TRIGON HEALTHCARE INC, 424B1, 1997-02-03

TRIGON HEALTHCARE INC
424B1, 1997-02-03
HOSPITAL & MEDICAL SERVICE PLANS

Previous: HOMESIDE INC, 424B1, 1997-02-03

Next: CENTURY BANCORP INC /NC, 10QSB, 1997-02-03

Filed Pursuant to Rule 424(b)(1)
File Number 333-09773

PROSPECTUS

15,500,000 SHARES

[Trigon Logo] TRIGON HEALTHCARE, INC.

COMMON STOCK

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

All of the 15,500,000 shares of Common Stock offered hereby are being
offered by Trigon Healthcare, Inc. ("Trigon" or the "Company"). Of the
15,500,000 shares of Common Stock offered hereby, 12,400,000 shares are being
offered in the United States and Canada by the U.S. Underwriters and 3,100,000
shares are being offered in a concurrent offering outside the United States and
Canada by the International Managers. The initial public offering price and the
underwriting discount per share will be identical for both offerings (together,
the "Offerings"). See "Underwriting."

Prior to the Offerings, there has been no public market for the Common
Stock. For a discussion of the factors to be considered in determining the
initial public offering price, see "Underwriting." The Common Stock has been
approved for listing on the New York Stock Exchange under the symbol "TGH,"
subject to official notice of issuance.

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

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

[CAPTION]
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share............................................. $13.00 $.84 $12.16
Total (3)............................................. $201,500,000 $13,020,000 $188,480,000
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $1,300,000.

(3) The Company has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 1,860,000 shares and 465,000 shares of Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $231,725,000, $14,973,000 and
$216,752,000, respectively. See "Underwriting."

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

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, subject to
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 February 5, 1997.

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

MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
MORGAN STANLEY & CO.
INCORPORATED
WHEAT FIRST BUTCHER SINGER
------------------------

The date of this Prospectus is January 30, 1997.

<PAGE>

[Graphic here] [Graphic here] [Graphic here]

NET
SIZE WORKS DIVERSITY

Trigon is the largest Trigon offers a Trigon offers a
managed health care continum of managed wide variety of
company in Virginia: care networks: health-related services:
<S> <C>
o Current members: o Participating Provider o Managed care programs
1.9 million Network (PAR) o Comprehensive health
o 1995 revenues: $1.7 billion o Perferred Provider care financing
o VA Market Share: 26% Organization Network o Health and wellness
(PPO) programs
o Health Maintenance o Life, accident and
Organization (HMO) disability coverage
o Dental
o Mental health
o Pharmacy

[Trigon logo]

A Managed Health Care Company

<PAGE>
THE COMPANY'S ARTICLES CONTAIN CERTAIN PROVISIONS THAT ARE INTENDED TO
PREVENT ANY STOCKHOLDER FROM ACQUIRING SHARES OF COMMON STOCK IN EXCESS OF
LIMITS SET FORTH IN THE COMPANY'S LICENSE AGREEMENT WITH THE BLUE CROSS AND BLUE
SHIELD ASSOCIATION. THOSE PROVISIONS GENERALLY PROHIBIT A STOCKHOLDER FROM
ACQUIRING BENEFICIAL OWNERSHIP OF MORE THAN 5% OF THE COMPANY'S OUTSTANDING
COMMON STOCK, WITHOUT THE APPROVAL OF THE BOARD OF DIRECTORS, RESTRICT TRANSFERS
OF SHARES OF COMMON STOCK THAT RESULT IN THE ACQUISITION BY A STOCKHOLDER OF
SHARES OF COMMON STOCK IN EXCESS OF 5% AND PERMIT THE BOARD OF DIRECTORS TO
CONVERT SHARES OF VOTING COMMON STOCK IN EXCESS OF 5% INTO SHARES OF A CLASS OF
NON-VOTING COMMON STOCK. BENEFICIAL OWNERSHIP OF SHARES OF COMMON STOCK INCLUDES
DIRECT OR INDIRECT OWNERSHIP, INCLUDING THE RIGHT TO VOTE SUCH SHARES PURSUANT
TO IRREVOCABLE PROXIES AND THE RIGHT TO ACQUIRE SUCH SHARES. SEE "RISK
FACTORS -- CERTAIN CHARTER AND STATE LAW PROVISIONS."

IN ADDITION, THE COMPANY'S PLAN OF DEMUTUALIZATION PROVIDES THAT NO
STOCKHOLDER MAY, DIRECTLY OR INDIRECTLY, ACQUIRE BENEFICIAL OWNERSHIP OF 5% OR
MORE OF THE COMMON STOCK UNTIL 30 MONTHS AFTER THE DEMUTUALIZATION WITHOUT THE
CONSENT OF THE COMPANY'S BOARD OF DIRECTORS. SEE "RISK FACTORS -- CERTAIN
CHARTER AND STATE LAW PROVISIONS."

VIRGINIA LAW CONTAINS PROVISIONS THAT ARE INTENDED TO LIMIT THE ABILITY OF
ANY PERSON TO ACQUIRE A SIGNIFICANT BLOCK OF COMMON STOCK OF A COMPANY. SHARES
OF COMMON STOCK ACQUIRED IN EXCESS OF CERTAIN BENEFICIAL OWNERSHIP THRESHOLDS DO
NOT HAVE VOTING RIGHTS UNLESS, IN CERTAIN CASES, THE ACQUISITION IS APPROVED BY
THE BOARD OF DIRECTORS OR THE COMPANY'S STOCKHOLDERS. THE LOWEST THRESHOLD
SUBJECT TO SUCH VOTING RESTRICTIONS IS 20% OF THE COMPANY'S COMMON STOCK.
VIRGINIA LAW ALSO RESTRICTS THE ABILITY OF ANY HOLDER OF MORE THAN 10% OF ANY
CLASS OF THE COMPANY'S VOTING SECURITIES TO ENGAGE IN CERTAIN TRANSACTIONS WITH
THE COMPANY WITHOUT THE APPROVAL OF THE COMPANY'S STOCKHOLDERS OR THE BOARD OF
DIRECTORS. BENEFICIAL OWNERSHIP INCLUDES DIRECT OR INDIRECT OWNERSHIP INCLUDING
THE RIGHT TO VOTE SUCH SHARES PURSUANT TO IRREVOCABLE PROXIES AND THE RIGHT TO
ACQUIRE SUCH SHARES. SEE "RISK FACTORS -- CERTAIN CHARTER AND STATE LAW
PROVISIONS."

STATE INSURANCE HOLDING COMPANY STATUTES APPLICABLE TO THE COMPANY AND ITS
INSURANCE SUBSIDIARIES GENERALLY PROVIDE THAT NO PERSON MAY ACQUIRE CONTROL OF
THE COMPANY, AND THUS INDIRECT CONTROL OF ITS INSURANCE SUBSIDIARIES, WITHOUT
THE PRIOR APPROVAL OF THE APPROPRIATE INSURANCE REGULATORS. GENERALLY, ANY
PERSON WHO ACQUIRES DIRECT OR INDIRECT OWNERSHIP OF 10% OR MORE OF THE
OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK (INCLUDING THE RIGHT TO VOTE
SUCH SHARES THROUGH PROXIES) WOULD BE PRESUMED TO HAVE ACQUIRED SUCH CONTROL,
UNLESS THE APPROPRIATE INSURANCE REGULATORS UPON APPLICATION DETERMINE
OTHERWISE. FOLLOWING THE DEMUTUALIZATION, THE COMPANY WILL HAVE INSURANCE
SUBSIDIARIES DOMICILED IN VIRGINIA AND NORTH CAROLINA.

FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA NOR
HAS SUCH COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK 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.

Blue Cross(Register mark) and Blue Shield(Register mark) are registered
tradenames, trademarks and service marks of the Blue Cross and Blue Shield
Association.

<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
SET FORTH IN THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND NOTES THERETO OR AS OTHERWISE NOTED HEREIN,
THE INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) GIVES EFFECT TO THE CONSUMMATION OF
THE TRANSACTIONS DESCRIBED UNDER "THE DEMUTUALIZATION." PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH IN "RISK FACTORS." FOR PURPOSES
OF THIS PROSPECTUS, THE TERM THE "COMPANY" OR "TRIGON" REFERS, AT ALL TIMES
PRIOR TO THE EFFECTIVE DATE (THE "EFFECTIVE DATE") OF THE DEMUTUALIZATION (AS
DEFINED BELOW), TO BLUE CROSS AND BLUE SHIELD OF VIRGINIA ("VIRGINIA BCBS") AND
ITS SUBSIDIARIES, COLLECTIVELY, AND, AT ALL TIMES ON OR AFTER THE EFFECTIVE
DATE, TO TRIGON HEALTHCARE, INC. ("TRIGON HEALTHCARE") AND ITS SUBSIDIARIES,
COLLECTIVELY, INCLUDING TRIGON INSURANCE COMPANY ("TRIGON INSURANCE," THE
SUCCESSOR TO VIRGINIA BCBS). MEMBER ENROLLMENT INFORMATION FOR THE FEDERAL
EMPLOYEE PROGRAM, MID-SOUTH INSURANCE COMPANY, A SUBSIDIARY OF TRIGON
HEALTHCARE, AND CERTAIN NATIONAL GROUP ACCOUNTS ARE NOT MAINTAINED ON THE
COMPANY'S SYSTEMS. MEMBER ENROLLMENT INFORMATION PRESENTED HEREIN FOR SUCH
GROUPS ARE CALCULATED BASED ON POLICY COUNTS PROVIDED TO THE COMPANY FOR THESE
GROUPS WHICH ARE CONVERTED TO A MEMBERSHIP NUMBER THROUGH THE USE OF ACTUARIALLY
DETERMINED CONVERSION FACTORS. FOR PURPOSES OF THIS PROSPECTUS, THE TERM
"MEMBER" REFERS TO INDIVIDUALS OR GROUPS COVERED BY ANY OF THE COMPANY'S
PRODUCTS AND THE TERM "ELIGIBLE MEMBER" REFERS TO THOSE INDIVIDUALS OR ENTITIES
HOLDING MEMBERSHIP INTERESTS IN VIRGINIA BCBS AS OF DECEMBER 31, 1995, WHICH
WILL BE CONVERTED INTO SHARES OF COMMON STOCK OR CASH AS A RESULT OF THE
DEMUTUALIZATION. THE TERM "COMMON STOCK" MEANS CLASS A COMMON STOCK, PAR VALUE
$.01 PER SHARE, OF TRIGON HEALTHCARE. CERTAIN DEFINED TERMS RELATING TO THE
BUSINESS OF THE COMPANY ARE SET FORTH IN THE GLOSSARY. SEE "GLOSSARY."

THE COMPANY

OVERVIEW

Trigon is the largest managed health care company in Virginia, serving
approximately 1.9 million members primarily through statewide and regional
provider networks. The Company's membership represents approximately 26% of the
Virginia population and 31% of the Virginia population in those areas where
Trigon has the exclusive right to use the Blue Cross and Blue Shield service
marks and tradenames. Within Virginia, Trigon provides a comprehensive spectrum
of managed care products through three network systems with a range of
utilization and cost containment controls. The Company is pursuing a growth
strategy which includes expansion within Virginia and outside of Virginia into
other southeastern and mid-Atlantic states.

As of September 30, 1996, the Company's network systems consisted of: the
health maintenance organization ("HMO") networks which, with 251,399 members,
are the Company's most tightly managed and cost efficient networks; the
preferred provider organization ("PPO") networks which, with 774,473 members,
offer greater choice of providers than Trigon's HMOs and may include a primary
care physician point of service ("POS") feature; and the participating provider
("PAR") network which, with 615,655 members, is the Company's broadest and most
flexible network. The Company also serves 218,814 additional members through
Medicare supplemental plans (128,006 members), third-party administration of
health care claims (40,383 members) and through Mid-South Insurance Company, a
Fayetteville, North Carolina-based health and life insurance company, which was
acquired by the Company in 1996 (50,425 members). Within the Company's managed
care product offerings, customers may choose between at-risk arrangements (in
which the Company bears the cost of providing specified health care services for
a fixed payment) and self-funded arrangements (in which the customer bears all
or a portion of the risk). As of September 30, 1996, 47.6% of members were
covered under at-risk arrangements and 41.8% were covered under self-funded
arrangements, with the remaining 10.6% covered under the Federal Employee
Program ("FEP") administered under contract with the Blue Cross and Blue Shield
Association (the "BCBSA").

Trigon, formerly doing business as Blue Cross and Blue Shield of Virginia,
was first established in Virginia in 1935, and retains its license to use the
Blue Cross and Blue Shield service marks and tradenames for the purpose of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. The portion of the Commonwealth in which the
Company has the exclusive right to use the Blue Cross and Blue Shield service
marks and tradenames includes approximately 5.6 million of the Commonwealth's
population of 6.6 million. In June 1994, the Company adopted the name Trigon to
reflect its intention to pursue growth opportunities outside of Virginia, where
it does not have the right to use the Blue Cross and Blue Shield service marks
and tradenames.

<PAGE>
TRANSITION TO MANAGED CARE

In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon has the largest number of HMO members in Virginia. Trigon's
total HMO enrollment has grown from 60,154 members at December 31, 1991 to
251,399 members as of September 30, 1996, representing a compound annual growth
rate of 35.1%. The Company's PPO network system is the largest in Virginia.
Trigon's total PPO enrollment has grown from 396,584 members at December 31,
1991 to 774,473 members as of September 30, 1996, representing a compound annual
growth rate of 15.1%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 55.1% as of September 30,
1996. Trigon's more traditional products are offered through its PAR network
which is the Company's largest network. As a result of the Company's strategy of
encouraging members to migrate to its more tightly managed networks, total
membership in the PAR network decreased from 951,020 members at December 31,
1991 to 615,655 members at September 30, 1996. The Company believes that it will
be necessary to significantly expand its market share in the HMO market, in part
by successfully transitioning its PAR and PPO members into HMOs, if it is to
succeed in retaining a high overall market share in its existing geographic
markets. See "Risk Factors." Trigon also offers several specialty health care
and related products, such as dental, wellness, mental health and life, accident
and disability insurance coverage.

Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business including the individual, small, mid-sized and large employer groups
and state and federal agency markets. In addition, Trigon's emphasis on
utilization management and cost control, as well as favorable pricing
arrangements with providers and hospitals, led to a decrease in the Company's
medical loss ratio (medical costs expense as a percentage of premium revenues)
from 1991 through 1994. However, the medical loss ratio has increased in both
1995 and through the first nine months of 1996, primarily as a result of greater
pressure on premium levels due to increased competition and an increase in
medical costs, which, in part, reflects industry trends. See "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

GROWTH STRATEGY

The Company is pursuing the following growth strategy:

(Bullet) OFFERING A CHOICE ALONG A CONTINUUM OF MANAGED CARE
PRODUCTS -- from the broad PAR network to the tightly managed
HMO -- to meet the demands of its current customers and the needs
of new customers. The breadth and flexibility of the Company's
benefit plan options are designed to appeal to a broad variety of
employer groups and individuals with differing product and service
preferences, including freedom of choice, cost containment, scope
of coverage and risk assumption. The Company believes its broad
range of products gives it a unique market advantage, allowing
Trigon to become the sole managed care provider to many of its
customers.

(Bullet) ENCOURAGING MEMBERS TO TRANSITION FROM TRADITIONAL HEALTH
INSURANCE INTO A CONTINUUM OF MANAGED CARE PRODUCTS in Virginia by
using the Company's expertise in designing, pricing and marketing
managed care products, and utilizing this expertise to enter into
other states that remain dominated by traditional insurance
coverage. Products such as PPO, POS and Blue Advantage (a
combination PPO/HMO product) are designed to facilitate the
transition of members to managed care.

(Bullet) CONTINUALLY INCREASING THE MANAGED CARE CONTENT AND COST
EFFECTIVENESS OF ITS PPO AND HMO NETWORKS AND PRODUCTS. To enhance
the cost effectiveness of its PPO networks, the Company offers an
optional POS feature which utilizes a primary care physician to
coordinate all health care services for the member. Within its
PPOs and HMOs, the Company is utilizing physician profiling
techniques, risk-sharing arrangements, ancillary networks for high
volume or high cost services, wellness programs and more
aggressive fee scheduling to reduce health care costs.

<PAGE>
(Bullet) GROWING ITS BUSINESS IN VIRGINIA by increasing utilization of the
Company's HMO products particularly in the more densely populated
areas of Eastern and Central Virginia, entering into new markets
such as Medicaid and Medicare HMOs, increasing utilization of the
Company's PPO and POS products in rural communities, which have
been slow to embrace managed care, and forming collaborative
relationships with provider groups and acquiring other managed
care companies.

(Bullet) EXPANDING OUTSIDE OF VIRGINIA to markets that have certain of the
following characteristics: reasonably large populations, low
market penetration of managed care products and a reasonable
regulatory environment. The Company considers the southeastern and
mid-Atlantic United States to be attractive and believes that it
can utilize its expertise in marketing, underwriting, network
development and cost control in these markets. The Company intends
to expand its out-of-state managed care business primarily through
a combination of acquisitions and strategic alliances with managed
care companies, traditional indemnity companies whose customers
can be transitioned to managed care, other health care providers
and other Blue Cross and Blue Shield companies. In line with this
strategy, Trigon completed the purchase of Mid-South Insurance
Company ("Mid-South") in February 1996. Mid-South provides health
insurance coverage to 50,425 members primarily through PPOs in
rural and suburban markets in North Carolina, South Carolina,
Georgia, Virginia and Tennessee. The Company currently has no
other material commitments or agreements with respect to expansion
outside of Virginia; however, the Company is in the process of
evaluating several potential acquisition opportunities outside of
Virginia. There can be no assurance that the Company's efforts to
expand outside of Virginia will be successful. See "Risk Factors"
and "Business -- Strategy."

THE DEMUTUALIZATION

The Company's conversion from a mutual insurance company to a stock
insurance company (the "Demutualization") pursuant to a Plan of Demutualization
(the "Plan of Demutualization") was approved on September 6, 1996 by the members
of Virginia BCBS entitled to vote. On November 5, 1996, the Virginia State
Corporation Commission (the "State Corporation Commission") entered a final
order approving the Plan of Demutualization after a public hearing. The
principal purpose of the Demutualization is to allow the Company access to the
equity capital markets in order to finance its expansion plans and to enhance
its strategic position in the consolidating managed care industry. The
Demutualization will also enable the Company to enter into strategic alliances,
including acquisitions, by issuing shares of its stock. Prior to the
Demutualization, sources of financing were limited to internally generated funds
or borrowings. Additionally, by creating a holding company structure through
demutualization, the Company will no longer be subject to the regulatory
limitations on subsidiary investments that currently restrict its ability to
effect acquisitions. The Demutualization and related transactions are expected
to be tax-free transactions for the Company.

The Plan of Demutualization requires that, pursuant to applicable Virginia
law, the Treasurer of the Commonwealth of Virginia must receive in connection
with the Demutualization an amount (the "Commonwealth Payment") equal to the
surplus, computed in accordance with generally accepted accounting principles,
of Virginia BCBS on December 31, 1987, plus $10 million. The Commonwealth
Payment will be approximately $175 million. The Commonwealth Payment is in
addition to any shares of Common Stock to which the Commonwealth of Virginia is
entitled as an Eligible Member. The Plan of Demutualization provides that at
least one-half of the Commonwealth Payment will be made in cash and the
remainder will be in cash or shares of Class C Common Stock, par value $.01
("Class C Common Stock") (valued at the initial per share price of the Common
Stock to the public in the Offerings). The Company expects to use proceeds of
the Offerings to pay $56.0 million of the Commonwealth Payment and to fund the
balance from borrowings under a revolving credit agreement or other available
cash. Consequently, the Company does not expect to issue Class C Common Stock as
part of the Commonwealth Payment. However, the Company has not received any
binding commitments with respect to such revolving credit agreement and there
can be no assurance that the Company will be able to enter into such an
agreement in connection with the Offerings. In this event, the Company would
issue Class C Common Stock in payment of one-half of the Commonwealth Payment
and use proceeds of the Offerings and other available cash to fund the balance.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources."

<PAGE>
RISK FACTORS

There are certain risks associated with the Company's business and with
investment in the Common Stock. These include: (i) the potential negative impact
of escalating health care costs in the Company's business; (ii) the impact of
increased competition in Virginia and within Trigon's target expansion area;
(iii) the impact of government regulation on the health care industry; (iv) the
reaction to the Demutualization; (v) the potential adverse effect on the
Company's ability to expand outside Virginia resulting from the Company's
inability to use the Blue Cross and Blue Shield service marks and tradenames
outside the Company's licensed territory in Virginia and the Company's lack of
substantial market share or established provider relationships outside Virginia;
(vi) the potential adverse effect on the Company of economic factors specific to
Virginia due to the concentration of the Company's business in Virginia; (vii)
the potential loss of the Blue Cross and Blue Shield service marks and
tradenames as a result of changing ownership and the potential negative impact
of unfavorable publicity concerning other BCBSA licensees on the Company; (viii)
the potential adverse impact of certain legal proceedings; (ix) the potential
impact of certain charter provisions and state law provisions with respect to
change of control on the market for the Common Stock; (x) the Company's
dependence on dividends from its subsidiaries to meet its liquidity needs and
the restrictions under Virginia insurance law on the payment of such dividends;
(xi) the lack of a prior public market for the Common Stock and the absence of
any assurance that an active public trading market will develop and (xii) the
potential adverse impact on the prevailing market price of the Common Stock as a
result of sales of substantial amounts of Common Stock or the perception that
such sales could occur. See "Risk Factors."

THE OFFERINGS

</TABLE>
<TABLE>
<S> <C> <C>
Common Stock Offered by the Company:

U.S. Offering....................................... 12,400,000 shares

International Offering.............................. 3,100,000 shares
-----------

Total............................................ 15,500,000 shares
-----------
-----------

Common Stock to be outstanding after the Offerings.... 39,975,022 shares (1)
</TABLE>

<TABLE>
<S> <C>
Use of Proceeds....................................... Of the $187.2 million estimated net proceeds of
the Offerings, $56.0 million of the net proceeds
is expected to be used to make a portion of the
Commonwealth Payment and $91.3 million of the
net proceeds is expected to be used to make cash
payments to Eligible Members in the
Demutualization in lieu of 7.6 million shares of
Common Stock. The balance of the net proceeds
(which will be approximately $39.8 million) will
be used for general corporate purposes,
including expansion of the Company's business
both through internal growth and through
acquisitions of managed health care companies or
related lines of business.

New York Stock Exchange Symbol........................ TGH
</TABLE>

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

(1) Includes 24,475,022 shares of Common Stock to be issued in the
Demutualization. See "The Demutualization" and "Unaudited Pro Forma
Consolidated Financial Information."

<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The summary consolidated financial and operating data presented below as of
the end of and for each of the years in the five-year period ended December 31,
1995 and the nine months ended September 30, 1996 are derived from the audited
consolidated financial statements of Virginia BCBS. The Statement of Operations
Data for the nine months ended September 30, 1995, the Balance Sheet Data as of
September 30, 1995, the pro forma data and the information under the caption
"Members at end of period" are unaudited. The results for the nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year. This summary data should be read in conjunction with the
Company's audited consolidated financial statements and the related summary of
significant accounting policies and notes thereto included elsewhere in this
Prospectus. The pro forma data are not necessarily indicative of the financial
condition or results of operations of the Company that would have been reported
had the transactions been consummated on the dates assumed, or of future
financial condition or results of operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN 000'S) (UNAUDITED)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Premium and fee revenues
Commercial..................... $1,024,066 $1,057,821 $1,050,157 $1,081,820 $1,157,899 $ 857,448 $ 985,127
Federal Employee Program....... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-
funded arrangements.......... 777,420 871,101 905,529 908,234 981,741 719,067 798,358
Less: Amounts attributable to
claims under self-funded
arrangements................. (697,069) (786,252) (815,488) (827,869) (897,954) (655,731) (731,062)
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,311,295 1,396,772 1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income................ 31,558 31,810 34,279 39,962 45,861 34,881 34,081
Net realized gains............... 24,017 25,584 26,199 12,793 52,976 34,833 50,685
Other revenues................... 25,579 27,946 30,555 45,467 55,176 41,096 37,666
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues................. 1,392,449 1,482,112 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
Operating expenses
Medical and other benefit costs
Commercial..................... 825,925 835,777 795,921 802,666 959,328 689,705 809,344
Federal Employee Program....... 193,505 238,986 262,295 283,645 312,222 234,965 252,478
---------- ---------- ---------- ---------- ---------- ---------- ----------
1,019,430 1,074,763 1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and adminis-
trative expenses............... 246,617 281,191 308,412 322,391 346,353 247,059 283,704
Copayment refund program (1)..... -- -- -- 36,432 47,073 46,702 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses....... 1,266,047 1,355,954 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes,
cumulative effects of changes in
accounting principles and
extraordinary items (operating
income).......................... 126,402 126,158 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (2)... 29,107 32,220 35,803 24,564 8,264 8,475 (46,751)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles
and extraordinary items.......... 97,295 93,938 107,858 93,959 51,702 52,797 141,667
Cumulative effects of changes in
accounting principles, net of
income taxes (3)................. (21,876) -- 8,126 -- -- -- --
Extraordinary items, net of income
taxes (4)........................ -- -- -- (644) (4,707) (2,999) (186,280)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).................. $ 75,419 $ 93,938 $ 115,984 $ 93,315 $ 46,995 $ 49,798 $ (44,613)
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN 000'S, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA DATA (UNAUDITED) (5):
Income before extraordinary
items............................ $ 34,337 $ 58,215
Income before extraordinary items
per share........................ $ .86 $ 1.46
Shares used in calculating per
share amounts.................... 39,975 39,975
OPERATING STATISTICS:
Medical loss ratio (6)
Commercial....................... 80.7% 79.0% 75.8% 74.2% 82.9% 80.4% 82.2%
Federal Employee Program......... 93.5 94.1 94.0 93.5 94.8 94.7 95.1
Total.......................... 82.8 81.9 79.6 78.4 85.5 83.6 84.9
Selling, general and administrative
expenses ratio (7)............... 12.1 12.7 13.6 13.8 13.7 13.2 13.6
Operating margin (7)............... 9.1 8.5 9.5 9.9 6.2 8.4 6.6
Net margin (7)..................... 7.0 6.3 7.1 7.9 5.4 7.3 5.4
Members at end of period
(unaudited)
HMO.............................. 60,154 60,683 84,081 119,982 221,148 210,057 251,399
PPO.............................. 396,584 561,686 624,811 672,610 747,297 710,365 774,473
PAR.............................. 951,020 770,038 687,475 653,097 618,238 629,213 615,655
Other (8)........................ 231,714 228,749 235,640 235,984 212,935 212,032 218,814
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total.......................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ----------- ----------
(IN 000'S) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments...... $590,623 $ 714,827 $ 940,914 $1,001,571 $1,119,652 $1,107,079 $1,124,280
Total assets.............. 939,912 1,037,301 1,266,952 1,403,104 1,565,331 1,557,263 1,734,737
Obligation for
Commonwealth Payment
Current............... -- -- -- -- -- -- 87,500
Noncurrent............ -- -- -- -- -- -- 87,500
Long-term debt............ -- -- -- -- -- -- --
Surplus (9)............... 350,333 444,271 606,146 655,875 740,071 743,501 686,650
Stockholders' equity......

