpatient prescription drug
formularies, retrospective review and drug education for physicians, pharmacists
and members. As of June 30, 1996, WellPoint Pharmacy Plan and Pro-Serv had more
than 11.9 million risk and non-risk members and approximately 42,000
participating pharmacies.

Dental Plans

WellPoint's dental plans include Dental Net, its California dental HMO,
with a provider network of approximately 2,000 dentists reimbursed on a
capitated basis, a dental PPO, with a network of approximately 8,700 dentists,
and traditional indemnity plans. The dental plans provide primary and specialty
dental services, including orthodontic services, and as of June 30, 1996, served
approximately 1.5 million dental members.

Life Insurance

In addition to its managed health care plans, WellPoint provides
traditional medical and dental indemnity coverage and administrative services to
large group employers that maintain self-funded health plans. The Company also
offers primarily term-life insurance to employers, generally in conjunction with
the Company's health plans. As of June 30, 1996, the Company had approximately
735,000 life insurance members.

Mental Health Plans

WellPoint offers a specialized mental health and substance abuse program
through the Behavioral Health Access ("BHA") program, which was established in
1990. The plan covers mental health and substance abuse treatment services on
both an inpatient and an outpatient basis, through a network of approximately
3,000 contracting providers. In addition, approximately 240 employee assistance
and behavioral managed care programs have been implemented for a wide variety of
businesses throughout the United States. As of June 30, 1996, there were
approximately 447,000 members covered under its mental health plans.

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Workers' Compensation

UFC's principal operating subsidiary, UNICARE Insurance Company,
underwrites workers' compensation insurance primarily in California. UFC
historically focused on insuring large accounts, working with a select group of
large property and casualty insurance brokers. In August 1994, the Company
introduced "UNICARE Integrated," a new integrated managed care product for
workers' compensation and medical benefits. Under UNICARE Integrated, WellPoint
has combined its existing HMO and PPO networks with a workers' compensation
occupational medical network of physicians and clinics. UNICARE Integrated
offers single point-of-service and account management for the employer and
affords employees access to existing HMO and PPO networks. WellPoint believes
that by integrating managed care and workers' compensation, medical treatment
costs and workers' compensation costs can be reduced.

Disability Plans

As a result of the MMHD Acquisition, the Company now provides long-term and
short-term disability coverage. As of June 30, 1996, the Company provided
disability coverage to approximately 111,000 persons.

Ancillary Networks

WellPoint evaluates current and emerging high volume or high cost services
to determine whether developing an ancillary service network will yield cost
control benefits. In establishing these ancillary service networks, WellPoint
seeks to enter into capitation or fixed fee arrangements with providers of these
services. WellPoint regularly collects and analyzes industry data on high cost
or high volume unmanaged services to identify the need for specialty managed
care networks. For example, WellPoint added specialty networks in clinical
laboratory and diagnostic imaging in 1993 and has created Centers of Expertise
for certain transplant services.

MANAGED CARE SERVICES

WellPoint provides administrative services to large group employers that
maintain self-funded health plans. The Company often has been able to transition
these customers into other lines of business by introducing WellPoint's managed
care products. WellPoint offers managed care services, including underwriting,
actuarial services, medical cost management, claims processing and
administrative services for self-funded employers. WellPoint also enables
employers with self-funded health plans to access WellPoint's PPO, POS and HMO
provider networks and to realize savings through WellPoint's favorable provider
arrangements, while allowing employers the ability to design certain health
benefit plans in accordance with their own requirements and objectives. As of
June 30, 1996, WellPoint serviced self-insured health plans covering
approximately 1.1 million medical members, of which approximately 577,300 were
attributable to the large employer group operations acquired in the MMHD
Acquisition. Management services revenue for these services was $61.2 million
and $61.7 million for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively.

MARKET RESEARCH AND ADVERTISING

WellPoint conducts market research and advertising programs to develop
products and marketing techniques tailored to customer segments. WellPoint uses
print and broadcast advertising to promote its health care plans. In addition,
the Company engages in promotional activities with agents, brokers and
consultants. WellPoint spent approximately $14.5 million, $21.2 million, $17.7
million and $14.1 million on advertising for the six months ended June 30, 1996
and the years ended December 31, 1995, 1994 and 1993, respectively. The Company
is currently planning an extensive advertising campaign to promote its UNICARE
brand name in certain key markets around the United States.

INFORMATION SYSTEMS

The data processing systems used by the Company are designed to support
customer service, health care cost and quality management and corporate
management. The systems are supported by custom applications

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that were developed to meet the unique needs of the Company's customers and
products. The Company is dependent upon this data processing system for
electronic claims receipt, utilization management authorization processing,
claims adjudication and payment, eligibility and billing processing and
corporate accounting. In case of emergency, the Company has a disaster recovery
plan and agreements for the transfer of its system and backed-up data to a
computer in the midwestern United States that is capable of emergency backup
processing on compatible equipment. WellPoint believes that its data processing
capabilities are sufficient to meet the needs of its business, including
projected growth, for the foreseeable future.

The Company also uses a proprietary management information system,
Executive Information System ("EIS"), that provides on-line access to
operational, financial and clinical performance, utilization and other cost
data, sales and revenue trends, health care cost trends and relative performance
of the Company as compared to its competitors. Information gathered and
processed by EIS is used by the Company to analyze costs and trends by business
segment and to assist managers of the Company in making decisions concerning
cost and utilization, customer service, enrollment, finances and administration.

COMPETITION

The managed health care industry in California is competitive on both a
regional and statewide basis. In addition, in recent months there has been a
trend of increasing consolidation among both national and California-based
health care companies, which may further increase competitive pressures.
WellPoint competes with other companies that offer similar managed health care
plans, some of which have greater resources than WellPoint. The large employer
group market is especially competitive, as employers continue to demand
increasing variety and flexibility from their health plans while trying to limit
increases in premiums. Currently, WellPoint is a market leader in offering
managed health care plans to individuals and small employer groups in
California. The medical loss ratio attributed to WellPoint's individual and
small group business is lower than that for its large employer group business.
As a result, a larger portion of WellPoint's profitability is due to the
individual and small group business. WellPoint has been experiencing increased
competition in this market, which could adversely affect its medical loss ratio
and future financial condition or results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- External Influences Which May Impact Future Operations."

The markets in which the Company operates outside of California are also
highly competitive. Because of the many different markets in which the Company
now serves members, the Company faces unique competitive pressures in regional
markets as well as on a national basis. The Company competes with other
companies that offer similar managed health care plans as well as traditional
indemnity insurance products. Many of these companies have greater financial and
other resources than the Company and greater market share on either a regional
or national basis. As the Company continues to expand its national operations,
it will be subject to national competitive factors as well as unique competitive
conditions which may affect the more localized markets in which the Company
operates.

In addition to rising health care costs and increased competition,
legislation and regulatory initiatives will contribute to certain changes in the
health care industry. See "-- Recent Development -- Pending Acquisition of the
GBO Operations" and "-- Government Regulation." Although the effects of these
activities cannot yet be determined, WellPoint remains committed to participate
in the debate over health care reform and lead the industry in the restructuring
of the health care system.

WellPoint believes that the most significant factors in the selection of a
managed health care plan by employers and individual members include price, the
extent and depth of provider networks, flexibility and scope of benefits,
quality of services, market presence, reputation (which may be affected by
public rankings or accreditation by voluntary organizations such as the National
Committee on Quality Assurance ("NCQA")) and financial stability. WellPoint
believes that it competes effectively with respect to these factors.

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<PAGE> 44

GOVERNMENT REGULATION

California

The Knox-Keene Act. WellPoint offers its managed health care services in
California through subsidiaries, CaliforniaCare Health Plans ("CaliforniaCare"),
WellPoint Dental Plan and WellPoint Pharmacy Plan, whose business is subject to
regulation principally by the DOC under the Knox-Keene Act. Under the Knox-Keene
Act, WellPoint's managed health care plans are each subject to various minimum
tangible net equity ("TNE"), deposit and other financial requirements. The
ability of WellPoint to issue capital stock or to pay dividends, and of its
subsidiaries to pay dividends or to diversify and implement changes in their
products, and the ability to effect intercompany transactions, are also subject
to DOC regulation. WellPoint must also file periodic financial reports with the
DOC regarding its activities and is subject to periodic reviews of those
activities by the DOC. In addition, WellPoint must obtain approval from the DOC
for all of its forms of individual and group subscriber contracts. Any material
modifications to the organization or operations of WellPoint are subject to
prior review and approval by the DOC. The approval process can be lengthy and
there is no certainty of approval by the DOC.

Under the Knox-Keene Act, WellPoint's managed health care programs are also
subject to extensive regulation by the DOC regarding minimum benefit and
coverage levels, WellPoint's contractual and business relationships with health
care providers, administrative capacity, marketing and advertising, procedures
for quality assurance and subscriber and enrollee grievance resolution.

DOI Regulation. The California DOI regulates the insurance, including the
third party administrator and workers' compensation, business conducted by
WellPoint Life Insurance Company ("WellPoint Life") and UNICARE Insurance
Company. WellPoint Life and UNICARE Insurance Company are subject to various
capital reserve and other financial requirements established by the California
DOI. WellPoint Life and UNICARE Insurance Company must also file periodic
reports regarding their activities regulated by the California DOI and are
subject to periodic reviews of those activities by the California DOI. WellPoint
Life must also obtain approval from the California DOI for all of its group
insurance policies and certain aspects of its individual policies prior to
issuing those policies. CIMS, which operates a general insurance agency, is also
subject to regulation by the California DOI. Under such regulation, CIMS is
required to be licensed by the California DOI and is prohibited from engaging in
certain business practices. There can be no assurance that any future regulatory
action by the California DOI will not have an adverse impact on the ability of
WellPoint Life, UNICARE Insurance Company and CIMS to conduct their business
profitably.

California Health Care Legislation. From time to time, new California
legislation is enacted and regulatory interpretations are adopted that adversely
affect WellPoint. For example, California's small group reform legislation
requires that coverage be offered to certain small groups, limits rate
increases, limits exclusions based on pre-existing conditions and imposes other
requirements designed to increase the availability of coverage for small groups.
In addition, California has adopted legislation that requires health care
service plans and insurance carriers to provide additional benefits for
individuals and small group members by limiting the application of preexisting
condition limitations and waivers (temporary exclusions for individuals of
specifically identified preexisting conditions). This legislation has resulted
in increased claims expense for the Company. In addition, in 1996 WellPoint
voluntarily removed certain temporary exclusions, including a temporary
exclusion for maternity services which will likely result in increased claims
expense for the Company. Further California legislation addresses the practice
of "freezing," or discontinuing the offering of certain benefit plans, by health
care service plans and insurance carriers. WellPoint has taken action to respond
to and resolve certain member complaints relating to this legislation. There can
be no assurance that compliance with the legislation discussed above will not
adversely affect the financial condition or results of operations of WellPoint.
The legislation described above and any similar legislation in California or
other states may result in increased claims expense.

Federal

Recent Federal Health Care Legislation. On August 21, 1996, the President
signed into law the Health Insurance Portability and Accountability Act of 1996
(originally known in the Senate as the Kennedy-

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<PAGE> 45

Kassebaum bill) ("HIPAA"). HIPAA imposes new obligations for issuers of health
insurance coverage and health benefit plan sponsors. The insurance reform
provisions of HIPAA become effective for "plan years" beginning July 1, 1997.

HIPAA requires health plans in the small group market (50 or fewer
employees) to accept every employer, employee and family member, subject to
certain prescribed exceptions. Plans must apply any restriction uniformly and
without regard to health status. HIPAA also guarantees the renewability of
coverage, regardless of the health status of any member of a group. Access to
coverage in the individual market is guaranteed to people who lose their group
coverage (due to loss of employment, change of jobs or other reasons).
Alternatively, states may develop programs to assure that comparable coverage is
available to these people. The coverage will be available without regard to
health status, and renewal will be guaranteed.

HIPAA further prohibits health plans from establishing enrollment
eligibility rules or premiums for individuals based on specified "health status"
related factors. An exception to this policy of nondiscrimination is provided
with respect to premium discounts or rebates, or modified copayments and
deductibles related to health promotion and disease prevention programs.

HIPAA provides parameters for the use of pre-existing condition limits by
health plans. Plans may limit or exclude benefits for a pre-existing condition
only if the exclusion is limited to 12 months for conditions diagnosed or
treated in the previous six months. Insurers cannot impose new pre-existing
condition exclusions for workers with previous coverage. HMOs only may use an
affiliation period of up to two months. The pre-existing condition exclusion
period is reduced or credited for each month of prior continuous coverage.

On September 26, 1996 the President signed maternity length of stay and
mental health parity benefits measures into law. The maternity stay provision
requires insurers to cover the cost of a 48-hour hospital stay (96 hours
following a Caesarian section). This measure does not mandate the length of
hospital stays but requires that longer stays are covered if deemed necessary by
a woman, her family and her physician. Health plans would be barred from
offering financial incentives for early discharges. The mental health parity
provision will require insurance plans that provide mental health benefits to
set the same level of yearly and lifetime coverage for mental health benefits as
for physical ones. The measures will take effect January 1, 1998. Approximately
30 states already guarantee minimum hospital stays for mothers and newborns. In
many regions, the maternity length of stay provisions reflect the existing
average length of stay. As a result of these factors and the significant time
period before the measures take effect, it is unclear what implications, if any,
these measures will have on WellPoint's operations.

WellPoint intends to take action to bring its operations into compliance
with the two new laws described above. There can be no assurance that compliance
with this legislation will not adversely affect the operating results of
WellPoint, and in particular, will not result in an increased claims expense for
WellPoint.

Medicare Legislation. WellPoint's health benefits programs include
products that are marketed to Medicare beneficiaries as a supplement to their
Medicare coverage. These products are subject to federal regulations that are
directed toward providing Medicare supplement customers with standard minimum
benefits and levels of coverage and full disclosure of the terms under which
that coverage is provided, and toward assuring that fair sales practices are
employed in the marketing of Medicare supplement coverage.

WellPoint provides a senior plan product under a Medicare risk contract
that is subject to regulation by HCFA. Under this contract and HCFA regulations,
if WellPoint's premiums received for Medicare-covered health care services
provided to senior plan Medicare members are more than the premiums received for
the same health care services provided to non-senior plan members, then
WellPoint must provide its senior plan members with additional benefits beyond
those required by Medicare or reduce its premiums, or deductibles or
co-payments, if any. WellPoint's senior plan is not permitted to account for
more than one-half of WellPoint's total HMO members in each of WellPoint's
geographic markets. HCFA has the right to audit HMOs operating under Medicare
contracts to determine the quality of care being rendered and the degree of
compliance with HCFA's contracts and regulations.

Future Health Care Reform. A number of legislative proposals, including
national health care reform, have been made at the Federal and state levels.
Certain of these proposals would require all employers to

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<PAGE> 46

purchase health care coverage for their employees, either from private providers
or from a government-sponsored program that would also make available coverage
to the uninsured or underinsured. Certain of these proposals would further
prohibit exclusions or denials of coverage for pre-existing conditions, and
would provide for "community rating" of risks. To help meet the needs of the
uninsured, in 1994 WellPoint offered guaranteed coverage to individuals,
including those with pre-existing conditions. To control medical costs, proposed
legislation may also set or limit fees of health care providers, which may be
established through a governmental board.

WellPoint is unable to evaluate what legislation may be proposed and when
or whether any legislation will be enacted and implemented. However, certain of
the proposals, if adopted, could have a material adverse effect on WellPoint's
financial condition or results of operations, while others, if adopted, could
potentially benefit WellPoint's business. Although the effects of these
activities cannot yet be determined, WellPoint remains committed to participate
in the debate over health care reform and in the restructuring of the health
care system.

Other States

The Company's activities in other states are subject to state regulation
applicable to the provision of health care services and the sale of traditional
health indemnity and workers' compensation insurance. For instance, most of the
products and plans offered by WellPoint in Texas are regulated by the Texas
Department of Insurance. As a result of the MMHD Acquisition, the Company and
certain of its subsidiaries are also subject to regulation by the DOI in the
various states in which they conduct business. The Company believes it is in
compliance in all material respects with all current state regulatory
requirements applicable to its business as presently conducted. However, changes
in government regulation policy could affect the level of services which the
Company is required to provide or the rates which the Company can charge for its
health care services. Such changes could adversely affect the financial
condition or results of operations of WellPoint.

SERVICE MARKS

"CaliforniaCare," "Prudent Buyer Plan" and "UNICARE" are registered service
marks of WellPoint. In addition to these marks, WellPoint has filed for
registration of and maintains several other service marks, trademarks and trade
names at the Federal level and in California. WellPoint and CaliforniaCare are
currently parties to license agreements with the BCBSA which allow them to use
the Blue Cross name and mark in California with respect to WellPoint's HMO and
PPO network-based plans. The BCBSA is a national trade association of Blue Cross
and Blue Shield licensees, the primary function of which is to promote the Blue
Cross and Blue Shield names. Each licensee is an independent legal organization
and is not responsible for the obligations of other BCBSA member organizations.
A Blue Cross license requires payment of a fee to the BCBSA and compliance with
various requirements established by the BCBSA, including the maintenance of
certain minimum capital amounts. The failure to meet the Minimum BCBSA Capital
requirements can subject the Company to certain corrective action, while the
failure to meet a lower specified level of capital can result in a termination
of the License Agreement. As of September 30, 1996, the Company's capital was in
excess of the Minimum BCBSA Capital. The Company has entered into the Commitment
Letter for the provision of the Subordinated Debt Facility to meet an
anticipated shortfall in capital under the BCBSA requirements because of an
increase in the Minimum BCBSA Capital requirements as of December 31, 1996 and
the pending acquisition of the GBO Operations. While the Company believes that
borrowings under the Subordinated Debt Facility will qualify as TNE (and thus as
capital for BCBSA purposes) and that the Company's resulting capital will exceed
the Minimum BCBSA Capital, there can be no assurance that the Company will be
able to enter into definitive documentation for the Subordinated Debt Facility
or conclude another qualifying transaction. See "Risk Factors -- Need for
Subordinated Debt to Meet Anticipated BCBSA Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." WellPoint considers the licensed
Blue Cross name and its registered service marks, trademarks and trade names
important in the operation of its business.

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<PAGE> 47

EMPLOYEES

At June 30, 1996, WellPoint and its subsidiaries employed approximately
6,600 people (not including the approximately 3,000 employees of the GBO
Operations). Approximately 116 of the Company's employees are presently covered
by a collective bargaining agreement with the Office and Professional Employees
International Union, Local 29. WellPoint believes that its relations with its
employees are good, and it has not experienced any work stoppages.

PROPERTIES

Effective as of January 1, 1996, the lease for the Company's Woodland
Hills, California headquarters facility was renegotiated to provide for a term
expiring in December 2019 with two options to extend the term for up to two
additional five-year terms. Rent expense under the new lease is anticipated to
be approximately $5.3 million for calendar year 1996. The annual rent for 1995
was approximately $10.3 million, of which approximately $9.0 million was paid by
WellPoint pursuant to the terms of an Administrative Services Agreement between
WellPoint and BCC. In addition, the Company, as well as the GBO Operations, have
offices in California and various other states.

LEGAL PROCEEDINGS

NCQA Lawsuit. On October 20, 1995, a lawsuit was filed in the United States
District Court for the District of Columbia by CaliforniaCare against the
National Committee for Quality Assurance ("NCQA"). The NCQA is an organization
that reviews and accredits HMOs and managed care plans and, in October 1995,
NCQA denied accreditation to CaliforniaCare. CaliforniaCare's lawsuit alleges,
among other things, that in its accreditation review of CaliforniaCare and in
its subsequent decision to deny accreditation to CaliforniaCare, NCQA: (1)
failed to follow its own policies, procedures and guidelines; (2) failed to
afford CaliforniaCare fair and due process; (3) breached its contractual
obligations with CaliforniaCare; and (4) that CaliforniaCare suffered
substantial damage as a result of the denial of accreditation. The complaint
seeks a declaratory judgement against NCQA, as well as a permanent injunction
prohibiting NCQA from implementing, acting upon, or disseminating further its
accreditation decision, and compensatory damages. CaliforniaCare and NCQA have
been engaged since January 11, 1996 in court-ordered mediation in an attempt to
resolve the lawsuit. On March 1, 1996, the federal district court judge assigned
to the case ordered the litigation "stayed" until September 30, 1996
(subsequently extended to December 16, 1996) while the parties continue to seek
a resolution through mediation. As a result of this mediation, CaliforniaCare
and NCQA have jointly agreed that NCQA will conduct another accreditation audit
of CaliforniaCare. The on-site field work for this audit was completed in
September 1996. The Company expects that a tentative assessment regarding this
audit will be received within 30 to 60 days thereafter and, after a response
period by the company, NCQA will issue the final results of its review
(currently expected on or before December 31, 1996). There can be no assurances
that CaliforniaCare will receive accreditation from NCQA. The failure to receive
accreditation could have an adverse effect on the Company's competitive
position. The management of CaliforniaCare continues to believe strongly in the
merits of its original claims in this litigation and will decide on which action
to take, if any, after completion of the mediation and re-auditing process.

Stockholder Litigation. On March 29, 1995, a class action and derivative
lawsuit, captioned Gollomp and Gover, et al, v. Schaeffer, Williams, Rich,
Weinberg, et al., was filed in the Superior Court of the State of California,
County of Los Angeles against Old WellPoint, its directors and BCC. The
complaint alleged, among other things, that the directors breached their
fiduciary duty to Old WellPoint's public stockholders by pursuing a business
combination with Health Systems International, Inc. ("HSI") and allegedly
rejecting certain other proposals without due consideration. The complaint
sought, among other things, a declaration that the proposed business combination
with HSI would be unfair, unjust and inequitable to WellPoint and its public
stockholders, an injunction from proceeding with the business combination,
actual and punitive damages and attorneys' fees. These claims were asserted on
behalf of the members of the alleged class, and derivatively on behalf of
WellPoint. On or about March 31, 1995, two additional class action and
derivative lawsuits captioned Greenberg, et al. v. Schaeffer Williams, Rich,
Weinberg, et al. and Freed, et al. v. Schaeffer Williams, Rich, Weinberg, et
al., were filed. A fourth class action lawsuit, captioned Kaiser v. WellPoint

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<PAGE> 48

Health Networks Inc., Blue Cross of California, et al., was filed in the
Superior Court of the State of California, County of Los Angeles on April 14,
1995, and was served on WellPoint on May 16, 1995. The basic allegations of the
Greenberg, the Freed and the Kaiser complaint were not materially different from
those made in the Gallomp complaint.

All class action claims asserted on behalf of WellPoint's public
stockholders were dismissed on August 10, 1995, leaving only claims asserted
derivatively on behalf of WellPoint. On October 9, 1996, the settlement of the
remaining claims asserted in the actions was approved by the Court as fair,
reasonable and adequate to WellPoint and its stockholders after notice to
stockholders and the opportunity to object to its terms. On October 21, 1996 the
Court issued an order (i) extending the period for objections to the settlement
to be filed until November 8, 1996 and (ii) setting a status conference
regarding the proposed judgment for November 26, 1996.