<CAPTION>
PRO FORMA
AS ADJUSTED (10)
----------------
SEPTEMBER 30,
1996
----------------
<S> <C>

(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and investments...... $1,158,116
Total assets.............. 1,768,573
Obligation for
Commonwealth Payment
Current............... --
Noncurrent............ --
Long-term debt............ 119,000
Surplus (9)...............
Stockholders' equity...... 776,486
</TABLE>

- ---------------
(1) The Company conducted a Copayment Refund Program (the "Copayment Program")
in accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original
coinsurance payment, which had been based on the facility's undiscounted
charges, and an adjusted coinsurance payment calculated using the Company's
average discount percentage at the facility. Costs incurred under the
Copayment Program included refunds, interest and administrative costs
associated with the Copayment Program that the Company would not otherwise
have incurred. The cost of the Copayment Program in 1994 was $36.4 million,
or $30.0 million net of income taxes. In accordance with an agreement with
the State Corporation Commission dated November 16, 1995, the Company
re-opened the Copayment Program. As part of the re-opening of the Copayment
Program, the Company mailed refunds to approximately 300,000 members who
had not filed a claim under the original program and for whom the Company
had an address. In addition, the Company announced that there are
approximately 200,000 former members for whom the Company does not have an
address and who are eligible for refunds. Under this new agreement, any
amounts not paid by December 31, 1996 will be escheated to the Commonwealth
of Virginia as unclaimed property. The cost of re-opening the Copayment
Program was $47.1 million, or $40.6 million net of income taxes, in 1995.

<PAGE>
the valuation allowance on deferred tax assets is primarily related to
realization of alternative minimum tax credits. The effective tax rate for
the nine months ended September 30, 1996 (income tax benefit as a
percentage of operating income) was a tax benefit of 49.3%. This rate
differs from the 35% statutory federal rate due primarily to the
realization of alternative minimum tax credits during the nine-month period
and the elimination as of September 30, 1996 of the $63.9 million valuation
allowance maintained by the Company with respect to deferred tax assets
because the Demutualization has made it more likely than not that the
assets will be realized. Excluding the effects of the elimination of the
valuation allowance the effective tax rate would have been 18.1% for the
nine months ended September 30, 1996. These items are not recurring and the
Company believes that in the future its effective tax rate as reflected in
its consolidated financial statements should approximate the 35% federal
statutory rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes."

(3) During 1991, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The cumulative effect at January 1, 1991 of
the change in accounting for postretirement benefits was a charge of $21.9
million to net income. During 1993, the Company adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect
at January 1, 1993 of the change in accounting for postemployment benefits
was a charge of $4.8 million to net income. During 1993, the Company also
adopted SFAS No. 109, "Accounting for Income Taxes." The cumulative effect
at January 1, 1993 of the change in accounting for income taxes was a $12.9
million increase in net income.

(4) For the years ended December 31, 1994 and 1995, the Company recognized
extraordinary charges of $644,000 and $4.7 million net of income taxes of
$347,000 and $2.5 million, for costs incurred in connection with the
Demutualization. During the nine-month periods ended September 30, 1995 and
1996, the Company recognized extraordinary charges of $3.0 million and
$11.3 million, net of income taxes of $1.6 million and $594,000,
respectively, for costs incurred in connection with the Demutualization.
For the nine months ended September 30, 1996, the Company also recognized
an extraordinary charge for the $175 million obligation to the Treasurer of
the Commonwealth of Virginia in connection with the Demutualization as
required by Virginia law. See "The Demutualization -- The Commonwealth
Payment."

(5) Pro forma data assumes (i) the issuance of 24.5 million shares of Common
Stock to Eligible Members pursuant to the Demutualization, which is based
on the assumption that certain Eligible Members receive $91.3 million in
cash in lieu of 7.6 million shares of Common Stock that would otherwise be
issued to such Eligible Members pursuant to the Demutualization, (ii) the
interest at 6% per annum on the long-term debt obligation under a revolving
credit agreement related to the borrowing of $119.0 million in connection
with the Commonwealth Payment, (iii) the sale of 15.5 million shares of
Common Stock in the Offerings and (iv) adjustment of the Company's
effective tax rate to the 35% statutory federal rate. In the pro forma
calculations, income before extraordinary items does not include any rate
of return on the net proceeds of the Offerings nor does it include the
effect of the planned reduction in the Company's equity portfolio and
reinvestment of such amounts in a fixed income portfolio with a higher
current yield. The Company has not received any binding commitments with
respect to borrowings to fund one-half of the Commonwealth Payment and
there can be no assurance that the Company will be able to obtain such
borrowings concurrently with the Offerings. In this event, the Company
would issue Class C Common Stock in payment of one-half of the Commonwealth
Payment. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," and
"Business -- Investments."

(6) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.

(7) The selling, general and administrative expenses ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains while
the operating margin and net margin ratios are calculated by dividing
operating income or net income by total revenues. These ratios have been
calculated exclusive of non-recurring items which include the Copayment
Program, the elimination of the $63.9 million valuation allowance on
deferred tax assets, effects of changes in accounting principles and
extraordinary items.

(8) "Other" members include enrollment from Medicare supplemental plans,
third-party administration of health care claims, out-of-state student
health care coverage and Mid-South members, after its acquisition in
February 1996.

(9) Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, at December 31, 1993, 1994 and 1995, surplus included net
unrealized gains on investment securities, net of deferred income taxes, of
$45.9 million, $2.3 million and $39.5 million, respectively. At September
30, 1995 and 1996 surplus included net unrealized gains on investment
securities, net of deferred income taxes, of $40.1 million and $30.7
million, respectively.

(10) Pro forma balance sheet data assumes (i) the issuance of 24.5 million
shares of Common Stock to Eligible Members pursuant to the Demutualization,
(ii) the payment of $91.3 million to certain Eligible Members in lieu of
7.6 million shares of Common Stock that would otherwise be issued to such
Eligible Members pursuant to the Demutualization, (iii) the payment of $175
million in cash and the incurrence of a long-term debt obligation under a
revolving credit agreement related to the borrowing of $119.0 million in
connection with the Commonwealth Payment, (iv) the payment of $6.0 million
for the remaining expenses of the Demutualization and (v) the sale of 15.5
million shares of Common Stock in the Offerings at the offering price of
$13 per share, less underwriting discount and estimated offering expenses
payable by the Company, as if such transactions had occurred as of
September 30, 1996.

<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BEFORE PURCHASING ANY OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.

ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY

The Company's profitability depends in large part on accurately predicting
and effectively managing health care costs. Predicting medical costs is
difficult partially due to the variability of medical inflation. From 1988 to
1995, the consumer price index, as a whole, had annual rates of increase ranging
from a high of 6.1% to a low of 2.5%. Medical cost inflation, on the other hand,
showed greater volatility with annual rates of increase ranging from a high of
9.6% to a low of 3.2% during the period. The aging of the population and other
demographic characteristics along with 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. Trigon continually reviews and
adjusts its premium and benefit structure to reflect its underlying claims
experience and revised actuarial data; however, several factors could adversely
affect the medical loss ratios. Certain of these factors, which include changes
in health care practices, inflation, new technologies, major epidemics, natural
disasters and malpractice litigation, are beyond any health plan's control and
could adversely affect the Company's ability to accurately predict and
effectively control health care costs. Costs in excess of those anticipated
could have a material adverse effect on the Company's results of operations. See
"Business."

Competitive price pressures in the health insurance and managed care
industry, which generally result from the entry and exit of health care
companies in the marketplace, historically have resulted in, or contributed to,
pricing and profitability cycles. The extent to which recent structural changes
in the managed health care and health insurance industry have altered cyclical
patterns is uncertain. There can be no assurance, however, that a continuation
of the typical cyclical pattern will not adversely affect the profitability of
the Company in the next few years. See "Business."

COMPETITION

The health care industry is highly competitive both in Virginia and in
other states in the southeastern and mid-Atlantic United States into which the
Company principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. This increased pricing
pressure has adversely affected the Company's medical loss ratio during 1995 and
through the first nine months of 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General." The Company is
facing this increased competition in the areas in which it is licensed to use
the Blue Cross and Blue Shield service marks and tradenames, as well as in the
areas it operates without these service marks and tradenames. The Company also
faces competition from a trend among health care providers to combine and form
their own networks in order to contract directly with employer groups and other
prospective customers to provide health care services. There is no assurance
that such overall increased competition will not exert strong pressures upon
Trigon's profitability, its ability to increase enrollment, or its ability to
successfully pursue growth in areas both within and outside of Virginia.

The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO networks and
products. The trend in the health care industry is toward both vertical and
horizontal integration coupled with significant levels of managed care,
principally through HMOs. In the Company's principal geographic market areas,
HMOs have a smaller share of the health care market than in other areas of the
country, but the Company believes that HMOs will capture an increasing share of
the health care market. The Company believes that it will be necessary to
significantly expand its market share in the HMO market, in part by successfully
transitioning its PAR and PPO members into HMOs, if it is to succeed in
retaining a high overall market share in its existing geographic markets. There
can be no assurance that the Company will succeed in significantly expanding its
market share in HMOs. See "Business -- Competition."

GOVERNMENT REGULATION

The Company and its operating subsidiaries are regulated by state
regulators in Virginia, its state of incorporation, and to a lesser extent by
regulators in other states in which the Company's subsidiaries do business. This
regulation includes, among

<PAGE>
other things, limits on the amount of dividends and other distributions that can
be paid to the Company by its operating subsidiaries without prior approval or
notification, restrictions on transactions among the Company's operating
subsidiaries, or between the Company and its operating subsidiaries without
prior approval or notification, the granting and revoking of licenses to
transact business, premium rate regulation for certain lines of business,
regulation of trade practices, policy forms and claims payment, licensing of
agents and brokers, limits on the amount and type of investments that the
Company may hold, minimum reserve and surplus requirements, risk-based capital
requirements and mandatory participation in, and assessments in connection with,
risk-sharing pools and guaranty funds. Such regulation is primarily intended to
protect policyholders rather than investors.

During 1996, the Congress passed and the President signed into law the
Health Insurance Portability and Accountability Act of 1996, and new federal
mandates concerning mental health parity and maternity stays. Among other
things, the new insurance reform law addresses group and individual market
reforms (increasing the portability of health insurance), permits medical
savings accounts on a trial basis, and increases the deductibility of health
insurance for self-employed. Although this legislation was recently adopted, the
Company does not believe it will have a material adverse impact on its
operations. In addition, many states, including states in which the Company does
business, have enacted or are considering various health care reform statutes.
The Virginia General Assembly has passed health insurance market reform measures
with the general objective of encouraging greater access to health insurance for
small groups (employers with 2-99 employees) and individuals. These reforms
relate to, among other things, managed care practices such as requirements with
respect to maternity stays, waiting period restrictions for pre-existing
conditions, credit for certain prior coverage and guaranteed renewability of
small group employer plans and policies for individuals. The Company does not
believe that these reforms will have a material adverse effect on its results of
operations.

There can be no assurance that additional regulatory initiatives will not
be undertaken in the future, either at the federal or state level, to engage in
structural reform of the health care industry in order to reduce the escalation
in health care costs or to make health care more accessible. Such reform, if it
occurs, could adversely affect Trigon's results of operations or financial
condition. See "Business -- Regulation."

POTENTIAL ADVERSE REACTION TO THE DEMUTUALIZATION

The contracts that the Company has with its members and providers are
cancelable with minimal notice requirements and are renewable periodically.
Virginia BCBS, Trigon's predecessor, has not experienced significant contract
cancellation or non-renewal in recent years. The Company is not aware of any
potential material adverse customer reaction to the Demutualization. However,
there can be no assurance that the conversion of the Company to a stock
corporation in connection with the Demutualization or the fact that certain
customers will not receive stock in the Demutualization will not adversely
affect the marketability of the Trigon products or that the current members or
providers will not object to Trigon's conversion to a stock corporation and
either cancel or decline to renew their contracts. See "The Demutualization."

POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS

The Company intends to expand its business in part through acquisitions.
However, as a result of the expansion of managed care companies into Virginia
and the southeastern and mid-Atlantic regions of the United States, the
competition to purchase health care companies has intensified, which in many
instances has resulted in significant increases in the costs of acquiring such
companies, and which could affect the availability of attractive acquisition
opportunities. In addition, the Company has no significant experience in
expanding its managed health care business outside Virginia. There can be no
assurance that the Company will successfully identify or complete acquisitions
or that any acquisitions, if completed, will perform as expected or will
contribute significant revenues or profits to the Company.

The Company's ability to expand successfully outside of Virginia through
acquisitions or otherwise may be adversely affected by its inability to use the
Blue Cross and Blue Shield service marks and trademarks outside of the Company's
licensed territory in Virginia, by the Company's lack of substantial market
share or established provider networks outside of Virginia and by the presence
of competitors with strong market positions in these areas.

CONCENTRATION OF BUSINESS IN VIRGINIA

The Company primarily conducts business within the Commonwealth of
Virginia. While the Company's growth strategy includes expansion outside
Virginia, for the foreseeable future a significant portion of the Company's
revenues may be subject to economic factors specific to Virginia. Therefore,
there can be no assurance that a downturn in the Virginia economy would not
adversely affect the Company.

<PAGE>
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES

In connection with the Demutualization, Trigon Healthcare and the BCBSA
will enter into a new license agreement pursuant to which the Company and its
subsidiaries will continue to have the right after the Demutualization to use
certain Blue Cross and Blue Shield service marks and tradenames for their
products throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. The license requires a fee to be paid to BCBSA
equal to total association expenses allocated to members based upon enrollment
and premiums written. The Company's license from BCBSA will terminate if any
person, without the prior approval of a majority of the disinterested members of
BCBSA, acquires securities representing 20% or more of the voting control of the
Company. In addition, BCBSA may terminate the license if any person acquires
securities representing 5% or more of the voting control of the Company, such
stock ownership is deemed by BCBSA to be detrimental to the Blue Cross and Blue
Shield service marks and tradenames and a supermajority of the disinterested
members of BCBSA votes for termination. The Company's Articles of Incorporation
(the "Articles") will contain certain provisions intended to prevent such
termination of the BCBSA license. There can be no assurance that a court would
enforce these provisions, or that if these provisions were not enforced the
Company would retain the license from BCBSA. If the BCBSA license were to be
terminated, there would be a material adverse effect on the Company's business
and operations, which the Company does not believe it can meaningfully quantify.
See "Description of Capital Stock -- Certain Provisions of the Charter and Plan"
and "Business -- The Blue Cross Blue Shield License."

To the extent that the Company continues to use the Blue Cross and Blue
Shield service marks and tradenames in marketing its managed care products,
there can be no assurance that any negative publicity concerning BCBSA and other
BCBSA licensees will not adversely affect the sales of the Company's managed
care products and the Company's operations.

LEGAL PROCEEDINGS

The Company is the subject of various legal actions arising out of the
conduct of its business. These include an inquiry from the United States
Department of Labor (the "DOL") regarding the Company's policies on passing
through the benefits of provider discounts to self-funded employer groups whose
health care plans are subject to the Employee Retirement Income Security Act,
and claims and litigation brought by self-funded employer groups related to
these practices. See "Legal Proceedings." Due to the early stages of these
actions, the Company's management cannot make an estimate of loss, if any (and
has not established any liability with respect to the DOL inquiries), or predict
whether or not such actions will result in a material adverse effect on the
Company's results of operations in any particular period. While the ultimate
resolution of the DOL inquiries and the discount-related claims and litigation
cannot be estimated, the Company believes that these actions should not have a
material adverse effect on the Company's financial position.

CERTAIN CHARTER AND STATE LAW PROVISIONS

The Company's Articles will contain certain provisions which are intended
to prevent any holder from acquiring shares in excess of the limits set forth in
the Company's license agreement with BCBSA. These provisions will provide that,
except with the consent of the Company's continuing directors (as defined in the
Company's Articles), a stockholder (other than the Commonwealth of Virginia with
respect to the Class C Common Stock) is prohibited from acquiring beneficial
ownership of more than 5% of any class of the Company's capital stock (for which
purpose, the Common Stock and the Non-Voting Common Stock described below will
be treated as a single class). Furthermore, capital stock may not be transferred
to any person to the extent that such person would own more than 5%, or some
higher percentage as determined by the Company's continuing directors, of such
class of capital stock as a result of such transfer. If this restriction is held
to be unenforceable, the Articles will give the Company certain rights with
respect to the capital stock held by such person in excess of 5% (or other
percentage applicable to such person) of such class of capital stock. In
addition, the Articles will give the Company the right to convert any Common
Stock held by any person and that person's associates in excess of 5% of the
outstanding Common Stock into a separate class of common stock ("Non-Voting
Common Stock") which will have no voting rights (except and only as conferred by
law) but which will otherwise have rights identical to the Common Stock. The
Company is unaware of any legal interpretations regarding the enforceability of
these provisions of the Company's Articles, and there can therefore be no
assurance that a court would enforce these provisions, or that if these
provisions were not enforced that the Company would retain the license from
BCBSA. The Articles of Trigon Healthcare will provide that these provisions, as
well as certain other provisions of the Articles, generally may be amended only
with the affirmative vote of more than 75% of each class of the outstanding
shares of Trigon Healthcare entitled to vote. See "Description of Capital
Stock -- Certain Provisions of the Charter and Plan." In addition, the Plan of
Demutualization provides that no stockholder may, directly or indirectly,
acquire beneficial ownership of more than 5% of the Common Stock until 30 months
after the Demutualization without the consent of the Company's Board of
Directors. This limitation will not prevent the issuance to any Eligible

<PAGE>
Member of the shares of Common Stock to which such Eligible Member is entitled
under the Plan of Demutualization. However, any Eligible Member who receives
more than 5% of the Common Stock as a result of the Demutualization may not
acquire, directly or indirectly, any additional Common Stock until 30 months
after the Demutualization, unless at the time of such acquisition and
immediately following such acquisition, such Eligible Member would not, directly
or indirectly, own more than 5% of the Common Stock.

Virginia insurance holding company laws and regulations, as well as similar
laws and regulations in North Carolina where an insurance company subsidiary of
the Company is domiciled, prohibit acquisition of control of the Company unless
the applicable state regulator has approved the acquisition. Under the laws and
regulations of these states, control would be presumed to exist if a person
directly or indirectly has beneficial ownership of 10% or more of the Common
Stock. See "Business -- Regulation -- Insurance Holding Company Regulation."

The Virginia Stock Corporation Act (the "VSCA") contains provisions
governing "Affiliated Transactions" which are designed to deter certain
takeovers of Virginia corporations. These provisions, with several exceptions,
require approval of material transactions between a Virginia corporation and any
holder of more than 10% of any class of its outstanding voting shares by the
holders of at least two-thirds of the remaining voting shares. See "Description
of Capital Stock -- Virginia Anti-Takeover Law."

The VSCA also contains provisions governing "Control Share Acquisitions."
These provisions provide that shares of a Virginia public issuer acquired in a
transaction that would cause the voting strength of the acquiring person and its
associates to meet or exceed any of three thresholds (20%, 33 1/3% or 50%) have
no voting rights unless granted by a majority vote of shares not owned by the
acquiring person or any officer or employee-director of the Virginia public
issuer. See "Description of Capital Stock -- Virginia Anti-Takeover Law."

Generally, beneficial ownership of shares of Common Stock includes direct
or indirect ownership, including the right to vote such shares pursuant to
irrevocable proxies and the right to acquire such shares.

LIMITATION ON DIVIDENDS; LIQUIDITY OF THE HOLDING COMPANY

As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers, such as Trigon Insurance, the Company's principal operating
subsidiary. See "Dividend Policy" and "Business -- Regulation."

NO PRIOR PUBLIC MARKET

Prior to the distribution of Common Stock in the Demutualization and the
Offerings, there has been no public market for the Common Stock. The Common
Stock has been approved for listing on the New York Stock Exchange under the
symbol "TGH," subject to official notice of issuance. However, there can be no
assurance that an active trading market in the Common Stock will develop or be
sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the representatives of
the Underwriters and may not be indicative of the market price for the Common
Stock after the Offerings. See "Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

The 24.5 million shares of Common Stock distributed in the Demutualization
to Eligible Members will be subject to a six-month lockup. After expiration of
the lockup period, the shares of Common Stock distributed in the Demutualization
will be eligible for immediate resale in the public market without restriction
by Eligible Members who are not "affiliates" of Virginia BCBS or Trigon
Healthcare within the meaning of Rule 144 under the Securities Act of 1933.
Local Virginia governments and school boards are expected to receive
approximately 3.1 million shares of Common Stock in the Demutualization. Under
current Virginia law, the Treasurer of each of these entities may be held
strictly liable for any decrease in value of the Common Stock held by such
entities after the end of the lockup period. Consequently, unless the Virginia
law is revised before the end of the lockup period, the Company expects that
substantially all these shares will be sold on the day the lockup period ends.
The Virginia General Assembly is currently considering legislation to relax the
strict liability standard with regard to Common Stock held by the Treasurer of
each of these entities; however, there can be no assurance that such legislation
will be enacted. In addition, Eligible Members subject to ERISA are expected to
receive approximately 12.2 million shares of Common Stock in the
Demutualization. ERISA plan fiduciaries have a duty to diversify the investments
of the ERISA plan to minimize the risk of large losses, unless it is clearly
prudent not to do so. For many ERISA plans, the Common Stock will be the only
asset of the plan. If an ERISA plan has no assets other than Common Stock, the
plan also may incur additional expenses for government reporting if the Common
Stock is not sold by the end of the plan year in which

<PAGE>
the lockup period ends. Consequently, ERISA plans may be more likely than other
Eligible Members to sell Common Stock in the near term after the lockup period
ends.

Moreover, in accordance with the Plan of Demutualization, the Company will
for a period of 90 days, which may be extended by the Company, commencing no
earlier than six months and no later than 18 months after the Effective Date of
the Demutualization provide for the public sale, at market prices and without
brokerage commissions or similar fees, of odd lot shares of Common Stock
received pursuant to the Plan of Demutualization by certain Eligible Members. In
the alternative, these Eligible Members will be able to purchase sufficient
shares of Common Stock to round up their holding to 100 shares. The Company will
determine after the Demutualization and at least 30 days before the program
begins the maximum number of shares of Common Stock received in the
Demutualization, not to exceed 99, that will entitle such holders to participate
in the program. The Company will also agree not to offer, sell or otherwise
dispose of any shares of Common Stock (or securities convertible into Common
Stock) for a period of 180 days after the date of this Prospectus without the
prior written consent of the Underwriters, subject to certain limited
exceptions.

No prediction can be made as to the effect, if any, such future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. See "The
Demutualization -- Commission-Free Sales and Round-Up Program," "Shares Eligible
for Future Sale" and "Underwriting."

<PAGE>
THE COMPANY

As of September 30, 1996, the Company's network systems consisted of: HMO
networks which, with 251,399 members, are the Company's most tightly managed and
cost efficient networks; the PPO networks which, with 774,473 members, offer
greater choice of providers than Trigon's HMOs and may include a POS feature;
and the PAR network which, with 615,655 members, is the Company's broadest and
most flexible network. The Company's more tightly managed networks exert greater
controls upon members in return for greater premium rate reductions, as well as
stronger utilization and price controls upon providers in return for larger
numbers of members directed to these businesses. See "Business -- Network
Systems." The Company also serves 218,814 additional members through its
Medicare supplemental plans (128,006 members), third-party administration of
health care claims (40,383 members) and through Mid-South Insurance Company, a
Fayetteville, North Carolina-based health and life insurance company, which the
Company acquired in 1996 (50,425 members). Within the Company's managed care
product offerings, customers may choose between at-risk arrangements (in which
the Company bears the cost of providing specified health care services for a
fixed payment) and self-funded arrangements (in which the customer bears all or
a portion of the risk). As of September 30, 1996, 47.6% of members were covered
under at-risk arrangements and 41.8% were covered under self-funded
arrangements, with the remaining 10.6% covered under the FEP administered under
a contract with the BCBSA.

In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon has the largest number of HMO members in Virginia. Trigon's
total HMO enrollment has grown from 60,154 members at December 31, 1991 to
251,399 members as of September 30, 1996, representing a compound annual growth
rate of 35.1%. The Company's PPO network system is the largest in Virginia.
Trigon's total PPO enrollment has grown from 396,584 members at December 31,
1991 to 774,473 members as of September 30, 1996, representing a compound annual
growth rate of 15.1%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 55.1% as of September 30,
1996. Trigon's more traditional products are offered through its PAR network,
which is the Company's largest network. As a result of the Company's strategy of
encouraging members to migrate to its more tightly managed networks, total
membership in the PAR network decreased from 951,020 members at December 31,
1991 to 615,655 members at September 30, 1996. Trigon also offers several
specialty health care and related products, such as dental, wellness, mental
health and life, accident and disability insurance coverage.

Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon Healthcare will be the holding company
for Trigon Insurance, which is the successor company to Virginia BCBS.

The mailing address for the Company's Corporate Headquarters is P.O. Box
27401, Richmond, VA 23279. Its telephone number is (804) 354-7000.

<PAGE>
THE DEMUTUALIZATION

HISTORY

The Company's Blue Cross predecessors were first established in Virginia in
1935 as prepaid health service plans by groups of hospitals. Originally, several
such hospital plans existed in the Company's service area. These plans
ultimately consolidated into two plans based in Richmond and Roanoke,
respectively, and these two plans later merged in 1986. The Company's Blue
Shield predecessors were first established in Virginia in 1944 as prepaid health
service plans by groups of physicians, later becoming the Virginia Blue Shield
plan. In 1982, the Blue Cross plan based in Richmond and the Blue Shield plan
merged to form Blue Cross and Blue Shield of Virginia, a nonstock corporation.
In 1991, the Company became a mutual company.

BACKGROUND OF THE DEMUTUALIZATION

As a mutual company, Trigon is not able to issue stock. The Company is
therefore generally unable to raise capital through the equity capital markets
or effect acquisitions through the issuance of equity securities, as stock
corporations are able to do. The Company believes that if it is to enhance its
strategic position in the consolidating managed care industry and finance its
expansion plans, it will be necessary for the Company to access the equity
capital markets, as well as to effect acquisitions and other strategic alliances
through the issuance of equity securities. Additionally, by creating a holding
company structure through demutualization, the Company will no longer be subject
to the regulatory limitations on subsidiary investments that currently restrict
its ability to effect acquisitions. See "Risk Factors -- Competition" and "Risk
Factors -- Potential Risks Associated with Growth Through Acquisitions."

PROCESS OF DEMUTUALIZATION

Under the Plan of Demutualization, Virginia BCBS will be converted into a
stock insurance corporation, will change its name to Trigon Insurance Company,
and will become a wholly owned subsidiary of Trigon Healthcare. The membership
interests of the Company's Eligible Members will be converted in the
Demutualization into Common Stock of Trigon Healthcare, or in certain
circumstances, cash. The cash consideration payable in lieu of Common Stock will
be based on the net proceeds per share of Common Stock received by the Company
in the Offerings. The Company does not expect that any single Eligible Member
will receive more than 5% of the Common Stock issuable in the Demutualization.
The only Common Stock that will be outstanding following the Demutualization
will be that issued in the Demutualization and that to be issued pursuant to the
Offerings. The Plan of Demutualization provides that the Company may issue
shares of Class C Common Stock to the Commonwealth of Virginia in connection
with the Demutualization; however, the Company does not expect to issue any
Class C Common Stock. See " -- The Commonwealth Payment."

As required by Virginia law, the Plan of Demutualization was approved by
the members of Virginia BCBS at a special meeting held on September 6, 1996. On
November 5, 1996, the State Corporation Commission entered a final order
approving the Plan of Demutualization after a public hearing. The Company
expects that the Demutualization will become effective on February 5, 1997. The
Plan of Demutualization requires the Company to complete, simultaneously with
the Demutualization, an initial public offering of Common Stock that will
generate net proceeds equal to at least $25.0 million plus the cash needed to
make mandatory cash payments under the Plan of Demutualization. At least $25.0
million in net proceeds of the Offerings will be used for general corporate
purposes, including expansion of the Company's networks, products and geographic
base, both through internal growth and through acquisitions of managed health
care companies or related lines of business. The Plan of Demutualization also
provides that the Company may make other offerings of other equity or debt
securities or incur debt obligations, simultaneously with such initial public
offering or anytime thereafter. The Company will not make any such additional
offerings at this time; however, the Company does expect to enter into a
revolving credit agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

THE COMMONWEALTH PAYMENT

Virginia law requires that, in connection with the Demutualization, the
Treasurer of the Commonwealth of Virginia must receive the Commonwealth Payment,
which is an amount equal to the surplus, computed in accordance with generally
accepted accounting principles, of Virginia BCBS on December 31, 1987, plus $10
million. The Commonwealth Payment will be approximately $175 million. From its
formation in 1935 until January 1, 1988, Virginia BCBS, as a health services
plan, was exempt pursuant to Virginia law from the premium tax that the
Commonwealth of Virginia imposed on other health insurers. While operating as a
tax exempt entity, Virginia BCBS accumulated a surplus of approximately $165
million. The

<PAGE>
Commonwealth Payment is in addition to any shares of Common Stock to which the
Commonwealth of Virginia is entitled as an Eligible Member.

The Plan of Demutualization provides that at least one-half of the
Commonwealth Payment will be made in cash. The remainder will be made in cash or
shares of Class C Common Stock (valued at the initial per share price of the
Common Stock to the public in the Offerings). The Company expects to use
proceeds of the Offerings to pay $56.0 million of the Commonwealth Payment and
to fund the balance from borrowings under a revolving credit agreement or other
available cash. The Company has not received any binding commitments with
respect to such revolving credit agreement and there can be no assurance that
the Company will be able to enter into such an agreement in connection with the
Offerings. In this event, the Company would issue Class C Common Stock in
payment of one-half of the Commonwealth Payment and use proceeds of the
Offerings and other available cash to fund the balance.

Pursuant to the Plan of Demutualization the Virginia Attorney General and
the Joint Rules Committee of the Virginia General Assembly have each identified
to the Company three proposed nominees to the Board of the Company. Under the
Plan of Demutualization these persons must be citizens of the Commonwealth of
Virginia who do not hold public office and have no direct or indirect financial
interest, except as consumers, in Virginia BCBS. The Company will cause two of
these nominees (one from the list submitted by the Virginia Attorney General and
one from the list submitted by the Joint Rules Committee) to be elected
directors of the Company before or within seven days after the effective date of
the Demutualization. See "Management -- Directors and Executive Officers."

FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION

Based on current law, including judicial decisions and the existing
administrative position of the Internal Revenue Service ("IRS"), the Company
believes that the Demutualization should be tax-free to the Company and that
Eligible Members of the Company should not be subject to federal income tax on
the receipt of Common Stock in exchange for their membership interests.
Accordingly, the Company believes that it will not realize any significant
income or loss for federal income tax purposes as a result of the
Demutualization, and that the federal income tax attributes of the Company,
including its basis and holding period in its assets, its earnings and profits
and any tax accounting methods will not be significantly affected by the
Demutualization.

As a Blue Cross and Blue Shield organization, the Company has been entitled
to certain federal income tax benefits, which have had the effect of reducing
its effective tax rate below the statutory federal income tax rate of 35%. The
Company believes that because of the Demutualization or other factors, its
effective tax rate in future years is likely to be equal to the statutory
federal income tax rate of 35%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Income Taxes."

In a recent case brought against the Federal Government in Federal District
Court in Maine, UNUM Corporation and UNUM Life Insurance Company, a Maine life
insurance company that demutualized in 1986 (collectively, "UNUM"), claimed that
its distribution of stock and cash to its policyholders pursuant to a plan of
demutualization should be treated for federal income tax purposes as the
distribution of a policyholder dividend rather than as a payment in exchange for
a membership interest. If the distribution were treated for federal income tax
purposes as a policyholder dividend, UNUM would be entitled to a deduction equal
to the amount of cash and the fair market value of any stock so distributed, and
each policyholder receiving cash or stock likely would be treated for federal
income tax purposes as having received a policyholder dividend equal to the
amount of cash and the fair market value of the stock so distributed. On May 23,
1996, the Federal District Court ruled in favor of the Federal Government and
against UNUM. Under the District Court's decision, no portion of the stock or
other property distributed by UNUM would be treated as a deductible policyholder
dividend. UNUM has appealed the District Court decision to the United States
Court of Appeals for the First Circuit.

The Company has been advised by its special tax counsel that the position
advanced by UNUM has not previously been tested in the courts and is
inconsistent with the treatment that has been applied by taxpayers and the IRS
to stock distributed in other demutualization transactions. The Company is
unable to predict the eventual outcome of the UNUM litigation, or whether the
outcome of the UNUM litigation could have any effect on the tax treatment of the
Demutualization.

The Company may decide, based on the eventual outcome of the UNUM case or
other judicial decisions, actions taken by the IRS, or other developments in the
law, and the advice of its tax advisors, that all or some portion of its
distribution of cash and Common Stock to Eligible Members pursuant to the
Demutualization should be treated for federal income tax purposes as a
policyholder dividend. In that event, the Company may claim a policyholder
dividend deduction equal to some or all of the amount of cash or fair market
value of the Common Stock distributed to Eligible Members. If the Company

<PAGE>
attempts to claim a policyholder dividend deduction, it is likely that the IRS
would challenge its claim. The tax treatment could remain unresolved for a
number of years. Final resolution of the issue could result in retroactive
changes to the tax treatment of Eligible Members. It is also possible that as a
result of the pending litigation or actions taken by the Company the IRS could
decide to treat some or all of the cash and Common Stock distributed in the
Demutualization as a policyholder dividend and seek to assert federal income tax
liability against certain Eligible Members.

For other potential federal income tax consequences of the Demutualization,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."

CASH PAYMENTS

Under the Plan of Demutualization, Eligible Members may elect a preference
to receive cash instead of Common Stock. In addition, certain Eligible Members
are required to receive cash in the Demutualization. The amount of funds
allocated to make cash payments to Eligible Members who elect to receive cash
will be determined by the Board of Directors of the Company but may not, under
the Plan of Demutualization, exceed the net proceeds from the Offerings and any
other offering of equity or debt securities completed on the effective date of
the Plan of Demutualization less the sum of (i) $25.0 million and (ii) the
amount required to make mandatory cash payments to Eligible Members. The amount
of cash consideration that will be payable in lieu of each share of Common Stock
will be equal to the net proceeds per share of the Offerings. Based on the
initial public offering price of $13 per share, the Company expects that $91.3
million will be paid to Eligible Members in lieu of issuing 7.6 million shares
of Common Stock. See "Unaudited Pro Forma Consolidated Financial Information."

If there is not sufficient cash available to allow all Eligible Members who
have elected a preference for cash ("Preferred Cash Members") to receive all of
their consideration in cash, then the available cash will be allocated as
follows. First, all Eligible Members required to receive cash under the Plan of
Demutualization ("Mandatory Cash Members") will receive cash in lieu of all
Common Stock allocated to them. Second, all Preferred Cash Members allocated
fewer than 100 shares of Common Stock in the Demutualization will receive cash
in lieu of all Common Stock allocated to them, and if the cash remaining after
paying cash to the Mandatory Cash Members is not sufficient to make payments to
all Preferred Cash Members allocated fewer than 100 shares, then the cash
available to such Preferred Cash Members will be distributed to them pro rata to
the number of shares of Common Stock allocated to them in the Demutualization.
Any cash remaining after those payments will be distributed among all other
Preferred Cash Members expressing a preference for cash pro rata to the number
of shares of Common Stock allocated to them in the Demutualization. Any portion
of consideration not paid to Eligible Members in cash will be paid by issuance
of shares of Common Stock, provided that, regardless of how the available cash
is allocated, no fractional shares of Common Stock will be issued in the
Demutualization.

Eligible Members are required under the Plan of Demutualization to receive
cash if (i) they are known by the Company to be subject to a lien or bankruptcy
proceeding; (ii) their address for mailing purposes is shown on the records of
Virginia BCBS as located outside of the United States; (iii) their address for
mailing purposes is shown on the records of Virginia BCBS as located in a state
in which there are 30 or fewer Eligible Members; or (iv) their address for
mailing purposes is shown on the records of Virginia BCBS as located in a state
in which, in the reasonable determination of the Company, the requirements
necessary to qualify the Common Stock in that state are excessively burdensome
or expensive or are likely to be subject to unreasonable delays.

LOCKUP PERIOD

All shares of Common Stock to be issued to Eligible Members as
consideration initially will be uncertificated and will be subject to a
six-month lockup period following the Offerings. All shares of Common Stock or
securities convertible into or exchangeable for Common Stock issued as a
dividend or distribution on shares of Common Stock subject to the lockup may, at
the Company's discretion, also be subject to the lockup. See "Shares Eligible
for Future Sale."

During the lockup period, Trigon Healthcare will be under no obligation to
recognize any transfer of any right or interest in any Common Stock subject to
the lockup, other than a transfer by an Eligible Member to a trust established
in connection with an ERISA Plan of the Eligible Member, the granting of a
revocable proxy that complies with the Articles and bylaws of Trigon Healthcare,
the Plan of Demutualization and Virginia law, a transfer as a result of the
bankruptcy or insolvency of an Eligible Member, a transfer as a result of the
death of an Eligible Member, or a transfer as a result of a merger or
consolidation affecting an Eligible Member. Thus, Eligible Members will not be
able to sell, pledge, or to realize their interest in the Common Stock or any
part of it while it is subject to the lockup, except pursuant to the limited
cases described above.

<PAGE>
COMMISSION-FREE SALES AND ROUND-UP PROGRAM

The Company intends to conduct a commission-free odd-lot sale and round-up
program to enable stockholders who receive fewer than a specified number of
shares of Common Stock in the Demutualization either to sell all of their shares
or to purchase sufficient stock to round up their holding to 100 shares. The
Plan of Demutualization provides that the odd-lot program will commence no
earlier than six months after the Demutualization and no later than 18 months
after the Demutualization. The Company expects that the odd-lot program will
continue for 90 days, but may be extended by the Company at its discretion. The
Company will determine after the Demutualization and at least 30 days before the
program begins the maximum number of shares of Common Stock, not to exceed 99,
that will entitle such holder to participate in either the selling or round-up
features of the program. The expenses of the program will be borne by the
Company. Purchases and sales under the program will be matched at the then
prevailing market prices of Common Stock, and any excess purchases or sales
needed to fulfill the program will be made in the market. Details of the odd-lot
program will be mailed by the Company to holders eligible to participate
following the Demutualization and prior to the commencement of the program.

USE OF PROCEEDS

The net proceeds to the Company from the Offerings will be approximately
$187.2 million ($215.5 million if the Underwriters' over-allotment options are
exercised in full), after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company intends to use $56.0
million of the net proceeds of the Offerings to make a portion of the
Commonwealth Payment, $91.3 million of the net proceeds of the Offerings to make
cash payments to Eligible Members in the Demutualization and the balance (which
amount will be approximately $39.8 million, or $68.1 million if the
Underwriters' over-allotment options are exercised in full) of the net proceeds
of the Offerings for general corporate purposes, including expansion of the
Company's networks, products and geographic base, both through internal growth
and through acquisitions of managed health care companies or related lines of
business. Although the Company has no commitments or agreements with respect to
any acquisitions, the Company believes that the increased resources and
financial flexibility provided by the Offerings will enhance its ability to take
advantage of acquisition opportunities as they arise. Pending such uses, the net
proceeds will be invested primarily in short-term and medium-term fixed income
securities.

DIVIDEND POLICY

The Company anticipates that all earnings in the foreseeable future will be
retained to finance the continuing development of its business. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, future earnings, the success
of the Company's business activities, regulatory and capital requirements, the
general financial condition of the Company and general business conditions.

To the extent that the Company determines to pay dividends in the future,
the principal source of funds to pay dividends to stockholders would be
dividends received by the Company from its subsidiaries, including Trigon
Insurance. Virginia insurance laws and regulations restrict the payment of
dividends by health care insurance companies, such as Trigon Insurance, in a
holding company structure. See "Business -- Regulation." In addition, under the
terms of the Company's proposed $300 million revolving credit agreement, the
Company may not pay dividends on the Common Stock unless the aggregate of all
dividends paid by the Company plus payments to purchase, redeem or otherwise
acquire capital stock of the Company (other than the Commonwealth Payment) does
not exceed the sum of (i) $10,000,000 plus (ii) 50% of the consolidated net
income (or minus 100% of consolidated net loss) of the Company for the period
from the effectiveness of the Demutualization through the end of the most
recently completed fiscal quarter, plus (iii) an amount (not to exceed
$50,000,000) equal to 50% of the cumulative cash dividends paid out of income of
certain subsidiaries of the Company earned prior to January 1, 1997 and received
by the Company after the date of the revolving credit agreement and before
December 31, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".

<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996. The "Pro Forma As Adjusted" column reflects
(i) the sale of 15.5 million shares of Common Stock in the Offerings at the
offering price of $13 per share, less the underwriting discount and estimated
offering expenses payable by the Company, (ii) the issuance of 24.5 million
shares of Common Stock to Eligible Members pursuant to the Demutualization,
(iii) the use of net proceeds of the Offerings to pay $91.3 million to certain
Eligible Members in lieu of 7.6 million shares of Common Stock that would
otherwise be issued to such Eligible Members pursuant to the Demutualization,
(iv) the use of net proceeds of the Offerings to pay $56.0 million of the
Commonwealth Payment and the borrowing of $119.0 million under a revolving
credit agreement to fund the balance of the Commonwealth Payment and (v) the
payment of $6.0 million for the remaining expenses of the Demutualization. This
table should be read in conjunction with the Company's consolidated financial
statements and the related summary of significant accounting policies and notes
thereto included elsewhere in this Prospectus. The pro forma as adjusted data
are not necessarily indicative of the financial condition of the Company that
would have been reported had the transactions been consummated on the date
assumed, or of future financial condition. See "Unaudited Pro Forma Consolidated
Financial Information."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
(UNAUDITED)

<CAPTION>
(DOLLARS IN 000'S,
EXCEPT PER SHARE DATA)
<S> <C> <C>
LIABILITIES:
Obligation for Commonwealth Payment, current............................. $ 87,500 $ --
-------- -----------
-------- -----------
Obligation for Commonwealth Payment, noncurrent.......................... $ 87,500 $ --(1)
Long-term debt........................................................... -- 119,000(1)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 per share par value, 300,000,000 shares authorized;
39,975,022 shares issued and outstanding (2)........................... 400(3)(4)
Capital in excess of par................................................. 745,388(3)(4)
Retained earnings........................................................ 655,952 --(4)
Net unrealized gain on investment securities, net of deferred income
taxes of $16,517....................................................... 30,698 30,698
-------- -----------
Total surplus....................................................... 686,650
Total stockholders' equity.......................................... 776,486
-------- -----------
Total capitalization.............................................. $774,150 $ 895,486
-------- -----------
-------- -----------
</TABLE>

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

(1) Reflects the borrowing of $119.0 million under a revolving credit agreement
to fund a portion of the Commonwealth Payment. The Company has not received
any binding commitments with respect to such revolving credit agreement and
there can be no assurance that the Company will be able to enter into such
an agreement in connection with the Offerings. In this event, the Company
would issue Class C Common Stock in payment of one-half of the Commonwealth
Payment and use proceeds of the Offerings and other available cash to fund
the balance.

(2) No shares of the Company's Class B non-voting Common Stock, $.01 par value
or Class C Common Stock are expected to be outstanding upon completion of
the Offerings.

(3) Reflects the issuance of 24.5 million shares of Common Stock to Eligible
Members in the Demutualization and the proceeds from the sale of 15.5
million shares of Common Stock in the Offerings at $13 per share, less the
underwriting discount and estimated offering expenses.

(4) Reflects the reclassification of the retained earnings of the mutual
insurance company after the effect of the Commonwealth Payment and the
payment of $91.3 million to certain Eligible Members in lieu of 7.6 million
shares of Common Stock that would otherwise be issued to such Eligible
Members in the Demutualization.

<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected consolidated financial and operating data presented below as
of the end of and for each of the years in the five-year period ended December
31, 1995 and the nine months ended September 30, 1996 are derived from the
audited consolidated financial statements of Virginia BCBS, which consolidated
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. The Statement of Operations Data for the nine months ended September
30, 1995, the Balance Sheet Data as of September 30, 1995 and the information
under the caption "Members at end of period" are unaudited. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year. The selected data should be read in
conjunction with the Company's audited consolidated financial statements and the
related summary of significant accounting policies and notes thereto included
elsewhere in this Prospectus. The audit report refers to changes in accounting
for investment securities, income taxes and postemployment benefits.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- --------- ---------
(IN 000'S) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Premium and fee revenues
Commercial....................... $1,024,066 $1,057,821 $1,050,157 $1,081,820 $1,157,899 $ 857,448 $ 985,127
Federal Employee Program......... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-
funded arrangements............ 777,420 871,101 905,529 908,234 981,741 719,067 798,358
Less: Amounts attributable to
claims under self-funded
arrangements................... (697,069) (786,252) (815,488) (827,869) (897,954) (655,731) (731,062)
---------- ---------- ---------- ---------- ---------- --------- ---------
1,311,295 1,396,772 1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income.................. 31,558 31,810 34,279 39,962 45,861 34,881 34,081
Net realized gains................. 24,017 25,584 26,199 12,793 52,976 34,833 50,685
Other revenues..................... 25,579 27,946 30,555 45,467 55,176 41,096 37,666
---------- ---------- ---------- ---------- ---------- --------- ---------
Total revenues................... 1,392,449 1,482,112 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
Operating expenses
Medical and other benefit costs
Commercial....................... 825,925 835,777 795,921 802,666 959,328 689,705 809,344
Federal Employee Program......... 193,505 238,986 262,295 283,645 312,222 234,965 252,478
---------- ---------- ---------- ---------- ---------- --------- ---------
1,019,430 1,074,763 1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and administrative
expenses......................... 246,617 281,191 308,412 322,391 346,353 247,059 283,704
Copayment refund program (1)....... -- -- -- 36,432 47,073 46,702 --
---------- ---------- ---------- ---------- ---------- --------- ---------
Total operating expenses......... 1,266,047 1,355,954 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before income taxes,
cumulative effects of changes in
accounting principles and
extraordinary items (operating
income)............................ 126,402 126,158 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (2)..... 29,107 32,220 35,803 24,564 8,264 8,475 (46,751)
---------- ---------- ---------- ---------- ---------- --------- ---------
Income before cumulative effects of
changes in accounting principles
and extraordinary items............ 97,295 93,938 107,858 93,959 51,702 52,797 141,667
Cumulative effects of changes in
accounting principles, net of
income taxes (3)................... (21,876) -- 8,126 -- -- -- --
Extraordinary items, net of income
taxes (4).......................... -- -- -- (644) (4,707) (2,999) (186,280)
---------- ---------- ---------- ---------- ---------- --------- ---------
Net income (loss).................... $ 75,419 $ 93,938 $ 115,984 $ 93,315 $ 46,995 $ 49,798 $ (44,613)
---------- ---------- ---------- ---------- ---------- --------- ---------
---------- ---------- ---------- ---------- ---------- --------- ---------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------------------------ -----------
1991 1992 1993 1994 1995 1995
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING STATISTICS:
Medical loss ratio (5)
Commercial........................ 80.7% 79.0% 75.8% 74.2% 82.9% 80.4%
Federal Employee Program.......... 93.5 94.1 94.0 93.5 94.8 94.7
Total........................... 82.8 81.9 79.6 78.4 85.5 83.6
Selling, general and administrative
expenses ratio (6)................ 12.1% 12.7% 13.6% 13.8% 13.7% 13.2%
Operating margin (6)................ 9.1 8.5 9.5 9.9 6.2 8.4
Net margin (6)...................... 7.0 6.3 7.1 7.9 5.4 7.3
Members at end of period (unaudited)
HMO............................... 60,154 60,683 84,081 119,982 221,148 210,057
PPO............................... 396,584 561,686 624,811 672,610 747,297 710,365
PAR............................... 951,020 770,038 687,475 653,097 618,238 629,213
Other (7)......................... 231,714 228,749 235,640 235,984 212,935 212,032
---------- ---------- ---------- ---------- ---------- -----------
Total........................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667
---------- ---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- ---------- -----------

1996
---------
<S> <C>

OPERATING STATISTICS:
Medical loss ratio (5)
Commercial........................ 82.2%
Federal Employee Program.......... 95.1
Total........................... 84.9
Selling, general and administrative
expenses ratio (6)................ 13.6%
Operating margin (6)................ 6.6
Net margin (6)...................... 5.4
Members at end of period (unaudited)
HMO............................... 251,399
PPO............................... 774,473
PAR............................... 615,655
Other (7)......................... 218,814
---------
Total........................... 1,860,341
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ----------- ----------
(IN 000'S) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments................ $590,623 $ 714,827 $ 940,914 $1,001,571 $1,119,652 $1,107,079 $1,124,280
Total assets........................ 939,912 1,037,301 1,266,952 1,403,104 1,565,331 1,557,263 1,734,737
Obligation for
Commonwealth Payment
Current......................... -- -- -- -- -- -- 87,500
Noncurrent...................... -- -- -- -- -- -- 87,500
Surplus (8)......................... 350,333 444,271 606,146 655,875 740,071 743,501 686,650
</TABLE>

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

(1) The Company conducted a Copayment Refund Program (the "Copayment Program")
in accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original coinsurance
payment, which had been based on the facility's undiscounted charges, and an
adjusted coinsurance payment calculated using the Company's average discount
percentage at the facility. Costs incurred under the Copayment Program
included refunds, interest and administrative costs associated with the
Copayment Program that the Company would not otherwise have incurred. The
cost of the Copayment Program in 1994 was $36.4 million, or $30.0 million
net of income taxes. In accordance with an agreement with the State
Corporation Commission dated November 16, 1995, the Company re-opened the
Copayment Program. As part of the re-opening of the Copayment Program, the
Company mailed refunds to approximately 300,000 members who had not filed a
claim under the original program and for whom the Company had an address. In
addition, the Company announced that there are approximately 200,000 former
members for whom the Company does not have an address and who are eligible
for refunds. Under this new agreement, any amounts not paid by December 31,
1996 will be escheated to the Commonwealth of Virginia as unclaimed
property. The cost of re-opening the Copayment Program was $47.1 million, or
$40.6 million net of income taxes, in 1995.

(2) The Company's effective tax rates (income tax expense as a percentage of
operating income) as reflected in its consolidated financial statements were
13.8% for the year-ended December 31, 1995 and 13.8% for the nine months
ended September 30, 1995. These effective tax rates were lower than the 35%
statutory federal income tax rate due to the recognition of nontaxable
income and the reduction in the valuation allowance on deferred tax assets.
The reduction in the valuation allowance on deferred tax assets is primarily
related to realization of alternative minimum tax credits. The effective tax
rate for the nine months ended September 30, 1996 (income tax benefit as a
percentage of operating income) was a tax benefit of 49.3%. This rate
differs from the 35% statutory federal rate due primarily to the realization
of alternative minimum tax credits during the nine-month period and the
elimination as of September 30, 1996 of the $63.9 million valuation
allowance maintained by the Company with respect to deferred tax assets
because the Demutualization has made it more likely than not that the assets
will be realized. Excluding the effects of the elimination of the valuation
allowance, the effective tax rate would have been 18.1% for the nine months
ended September 30, 1996. These items are not recurring and the Company
believes that in the future its effective tax rate as reflected in its
consolidated financial

<PAGE>
statements should approximate the 35% federal statutory rate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."