The management of WellPoint believes that its directors acted in good faith
and in an independent, informed and appropriate manner in all aspects of the
decision to approve the BCC/WellPoint transaction and the business combination
with HSI, and to not approve the alternative proposals. Based upon the
foregoing, the management of WellPoint believes that these lawsuits are without
merit and intends to continue to defend those actions vigorously if the
settlement does not receive final approval from the court.

Miscellaneous Proceedings. WellPoint and certain of its subsidiaries are
also parties to various legal proceedings, many of which involve claims for
coverage encountered in the ordinary course of its business. WellPoint, like
HMOs and health insurers generally, excludes certain health care services from
coverage under its HMO, PPO and other plans. In the ordinary course of its
business, WellPoint is subject to the claims of its enrollees arising out of
decisions to restrict treatment or to restrict reimbursement for certain
services. The loss of even one such claim, if it resulted in a significant
punitive damage award, could have a material adverse effect on WellPoint. In
addition, the risk of potential liability under punitive damage theories may
increase significantly the difficulty of obtaining reasonable settlements of
coverage claims. However, the financial and operational impact that such
evolving theories of recovery will have on the managed care industry generally,
or WellPoint in particular, is at present unknown.

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

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<PAGE> 49

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------------- --- -----------------------------------
<S> <C> <C>
Leonard D. Schaeffer............... 51 Chairman of the Board of Directors
and Chief Executive Officer
David R. Banks..................... 59 Director
W. Toliver Besson.................. 52 Director
Roger E. Birk...................... 66 Director
Stephen L. Davenport............... 64 Director
Julie A. Hill...................... 50 Director
Robert T. Knight................... 58 Director
Elizabeth A. Sanders............... 51 Director
D. Mark Weinberg................... 44 Executive Vice President, National
Businesses and Specialty Products
Ronald A. Williams................. 46 Executive Vice President,
California Businesses
Howard G. Phanstiel................ 47 Executive Vice President, Finance
and Information Services
John C. Shaw....................... 62 Office of the Chairman
Thomas C. Geiser................... 46 Executive Vice President, General
Counsel and Secretary
Yon Y. Jorden...................... 41 Senior Vice President, Chief
Financial Officer
</TABLE>

LEONARD D. SCHAEFFER has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since August 1992. From 1989 until May 1996,
Mr. Schaeffer was also Chairman of the Board of Directors and, from 1986, Chief
Executive Officer of BCC. From 1982 to 1986, Mr. Schaeffer served as President
of Group Health, Inc., an HMO in the midwestern United States. Prior to joining
Group Health, Inc., Mr. Schaeffer was the Executive Vice President and Chief
Operating Officer of the Student Loan Marketing Association (Sallie Mae), a
financial institution that provides a secondary market for student loans, from
1980 to 1981. From 1978 to 1980, Mr. Schaeffer was the Administrator of HCFA.
HCFA administers the Federal Medicare, Medicaid and Peer Review Organization
programs. Mr. Schaeffer serves as a director of Allergan, Inc. and Metra
Biosystems.

DAVID R. BANKS has been an independent director of the Company since April
1993. He has been Chairman and Chief Executive Officer of Beverly Enterprises
since September 1979. Beverly Enterprises operates health care facilities in 34
states and the District of Columbia. Mr. Banks serves as a director of Ralston
Purina and Nationwide Health Properties. Mr. Banks serves on the Nominating and
Compensation Committees of the Board and is Chairperson of the Compensation
Committee.

W. TOLIVER BESSON has been an independent director of the Company since May
1996, was an independent director of BCC from April 1994 until May 1996 and
prior to that served as an advisory director of BCC from 1989. He has been a
partner at the law firm of Paul, Hastings, Janofsky & Walker since 1977. He
served on its national management committee from 1985 to 1990 and served on the
Board of Governors of the California State Bar from 1979 to 1980. He currently
serves as a member of the management committee of Cross Country Ventures (a
venture capital limited partnership). Pursuant to an undertaking with the DOC,
Mr. Besson has effectively agreed to not serve as a director beyond April 2003.
Mr. Besson serves on the Audit Committee of the Board.

ROGER E. BIRK has been an independent director of the Company since April
1993. Mr. Birk served as President of the Federal National Mortgage Association
("Fannie Mae") from 1987 to 1992 and as Chairman

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<PAGE> 50

and Chief Executive Officer of Merrill Lynch & Co., Inc. from 1982 to 1986. Mr.
Birk serves as a director of Penske Transportation, Fannie Mae and Mutual of
America Capital Corp. Mr. Birk serves as the Chairperson of the Audit Committee
of the Board.

STEPHEN L. DAVENPORT has been an independent director of the Company since
May 1996, was an independent director of BCC from 1991 until May 1996 and prior
to that served as an advisory director of BCC from 1989. He is retired. From
1980 to 1995 he was president of D/A Financial Group. Prior to that he was
Senior Vice President of Provident Mutual Life Insurance Company. He currently
serves on the board of directors of Tinsley Laboratories, Inc. Pursuant to an
undertaking with the DOC, Mr. Davenport has effectively agreed to not serve as a
director beyond April 2002. Mr. Davenport serves on the Compensation Committee
of the Board.

JULIE A. HILL has been an independent director of the Company since March
1994. She has been President and Chief Executive Officer of Costain Homes Inc.
("Costain") since January 1991, having joined Costain in 1988 as Vice President
of Sales and Marketing. Costain is a division of London-based Costain Group PLC
and builds single-family detached residential communities. Ms. Hill serves on
the Compensation and Nominating Committees of the Board.

ROBERT T. KNIGHT has been an independent director of the Company since May
1996, was an independent director of BCC from 1988 until May 1996 and prior to
that served as an advisory director of BCC from 1986. He was Chairman of Digital
Sound Corporation from January 1995 to May 1996 and prior to that had been
President and Chief Executive Officer of Digital Sound Corporation since 1992.
He had previously been a Senior Vice President of Xerox Corporation in Stamford,
Connecticut since 1986. He currently serves on the boards of directors of
Picture Tel Corporation and Blue Sky Research, Inc. Pursuant to an undertaking
with the DOC, Mr. Knight has effectively agreed to not serve as a director
beyond April 1997. Mr. Knight serves as the Chairperson of the Nominating
Committee of the Board.

ELIZABETH A. SANDERS has been a director of the Company since May 1996 and
has been a consultant to executive management and served as Vice President and
General Manager of Nordstrom, Inc. from 1978 to 1990. Ms. Sanders is a founder
of the National Bank of Southern California and was on its board of directors
from 1983 to 1990. She currently serves on the following boards of directors: H.
F. Ahmanson & Company, Wal-Mart Stores, Inc., Wolverine Worldwide, Inc. and the
Flagstar Companies, Inc. Ms. Sanders serves on the Audit Committee of the Board.

D. MARK WEINBERG has been Executive Vice President, National Businesses and
Specialty Products of the Company since October 1995. From August 1992 until May
1996, Mr. Weinberg served as a director of the Company. From February 1993 to
October 1995, Mr. Weinberg was Executive Vice President, Consumer and Specialty
Services of the Company. Prior to February 1993, Mr. Weinberg was Executive Vice
President of BCC's Consumer Services Group from December 1989 to February 1993
and was Senior Vice President of Individual and Senior Services of BCC from
April 1987 to December 1989. From 1981 to 1987, Mr. Weinberg held a variety of
positions at Touche Ross & Co. From 1976 to 1981, Mr. Weinberg was general
manager for the CTX Products Division of PET, Inc.

RONALD A. WILLIAMS has been Executive Vice President, California Businesses
of the Company since October 1995. From August 1992 until May 1996, Mr. Williams
served as a director of the Company. From February 1993 to October 1995, Mr.
Williams was Executive Vice President, Group and Network Services of the
Company. Prior to February 1993, Mr. Williams was Executive Vice President of
BCC's Group Services from May 1992 to February 1993. Prior to that time, Mr.
Williams served as Executive Vice President of BCC's Health Services and
Products Group from December 1989 to May 1992 and as BCC's Senior Vice President
of Marketing and Related Products from November 1988 to December 1989. From May
1987 to November 1988 he was Vice President of Corporate Services of BCC. From
July 1984 to May 1987 he was Senior Vice President of Vista Health Corporation,
an alternative delivery system for outpatient psychological and substance abuse
services of which he was also a co-founder.

HOWARD G. PHANSTIEL has been Executive Vice President, Finance and
Information Services since December 1994. Prior to joining the Company, he was
Managing Director in the Finance Group of Prudential

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<PAGE> 51

Securities Incorporated in New York City and a member of the firm's Operating
Council. He also served as Chairman of Prudential-Bache International Bank.
Prior to joining Prudential in 1989, Mr. Phanstiel was Chief Financial Officer
and Executive Vice President of Marine Midland Bank.

JOHN (JACK) C. SHAW has been an officer of the Company since October 1994.
Prior to joining the Company, Mr. Shaw was the Vice Chairman of Deloitte &
Touche Management Consulting since 1989. He joined Deloitte & Touche in 1965 and
was named Partner-in-Charge of the New York office in 1977.

THOMAS C. GEISER has been Executive Vice President, General Counsel and
Secretary of the Company since May 1996. From July 1993 until May 1996, Mr.
Geiser held the position of Senior Vice President, General Counsel and
Secretary. Prior to joining the Company, he was a partner in the law firm of
Brobeck, Phleger & Harrison from June 1990 to June 1993 and a partner in the law
firm of Epstein Becker Stromberg & Green from May 1985 to May 1990. Mr. Geiser
joined the law firm of Hanson, Bridgett, Marcus, Vlahos & Stromberg as an
associate in March 1979 and became a partner in the firm, leaving in May 1985.

YON Y. JORDEN has been Senior Vice President and Chief Financial Officer
since May 1994. Ms. Jorden has announced that she will resign from the Company
effective as of December 31, 1996. Ms. Jorden will provide consulting services
to the Company in 1997. Previous positions with the Company held by Ms. Jorden
were Acting Chief Financial Officer, appointed in August 1993, and Vice
President and Controller from February 1993 to August 1993. Ms. Jorden was Vice
President and Controller of BCC from October 1990 to February 1993. Prior to
joining BCC, Ms. Jorden was Vice President of Finance and Corporate Controller
of FHP International, a managed care company in Fountain Valley, California from
January 1987 to September 1990. Ms. Jorden was director of Internal Audit at
Western Digital Corp. in Irvine, California from July 1983 to January 1987.

BOARD OF DIRECTORS

The WellPoint Articles of Incorporation provide that the Board of Directors
is divided into three classes, currently with three directors in each class.
Directors in each class serve for a three-year term and the current composition
of the classes is as follows: Class I directors (whose terms expire in 1997)
consist of Ms. Sanders and Messrs. Birk and Knight; Class II directors (whose
terms expire in 1998) consist of Messrs. Banks and Davenport (with one vacancy);
and Class III directors (whose terms expire in 1999) consist of Ms. Hill and
Messrs. Besson and Schaeffer.

50
<PAGE> 52

RELATIONSHIP WITH THE FOUNDATION

In order to fulfill BCC's public benefit obligations to the State of
California arising out of the creation of Old WellPoint, Old WellPoint and BCC
entered into a Recapitalization Agreement dated as of March 31, 1995 regarding
certain transactions between Old WellPoint and BCC. On February 20, 1996, Old
WellPoint, BCC and the two newly created foundations, the Foundation and the
Endowment, executed an Amended and Restated Recapitalization Agreement (the
"Amended Recapitalization Agreement"). On May 20, 1996, BCC and Old WellPoint
concluded the Recapitalization. Pursuant to the Amended Recapitalization
Agreement, (a) Old WellPoint distributed an aggregate of $995.0 million by means
of a special dividend of $10.00 per share of its common stock, and BCC, as a
California nonprofit public benefit corporation, thereupon immediately donated
its portion thereof ($800.0 million) to the Endowment; (b) BCC donated its
assets, other than BCC's Old WellPoint Class B Common Stock and the BCC
Commercial Operations, to the Foundation; (c) BCC changed its status to a
California for-profit business corporation by means of filing Amended and
Restated Articles of Incorporation with the California Secretary of State and
issued to the Foundation 53,360,000 shares of Common Stock; and (d) Old
WellPoint merged with and into BCC and the surviving entity changed its name to
WellPoint Health Networks Inc. In the Merger, (i) each outstanding share of Old
WellPoint Class A Common Stock was converted into 0.667 shares of the Company's
Common Stock, (ii) the outstanding shares of the Company's Common Stock held by
the Foundation prior to the Merger were converted into 53,360,000 shares of the
post-Merger Company's Common Stock and a cash payment of $235.0 million to
reflect the value of the BCC Commercial Operations and the value of the Blue
Cross mark and (iii) the outstanding shares of Old WellPoint Class B Common
Stock were cancelled.

In connection with the Recapitalization, BCC received a ruling from the IRS
that, among other things, the BCC Conversion qualified as a tax-free transaction
and that no gain or loss was recognized by BCC for Federal income tax purposes.
The Foundation and the Company have entered into the Indemnification Agreement
which provides, with certain exceptions, that the Foundation will indemnify
WellPoint against the net tax liability as a result of a revocation or
modification, in whole or in part, of the ruling by the IRS or a determination
by the IRS that the BCC Conversion constitutes a taxable transaction for Federal
income tax purposes.

In connection with the Recapitalization, BCC relinquished its rights under
the Blue Cross License Agreement dated January 1, 1991, between Blue Cross of
California and the BCBSA. The BCBSA and the Company entered into the License
Agreement, pursuant to which the Company has become the exclusive licensee for
the right to use the Blue Cross name and related service marks in California and
has become a member of the BCBSA. See "Risk Factors -- Blue Cross Mark" and
"Business -- Service Marks."

The License Agreement required that the Foundation enter into the Voting
Trust Agreement, pursuant to which the Foundation deposited into a voting trust
(the "Voting Trust") the number of shares of the Company's Common Stock
sufficient to reduce the Foundation's holdings outside such Voting Trust to a
level not in excess of 50% of the voting power of the outstanding shares of the
Company's Common Stock. The shares held by the trustee under the Voting Trust
Agreement (the "Voting Trust Shares") generally will be voted (i) with respect
to elections and removal of directors, calling of shareholder meetings and
amendment of the Company's Articles of Incorporation and Bylaws, where such
actions are opposed by the Board of Directors, to support the position of the
Board of Directors, (ii) with certain exceptions, on matters requiring a vote of
at least an absolute majority of all outstanding shares of Common Stock, as the
majority of non-Voting Trust Shares vote, and (iii) on all other matters, in the
identical proportion in favor of or in opposition to such matters as non-Voting
Trust Shares vote.

With respect to those shares held by the Foundation in excess of the
Ownership Limit that are not subject to the Voting Trust Agreement, the
Foundation has also entered into the Voting Agreement. The Voting Agreement
provides among other things, that the Foundation, during the period that it
continues to own in excess of the Ownership Limit, will vote all shares of the
Company's Common Stock owned by it in excess of 5% of the outstanding shares
(except those shares held pursuant to the Voting Trust Agreement) in favor of
each nominee to the Board of Directors of the Company who has been nominated by
the Nominating Committee of the Board of Directors, or under certain
circumstances, other subsets of the Board of Directors,

51
<PAGE> 53

all as set forth in the Company's Bylaws. With respect to the removal of
directors, calling of shareholder meetings and amendment of the Company's
Articles of Incorporation and Bylaws, where such actions are opposed by the
Board of Directors, the Foundation has also agreed under the Voting Agreement to
support the position of the Board of Directors. In addition, the Voting Trust
Agreement requires that the Foundation, through sales (which may involve
additional exercises of its registration rights discussed below) or additional
deposits into the Voting Trust, reduce its holdings outside the Voting Trust to
20% and 5% of the outstanding Common Stock on and after three and five years,
respectively, from May 20, 1996.

In connection with the Recapitalization, the Company and the Foundation
also entered into the Registration Rights Agreement with respect to the shares
of the Company held by the Foundation. The Registration Rights Agreement grants
the Foundation (and certain transferees of the shares covered by the
Registration Rights Agreement), certain demand and "piggyback" registration
rights. The sale of Common Stock offered hereby by the Foundation is being made
pursuant to the exercise of demand registration rights. The undertakings made by
Old WellPoint in order to secure the DOC's approval of the Recapitalization
require the Foundation to make certain minimum annual distributions beginning in
1997. In order to fund such required distributions, the Foundation may make
additional sales of shares of the Company's Common Stock pursuant to the
exercise of its rights under the Registration Rights Agreement.

SELLING SHAREHOLDER

As of September 30, 1996 the Foundation owned 53,360,000 shares of the
Company's Common Stock, representing approximately 80.3% of the total 66,484,298
shares of Common Stock outstanding. Following the Offerings, the Foundation will
own 40,360,000 shares of WellPoint Common Stock, which will represent
approximately 60.7% of the outstanding shares (or, if the over-allotment option
is exercised in full, 38,410,000 shares of WellPoint Common Stock, which will
represent approximately 57.8% of the outstanding shares).

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<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

Under the Company's Amended and Restated Articles of Incorporation (the
"Articles of Incorporation"), the Company is authorized to issue up to
300,000,000 shares of Common Stock, $0.01 par value ("Common Stock"). As of
September 30, 1996, there were 66,484,298 shares of Common Stock issued and
outstanding. In addition, up to 5,000,000 shares have been reserved for issuance
upon the exercise of options and awards or upon purchase under the Company's
1994 Stock Option/Award Plan, Employee Stock Purchase Plan and Employee Stock
Option Plan. The shares of Common Stock are listed on the New York Stock
Exchange under the symbol "WLP." Chase Mellon Shareholder Services, L.L.C. is
the transfer agent and registrar of the shares of Common Stock.

The Common Stock is not redeemable, does not have any conversion rights and
is not subject to call. Holders of shares of Common Stock have no preemptive
rights to maintain their percentage of ownership in future offerings or sales of
stock of the Company. Holders of shares of Common Stock have one vote per share
on all matters submitted to a vote of shareholders of the Company, except with
respect to shares of Common Stock owned by the Selling Shareholder as described
under the caption "Relationship with the Foundation." Subject to the
restrictions on shares owned in excess of the Ownership Limit as described
below, the holders of Common Stock are entitled to receive dividends, if any, as
and when declared from time to time by the Board of Directors of the Company out
of assets or funds legally available therefor. See "-- Certain Charter
Provisions That May Limit Changes in Control -- Restrictions on Ownership and
Transfer." The holders of Common Stock do not have cumulative voting rights.
Upon liquidation, dissolution or winding up of the affairs of the Company, the
holders of Common Stock will be entitled to participate ratably, in proportion
to the number of shares held, in the net assets of the Company available for
distribution to holders of Common Stock. The shares of Common Stock currently
outstanding (including the shares offered hereby by the Selling Shareholder) are
fully paid and nonassessable.

PREFERRED STOCK

The Company is authorized to issue 50,000,000 shares of Preferred Stock,
$0.01 par value ("Preferred Stock"), of which no shares were outstanding as of
the date hereof. The Board of Directors has the authority to issue Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions, including dividend rights, voting rights, conversion rights, terms
of redemption and liquidation preferences, without any further vote or action by
the Company's shareholders, unless action is required by applicable laws or
regulations or by the terms of other outstanding preferred stock. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company.

CERTAIN CHARTER PROVISIONS THAT MAY LIMIT CHANGES IN CONTROL

The License Agreement requires as a condition to the Company's retention of
the Blue Cross license that the Company's Articles of Incorporation contain the
following provisions:

Shareholders' Meetings

The Company's Articles of Incorporation provide that special meetings of
the shareholders may be called at any time only by a majority of the Board of
Directors, the Chairman of the Board, the President or the holders of shares
entitled to cast not less than 10% of the votes at the meeting. This provision
will make it more difficult for shareholders to take actions opposed by the
Board of Directors.

No Action by Shareholder Consent

The Company's Articles of Incorporation prohibit action that is required or
permitted to be taken at any annual or special meeting of shareholders of the
Company from being taken by the written consent of shareholders without a
meeting.

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<PAGE> 55

Classified Board of Directors

The Company's Articles of Incorporation and Bylaws provide that the
Company's Board of Directors is divided into three classes, with each class
consisting, as nearly as possible, of one-third of the total number of directors
constituting the entire Board of Directors. See "Management -- Board of
Directors." These classes (after an interim period) will serve for staggered
three-year terms. The classified Board provisions could have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. In addition, these provisions could delay
shareholders who do not like the policies of the Board of Directors from
removing a majority of the members of the Board for two years unless such
shareholders can show cause and obtain the requisite vote.

Restrictions on Ownership and Transfer

The Company's Articles of Incorporation provide that no person other than
existing shareholders on the date the Articles of Incorporation became effective
may Beneficially Own (as defined) shares of voting capital stock of the Company
in excess of the Ownership Limit. The Foundation was the only 5% or greater
shareholder on the date the Articles of Incorporation became effective. Any
transfer of stock that would result in any person Beneficially Owning shares of
voting capital stock in excess of the Ownership Limit will result in such
intended transferee acquiring no rights in such shares (with certain exceptions)
and such shares will be deemed transferred to an escrow agent to be held until
such time as such shares are transferred to a person whose acquisition thereof
will not violate the Ownership Limit. These provisions prevent a third party
from obtaining control of the Company without obtaining the vote required to
amend the Company's Articles of Incorporation.

Supermajority Provisions

Under the Company's Articles of Incorporation, the affirmative vote of the
holders of at least 75% of each class of the shares of voting capital stock
represented and voting at a duly held meeting of shareholders at which a quorum
is present, voting by class, is required to amend certain provisions of the
Company's Articles, including the provisions concerning (i) the number of
directors, (ii) the classified board provision, (iii) the filling of vacancies
on the Board of Directors, (iv) the power of directors to amend the Company's
Articles of Incorporation, (v) the prohibition on shareholder action by written
consent, (vi) the ownership and transfer restrictions, (vii) the prohibition on
cumulative voting by shareholders and (viii) the requirement for supermajority
shareholder approval to amend such provisions. In addition, any amendment of the
Company's Articles of Incorporation, and amendment of certain provisions of the
Company's bylaws, requires the approval of the greater of two-thirds or seven of
the Company's directors.

CERTAIN LICENSE AGREEMENT PROVISIONS

As prescribed by the License Agreement, until the Foundation ceases to own
voting capital stock of the Company in excess of the Ownership Limit (as
described in "Relationship with the Foundation"), the Nominating Committee of
the Company's Board of Directors will be comprised of three directors, each of
whom will be an independent director. One of the members of the Nominating
Committee must be one of the directors (or their replacement) designated by BCC
prior to the Recapitalization. The BCC-designated directors are Messrs. Besson,
Davenport and Knight. The Nominating Committee is currently comprised of Robert
T. Knight (Chairman), David R. Banks and Julie A. Hill.

LISTING

The Company's Common Stock is listed on the New York Stock Exchange under
the trading symbol "WLP."

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<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

All of the shares of Common Stock sold in the Offerings (including shares,
if any, sold if the Underwriter's over-allotment is exercised), may be freely
traded without restriction under the Securities Act, except for any shares
purchased or held by an "affiliate" of the Company, as that term is defined
under Rule 144 promulgated under the Securities Act. In addition to the shares
sold in the Offerings, 1,716,376 shares issuable upon the exercise of options
(of which options covering 87,191 shares were exercisable as of September 30,
1996) and approximately 13,011,483 shares of Common Stock outstanding as of
September 30, 1996 will be eligible for sale by holders without restrictions
under the Securities Act. In addition, 1,334,109 shares issuable upon the
exercise of options (of which options covering 57,667 shares will be exercisable
immediately following the Offerings), and 112,815 of the outstanding shares,
will be subject to the volume and manner of sale restrictions contained in Rule
144 unless sold pursuant to an effective registration under the Securities Act
and the sale restrictions described in the third paragraph below. The remaining
40,360,000 shares held by the Selling Shareholder (assuming no exercise of the
Underwriter's over-allotment option), will also be subject to the volume and
manner of sale restrictions contained in Rule 144 unless sold pursuant to an
effective registration under the Securities Act. As the shares held by the
Foundation were registered in the Recapitalization, they are not subject to the
holding period requirements of Rule 144 if sold in compliance with such volume
and manner of sale restrictions.

In general, under Rule 144, as currently in effect, the Foundation or any
other affiliate is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of one percent of the then-outstanding
shares of Common Stock of the Company or the average weekly trading volume
during the four calendar weeks preceding such sale. Under Rule 144(k), a person
who is not deemed an affiliate and who has beneficially owned shares for at
least three years is entitled to sell such shares at any time under Rule 144
without regard to the volume limitations described above. As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or indirectly
through the usage of one or more intermediaries, controls, is controlled by, or
is under common control with, such issuer. The foregoing is not intended to be a
complete description of Rule 144 or of the rights of the Foundation or any other
affiliate to sell shares of Common Stock.

The Company, the Selling Shareholder and Leonard Schaeffer have agreed not
to sell, offer to sell, grant any option (other than pursuant to the 1994 Stock
Option/Award Plan, Employee Stock Option Plan and Employee Stock Purchase Plan)
for the sale of or otherwise dispose of any shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock (except for
shares offered hereby) for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, subject to certain limited exceptions included in the
Purchase Agreements (as defined). Certain other executive officers of the
Company have agreed to similar restrictions for a period of 90 days after the
date of this Prospectus. See "Underwriting."

Pursuant to the Voting Trust Agreement, the Foundation has agreed to reduce
its holdings outside of the Voting Trust to 20% and 5% of the outstanding Common
Stock of the Company on and after three and five years, respectively, from May
20, 1996. Following the Offerings, the Foundation will own 40,360,000 shares of
Common Stock, which will represent approximately 60.7% of the outstanding shares
(or, if the over-allotment option is exercised in full, 38,410,000 shares of the
Common Stock, which will represent approximately 57.8% of the outstanding
shares). Pursuant to the Registration Rights Agreement, the Selling Shareholder
has been granted certain demand and "piggy-back" registration rights with
respect to the shares of Common Stock held by it. See "Relationship with the
Foundation."

The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales by
such shareholders will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock, including
pursuant to a demand registration conducted for the benefit of the Selling
Shareholder, could adversely affect prevailing market prices.

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<PAGE> 57

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), the Selling Shareholder has agreed to sell to each
of the underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc. and
Morgan Stanley & Co. Incorporated are acting as representatives (the "U.S.
Representatives"), severally has agreed to purchase, the aggregate number of
shares of Common Stock set forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Salomon Brothers Inc ....................................................
Bear, Stearns & Co. Inc. ................................................
Dean Witter Reynolds Inc.................................................
Morgan Stanley & Co. Incorporated........................................
---------
Total....................................................... 10,400,000
=========
</TABLE>

The Selling Shareholder has also entered into a purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with Merrill Lynch International, Salomon
Brothers International Limited, Bear, Stearns International Limited, Dean Witter
International Ltd. and Morgan Stanley & Co. International Limited and certain
other underwriters outside the United States and Canada (collectively, the
"International Managers" and, together with the U.S. Underwriters, the
"Underwriters"). Subject to the terms and conditions set forth in the
International Purchase Agreement, the Selling Shareholder has agreed to sell to
the International Managers, and the International Managers severally have agreed
to purchase, an aggregate of 2,600,000 shares of Common Stock.

In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Common Stock being sold pursuant to such Purchase
Agreement if any of the shares of Common Stock being sold pursuant to such
Purchase Agreement are purchased. Under certain circumstances under the Purchase
Agreements, the commitments of non-defaulting Underwriters may be increased.
Each Purchase Agreement provides that the Selling Shareholder is not obligated
to sell, and the Underwriters named herein are not obligated to purchase, the
shares of Common Stock under the terms of such Purchase Agreement unless all of
the shares of Common Stock to be sold pursuant to such Purchase Agreement are
contemporaneously sold.

The U.S. Representatives have advised the Selling Shareholder that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $
per share. The U.S. Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The public offering price per share of Common Stock and the underwriting
discount per share of Common Stock are identical for both Offerings.

The Selling Shareholder has granted to the U.S. Underwriters and the
International Managers options to purchase up to an aggregate of 1,560,000 and
390,000 shares of Common Stock, respectively, at the public offering price, less
the underwriting discount. Such options, which will expire 30 days after the
date of this Prospectus, may be exercised solely to cover over-allotments. To
the extent that the Underwriters exercise such options, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage of the option shares that the number of shares
to be purchased initially by that Underwriter is of the 13,000,000 shares of
Common Stock initially purchased by the Underwriters.

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<PAGE> 58

The Selling Shareholder has been informed that the Underwriters have
entered into an agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other.

The Company, the Selling Shareholder and Leonard Schaeffer have agreed not
to sell, offer to sell, grant any options for the sale of or otherwise dispose
of any shares of Common Stock (other than pursuant to the Company's 1994 Stock
Option/Award Plan, Employee Stock Option Plan and Employee Stock Purchase Plan)
or securities convertible into or exchangeable or exercisable for Common Stock
(except for the shares offered hereby) for a period of 180 days after the date
of this Prospectus without the prior written consent of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, subject to certain limited exceptions included in
the Purchase Agreements. Certain other executive officers of the Company have
agreed to similar restrictions for a period of 90 days after the date of this
Prospectus. See "Shares Eligible for Future Sale."

The Selling Shareholder has been informed that, under the terms of the
Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or resell shares of Common Stock
to persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any bank, broker, or dealer to whom they sell shares
of Common Stock will not offer to sell or resell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. persons or Canadian persons, except in the case of transactions pursuant to
the Intersyndicate Agreement which, among other things, permits the Underwriters
to purchase from each other and to offer to resell such number of shares of
Common Stock as the selling Underwriter or Underwriters and the purchasing
Underwriter or Underwriters may agree.

The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.

Certain of the U.S. Underwriters have been engaged from time to time, and
may in the future be engaged, to perform investment banking and other
advisory-related services to the Company and its affiliates, including the
Selling Shareholder, in the ordinary course of business. In connection with
rendering such services in the past, such U.S. Underwriters have received
customary compensation, including reimbursement of related expenses.

LEGAL MATTERS

The validity of WellPoint Common Stock to be offered in the Offerings will
be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San
Francisco, California. Certain legal matters in connection with the Offerings
will be passed upon for the Selling Shareholder by Munger, Tolles & Olson, Los
Angeles, California and for the U.S. Underwriters by Latham & Watkins, Los
Angeles, California. Latham & Watkins has from time to time represented the
independent directors of WellPoint in various matters, including their
consideration and approval of the Recapitalization.

EXPERTS

The audited consolidated financial statements of WellPoint Health Networks
Inc. and subsidiaries as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995, included herein, have been audited
by Coopers & Lybrand L.L.P., independent accountants, as stated in their report
with respect thereto and are included herein, in reliance upon the authority of
such firm as experts in accounting and auditing.

57
<PAGE> 59

with respect thereto and are incorporated herein by reference, in reliance upon
the authority of such firm as experts in accounting and auditing.

The audited Post-Reorganization combined financial statements of the Life &
Health Benefits Management Division of Massachusetts Mutual Life Insurance
Company and Subsidiaries as of December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995, incorporated herein by
reference, have been audited by Coopers & Lybrand L.L.P., independent
accountants, as stated in their report with respect thereto and are incorporated
herein by reference, in reliance upon the authority of such firm as experts in
accounting and auditing.

The combined financial statements of the Group Benefits Operations of John
Hancock Mutual Life Insurance Company and subsidiaries at December 31, 1995 and
1994 and for the years then ended, included in the Company's Current Report on
Form 8-K dated October 9, 1996 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such combined financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy and information statements
and other information with the Commission. Reports, proxy and information
statements and other information filed by the Company with the Commission
pursuant to the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Branch of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy and information statements and other information can also be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005, the Chicago Stock Exchange, 440 South LaSalle Street,
Chicago, Illinois 60605, and the Pacific Stock Exchange, Inc., 301 Pine Street,
San Francisco, California 94104, or 233 South Beaudry Avenue, Los Angeles,
California 90012 or by way of the Commission's Internet address,
http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.

58
<PAGE> 60

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

WELLPOINT HEALTH NETWORKS INC.

<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1994, 1995 and June 30, 1996.......... F-3
Consolidated Income Statements for the Years Ended December 31, 1993, 1994, and 1995
and the Six Months Ended June 30, 1995 and 1996................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December
31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1996.................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994,
and 1995 and the Six Months Ended June 30, 1995 and 1996.......................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>

EXPLANATORY NOTE: Certain historical financial statements with respect to
MMHD and the BCC Commercial Operations are included in the Annual Report on Form
10-K for the year ended December 31, 1995 and certain of the Current Reports on
Form 8-K incorporated by reference herein. Certain historical financial
statements with respect to the GBO Operations are included in a Current Report
on Form 8-K incorporated by reference herein. See "Documents Incorporated by
Reference."

F-1
<PAGE> 61

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
WellPoint Health Networks Inc.

We have audited the accompanying consolidated balance sheets of WellPoint
Health Networks Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated income statements, statements of changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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.

As discussed in Note 14, on May 20, 1996 the Company concluded a series of
transactions in accordance with the Amended and Restated Recapitalization
Agreement with its principal shareholder, Blue Cross of California. The effect
of these transactions was to substantially reduce stockholders' equity, cash and
investment securities and increase long-term indebtedness.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WellPoint
Health Networks Inc. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt and
equity securities effective January 1, 1994 and for postretirement benefits
other than pensions and for income taxes effective January 1, 1993.

COOPERS & LYBRAND L.L.P.

Los Angeles, California
February 20, 1996, except for
Note 14 as to which the date is
May 20, 1996

F-2
<PAGE> 62

WELLPOINT HEALTH NETWORKS INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

DECEMBER 31,
JUNE 30, -------------------------
1996 1995 1994
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................... $ 480,779 $1,069,631 $ 163,444
Investment securities, at market value.............................. 1,505,078 1,174,974 1,798,846
Receivables, net.................................................... 402,102 149,081 111,047
Deferred tax assets................................................. 61,733 42,969 83,061
Other current assets................................................ 32,653 25,651 20,709
---------- ---------- ----------
Total Current Assets......................................... 2,482,345 2,462,306 2,177,107
Property and equipment, net........................................... 65,929 42,964 33,903
Intangible assets..................................................... 563,931 124,956 142,741
Long-term investments................................................. 121,709 12,664 11,098
Other assets.......................................................... 88,289 36,367 20,787
---------- ---------- ----------
Total Assets................................................. $3,322,203 $2,679,257 $2,385,636
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Medical claims payable.............................................. $ 706,403 $ 362,881 $ 367,303
Loss and loss adjustment expense reserves........................... 160,159 66,489 55,499
Unearned premiums................................................... 154,113 132,298 127,363
Accounts payable and accrued expenses............................... 188,595 111,005 122,802
Experience rated and other refunds.................................. 133,566 93,478 129,730
Income taxes payable and other current liabilities.................. 131,954 74,197 15,622
---------- ---------- ----------
Total Current Liabilities.................................... 1,474,790 840,348 818,319
Accrued postretirement benefits....................................... 64,239 50,158 45,806
Loss and loss adjustment expense reserves, non-current................ 127,128 107,000 92,409
Long-term debt........................................................ 809,870 -- --
Other non-current liabilities......................................... 84,923 11,525 10,183
---------- ---------- ----------
Total Liabilities............................................ 2,560,950 1,009,031 966,717
Stockholders' Equity:
Preferred Stock -- $0.01 par value, 50,000,000 shares authorized,
none issued and outstanding....................................... -- -- --
Common Stock
June 30, 1996 -- $0.01 par value, 300,000,000 shares authorized,
66,482,300 issued and outstanding; December 31, 1995 and
1994 -- none.................................................... 665 -- --
Class A Common Stock
June 30, 1996 -- none; December 31, 1995 and 1994 -- $0.01 par
value, 200,000,000 shares authorized, 19,500,000 issued and
outstanding..................................................... -- 195 195
Class B Common Stock
June 30, 1996 -- none; December 31, 1995 and 1994 -- $0.01 par
value 100,000,000 shares authorized, 80,000,000 issued and
outstanding..................................................... -- 800 800
Additional paid-in capital.......................................... 760,859 1,100,288 1,100,288
Unrealized valuation adjustment..................................... (26,063) 1,820 (69,498)
Retained earnings................................................... 25,792 567,123 387,134
---------- ---------- ----------
Total Stockholders' Equity................................... 761,253 1,670,226 1,418,919
---------- ---------- ----------
Total Liabilities and Stockholders' Equity................... $3,322,203 $2,679,257 $2,385,636
========== ========== ==========
</TABLE>

See the accompanying notes to the consolidated financial statements.

F-3
<PAGE> 63

WELLPOINT HEALTH NETWORKS INC.

CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ --------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Premium revenue................ $1,748,949 $1,458,548 $2,910,622 $2,647,951 $2,355,980
Management services
revenue..................... 61,663 28,661 61,151 36,274 18,121
Investment income.............. 72,429 69,379 135,306 107,447 75,074
---------- ---------- ---------- ---------- ----------
1,883,041 1,556,588 3,107,079 2,791,672 2,449,175
Operating Expenses:
Health care services and other
benefits.................... 1,334,738 1,091,004 2,199,953 1,927,954 1,719,853
Selling expense................ 107,727 94,999 190,161 169,483 147,097
General and administrative
expense..................... 235,765 171,554 344,427 334,206 266,295
Nonrecurring costs............. -- -- 57,074 -- --
---------- ---------- ---------- ---------- ----------
1,678,230 1,357,557 2,791,615 2,431,643 2,133,245
---------- ---------- ---------- ---------- ----------
Operating Income................. 204,811 199,031 315,464 360,029 315,930
Interest expense............... 10,923 -- -- -- --
Other expense, net............. 9,181 5,883 12,677 8,008 2,901
---------- ---------- ---------- ---------- ----------
Income before Provision for
Income Taxes and Cumulative
Effect of Accounting Changes... 184,707 193,148 302,787 352,021 313,029
Provision for income taxes..... 74,822 78,238 122,798 138,851 126,385
---------- ---------- ---------- ---------- ----------
Income before Cumulative Effect
of Accounting Changes.......... 109,885 114,910 179,989 213,170 186,644
Cumulative effect of accounting
changes -- adoption of SFAS
Nos. 106 and 109............ -- -- -- -- (21,260)
---------- ---------- ---------- ---------- ----------
Net Income....................... $ 109,885 $ 114,910 $ 179,989 $ 213,170 $ 165,384
========== ========== ========== ========== ==========
Earnings Per Share:
Income before Cumulative Effect
of Accounting Changes....... $ 1.66 $ 1.73 $ 2.71 $ 3.21 $ 2.81
Cumulative effect of accounting
changes..................... -- -- -- -- (0.32)
---------- ---------- ---------- ---------- ----------
Net Income..................... $ 1.66 $ 1.73 $ 2.71 $ 3.21 $ 2.49
========== ========== ========== ========== ==========
Weighted average number of shares
outstanding.................... 66,381 66,367 66,367 66,367 66,367
</TABLE>

See the accompanying notes to the consolidated financial statements.

F-4
<PAGE> 64

WELLPOINT HEALTH NETWORKS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
PREFERRED --------------- ---------------- ---------------- PAID-IN
STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ ------ ------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1992......... $ -- -- $ -- -- $ -- -- $ -- $ --
Net income (loss).....................
Class A Common Stock issued, net...... 19,500 195 515,718
Class B Common Stock issued........... 80,000 800 498,103
Unrealized valuation adjustment on
investment securities, net of tax...
Additional capital contributed by Blue
Cross of California (utilization of
AMT credit)......................... 42,767
------- ------ ---- ------- ----- ------- ----- ----------
Balance as of December 31, 1993......... -- -- -- 19,500 195 80,000 800 1,056,588
Net income............................
Unrealized valuation adjustment on
investment securities, net of tax...
Additional capital contributed by Blue
Cross of California (utilization of
AMT credit)......................... 43,700
------- ------ ---- ------- ----- ------- ----- ----------
Balance as of December 31, 1994......... -- -- -- 19,500 195 80,000 800 1,100,288
Net income............................
Unrealized valuation adjustment on
investment securities, net of tax...
------- ------ ---- ------- ----- ------- ----- ----------
Balance as of December 31, 1995......... -- -- -- 19,500 195 80,000 800 1,100,288
Net income (unaudited)................
Recapitalization (see Note 14)
Dividends........................... (343,784)
Stock exchange...................... 66,367 664 (19,500) (195 ) (80,000) (800 ) 331
Stock issued for employee long-term
incentive plan (unaudited).......... 115 1 4,024
Change in unrealized valuation
adjustment on investment securities,
net of tax (unaudited)..............
------- ------ ---- ------- ----- ------- ----- ----------
Balance as of June 30, 1996
(unaudited)........................... $ -- 66,482 $665 -- $ -- -- $ -- $ 760,859
======= ====== ==== ======= ===== ======= ===== ==========

UNREALIZED INVESTMENT
VALUATION RETAINED BY BLUE CROSS
ADJUSTMENT EARNINGS OF CALIFORNIA TOTAL
---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1992......... $ -- $ -- $ 507,483 $ 507,483
Net income (loss)..................... 173,964 (8,580) 165,384
Class A Common Stock issued, net...... 515,913
Class B Common Stock issued........... (498,903) --
Unrealized valuation adjustment on
investment securities, net of tax... 1,643 1,643
Additional capital contributed by Blue
Cross of California (utilization of
AMT credit)......................... 42,767
-------- --------- --------- ----------
Balance as of December 31, 1993......... 1,643 173,964 -- 1,233,190
Net income............................ 213,170 213,170
Unrealized valuation adjustment on
investment securities, net of tax... (71,141) (71,141)
Additional capital contributed by Blue
Cross of California (utilization of
AMT credit)......................... 43,700
-------- --------- --------- ----------
Balance as of December 31, 1994......... (69,498) 387,134 -- 1,418,919
Net income............................ 179,989 179,989
Unrealized valuation adjustment on
investment securities, net of tax... 71,318 71,318
-------- --------- --------- ----------
Balance as of December 31, 1995......... 1,820 567,123 -- 1,670,226
Net income (unaudited)................ 109,885 109,885
Recapitalization (see Note 14)
Dividends........................... (651,216) (995,000)
Stock exchange...................... --
Stock issued for employee long-term
incentive plan (unaudited).......... 4,025
Change in unrealized valuation
adjustment on investment securities,
net of tax (unaudited).............. (27,883) (27,883)
-------- --------- --------- ----------
Balance as of June 30, 1996
(unaudited)........................... $(26,063) $ 25,792 $ -- $ 761,253
======== ========= ========= ==========
</TABLE>

See the accompanying notes to the consolidated financial statements.

F-5
<PAGE> 65

WELLPOINT HEALTH NETWORKS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------
1996 1995 1995 1994 1993
---------- --------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 109,885 $ 114,910 $ 179,989 $ 213,170 $ 165,384
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting changes, net of
tax.......................................... -- -- -- -- 21,260
Depreciation and amortization, net of
accretion.................................... 16,526 8,801 22,034 20,292 9,896
Gains on sales of assets, net.................. (9,153) (10,163) (14,510) (4,000) (1,280)
Provision (benefit) for deferred income tax
benefits..................................... 3,008 -- (17,973) (5,970) (6,072)
Write down for impairment of intangible
asset........................................ -- -- 27,316 -- --
(Increase) decrease in certain assets, net of
acquisitions:
Receivables, net............................. 14,010 (57,291) (37,508) 6,763 3,948
Other current assets......................... 25,474 (8,756) (4,907) (12,383) (3,449)
Other non-current assets..................... (52,860) -- -- -- --
Increase (decrease) in certain liabilities, net
of acquisitions:
Medical claims payable....................... 6,138 (16,061) (4,422) 4,267 19,628
Loss and loss adjustment expense reserves.... 29,834 6,616 25,581 14,689 --
Unearned premiums............................ 14,459 7,057 4,935 (7,961) 1,108
Accounts payable and accrued expenses........ (1,334) (22,683) 3,711 38,545 (55,961)
Experience rated and other refunds........... (8,756) (22,155) (36,252) 13,200 17,943
Income taxes payable and other current
liabilities............................... (13,989) 49,383 (3,304) (38,973) 64,361
Accrued postretirement benefits.............. 1,553 1,719 4,352 7,101 3,190
Other non-current liabilities................ 17,905 (119) 1,342 10,183 --
---------- --------- ---------- ----------- -----------
Net cash provided by operating
activities.............................. 152,700 51,258 150,384 258,923 239,956
---------- --------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased............................ (395,054) (416,054) (706,792) (1,084,809) (1,722,029)
Proceeds from investments sold................... 308,750 731,777 771,074 1,012,726 38,648
Proceeds from matured investments................ 33,714 1,205 686,221 75,112 974,261
Property and equipment purchased, net............ (15,673) (10,538) (25,223) (22,004) (13,080)
Purchase of subsidiaries, net of cash acquired... (412,314) (13,177) (13,177) (215,813) --
---------- --------- ---------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (480,577) 293,213 712,103 (234,788) (722,200)
---------- --------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt..................... 775,000 -- -- -- --
Repayment of long-term debt...................... (45,000) -- -- -- --
Stock issued for long-term incentive plan........ 4,025 -- -- -- --
Recapitalization (see Note 14)................... (995,000) -- -- -- --
Repayment of UniCARE Financial Corp's long-term
note........................................... -- -- -- (15,000) --
Proceeds from initial public offering of Class A
Common Stock, net of expenses.................. -- -- -- -- 515,913
Additional capital contributed by Blue Cross of
California..................................... -- -- 43,700 42,767 --
---------- --------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. (260,975) -- 43,700 27,767 515,913
---------- --------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (588,852) 344,471 906,187 51,902 33,669
Cash and cash equivalents at beginning of period... 1,069,631 163,444 163,444 111,542 77,873
---------- --------- ---------- ----------- -----------
Cash and cash equivalents at end of period......... $ 480,779 $ 507,915 $1,069,631 $ 163,444 $ 111,542
========== ========= ========== =========== ===========
</TABLE>

See the accompanying notes to the consolidated financial statements.