(3) During 1991, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions." The cumulative effect at January 1, 1991 of the change in
accounting for postretirement benefits was a charge of $21.9 million to net
income. During 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The cumulative effect at January 1,
1993 of the change in accounting for postemployment benefits was a charge of
$4.8 million to net income. During 1993, the Company also adopted SFAS No.
109, "Accounting for Income Taxes." The cumulative effect at January 1, 1993
of the change in accounting for income taxes was a $12.9 million increase in
net income.

(4) For the years ended December 31, 1994 and 1995, the Company recognized
extraordinary charges of $644,000 and $4.7 million net of income taxes of
$347,000 and $2.5 million, for costs incurred in connection with the
Demutualization. During the nine-month periods ended September 30, 1995 and
1996, the Company recognized extraordinary charges of $3.0 million, and
$11.3 million, net of income taxes of $1.6 million and $594,000,
respectively, for costs incurred in connection with the Demutualization. For
the nine months ended September 30, 1996, the Company also recognized an
extraordinary charge for the $175 million obligation to the Commonwealth of
Virginia in connection with the Demutualization as required by Virginia law.
See "The Demutualization -- The Commonwealth Payment."

(5) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.

(6) The selling, general and administrative expenses ratio is calculated as a
percentage of total revenues excluding amounts attributable to claims under
self-funded arrangements, investment income and net realized gains while the
operating margin and net margin ratios are calculated by dividing operating
income or net income by total revenues. These ratios have been calculated
exclusive of non-recurring items which include the Copayment Program, the
elimination of the $63.9 million valuation allowance on deferred tax assets,
effects of changes in accounting principles and extraordinary items.

(7) "Other" members include enrollment from Medicare supplemental plans,
third-party administration of health care claims, out-of-state student
health care coverage and Mid-South members, after its acquisition in
February 1996.

(8) Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, at December 31, 1993, 1994 and 1995, surplus included net
unrealized gains on investment securities, net of deferred income taxes, of
$45.9 million, $2.3 million and $39.5 million, respectively. At September
30, 1995 and 1996 surplus included net unrealized gains on investment
securities, net of deferred income taxes, of $40.1 million and $30.7
million, respectively.

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated financial information (the "Pro Forma
Information") presented below gives effect to (i) the Demutualization, including
the issuance of 24.5 million shares of Common Stock in connection therewith to
Eligible Members, (ii) the use of net proceeds of the Offerings to pay $56.0
million of the Commonwealth Payment and the borrowing of $119.0 million under a
revolving credit agreement to fund the balance of the Commonwealth Payment (iii)
the sale of 15.5 million shares of Common Stock in the Offerings at the initial
public offering price of $13 per share (before deducting the estimated
underwriting discount and offering expenses payable by the Company), as if the
Demutualization had occurred as of September 30, 1996 for purposes of the
unaudited pro forma consolidated balance sheet, and as of January 1, 1995 for
purposes of the unaudited pro forma consolidated statements of operations for
the year ended December 31, 1995 and the nine months ended September 30, 1996.
Prior to the Demutualization, "Stockholders' Equity" represents consolidated
surplus of Virginia BCBS.

The Pro Forma Information reflects estimated gross and net proceeds of the
Offerings of $201.5 million and $187.2 million, respectively. The Pro Forma
Information also assumes that, of the estimated net proceeds, (i) $91.3 million
will be paid to certain Eligible Members in lieu of 7.6 million shares of Common
Stock that would otherwise be issued to such Eligible Members in the
Demutualization, (ii) $56.0 million will be used to make a portion of the
Commonwealth Payment and (iii) the balance will be retained by the Company for
general corporate purposes. See "Use of Proceeds." In addition, the Pro Forma
Information assumes the payment of $6.0 million for the remaining expenses of
the Demutualization.

The Pro Forma Information is based on available information and on
assumptions the Company believes are reasonable and that reflect the effects of
these transactions. The Pro Forma Information is provided for informational
purposes only and should not be construed to be indicative of the Company's
consolidated financial position or its consolidated results of operations had
these transactions been consummated on the dates assumed and does not in any way
represent a projection or forecast of the Company's consolidated financial
position or consolidated results of operations for any future date or period.
The Pro Forma Information should be read in conjunction with the historical
consolidated financial statements of the Company included elsewhere in this
Prospectus and with the information set forth under "The Demutualization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
(IN 000'S)
ASSETS:
Current assets
Cash............................................................................. $ 33,303 $ 95,836 (1) $ 67,139
119,000 (2)
(175,000)(2)
(6,000)(3)
Investment securities, at estimated fair value................................... 1,090,977 1,090,977
Premiums and other receivables................................................... 369,406 369,406
Deferred income taxes............................................................ 18,474 18,474
Other assets..................................................................... 9,717 9,717
---------- ----------- -----------
Total current assets.......................................................... 1,521,877 33,836 1,555,713
Property and equipment, net........................................................ 51,514 51,514
Deferred income taxes.............................................................. 58,108 58,108
Goodwill and other intangibles, net................................................ 77,372 77,372
Restricted investments, at estimated fair value.................................... 10,314 10,314
Other assets....................................................................... 15,552 15,552
---------- ----------- -----------
Total assets................................................................ $1,734,737 $ 33,836 $ 1,768,573
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Medical and other benefits payable............................................... $ 444,200 $ 444,200
Unearned premiums................................................................ 98,558 98,558
Accounts payable and accrued expenses............................................ 80,896 80,896
Deferred income taxes............................................................ -- --
Other liabilities................................................................ 153,103 153,103
Obligation for Commonwealth Payment.............................................. 87,500 $ (87,500)(2) --
---------- ----------- -----------
Total current liabilities..................................................... 864,257 (87,500) 776,757
Obligation for Commonwealth Payment, noncurrent.................................... 87,500 (87,500)(2) --
Obligations for employee benefits, noncurrent...................................... 57,539 57,539
Medical and other benefits payable, noncurrent..................................... 34,734 34,734
Long-term debt..................................................................... -- 119,000 (2) 119,000
Minority interest in subsidiary.................................................... 4,057 4,057
---------- ----------- -----------
Total liabilities............................................................. 1,048,087 (56,000) 992,087
---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock..................................................................... -- 245 (4) 400
-- 155 (1)
Capital in excess of par......................................................... -- 95,681 (1) 745,388
649,707 (4)
Retained earnings................................................................ 655,952 (649,952)(4) --
(6,000)(3)
Net unrealized gain on investment securities, net of deferred income taxes of
$16,517....................................................................... 30,698 30,698
---------- ----------- -----------
Total stockholders' equity.................................................... 686,650 89,836 776,486
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $1,734,737 $ 33,836 $ 1,768,573
---------- ----------- -----------
---------- ----------- -----------
</TABLE>

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------- --------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN 000'S, EXCEPT PER SHARE DATA)
Revenues
Premium and fee revenues
Commercial.............................. $1,157,899 $1,157,899 $ 985,127 $ 985,127
Federal Employee Program................ 329,243 329,243 265,587 265,587
Amounts attributable to self-funded
arrangements.......................... 981,741 981,741 798,358 798,358
Less: amounts attributable to claims
under self-funded arrangements........ (897,954) (897,954) (731,062) (731,062)
---------- ----------- ---------- ---------- ----------- ----------
1,570,929 1,570,929 1,318,010 1,318,010
Investment income.......................... 45,861 45,861 34,081 34,081
Net realized gains......................... 52,976 52,976 50,685 50,685
Other revenues............................. 55,176 55,176 37,666 37,666
---------- ----------- ---------- ---------- ----------- ----------
Total revenues.......................... 1,724,942 1,724,942 1,440,442 1,440,442
Operating expenses
Medical and other benefit costs
Commercial.............................. 959,328 959,328 809,344 809,344
Federal Employee Program................ 312,222 312,222 252,478 252,478
---------- ----------- ---------- ---------- ----------- ----------
1,271,550 1,271,550 1,061,822 1,061,822
Selling, general and administrative
expenses................................ 346,353 346,353 283,704 283,704
Interest expense........................... -- $ 7,140(2) 7,140 -- $ 5,355(2) 5,355
Copayment refund program................... 47,073 47,073 -- --
---------- ----------- ---------- ---------- ----------- ----------
Total operating expenses................ 1,664,976 7,140 1,672,116 1,345,526 5,355 1,350,881
---------- ----------- ---------- ---------- ----------- ----------
Income before income taxes and extraordinary
items (operating income)................... 59,966 (7,140) 52,826 94,916 (5,355) 89,561
Income tax expense (benefit)................. 8,264 10,225(5) 18,489 (46,751) 78,097(5) 31,346
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items (6)... $ 51,702 $ (17,365) $ 34,337 $ 141,667 $ (83,452) $ 58,215
---------- ----------- ---------- ---------- ----------- ----------
---------- ----------- ---------- ---------- ----------- ----------
Income before extraordinary items per common
share...................................... $ .86 $ 1.46
Shares used in calculating per common share
amount (7)................................. 39,975 39,975
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

(1) Represents gross proceeds of $201.5 million from the issuance of 15.5
million shares of Common Stock in the Offerings at the initial offering
price of $13 per share less underwriting discounts and offering expenses of
$14.3 million. Also represents the payment of $91.3 million, the amount of
cash which is expected to be paid to certain Eligible Members in lieu of
shares of Common Stock that would otherwise be issued to such Eligible
Members in the Demutualization.

(2) Represents the following effects of the Commonwealth Payment: (i) on the
Unaudited Pro Forma Consolidated Balance Sheet (A) the $175.0 million in
cash payment funded with $56.0 million from net proceeds of the Offerings
and $119.0 million in borrowings under a revolving credit facility and (B)
the long-term debt obligation under a revolving credit agreement related to
the borrowing of $119.0 million to fund a portion of the Commonwealth
Payment, with offsetting reductions to the obligation for the Commonwealth
Payment and (ii) on the Unaudited Pro Forma Consolidated Statements of
Operations, the interest on the $119.0 million borrowing under the revolving
credit agreement at 6% per annum. The Company has not received any binding
commitments with respect to such revolving credit agreement and there can be
no assurance that the Company will be able to enter into such an agreement
in connection with the Offerings. In this event, the Company would issue
Class C Common Stock in payment of one-half of the Commonwealth Payment and
use proceeds of the Offerings and other available cash to fund the balance.

<PAGE>
(3) Represents estimated additional nonrecurring expenses of $6.0 million
related to the Demutualization assumed to be incurred as of the date of the
Unaudited Pro Forma Consolidated Balance Sheet. Such expenses will be
reported as extraordinary expenses.

(4) Represents the reclassification of the retained earnings of the mutual
insurance company to reflect conversion to a stock company.

(5) As a result of the elimination at September 30, 1996 of the $63.9 million
valuation allowance on deferred tax assets, the Company's income in future
years should be subject to an effective tax rate (as reflected in its
consolidated financial statements) that approximates the 35% statutory
federal rate. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes." On the Unaudited Pro
Forma Consolidated Statements of Operations, the current period impact of
the valuation allowance elimination has been excluded and the effective tax
rate has been adjusted to the 35% federal statutory rate.

(6) The unaudited pro forma income before extraordinary items does not include
investment income related to the balance of the net proceeds from the sale
of the Common Stock in the Offerings nor does it include the effect of the
planned reduction in the Company's equity portfolio and reinvestment of such
amounts in a fixed income portfolio with a higher current yield.

(7) The number of shares used in the calculation of unaudited pro forma income
before extraordinary items per common share is as follows:

<TABLE>
<CAPTION>
NUMBER
OF SHARES
----------
<S> <C>
Shares allocated to Eligible Members................................. 32,036,599
Less: shares allocated to Eligible Members who receive cash (a)...... 7,561,577
----------
Shares issued to Eligible Members.................................... 24,475,022
Shares issued in the Offerings....................................... 15,500,000
----------
Total shares of Common Stock outstanding............................. 39,975,022
----------
----------
</TABLE>

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

(a) Assumes that $91.3 million is paid to certain Eligible Members who
receive cash in lieu of shares of Common Stock.

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Substantially all of Trigon's revenues are generated from premiums and fees
received for health care services provided to its members and from net
investment income. Trigon's expenses are primarily related to health care
services provided which consist of payments to physicians, hospitals and other
providers. A portion of medical costs expense for each period consists of an
actuarial estimate of claims incurred but not reported to Trigon during the
period.

The Company's results of operations depend in large part on its ability to
accurately predict and effectively manage health care costs. The Company has
been a leader in Virginia in the movement toward managed care. The Company
established the first PPO in Virginia in 1983, and in the following year created
one of the first HMOs in the state. The Company continued the transition to
managed care in 1990 with the development and implementation of a strategy to
emphasize the management of health care rather than simply administering health
care benefits. Additionally, the Company employs sophisticated underwriting and
pricing techniques, using its accumulated actuarial data to evaluate health care
costs for specific groups, with adjustment factors such as age, sex, industry
and geographic differences. Since 1991, the Company's key demographic features
have not significantly changed or materially affected medical cost trends. As of
September 30, 1996, the average member age was 38.0 years. Excluding members
holding Medicare supplemental policies, the average age was 33.6 years. Adult
females comprise 39.3%, adult males comprise 34.7% and children comprise 26.0%
of total membership.

As a result of the Company's emphasis on utilization management and cost
control, the Company has achieved improvements across all its networks in its
inpatient days per thousand members from 356 in 1991 to 245 for the twelve
months ended September 30, 1996, a 31.2% reduction, and an improvement in
admissions per thousand members from 76 in 1991 to 63 for the twelve months
ended September 30, 1996, a 17.1% reduction. The Company cannot predict whether
or to what extent these trends will continue in the future. These improvements
in utilization controls, combined with favorable pricing arrangements with
providers and hospitals, resulted in a decrease in medical costs expense as a
percentage of premium revenues (the "medical loss ratio") for the Company's
commercial business from 80.7% for the year ended December 31, 1991 to 74.2% for
the year ended December 31, 1994. The Company's medical loss ratio on commercial
business has recently increased from 74.2% in 1994 to 82.9% in 1995 and from
80.4% through the first nine months of 1995 to 82.2% for the same period in
1996. The increase in the medical loss ratio can be attributed to two main
factors: (i) a higher degree of competition for market share and (ii) an
increase in medical costs which, in part, reflects industry trends.

With respect to competition, in recent years there have been a number of
new entrants into Virginia's health insurance markets. Over the past two years,
these new entrants, as well as existing competitors, have been reducing prices
in order to maintain or increase market share. In the face of this increased
competition, margins have decreased as the Company priced its products to
maintain market share. Notwithstanding this competitive environment, commercial
enrollment increased by approximately 150,000 members from December 31, 1994 to
September 30, 1996, a 20.4% increase. The commercial enrollment increase came
primarily from growth in HMO enrollment (approximately 65,000 members), the
acquisition of Mid-South (approximately 50,000 members), the acquisition of an
80% ownership interest in Priority Health Care, Inc. ("Priority") (approximately
25,000 HMO members), the introduction of a Medicaid HMO product (approximately
29,000 members), the conversion of HMO self-funded groups to commercial products
(approximately 31,000 members), offset by net enrollment losses in the PAR/PPO
networks (approximately 21,000 members) and losses in out of state student and
Medicare supplemental products (approximately 29,000 members). Premium revenues
from commercial business have decreased by 1.1% on a per member month basis
comparing the twelve months ended December 31, 1994 period average to the nine
months ended September 30, 1996 period average.

Commercial medical costs increased 9.5% on a per member basis comparing the
twelve months ended December 31, 1994 period average to the nine months ended
September 30, 1996 period average. The increases in medical costs reflect a
higher cost per hospital inpatient day, increased outpatient utilization and
cost per encounter and higher pharmacy costs. These increases were partially
offset by continued improvements in hospital inpatient utilization levels. The
Company has taken and continues to take steps to improve the medical loss ratio
and to reduce its exposure to health care cost trends. These steps include:
increasing efforts to negotiate more advantageous contracts with key health care
providers, particularly in the area of outpatient facility fees; continuing the
successful implementation of changes to physician lab reimbursement methods,
which includes expanding the program to include facility labs; focusing on
internal claims processing accuracy with an emphasis on strict enforcement of
medical policy rules; and continuing to improve claims adjudication methods to
reduce administrative costs. To supplement these cost reduction actions, the
Company will continue to seek higher premium rates on

<PAGE>
selected groups and product lines while exiting certain unprofitable accounts to
improve the Company's overall risk profile. The Company expects to continue
investing heavily in managed care information systems to enhance medical
management efforts and to continue improving and expanding existing case
management and appropriateness review programs so as to avoid unnecessary or
inappropriate care.

The Company participates in the Federal Employee Program (the "FEP"), a
national contract with the U.S. Office of Personnel Management ("OPM"), to
provide benefits through its PPO network for approximately 198,000 federal
employees and their dependents living in Virginia. FEP revenues represent the
reimbursement by OPM of actual medical costs incurred including the actual cost
of administering the program, as well as a performance based share of the
national program's overall profit. The FEP medical loss ratio remained
relatively constant from 1991 to 1994. The FEP medical loss ratio increased from
93.5% in 1994 to 95.1% through the first nine months of 1996. The increase was
primarily due to reductions, on a per member basis, in the cost of administering
the FEP program which results in a smaller spread between revenues and medical
costs.

MEDICAL LOSS RATIOS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... 80.7% 79.0% 75.8% 74.2% 82.9% 80.4% 82.2%
FEP........................... 93.5 94.1 94.0 93.5 94.8 94.7 95.1
Total......................... 82.8 81.9 79.6 78.4 85.5 83.6 84.9
</TABLE>

Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the customers bear all or a portion of the underwriting risk.
Self-funded arrangements are typically utilized by large and mid-size groups.
Most self-funded groups purchase aggregate and/or claim specific stop-loss
coverage. In exchange for a premium, the group's aggregate liability is capped
for the year or the group's liability on any one episode of care is capped.
Trigon charges self-funded groups an administrative fee which is based on the
number of members in a group or the group's claims experience. Under the
Company's self-funded arrangements, amounts due are recognized based on incurred
claims plus administrative and other fees and any stop-loss premiums.

Trigon's HMO and PPO networks and products are the Company's fastest
growing lines of business. Since December 31, 1991, HMO enrollment has increased
at a compound annual rate of 35.1% and PPO enrollment has increased at a
compound annual rate of 15.1%. The acquisition in May 1995 of an 80% interest in
Priority Health Care, Inc., an eastern Virginia-based HMO, accounted for
approximately 25,000 of the 191,000 growth in HMO members. In contrast, PAR
network enrollment has declined at a compound annual rate of 8.7% since December
31, 1991 due largely to the Company's emphasis on transitioning its customer
base toward the more cost-effective PPO and HMO products. From 1991 through
1994, Trigon's total enrollment remained relatively stable. Growth in total
enrollment of more than 178,000 members has occurred since December 31, 1994.
Approximately 75,000 of the growth in members is attributable to the Mid-South
and Priority acquisitions. Approximately 3.5%, 26.7% and 61.3% of premium and
fee revenues including amounts attributable to self-funded arrangements (premium
equivalents) were derived from the Company's HMO, PPO and PAR networks,
respectively, in 1991 versus 12.2%, 44.7% and 33.7% through the first nine
months of 1996.

<PAGE>
MEMBERSHIP BY NETWORK SYSTEM

<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C> <C>
Commercial:
HMO...................... 48,661 45,004 59,353 85,739 172,893 157,811 236,127
PPO...................... 75,522 102,247 131,052 155,433 212,322 207,968 216,937
PAR...................... 441,687 400,997 352,783 334,800 296,716 304,060 252,774
Other(1)................. 147,479 150,586 156,737 158,503 149,109 146,456 178,431
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 713,349 698,834 699,925 734,475 831,040 816,295 884,269

Self-funded:
HMO...................... 11,493 15,679 24,728 34,243 48,255 52,246 15,272
PPO...................... 148,291 283,716 313,744 321,863 336,414 303,462 359,701
PAR...................... 509,333 369,041 334,692 318,297 321,522 325,153 362,881
ASO...................... 84,235 78,163 78,903 77,481 63,826 65,576 40,383
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 753,352 746,599 752,067 751,884 770,017 746,437 778,237
FEP (PPO network).......... 172,771 175,723 180,015 195,314 198,561 198,935 197,835
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total...................... 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C> <C> <C>
Commercial:
HMO...................... $ 58,933 $ 63,801 $ 75,939 $ 106,060 $ 181,052 $ 125,790 $ 233,126
PPO...................... 112,476 139,866 175,539 215,596 271,252 192,584 240,011
PAR...................... 682,382 660,007 590,571 537,543 485,412 376,292 320,693
Other(1)................. 170,275 194,147 208,108 222,621 220,183 162,782 191,297
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 1,024,066 1,057,821 1,050,157 1,081,820 1,157,899 857,448 985,127

Self-funded:
HMO...................... 10,450 17,378 28,087 42,209 60,639 45,360 17,702
PPO...................... 217,202 313,335 439,960 457,281 482,779 350,215 410,667
PAR...................... 549,768 540,388 437,482 408,744 438,323 323,492 369,989
---------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal............ 777,420 871,101 905,529 908,234 981,741 719,067 798,358
FEP (PPO network).......... 206,878 254,102 279,058 303,250 329,243 248,109 265,587
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total...................... $2,008,364 $2,183,024 $2,234,744 $2,293,304 $2,468,883 $1,824,624 $2,049,072
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM AS A PERCENT OF TOTAL

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
HMO..................... 3.5% 3.7% 4.7% 6.4% 9.8% 9.4% 12.2%
PPO..................... 26.7 32.4 40.0 42.6 43.9 43.3 44.7
PAR..................... 61.3 55.0 46.0 41.3 37.4 38.4 33.7
Other (1)............... 8.5 8.9 9.3 9.7 8.9 8.9 9.4
----- ----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
</TABLE>

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

Between 1991 and September 30, 1996, Trigon significantly increased its
selling, general and administrative expenditures to develop its managed care
technologies, improve data collection and analysis tools and internally develop
a new claims processing system customized to support the Company's products. The
Company intends to continue its investment in managed care technologies and in
providing support for business expansion opportunities, both within and outside
Virginia. The Company expects that these investments will be partially funded
through administrative expense reductions in overhead and production departments
by means of implementing cost saving programs and automation improvement
projects such as imaging to reduce paper handling.

RECENT DEVELOPMENTS

The Company's preliminary unaudited financial results for the year ended
December 31, 1996, reflect income before income taxes and extraordinary items,
excluding the effect of a non-operating gain on the sale of a subsidiary in the
fourth quarter of 1996, of $120.6 million as compared to $107.0 million,
excluding the effect of the Copayment Program, for the year ended December 31,
1995. The $120.6 million for 1996 is composed of realized gains of $59.4
million, investment income of $47.3 million, and income from operations of $13.9
million. This compares to the $107.0 million for 1995 which is composed of
realized gains of $53.0 million, investment income of $45.9 million and income
from operations, excluding the Copayment Program, of $8.1 million.

Premium and fee revenues increased 12.4% from $1.571 billion for the year
ended December 31, 1995 to $1.766 billion for the year ended December 31, 1996.
Medical costs increased 12.1% from $1.272 billion for the year ended December
31, 1995 to $1.426 billion for the year ended December 31, 1996. These increases
are primarily due to the growth in membership in the Company's HMO and PPO
networks as well as the acquisition of Mid-South. The Company's commercial
medical loss ratio improved to 82.3% for the year ended December 31, 1996 as
compared to 82.9% for the year ended December 31, 1995. Selling, general and
administrative expenses were $376.4 million in 1996 compared with $346.4 million
in 1995. This increase is primarily related to the acquisition of Mid-South as
well as continued investment in managed care infrastructure and technology. In
addition, the Company's preliminary unaudited financial results reflect a
non-operating gain of $62.3 million ($40.0 million after tax) on the sale of its
electronic communication services subsidiary, Health Communication Services,
Inc. ("HCS") on December 31, 1996.

The Company's commercial enrollment grew from 831,040 members in 1995 to
892,496 members in 1996, an increase of 7.4%. This growth is primarily the
result of growth in the Company's HMOs, from 172,893 members in 1995 to 248,172
members in 1996, growth in the PPO networks (approximately 18,000 members) and
the acquisition of Mid-South in February 1996 (approximately 50,000 members),
partially offset by declines in the PAR network and losses in the out of state
student product. The Company's total enrollment increased from 1,799,618 members
in 1995 to 1,860,549 members in 1996.

The information above for the year ended December 31, 1996 is based on
preliminary unaudited data prepared by the Company and is subject to adjustment.

The Virginia General Assembly is currently considering legislation which
would change the Virginia open enrollment program. See
"Business -- Regulation -- Virginia's Open Enrollment Program." If this
legislation were enacted, the Company would pay a premium tax rate of 2.25% on
all group business effective January 1, 1998. The Company does not expect this
proposed change to have a significant impact on its financial results.

<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

Premium and fee revenues increased 12.8% from $1.169 billion through the
first nine months of 1995 to $1.318 billion for the same period in 1996,
primarily due to the growth in membership in the Company's HMO and PPO networks,
which was partially offset by declines in PAR network enrollment, and as a
result of the Mid-South acquisition. Commercial HMO revenues grew from $125.8
million in the first nine months of 1995 to $233.1 million through the same
period in 1996, a growth rate of 85.3%. The $107.3 million increase in
commercial HMO revenues is attributable to increased HMO enrollment as a result
of a shift in members from PAR and PPO networks into the HMO network and from
enrollment of new HMO members (collectively accounting for an estimated $44
million of the increase), the Priority acquisition (an estimated $39 million),
the conversion of 31,000 members from self-funded products to commercial
products (an estimated $19 million) and a 3.8% increase in the average revenue
per member (an estimated $5 million). Commercial PPO revenues grew from $192.6
million to $240.0 million for the same periods, a growth rate of 24.6%.
Commercial PAR revenues declined from $376.3 million for the first nine months
of 1995 to $320.7 million for the same period in 1996 as a result of the
Company's efforts to transition groups into more tightly managed networks.
Commercial revenues for the nine months ended September 30, 1996 also included
$37.7 million of revenues from Mid-South, which was acquired on February 29,
1996. FEP revenues increased 7.0% from $248.1 million for the first nine months
of 1995 to $265.6 million for the same period in 1996 as a result of increased
medical costs reimbursed by the OPM.

The number of members served by the Company increased 5.6%, or by 98,674
members, from September 30, 1995 to September 30, 1996. The increase in
enrollment, excluding acquisitions, was 22,586 members, primarily in the HMOs.
In addition, the Mid-South acquisition added 50,425 members and the Priority
acquisition added 24,767 initial members.

Investment income decreased 2.3% from $34.9 million for the nine months
ended September 30, 1995 to $34.1 million for the nine months ended September
30, 1996. Realized gains increased 45.5% from $34.8 million for the nine months
ended September 30, 1995 to $50.7 million for the nine months ended September
30, 1996. The decline in investment income and the increase in realized gains
are both due primarily to the sale of investment securities to fund the
Mid-South acquisition. Net realized gains have also increased due to the sale of
investment securities in an effort to shorten bond maturity levels. Net
unrealized gains as reflected on the Company's balance sheet at September 30,
1996 totaled $47.2 million as compared to $61.6 million at September 30, 1995.

Other revenues decreased by 8.3% from $41.1 million for the first nine
months of 1995 to $37.7 million for the same period in 1996. Increased revenue
generated from Healthy Homecomings, Inc., a women's health care company, and
from the workers' compensation administration business were offset by declining
administrative services only revenues. Prior year results also include
nonrecurring gains of $5.4 million related to the sale to unrelated parties of
joint venture interests and other assets. The Company sold its electronic
communication services subsidiary HCS, on December 31, 1996 and expects to
recognize an after tax gain of approximately $40 million as a result of this
sale. For the nine months ended September 30, 1996, HCS contributed $16.1
million in third-party revenues.

Medical costs increased 14.8% from $924.7 million for the first nine months
of 1995 to $1,061.8 million for the same period in 1996. The increase is
primarily the result of enrollment growth in the HMOs and the Priority and
Mid-South acquisitions. The Company's medical loss ratio on commercial business
increased from 80.4% for the first nine months of 1995 to 82.2% for the same
period in 1996. The increase is a result of greater competition within Virginia
for market share and a moderate increase in medical costs trends. The medical
cost per member per month for the Company's commercial business increased 2.8%
from $99.79 for the first nine months of 1995 to $102.58 for the same period in
1996.

Selling, general and administrative ("SG&A") expenses increased 14.8% from
$247.1 million for the first nine months of 1995 to $283.7 million for the first
nine months of 1996. The SG&A expense ratio for the nine months ended September
30, 1996 was 13.6% versus 13.2% for the nine months ended September 30, 1995.
The Company incurred $13.8 million of additional costs related to its growing
HMO business including the impact of the Priority acquisition. The acquisitions
of Mid-South, Healthy Homecomings, Inc. and Healthcare Venture Associates
resulted in a $11.6 million increase in the first nine months of 1996. The
Company continues to invest in managed care infrastructure and technology,
increasing SG&A $6.1 million, for improved medical cost data analysis,
internally developed managed mental health capabilities, expansion of
appropriateness review, costs associated with obtaining NCQA accreditation and
upgrading systems software for the century date change. For the nine months
ended September 30, 1996 the Company incurred a one-time charge of $1.5 million
for signing bonuses, relocation and employment agreement adjustments.

<PAGE>
Operating income, ignoring the effect of the Copayment Program, decreased
by 12.1% from $108.0 million in the first nine months of 1995 to $94.9 million
for the same period in 1996. The decrease is a result of the effect of
competitive pricing pressure and increased medical costs on commercial business
offset by favorable net realized gains on investments.

The Company's effective tax rate (income tax expense as a percentage of
operating income) was 13.8% for the nine months ended September 30, 1995. This
effective tax rate for 1995 was lower than the 35% statutory federal income tax
rate due to the recognition of nontaxable income and the reduction in the
valuation allowance on deferred tax assets. The reduction in the valuation
allowance on deferred tax assets is primarily related to realization of
alternative minimum tax credits. The effective tax rate for the nine months
ended September 30, 1996 (income tax benefit as a percentage of operating
income) was a tax benefit of 49.3%. This rate differs from the 35% statutory
federal rate primarily due to the realization of alternative minimum tax credits
during the nine-month period and the elimination as of September 30, 1996 of the
$63.9 million valuation allowance maintained by the Company with respect to
deferred tax assets because the Demutualization has made it more likely than not
that the assets will be realized. Excluding the effects of the elimination of
the valuation allowance, the effective tax rate would have been 18.1% for the
nine months ended September 30, 1996. These items are not recurring and the
Company believes that in the future its effective tax rate as reflected in its
consolidated financial statements should approximate the 35% federal statutory
rate. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Income Taxes."

The Company has reflected the impact of the $175 million obligation to the
Commonwealth of Virginia (the Commonwealth Payment) in the consolidated
financial statements for the nine months ended September 30, 1996 as an
extraordinary item. See "The Demutualization -- The Commonwealth Payment."

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

Premium and fee revenues increased 7.2% from $1.465 billion in 1994 to
$1.571 billion in 1995, primarily due to the growth in membership in the
Company's PPO and HMO networks offset by declines in PAR network enrollment.
Commercial HMO revenues grew from $106.1 million in 1994 to $181.1 million in
1995, a growth rate of 70.7%. The $75.0 million increase in commercial HMO
revenues is attributable to increased HMO enrollment as a result of a shift in
members from PAR and PPO networks into the HMO networks and from enrollment of
new HMO members (collectively accounting for $73.7 million of the increase) and
the Priority acquisition ($19.0 million) partially offset by a 9.8% decrease in
the average revenue per member, causing a decrease in revenue of $17.7 million.
Commercial PPO revenues grew from $215.6 million to $271.3 million during the
same period, a growth rate of 25.8%. Commercial PAR revenues declined from
$537.5 million in 1994 to $485.4 million in 1995 as a result of the Company's
greater emphasis on its HMO and PPO networks as customers transition to more
tightly managed networks. Premium revenues on a per member basis for the
Company's commercial business decreased 2.2%. FEP revenues increased 8.6% from
$303.3 million in 1994 to $329.2 million in 1995 as a result of increased
medical costs reimbursed by the OPM. The net impact of self-funded arrangements
increased 4.3% from $80.4 million in 1994 to $83.8 million in 1995. The increase
includes a non-recurring $6.0 million adjustment resulting from the favorable
settlement of a potential liability with the Health Care Financing
Administration.

The number of members served by the Company increased 7.0% over 1994.
Enrollment in the HMO networks increased 84.3% over 1994 and at December 31,
1995 accounted for 12.3% of the Company's total enrollment and 20.8% of the
Company's commercial enrollment. Enrollment in the PPO networks increased 11.1%
over 1994 and at December 31, 1995 represented 41.5% of the Company's total
enrollment. The number of PAR members declined 5.3% from 1994 and such members
represented 34.4% of the Company's total members at December 31, 1995.

Investment income increased 14.8% from $40.0 million in 1994 to $45.9
million in 1995. Also, net realized gains increased $40.2 million from $12.8
million in 1994 to $53.0 million in 1995. The improvement in investment income
is primarily due to the increase in fixed income securities held. With regard to
realized gains, 1995 net realized gain on equities was $48.2 million, an
improvement of $28.2 million over 1994. The 1995 net realized gain on fixed
income securities was $4.8 million, an improvement of $12.0 million over 1994.
Realized gains improved due to normal portfolio turnover during a period of
favorable equity and bond market advances and asset class rotation (primarily
reducing the portion of the portfolio allocated to domestic equities and
increasing the portion allocated to international equities). As of December
1995, net unrealized gains totaled $60.7 million compared to $3.4 million at
December 31, 1994.

Other revenues increased by 21.4% from $45.5 million in 1994 to $55.2
million in 1995. The increase in other revenue is a result of the acquisition of
Healthy Homecomings, Inc., a women's health care company, continued revenue
growth in the electronic communication services and workers' compensation
administration businesses and from non-recurring gains of $5.4 million (related
to the sale to unrelated parties of joint venture interests and other assets).

<PAGE>
Medical costs increased 17.1% from $1.086 billion in 1994 to $1.272 billion
in 1995. The $186.0 million increase includes a $28.6 million increase in FEP
medical costs with the balance of the increase attributable to both enrollment
growth in the HMOs and an increase in commercial per member medical costs.
Compared to 1994, the commercial medical cost per member month increased by 9.2%
from $93.67 to $102.31. The Company's medical loss ratio on commercial business
increased from 74.2% in 1994 to 82.9% in 1995. The increase in the medical loss
ratio can be attributed to two main factors: a higher degree of competition for
market share and an increase in medical costs. The increase in medical costs,
which in part reflects industry trends, was primarily due to higher cost per
hospital inpatient day and higher hospital outpatient utilization and cost per
encounter. In addition, the higher medical costs in 1995 reflect the recognition
of $15.0 million for unfavorable hospital contractual settlements, some of which
relate to periods as far back as 1993. These increases were partially offset by
improvements in inpatient days per thousand members.

Selling, general and administrative expenses increased 7.4% from $322.4
million in 1994 to $346.4 million in 1995. The Company incurred $19.2 million of
additional costs related to its growing HMO business, of which $5.4 million is
related to the purchase of an 80% interest in Priority. SG&A expenses also
increased as a result of the acquisitions of Healthy Homecomings, Inc. and
Healthcare Venture Associates and in support of revenue growth in electronic
communications services. These increases were partially offset by a $5.0 million
favorable adjustment to eliminate a liability for potential losses associated
with the financial difficulties of other insurance companies. In addition, the
Company recorded $7.5 million of selling, general and administrative expenses in
the fourth quarter of 1995 for regulatory settlements, an adjustment to the
pension liability discount rate assumption, the cost of terminating certain
long-term equipment and facility leases, and additional liabilities for
potential legal matters. The SG&A expense ratio for the year ended December 31,
1995 was 13.7%. Eliminating both the favorable and unfavorable impacts of the
$5.0 million and $7.5 million adjustments, respectively, described above would
decrease the ratio to 13.6% compared to 13.8% for the year ended December 31,
1994.

In accordance with an agreement with the State Corporation Commission dated
November 16, 1995, the Company re-opened the Copayment Program. As part of the
re-opening of the Copayment Program, the Company mailed refunds to approximately
300,000 members who had not filed a claim under the original program and for
whom the Company had an address. In addition, the Company announced that it has
determined that there are approximately 200,000 former members for whom the
Company does not have an address and who are eligible for refunds. Under this
new agreement, any amounts not paid by December 31, 1996 will be escheated to
the Commonwealth of Virginia as unclaimed property. The cost of the Copayment
Program in 1994 was $36.4 million or $30.0 million, net of income taxes, and the
cost of re-opening the Copayment Program in 1995 was $47.1 million or $40.6
million, net of taxes. As a result of re-opening the Copayment Program, the
Company anticipates making a cash payment of approximately $22 million to the
Commonwealth of Virginia in the second quarter of 1997, which has been
previously accrued.

Operating income prior to the effect of the Copayment Program decreased
30.9% from $155.0 million in 1994 to $107.0 million in 1995. The decrease is a
result of the effect of competitive pricing pressure and increased medical costs
on commercial business offset by favorable investment income and $16.4 million
of one-time gains and adjustments. Operating income including the effect of the
Copayment Program decreased 49.4% from $118.5 million in 1994 to $60.0 million
in 1995.

The Company's effective tax rate was 20.7% (as reflected in its
consolidated financial statements) for 1994 compared to 13.8% for 1995. The
effective rate for 1994 was reduced primarily by a reduction in the valuation
allowance on deferred tax assets relating to AMT credit carryforwards. The 1995
effective tax rate as reflected in its financial statements was reduced by the
recognition of nontaxable income and by a reduction of the valuation allowance
on deferred tax assets. The reduction in the valuation allowance is the result
of the reversal of certain liabilities, the deductibility of which was
considered uncertain, and the realization of AMT credit carryforwards. These
items are not recurring and the Company believes that its effective tax rate as
reflected in its financial statements should approximate 35% after the
Demutualization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes."

Income before extraordinary item decreased from $94.0 million in 1994 to
$51.7 million in 1995, due primarily to the effects of the declining margin in
the Company's commercial business and to the effect of the Copayment Program.
Without the Copayment Program, income before extraordinary item would have been
$124.0 million in 1994 and $92.3 million in 1995. As a percentage of total
revenues, net margin exclusive of cumulative effects of changes in accounting
principles and extraordinary item decreased from 7.9% in 1994 to 5.4% in 1995,
before giving effect to the Copayment Program and decreased from 6.0% in 1994 to
3.0% in 1995 after giving effect to the Copayment Program.

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

Premium and fee revenues increased 3.3% from $1.419 billion in 1993 to
$1.465 billion in 1994, primarily due to the growth in membership in the
Company's HMO and PPO networks. Commercial HMO revenues grew from $75.9 million
in 1993 to $106.1 million in 1994, a 39.7% growth rate, while commercial PPO
revenues grew from $175.5 million in 1993 to

<PAGE>
$215.6 million in 1994, a 22.8% growth rate. Commercial PAR revenues declined
from $590.6 million in 1993 to $537.5 million in 1994 as a result of the
Company's greater emphasis on its HMO and PPO networks as its customers
transitioned to its more tightly managed networks. FEP revenues increased 8.7%
from $279.1 million in 1993 to $303.3 million in 1994 as a result of increased
medical costs reimbursed by OPM. While the number of members served by the
Company's networks and products increased by 3.0% during 1994, the number of HMO
members grew 42.7% and at December 31, 1994 accounted for 7.1% of the Company's
total enrollment. PPO membership grew by 7.7% during 1994 and at December 31,
1994 represented 40.0% of the Company's total enrollment. The number of PAR
members dropped 5.0% and such members represented 38.8% of the Company's total
members at December 31, 1994. Premium revenue increases, on a per member basis,
for the Company's commercial business averaged 1.6%, reflecting the Company's
efforts to control claims utilization, minimal medical inflation and increasing
competitive pricing pressure.

Investment income increased 16.6% from $34.3 million in 1993 to $40.0
million in 1994. Net realized gains decreased $13.4 million from $26.2 million
in 1993 to $12.8 million in 1994. The increase in investment income was driven
primarily by an increase in fixed income securities held. With regard to
realized gains, the 1994 net realized gain on equities was $20.0 million, an
improvement of $4.6 million over 1993. The 1994 net realized loss on fixed
income securities was $7.2 million, a decrease of $18.0 million from the
previous year. Much of the decrease in net realized investment gains was a
result of interest rate increases throughout 1994 which resulted in realized
losses on the sale of fixed income securities.

Other revenues increased by 48.8% from $30.6 million in 1993 to $45.5
million in 1994. The increase was primarily attributable to the addition of
revenues from two electronic data interchange companies acquired in late 1993.
In addition, revenues from third-party administration for workers' compensation
increased from $7.0 million in 1993 to $9.9 million in 1994, a 41.8% increase.

Medical costs increased by 2.7% from $1.058 billion in 1993 to $1.086
billion in 1994. The increase was primarily a result of growth in business sold
through the HMO and PPO networks. As a result of the Company's continued
emphasis on managing utilization and medical inflation, medical costs per member
were essentially unchanged from 1993. The total medical loss ratio improved from
79.6% in 1993 to 78.4% in 1994. The medical loss ratio for commercial business
fell from 75.8% to 74.2% over the same period.

Selling, general and administrative expenses increased by 4.5% from $308.4
million in 1993 to $322.4 million in 1994. The Company incurred $6.4 million of
additional costs related to the Company's growing HMO business and the workers'
compensation processing unit. To enhance its managed care products, the Company
spent an additional $3.3 million to further its provider alliance strategy and
to improve its managed care information systems and related programs. This
expenditure was largely offset by savings created through a reduction in
overhead and an increase in operational efficiencies through the implementation
of multi-functional customer support teams, company-wide administrative
cost-cutting programs and imaging technology intended to reduce paper handling
costs. Commissions paid to outside brokers and agents representing the Company
increased 22.4% from $23.3 million in 1993 to $28.6 million in 1994. The Company
believes that brokers are an important distribution channel for its small
business products. The percentage of small group and individual policies sold
through brokers continues to increase. Accordingly, the Company has increased
commission levels and continues to support a broker bonus program. In addition,
1994 expenses reflect the full year impact, $8.5 million, of the electronic data
interchange acquisitions made in late 1993. Selling, general and administrative
expenses as a percentage of premium and fee revenues (including amounts
attributable to claims under self-funded arrangements) and other revenues
increased slightly from 13.6% in 1993 to 13.8% in 1994.

The Company conducted a Copayment Refund Program in accordance with an
agreement with the State Corporation Commission dated September 22, 1994. The
total cost of this phase of the Copayment Program was $36.4 million pre-tax and
$30.0 million after-tax. Costs incurred under this phase of the Copayment
Program included refunds, interest and administrative costs associated with this
phase of the Copayment Program that the Company would not otherwise have
incurred. In addition, the Company agreed to pay a $5 million civil forfeiture
to the Commonwealth of Virginia which is included in the total cost of this
phase of the Copayment Program.

Operating income prior to the effect of the Copayment Program improved 7.9%
from $143.7 million in 1993 to $155.0 million in 1994 as a result of enrollment
increases in the commercial business of 4.9% and an improvement in the
commercial medical loss ratio from 75.8% in 1993 to 74.2% in 1994. Operating
income after the effect of the Copayment Program was $118.5 million in 1994.

The Company's effective tax rate (as reflected in its financial statements)
was 24.9% for 1993 compared to 20.7% for 1994. The 1993 effective tax rate
reflects a reduction for the benefit generated by the Internal Revenue Code
Section 833 deduction and an increase in the valuation allowance maintained by
the Company on deferred tax assets due to (i) expenses that were deducted for
financial statement purposes in 1993 but will not be deductible for income tax
purposes until well into

<PAGE>
the future and (ii) AMT credit carryforwards generated in 1993. The expenses
which will not be deductible until well into the future relate primarily to
retiree medical obligations and certain medical costs reserves. The effective
rate for 1994 was reduced primarily by a reduction in the valuation allowance on
deferred tax assets relating to AMT credit carryforwards. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."

Income before the cumulative effects of changes in accounting principles
and extraordinary item decreased from $107.9 million in 1993 to $94.0 million in
1994, due primarily to the effect of the Copayment Program. Without the
Copayment Program, income from continuing operations before the cumulative
effects of changes in accounting principles would have been $124.0 million, a
14.9% increase over 1993. As a percentage of total revenues, net margin
exclusive of the cumulative effects of changes in accounting principles
increased from 7.1% in 1993 to 7.9% in 1994, before giving effect to the
Copayment Program and decreased to 6.0% after giving effect to the Copayment
Program.

QUARTERLY RESULTS

The following table sets forth the unaudited quarterly results of
operations for each of the quarters in fiscal 1995 and the first three quarters
in 1996. In management's opinion, this unaudited quarterly information includes
all adjustments which are necessary for a fair presentation of the quarters
presented. The operating results in any quarter are not necessarily indicative
of the results which may be expected for any other interim period or for the
year ending December 31, 1996. The Company has experienced, and in the future
expects that it will experience, quarterly variations in its operating margins
due to a number of factors; however management does not believe that these
factors have indicated a trend toward seasonal fluctuations in health care
costs.

OPERATING STATISTICS BY QUARTER (UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
-------------------------------------------- --------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN 000'S)
Revenue from operations (1)............. $391,921 $402,146 $415,922 $416,116 $443,800 $456,272 $455,604
Investment income....................... 10,900 12,676 11,305 10,980 11,193 11,726 11,162
Net realized gains...................... 4,667 13,598 16,568 18,143 15,214 19,020 16,451
Operating income (loss) (2)............. 38,901 41,710 27,363 (935) 30,814 34,329 29,773
Commercial medical loss ratio........... 77.7% 79.7% 83.6% 89.7% 83.2% 80.8% 82.5%
</TABLE>

- ---------------
(1) Revenue from operations includes premium and fee revenues and other
revenues.
(2) Operating income excludes the effects of the Copayment Program.

For 1995, operating income decreased in the third and fourth quarters
primarily as a result of more intense competition and from increases in medical
costs. The commercial medical loss ratio during 1995 increased from 77.7% in the
first quarter to 83.6% and 89.7% in the third and fourth quarters of the year,
respectively. The increase reflects both a $2.41 decrease in commercial premiums
per member from $124.26 in the first quarter of 1995 to $121.85 in the fourth
quarter and an increase of $12.74 in the medical cost per member from $96.61 in
the first quarter of 1995 to $109.35 in the fourth quarter. Contributing to the
high medical costs and the operating income decline in the third and fourth
quarters of 1995 was the recognition of $15.0 million ($6.0 million in the third
quarter and $9.0 million in the fourth quarter) for unfavorable hospital
contractual settlements some of which related to periods as far back as 1993 and
the impact of approximately $6 million in adverse claims adjustments
attributable to the first and second quarters. In addition, the Company recorded
$7.5 million of selling, general and administrative expenses in the fourth
quarter of 1995 for regulatory settlements, an adjustment to the pension
liability discount rate assumption, the cost of terminating certain long-term
equipment and facility leases, and additional liabilities for potential legal
matters.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of cash are from premiums and fees received
and investment income. The primary uses of cash include health care benefit
expenses and capitation payments, brokers' and agents' commissions,
administrative expenses and income taxes. Trigon receives premium revenues in
advance of anticipated claims for related health care services.

The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital. Trigon fundamentally
believes that concentrations of investments in any one asset class are unwise
due to constantly changing interest rates, market and economic conditions;
accordingly the Company maintains a diversified investment portfolio consisting
both of fixed income and equity securities, with the objective of reducing risk
and maximizing

<PAGE>
overall return. The fixed income portfolio includes high grade (minimum average
quality rating of AA as of September 30, 1996) government and corporate
securities, both domestic and international. The short-term fixed income
portfolio had an average contractual maturity of five years as of September 30,
1996 and is intended to cover near term cash flow needs and to serve as a buffer
for unanticipated business needs. The long-term fixed income portfolio had an
average contractual maturity as of September 30, 1996 of 9.2 years. The equity
portfolios contain readily marketable securities ranging from small growth to
well-established Fortune 500 companies. The international equity portfolio is
diversified by industry, country and currency-related exposure. The Company does
enter into foreign currency exchange forward contracts and foreign currency
options to manage its exposure to fluctuations in foreign currency exchange
rates on its foreign debt and equity investments.

The Company expects to reduce its equity portfolio from 27.4% at September
30, 1996 to approximately 15% of the total portfolio in the first quarter of
1997. The Company currently plans to maintain the equity portfolio at levels
generally no greater than 15%. As a result of this change, the Company expects
greater than normal realized gains in the first quarter of 1997 and thereafter
lower realized gains and a more consistent contribution to income from the
investment portfolio.

As of September 30, 1996, the Company's investment portfolio of $1,101.3
million included U.S. Treasury and other governmental obligations ($157.6
million), foreign government obligations ($48.4 million), domestic corporate
bonds ($141.0 million), foreign corporate bonds ($6.5 million), mortgage-backed
and asset-backed securities ($284.7 million), domestic equity securities ($151.1
million), foreign equity securities ($150.7 million), short-term debt securities
($159.1 million) and derivative instruments (primarily foreign currency options
and forward currency contracts) ($2.2 million). Approximately 27.4% of the
Company's portfolio was invested in equities. As of September 30, 1996 the
equity portfolio consisted of approximately 50.1% domestic holdings and 49.9%
international holdings. As of the same date, approximately 19.6% of the
Company's portfolio was invested in international equities or fixed income
securities. Included in this amount was $21.9 million of U.S. dollar-denominated
investment funds which are invested internationally. While each of these asset
classes by itself may be volatile over short time periods, the Company believes
that a portfolio diversified with multiple asset classes will be less volatile
in the long run than one concentrated in a single asset class.

As of September 30, 1996, net unrealized gains totaled $47.2 million as
compared to $60.7 million at December 31, 1995. Net unrealized gains in the
equity portfolio decreased to $42.2 million from $47.3 million at December 31,
1995. Net unrealized gains in the long-term and short-term fixed income
investment portfolios were $3.0 million at September 30, 1996 compared to $13.1
million at December 31, 1995. The net unrealized gain on derivative instruments
was $2.0 million at September 30, 1996 as compared to $371,000 at December 31,
1995. For more information on the Company's investment portfolio, see
"Business -- Investments."

Cash provided by operations for the years ended December 31, 1993, 1994 and
1995, was $147.9 million, $122.6 million and $34.1 million, respectively. Cash
provided by operations for the nine months ended September 30, 1995 and 1996 was
$55.4 million and $32.3 million, respectively.

The Company believes that cash flow generated by operations and its cash
and investment balances will be sufficient to fund continuing operations and
capital expenditures for the foreseeable future. The nature of the Company's
operations is such that cash receipts are principally premium revenues typically
received up to three months prior to the expected cash payment for related
health care services. The Company's operations are not capital intensive, and
there are currently no commitments for major capital expenditures to support
existing business. The Company currently has no commitments or agreements with
respect to expansion outside of Virginia. The net proceeds from the Offerings
will enable the Company to make a portion of the Commonwealth Payment, make cash
payments to Eligible Members in the Demutualization and enable the Company to
further expand its networks, products and geographic base through both internal
growth and acquisitions. See "Use of Proceeds."

In connection with the Demutualization, the Company will be required to
make the Commonwealth Payment, which will be approximately $175 million. See
"The Demutualization -- The Commonwealth Payment." The Company expects to use
proceeds of the Offerings to pay $56.0 million of the Commonwealth Payment and
to fund the balance from borrowings under a revolving credit facility or other
available cash. The Commonwealth Payment has been accrued as an extraordinary
charge as of September 30, 1996.

The Company is pursuing a $300 million revolving credit agreement which the
Company plans to enter into in connection with the Offerings. The Company
intends to use borrowings under the revolving credit agreement to fund $119.0
million of the Commonwealth Payment. See "The Demutualization -- the
Commonwealth Payment." The Company has not received any binding commitments with
respect to such agreement and there can be no assurance that the Company will be
able to enter into such agreement in connection with the Offerings. In this
event, the Company would issue Class C Common Stock

<PAGE>
in payment of one-half of the Commonwealth Payment and use proceeds of the
Offerings and other available cash to fund the balance; however, at least $25.0
million of the net proceeds of the Offerings will be used for general corporate
purposes. See "The Demutualization -- The Commonwealth Payment" and "Description
of Capital Stock."

The proposed revolving credit agreement is expected to contain certain
covenants, customary for transactions of this type, including (i) limitations on
the incurrence of liens by the Company or its subsidiaries, (ii) limitations on
the incurrence of indebtedness by the Company or its subsidiaries, (iii)
limitations on dividends and other restricted payments by the Company or its
subsidiaries in respect of their capital stock (See "Dividend Policy"), (iv)
required maintenance of consolidated net worth, (v) required levels of
regulatory capital, and (vi) limits on the amount of leverage incurred. In
addition, under the terms of the proposed revolving credit agreement, certain
change of control events involving the Company will result in an event of
default thereunder.