F-6
<PAGE> 66

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

WellPoint Health Networks Inc. (the "Company" or "WellPoint"), incorporated
in 1992, is a publicly-traded, majority-owned for-profit subsidiary of Blue
Cross of California ("BCC"). In early 1993, BCC, as the sole holder of all Class
B Common Stock, transferred certain assets, liabilities and related managed care
operations to WellPoint, and WellPoint completed its initial public offering of
19,500,000 shares of Class A Common Stock generating $515.9 million in net
proceeds. The Class B Common Stock continues to be held by BCC.

WellPoint offers a comprehensive array of managed care health care plans to
both the large employer and the individual and small employer markets. These
plans are marketed through a health maintenance organization ("HMO"), a
preferred provider organization ("PPO") and specialty managed care networks. The
PPO network is also used to provide claims processing, cost containment and
administrative services to self-funded employers. WellPoint serves the health
care needs of approximately 2.8 million medical members in HMO, PPO and
management services plans and approximately 10.4 million pharmacy/dental members
through some of the largest provider networks in California and a nationwide
pharmacy network. The Company also offers workers' compensation and life
insurance products. The Company's primary market for all of the products it
offers, excluding pharmacy managed care services, is the state of California.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies used in the
preparation of the accompanying consolidated financial statements. Such policies
are in accordance with generally accepted accounting principles and have been
consistently applied. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. The significant estimates made in the preparation of the Company's
consolidated financial statements relate to the assessment of the carrying value
of the intangible assets, medical claims payable, loss and loss adjustment
expense reserves and contingent liabilities. While management believes that the
carrying value of such assets and liabilities are adequate as of December 31,
1995 and 1994, it is reasonably possible that actual results could differ from
the estimates upon which the carrying values were based.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated in consolidation.

Cash Equivalents

The Company considers cash equivalents to include highly liquid debt
instruments purchased with an original remaining maturity of three months or
less. These investments (primarily commercial paper and money market funds) are
carried at cost, which approximates fair value.

Concentration of Credit Risk

The Company invests its excess cash primarily in commercial paper and money
market funds. Although a majority of the cash accounts exceed the federally
insured deposit amount, management does not anticipate nonperformance by
financial institutions. Management reviews the financial viability of these
institutions on a periodic basis.

F-7
<PAGE> 67

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investment Securities

Investment securities consist primarily of U.S. Treasury bonds and notes,
mortgage-backed securities, investment grade corporate bonds and equity
securities. Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires companies to
carry certain debt and equity securities at fair value, excluding those debt
securities that a company intends and has the ability to hold to maturity. This
Statement also requires a company to include in income any unrealized gains and
losses on debt and equity securities that are bought and held principally for
the purpose of selling in the near term.

In conjunction with the adoption of SFAS No. 115, the Company has
classified its debt and equity securities as "available for sale." The adoption
of this Statement did not have a material impact on the Company's consolidated
financial position as of December 31, 1994 and had no impact on the results of
operations for the year ended December 31, 1994. Debt and equity securities are
carried at market value with an adjustment for any unrealized gain or loss in
the stockholders' equity section of the balance sheet, net of applicable
deferred income taxes.

Prior to January 1, 1994, investments in debt securities were carried
principally at cost adjusted for amortization of premium or discount computed
using the straight-line method, which did not materially differ from the
interest method.

Realized gains and losses on the disposition of investments are included in
investment income. The first-in first-out method is used in computing the cost
of fixed income and equity securities sold. The fair value of the investments is
estimated based on quoted market prices.

The Company has determined that the debt and equity securities are
available for use in current operations and, accordingly, has classified such
investment securities as current without regard to contractual maturity dates.

Premiums Receivable

Premiums receivable are shown net of an allowance based on historical
collection trends and management's judgment on the collectibility of these
accounts. These collection trends, as well as prevailing and anticipated
economic conditions, are routinely monitored by management, and any adjustments
required are reflected in current operations.

Intangible Assets

Intangible assets represent the cost in excess of fair value of the net
assets (including tax attributes) of the companies acquired in purchase
transactions. Intangible assets are amortized on a straight-line basis over
periods ranging from 25 to 30 years. Amortization charged to operations was $5.6
million in 1995 and $3.2 million in 1994. Accumulated amortization as of
December 31, 1995 and 1994 was $8.8 million and $3.2 million, respectively. The
Company periodically evaluates whether events or circumstances have occurred
that may affect the estimated useful life or the recoverability of the remaining
balance of goodwill and other identifiable intangible assets. Impairment of the
intangible assets is triggered when the estimated future undiscounted cash flows
(excluding interest charges) do not exceed the carrying amount of the intangible
assets. If the events or circumstances indicate that the remaining balance of
the intangible assets may be permanently impaired, such potential impairment
will be measured based upon the difference between the carrying amount of the
intangible assets and the fair value of such assets determined using the
estimated future discounted cash flows (excluding interest charges) generated
from the use and ultimate disposition of the respective acquired entity.

F-8
<PAGE> 68

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Medical Claims Payable

Health care services and other benefits expense includes the costs of
health care services, capitation expenses and expenses related to risk-sharing
agreements with participating physicians, medical groups and hospitals.

The costs of health care services are accrued as services are rendered,
including an estimate for claims incurred but not yet reported which is
actuarially determined based on historical claims payment experience and other
statistics. The liability for medical claims payable includes claims in process
and a provision for incurred but not yet reported claims. Claim processing
expenses are also accrued based on an estimate of expenses necessary to process
such claims. Such reserves are continually monitored and reviewed with any
adjustments reflected in current operations.

Capitation costs represent monthly fees paid to physicians, certain other
medical service providers and hospitals in the Company's HMO network as
retainers for providing continuing medical care. The Company maintains various
programs that provide incentives to physicians, certain other medical service
providers and hospitals participating in its HMO network through the use of
risk-sharing agreements and other programs. Payments under such agreements are
made based on the providers' performance in controlling health care costs while
providing quality health care. Expenses related to these programs, which are
based in part on estimates, are recorded in the period in which the related
services are dispensed.

Loss and Loss Adjustment Expense Reserves

The estimated liabilities for loss and loss adjustment expenses related to
the Company's workers' compensation business include the accumulation of
estimates for losses and claims reported prior to the balance sheet dates,
estimates (based upon projections of historical developments) of claims incurred
but not reported and estimates of expenses for investigating and adjusting all
incurred and unadjusted claims. Amounts reported are estimates of the ultimate
net cost of settlement which is subject to the impact of future changes in
economic and social conditions. Such amounts are not discounted for interest.
Reserves are continually monitored and reviewed, and as settlements are made or
reserves adjusted, differences are reflected in current operations.

Postretirement Benefits

The Company provides certain health care and life insurance benefits to
eligible retirees and their dependents under plans administered by BCC.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions." This Statement
requires the Company to accrue the estimated costs of retiree health and other
postretirement benefits during the periods in which eligible employees render
service to earn the benefits. The Company elected to recognize the accumulated
postretirement benefit obligation immediately resulting in a one-time charge of
$21.3 million, net of the related tax benefits of $14.2 million in 1993, which
was recorded as the cumulative effect of an accounting change.

Income Taxes

The operating results of the Company are included in the consolidated
income tax returns filed by BCC. The income tax provision is calculated
separately for the Company without the benefit of any special tax provisions
applicable to BCC or its other subsidiaries. The Company's provision for income
taxes is the current and deferred tax consequences of all events that have been
recognized in the financial statement as measured by the provision of currently
enacted tax laws and rates applicable to future periods.

F-9
<PAGE> 69

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. The adoption of this Statement did not have a material impact
on the Company's net income in 1993 other than the effect relating to the
adoption of SFAS No. 106.

Recognition of Premium Revenue and Management Services Revenue

For most health care contracts, premiums are billed in advance of coverage
periods and are recognized as revenue over the period in which services are
obligated to be provided. For other contracts, revenue is recognized based on
claims paid, estimated outstanding claims and related administrative fees.
Premium revenue is adjusted by a provision for experience rated refunds which is
estimated for certain group contracts based on historical and current claims
experience.

Workers' compensation insurance premiums are based upon the payroll of the
insured. Premiums are earned on a pro rata basis over the term of the policy,
generally one year. The ultimate premiums on retrospectively rated policies are
estimated and, if necessary, adjusted for current claims experience.

Premiums applicable to the unexpired contractual coverage periods are
reflected on the accompanying consolidated balance sheets as unearned premiums.

Management services revenue consists of administrative fees for services
provided to third parties including management of medical services, claims
processing and access to provider networks.

Earnings per Share

Earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. The number of shares outstanding for the
years ended December 31, 1995, 1994 and 1993 have been recomputed to 66.4
million, the number of shares outstanding immediately following the
Recapitalization to give effect to the stock exchange that occurred as part of
the Recapitalization. (See Note 14.)

Reclassifications

Certain amounts in the prior years financial statements have been
reclassified to conform to the 1995 presentation.

3. INVESTMENT SECURITIES

The Company's investments in debt securities consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------
GROSS UNREALIZED
AMORTIZED FAIR -------------------
COST VALUE GAINS LOSSES
---------- ---------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury and agency............... $ 633,385 $ 635,797 $3,661 $ 1,249
Mortgage-backed securities............. 205,361 201,368 131 4,124
Corporate and other securities......... 273,997 267,200 1,474 8,271
---------- ---------- ------ --------
Total debt securities........ $1,112,743 $1,104,365 $5,266 $ 13,644
========== ========== ====== ========
</TABLE>

F-10
<PAGE> 70

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------
GROSS UNREALIZED
AMORTIZED FAIR -------------------
COST VALUE GAINS LOSSES
---------- ---------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury and agency............... $ 748,202 $ 701,388 $ -- $ 46,814
Mortgage-backed securities............. 591,982 553,853 7 38,136
Corporate and other securities......... 490,083 452,958 15 37,140
---------- ---------- ------ --------
Total debt securities........ $1,830,267 $1,708,199 $ 22 $122,090
========== ========== ====== ========
</TABLE>

The amortized cost and estimated fair value of debt securities as of
December 31, 1995, based on contractual maturity dates are summarized below (in
thousands). Expected maturities will 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 FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less................................... $ 61,864 $ 62,187
Due after one year through five years..................... 505,213 501,174
Due after five years through ten years.................... 388,075 386,779
Due after ten years....................................... 158,021 154,655
---------- ----------
Total debt securities........................... $1,113,173 $1,104,795
========== ==========
</TABLE>

Unrealized gross gains on equity securities totaled $2.3 million and
unrealized gross losses totaled $2.1 million as of December 31, 1995. The cost
of equity securities as of December 31, 1995 was $70.4 million. Unrealized gross
gains and unrealized gross losses on equity securities were $4.1 million and
$4.7 million, respectively, as of December 31, 1994. The cost of equity
securities as of December 31, 1994 was $91.2 million.

Proceeds from the sales of equity securities for the year ended December
31, 1995 were $204.3 million. Gross gains of $21.1 million and gross losses of
$2.7 million were realized on the sales of equity securities in 1995. In 1994,
proceeds from the sale of equity securities were $64.0 million, and the gross
realized gains and gross realized losses on the sale of equity securities were
$6.1 million and $4.6 million, respectively. In 1993, proceeds from the sale of
equity securities were $38.6 million, and the gross realized gains and gross
realized losses on the sale of equity securities were $4.4 million and $3.2
million, respectively.

For the years ended December 31, 1995, 1994 and 1993, proceeds from the
sales and maturities of debt securities were $1,253.0 million, $1,023.8 million
and $974.3 million, respectively. Gross gains of $2.2 million and gross losses
of $5.2 million were realized on the sales of debt securities for the year ended
December 31, 1995. For 1994 gross realized gains from sales of debt securities
were $6.2 million and gross realized losses were $2.7 million. In 1993, net
realized gains from sales of debt securities were $0.1 million.

The Company participates in a securities lending program whereby marketable
securities in the Company's portfolio are transferred to an independent broker
or dealer in exchange for collateral equal to at least 102% of the market value
of securities on loan. Securities on loan are included in the Company's cash and
investment portfolio shown on the accompanying consolidated balance sheets.
Under this program, brokers/dealers are required to deliver substantially the
same security to the Company upon completion of the transaction. Transactions
under the securities lending program are in accordance with Board approved
investment policies and are monitored by the Company's Corporate Treasury
Department. The balances of securities on loan as of December 31, 1995 and 1994
were $1,345.5 million and $533.3 million, respectively, and income earned on
security lending transactions for the years ended December 31, 1995 and 1994 was
$1.2 million and $0.4 million, respectively. There were no securities on loan
during the year ended December 31, 1993.

F-11
<PAGE> 71

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. RECEIVABLES, NET

Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Premiums receivable.......................................... $ 77,508 $ 63,733
Investment income and other receivables...................... 77,902 52,032
-------- --------
155,410 115,765
Less allowance for doubtful accounts......................... 6,329 4,718
-------- --------
Receivables, net............................................. $149,081 $111,047
======== ========
</TABLE>

5. PROPERTY AND EQUIPMENT, NET

Property and equipment, at cost, consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Furniture and fixtures......................................... $23,064 $20,202
Equipment...................................................... 36,743 25,355
Leasehold improvements......................................... 12,602 10,369
------- -------
72,409 55,926
Less accumulated depreciation and amortization................. 29,445 22,023
------- -------
Property and equipment, net.................................... $42,964 $33,903
======= =======
</TABLE>

6. LINE OF CREDIT

At December 31, 1995 and 1994, the Company had an unused line of credit
totaling $250 million. The Company pays commitment fees of 0.625% on the unused
portion.

7. INCOME TAXES

The operating results of the Company are included in the consolidated
income tax returns filed by BCC. The income tax provision is calculated on a
separate return for the Company without the benefit of any special tax
provisions applicable to BCC or its other subsidiaries. BCC assesses the Company
for its share of estimated tax payments on a quarterly basis. Income taxes paid
for the years ended December 31, 1995, 1994 and 1993 were $79.0 million, $101.9
million and $85.1 million, respectively.

F-12
<PAGE> 72

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the provision (benefit) for income taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................... $111,814 $115,001 $104,012
State............................................. 28,957 29,820 28,445
-------- -------- --------
140,771 144,821 132,457
-------- -------- --------
Deferred:
Federal........................................... (14,998) (4,791) (4,943)
State............................................. (2,975) (1,179) (1,129)
-------- -------- --------
(17,973) (5,970) (6,072)
-------- -------- --------
Provision for income taxes.......................... $122,798 $138,851 $126,385
======== ======== ========
</TABLE>

The overall effective tax rate differs from the statutory federal tax rate
as follows (percent of pretax income):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax provision based on the federal statutory rate...... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............. 5.6 5.3 5.7
Salvage and subrogation................................ -- -- (1.0)
Effect of enacted tax rate change on existing temporary
difference........................................... -- -- (0.2)
Tax exempt income...................................... (1.3) (1.2) --
Non-deductible expenses................................ 0.8 0.7 --
Other, net............................................. 0.5 (0.4) 0.9
---- ---- ----
Effective tax rate..................................... 40.6% 39.4% 40.4%
==== ==== ====
</TABLE>

F-13
<PAGE> 73

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net deferred tax assets are comprised of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
Gross deferred tax assets:
Market valuation on investment securities................... $ 250 $ 42,698
Vacation and holiday accruals............................... 3,770 2,790
Incurred claim reserve discounting.......................... 15,353 13,004
Provision for doubtful accounts............................. 11,561 9,552
Unearned premium reserve.................................... 10,393 9,786
State income taxes.......................................... 4,548 8,515
Postretirement benefits..................................... 19,844 19,053
Policyholder dividends...................................... 4,787 3,987
Intangible asset impairment................................. 10,850 --
Other, net.................................................. 3,988 369
------- --------
Total gross deferred tax assets............................... 85,344 109,754
------- --------
Gross deferred tax liabilities:
Depreciation and amortization............................... (1,263) (1,981)
Bond discount and basis differences......................... (3,185) (2,875)
Other, net.................................................. (1,560) (1,050)
------- --------
Total gross deferred tax liabilities.......................... (6,008) (5,906)
------- --------
Net deferred tax assets....................................... $79,336 $103,848
======= ========
</TABLE>

The deferred tax assets recorded above are comprised of temporary
differences that are short-term in nature except for the SFAS No. 106
postretirement benefits liability which will reverse over the next 30 years,
intangible asset impairment which will reverse over the next 15 years and
depreciation and amortization differences which will reverse over 20 years.
Management believes that the deferred tax assets listed above are fully
recoverable and, accordingly, no valuation allowance has been recorded.

In accordance with the Tax Allocation Agreement among BCC and certain
subsidiaries of BCC (including the Company and its subsidiaries), a portion of
BCC's consolidated AMT credit was allocated to the Company based on the
respective tax liabilities in the years that the AMT credits were utilized in
the consolidated federal income tax return. The tax benefits associated with the
AMT credits were reflected as capital contributions from BCC resulting from the
Company's portion of AMT credits utilized. The 1993 capital contribution of
$42.8 million was received in 1994 and the 1994 capital contribution of $43.7
million was received in 1995. There was no AMT credit remaining as of December
31, 1995.

8. PENSION AND POSTRETIREMENT BENEFITS

Pension Benefits

The Company and its subsidiaries participate in two non-contributory
defined benefits pension plans of BCC, covering substantially all Company
employees. One plan covers bargaining unit employees, while the second plan,
which was established on January 1, 1987, covers all eligible exempt and
administrative employees meeting certain age and employment requirements. Plan
assets are invested primarily in pooled income funds. BCC's policy is to fund
its plans according to the 1974 Employee Retirement Income Security Act and
income tax regulations. BCC uses the unit credit method of cost determination.

F-14
<PAGE> 74

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The funded status of the BCC plans is as follows (in thousands):

<TABLE>
<CAPTION>
NON-BARGAINING BARGAINING
UNIT EMPLOYEES UNIT EMPLOYEES
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Actuarial present value of projected benefit
obligations:
Vested...................................... $29,923 $21,374 $ 8,261 $ 6,351
Non-vested.................................. 2,326 2,013 94 50
------- ------- ------ ------
Accumulated benefit obligation................ 32,249 23,387 8,355 6,401
Provision for future salary increases......... 2,543 1,757 578 406
------- ------- ------ ------
Projected benefit obligation.................. 34,792 25,144 8,933 6,807
Less plan assets at fair value................ 28,540 20,962 8,496 7,732
------- ------- ------ ------
Projected benefit obligation in excess of
(less than) plan assets..................... 6,252 4,182 437 (925)
Unrecognized prior service benefit............ 106 122 251 299
Unrecognized net loss......................... (7,149) (4,891) (2,053) (710)
Unrecognized net transition asset............. -- -- 41 67
Adjustment to recognize minimum liability..... 4,499 3,012 -- --
------- ------- ------ ------
Accrued pension liability (asset)............. $ 3,708 $ 2,425 $(1,324) $(1,269)
======= ======= ====== ======
Major Assumptions:
Discount rate............................... 7.25% 8.65% 7.25% 8.65%
Rate of increase in compensation levels..... 5.50% 5.50% 5.50% 5.50%
Expected long-term rate of return on plan
assets................................... 8.50% 8.50% 8.50% 8.50%
</TABLE>

Net periodic pension expense (benefit) for the BCC defined benefit pension
plans includes the following components (in thousands):

<TABLE>
<CAPTION>
NON-BARGAINING UNIT EMPLOYEES BARGAINING UNIT EMPLOYEES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned
during the year............ $ 3,084 $ 3,531 $ 3,368 $ 76 $ 112 $ 152
Interest cost on projected
benefits obligations....... 2,402 2,048 1,400 589 607 637
Actual (return) loss on plan
assets..................... (5,417) 319 (1,253) (1,062) 235 96
Net amortization and
deferral................... 3,878 (1,270) 662 342 (945) (1,052)
------- ------- ------- ------- ----- -------
Net periodic pension expense
(benefit).................. $ 3,947 $ 4,628 $ 4,177 $ (55) $ 9 $ (167)
======= ======= ======= ======= ===== =======
</TABLE>

In 1993, BCC recognized a curtailment of the bargaining unit plan due to a
reduction in work force. BCC also recognized a settlement for lump-sum payments
made to the majority of terminated employees. Pension expense for 1993 includes
a net gain of $0.9 million resulting from the curtailment and settlement.

The pension expense allocated to the Company based on the number of
employees, which management believes to be a reasonable and appropriate method
of allocation, was $3.6 million, $4.1 million and $2.4 million for the years
ended December 31, 1995, 1994 and 1993, respectively.

F-15
<PAGE> 75

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company and its subsidiaries participate in BCC's Salary Deferral
(401(k)) Savings Program (the "Plan"). Employees over 18 years of age are
eligible to participate in the Plan if they meet certain length of service
requirements. Under this plan, employees may contribute a percentage of their
pre-tax earnings to the Plan. After one year of service, employee contributions
up to 6% are matched by up to a 75% employer contribution which is immediately
vested. Effective January 1, 1994, the employer contribution rate was increased
to 85% for employees with ten years of service and to 100% for employees with
twenty years of service. Company expenses related to the savings plan totaled
$6.1 million, $4.3 million and $3.9 million for the years ended December 31,
1995, 1994 and 1993, respectively.

Postretirement Benefits

The Company provides certain health care and life insurance benefits to
eligible retirees and their dependents under the BCC plans. The Company's
employees are fully eligible for retiree benefits upon attaining 10 years of
service and a minimum age of 55. The plan in effect for those retiring prior to
September 1, 1994 provides for Company-paid life insurance for all retirees
based on age and a percent of salary. In addition, the majority of retirees from
age 62 forward receive fully paid health benefit coverage for themselves and
their dependents. For employees retiring after September 1, 1994, the Company
currently intends to subsidize health benefit coverage based on the retiree's
years of service at retirement and date of hire. Life insurance benefits for
retirees hired on or after May 1, 1992 are set at $10,000 upon retirement and
are reduced to $5,000 at age 70.

The accumulated postretirement benefit obligation ("APBO") and the accrued
postretirement benefit cost as of December 31, 1995 and 1994 are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Actives not eligible........................................... $20,411 $22,639
Actives fully eligible......................................... 152 1,294
Retirees and dependents........................................ 22,750 17,868
------- -------
Accumulated postretirement benefits obligation................. 43,313 41,801
Unrecognized net gain from accrued postretirement benefit
cost......................................................... 6,845 4,005
------- -------
Accrued Postretirement Benefit Obligation...................... $50,158 $45,806
======= =======
</TABLE>

The above actuarially determined APBO was calculated using discount rates
of 7.25% and 8.0% as of December 31, 1995 and 1994, respectively. The medical
trend rate is assumed to decline gradually from 14% (under age 65) and 12% (age
65 and over) to 6% by the year 2002. These estimated trend rates are subject to
change in the future. The medical trend rate assumption has a significant effect
on the amounts reported. For example, an increase in the assumed health care
trend rates of one percentage in each year would increase the APBO as of
December 31, 1995 by $7.0 million and would increase service and interest costs
by $0.8 million. For life insurance benefit calculations, a compensation
increase of 5.5% was assumed.