The Company's strategy contemplates growth through acquisitions and
strategic alliances. See "Business -- Strategy." These transactions may be
financed through the issuance of securities, including Common Stock, cash which
may be generated internally or from other sources, or a combination of cash and
securities. The source of financing will be determined at the time of any such
transaction, based on a variety of factors including the market value of Common
Stock at such time and the size of the proposed transaction. Depending on the
size and source of financing, any such future acquisition or strategic alliance
may have a material impact on the Company's results of operations or financial
position.

Virginia BCBS' claims paying ability has been rated "AA-(Excellent)" by
Standard & Poor's ("S&P") since 1992, and the rating was re-affirmed in January
1997. The claims-paying ability represents S&P's opinion of an assessment of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. This opinion is not a rating
of the Company's securities, including those covered by this registration
statement. The rating scale is divided into two main categories. Ratings from
"AAA' to "BBB' are classified as "secure" claims-paying ability and ratings from
"BB' to "CCC' are classified as "vulnerable" claims-paying ability. Plus (+) and
minus (-) signs show relative standing within a category. The "AA-' rating means
excellent financial security; i.e., the capacity to meet policyholders
obligations is strong under a variety of economic and underwriting conditions.

As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers such as Trigon Insurance, the Company's principal operating subsidiary.
See "Business -- Regulation."

INCOME TAXES

Prior to 1987, the Company was exempt from United States federal income
taxation. The Tax Reform Act of 1986 (the "Act") eliminated the tax exemption
for Blue Cross and Blue Shield organizations, and since 1987 the Company has
been subject to federal income tax. Under the Act, however, certain Blue Cross
and Blue Shield organizations that were in existence on August 16, 1986, are
entitled to certain special tax provisions, including special tax deductions.
The most important of these provisions is a deduction (the "Section 833(b)
deduction"), which, if otherwise available, is equal to the amount by which 25%
of the Company's claims and claims-related expenses incurred during the year
exceeds its adjusted surplus as of the beginning of the year. Because of these
special provisions, the Company was not subject to regular tax for the years
1990 through 1993; however, because the Section 833(b) deduction is not
allowable for purposes of the AMT, the Company was subject to AMT during those
years at the rate of 20% of federal taxable income. For 1995 and 1996, the
Company's Section 833(b) deduction was limited due to the relationship between
the Company's adjusted surplus and the amount of its claims and claims related
expenses and the Company was therefore subject to the regular tax; however,
because of the Company's prior payments of AMT, it was entitled to claim an AMT
credit against its regular tax liability, which had the effect of preserving its
marginal federal income tax rate at the 20% AMT rate (as applied to income as
adjusted for AMT purposes). The Company's ability to continue to qualify for the
special provisions for taxable years beginning with the year in which the
Demutualization occurs depends on whether the Demutualization is characterized
as a "material change" in its operations or structure within the meaning of
Section 833(c)(2) of the Internal Revenue Code, which is unclear under current
law. Personnel in the National Office of the IRS have indicated informally that
the IRS will likely take the position that any issuance of stock by a Blue Cross
or Blue Shield organization generally will result in a material change.

Because it has been unclear whether the Company would be subject to the
regular tax in the future, the Company has maintained a valuation allowance with
respect to its existing AMT credits. If as a result of the Demutualization the
Company were to undergo a material change, it would lose the ability to take
advantage of the special provisions and therefore would be subject to the
regular tax. As a result, the Company would be required to eliminate the
valuation allowance, causing the full amount of its existing AMT credits to be
taken into account in computing its income for financial accounting purposes

<PAGE>
for the year in which the Demutualization has received all necessary legal
clearances and regulatory approvals. Although whether the Demutualization will
result in a "material change" for federal income tax purposes is unclear under
current law, for financial accounting purposes it is assumed that a material
change will occur as a result of the Demutualization. Because all legal
clearances and regulatory approvals necessary to effect the Demutualization have
been received, the valuation allowance on the deferred tax assets relating to
the AMT credits has been eliminated as of September 30, 1996. The balance of the
Company's valuation allowance, which relates primarily to employee benefit
liabilities and certain medical cost reserves, has been eliminated as it is more
likely than not that such assets will be realized. Thereafter the effective rate
as reflected in the Company's consolidated financial statements should
approximate the 35% statutory federal rate.

REINSURANCE

Prior to 1995, the Company ceded 100% of the risk on any individual claim
in excess of $500,000 up to $1,000,000. This reinsurance was discontinued
effective January 1, 1995. The Company currently cedes 50% to 75% of the risk on
its long-term care business and portions of its risk on certain student
insurance policies. The Company's HMO subsidiaries have stop-loss coverage on
health claims. Total reinsurance premiums paid for the nine months ended
September 30, 1996 were $2.5 million, and have been netted against commercial
premium revenue. Claims ceded in the amount of $1.7 million have been netted
against commercial medical costs. In addition, both Mid-South and Monticello
Life have stop-loss coverage on life insurance. Total stop-loss premiums on life
insurance amounted to $1.9 million for the nine months ended September 30, 1996.

RECENT ACCOUNTING PRONOUNCEMENT

In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
provides guidance for recognition of impairment losses related to long-lived
assets (for example, property and equipment), and certain intangibles and
related goodwill for (1) assets to be held and used and (2) assets to be
disposed of. SFAS No. 121 is effective for years beginning after December 15,
1995. Implementation of SFAS No. 121 is not expected to have a material effect
on the Company's consolidated financial statements.

INFLATION

Health care costs in the United States have increased more rapidly than the
national consumer price index ("CPI") in recent years and although health care
trends have moderated they are still expected to exceed CPI. The Company
believes that it has reduced the impact of such increases through expanding and
aggressively managing its provider networks, establishing risk-sharing
arrangements, and enhancing its underwriting standards. The Company has
negotiated favorable rates, terms and incentives with its provider network of
hospitals and physicians. Additionally, the Company has strengthened its ability
to apply appropriate underwriting criteria in selecting groups and individuals
and in controlling the utilization of health care services. However, there can
be no assurance that the Company's efforts to reduce the impact of inflation
will be as effective as in the past or that premium increases will equal or
exceed increasing health care costs.

<PAGE>
BUSINESS

THE COMPANY

As of September 30, 1996, the Company's network systems consisted of: HMO
networks which, with 251,399 members, are the Company's most tightly managed and
cost efficient networks; the PPO networks which, with 774,473 members, offer
greater choice of providers than Trigon's HMOs and may include a POS feature;
and the PAR network which, with 615,655 members, is the Company's broadest and
most flexible network. The Company also serves 218,814 additional members
through Medicare supplemental plans (128,006 members), third-party
administration of health care claims (40,383 members) and through Mid-South
Insurance Company, a Fayetteville, North Carolina-based health and life
insurance company, which was acquired by the Company in 1996 (50,425 members).
Within the Company's managed care product offerings, customers may choose
between at-risk arrangements (in which the Company bears the cost of providing
specified health care services for a fixed payment) and self-funded arrangements
(in which the customer bears all or a portion of the risk). As of September 30,
1996, 47.6% of members were covered under at-risk arrangements and 41.8% were
covered under self-funded arrangements, with the remaining 10.6% covered under
the FEP, administered under contract with the BCBSA.

In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon has the largest number of HMO members in Virginia. Trigon's
total HMO enrollment has grown from 60,154 members at December 31, 1991 to
251,399 members as of September 30, 1996, representing a compound annual growth
rate of 35.1%. The Company's PPO network system is the largest in Virginia.
Trigon's total PPO enrollment has grown from 396,584 members at December 31,
1991 to 774,473 members as of September 30, 1996, representing a compound annual
growth rate of 15.1%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 55.1% as of September 30,
1996. Trigon's more traditional products are offered through its PAR network,
which is the Company's largest network. As a result of the Company's strategy of
encouraging members to migrate to its more tightly managed networks, total
membership in the PAR network decreased from 951,020 members at December 31,
1991 to 615,655 members at September 30, 1996. Trigon also offers several
specialty health care and related products, such as dental, wellness, mental
health and life, accident and disability insurance coverage.

Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business, including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon will be the holding company for Trigon
Insurance, which will be the successor company to Virginia BCBS.

MANAGED HEALTH CARE INDUSTRY

According to the Health Care Financing Administration, health care spending
in the U.S. rose from $697 billion in 1990 to $1,008 billion in 1995, an average
annual increase of 7.7%. This rate was considerably more than the average annual
increase of the Consumer Price Index ("CPI") of 3.1% for the same period. Health
care spending accounted for 13.9% of the

<PAGE>
Gross Domestic Product ("GDP") in 1995, versus 12.1% in 1990. For 1996, health
care spending is estimated to account for 14.3% of the GDP, with projected
health care expenses exceeding $1.1 trillion. On an absolute dollar basis, as
well as on a percentage of GDP basis, the United States spends more on health
care than any other country in the world. Factors contributing to this increase
in health care costs include: the development of new medical technologies and
procedures, the aging of the population, the excessive duplication of medical
resources, the growth of third-party payment (both private insurance and
government health care programs), and defensive medicine practiced out of fear
of malpractice litigation.

In response to continuing increases in health care costs, purchasers of
health care services have sought plans that control the cost of health care.
These plans include HMOs, PPOs and other managed health care plans, such as
broader participating provider networks and plans which incorporate some of the
features of PPOs. Typically, HMO and PPO plans develop networks of health care
providers by entering into contracts with hospitals and physicians which
incorporate health care utilization management and other cost control measures.
HMO and PPO plans for individuals and small groups often are able to control
costs by applying strict underwriting criteria prior to accepting new members.
HMO and PPO members are charged periodic, prepaid premiums, and such plans
frequently charge modest copayments for services provided by network providers.
PPOs and a number of HMOs (including some of the Company's HMOs) allow
out-of-network usage but at substantially higher out-of-pocket costs. PPOs allow
members to select physicians from a panel of providers in a network. In HMOs,
members select one primary care physician from a network. That primary care
physician is responsible for coordinating health care services for the member.
According to a compilation of industry sources, membership in HMOs nationwide
has grown from 33.1 million in 1990 to 59.1 million as of January 1, 1996, an
increase in market penetration from 13.3% in 1990 to 22.3% as of January 1,
1996.

The ability of a managed health care company to offer a variety of
cost-effective products depends in large part on its ability to develop provider
networks in its geographical market. A managed health care company with a
substantial membership base in its market is often able to negotiate provider
contracts with favorable rates. A managed health care company is also able to
reduce expenses by curtailing unnecessary or inappropriate health care services
its members receive by employing utilization management techniques. These
include member selection of a primary care physician to coordinate all patient
care and manage referrals to specialists, profiling of providers to identify and
correct over-utilization patterns, review of hospital admissions and cases and
intensive management of all high-cost cases.

Traditional indemnity health insurance generally provides reimbursement to
the insured for health care services rendered by physicians, hospitals and other
providers according to a standard fee schedule. Persons insured through
indemnity insurance are not restricted to receiving health care services from a
specified provider network. Unlike managed health care plans, indemnity
insurance is generally not designed to control health care costs. As a result of
increasing concern over health care costs, demand for traditional indemnity
products has declined as demand for managed health care plans has increased
among purchasers of health care services.

THE VIRGINIA MARKET

Approximately 5.2 million of Virginia's population reside within eight
metropolitan areas, with the remaining approximately 1.4 million people located
in more sparsely populated rural areas. For purposes of marketing, Trigon
divides the state into four regions: Central, which includes the Richmond,
Petersburg and Charlottesville metropolitan statistical areas ("MSA") and 1.4
million people; Eastern, which includes the Norfolk/Newport News MSA and 1.6
million people; Northern, which includes the Virginia portion of the Washington,
D.C. MSA and 1.9 million people; and Western, which includes Bristol, Danville,
Lynchburg and Roanoke and 1.6 million people. Approximately 50% of the
population in the Northern region resides in areas where the Company is not
licensed to use the Blue Cross and Blue Shield service marks and tradenames.
While the state population has grown at the rate of about one percent per year
during the last four years, employment has increased approximately 3% from 1994
to 1995, with the service sector growing at approximately 6%.

Trigon's membership constituted approximately 26% of Virginia's total
population as of September 30, 1996 and 31% of the Virginia population in those
areas where Trigon has the exclusive right to use the Blue Cross and Blue Shield
service marks and tradenames. The Company's PPO network system, including its
POS feature, serves nearly the entire state, and its HMO network system serves
the majority of the Central, Northern and Eastern portions of the state. During
1995 the Company began offering HMO services in the Roanoke area of western
Virginia, and plans to expand HMO coverage to other strategic portions of the
state. As of June 30, 1996, HMO penetration throughout the state was 20.5%,
compared to a national average of 22.3% at January 1, 1996. Trigon's HMO
membership represents 17.9% of Virginia's total HMO market with a higher
concentration in the Central and Eastern regions.

<PAGE>
Since 1972, the Company has provided health benefits to employees and
retirees of the Commonwealth of Virginia. In 1995, the Company recorded $340.5
million for amounts attributable to this self-funded arrangement, which
represented 35% of the Company's self-funded business. In the latter part of
1994, the Commonwealth of Virginia, after a competitive bid process, awarded the
Company a new five year agreement effective July 1, 1995 to provide health
benefits to the employees and retirees of the Commonwealth of Virginia. Under
the agreement, such services may be terminated by either party upon twelve
months' written notice. The Company believes, as demonstrated by the recent
awarding of the five year contract, that it is well qualified to meet the
Commonwealth of Virginia's health care requirements because of the size and
geographic range of the Company's network systems and its broad offering of PPO
and HMO network products.

The Company is specifically targeting the densely populated eastern and
northern regions of Virginia, where its market share is lowest, for much of its
new growth in Virginia. Activities in the Eastern and Central regions include
the start-up of a Medicaid HMO product and the acquisition of 80% of Priority.
In the Northern region, the Company has formed an alliance with a major medical
system in order to improve HMO growth in this region. Trigon is targeting HMO
growth in the Central region, with the goal of obtaining much of that growth
from groups not currently covered by the Company. In the rural Western region,
where the population has been slower to adopt the concept of managed care,
Trigon believes that its significant market share and large provider networks
give it a significant competitive advantage in marketing its PPO and HMO network
systems. The Company believes that its expanded statewide contract with the
Commonwealth of Virginia provides a competitive advantage to the Company
allowing it to offer the POS feature and its HMOs to commercial customers
throughout the state. The Company also plans to introduce a Medicare HMO product
in the Central region beginning in late 1997.

STRATEGY

BACKGROUND. In 1990, the Company implemented a long-term corporate strategy
called SHOWCASE with the goals of attaining market leadership in managed care
and strong financial performance. The strategy initiated specific programs aimed
at generating a market-targeted range of managed care products, strengthening
managed care support systems and management expertise and enhancing customer
support services. These initiatives included development of an integrated data
base for capturing and analyzing financial and other information on provider
claims and group experience; investment of approximately $59 million in a new
claims processing system; tighter underwriting standards intended to promote
group profitability; and the expansion of health-related product lines,
including illness and disease management and prevention, within Virginia and
other states.

From 1990 through 1993 Trigon's membership declined slightly. This slight
decline in enrollment was largely the result of two key factors. First, based
upon its 1990 SHOWCASE strategy, Trigon decided to focus on increasing
profitability by tightening underwriting criteria for new groups. This resulted
in the loss of approximately 27,000 members of small groups from 1991 through
1993, and a slow-down in overall new membership gains. Also impacting enrollment
was the loss of approximately 72,000 Virginia employees of groups headquartered
outside of Virginia during the period from 1990 to 1993 that decided to leave
Blue Cross carriers elsewhere. In addition, Trigon lost approximately 96,000
members between 1991 and 1993 due to recession-prompted economic downsizing in
groups where Trigon, for the most part, was the exclusive carrier. Second, the
Company emphasized transitioning current PAR membership into its PPO and HMO
networks where costs could be better controlled, rather than directing its sales
and marketing energies to new prospects. Beginning in 1994, Trigon began to
focus on new growth opportunities in addition to the transitioning of existing
groups into its PPO and HMO networks. Due in part to this focus on growth, total
members increased 3.0% from December 31, 1993 to December 31, 1994, increased
7.0% from December 31, 1994 to December 31, 1995, and increased 3.4% from
December 31, 1995 to September 30, 1996.

The Company is pursuing the following growth strategy:

OFFERING A CHOICE ALONG A CONTINUUM OF MANAGED CARE PRODUCTS. Trigon has
developed a continuum of health care network systems and products -- from the
broad PAR network to the tightly managed HMO -- to meet the demands of its
current customers and appeal to the needs of potential new customers. The
breadth and flexibility of the Company's benefit plan options are designed to
appeal to a broad variety of employer groups and individuals with differing
product and service preferences, including freedom of choice, cost containment,
scope of coverage and risk assumption. The Company believes its broad range of
products gives it a unique market advantage, allowing Trigon to become the sole
managed care provider to many of its members.

MIGRATING MEMBERS INTO THE COMPANY'S MORE TIGHTLY MANAGED NETWORK SYSTEMS
AND PRODUCTS. Trigon intends to design, price and market its products to
encourage its customers to migrate over time into the Company's more
cost-effective, tightly controlled networks, but will do so at a pace that the
Company's markets will support. Products such as PPO, POS

<PAGE>
(the Company's gatekeeper PPO) and Blue Advantage (a combination PPO/HMO
product) are designed to facilitate the transition of employees to managed care.
While the Company anticipates that its more tightly managed networks will
continue to be more attractively priced than PAR products, future pricing
decisions will be based on a variety of factors including competitive pressures
and medical cost trends. Trigon believes that its experience in converting
customers from traditional health insurance into a continuum of managed care
products will allow the Company to continue to manage its medical costs and to
grow within Virginia as well as in other states that remain dominated by
traditional insurance coverage.

INCREASING THE MANAGED CARE CONTENT AND COST EFFECTIVENESS OF ITS PPO AND
HMO PRODUCTS. Trigon intends to continually increase the managed care content
and cost effectiveness of its PPO and HMO networks and products. To enhance the
cost effectiveness of its PPO networks, the Company offers an optional POS
feature within the Company's PPO networks, which utilizes a primary care
physician to coordinate all health care services for the member. Within its PPOs
and HMOs, the Company is utilizing physician profiling techniques, risk-sharing
arrangements, ancillary networks for high volume or high cost services, wellness
programs and more aggressive fee scheduling to reduce health care costs.

GROWING ITS BUSINESS IN VIRGINIA. Trigon intends to capitalize on its
extensive provider networks, continuum of health care products and broad
services to increase the Company's share of health care business in Virginia. To
increase market share, Trigon intends to focus on increasing utilization of its
HMO products, entering into new product markets such as Medicaid and
Medicare-risk, increasing utilization of the Company's managed care products in
rural communities and acquiring other managed care companies.

To increase rural utilization of its managed care networks, the Company is
utilizing its PPO and POS products to transition rural communities, primarily in
western Virginia, which have been slow to embrace managed care, particularly
HMOs, into managed care. The Company believes that its PPO and POS product
offerings give it an advantage in attracting rural populations over other
managed care companies which do not offer less restrictive managed care products
such as PPOs and POS. The Company believes it has an additional competitive
advantage in rural areas as most other managed care companies do not include
these regions in their networks.

Trigon also intends to increase market share in Virginia by acquiring other
managed care companies or traditional indemnity companies, whose customers can
be transitioned into managed care and by entering into new product markets. In
addition to expanding health care market share, Trigon will pursue in-state
growth opportunities related to cross-selling its specialty products.

EXPANDING OUTSIDE OF VIRGINIA. The Company believes that it has developed
expertise in marketing, underwriting, network development and cost control which
is transferable to attractive markets outside of Virginia. The Company considers
attractive those markets that have the following characteristics: reasonably
large populations, low market penetration of managed care products and a
reasonable regulatory environment. The Company considers the mid-Atlantic and
southeastern United States to be attractive. The Company intends to expand its
out-of-state managed care business primarily through a combination of
acquisitions and strategic alliances with managed care companies, traditional
indemnity companies whose customers can be transitioned to managed care, other
health care providers and other Blue Cross/Blue Shield companies. The Company
also intends to capitalize on its specialty products to achieve entry into new
markets. In line with this expansion strategy, Trigon acquired Mid-South for
approximately $85.6 million in February 1996. Mid-South is a Fayetteville, North
Carolina-based company that provides health insurance coverage to 50,425 members
primarily in rural and suburban markets in North Carolina, South Carolina,
Georgia, Virginia and Tennessee. Trigon believes benefits from the acquisition
will include administrative economies, additional experience in developing
PPO-type health products in rural areas, and expansion into Southeastern target
states. The Company currently has no other commitments or agreements with
respect to expansion outside of Virginia; however, the Company is in the process
of evaluating several potential acquisition opportunities outside of Virginia.
The Company has no significant experience in expanding its managed health care
business outside of Virginia. Consequently, there can be no assurance that the
Company's efforts to expand outside Virginia will be successful.

OFFERING SPECIALTY PRODUCTS. Trigon's strategy includes offering specialty
health care and related products including Medicare supplemental products,
third-party administration for health care plans and workers' compensation,
illness and disease prevention products, dental managed care, Medicare Part A
claims processing, student insurance, life insurance, and group life, accidental
death and dismemberment, and short-term and long-term disability insurance.
Trigon and its subsidiaries serve 34 states and the District of Columbia. The
Company's strategy is to continue marketing these products on a stand-alone
basis, as enhancements to its core product line, and as avenues for entry into
new markets within and outside of Virginia.

<PAGE>
MANAGED CARE MARKETING AND OPERATIONS

The Company's managed care and specialty managed care products as well as
certain of its life, health and wellness products are marketed through five
Local Market Units and two Specialty Market Units. Each Market Unit focuses on
the needs of its respective markets and has operating profit responsibility for
its products and services.

LOCAL MARKETS. Each of the five Local Market Units is geographic in scope
and focused on its local markets. Market managers are responsible for fully
understanding the dynamics of their respective region. The defined regions are
Central Virginia, Eastern Virginia, Western Virginia, Mid-Atlantic and Southeast
United States. Each market includes large, medium and small group employers. The
large employers (generally greater than 500 employees) often engage consultants
to assist in the design and procurement of benefit plans. The majority of these
large employers are fully or partially self-funded. The medium size employers
(generally ranging in size from 50 to 499 employees) may use consultants to
assist in the tailoring of benefits and networks. The smaller employers
(generally having fewer than 50 employees) generally use insurance brokers to
assist in the selection of products and analysis of the actual cost of competing
plans. Approximately 60% of the employers with more than 50 employees are fully
insured. These groups are experience rated with premiums based on the group's
specific medical claims experience. All of the business with employers of less
than 50 employees are fully insured with premiums based on community rating
principles modified by the individual medical characteristics of the persons
covered.

There are two Specialty Market Units designated to focus on customer
segments with special demands -- Major Accounts and the Government and
Individual Business Unit. These Specialty Market Units distribute their products
and services across all of the Local Market regions.

MAJOR ACCOUNTS. The Major Account Unit focuses on selling and servicing
large and multi-state accounts. These customers are generally sophisticated with
knowledgeable staffs and often engage consultants to work with the Trigon sales
staff to tailor benefits and networks to the needs of the customer. The Trigon
sales representative markets the product first to the employer and then directly
to the employees. Trigon believes that offering tailored benefits and network
options, as well as low cost products, is essential to success in this market.
The majority of groups in this market are fully or partially self-funded.

GOVERNMENT AND INDIVIDUAL BUSINESS. The Government and Individual Business
Unit administers federal government programs (Medicare Part A and the FEP), and
serves all of the individual lines of business. The individual products are
marketed principally through a 39-person telemarketing unit. Brokers are also
used in this line of business. Products include fee-for-service, managed care
and specialty managed care. Medicare Supplemental products are marketed to
individuals over age 65. Long-term care products are offered through this
business unit, both to individuals and members of groups. Individual products
are fully insured.

The Market Units are supported by Shared Service Units comprised of
functions that have been centralized to leverage expertise and economies of
scale to add value to the Market Units. Included in the Shared Service Units is
the Health Delivery Unit, which encompasses provider contracting (including
development of provider partnerships), provider selection, quality management
(NCQA, HEDIS), utilization management, provider credentialing and profiling,
medical policy, disease management and health outcomes research. Shared Service
Units also include such functions as finance, actuarial, human resources and
information services.

NETWORK SYSTEMS

The Company's extensive managed health care provider networks enable it to
offer a comprehensive array of managed health care programs throughout Virginia.
These networks include its HMO, PPO and PAR networks, as well as specialty
managed care networks. In establishing these networks, the Company enters into
contracts with qualified providers in each geographic area to serve its members.
These contracts are intended to control the cost of health care through both
control of unit cost and utilization management. As a result, the Company
reduces the need to utilize out-of-network providers that are not subject to the
Company's cost controls.

With the largest membership base in Virginia, the Company is generally able
to negotiate provider contracts with favorable rates and effective utilization
management and other cost control measures. The Company's networks consist of
contractual relationships with primary care physicians, specialists, hospitals
and ancillary providers who are selected to meet customers' geographic access
needs and to be attractive to the Company's customers. Pursuant to these
contracts, hospitals and ancillary providers are paid on a discounted charges
basis or a per case or per diem basis, and physician providers are paid either
on a capitated or fixed fee schedule basis. Once credentialed and admitted to
the applicable network, physicians are reviewed on a periodic basis to help
ensure that their health care practice patterns and outcomes are consistent with

<PAGE>
quality and cost-effectiveness guidelines established by the Company. In
selecting physicians for its networks, the Company uses its credentialing and
profiling programs to evaluate the applicant's professional qualifications and
experience, including license and malpractice claims history and hospital
affiliations. In addition, the applicant's cost and quality profiles are
assessed using the Company's extensive claims database and utilization review
history. The physician's ability to satisfy expected enrollment demands is
evaluated as well.