Net periodic postretirement benefit cost includes the following components
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Service cost............................................ $1,691 $2,207 $1,783
Interest cost........................................... 3,216 3,004 2,600
------ ------ ------
Net periodic postretirement benefit costs............... $4,907 $5,211 $4,383
====== ====== ======
</TABLE>

F-16
<PAGE> 76

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. LEASES

The Company has an agreement with BCC to lease office space. BCC's lease
terms range from one to ten years with options to renew. As discussed further in
Note 14, the Company renegotiated the lease for their headquarters building
effective January 1, 1996. Certain lease agreements provide for escalation of
payment which are based on fluctuations in certain published cost-of-living
indices.

Future minimum rental payments under operating leases utilized by the
Company having initial or remaining noncancellable lease terms in excess of one
year at December 31, 1995, including the new headquarters building lease, are as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.............................................................. $ 13,228
1997.............................................................. 11,741
1998.............................................................. 9,163
1999.............................................................. 8,337
2000.............................................................. 7,075
Thereafter........................................................ 106,704
--------
Total payments required................................. $156,248
========
</TABLE>

Rental expense for the years ended December 31, 1995, 1994 and 1993 for all
operating leases was $18.7 million, $17.5 million and $12.9 million,
respectively. Contingent rentals included in the above rental expense for the
years ended December 31, 1995, 1994 and 1993 were $2.0 million, $1.3 million and
$1.1 million, respectively.

10. RELATED PARTY TRANSACTIONS

Pursuant to the Administrative Services and Product Marketing Agreement,
BCC provides office space and certain administrative and support services,
including computerized data processing and management information systems,
telecommunications systems and other management services to the Company. These
expenses are allocated to and paid by the Company in an amount equal to the
direct and indirect costs and expenses incurred in furnishing these services. In
addition, the Company provides services to BCC which include health plan
services, claims processing related to such plans, other financial management
services and provider contracting (excluding hospitals and other institutional
health care providers) which are reimbursed on a basis that approximates cost.
Management of both the Company and BCC consider the allocation methodologies and
cost approximations reasonable and appropriate.

The Administrative Services and Product Marketing Agreement will expire in
the year 2003 with subsequent renewals in five-year increments. However, the
Company may obtain similar outside services or lease space and equipment from
outside vendors as long as BCC is provided with at least six months written
notice of its intent to obtain services from a party other than BCC.

Intercompany charges between the Company and BCC for the respective periods
are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Services provided by BCC.......................... $ 17,418 $ 37,313 $74,393
Services provided to BCC.......................... (11,592) (13,013) (7,782)
-------- -------- -------
Net intercompany charges included in general and
administrative expense.......................... $ 5,826 $ 24,300 $66,611
======== ======== =======
</TABLE>

F-17
<PAGE> 77

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As required by the DOC, non-contract provider services under the Company
and BCC's jointly marketed Prudent Buyer and Medicare supplement products are
required to be provided by BCC, and revenues attributable to such non-contract
provider services are, therefore, not included in the Company's consolidated
financial statements. BCC records a portion of premium revenue for these
products based on the estimated cost of providing these non-contract provider
health care services, plus an underwriting margin equal to the greater of 2.0%
or the average percentage of underwriting gain among Blue Cross and Blue Shield
Association member plans. For the year ended December 31, 1995, the underwriting
margin was estimated at 2.0%. For each of the years ended December 31, 1994 and
1993, the underwriting margin was estimated at 2.5%. Such aggregate premium
revenue recognized by BCC related to the non-contract provider services for
these products for the years ended December 31, 1995, 1994 and 1993 was $163.4
million, $172.6 million and $235.1 million, respectively. Operating income
recognized by BCC on such non-contract provider services for the years ended
December 31, 1995, 1994 and 1993 was $3.2 million, $4.3 million and $5.9
million, respectively.

In accordance with the Line of Business and Assumption Agreement between
the Company and BCC, BCC retained medical claims payable of approximately $265
million for health care services incurred prior to February 1, 1993 with an
offsetting amount of investments to satisfy such claims. The consolidated
statement of cash flows for the year ended December 31, 1993 excludes the impact
of the claim liability retained by BCC to reflect the Company's cash flows on a
comparable basis.

In 1993, WellPoint purchased equity securities of $71.8 million from BCC at
fair market values as quoted by national markets.

11. COMMITMENTS AND CONTINGENCIES

WellPoint has had lawsuits filed against it on behalf of its stockholders
pertaining to an alleged breach by its Board of Directors of fiduciary duties by
pursuing the Health Systems International ("HSI") transaction and allegedly
rejecting certain other proposals without due consideration. BCC is also a
defendant in the lawsuits against WellPoint. WellPoint believes that its
directors acted in good faith and in an independent, informed and appropriate
manner in all aspects of their decision to approve the HSI transaction and not
to approve alternative proposals. Based upon the foregoing, WellPoint believes
that these lawsuits are without merit and intends to vigorously defend such
actions.

In addition, WellPoint and certain of its subsidiaries are also parties to
various other legal proceedings, many of which involve claims for coverage
encountered in the ordinary course of business. WellPoint, like HMOs and health
insurers generally, excludes certain health care services from coverage under
its HMO, PPO and other plans. WellPoint is, in its ordinary course of business,
subject to the claims of its enrollees arising out of decisions to restrict
treatment or to restrict reimbursement for certain services. The loss of even
one such claim, if it results in a significant punitive damage award, could have
a material adverse affect on WellPoint. In addition, the risk of potential
liability under punitive damage theories may increase significantly the
difficulty of obtaining reasonable settlements of coverage claims. However, the
financial and operational impact that such evolving theories of recovery will
have on the managed care industry generally, or WellPoint in particular, is at
present unknown.

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

12. NONRECURRING COSTS

F-18
<PAGE> 78

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

from costs, primarily professional fees, associated with the proposed
recapitalization of WellPoint and the terminated acquisition of Health Systems
International. In addition, the Company recorded a charge of $27.3 million for
the impairment of its pharmaceutical benefits management business based on the
Company's most recent analysis to evaluate impairment of long-lived assets in
accordance with Company policy. The impairment reflects an anticipated dramatic
reduction in future claims processing fees. The anticipated reduced fees result
from an industry market shift whereby pharmaceutical manufacturing companies
have purchased pharmaceutical benefits management companies to market their
products by reducing claims processing fees.

13. REGULATORY REQUIREMENTS

The Company's regulated subsidiaries must comply with certain minimum
capital or tangible net equity requirements in each of the states in which they
operate. As of December 31, 1995, all of the Company's regulated subsidiaries
were in compliance with these requirements.

14. SUBSEQUENT EVENTS

New Lease on Headquarters Building

Effective January 1, 1996, the Company entered into a new lease agreement
for a 24 year period. In addition to a base rent, the Company may have to pay a
contingent amount, beginning in 1997, based upon annual changes in the CPI
Index. The Company has paid $30 million to the owner of the building in
connection with the agreement; this amount will be amortized over the life of
the lease.

Recapitalization and Purchase of BCC Commercial Operations

On May 20, 1996, the Company concluded a series of transactions
(collectively, the "Recapitalization") to recapitalize its publicly traded,
majority-owned subsidiary, WellPoint Health Networks Inc., a Delaware
corporation ("Old WellPoint"), pursuant to the Amended and Restated
Recapitalization Agreement dated as of March 31, 1995 (the "Amended
Recapitalization Agreement"), by and among Old WellPoint, the Company (formerly
known as Blue Cross of California), the California HealthCare Foundation (the
"Foundation") and the California Endowment Fund (the "Endowment"). In connection
with the Recapitalization, (a) Old WellPoint distributed an aggregate of $995.0
million by means of an extraordinary dividend of $10.00 per share to the record
holders of its Class A and Class B Common Stock as of May 15, 1996, (b) the
Company, the sole shareholder of Old WellPoint's Class B Common Stock, donated
its portion of such dividend ($800.0 million) to the Endowment, (c) the Company
donated its assets, other than the shares of the Old WellPoint Class B Common
Stock held by the Company and the Company's commercial operations (the "BCC
Commercial Operations"), to the Foundation, (d) the Company changed its status
from a California nonprofit public benefit corporation to a California
for-profit business corporation, in conformity with the terms and orders of the
California Department of Corporations, by means of filing amended and restated
articles of incorporation with the California Secretary of State, immediately
following which the Company issued to the Foundation 53,360,000 shares of its
common stock and (e) Old WellPoint merged with and into the Company (the
"Merger"), with the resulting entity changing its name to WellPoint Health
Networks Inc.

In connection with the Merger, (i) each outstanding share of Old
WellPoint's Class A Common Stock was converted into 0.667 shares of the
Company's Common Stock, (ii) the outstanding shares of the Company's common
stock issued to the Foundation prior to the Merger were converted into
53,360,000 shares of the postmerger Company's Common Stock and a cash payment of
$235,000,000 to reflect the value of the BCC Commercial Operations and (iii) the
outstanding shares of Old WellPoint's Class B Common Stock were canceled. The
BCC Commercial Operations consisted of, among other things, the health care
lines of business conducted by Blue Cross of California, substantially all
agreements with health care providers that

F-19
<PAGE> 79

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

provided services to enrollees of Blue Cross of California and all of the cash
and securities of Blue Cross of California on hand at the time of closing of the
Recapitalization.

By virtue of the Merger and the exchange of shares of Old WellPoint for
those of the Company, as of May 20, 1996 (the effective date of the Merger),
there were a total of 66,366,500 shares of the Company's Common Stock
outstanding, of which 53,360,000 shares (or approximately 80.4%) were held
beneficially by the Foundation.

The purchase method of accounting has been used to account for the
acquisition of the BCC Commercial Operations. At the acquisition date, the
excess purchase price over assets acquired was approximately $211.4 million and
is being amortized on a straight-line basis over 40 years.

15. SUBSEQUENT EVENTS (UNAUDITED)

Purchase of Massachusetts Mutual Life Insurance Company's Life and Health
Benefits Management Division

On March 31, 1996, the Company completed its acquisition of the Life and
Health Benefits Management Division ("MMHD") of Massachusetts Mutual Life
Insurance Company ("MassMutual"), which conducts business under the name UNICARE
Life & Health Insurance Company, through the acquisition of its parent
MassMutual Holding Company Two, Inc. The purchase price was $380.0 million plus
an estimated $18.0 million purchase price adjustment. The $380.0 million was
funded with $318.0 million in existing cash and a Series A term note for $62.0
million. Under the terms of the acquisition agreement for MMHD, the Company was
obligated to issue a Series B term note based upon the results of a post-closing
audit. In August 1996, the Company paid $22.2 million in full satisfaction of
this obligation. The purchase method of accounting has been used to account for
the acquisition. The excess purchase price over assets acquired was
approximately $238.5 million and is being amortized on a straight-line basis
over 35 years. The Company expects to incur approximately $30 -$40 million of
restructuring costs related to this acquisition, a portion of which is expected
to be reflected in the Company's results of operations.

MMHD provides medical services to approximately 1.1 million members,
focusing on the large employer market (groups of 251 to 3,000), and has medical
members in all 50 states. In addition, MMHD also has approximately 0.9 million
dental members, 0.4 million life insurance members, 0.5 million pharmacy members
and 0.1 million disability members.

Long-term Debt -- Notes Payable

During the first quarter of 1996 in connection with the acquisition of
MMHD, the Company issued a Series A term note for $62.0 million. Under the terms
of the acquisition agreement for MMHD, the Company was obligated to issue a
Series B term note based upon the results of a post-closing audit. In August
1996, the Company paid $22.2 million to MassMutual in full satisfaction of this
obligation. The Series A term note will mature on March 31, 1999. From March 31,
1996 through June 30, 1996, the interest rate was set at 5.72%. Thereafter, the
interest rate will be equal to the Company's average interest cost by reason of
the availability of the revolving credit facility, as described below. Interest
will be paid quarterly.

Long-term Debt -- Revolving Credit Facility

In May 1996, the Company entered into an agreement with a consortium of
financial institutions for a five-year unsecured revolving credit facility which
provides a line of credit up to $1.25 billion through May 2001 with extension
options through May 2003. The agreement provides for interest on committed
advances at a rate equal to the London Interbank Offered Rate plus the
applicable margin determined by the long-term

F-20
<PAGE> 80

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unsecured debt ratings or the leverage ratio as outlined in the agreement, or a
reference rate or via a bid auction with the bank syndicate. Interest is
determined using whichever of these methods which is the most favorable to the
Company. A facility fee based on the facility amount, regardless of utilization,
will be payable quarterly. The facility fee rate will also be determined by the
unsecured debt ratings or the leverage ratio of the Company. The agreement
requires maintenance of certain financial ratios and contains other restrictive
covenants. At June 30, 1996, $730.0 million was outstanding under this facility
which was used for the payment of a dividend to WellPoint stockholders in
connection with the Recapitalization. (See Note 14).

Purchase of Group Benefits Operations of John Hancock Mutual Life Insurance
Company

On October 10, 1996, the Company signed a definitive agreement to acquire
part of the Group Benefits Operations of John Hancock Mutual Life Insurance
Company for approximately $86.7 million. The acquisition, which is subject to
regulatory approvals, is expected to be completed in the first quarter of 1997.

16. BASIS OF PRESENTATION FOR UNAUDITED INTERIM PERIODS

The accompanying unaudited consolidated financial statements of WellPoint,
in the opinion of management, reflect all material adjustments (which are of a
normal recurring nature) necessary for the fair presentation of its financial
condition as of June 30, 1996, the results of operations for each of the
six-month periods ended June 30, 1996 and 1995, cash flows for each of the
six-month periods ended June 30, 1996 and 1995, and the statement of changes in
stockholders' equity for the six months ended June 30, 1996. The results of
operations for the interim periods presented are not necessarily indicative of
the operating results for the full year. Certain amounts in previously issued
financial statements have been reclassified to conform to the 1996 presentation.
The reclassifications had no effect on net income or stockholders' equity as
previously reported.

17. EARNINGS PER SHARE -- INTERIM PERIODS (UNAUDITED)

Earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. The number of shares outstanding for the
six months ended June 30, 1996 is 66.4 million. The number of shares outstanding
for the six months ended June 30, 1995 has been recomputed to 66.4 million, the
number of shares outstanding immediately following the Recapitalization, to give
effect to the stock exchange that occurred as part of the Recapitalization.

The following unaudited pro forma summary combines the consolidated results
of operations of the Company and the BCC Commercial Operations as if the
Recapitalization had occurred at the beginning of each period presented, after
giving effect to pro forma adjustments, which represent interest expense on
long-term debt incurred to pay the special dividend, amortization of intangible
assets, foregone interest on net cash used for the purchase of BCC Commercial
Operations and payment of the special dividend and the related income tax
effect.

<TABLE>
<CAPTION>
PRO FORMA
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1996 1995
------- -------
(NET INCOME IN
THOUSANDS)
<S> <C> <C>
Net Income....................................................... $95,001 $92,240
Earnings per Share............................................... $ 1.43 $ 1.39
</TABLE>

Fully diluted earnings per share is equivalent to the earnings per share
indicated.

F-21
<PAGE> 81

WELLPOINT HEALTH NETWORKS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

In accordance with the requirements of Accounting Principles Bulletin No.
16, Business Combinations, the following unaudited pro forma summary combines
the consolidated results of operations of the Company, MMHD and the BCC
Commercial Operations as if the acquisitions had occurred as of the beginning of
each period presented after giving effect to pro forma adjustments. The columns
entitled WellPoint, BCC and MMHD represent results of operations for these
entities as if the acquisitions and the Recapitalization had not occurred. The
pro forma adjustments represent interest expense on long-term debt incurred to
fund the acquisitions and the Recapitalization, amortization of intangible
assets, foregone interest on the net cash used for the acquisitions,
administrative expenses related to the investment into national expansion of
managed care networks and the related income tax effect. The pro forma financial
information is presented for informational purposes only and may not be
indicative of the results of operations as they would have been if the Company,
MMHD and the BCC Commercial Operations had been a single entity during the six
months ended June 30, 1996 and 1995, nor is it necessarily indicative of the
results of operations which may occur in the future. Pro forma earnings per
share is calculated based on 66.4 million shares of common stock outstanding
during all periods presented.

<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------------
WELLPOINT BCC MMHD ADJUSTMENTS TOTAL
--------- ------ ------ ----------- --------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
Revenues................................ $1,658.2 $208.4 $407.2 $ (21.2) $2,252.6
Net Income.............................. $ 114.9 $ 5.0 $ 11.4 $ (39.4) $ 91.9
Earnings Per Share...................... $ 1.38
</TABLE>

<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED JUNE 30, 1995
----------------------------------------------------
WELLPOINT BCC MMHD ADJUSTMENTS TOTAL
--------- ------ ------ ----------- --------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C>
Revenues................................ $1,556.6 $231.0 $468.3 $ (21.2) $2,234.7
Net Income.............................. $ 114.9 $ 3.4 $ 21.3 $ (42.7) $ 96.9
Earnings Per Share...................... $ 1.46
</TABLE>

Lower MMHD net income for the six months ended June 30, 1996 compared to
June 30, 1995 was primarily due to a decrease of $9.0 million in the gross
underwriting margin from a lower volume of premiums and claims and a decrease of
$9.6 million in pre-tax realized gains on investments in 1996.

F-22
<PAGE> 82

- ------------------------------------------------------
- ------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference... 2
Prospectus Summary.................... 3
Cautionary Disclosure Regarding
Forward-Looking Statements.......... 7
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Consolidated Financial and
Operating Data...................... 16
Unaudited Pro Forma Combined Condensed
Financial Statements................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 48
Relationship with the Foundation...... 51
Selling Shareholder................... 52
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Additional Information................ 58
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------

13,000,000 SHARES

LOGO

COMMON STOCK

------------------------------

PROSPECTUS

------------------------------

MERRILL LYNCH & CO.

SALOMON BROTHERS INC

BEAR, STEARNS & CO. INC.

DEAN WITTER REYNOLDS INC.

MORGAN STANLEY & CO.
INCORPORATED

, 1996

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 83

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 30, 1996

PROSPECTUS

13,000,000 SHARES

LOGO

COMMON STOCK
------------------------

All of the 13,000,000 shares of Common Stock of WellPoint Health Networks
Inc. ("WellPoint" or the "Company") offered hereby are being sold by the
California HealthCare Foundation (the "Foundation" or "Selling Shareholder").
See "Selling Shareholder." The Company will not receive any of the proceeds from
the sale of shares by the Selling Shareholder. Of the 13,000,000 shares of
Common Stock being offered hereby, 2,600,000 shares (the "International Shares")
are being offered outside the United States and Canada (the "International
Offering") by the International Managers and 10,400,000 shares (the "U.S.
Shares") are being offered in the United States and Canada (the "U.S. Offering"
and, together with the International Offering, the "Offerings") by the U.S.
Underwriters. The price to public and underwriting discount per share are
identical for both Offerings and the closings for both Offerings are conditioned
upon each other. See "Underwriting." The Common Stock of the Company is traded
on the New York Stock Exchange under the symbol "WLP." On October 29, 1996, the
last sale price of the Common Stock, as reported on the New York Stock Exchange
was $31 5/8 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.

------------------------

(1) The Company and the Selling Shareholder have agreed to indemnify the several
U.S. Underwriters and International Managers (collectively, the
"Underwriters") against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Excludes expenses payable by the Company, estimated at $ .
(3) The Selling Shareholder has granted to the International Managers and the
U.S. Underwriters a 30-day option to purchase an aggregate of 390,000 and
1,560,000 additional shares, respectively of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such additional shares
are purchased, the total Price to Public, Underwriting Discount, and
Proceeds to Selling Shareholder will be $ , $ and $ ,
respectively.
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares will be made in New York, New York on or about
, 1996.
------------------------

MERRILL LYNCH INTERNATIONAL SALOMON BROTHERS INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO.
INTERNATIONAL
------------------------

The date of this Prospectus is , 1996.
<PAGE> 84

CERTAIN UNITED STATES TAX CONSEQUENCES TO
NON-UNITED STATES HOLDERS

The following is a discussion of certain anticipated United States income
and estate tax consequences of the ownership and disposition of the Common Stock
by a "Non-U.S. Holder." For the purpose of this discussion, a "Non-U.S. Holder"
is any person or entity that is, as to the United States, a foreign corporation,
a non-resident alien individual, a foreign partnership or a non-resident
fiduciary of a foreign estate or trust as such terms are defined in the Internal
Revenue Code of 1986, as amended (the "Code"). This discussion does not deal
with all aspects of United States income and estate taxation and does not
address foreign, state and local tax consequences that may be relevant to
Non-U.S. Holders in light of their personal circumstances. Furthermore, the
following discussion is based on current provisions of the Code, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations as of the date hereof, all of which are subject to change.
Prospective foreign investors are urged to consult their tax advisors regarding
the United States Federal, state, local and non-United States income and other
tax consequences of owning and disposing of Common Stock.

DIVIDENDS

Generally, any dividend paid to a Non-U.S. Holder of Common Stock will be
subject to United States withholding tax either at a rate of 30% of the gross
amount of the dividend or at a lesser rate as may be specified by an applicable
income tax treaty. Under current United States Treasury regulations, dividends
paid to an address in a country other than the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above (unless the payor has knowledge to the contrary) and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. However, under proposed
United States Treasury regulations not currently in effect, a Non-U.S. Holder of
Common Stock who wishes to claim the benefit of an applicable treaty rate would
be required to satisfy applicable certification and other requirements.
Dividends received by a Non-U.S. Holder that are effectively connected with a
United States trade or business conducted by such Non-U.S. Holder are exempt
from such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, are taxed at the same graduated rates applicable
to United States individuals or corporations. A Non-U.S. Holder may claim
exemption from withholding under the effectively connected income exception by
filing Form 4224 (Statement Claiming Exemption from Withholding of Tax on Income
Effectively Connected With the Conduct of Business in the United States) with
the Company or its paying agent.

In addition to the graduated tax described above, dividends received by a
corporate Non-U.S. Holder that are effectively connected with a United States
trade or business of the corporate Non-U.S. Holder may also be subject to a
branch profits tax at a rate of 30% or at a lesser rate as may be specified by
an applicable income tax treaty.

A Non-U.S. Holder eligible for a reduced rate of United States withholding
tax pursuant to an income tax treaty may obtain a refund for any excess amount
withheld by filing an appropriate claim for refund with the Internal Revenue
Service (the "IRS").

DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States Federal
income tax on any gain realized upon the sale or other disposition of Common
Stock unless (i) such gain is effectively connected with a United States trade
or business of the Non-U.S. Holder, (ii) in the case of certain Non-U.S. Holders
who are non-resident alien individuals and hold the Common Stock as a capital
asset, such individuals are present in the United States for 183 or more days in
the taxable year of disposition and certain other conditions are met, or (iii)
the Company is or has been a "United States real property holding corporation"
for Federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such holder's holding period. The Company
has determined that it is not and does not believe that it will become a "United
States real property holding corporation" for Federal income tax purposes. If a
Non-U.S. Holder falls under clause (i) above, the holder will be taxed on the
net gain derived from the sale under regular graduated United States Federal
income tax rates (and, with respect to corporate Non-U.S. Holders, may also be
subject to the branch profits tax described above). If an individual Non-U.S.
Holder falls under clause (ii) above, the

56
<PAGE> 85

holder generally will be subject to a 30% tax on the gain derived from the sale,
which gain may be offset by U.S. capital losses recognized within the same
taxable year of such sale.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the U.S. Internal Revenue Service may make its
reports available to tax authorities in the recipient's country of residence.

Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the Non-U.S. Holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payor.

The payment of the proceeds of the disposition of Common Stock to or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the beneficial owner certifies
under penalties of perjury that it is a non-U.S. Holder or otherwise establishes
an exemption. Generally, U.S. information reporting and backup withholding will
not apply to a payment of disposition proceeds if the payment is made outside
the United States through a non-United States office of a non-United States
broker. However, information reporting requirements (but not backup withholding)
will apply to a payment of disposition proceeds outside the United States
through an office outside the United States of a broker that is (a) a United
States person; (b) a United States controlled foreign corporation or (c) a
foreign person 50% or more of whose gross income for certain periods is from a
United States trade or business unless such broker has documentary evidence in
its files of the owner's foreign status and has no actual knowledge to the
contrary.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.

The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantial withholding and
information reporting requirements but unify current certification procedures
and forms and clarify and modify reliance standards. If finalized in their
current form, the proposed regulations would generally be effective for payments
made after December 31, 1997, subject to certain transition rules.

ESTATE TAX

An individual Non-U.S. Holder who owns Common Stock at the time of his
death or has made certain lifetime transfers of an interest in Common Stock will
be required to include the value of such Common Stock in his gross estate for
United States Federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise.

57
<PAGE> 86

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement"), the Selling Shareholder has agreed to sell
to each of the underwriters named below (the "International Managers severally
has agreed to purchase, the aggregate number of shares of Common Stock set forth
opposite its name below.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Merrill Lynch International...............................................
Salomon Brothers International Limited....................................
Bear, Stearns International Limited.......................................
Dean Witter International Ltd. ...........................................
Morgan Stanley & Co. International Limited................................
---------
Total......................................................... 2,600,000
=========
</TABLE>

The Selling Shareholder has also entered into a purchase agreement (the
"U.S. Purchase Agreement" and, together with the International Purchase
Agreement, the "Purchase Agreements") with Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc., Dean Witter
Reynolds Inc. and Morgan Stanley & Co. Incorporated acting as representatives
(the "U.S. Representatives"), and certain other underwriters within the United
States and Canada (collectively, the "U.S. Underwriters" and, together with the
International Managers, the "Underwriters"). Subject to the terms and conditions
set forth in the U.S. Purchase Agreement, the Selling Shareholder has agreed to
sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed
to purchase, an aggregate of 10,400,000 shares of Common Stock.

In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Common Stock being sold pursuant to such Purchase
Agreement if any of the shares of Common Stock being sold pursuant to such
Purchase Agreement. Under certain circumstances under the Purchase Agreements,
the commitments of non-defaulting Underwriters may be increased. Each Purchase
Agreement provides that the Selling Shareholder is not obligated to sell, and
the Underwriters named herein are not obligated to purchase, the shares of
Common Stock under the terms of such Purchase Agreement unless all of the shares
of Common Stock to be sold pursuant to such Purchase Agreement are
contemporaneously sold.

The International Managers have advised the Selling Shareholder that the
International Managers propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $
per share. The International Managers may allow, and such dealers may reallow, a
discount not in excess of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The public offering price per share of Common Stock and the underwriting
discount per share of Common Stock are identical for both Offerings.

The Selling Shareholder has granted to the International Managers and the
U.S. Underwriters options to purchase up to an aggregate of 390,000 and
1,560,000 shares of Common Stock, respectively, at the public offering price,
less the underwriting discount. Such options, which will expire 30 days after
the date of this Prospectus, may be exercised solely to cover over-allotments.
To the extent that the Underwriters exercise such options, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of the option shares that the number
of shares to be purchased initially by that Underwriter is of the 13,000,000
shares of Common Stock initially purchased by the Underwriters.

The Selling Shareholder has been informed that the Underwriters have
entered into an agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Underwriters are permitted to sell
shares of Common Stock to each other.

58
<PAGE> 87

securities convertible into or exchangeable or exercisable for Common Stock
(except for the shares offered hereby) for a period of 180 days after the date
of this Prospectus without the prior written consent of Merrill Lynch
International, subject to certain limited exceptions included in the Purchase
Agreements. Certain other executive officers of the Company have agreed to
similar restrictions for a period of 90 days after the date of this Prospectus.
See "Shares Eligible for Future Sale."

Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform investment banking and other advisory-related
services to the Company and its affiliates, including the Selling Shareholder,
in the ordinary course of business. In connection with rendering such services
in the past, such Underwriters have received customary compensation, including
reimbursement of related expenses.

LEGAL MATTERS

The validity of WellPoint Common Stock to be offered in the Offerings will
be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San
Francisco, California. Certain legal matters in connection with the Offerings
will be passed upon for the Selling Shareholder by Munger, Tolles & Olson, Los
Angeles, California and for the International Managers by Latham & Watkins, Los
Angeles, California. Latham & Watkins has from time to time represented the
independent directors of WellPoint in various matters, including their
consideration and approval of the Recapitalization.

EXPERTS

The audited financial statements of Blue Cross of California Commercial
Operations as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995, incorporated herein by reference, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their
report with respect thereto and are incorporated herein by reference, in
reliance upon the authority of such firm as experts in accounting and auditing.

59
<PAGE> 88

reference. Such combined financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

60
<PAGE> 89

- ------------------------------------------------------

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference... 2
Prospectus Summary.................... 3
Cautionary Disclosure Regarding
Forward-Looking Statements.......... 7
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 14
Dividend Policy....................... 14
Price Range of Common Stock........... 14
Capitalization........................ 15
Selected Consolidated Financial and
Operating Data...................... 16
Unaudited Pro Forma Combined Condensed
Financial Statements................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 48
Relationship with the Foundation...... 51
Selling Shareholder................... 52
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Certain United States Tax Consequences
to Non-United States Holders........ 56
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

- ------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------

13,000,000 SHARES

LOGO

COMMON STOCK

------------------------------

PROSPECTUS
------------------------------

MERRILL LYNCH INTERNATIONAL

SALOMON BROTHERS INTERNATIONAL
LIMITED

BEAR, STEARNS INTERNATIONAL
LIMITED

DEAN WITTER INTERNATIONAL LTD.

MORGAN STANLEY & CO.
INTERNATIONAL

, 1996

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 90

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses payable by the
Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the registration fee and the NASD fee.

<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Registration fee.......................................................... $146,103
NASD fee.................................................................. 30,500
Printing and engraving.................................................... 150,000
Legal fees and expenses................................................... 100,000
Accounting fees and expenses.............................................. 150,000
Blue sky fees and expenses................................................ 10,000
Transfer agent fees....................................................... 5,000
Miscellaneous............................................................. 108,397
---------
Total........................................................... $700,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company is a California corporation. Reference is made to Section 317
of the California Corporations Code, which specifies the circumstances under
which a California corporation may indemnify a director, officer, employee or
agent, but further provides that a corporation's Articles of Incorporation may
authorize additional rights to indemnification. Article V of the Company's
Articles of Incorporation provides for such additional indemnification. Section
204 of the California Corporations Code generally limits the corporation's
ability to provide for indemnification rights for intentional misconduct, a
knowing and culpable violation of law, acts or omissions that involve the
absence of good faith, an unexcused pattern of inattention or reckless disregard
for duty, transactions from which the director or other indemnitee derives an
improper personal benefit, or improper shareholder distributions.

Article VI of the By-laws of the Company provides that the Company shall
indemnify its directors and officers to the maximum extent permitted by the
California Corporations Code.

Under the terms of the U.S. and International Purchase Agreements filed as
exhibits hereto, directors, certain officers and controlling persons of the
Company are entitled to indemnification under certain circumstances including
proceedings under the Securities Act of 1933 and the Securities Exchange Act of
1934.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1 U.S. Purchase Agreement.
1.2* International Purchase Agreement.
4.1 Amended and Restated Articles of Incorporation of the Company (incorporated by
reference from Exhibit 3.1 to the Company's Current Report on Form 8-K filed on June
3, 1996).
4.2 By-laws of the Company (incorporated by reference from Exhibit 3.2 to the Company's
Current Report on Form 8-K filed on June 3, 1996).
</TABLE>

II-1
<PAGE> 91

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
4.3 Agreement of Merger dated as of May 20, 1996 by and among the Company, WellPoint
Health Network Inc., a Delaware corporation, Western Health Partnership and Western
Foundation for Health Improvement (incorporated by reference from Exhibit 3.3 to the
Company's Current Report on Form 8-K filed on June 3, 1996).
4.4+ Specimen of Common Stock Certificate.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.
9.1 Voting Agreement (incorporated by reference from Exhibit 99.3 to the Company's
Current Report on Form 8-K filed on June 3, 1996).
9.2 Voting Trust Agreement (incorporated by reference from Exhibit 99.2 to the Company's
Current Report on Form 8-K filed on June 3, 1996).
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Ernst & Young LLP.
23.3+ Consent of Brobeck, Phleger & Harrison LLP (included in its Opinion filed as Exhibit
5.1).
24.1+ Powers of Attorney (see signature page included in Registration Statement).
</TABLE>

- ---------------

* To be filed by amendment

+ Previously filed.

(b) Financial Statement Schedules.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;

provided, however, that the undertakings set forth in paragraphs (1)(i) and
(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the Company pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities

II-2
<PAGE> 92

offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15 or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 93

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, California, on the 30th day of October,
1996.

WELLPOINT HEALTH NETWORKS INC.

By: /s/ THOMAS C. GEISER

------------------------------------

Thomas C. Geiser

Executive Vice President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 30th day of October, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------
<C> <S> <C>
* Chairman of the Board and
--------------------------------- Chief Executive Officer
Leonard D. Schaeffer (Principal Executive
Officer)

* Executive Vice President,
--------------------------------- Finance and Information
Howard G. Phanstiel Services (Principal
Financial Officer)

* Senior Vice President and
--------------------------------- Chief Financial Officer
Yon Y. Jorden (Principal Accounting
Officer)

* Director
---------------------------------
David R. Banks

* Director
---------------------------------
W. Toliver Besson

* Director
---------------------------------
Roger E. Birk

* Director
---------------------------------
Stephen L. Davenport

* Director
---------------------------------
Julie A. Hill
</TABLE>

II-4
<PAGE> 94

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------
<C> <S> <C>
* Director
---------------------------------
Robert T. Knight
* Director
---------------------------------
Elizabeth A. Sanders

*By: /s/ THOMAS C. GEISER
------------------------------
Thomas C. Geiser, Attorney-in-Fact
</TABLE>

II-5
<PAGE> 95

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- -------------
<S> <C> <C>
1.1 U.S. Purchase Agreement....................................
1.2* International Purchase Agreement...........................
4.1 Amended and Restated Articles of Incorporation of the
Company (incorporated by reference from Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on June 3,
1996)......................................................
4.2 By-laws of the Company (incorporated by reference from
Exhibit 3.2 to the Company's Current Report on Form 8-K
filed on June 3, 1996).....................................
4.3 Agreement of Merger dated as of May 20, 1996 by and among
the Company, WellPoint Health Network Inc., a Delaware
corporation, Western Health Partnership and Western
Foundation for Health Improvement (incorporated by
reference from Exhibit 3.3 to the Company's Current Report
on Form 8-K filed on June 3, 1996).........................
4.4+ Specimen of Common Stock Certificate.......................
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.................
9.1 Voting Agreement (incorporated by reference from Exhibit
99.3 to the Company's Current Report on Form 8-K filed on
June 3, 1996)..............................................
9.2 Voting Trust Agreement (incorporated by reference from
Exhibit 99.2 to the Company's Current Report on Form 8-K
filed on June 3, 1996).....................................
23.1 Consent of Coopers & Lybrand L.L.P. .......................
23.2 Consent of Ernst & Young LLP...............................
23.3+ Consent of Brobeck, Phleger & Harrison LLP (included in its
Opinion filed as Exhibit 5.1)..............................
24.1+ Powers of Attorney (see signature page included in
Registration Statement)....................................
</TABLE>

- ---------------

* To be filed by amendment

+ Previously filed.

<PAGE> 1
Exhibit 1.1

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONFIDENTIAL
L&W DRAFT 10/29/96

WELLPOINT HEALTH NETWORKS INC.

(a California corporation)

10,400,000 Shares of Common Stock

U.S. PURCHASE AGREEMENT

Dated: ____________, 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE> 2

WELLPOINT HEALTH NETWORKS INC.

(a California corporation)

10,400,000 Shares of Common Stock

(Par Value $.01 Per Share)

U.S. PURCHASE AGREEMENT

___________, 1996

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO. INCORPORATED
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209

Ladies and Gentlemen:

WellPoint Health Networks Inc., a California corporation (the
"Company"), and the California HealthCare Foundation, a California non-profit
corporation (the "Selling Shareholder"), confirm their respective agreements
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A
hereto (collectively, the "U.S. Underwriters," which term shall also include
any underwriter substituted as hereinafter provided in Section 10 hereof), for
whom Merrill Lynch, Salomon Brothers Inc, Bear, Stearns & Co. Inc., Dean Witter
Reynolds Inc. and Morgan Stanley & Co. Incorporated are acting as
representatives (in such capacity, the "U.S. Representatives"), with respect to
(i) the sale by the Selling Shareholder, and the purchase by the U.S.
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in Schedule A hereto and (ii) the grant by the Selling
Shareholder to the U.S. Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part
<PAGE> 3

of 1,560,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 10,400,000 shares of Common Stock (the "Initial U.S.
Securities") to be purchased by the U.S. Underwriters and all or any part of
the 1,560,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities."

It is understood that the Company and the Selling Shareholder
are concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Selling
Shareholder of an aggregate of 2,600,000 shares of Common Stock (the "Initial
International Securities") through arrangements with certain underwriters
outside the United States and Canada (the "International Managers") for which
Merrill Lynch International, Salomon Brothers International Limited, Bear,
Stearns International Limited, Dean Witter International Ltd. and Morgan
Stanley & Co. International Limited are acting as lead managers (the "Lead
Managers") and the grant by the Selling Shareholder to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to 390,000
additional shares of Common Stock solely to cover overallotments, if any (the
"International Option Securities" and, together with the U.S. Option
Securities, the "Option Securities"). The Initial International Securities and
the International Option Securities are hereinafter called the "International
Securities." It is understood that the Selling Shareholder is not obligated to
sell and the U.S. Underwriters are not obligated to purchase, any Initial U.S.
Securities unless all of the Initial International Securities are
contemporaneously purchased by the International Managers.

The U.S. Underwriters and the International Managers are
hereinafter collectively called the "Underwriters," the Initial U.S.
Securities and the Initial International Securities are hereinafter
collectively called the "Initial Securities," and the U.S. Securities, and the
International Securities are hereinafter collectively called the "Securities."

The Underwriters will concurrently enter into an
Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement")
providing for the coordination of certain transactions among the Underwriters
under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated (in such capacity, the "Global Coordinator").

The Company and the Selling Shareholder understand that the
U.S. Underwriters propose to make a public offering of the U.S. Securities as
soon as the U.S. Representatives deem advisable after this Agreement has been
executed and delivered.

The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-3 (No.
333-___) covering the registration of the Securities under the Securities Act
of 1933, as amended (the "1933 Act"), including the related preliminary
prospectus or prospectuses. Promptly after execution and delivery of this
Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of

2
<PAGE> 4

the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in
accordance with the provisions of Rule 434 and Rule 424(b). Two forms of
prospectus are to be used in connection with the offering and sale of the
Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus")
and one relating to the International Securities (the "Form of International
Prospectus"). The Form of International Prospectus is identical to the Form of
U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting" and the inclusion in the Form of
International Prospectus of a section under the caption "Certain United States
Tax Considerations for Non-United States Holders." The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to
as "Rule 434 Information." Each Form of U.S. Prospectus and Form of
International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto, schedules thereto, if any, and the documents incorporated by reference
therein (including the exhibits to any such documents) pursuant to Item 12 of
Form S-3 under the 1933 Act, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
Form of U.S. Prospectus and the final Form of International Prospectus,
including the documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the 1933 Act, in the forms first furnished to the
Underwriters for use in connection with the offering of the Securities are
herein called the "U.S. Prospectus" and the "International Prospectus,"
respectively, and collectively, the "Prospectuses." If Rule 434 is relied on,
the terms "U.S. Prospectus" and "International Prospectus" shall refer to the
preliminary U.S. Prospectus dated _____, 1996 and preliminary International
Prospectus dated ____, 1996, respectively, each together with the applicable
Term Sheet and all references in this Agreement to the date of such
Prospectuses shall mean the date of the applicable Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").

All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement, any preliminary prospectus (including the Form of

3
<PAGE> 5

U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus
(including the Form of U.S. Prospectus and Form of International Prospectus) or
the Prospectuses, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectuses shall be deemed to mean and include the filing
of any document under the Securities Exchange Act of 1934 (the "1934 Act")
which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectuses, as the case may be.

SECTION 1. Representations and Warranties.

(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S.
Underwriter, as follows:

(i) Compliance with Registration Requirements. The Company
meets the requirements for use of Form S-3 under the 1933 Act. Each
of the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act and
no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Company, are contemplated by the
Commission, and any request on the part of the Commission for
additional information has been complied with.

At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), the
Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied and will comply in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations and did not and will not contain an untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading. Neither the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any such
amendment or supplement was issued and at the Closing Time (and, if
any U.S. Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or
omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. If Rule 434 is used, the
Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter through
the U.S. Representatives expressly for use in the Registration
Statement or the Prospectuses.

Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule

4
<PAGE> 6

424 under the 1933 Act, complied when so filed in all material
respects with the 1933 Act Regulations and each preliminary prospectus
and the Prospectuses delivered to the Underwriters for use in
connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.

(ii) Incorporated Documents. The documents incorporated or
deemed to be incorporated by reference in the Registration Statement
and the Prospectuses, at the time they were or hereafter are filed
with the Commission, complied and will comply in all material respects
with the requirements of the 1934 Act and the rules and regulations of
the Commission thereunder (the "1934 Act Regulations") and, when read
together with the other information in the Prospectuses, at the time
the Registration Statement became effective, at the time the
Prospectuses were issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), did not and
will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading.

(iii) Independent Accountants. The accountants who certified
the financial statements and supporting schedules included in the
Registration Statement are independent public accountants as required
by the 1933 Act and the 1933 Act Regulations.

(iv) Financial Statements. The financial statements included
in the Registration Statement and the Prospectuses, together with the
related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated
and the statement of operations, stockholders' equity and cash flows
of the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules, if any, included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated
therein. The selected financial data and the summary financial
information included in the Prospectuses present fairly the
information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the
related notes thereto included in the Registration Statement and the
Prospectuses present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly
compiled on the bases described therein, and the assumptions used in
the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions and
circumstances referred to therein.

(v) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein,
(A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as
one enterprise, whether or not arising in the

5
<PAGE> 7

ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.

(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the state of California and has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and
perform its obligations under this Agreement; and the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to
be in good standing would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries. Each subsidiary of the
Company listed on Schedule D hereto has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each such subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
owned by the Company, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity; none of the outstanding shares of capital stock of any such
subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such subsidiary. Other than the subsidiaries
listed on Schedule D hereto, the Company has no subsidiaries which
either (i) are "Significant Subsidiaries," as such term is defined
under Regulation S- X under the 1933 Act, or (ii) are material to the
Company's financial condition or results of operations.

(viii) Capitalization. The authorized, issued and
outstanding capital stock of the Company is as set forth in the
Prospectuses under the caption "Capitalization" (except for subsequent
issuances, if any, under the Company's 1994 Stock Option/Award Plan,
Employee Stock Option Plan or Employee Stock Purchase Plan). The
shares of issued and outstanding capital stock, including the
Securities to be purchased by the Underwriters from the Selling
Shareholder, have been duly authorized and validly issued and are
fully paid and non-assessable; none of the outstanding shares of
capital stock, including the Securities to be purchased by the
Underwriters from the Selling Shareholder, was issued in violation of
the preemptive or other similar rights of any securityholder of the
Company.

6
<PAGE> 8

(ix) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company.

(x) Absence of Manipulation. None of the Company or its
subsidiaries or any of their respective officers and directors has
taken, or will take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.

(xi) Authorization and Description of Securities. The Common
Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder.

(xii) Absence of Defaults and Conflicts Neither the Company
nor any of its subsidiaries is in violation of its charter or by-laws
or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any
subsidiary is subject (collectively, "Agreements and Instruments")
except for such defaults that would not result in a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
and the International Purchase Agreement and the consummation of the
transactions contemplated in this Agreement, the International
Purchase Agreement and the Registration Statement and compliance by
the Company with its obligations under this Agreement and the
International Purchase Agreement have been duly authorized by all
necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to, the Agreements and Instruments (except for
such conflicts, breaches, defaults or Repayment Events or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary
or any applicable law, statute, rule, regulation, judgment, order,
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness
(or any person acting on such holder's behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.

(xiii) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees

7
<PAGE> 9

of any of its or any subsidiary's principal suppliers, manufacturers,
customers or contractors, which, in either case, may reasonably be
expected to result in a Material Adverse Effect.

(xiv) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
might reasonably be expected to result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely
affect the consummation of the transactions contemplated in this
Agreement and the International Purchase Agreement or the performance
by the Company of its obligations hereunder or thereunder; the
aggregate of all pending legal or governmental proceedings to which
the Company or any subsidiary is a party or of which any of their
respective property or assets is the subject which are not described
in the Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Effect.

(xv) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement, the Prospectuses or the documents incorporated by reference
therein or to be filed as exhibits thereto which have not been so
described and filed as required.

(xvi) Possession of Intellectual Property. The Company and
its subsidiaries own, possess, or can acquire on reasonable terms,
adequate rights to use all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade
names or other intellectual property (collectively, "Intellectual
Property") necessary for the conduct of the business now operated or
to be operated by the Company and its subsidiaries, as described in
the Prospectuses, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of
or conflict with asserted rights of others with respect to any
Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.

(xvii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations under this Agreement and the International Purchase
Agreement, in connection with the offering or sale of the Securities
by the Selling Shareholder under this Agreement and the International
Purchase Agreement, or the consummation of the transactions
contemplated by this Agreement and the International Purchase
Agreement, except such as

8
<PAGE> 10

have been already obtained or as may be required under the 1933 Act or
the 1933 Act Regulations or state securities laws.