In developing its three main network systems -- PAR, PPO (which includes an
optional POS feature) and HMO -- the Company's strategy has been twofold: to
offer the market a wide choice of prices and benefits; and to control health
care costs more effectively by moving customers through a progressively more
controlled series of benefit and network designs. This product continuum offers
the most choice at the PAR level, followed by PPO and HMO. All networks contain
provider fee discounts and utilization management controls. Overlayed upon each
network is a range of benefit and pricing designs which exert greater controls
upon members in return for greater premium rate reductions, as well as stronger
utilization and unit price controls upon providers in return for larger numbers
of members directed to their businesses. The PAR network, the most traditional,
is differentiated by the greatest number of participating providers, generally
the lowest percentage of provider fee discounts and the ability of members to
exercise the greatest freedom within and outside the PAR network. The PPO
network, by contrast, is smaller and more restrictive in allowing for
non-network provider usage. The optional POS feature adds greater utilization
controls to the Company's PPO networks by requiring members to coordinate all
health care and referral decisions through a primary care physician or
gatekeeper. At the most restrictive -- and least expensive -- level is the HMO,
which has the smallest number of providers, capitates primary care physicians,
and exercises the greatest degree of management of utilization and referrals of
members through coordination by the primary care physician. In addition to these
network options, the Company's "Blue Advantage" product uses whole group
underwriting to provide both the PPO and HMO products to groups desiring only
one health care administrator and the ability to transition employees gradually
into more restrictive managed care.

The following table sets forth the number of members in each of the
Company's product groups for the last five years and for the nine month periods
ended September 30, 1995 and 1996.

MEMBERSHIP BY NETWORK SYSTEM

<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------

<S> <C> <C> <C> <C> <C> <C> <C>
Commercial:
HMO.............................. 48,661 45,004 59,353 85,739 172,893 157,811 236,127
PPO.............................. 75,522 102,247 131,052 155,433 212,322 207,968 216,937
PAR.............................. 441,687 400,997 352,783 334,800 296,716 304,060 252,774
Other(1)......................... 147,479 150,586 156,737 158,503 149,109 146,456 178,431
--------- --------- --------- --------- --------- --------- ---------
Subtotal...................... 713,349 698,834 699,925 734,475 831,040 816,295 884,269

Self-funded:
HMO.............................. 11,493 15,679 24,728 34,243 48,255 52,246 15,272
PPO.............................. 148,291 283,716 313,744 321,863 336,414 303,462 359,701
PAR.............................. 509,333 369,041 334,692 318,297 321,522 325,153 362,881
ASO.............................. 84,235 78,163 78,903 77,481 63,826 65,576 40,383
--------- --------- --------- --------- --------- --------- ---------
Subtotal...................... 753,352 746,599 752,067 751,884 770,017 746,437 778,237
FEP (PPO network).................. 172,771 175,723 180,015 195,314 198,561 198,935 197,835
--------- --------- --------- --------- --------- --------- ---------
Total.............................. 1,639,472 1,621,156 1,632,007 1,681,673 1,799,618 1,761,667 1,860,341
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>

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

(1) "Other" members include enrollment from Medicare supplement plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

As a result of the Company's increased emphasis on utilization management
and cost control, the Company has achieved improvements in medical management
statistics as set forth in the table below. The Company believes it has the
opportunity for further improvement in these statistics through continued
implementation of utilization management, illness and disease prevention
programs and cost control programs.

<PAGE>
NETWORK SYSTEMS UTILIZATION STATISTICS (1)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------ TWELVE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996 (2)
---- ---- ---- ---- ---- ----------------------

<S> <C> <C> <C> <C> <C> <C>
Inpatient days per thousand
members......................... 356 329 299 278 266 245
Admissions per thousand members... 76 69 64 64 66 63
</TABLE>

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

(1) Includes PAR, PPO and HMO network members (medical, surgical and maternity
admissions only).

(2) Calculated using total number of inpatient days and inpatient admissions
from October 1, 1995 through September 30, 1996 divided by average
enrollment, in thousands, for the same period.

Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the claims are not underwritten by Trigon but are funded by the
groups. Self-funded arrangements are typically utilized by large and mid-size
groups. In addition, most self-funded groups purchase aggregate and/or claim
specific stop loss coverage. In exchange for a premium, the group's aggregate
liability is capped for the year or the group's liability on any one episode of
care is capped. Trigon charges self-funded groups an administrative fee which is
based on the number of members in a group or the group's claims experience.
Under the Company's self-funded arrangements, amounts due are recognized based
on incurred claims plus administrative and other fees and any stop-loss
premiums.

The Company's underwriting methodologies for plans offered in its HMO, PPO
and PAR networks vary by market segment. In the individual and small group
markets, community rating principles modified by the individual medical
characteristics of the persons covered are used in establishing premium rates.
In larger group markets, group specific claims experience is used in
establishing the appropriate premium rates. The Company's underwriting practices
with respect to certain members are subject to state regulation. See
"Regulation."

The Company believes that its success in managing network health care costs
is related to its efforts to maintain the health and well being of its members.
As a result, the Company offers a variety of programs to promote wellness and to
prevent disease. One of these programs, comprehensive case management, seeks to
educate members about the importance of following recommended treatments for
diseases such as asthma, diabetes and cancer and to suggest lifestyle changes.
The Company also offers a variety of wellness educational programs, such as Baby
Benefit, Better Prepared and Healthy Returns. These programs seek to identify
members at high risk for certain health care problems and to institute lifestyle
changes prior to the onset of illness. In addition, Trigon has adopted
network-wide prevention guidelines which set treatment standards in such areas
as immunization, mammograms, cholesterol and cancer screenings. Other wellness
and prevention programs available through Trigon's network offerings include
smoking cessation programs, well baby programs, and health-related newsletters.

Academic studies have found generally that the benefits of specific quality
control programs (such as improvements in mortality and morbidity rates) are
difficult to measure. However, the Company believes that its overall commitment
to both cost and quality control programs have contributed to the reduction over
time of the Company's network system utilization and medical loss ratios as well
as to its increasing member enrollment.

Trigon has adopted treatment guidelines for many diseases and procedures.
These treatment guidelines are based upon generally accepted medical practice
and are derived from medical literature developed by such experts as the
American College of Obstetrics and Gynecology and the National Institute of
Health. In line with nationally accepted standards, the guidelines reflect
recommendations by committees of independent local physicians as part of
Trigon's quality improvement program. These guidelines do not mandate specific
treatments, but are designed to be used by the Company's network physicians to
confirm diagnoses and design treatments.

The following is a more detailed description of the principal features of
the Company's networks and the health care plans based on these networks.

HMO NETWORKS

Trigon established its first HMO in 1984 and now operates six separate
HMOs. HMO Virginia, Inc. is a federally qualified HMO that operates in the
Richmond and Norfolk areas. HealthKeepers, Inc. is a state qualified HMO that
operates

<PAGE>
primarily in the central, eastern, and southwestern areas of Virginia.
Physicians Health Plan, Inc. ("PHP") is a federally qualified HMO operating in
Northern Virginia, Washington D.C. and the surrounding Maryland counties.
Peninsula Health Care, Inc. ("PHC"), a joint venture owned 51% by Trigon, is a
state qualified HMO operating primarily on the Peninsula in Eastern Virginia. On
May 12, 1995 the Company completed the acquisition of 80% of Priority, which
owns both a state qualified HMO and a federally qualified HMO operating in the
Tidewater area. Membership in these six HMOs has grown from 60,154 members as of
December 31, 1991 to 251,399 members as of September 30, 1996. As of June 30,
1996, the HMO networks included approximately 2,300 primary care physicians,
7,700 specialist physicians and 63 hospitals throughout Virginia. All six of the
HMOs are individual practice association ("IPA") models. In IPAs, physicians
practicing in their own offices participate in a prepaid health care plan. The
physicians are paid agreed-upon rates either through a fixed fee schedule or on
a capitated basis. Each of Trigon's HMOs uses the Blue Cross and Blue Shield
service mark except for PHP, which operates outside the area covered by the
Company's license to use the service mark.

The Company's HMOs are able to provide for the delivery of health care
services at lower costs than traditional health insurance plans due to their
network provider arrangements which specify favorable rates and require
utilization management and other cost control measures. Members choose a primary
care physician who is responsible for coordinating health care services for the
member. The HMO product portfolio is presented to customers as a stand alone HMO
offering, or through "Blue Advantage," a program which includes HMO and PPO
options administered and priced as a single program and which can only be
utilized by groups that contract with Trigon on an exclusive basis.

Most HMO products have a copayment provision under which the member bears a
portion of health care costs. Certain of the Company's HMOs offer a feature
which permits the member to receive health care services from providers that are
not part of the Company's HMO network at a substantial out-of-pocket cost to the
member which includes a deductible and higher copayment obligation. The Company
believes that copayment obligations, out-of-network costs and other obligations
of these HMO plans enhance its ability to control costs by encouraging members
to take more responsibility for their health care decisions.

PROVIDER ARRANGEMENTS. Trigon's HMO networks have contracts with hospitals,
physicians and other professionals at reduced rates, which are typically more
favorable than rates for the Company's PPO and PAR networks. Almost all of the
primary care physicians in the HMO networks are reimbursed on a capitated basis,
while specialists are reimbursed based on a fee schedule. Some ancillary
services, lab services, mental health and vision services are also capitated.
These arrangements provide the incentive to control utilization and cost. The
Company has not experienced any material problems involving the inability of
physicians to perform their obligations under capitation arrangements because of
physician insolvency or otherwise. HMO network hospital provider contracts,
normally two to five years in duration, are on a nonexclusive basis and are
generally paid on the basis of per diems (fixed fee schedules where the daily
rate is based on the type of service), per case per admission (fixed fee
schedules for all services during a member's hospitalization), or a percentage
of covered charges with limits on the subsequent year increases. The average
rate negotiated with hospitals under this arrangement are lower than the
hospital's average standard retail charges. Services not subject to special per
case or per diem payment arrangements are generally paid according to a fee
schedule or as a percentage of billed charges. Based on these payment
arrangements, physicians and hospitals in the HMO networks have financial
incentives to control health care costs. Additionally, in the case of PHC, the
joint venture interest of the hospital system partner provides an added
financial incentive to minimize unnecessary or marginal health care in this HMO.

UTILIZATION MANAGEMENT. Trigon also manages health care costs in its HMO
networks by using utilization management systems guidelines for the HMO network
that are intended to address quality of care and help to ensure that only
appropriate services are rendered, and that such services are provided in the
most cost-effective manner. The primary care physicians are considered to be the
overall manager of the individual's health care needs. Primary care physicians
manage and optimize care through the use of referrals and by approving all
specialty care before it is rendered. In addition, under a utilization review
program, the HMO reviews all high cost services needed by individual members
which are not provided by the primary care physician. This review program is
intended to ensure that all enrollees receive necessary, appropriate and
cost-effective care. Focused case management techniques are used on all high
cost cases. New medical technologies are reviewed in advance through Trigon's
participation in a new technology evaluation program sponsored by the BCBSA and
a large HMO company. Such review of new medical technologies attempts to ensure
that only safe and effective new medical procedures are covered.

The Company also manages health care costs and quality by reviewing monthly
cost and utilization trends within its HMO networks. Utilization rates and cases
are reviewed in the aggregate and by service type to identify opportunities for
better cost and quality control. In addition, the highest cost services are
studied to determine if costs can be reduced by using

<PAGE>
new, less expensive technologies or by creating additional networks or
contracts, such as networks for ambulatory care, to reduce provider costs.

QUALITY MANAGEMENT. Trigon's HMO quality assurance standards are modeled on
those of the National Committee on Quality Assurance ("NCQA"), an independent,
nonprofit institution that reviews and accredits health maintenance and managed
care organizations. The quality improvement program instituted by the Company's
HMOs provides for the review of medical care, service, outcomes of care, and the
initial and ongoing review of the credentials of all network providers. This
credentialing process includes a review of whether the provider has the
necessary licenses, is qualified in the specialty indicated, and meets standards
for safety, sanitation, and accessibility. The HMO reviews the findings with a
quality improvement committee, which includes leading physicians from the HMO
network. In addition, quality of care outcomes are monitored through profiling
and data analysis, member satisfaction surveys, and problem case review. Two of
Trigon's HMOs -- HealthKeepers and HMO Virginia -- sought NCQA accreditation in
late 1994, but were denied accreditation in mid-1995, primarily because of a
lack of NCQA-formatted documentation and tracking processes, and not due to any
specific issues related to quality of care or service. The remaining Trigon HMO
plans -- Priority, PHC and PHP -- did not seek accreditation in 1994.
HealthKeepers, Trigon's largest HMO, has applied for accreditation in 1996, with
NCQA-review expected to occur in early 1997. The Company believes that the
failure to receive NCQA accreditation has not materially affected the market
acceptance of its HMO products.

MEDICAID AND MEDICARE HMO PRODUCTS. HealthKeepers, PHC and Priority have
begun marketing Medicaid services to participants in the Aid to Families with
Dependent Children ("AFDC") program in the Peninsula, Tidewater and Central
regions of Virginia. The Company also plans to introduce a Medicare HMO product
in 1997 within Virginia, which has approximately 600,000 Medicare eligibles in
the areas where the Company has the exclusive rights to use the Blue Cross and
Blue Shield service marks and tradenames.

PPO NETWORKS

The Company's PPO networks include a statewide PPO network, which as of
June 30, 1996 included approximately 14,400 physicians and 151 hospitals, as
well as a smaller, more restrictive regional network in the Richmond and Norfolk
areas which included approximately 3,200 physicians. The Company anticipates
establishing additional regional networks in other areas of Virginia. There were
774,473 members enrolled in these PPO health care plans as of September 30,
1996. Approximately 27% of PPO members as of September 30, 1996 were employees
of the Commonwealth of Virginia, whose plan includes the POS feature discussed
below.

The Company's PPO products are similar to its HMO products in that they are
able to provide for health care delivery at lower costs than traditional health
insurance due to network provider arrangements which specify favorable rates and
employ utilization management and other cost control measures. Services are
provided to customers based on periodic, prepaid charges or are provided under a
variety of self-funded financial arrangements. Members also have copayment or
coinsurance obligations for services rendered by network providers that are
similar to those of the Company's HMO products. Trigon includes as part of its
PPO networks the option of including a POS feature in which each member chooses
a primary care physician who is responsible for coordinating all health care
services for the member. Unlike the HMO and PPO products electing the POS
feature, members with the standard PPO products may seek care from any PPO
network physician in the appropriate PPO network depending on services required.
Appropriate copayments are charged at the time of services. PPO members have the
option to receive health care services from providers that are not a part of the
network, typically at substantial out-of-pocket costs. Trigon believes that
copayments and out-of-network obligations of its PPO products enhance its
ability to control costs by encouraging members to take more responsibility for
their health care decisions.

Trigon's PPO networks and products provide choice and flexibility to all
types of customers in its markets. In the statewide PPO network, providers
accept payments for covered services which generally are lower than the
allowance in the broader PAR network. For PPO products including the POS feature
providers also receive reimbursement incentives for controlling unnecessary
utilization costs. In the regional network, primary care physicians are
reimbursed at the same rate as those in the statewide PPO networks, and
specialists are generally reimbursed at a lower rate than in the statewide PPO
network. In both the statewide and regional networks, providers do not bill the
members for the difference between the provider charges and the PPO payment. If
a member chooses to receive out-of-network services, the member will be required
to bear a larger portion of the total expenses for services.

The cost control methods used by the Company for its PPO products are
similar to those the Company utilizes for its HMO products. Trigon endeavors to
manage and control costs for its PPO products by negotiating favorable fee
schedules

<PAGE>
with physicians and hospitals and through utilization management and other cost
control measures. In addition, Trigon manages costs through pricing and product
design decisions intended to influence the behavior of both providers and
members, as well as by applying specific underwriting criteria to employer
groups and individuals.

PROVIDER ARRANGEMENTS. Like the Company's HMO products, the Company's PPO
products provide for the delivery of specified health care services to members
by contracting with physicians and other professional providers. PPO network
hospital provider contracts are generally based upon per diem or per case or a
percentage of covered charges arrangements that provide for rates that are
typically lower than the hospital's average standard billing rates and generally
more favorable than rates for the Company's PAR network. Physician provider
contracts also employ attractive fixed fee schedules which are below standard
billing rates and more favorable than rates for the Company's PAR network.
Physician fee schedule payments are set by the Company using Resource Based
Relative Value System methodologies and are generally adjusted annually.
Hospital rates are generally negotiated for terms of from two to three years.
When considering whether to contract with a physician for its PPO networks, the
Company conducts a credentialing program to evaluate the applicant's
professional experience, including licensure.

UTILIZATION MANAGEMENT. The Company also manages health care costs in its
PPO networks by adopting utilization management systems that are intended to
reduce unnecessary procedures, admissions and other medical costs. The Company's
utilization management systems guidelines for the PPO network help to ensure
that only appropriate services are rendered and that such services are provided
in the most cost-effective manner. Trigon utilizes medical guidelines and
requires pre-admission approvals of all hospital stays and concurrent review of
length of stay. Trigon also retrospectively reviews physician practice patterns.
Review of physician practice patterns may result in modifications and
refinements to the PPO network of providers and network contractual
arrangements. Physicians participating in the regional PPO network and in the
POS program are required to meet certain economic profiling criteria that
indicate cost effective and quality practice standards. Primary care and
specialist providers in the POS program are periodically given utilization, cost
and quality profiles, or "report cards." In the POS program, utilization
management includes an outpatient review program, with pre-authorization of
high-cost outpatient care, in addition to management of hospital care through
precertification, concurrent review, case management and discharge planning
capacity. Outpatient care is further controlled through claim edits designed to
detect and correct inappropriate provider billing patterns. All new medical
technologies are reviewed in advance in an attempt to ensure that only safe and
effective new medical procedures are covered. Additionally, the Company also
employs a comprehensive care management program. In this program, the Company
identifies those members having certain chronic diseases (such as asthma,
hypertension and cancer) and proactively works with the member and the physician
to facilitate appropriate treatment, help to ensure compliance with recommended
therapies and educate members on lifestyle modifications to manage the disease.
The Company believes that the program promotes the delivery of efficient care
and helps to improve the quality of health care delivered.

As with its HMO network, Trigon further manages health care costs by
reviewing monthly cost and utilization trends within its PPO networks.

QUALITY MANAGEMENT. The Company has an active program to evaluate the
quality and appropriateness of care provided by its PPO networks. Provider
credentialing, profiling and member satisfaction, along with monitoring of
outcomes, and clinical studies are all performed to monitor and manage quality
of care. Network physicians and other providers participate in quality
management programs overseen by medical advisory panels. Using the Company's
computerized medical information database, these programs involve profiles of
the tests, types of treatment and procedures performed for specific diagnoses by
these physicians, as well as reviews of aggregate data.

PAR NETWORK

Trigon's PAR network provides more traditional health coverage and included
approximately 16,200 physicians and 153 hospitals as of June 30, 1996. The PAR
network served 615,655 members as of September 30, 1996. The PAR network offers
members more providers to choose from, greater customization of benefit design,
and fewer restrictions in the use of non-network providers than the PPO network.
The Company's strategy is to transition members from the PAR network to the more
tightly managed PPO and HMO networks. However, Trigon expects that its PAR
network and products will continue to be an important offering for groups
desiring greater flexibility and choice in networks and benefits, as well as a
source of new PPO and HMO members.

The Company's PAR network and products are able to provide for health care
delivery at lower costs than many other traditional health plans due to network
arrangements which specify favorable rates and encourage utilization management
and other cost control measures. Members may choose any physician from the PAR
network depending on services required,

<PAGE>
and are generally subject to annual deductible requirements and coinsurance.
Trigon believes that annual deductibles and higher out-of-network costs of its
PAR products enhance its ability to control costs by encouraging members to take
more responsibility for their health care decisions.

In the PAR network, physicians accept payments for covered services and do
not bill the members for the difference between the provider charges and the
Company reimbursements. If a member chooses to receive out-of-network services
under a PAR health plan, the member will be required to bear a larger portion of
the total expenses for such services since the provider is able to bill the
member for the difference between the provider's charge and the Company payment.

The cost control methods used by the Company for its PAR products are
substantially similar to those the Company utilizes for its other managed care
networks. Trigon endeavors to manage and control costs for its PAR products by
negotiating favorable arrangements with physicians and hospitals, which include
utilization management and other cost control measures. In addition, Trigon
controls costs through pricing and product design decisions intended to
influence the behavior of both providers and members, as well as by applying
specific underwriting criteria to employer groups and individuals.

PROVIDER ARRANGEMENTS. Like the Company's PPO products, the Company's PAR
products provide for the delivery of specified health care services to members
through contracts with physicians and other professional providers. PAR network
hospital and physician contracts are generally paid on the basis of per diems,
per case, fixed fee schedule or percentage of covered charges and provide for
rates that are typically below standard billing rates but which are less
favorable than rates for the Company's HMO and PPO networks. The Company is able
to obtain discounted prices for services because of the volume of business it
offers to health care providers that are part of the network. Hospital
reimbursement rates are generally negotiated for terms of one to three years.
Physician reimbursements renew automatically, with a ninety-day notification
period required for any change by the Company. When considering whether to
contract with a physician for its PAR network, the Company conducts a
credentialing program to evaluate the applicant's professional experience,
including licensure.

UTILIZATION MANAGEMENT. The Company also manages health care costs in its
PAR network by adopting utilization management systems guidelines that help to
ensure that only appropriate services are rendered and that such services are
provided in the most cost-effective manner. The Company's utilization management
systems seek to ensure that medical services provided are based on medical
necessity and are covered under the benefit design. The Company utilizes medical
guidelines and offers targeted pre-admission approvals of hospital stays and
concurrent review for targeted admissions, and retrospectively reviews physician
practice patterns.

QUALITY MANAGEMENT. The Company has an active program to evaluate the
quality and appropriateness of care provided by its PAR network. Physicians and
other providers participate in quality management programs overseen by the
Company's medical policy area. Using the Company's computerized medical
information database, these programs involve reviews of the tests, types of
treatment and procedures performed for specific diagnoses by these physicians,
as well as reviews of aggregate data.

SPECIALTY MANAGED HEALTH CARE PLANS

Trigon also offers specialty managed health care services through a number
of specialized networks. The Company believes that these specialty networks and
plans complement and facilitate the Company's marketing plans and enable the
Company to attract employer groups and other members that are increasingly
seeking a variety of options and services.

TRIGON PHARMACY PLANS. The Company offers several network-based retail card
pharmacy programs administered by PAID Prescriptions, Inc., a subsidiary of
Merck-Medco. Pharmacy network options include a broad "traditional" network, two
PPO networks, and an HMO network. The HMO offers the tightest network with the
deepest discounts. A mail order option with substantial discounts is also
available. All managed pharmacy programs incorporate cost containment and
quality assurance features including a drug formulary, manufacturer's rebates
and both concurrent and retrospective drug utilization review programs. Future
initiatives are expected to include pharmacy profiling, continued pharmacy
audits, further integration of medical and pharmacy programs and provider
risk-sharing. As of September 30, 1996, combined enrollment in all pharmacy
programs totalled approximately 1.4 million members. Effective July 1, 1995, the
Commonwealth of Virginia state employees have become participants in these
pharmacy programs, in addition to their participation in the Company's managed
care plans.

TRIGON DENTAL PLANS. The Company offers three network-based dental programs
in most areas of the state -- PAR, PPO and HMO. The PAR and PPO programs are the
broadest and most flexible, with more than 52% statewide provider participation.
The HMO utilizes a smaller number of physicians under capitated arrangements.
The programs are sold either as stand-alone products or in conjunction with the
Company's medical plans.

<PAGE>
MENTAL HEALTH PLANS. The Company has developed a mental health managed care
program designed to enhance the quality and cost-effectiveness of mental health
and substance abuse services for its customers. The program pre-authorizes
treatment that is medically necessary, appropriate to the patient's condition
and delivered in an efficient manner. This is accomplished using Trigon's
network of credentialed providers and a case management approach to care.
Providers must meet credentialing standards for network participation and are
monitored for quality and cost-effectiveness. Contracts with preferred payment
rates are in place for facilities and professional providers. The Company has
risk-sharing arrangements with providers and has future plans to develop
clinical practice guidelines, mental health provider profiling and outcomes
studies.

ANCILLARY NETWORKS. The Company evaluates emerging high volume or high cost
outpatient services to determine whether ancillary service networks will yield
cost control benefits. Per diem and discounted fee for service contracts have
been negotiated with participating home health care, home infusion and durable
medical equipment providers. Cost and appropriateness of care are monitored
through medical policy and pre-authorization on major home health visits.

SENIOR PLANS. Trigon offers numerous Medicare supplemental plans, which
typically pay the difference between the health care cost incurred and the
amount paid by Medicare. As of September 30, 1996, all of these Medicare
supplemental plans were fee-for-service in nature. In 1992, the Commonwealth of
Virginia adopted a National Association of Insurance Commissioners ("NAIC")
proposal to standardize Medicare supplemental products. As of September 30,
1996, over 90,400 members were enrolled in pre-standardization products, all of
which are community rated. As of the same date, Trigon had enrolled more than
37,500 members into six "standardized" products which are underwritten and entry
age rated. Approximately 7,500 members enrolled in supplemental products are on
Medicare due to disability. These disability members are pooled separately and
community rated.

RELATED BUSINESSES

In addition to its core managed care business, the Company engages in
several other health-related businesses including employee benefits
administration, workers' compensation administration and health management
services. Together, these businesses generated $20.5 million in revenues for the
nine months ended September 30, 1996 (excluding $16.1 million of revenue from
HCS, which was sold on December 31, 1996), included in "Other Revenues" in the
Company's financial statements. These businesses represent approximately 1% of
the Company's total revenues, a trend which is expected to remain consistent in
the next several years. Aside from their direct contribution to revenue, the
Company believes these related businesses also provide Trigon with competitive
advantages from single-source product offerings, cross-selling, market presence
and as avenues into new markets.

HEALTH MANAGEMENT CORPORATION ("HMC") provides health management and
promotion and data analysis services to both Trigon and to third parties.
Through its health promotion services, HMC assists organizations to manage their
own health risks with innovative solutions to health care issues with such
products as Baby Benefits, Better Prepared and Healthy Returns. Baby Benefits
provides maternity risk management, Better Prepared provides lifestyle case
management targeting those individuals with high cost chronic illnesses and
Healthy Returns reinforces and financially rewards program participants for
positive lifestyle choices. HMC products are currently marketed by the Trigon
sales force as well as through direct sales to other organizations nationally.
HMC continues to enhance its direct sales efforts as well as the development of
alternative distribution channels to increase penetration of other markets
nationally. In July 1995, HMC acquired Healthy Homecomings, Inc., a St. Louis,
Missouri based women's health care company. It gives HMC added capability to
serve the special health care needs of women, including preconception planning,
prenatal and maternity services, gynecological surgery education and
post-operative support, menopause education and treatment options, and breast
cancer prevention and treatment education. Healthy Homecomings, Inc. has
extensive experience in specialized, in-home maternity and gynecological
follow-up care.