(xviii) Knox-Keene License. Each of the Company,
CaliforniaCare Health Plans, WellPoint Pharmacy Plan and WellPoint
Dental Plan has been licensed in the State of California as a health
care service plan under the Knox-Keene Health Care Service Plan Act of
1975, as amended (the "Knox-Keene Act"), and such licenses have not
been modified since the issuance thereof (other than immaterial
modifications filed in the ordinary course of business). None of the
Company's other subsidiaries are required to be licensed under the
Knox-Keene Act.

(xix) BCBSA License. The Company is in full compliance with
the requirements of the Blue Cross License Agreement, dated as of May
20, 1996, between the Company and the Blue Cross and Blue Shield
Association (the "BCBSA") [and the California Blue Cross License
Addendum, dated as of May 17, 1996, between the Company and the
BCBSA,] except [in each case] where such noncompliance would not have
a Material Adverse Effect. [Each of the Company's subsidiaries that is
required by the BCBSA to be a party to a Blue Cross Affiliate License
Agreement [or Controlled Affiliate License Agreement] is in full
compliance with the requirements of such agreement, except in each
case where such noncompliance would not have a Material Adverse
Effect.]

(xx) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations, including, without limitation, under the
Knox-Keene Act (collectively, "Governmental Licenses"), issued by the
appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them; the
Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure
so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full
force and effect would not have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.

(xxi) Title to Property. The Company and its subsidiaries
have good and marketable title to all real property owned by the
Company and its subsidiaries and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, have a Materially Adverse Effect and
do not interfere in any material respect with the use made and
proposed to be made of such property by the Company or any of its
subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one
enterprise, and under which the Company or any of its subsidiaries

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<PAGE> 11

holds properties described in the Prospectuses, are in full force and
effect, and neither the Company nor any subsidiary has any notice of
any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.

(xxii) Maintenance of Insurance. The Company and each of its
subsidiaries maintain insurance policies or reserves with respect to
such insurable properties, potential liabilities and occurrences that
merit or require catastrophic insurance in amounts deemed adequate in
the reasonable opinion of the Company's management; all such insurance
policies are in full force and effect; and, at the time that each of
the physicians and physicians groups with which the Company or any of
its subsidiaries has contracted entered into such agreement, such
physician or physician group represented that they had professional
liability and medical malpractice insurance in minimum amounts which
the Company believes to be adequate for such physicians and physician
groups generally.

(xxiii) Compliance with Tax Laws. All material income,
payroll and sales tax returns required to be filed by the Company or
any of its subsidiaries, in any jurisdiction, have been so filed, and
all material taxes, including related withholding taxes, penalties and
interest, assessments and other charges due or claimed to be due from
such entities have been paid, other than those being contested in good
faith and for which adequate reserves have been provided or those
currently payable without penalty or interest.

(xxiv) Compliance with Cuba Act. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder (collectively, the "Cuba Act") or is
exempt therefrom.

(xxv) Investment Company Act. The Company is not an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act").

(xxvi) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the
Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws
and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling
of Hazardous Materials (collectively,

10
<PAGE> 12

"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any
of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.

(b) Representations and Warranties by the Selling Shareholder. The
Selling Shareholder represents and warrants to each U.S. Underwriter as of the
date hereof, as of the Closing Time and, if the Selling Shareholder is selling
U.S. Option Securities on a Date of Delivery, as of each such Date of Delivery,
and agrees with each U.S. Underwriter, as follows:

(i) Accurate Disclosure. To the extent that any statements
or omissions made in the Registration Statement or Prospectuses, or
any amendment or supplement thereto, are made in reliance on, and in
conformity with, written information furnished to the Company by or on
behalf of the Selling Shareholder specifically for use in the
preparation thereof, each such part of the Registration Statement,
when it became effective, did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statement therein not misleading, and
each such part of either of the Prospectuses, or of any amendments or
supplements thereto, at the time it was issued and as of the Closing
Time, did not include nor will it include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; the Selling
Shareholder is not prompted to sell the Securities to be sold by the
Selling Shareholder hereunder by any material nonpublic information
concerning the Company or any subsidiary of the Company which is not
set forth in the Prospectuses. The Company and the Underwriters
acknowledge that the statements relating to such Selling Shareholder
under the heading "Selling Shareholder" and "Relationship with the
Foundation" (but in such latter case, only insofar as it purports to
describe agreements to which the Foundation is a party) in any
Prospectus constitutes the only information furnished in writing by or
on behalf of such Selling Shareholder for inclusion in the
Registration Statement or any Prospectus.

(ii) Authorization of Agreements. The Selling Shareholder
has the full right, power and authority to enter into this Agreement,
the International Purchase Agreement and to sell, transfer and deliver
the Securities to be sold by the Selling Shareholder hereunder. The
execution and delivery of this Agreement, the International Purchase
Agreement and the sale and delivery of the Securities to be sold by
the Selling Shareholder and the consummation of the transactions
contemplated in this Agreement and the International Purchase
Agreement and compliance by the Selling Shareholder with its
obligations

11
<PAGE> 13

hereunder have been duly authorized by the Selling Shareholder and do
not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax,
lien, charge or encumbrance upon the Securities to be sold by the
Selling Shareholder or any property or assets of the Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which the Selling Shareholder is a party or
by which the Selling Shareholder may be bound, or to which any of the
property or assets of the Selling Shareholder is subject, nor will
such action result in any violation of the provisions of the charter
or by-laws or other organizational instrument of the Selling
Shareholder, if applicable, or any applicable treaty, law, statute,
rule, regulation, judgment, order, writ or decree of any government,
government instrumentality or court, domestic or foreign, having
jurisdiction over the Selling Shareholder or any of its properties.

(iii) Good and Marketable Title. The Selling Shareholder has
and will at the Closing Time and, if any Option Securities are
purchased, on the Date of Delivery have good and marketable title to
the Securities to be sold by the Selling Shareholder hereunder, free
and clear of any security interest, mortgage, pledge, lien, charge,
claim, equity or encumbrance of any kind, other than pursuant to this
Agreement, the International Purchase Agreement and the Voting
Agreement and the Voting Trust Agreement, each as defined in the
Registration Statement; and upon delivery of such Securities and
payment of the purchase price therefor as herein contemplated,
assuming each such Underwriter has no notice of any adverse claim,
each of the Underwriters will receive good and marketable title to the
Securities purchased by it from the Selling Shareholder, free and
clear of any security interest, mortgage, pledge, lien, charge, claim,
equity or encumbrance of any kind.

(iv) Absence of Manipulation. The Selling Shareholder has
not taken, and will not take, directly or indirectly, any action which
is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.

(v) Absence of Further Requirements. No filing with, or
consent, approval, authorization, order, registration, qualification
or decree of, any court or governmental authority or agency, domestic
or foreign, is necessary or required for the performance by the
Selling Shareholder of its obligations under this Agreement or the
International Purchase Agreement, or in connection with the sale and
delivery of the Securities under this Agreement or the International
Purchase Agreement or the consummation of the transactions
contemplated by this Agreement and the International Purchase
Agreement, except such as may have previously been made or obtained or
as may be required under the 1933 Act or the 1933 Act Regulations or
state securities laws.

(vi) Restriction on Sale of Securities. During a period of
180 days from the date of the Prospectuses, the Selling Shareholder
will not, without the prior written consent of Merrill Lynch, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or

12
<PAGE> 14

otherwise transfer or dispose of, directly or indirectly, any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under
the 1933 Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, whether any such swap or transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise, provided,
that Merrill Lynch shall give the Selling Shareholder at least two
business days' notice of any waiver of the restriction on sales by the
Company contained in Section 3(h) hereof and the Selling Shareholder
shall be deemed to have been granted a waiver of this subsection
3(b)(vi) on the same terms as any such waiver granted to the Company.
The foregoing sentence shall not apply to the Securities to be sold
hereunder, or to any deposit or withdrawal of Common Stock in or from
the trust established pursuant to the Voting Trust Agreement.

(vii) No Association with NASD. Neither the Selling
Shareholder nor any of its affiliates directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under
common control with, or has any other association with (within the
meaning of Article I, Section 1(m) of the By-laws of the National
Association of Securities Dealers, Inc.), any member firm of the
National Association of Securities Dealers, Inc.

(c) Officer's Certificates. Any certificate signed by any officer
of the Company or any of its subsidiaries delivered to the Global Coordinator,
the U.S. Representatives or to counsel for the U.S. Underwriters shall be
deemed a representation and warranty by the Company to each U.S. Underwriter as
to the matters covered thereby; and any certificate signed by or on behalf of
the Selling Shareholder as such and delivered to the Global Coordinator, the
U.S. Representatives or to counsel for the U.S. Underwriters pursuant to the
terms of this Agreement shall be deemed a representation and warranty by the
Selling Shareholder as to the matters covered thereby.

SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.

(a) Initial U.S. Securities. On the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Selling Shareholder agrees to sell to each U.S. Underwriter,
severally and not jointly, and each U.S. Underwriter, severally and not
jointly, agrees to purchase from the Selling Shareholder, at the price per
share set forth in Schedule B, the number of Initial U.S. Securities set forth
in Schedule A, plus any additional number of Initial U.S. Securities which such
U.S. Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof, subject, in each case, to such adjustments among such U.S.
Underwriters as the U.S. Representatives in their sole discretion shall make to
eliminate any sales or purchases of fractional securities.

(b) U.S. Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Selling Shareholder hereby grants an option to
the U.S. Underwriters, severally and not jointly, to purchase up to an
additional 1,560,000 shares of Common Stock at the price per share set forth in
Schedule

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<PAGE> 15

B, less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial U.S. Securities but not payable on the
U.S. Option Securities. The option hereby granted will expire 30 days after
the date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial U.S. Securities upon notice
by the Global Coordinator to the Selling Shareholder setting forth the number
of U.S. Option Securities as to which the several U.S. Underwriters are then
exercising the option and the time and date of payment and delivery for such
U.S. Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Global Coordinator, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the U.S. Option Securities, each of the
U.S. Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of U.S. Option Securities then being purchased
which the number of Initial U.S. Securities set forth in Schedule A opposite
the name of such U.S. Underwriter bears to the total number of Initial U.S.
Securities, subject in each case to such adjustments as the U.S.
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares.

(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Latham
& Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA 90071, or at such
other place as shall be agreed upon by the U.S. Representatives and the Company
and the Selling Shareholder, at 7:00 A.M. (California time) on the third
business day (or the fourth business day, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given business day) after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
U.S. Representatives and the Selling Shareholder (such time and date of payment
and delivery being herein called "Closing Time").

In addition, in the event that any or all of the U.S. Option
Securities are purchased by the U.S. Underwriters, payment of the purchase
price for, and delivery of certificates for, such U.S. Option Securities shall
be made at the above-mentioned offices, or at such other place as shall be
agreed upon by the U.S. Representatives and the Company and the Selling
Shareholder, on each Date of Delivery as specified in the notice from the U.S.
Representatives to the Company and the Selling Shareholder.

Payment shall be made to the Selling Shareholder by wire
transfer of immediately available funds to a bank account designated by the
Selling Shareholder not later than two business days preceding the Closing Time
against delivery to the U.S. Representatives for the respective accounts of the
U.S. Underwriters of certificates for the Securities to be purchased by them.
It is understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the U.S. Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial U.S.
Securities or the U.S.

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<PAGE> 16

Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.

(d) Denominations; Registration. Certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates for the
Initial U.S. Securities and the U.S. Option Securities, if any, will be made
available for examination and packaging by the U.S. Representatives in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company. The Company covenants with
each U.S. Underwriter as follows:

(a) Compliance with Securities Regulations and Commission Request.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the U.S. Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectuses or for additional information,
and (iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of any prospectus transmitted for filing under Rule 424(b) was received
for filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable effort
to prevent the issuance of any stop order and, if any stop order is issued, to
obtain the lifting thereof at the earliest possible moment.

(b) Filing of Amendments. The Company will give the U.S.
Representatives notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectuses included in
the Registration Statement at the time it became effective or to the
Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will
furnish the U.S. Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the U.S. Representatives or
counsel for the U.S. Underwriters shall object.

(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits

15
<PAGE> 17

filed therewith or incorporated by reference therein and documents incorporated
or deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each
of the U.S. Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.

(d) Delivery of Prospectuses. The Company has delivered to each
U.S. Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The Company
will furnish to each U.S. Underwriter, without charge, during the period when
the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934
Act, such number of copies of the U.S. Prospectus (as amended or supplemented)
as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any
amendments or supplements thereto furnished to the U.S. Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the
1934 Act Regulations so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the International Purchase
Agreement and the Prospectuses. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is
necessary, in the reasonable opinion of counsel for the U.S. Underwriters or
for the Company, to amend the Registration Statement or amend or supplement the
Prospectuses in order that the Prospectuses will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the reasonable opinion of such counsel, at any such time
to amend the Registration Statement or amend or supplement the Prospectuses in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b) of the 1933 Act, such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the Company
will furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.

(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Representatives may designate
and to maintain such qualifications in effect for a period of not less than one
year from the later of the effective date of the Registration Statement and any
Rule 462(b) Registration Statement; provided, however, that the Company shall
not be obligated to file any general consent

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<PAGE> 18

to service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to subject
itself to taxation in respect of doing business in any jurisdiction in which it
is not otherwise so subject. In each jurisdiction in which the Securities have
been so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.

(g) Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.

(h) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without the prior
written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold under this Agreement
and the International Purchase Agreement, (B) any shares of Common Stock issued
by the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectuses,
(C) any shares of Common Stock issued or options to purchase Common Stock
granted pursuant to the Company's 1994 Stock Option/Award Plan, Employee Stock
Option Plan, Employee Stock Purchase Plan or any other existing employee
benefit plans of the Company referred to in the Prospectuses (as well as the
filing of any registration statement on Form S-8 (or similar form) for the
purpose of registering under the 1933 Act shares of Common Stock issued in
connection with any such plan) or (D) any shares of Common Stock issued
pursuant to any dividend reinvestment plan.

(i) Reporting Requirements. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.

SECTION 4. Payment of Expenses.

(a) Expenses. The Company will pay or cause to be paid all expenses
incident to the performance of its or the Selling Shareholder's obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and

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<PAGE> 19

delivery to the Underwriters of this Agreement, the International Purchase
Agreement, any Agreement among Underwriters, the Intersyndicate Agreement and
such other documents as may be required in connection with the offering,
purchase, sale, issuance or delivery of the Securities, (iii) the preparation,
issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or
other duties payable upon the sale or delivery of the Securities to the
Underwriters and the transfer of the Securities between the U.S. Underwriters
and the International Managers, (iv) the fees and disbursements of the
Company's counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Preliminary Blue Sky Survey, the Final Blue Sky Survey and
any supplements thereto, (vi) the printing and delivery to the Underwriters of
copies of each preliminary prospectus, any Term Sheets and of the Prospectuses
and any amendments or supplements thereto, (vii) the preparation, printing and
delivery to the Underwriters of copies of the Preliminary Blue Sky Survey, the
Final Blue Sky Survey and any supplements thereto, (viii) the fees and expenses
of any transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities and (x) the fees and expenses incurred in connection with the
listing of the Securities on the New York Stock Exchange. The Selling
Shareholder will pay or cause to be paid the fees and expenses of its counsel,
agents and advisors for which it is responsible under the terms of the
Registration Rights Agreement between the Selling Shareholder and the Company.

(b) Termination of Agreement. If this Agreement is terminated by
the U.S. Representatives in accordance with the provisions of Section 5 or
Section 9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for
all of their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the U.S. Underwriters. If this Agreement is
terminated by the U.S. Representatives in accordance with the provisions of
Section 11 hereof, the Selling Shareholder shall reimburse the U.S.
Underwriters for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the U.S. Underwriters.

(c) Allocation of Expenses. The provisions of this Section shall
not affect any agreement that the Company and the Selling Shareholder may make
for the sharing of such costs and expenses.

SECTION 5. Conditions of U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholder contained in Section 1 hereof or in certificates of any officer of
the Company or any subsidiary of the Company or on behalf of the Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:

(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933

18
<PAGE> 20

Act or proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Company
has elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 424(b).

(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Brobeck, Phleger & Harrison LLP, counsel for the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.

(c) Opinion of General Counsel for the Company. At Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Thomas C. Geiser, Esq., general counsel for the Company, in
form and substance satisfactory to counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.

(d) Opinion of Counsel for the Selling Shareholder. At Closing
Time, the U.S. Representatives shall have received the favorable opinion, dated
as of Closing Time, of Munger, Tolles & Olson, counsel for the Selling
Shareholder, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for each
of the other U.S. Underwriters to the effect set forth in Exhibit C hereto and
to such further effect as counsel to the U.S. Underwriters may reasonably
request.

(e) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of Latham & Watkins, counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters with respect to the matters set forth in clauses (i) (solely with
respect to the Company), (ii) (solely with respect to the Company), (v)
through (vii), inclusive, (ix) (solely as to the information in the Prospectus
under "Description of Capital Stock--Common Stock") and the penultimate
paragraph of Exhibit A hereto. In giving such opinion such counsel may rely,
as to all matters governed by the laws of jurisdictions other than the laws of
the States of New York and California and the federal securities laws of the
United States, upon the opinions of counsel satisfactory to the U.S.
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper,
upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.

(f) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs

19
<PAGE> 21

or business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
U.S. Representatives shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company
has complied in all material respects with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to such persons' knowledge, are contemplated by
the Commission.

(g) Certificate of Selling Shareholder. At Closing Time, the U.S.
Representatives shall have received a certificate of an officer of the Selling
Shareholder, dated as of Closing Time, to the effect that (i) the
representations and warranties of the Selling Shareholder contained in Section
1(b) hereof are true and correct in all respects with the same force and effect
as though expressly made at and as of Closing Time and (ii) the Selling
Shareholder has complied in all material respects with all agreements and all
conditions on its part to be performed under this Agreement at or prior to
Closing Time.

(h) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the U.S. Representatives shall have received from Coopers &
Lybrand L.L.P. a letter dated such date, in form and substance satisfactory to
the U.S. Representatives, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort letters"
to underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectuses.

(i) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the U.S. Representatives shall have received from Ernst & Young
L.L.P. a letter dated such date, in form and substance satisfactory to the U.S.
Representatives, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters containing statements and information of
the type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the interim unaudited financial information contained in the
Registration Statement and the Prospectuses relating to the group benefits
operations of John Hancock Mutual Life Insurance Company.

(j) Bring-down Comfort Letter. At Closing Time, the U.S.
Representatives shall have received from Coopers & Lybrand L.L.P. a letter,
dated as of Closing Time, to the effect that they reaffirm the statements made
in the letter furnished pursuant to subsection (h) of this Section, except that
the specified date referred to shall be a date not more than three business
days prior to Closing Time.

(k) Bring-down Comfort Letter. At Closing Time, the U.S.
Representatives shall have received from Ernst & Young L.L.P. a letter, dated
as of Closing Time, to the effect that they

20
<PAGE> 22

reaffirm the statements made in the letter furnished pursuant to subsection (i)
of this Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.

(l) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit D-1 hereto signed by the Company's Chief Executive Officer, and in the
form of Exhibit D-2 hereto from each of the persons listed on Schedule E
hereto.

(m) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company and the Selling Shareholder
contained herein and the statements in any certificates furnished by the
Company, any subsidiary of the Company and the Selling Shareholder hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the U.S. Representatives shall have received:

(i) Officers' Certificate. A certificate, dated
such Date of Delivery, of the President or a Vice President of
the Company and of the chief financial or chief accounting
officer of the Company confirming that the certificate
delivered at the Closing Time pursuant to Section 5(f) hereof
remains true and correct as of such Date of Delivery.

(ii) Certificate of Selling Shareholder. A
certificate, dated such Date of Delivery, of an officer of the
Selling Shareholder confirming that the certificate delivered
at Closing Time pursuant to Section 5(g) remains true and
correct as of such Date of Delivery.

(iii) Opinion of Counsel for Company. The
favorable opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Company, in form and substance satisfactory to counsel
for the U.S. Underwriters, dated such Date of Delivery,
relating to the U.S. Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(b) hereof.

(iv) Opinion of General Counsel for Company. The
favorable opinion of Thomas C. Geiser, Esq., general counsel
for the Company, in form and substance satisfactory to counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(c) hereof.

(v) Opinion of Counsel for the Selling
Shareholder. The favorable opinion of Munger, Tolles and
Olson, counsel for the Selling Shareholder, in form and
substance satisfactory to counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option
Securities to be purchased on such Date of

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<PAGE> 23

Delivery and otherwise to the same effect as the opinion
required by Section 5(d) hereof.

(vi) Opinion of Counsel for U.S. Underwriters.
The favorable opinion of Latham & Watkins, counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(e) hereof.

(vii) Bring-down Comfort Letter. A letter from
Coopers & Lybrand L.L.P., in form and substance satisfactory
to the U.S. Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter
furnished to the U.S. Representatives pursuant to Section 5(h)
hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.

(viii) Bring-down Comfort Letter. A letter from
Ernst & Young L.L.P., in form and substance satisfactory to
the U.S. Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter
furnished to the U.S. Representatives pursuant to Section 5(i)
hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.

(n) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the U.S. Underwriters shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company and the Selling
Shareholder in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the U.S.
Representatives and counsel for the U.S. Underwriters.

(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant U.S.
Option Securities, may be terminated by the U.S. Representatives by notice to
the Company at any time at or prior to Closing Time or such Date of Delivery,
as the case may be, and such termination shall be without liability of any
party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.

SECTION 6. Indemnification.

(a) Indemnification of Underwriters. The Company and the Selling
Shareholder, jointly and severally, agree to indemnify and hold harmless each
U.S. Underwriter and each person,

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<PAGE> 24

if any, who controls any U.S. Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company and the
Selling Shareholder; and

(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission to the extent that any such
expense is not paid under (i) or (ii) above;

provided, however, that (A) this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any U.S. Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto) and (B)
the foregoing indemnity agreement with respect to any untrue statement
contained in or omission from a preliminary prospectus shall not inure to the
benefit of the U.S. Underwriter from whom the person asserting any such losses,
liabilities, claims, damages or expenses purchased U.S. Securities, or any
person controlling such U.S. Underwriter, if (i) the Company and the Selling
Shareholder shall sustain the burden of proving that a copy of the U.S.
Prospectus (as then amended or supplemented, if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of the U.S. Underwriters to such person at or prior to the written
confirmation of the sale of such U.S. Securities to such person, (ii) the
Company shall have delivered the U.S. Prospectus (as then supplemented or
amended) to the U.S. Underwriters on a timely basis and in the

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<PAGE> 25

requisite quantity to permit the U.S. Underwriters to send or deliver such U.S.
Prospectus to such person at or prior to such written confirmation of the sale
of such U.S. Securities and (iii) the untrue statement contained in or omission
from such preliminary prospectus was corrected in the U.S. Prospectus (or the
U.S. Prospectus as amended or supplemented).

In making a claim for indemnification under this Section 6 or
contribution under Section 7 hereof by the Company or the Selling Shareholder,
the indemnified parties may proceed against either (i) both the Company and the
Selling Shareholder jointly or (ii) the Company only, but may not proceed
solely against the Selling Shareholder. In the event that the indemnified
parties are entitled to seek indemnity or contribution hereunder against any
loss, liability, claim, damage and expense incurred with respect to a final
judgment from a trial court then, as a precondition to any indemnified party
obtaining indemnification or contribution from the Selling Shareholder, the
indemnified parties shall first obtain a final judgment from a trial court that
such indemnified parties are entitled to indemnify or contribution under this
Agreement with respect to such loss, liability, claim, damage or expense (the
"Final Judgment") from the Company and the Selling Shareholder and shall seek
to satisfy such Final Judgment in full from the Company by making a written
demand upon the Company for such satisfaction. Only in the event such Final
Judgment shall remain unsatisfied in whole or in part 30 days following the
date of receipt by the Company of such demand shall any party entitled to
indemnification hereunder have the right to take action to satisfy such Final
Judgment by making demand directly on the Selling Shareholder (but only if and
to the extent the Company has not already satisfied such Final Judgment,
whether by settlement, release or otherwise). The indemnified parties shall,
however, be relieved of their obligation to first obtain a Final Judgment, to
seek to obtain payment from the Company with respect to such Final Judgment or,
having sought such payment, to wait such 30 days after failure by the Company
to immediately satisfy any such Final Judgment if (i) the Company files a
petition for relief under the United States Bankruptcy Code (the "Bankruptcy
Code"), (ii) an order for relief is entered against the Company in an
involuntary case under the Bankruptcy Code, (iii) the Company makes an
assignment for the benefit of its creditors, or (iv) any court

24
<PAGE> 26

orders or approves the appointment of a receiver or custodian for the Company
or a substantial portion of its assets. The foregoing provisions of this
paragraph are not intended to require any indemnified party to obtain a Final
Judgment against the Company or the Selling Shareholder before obtaining
reimbursement of expenses pursuant to clause (a)(iii) of this Section 6.
However, the indemnified parties shall first seek to obtain such reimbursement
in full from the Company by making a written demand upon the Company for such
reimbursement. Only in the event such expenses shall remain unreimbursed in
whole or in part 30 days following the date of receipt by the Company of such
demand shall any indemnified party have the right to receive reimbursement of
such expenses from the Selling Shareholder by making written demand directly on
the Selling Shareholder (but only if and to the extent the Company has not
already satisfied the demand for reimbursement, whether by settlement, release
or otherwise). The indemnified parties shall, however, be relieved of their
obligation to first seek to obtain such reimbursement in full from the Company
or, having made written demand therefor, to wait such 30 days after failure by
the Company to immediately reimburse such expenses if (i) the Company files a
petition for relief under the Bankruptcy Code, (ii) an order for relief is
entered against the Company in an involuntary case under the Bankruptcy Code,
(iii) the Company makes an assignment for the benefit of its creditors, or (iv)
any court orders or approves the appointment of a receiver or custodian for the
Company or a substantial portion of its assets.

(b) Indemnification of Company, Directors and Officers and Selling
Shareholder. Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
and the Selling Shareholder and each person, if any, who controls the Selling
Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the U.S.
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or the U.S.
Prospectus (or any amendment or supplement thereto).

(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. An indemnifying party may participate at its own
expense in the defense of any such action; provided, however, that counsel to
the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.

(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is

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<PAGE> 27

entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.

(e) Other Agreements with Respect to Indemnification. The
provisions of this Section shall not affect any agreement among the Company and
the Selling Shareholder with respect to indemnification.

SECTION 7. Contribution. Subject to the last paragraph of
Section 6(a) hereof, if the indemnification provided for in Section 6 hereof is
for any reason unavailable to or insufficient to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholder on the one hand and the U.S. Underwriters on the other hand
from the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Shareholder on the one hand and of the U.S. Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.

The relative benefits received by the Company and the Selling
Shareholder on the one hand and the U.S. Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before
deducting expenses) received by the Company and the Selling Shareholder and the
total underwriting discount received by the U.S. Underwriters, in each case as
set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet bear to the aggregate initial public
offering price of the U.S. Securities as set forth on such cover.

The relative fault of the Company and the Selling Shareholder
on the one hand and the U.S. Underwriters on the other hand shall be determined
by reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Shareholder or by the U.S. Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.

The Company, the Selling Shareholder and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the U.S. Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities,
claims, damages and

26
<PAGE> 28

expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no U.S.
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the U.S. Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such U.S. Underwriter has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.

No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who
controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
U.S. Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement, and each person, if any, who controls
the Company or the Selling Shareholder within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company or the Selling Shareholder, as the case may be.
The U.S. Underwriters' respective obligations to contribute pursuant to this
Section 7 are several in proportion to the number of Initial U.S. Securities
set forth opposite their respective names in Schedule A hereto and not joint.

The provisions of this Section shall not affect any agreement
among the Company and the Selling Shareholder with respect to contribution.

SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholder submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any U.S. Underwriter or controlling person, or by or on behalf
of the Company or the Selling Shareholder, and shall survive delivery of the
U.S. Securities to the U.S. Underwriters.

SECTION 9. Termination of Agreement.

(a) Termination; General. The U.S. Representatives may terminate
this Agreement, by notice to the Company and the Selling Shareholder, at any
time at or prior to Closing Time (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of

27
<PAGE> 29

business, or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis
or any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the U.S.
Representatives, impracticable to market the U.S. Securities or to enforce
contracts for the sale of the U.S. Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.

(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.

SECTION 10. Default by One or More of the Underwriters. If one or
more of the U.S. Underwriters fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting U.S. Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:

(a) if the number of Defaulted Securities does not exceed 10% of
the number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting U.S. Underwriters, or

(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell the
U.S. Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting U.S. Underwriter.

No action taken pursuant to this Section shall relieve any
defaulting U.S. Underwriter from liability in respect of its default.

In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not

28
<PAGE> 30

result in a termination of the obligation of the U.S. Underwriters to purchase
and the Company to sell the relevant U.S. Option Securities, as the case may
be, either (i) the U.S. Representatives or (ii) the Company and the Selling
Shareholder shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectuses or
in any other documents or arrangements. As used herein, the term "U.S.
Underwriter" includes any person substituted for a U.S. Underwriter under this
Section 10.

SECTION 11. Default by the Selling Shareholder. If the Selling
Shareholder shall fail at Closing Time or at a Date of Delivery to sell and
deliver the number of U.S. Securities which the Selling Shareholder is
obligated to sell hereunder, then the U.S. Underwriters may, at option of the
U.S. Representatives, by notice from the U.S. Representatives to the Company
and the non-defaulting Selling Shareholder, either (a) terminate this Agreement
without any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect
or (b) elect to purchase the U.S. Securities which the non-defaulting Selling
Shareholder has agreed to sell hereunder. No action taken pursuant to this
Section 11 shall relieve the Selling Shareholder so defaulting from liability,
if any, in respect of such default.

In the event of a default by the Selling Shareholder as
referred to in this Section 11, each of the U.S. Representatives and the
Company shall have the right to postpone Closing Time or Date of Delivery for a
period not exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or arrangements.

SECTION 12. Notices All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to the Representatives at 101 California
Street, Suite 1420, San Francisco, California 94111 / 10900, Wilshire
Boulevard, Suite 900, Los Angeles, California 90024, attention of ____________
(with a copy, which shall not constitute notice, to Latham & Watkins, 633 W.
Fifth Street, Los Angeles, CA 90071-2007, attention of Gary Olson, Esq.);
notices to the Company shall be directed to it at 21555 Oxnard Street, Woodland
Hills, California 91367, attention of Thomas C. Geiser, Esq., General Counsel
(with a copy, which shall not constitute notice, to Brobeck, Phleger & Harrison
LLP, One Market, Spear Street Tower, San Francisco, CA 94105, attention of
William L. Hudson, Esq.); and notices to the Selling Shareholder shall be
directed to California HealthCare Foundation, c/o Munger, Tolles & Olson, 355
S. Grand Avenue, Suite 3500, Los Angeles, CA 90071, attention of Ruth E.
Fisher, Esq.

SECTION 13. Parties. This Agreement shall each inure to the benefit
of and be binding upon the U.S. Underwriters, the Company and the Selling
Shareholder and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company and the Selling
Shareholder and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or
in respect of this Agreement or any provision herein

29
<PAGE> 31

contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the U.S. Underwriters,
the Company and the Selling Shareholder and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Securities from any U.S. Underwriter shall be deemed to be a
successor by reason merely of such purchase.

SECTION 14. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.

If the foregoing is in accordance with your understanding of
our agreement, please sign and return to the Company and to the Selling
Shareholder a counterpart hereof, whereupon this instrument, along with all
counterparts, will become a binding agreement among the Underwriters, the
Company and the Selling Shareholder in accordance with its terms.

Very truly yours,

WELLPOINT HEALTH NETWORKS INC.

By
---------------------------------
Title:

CALIFORNIA HEALTHCARE FOUNDATION

By
---------------------------------
Acting Chief Executive Officer

CONFIRMED AND ACCEPTED,
as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON BROTHERS INC
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO. INCORPORATED

30
<PAGE> 32

By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By ____________________________________
Authorized Signatory

For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.

31
<PAGE> 33

SCHEDULE A

<TABLE>
<CAPTION>
Name of Underwriter Number of
------------------- Initial
U.S. Securities
---------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Brothers Inc
Bear, Stearns & Co. Inc.
Dean Witter Reynolds Inc.
Morgan Stanley & Co. Incorporated

-----------

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
===========
</TABLE>

Sch A-1
<PAGE> 34

SCHEDULE B

WELLPOINT HEALTH NETWORKS INC.
__ Shares of Common Stock
(Par Value $.01 Per Share)

1. The public offering price per share for the U.S. Securities,
determined as provided in said Section 2, shall be $_______.

2. The purchase price per share for the U.S. Securities to be
paid by the several U.S. Underwriters shall be $______, being an amount
equal to the public offering price set forth above less $______ per share;
provided that the purchase price per share for any U.S. Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial U.S.
Securities but not payable on the U.S. Option Securities.

Sch B-1
<PAGE> 35

SCHEDULE C

List of subsidiaries

Sch C-1
<PAGE> 36

SCHEDULE D

List of persons and entities
subject to lock-up

Sch D-1
<PAGE> 37

Exhibit A

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)

(i) The Company and each of its subsidiaries (a) has been
duly organized and (b) is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation.

(ii) The Company and each of its subsidiaries has corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement.

(iii) The Company and each of its subsidiaries is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, except where the
failure to so qualify would not have a Material Adverse Effect.

(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectuses under the caption
"Capitalization"; all of the shares of issued and outstanding capital stock of
the Company, including the Securities to be purchased by the Underwriters from
the Selling Shareholder, have been duly authorized and validly issued and are
fully paid and nonassessable and the shares of issued and outstanding capital
stock of each subsidiary of the Company are owned, directly or through
subsidiaries, by the Company and have been duly authorized and validly issued,
are fully paid and nonassessable and are owned free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.

(v) The U.S. Purchase Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by the
Company.

(vi) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.

(vii) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434 Information,
as applicable, the

A-1
<PAGE> 38

Prospectuses, excluding the documents incorporated by reference therein, and
each amendment or supplement to the Registration Statement and Prospectuses,
excluding the documents incorporated by reference therein, as of their
respective effective or issue dates (other than the financial statements and
supporting schedules included therein or omitted therefrom, as to which we need
express no opinion) complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.

(viii) The documents incorporated by reference in the
Prospectuses (other than the financial statements and supporting schedules
included therein or omitted therefrom, as to which we need express no opinion),
when they were filed with the Commission, complied as to form in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the Commission thereunder.

(ix) The capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectuses
under the caption "Description of Capital Stock," and the form of certificate
used to evidence the Common Stock is in due and proper form and complies in all
material respects with all applicable statutory requirements and the
requirements of the New York Stock Exchange.

(x) There are no statutes or regulations and there are no
legal or governmental proceedings pending or, to the knowledge of such counsel,
threatened that are required to be disclosed in the Registration Statement,
other than those disclosed therein and described as required, and all pending
legal or governmental proceedings to which the Company or any of its
subsidiaries is a party or to which any of their property is subject which are
not described in the Registration Statement, including ordinary routine
litigation incidental to the business, are, considered in the aggregate, not
material.

(xi) To the knowledge of such counsel, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments required to be filed as exhibits to the Registration Statement
which have not been so filed.

(xii) The information in the Prospectuses under the captions
"Business Government Regulation," "Business Relationship with the Foundation,"
"Shares Eligible for Future Sale" and "Certain United States Tax Consequences
to Non-United States Holders" to the extent that it constitutes matters of law,
summaries of legal matters, documents or proceedings or legal conclusions, has
been reviewed by such counsel and is correct in all material respects.

(xiii) No authorization, approval, consent or order of any
court or governmental authority or agency is required in connection with the
sale to the Underwriters of the Securities, except such as may be required
under the 1933 Act, the 1934 Act or the respective rules and regulations of the
Commission thereunder or state or foreign securities laws; and the execution,
delivery and performance of the U.S. Purchase Agreement and the International
Purchase Agreement, and the consummation of the transactions contemplated
thereby by the Company, will not conflict with or constitute a material breach
of or material default, or cause an acceleration of any obligation under, or
result in the creation or imposition of any lien, charge or

A-2
<PAGE> 39

encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any instrument included as an exhibit to the
Registration Statement to which the Company or any of its subsidiaries is a
party or by which any of them may be bound, or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the charter or by-laws of
the Company or any of its subsidiaries, or any applicable law, administrative
regulation or administrative or court decree.

(xiv) Neither the Company nor any of its subsidiaries is (a)
in violation of its charter or by-laws; or (b) in violation of or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument included as an exhibit to the
Registration Statement to which the Company or any of its subsidiaries is a
party or by which any of them may be bound, or to which any of the property or
assets of the Company or any of its subsidiaries is subject, or any applicable
law, administrative regulation or administrative or court order or decree,
which violation or default would have a Material Adverse Effect on the Company
and its subsidiaries considered as one enterprise, as the case may be.

(xv) The Company and its subsidiaries possess such
certificates necessary to conduct the business now operated by them.

(xvi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.

Nothing has come to our attention that would lead us to
believe that the Registration Statement or any amendment thereto, including the
Rule 430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included or
incorporated by reference therein or omitted therefrom, as to which we need
make no statement), at the time such Registration Statement or any such
amendment became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectuses or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included or incorporated by reference therein or
omitted therefrom, as to which we need make no statement), at the time the
Prospectuses were issued, at the time any such amended or supplemented
prospectuses were issued or at the Closing Time, included or include an untrue
statement of a material fact or omitted or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

In rendering such opinion, such counsel may rely, as to
matters of fact (but not as to legal conclusions), to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials. Such opinion shall not state that it is to be governed or qualified
by, or that it is otherwise subject to, any treatise, written policy or other
document relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).

A-3
<PAGE> 40

Exhibit B

FORM OF OPINION OF GENERAL COUNSEL TO THE COMPANY TO BE
DELIVERED PURSUANT TO SECTION 5(c)

(i) The statements in "Business - Government Regulation" and in
"Business - Legal Proceedings" of the Prospectuses insofar as such statements
constitute summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize, in all material
respects, the matters referred to therein.

(ii) The Company, CaliforniaCare Health Plans, WellPoint Dental
Plan and WellPoint Pharmacy Plan each have been duly qualified and licensed in
the State of California as health care service plans under the Knox-Keene Act,
and none of the Company's other subsidiaries are required to be licensed under
the Knox-Keene Act.

(iii) The Company is in full compliance with the requirements of the
Blue Cross License Agreement, dated as of May 20, 1996, between the Company and
the Blue Cross and Blue Shield Association (the "BCBSA") [and the California
Blue Cross License Addendum, dated as of May 17, 1996, between the Company and
the BCBSA,] except [in each case] where such noncompliance would not have a
Material Adverse Effect. [Each of the Company's subsidiaries that is required
by the BCBSA to be a party to a Blue Cross Affiliate License Agreement [or
Controlled Affiliate License Agreement] is in full compliance with the
requirements of such agreement, except in each case where such noncompliance
would not have a Material Adverse Effect.]

(iv) To such counsel's knowledge, none of the Company and its
subsidiaries have received any notice or correspondence (i) relating to the
loss or threatened loss by the Company or any of its subsidiaries of any
material permit, license, franchise or authorization by any applicable managed
health care or insurance regulatory agency or body or (ii) asserting that the
Company or any of its subsidiaries is not in substantial compliance with any
applicable regulation relating to the operation or conduct of managed health
care or insurance businesses (the "HMO Regulations") or threatening the taking
of any action against the Company or any of its subsidiaries under any HMO
Regulation, except where such noncompliance or the taking of such action, if
adversely determined, would not have a material adverse effect on the business,
operations or financial condition of the Company and its subsidiaries, taken as
a whole.

B-1
<PAGE> 41

Exhibit C

FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER
TO BE DELIVERED PURSUANT TO SECTION 5(d)

(i) No filing with, or consent, approval, authorization, license, order,
registration, qualification or decree of, any court or governmental authority
or agency, domestic or foreign (other than the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state
securities laws, as to which we need express no opinion), is necessary or
required to be obtained by the Selling Shareholder for the performance by the
Selling Shareholder of its obligations under the U.S. Purchase Agreement, the
International Purchase Agreement or in connection with the offer, sale or
delivery of the Securities.

(ii) The U.S. Purchase Agreement and the International Purchase Agreement
have been duly authorized, executed and delivered by or on behalf of the
Selling Shareholder.

(v) The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the sale and delivery of
the Securities and the consummation of the transactions contemplated in the
U.S. Purchase Agreement and the International Purchase Agreement and compliance
by the Selling Shareholder with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement have been duly authorized by
all necessary action on the part of the Selling Shareholder and do not and will
not, whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default under or result in the
creation or imposition of any tax, lien, charge or encumbrance upon the
Securities or any property or assets of the Selling Shareholder pursuant to,
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, license, lease or other instrument or agreement to which the Selling
Shareholder is a party or by which it may be bound, or to which any of the
property or assets of the Selling Shareholder may be subject nor will such
action result in any violation of the provisions of the charter or by-laws of
the Selling Shareholder, if applicable, or any law, administrative regulation,
judgment or order of any governmental agency or body or any administrative or
court decree having jurisdiction over the Selling Shareholder or any of its
properties.

(vi) To the best of our knowledge, the Selling Shareholder has valid and
marketable title to the Securities to be sold by the Selling Shareholder
pursuant to the U.S. Purchase Agreement and the International Purchase
Agreement, free and clear of any pledge, lien, security interest, charge,
claim, equity or encumbrance of any kind, other than as disclosed in the
Registration Statement, and has full right, power and authority to sell,
transfer and deliver such Securities pursuant to the U.S. Purchase Agreement
and the International Purchase Agreement. By delivery of a certificate or
certificates therefor the Selling Shareholder will transfer to the Underwriters
who have purchased such Securities pursuant to the Purchase Agreement (without
notice of any defect in the title of the

C-1
<PAGE> 42

Selling Shareholder and who are otherwise bona fide purchasers for purposes of
the Uniform Commercial Code) valid and marketable title to such Securities,
free and clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.

C-2
<PAGE> 43

[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(L)]

Exhibit D-1

_______________, 1996

Re: Proposed Public Offering by WellPoint Health Networks Inc.

Dear Sirs:

The undersigned, a shareholder and an officer andor director of
WellPoint Health Networks Inc., a California corporation (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Salomon Brothers Inc, Bear, Stearns & Co. Inc.,
Dean Witter Reynolds Inc. and Morgan Stanley & Co. Incorporated propose(s) to
enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the
Company and the Selling Shareholder providing for the public offering of shares
(the "Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a stockholder [and an officer and/or director]
of the Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 180
days from the date of the Purchase Agreement provided that such person
continues to be an officer of the Company during such period, the undersigned
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of or transfer
any shares of the Company's Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of

D-1
<PAGE> 44

disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise.

Notwithstanding the provisions of the preceding sentence, the
undersigned shall be permitted to sell, transfer or otherwise dispose of shares
of Common Stock to: (1) the undersigned's spouse, children, spouses of
children, siblings and spouses of siblings, provided that any such transferee
shall have agreed in writing to be subject to the terms of this letter; and (2)
any trust or charitable foundation established by the undersigned and/or one or
more of the persons listed in the foregoing clause (1), provided that any such
trust or charitable foundation and their respective beneficiaries shall have
agreed in writing to be subject to the terms of this letter.

Very truly yours,

Signature:
-----------------------

Print Name:
---------------------

D-2
<PAGE> 45

[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(L)]

Exhibit D-2

_______________, 1996

Re: Proposed Public Offering by WellPoint Health Networks Inc.

Dear Sirs:

The undersigned, a shareholder [and an officer and/or director] of
WellPoint Health Networks Inc., a California corporation (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Salomon Brothers Inc, Bear, Stearns & Co. Inc.,
Dean Witter Reynolds Inc. and Morgan Stanley & Co. Incorporated propose(s) to
enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the
Company and the Selling Shareholder providing for the public offering of shares
(the "Securities") of the Company's common stock, par value $.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a stockholder [and an officer and/or director]
of the Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 90
days from the date of the Purchase Agreement provided that such person
continues to be an officer of the Company during such period, the undersigned
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, or otherwise dispose of or transfer
any shares of the Company's Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock, whether now owned or hereafter
acquired by the undersigned or with respect to which the undersigned has or
hereafter acquires the power of

D-1
<PAGE> 46

Very truly yours,

Signature:
-----------------------

Print Name:
---------------------

D-2

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Amendment No.
1 to Form S-3 of our report dated February 20, 1996, except for Note 14 as to
which the date is May 20, 1996, on our audit of the consolidated financial
statements of WellPoint Health Networks Inc. We also consent to the
incorporation by reference of our report dated February 20, 1996 on our audit of
the financial statements of Blue Cross of California Commercial Operations and
our report dated February 23, 1996, except for Note 12 as to which the date is
March 1, 1996, on our audit of the Post-Reorganization combined financial
statements of the Life & Health Benefits Management Division of Massachusetts
Mutual Life Insurance Company and Subsidiaries. We also consent to the reference
to our Firm under the caption "Experts."

COOPERS & LYBRAND L.L.P.

Los Angeles, California

October 30, 1996

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-14885) and
related Prospectus of WellPoint Health Networks Inc. for the registration of its
common stock and to the incorporation by reference therein of our report dated
September 27, 1996, with respect to the combined financial statements of The
Group Benefits Operations of John Hancock Mutual Life Insurance Company and
subsidiaries included in WellPoint Health Networks Inc.'s Current Report on Form
8-K dated October 9, 1996, filed with the Securities and Exchange Commission.

Ernst & Young LLP

Boston, Massachusetts

October 30, 1996