MONTICELLO LIFE INSURANCE COMPANY ("MLIC") began operations in 1993 with
the sale of student health products in several states followed by the marketing
of group life and disability products to Trigon groups. MLIC is currently
licensed to do business in 47 states and the District of Columbia. MLIC provides
the necessary vehicle for the marketing of managed care products outside the
Virginia market. Currently, life products are sold primarily through the Trigon
sales force to Virginia customers; managed care products are sold by a
telemarketing staff as well as through a selected broker network.

MONTICELLO SERVICE AGENCY ("MSA") was established in 1972 for the purpose
of marketing group life, accidental death, and disability products to Trigon
groups. MSA concentrates its activity primarily on the small and regional lines
of business where the packaging of group term life and disability with a health
product is common. MSA products are currently underwritten by several large
carriers with American Bankers Life and MLIC as the primary carriers.

<PAGE>
TRIGON ADMINISTRATORS, INC. provides claims processing and third-party
administrative services for employee benefit programs and property and casualty
programs to employers in the mid-Atlantic states pursuant to an administrative
services arrangement. Trigon Administrators, Inc. has two operational divisions,
a property and casualty division and an employee benefits division. It has been
conducting business since 1986, and currently has five claims offices located in
Maryland, Virginia and North Carolina.

The property and casualty division handles workers' compensation and
liability programs and currently has 73 customers. In addition to providing the
basic workers' compensation administrative services, this division actively
manages each case in order to control medical costs. Provider networks are also
used to help control these costs. In 1992, this division began offering these
cost containment services to self-administered workers compensation accounts as
well as insurance companies. The employee benefits division handles group
health, flexible benefits plans and COBRA administration and has 40,383 members
as of September 30, 1996. The employee benefits division is qualified to do
business in 8 states and the District of Columbia. Provider networks, case
management and utilization review programs are used to help employers contain
medical claims costs.

GOVERNMENT PROGRAMS

Trigon acts as an intermediary and administrative agent in servicing
approximately 1.1 million Medicare Part A beneficiaries in Virginia and West
Virginia. In 1995, the Company processed 3,189,700 Medicare Part A claims
amounting to $2.7 billion of charges. Claims processed and the reimbursement for
these claims are not included in the Company's consolidated statements of
operations. However, the Company is reimbursed for operating expenses related to
administering this business. In 1995, such expense reimbursements totaled $11.6
million. Trigon's Medicare program carries no underwriting risk.

Trigon also administers Virginia's portion of the BCBSA's national contract
with the U.S. Office of Personnel Management ("OPM") to provide benefits through
its PPO networks for approximately 200,000 federal employees and their
dependents living in Virginia. The contract renews automatically for a term of
one year each January 1, unless written notice is given by either party at least
60 days prior to the date of renewal. In 1995, Trigon recorded revenues of
$329.2 million under this program, which represented 19% of total revenue. Under
the program, a special FEP reserve is maintained at the national level as
protection against adverse claims trends. However, if the contract should
terminate with a negative balance in the FEP special reserve, the losses would
be allocated to participating plans or subcontractors based on a ratio of the
Company's past five year claims experience as a percent of the total program's
experience. As of December 31, 1995, the national reserve amounted to $3.6
billion or 6.5 months of program income. The national reserve, overall, has not
been in a deficit position since the inception of the contract in 1960.

INFORMATION SYSTEMS

The Company develops and maintains its own information systems. Information
systems have played and will continue to play a key role in ongoing plans to
continually improve quality, lower costs and increase benefit flexibility for
the Company's customers. Trigon's centralized, common database and analytical
technologies allow for increasingly more sophisticated methods of managing costs
and quality of care. The database includes comprehensive information on
virtually all physicians and hospitals and one third of the population in
Virginia, which assists Trigon in analyzing the medical and economic performance
of providers and the medical and economic experience of specific customer groups
and individuals. The Company believes that its information systems are a
competitive advantage and are sufficient to meet its current needs and future
expansion plans.

The majority of the Company's hardware has been acquired through staggered
operating leases with terms of from two to four years. This allows the Company
to take advantage of the declining cost of hardware and new technical
capabilities without subjecting itself to residual value risk. The systems run
on various platforms, the largest being a Hitachi Data Systems 8724 series
mainframe computer.

The Company uses an integrated set of applications software to support
marketing and underwriting, eligibility and billing, electronic claims
submission, claims administration, managed care programs and corporate financial
management. A combination of custom developed and licensed systems are used to
meet the unique needs of different products and markets. An overall systems
architecture is maintained to promote consistency of data, processing rules and
flexibility. Different systems serving the unique products or markets feed data
to a corporate information and decision support system. This decision support
system provides a single source of information for all of the Company's data
reporting and analytic needs. This includes operational and financial
performance, underwriting and marketing analysis, utilization management and
actuarial reporting.

<PAGE>
COMPETITION

The health care industry is highly competitive both in Virginia and in
other states in the southeastern and mid-Atlantic United States into which the
Company principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. This increased pricing
pressure has adversely affected the Company's medical loss ratio during 1995 and
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." The Company is facing this increased
competition in the areas in which it is licensed to use the Blue Cross and Blue
Shield service marks and tradenames, as well as the areas in which it operates
without these service marks and tradenames. In areas outside of its licensed
territory, the Company's ability to successfully compete may be adversely
affected by its inability to use the Blue Cross and Blue Shield service marks
and tradenames, by the presence of competitors that are able to use such service
marks and tradenames in the areas, and by the Company's lack of substantial
market share or established provider networks in these areas. The Company also
faces competition from a trend among health care providers to combine and form
their own networks in order to contract directly with employer groups and other
prospective customers to provide health care services. There is no assurance
that such overall increased competition will not exert strong pressures upon
Trigon's profitability, its ability to increase enrollment or its ability to
successfully pursue growth in areas both within and outside of Virginia.

The Company believes that it has effectively integrated its managed care
programs into its traditional business, principally through its PPO and HMO
networks and products. The trend in the health care industry is toward both
vertical and horizontal integration coupled with significant levels of managed
care, principally through HMOs. In the Company's principal geographic market
areas, HMOs have a smaller share of the health care market than in other areas
of the country, but the Company believes that HMOs will capture an increasing
share of the health care market. The Company believes that it will be necessary
to expand significantly its market share in the HMO market, in part by
successfully transitioning its PAR and PPO members into HMOs, if it is to
succeed in retaining a high overall market share in its existing geographic
markets. There can be no assurance that the Company will succeed in
significantly expanding its market share in HMOs.

INVESTMENTS

The Company's investment policies are designed to provide liquidity to meet
anticipated payment obligations and preserve capital within acceptable levels of
risk. The Company believes that concentration of investments in any one asset
class is unwise due to constantly changing interest rates, market and economic
conditions. A portion of the portfolio has been designated to meet the operating
and liquidity needs of the Company. The liquidity portfolio is invested in
short- to intermediate-term fixed income instruments with an average portfolio
duration of three years or less and an average quality of AA or higher.
Additional funds not required for liquidity needs are invested by external money
managers in fixed income and equity securities with the dual objective of
generating income and safeguarding principal. The long-term fixed income
portfolio is invested in governmental and corporate securities, both domestic
and international, with a minimum average quality rating of AA or higher. The
equity portfolio contains readily marketable investment securities (domestic and
international) ranging from small growth to well-established Fortune 500
companies. The Company expects to reduce its equity portfolio from 27.4% at
September 30, 1996 to approximately 15% of the total portfolio in the first
quarter of 1997. The Company currently plans to maintain the equity portfolio at
levels generally no greater than 15%. As a result of this change, the Company
expects greater than normal realized gains in the first quarter of 1997 and
thereafter lower realized gains and a more consistent contribution to income
from the investment portfolio.

Each external manager invests within certain guidelines established by the
Company designed to fit into the overall investment strategy. These guidelines
establish minimum quality and diversification requirements which, among other
things, provide that no more than 5% of the individual manager's portfolio may
be invested in securities of a single issuer. In addition, for those managers
investing in international securities, there are additional guidelines to
provide limitations on exposure to any one currency. At September 30, 1996,
45.1% of the portfolio was invested to meet the liquidity needs of the Company
with an additional 27.5% in long-term fixed income (including derivative
instruments) and 27.4% in equity portfolios. At September 30, 1996, 8.1% of the
fixed income portfolio and 49.9% of the equity portfolio was invested
internationally. The exposure to securities denominated in any one currency
(other than U.S. dollars) was less than 5.0% at September 30, 1996.

<PAGE>
At September 30, 1996 the investment portfolio was comprised of the
following (in thousands):

<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO
-------------- ----------
<S> <C> <C>
Fixed Income:
Domestic:
U.S. Treasury securities and obligations of
U.S. government agencies................... $ 117,112 10.6%
Mortgage-backed obligations of U.S.
government agencies........................ 40,423 3.7
Other mortgage-backed and asset-backed
securities................................. 284,688 25.8
Domestic corporate bonds..................... 140,994 12.8
Short-term debt securities with maturities of
less than one year......................... 149,359 13.6
Foreign:
Debt securities issued by foreign
governments................................ 48,424 4.4
Foreign corporate bonds...................... 6,484 0.6
Short-term debt securities with maturities of
less than one year......................... 9,751 0.9
-------------- ----------
Total fixed income......................... 797,235 72.4
-------------- ----------
Equities:
Domestic equity securities...................... 151,102 13.7
Foreign equity securities....................... 150,716 13.7
-------------- ----------
Total equities............................. 301,818 27.4
Derivative Instruments............................ 2,238 0.2
-------------- ----------
Total investments.......................... $1,101,291 100.0%
-------------- ----------
-------------- ----------
</TABLE>

As of September 30, 1996, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):

<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
RATING (1) FAIR VALUE TOTAL
- -------------------------------------------------- -------------- ----------

<S> <C> <C>
AAA............................................... $476,468 59.8%
AA................................................ 33,636 4.2
A................................................. 105,580 13.2
BBB............................................... 144,087 18.1
BB................................................ 32,393 4.1
B................................................. 5,071 0.6
CCC or lower...................................... 0 0.0
Not rated......................................... 0 0.0
-------------- ----------
Total........................................ $797,235 100.0%
-------------- ----------
-------------- ----------
</TABLE>

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

(1) Ratings are assigned primarily by Standard & Poor's Corporation when
available, with the remaining ratings assigned by Moody's Investor Service,
Inc.

<PAGE>
At September 30, 1996, $215.4 million, or 19.6% of the Company's investment
portfolio, was invested internationally. This amount includes $21.9 million
invested in U.S. dollar-denominated investment funds that are invested in
international investment securities. The geographic concentration of the
Company's foreign investments was as follows at September 30, 1996 (in
thousands):

<TABLE>
<CAPTION>
PERCENT
OF
TOTAL PERCENT OF ESTIMATED FAIR
COUNTRY PORTFOLIO FOREIGN PORTFOLIO VALUE
- ----------------------------------------- --------- ----------------- --------------

<S> <C> <C> <C>
Japan.................................... 4.3% 21.9% $ 47,142
U.S. Dollar-denominated investment funds
(1).................................... 2.0 10.2 21,930
United Kingdom........................... 1.9 9.8 21,016
France................................... 1.6 8.3 17,982
Germany.................................. 1.6 8.1 17,503
Netherlands.............................. 1.3 6.8 14,704
Canada................................... 1.3 6.7 14,490
All others............................... 5.6 28.2 60,608
--------- -------- --------------
Total............................... 19.6% 100.0% $215,375
--------- -------- --------------
--------- -------- --------------
</TABLE>

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

(1) Represents investments in six U.S. dollar-denominated investment funds which
invest primarily in investment securities of non-U.S. companies.

The Company enters into foreign currency forward transactions and foreign
currency options to manage its exposure to fluctuations in foreign currency
exchange rates. The forward contracts involve the exchange of one currency for
another at a future date and typically have maturities of six months or less. At
September 30, 1996, the Company had forward exchange contracts outstanding to
purchase approximately $25.8 million in foreign currencies and to sell
approximately $12.3 million in foreign currencies (primarily German Mark,
Japanese Yen, Danish Krone, Swedish Krona and British Pound). The gross
unrealized gains and losses related to these contracts at September 30, 1996
aggregated $447,848 and $211,436, respectively. The foreign currency options
involve purchased options to sell $35.9 million of foreign currencies (Japanese
Yen and German Mark) at set prices. These options expire within twelve months.
The gross unrealized gains and losses related to these options at September 30,
1996 aggregated $1,741,287 and $11,360, respectively.

The Company has no investment in real estate or mortgage loans, other than
through mortgage-backed securities. The Company does not enter into any
derivative instruments other than the forward currency contracts, foreign
currency options, and covered call options.

REGULATION

HEALTHCARE REFORM. During 1996, the Congress passed and the President
signed into law the Health Insurance Portability and Accountability Act of 1996,
and new federal mandates concerning mental health parity and maternity stays.
Among other things, the new insurance reform law addresses group and individual
market reforms (increasing the portability of health insurance), permits medical
savings accounts on a trial basis, and increases the deductibility of health
insurance for the self-employed. Although this legislation was recently adopted,
the Company does not believe it will have a material adverse impact on its
operations. In addition, many states, including states in which the Company does
business, have enacted or are considering various health care reform statutes.
The Virginia General Assembly has initiated health insurance market reform
measures with the general objective of encouraging greater access to health
insurance for small group employers and individuals. Those health insurance
market reforms require all insurer and HMO carriers doing business in the small
group employer market (employers with 2-99 employees) to limit waiting period
restrictions for preexisting conditions to 12 months, to give credit for prior
coverage, to guarantee the renewability of small employer group plans and to
require whole group underwriting of small employer groups which would prohibit
the exclusion from coverage or the charge of additional premiums for eligible
employees or dependents because of health status.

The reforms also require all insurers and HMOs doing business in the
primary small group market (employers with 2-25 employees) to offer and make
available both an essential and a standard benefit plan to primary small group
employers in addition to other insurance plans which they now market. Rating
requirements apply to the two benefit plans, which will allow carriers to use
the demographic risk classification factors of age, gender and geographic area.
Variations in premiums

<PAGE>
charged by a small employer carrier based on claim experience, health status and
duration are limited to a range of 20% above or 20% below the community rate
filed by the carrier, defined as the average rate charged for the same or
similar coverage to all of that carrier's primary small employer group business.

In addition, legislative reform in the individual health insurance market
requires that all insurers and HMOs doing business in the individual market in
Virginia limit the waiting period for preexisting conditions to 12 months, that
credit toward waiting periods be given for prior coverage and that every
individual insurance policy provide for renewability of coverage subject to
certain exceptions.

Based on the Company's experience in both the small group and individual
markets, its experience with existing reform measures in the small group
employer market, and the accumulated actuarial data, the Company believes that
those insurance reform measures will have no material adverse effect on the
results of its operations. There can be no assurance, however, that additional
regulatory initiatives will not be undertaken in the future, either at the
federal or state level, to engage in structural reform of the health care
industry in order to reduce the escalation in health care costs or to make
health care more accessible. Such reform, if it occurs, could adversely affect
Trigon's results of operations or financial condition.

HMO REGULATION. Virginia BCBS has six HMO subsidiaries, three of which are
federally qualified HMOs. All of Virginia BCBS' HMO subsidiaries are licensed by
the Commonwealth of Virginia and are subject to regulation and review by the
State Corporation Commission, with which they must file periodic reports. In
addition, one of the HMO subsidiaries is licensed by and subject to regulation
and review by the State of Maryland, with which it must file periodic reports.
Among the areas regulated by Virginia and Maryland law are policy forms, market
conduct, quality assurance, covered benefits, contracts between the HMO and its
health care providers, the HMO's financial condition, including net worth
requirements, and the geographic service area of an HMO.

In addition, Virginia BCBS' federally qualified HMOs are also subject to
regulation and review by the U.S. Department of Health and Human Services and
certain other federal authorities, with which they must file periodic reports.
Areas covered by federal law are similar to those covered by state law and
regulation.

INSURANCE HOLDING COMPANY REGULATION. Trigon Healthcare will not be
regulated as an insurance company, but as the direct or indirect owner of all
the capital stock of Trigon Insurance, Monticello Life Insurance Company and
Mid-South, will be regulated as an insurance holding company and subject to the
insurance holding company acts of Virginia, Wisconsin and North Carolina, the
states in which the insurance company subsidiaries are domiciled. These acts
contain certain reporting requirements as well as restrictions on transactions
between an insurer and its affiliates. The Virginia insurance holding company
laws and regulations generally require insurance companies within an insurance
holding company system to register with the State Corporation Commission, and to
file with the State Corporation Commission certain reports describing capital
structure, ownership, financial condition, certain intercompany transactions and
general business operations. In addition, various notice and reporting
requirements generally apply to transactions between insurance companies and
their affiliates within an insurance holding company system, depending on the
size and nature of the transactions. Virginia insurance holding company laws and
regulations require prior regulatory approval or, in certain circumstances,
prior notice of, certain material intercompany transfers of assets as well as
certain transactions between insurance companies, their parent holding companies
and affiliates.

Additionally, holding company acts (including those of Virginia and North
Carolina) restrict the ability of any person to obtain control of an insurance
company without prior regulatory approval. Under Virginia insurance holding
company laws and regulations, the acquisition of control of a Virginia insurer
or a person controlling a Virginia insurer, including Trigon Healthcare,
requires the prior approval of the State Corporation Commission. Without such
approval (or an exemption), no person may acquire any voting security of an
insurance holding company which controls a Virginia insurance company, or merge
with such a holding company, if as a result of such transaction such person
would "control" the insurance holding company. "Control" is defined as the
direct or indirect power to direct or cause the direction of the management and
policies of a person and is presumed to exist if a person directly or indirectly
owns or controls 10% or more of the voting securities of another person.

INSURANCE COMPANY REGULATION. Virginia BCBS and its subsidiaries are
subject to the insurance laws and regulations of the Commonwealth of Virginia,
the domiciliary state of the Company and its subsidiaries (except Mid-South
which is domiciled in North Carolina and is subject to the laws and regulations
of that state). In addition, the Company and its subsidiaries are subject to the
insurance laws and regulations of the other jurisdictions in which the Company
and its subsidiaries are licensed or authorized to do business. These insurance
laws and regulations generally give state regulatory authorities broad
supervisory, regulatory and administrative powers over insurance companies and
insurance holding companies with respect

<PAGE>
to most aspects of their insurance businesses. This regulation is intended
primarily for the benefit of the policyholders and members of insurance
companies and not investors. Regulatory authorities exercise extensive
supervisory power over health and life insurance companies with respect to the
licensing of insurance companies; the approval of forms and insurance policies
used; the nature of, and limitations on, an insurance company's investments; the
periodic examination of the operations of insurance companies; the form and
content of annual statements and other reports required to be filed on the
financial condition of insurance companies; and the establishment of capital
requirements for insurance companies. Trigon is required to file periodic
statutory financial statements in each jurisdiction in which it is licensed.
Additionally, Trigon is periodically examined by the insurance departments of
the jurisdictions in which it is licensed to do business. Some states impose
surcharges on all insurance companies operating in the state except for the Blue
Cross plan or plans operating there. The Company does not believe that these
surcharges will materially affect its ability to expand outside of Virginia
because the surcharges have generally not been imposed in the states in which
the Company principally intends to expand and, if imposed, would likely apply
equally to all non-Blue Cross companies operating in the state.

RISK-BASED CAPITAL REQUIREMENTS. In 1994, Virginia adopted new statutory
risk-based capital ("RBC") requirements for health and other insurance
companies. Such requirements are intended to assess the capital adequacy of life
and health insurers, taking into account the risk characteristics of an
insurer's investments and products. The formula for calculating such RBC
requirements, set forth in instructions adopted by the NAIC, is designed to take
into account asset risks, insurance risks, interest rate risks and other
relevant risks with respect to an individual insurance company's business. Under
these laws, an insurance company must submit a report of its RBC level to the
State Corporation Commission as of the end of the previous calendar year.

The Virginia RBC requirements categorize insurance companies according to
the extent to which they meet or exceed certain RBC thresholds. The law requires
increasing degrees of regulatory oversight and intervention as an insurance
company's RBC declines. These degrees of regulatory action are triggered by the
RBC level of an insurance company as follows: (i) a "Company Action Level Event"
(requiring the insurance company to inform and obtain approval from the Virginia
Insurance Commissioner of a comprehensive financial plan for increasing its
RBC), which would occur if, among other things, an insurance company's RBC falls
below 200% of its authorized control level RBC requirement, or if an insurance
company's RBC falls below 250% of its authorized control level RBC requirement
and has a negative trend; (ii) a "Regulatory Action Level Event" (resulting in,
in addition to the requirement of a financial plan, regulatory actions including
examination of an insurance company's assets, liabilities and operations
followed by an order specifying such corrective actions as the Virginia
Insurance Commissioner determines to be appropriate), which would occur if,
among other things, an insurance company's RBC falls below 150% of its
authorized control level RBC requirement; (iii) an "Authorized Control Level
Event" (resulting in, in addition to the regulatory actions specified above,
such actions as are necessary to cause an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding if deemed to be
in the best interests of policyholders, creditors and the public), which would
occur if, among other things, an insurance company's RBC falls below 100% of its
authorized RBC level; and (iv) a "Mandatory Control Level Event" (resulting in,
on a mandatory basis, such actions as are necessary to cause an insurance
company to be placed under regulatory control in a rehabilitation or liquidation
proceeding), which would occur if, among other things, an insurance company's
RBC falls below 70% of its authorized control level RBC requirement.

As of December 31, 1995, Virginia BCBS' RBC level as calculated in
accordance with the NAIC RBC instructions exceeded all RBC thresholds.

RESTRICTIONS ON DIVIDENDS. In the event Trigon Healthcare determines to pay
dividends, the principal source of funds to pay dividends to stockholders would
be dividends received by Trigon Healthcare from its subsidiaries, including
Trigon Insurance. Virginia insurance laws and regulations restrict the payment
of extraordinary dividends declared by insurance companies, including health
care insurers such as Trigon Insurance, in a holding company system. An
insurance company is prohibited from paying an extraordinary dividend unless it
obtains the approval of the State Corporation Commission. The State Corporation
Commission must approve or disapprove the dividend within thirty days after
receiving notice of the declaration of the dividend. If the State Corporation
Commission does not disapprove the dividend within thirty days, the distribution
is considered approved. An extraordinary dividend is one which, together with
the amount of dividends and distributions paid by the insurance company during
the immediately preceding 12 months, exceeds the lesser of (i) 10% of the
insurance company's surplus to policyholders as of the preceding December 31st
or (ii) the insurance company's net income (not including realized capital
gains) for the preceding calendar year. Further, an insurance company may not
pay a dividend unless, after such payment, its surplus to policyholders is
reasonable in relation to its outstanding liabilities and adequate to meet its
financial needs. The State Corporation Commission may bring an action to enjoin
or rescind the payment of any dividend or distribution that would cause the
insurance company's statutory surplus to be unreasonable or inadequate.

<PAGE>
Assuming that the Demutualization had occurred on December 31, 1995 and not
giving effect to the Offerings, Trigon Insurance would have had statutory
surplus of $478.2 million. The maximum amount available during 1996 for payment
of dividends by Trigon Insurance to Trigon Healthcare without the prior approval
of the State Corporation Commission would have been $47.8 million. The Company
expects that this amount will be substantially less for 1997 as a result of
lower expected statutory earnings for 1996.

North Carolina, Mid-South's domiciliary state, similarly restricts the
payment of dividends by their domiciliary insurance companies.

ASSESSMENTS AGAINST INSURERS. Under insolvency or guaranty association laws
in most states, insurance companies can be assessed for amounts paid by guaranty
funds for policyholder losses incurred by insolvent insurance companies. Most
state insolvency or guaranty association laws, including Virginia's, currently
provide for assessments based upon the amount of premiums received on insurance
underwritten within such state (with a minimum amount payable in some states
where Monticello Life Insurance Company and Mid-South are licensed even if no
premium is received). Substantially all of Virginia BCBS' premiums are currently
derived from insurance underwritten in Virginia.

Under the Virginia Life, Accident and Sickness Insurance Guaranty
Association (the "Association") Act, assessments against insurance companies
which issue policies of accident or sickness insurance, such as Virginia BCBS,
are made retrospectively and are based (up to prescribed limits) upon the ratio
of (i) the insurance company's premiums received in Virginia over the previous
three calendar years on accident and sickness insurance, to (ii) the aggregate
amount of premiums received by all assessed member insurance companies over such
three calendar years on accident and sickness insurance. The guaranty fund and
assessments made under the act are administered by the Association, which has
its own board of directors selected by member insurers with the approval of the
State Corporation Commission. An assessment may be abated or deferred by the
Association if, in the opinion of the board, payment would endanger the ability
of the member to fulfill its contractual obligations, but the other member
insurers may be assessed for the amount of such abatement or deferral. Any such
assessment paid by a member insurance company may be offset against its premium
tax liability to the Commonwealth of Virginia in each succeeding year in an
amount not to exceed 0.05 (one twentieth) of one percent of the member's direct
gross premium income for the class of insurance for which the insurer is
assessed. The amount and timing of any future assessments, however, cannot be
reasonably estimated and are beyond the control of the Company.

VIRGINIA'S OPEN ENROLLMENT PROGRAM. The Commonwealth of Virginia has an
open enrollment program, pursuant to which Virginia BCBS is required to offer
comprehensive accident and sickness insurance contracts to individuals and to
groups of fewer than 50 members without imposition of certain underwriting
criteria that would deny coverage on the basis of medical condition, age or
employment status. As an incentive for participating in the open enrollment
program, Virginia BCBS pays Virginia premium tax of three-fourths of one percent
(0.75%) on premiums received from accident and sickness insurance, (other than
insurance issued to certain small employers) rather than the general Virginia
premium tax of two and one fourth percent (2.25%). This general Virginia premium
tax applies to accident and sickness insurance premiums received by Virginia
BCBS from certain small employers. To withdraw from the open enrollment program,
Virginia BCBS would be required to give 24 months advance notice of withdrawal
to the State Corporation Commission. Trigon Healthcare's present intention is to
maintain Trigon Insurance's participation in the open enrollment program
indefinitely. Over the last five years, the loss suffered by Virginia BCBS on
the health care insurance policies issued by it under its open enrollment
program to uninsurable risks has been covered by the premium tax reduction
received by it for participating in the open enrollment program. There can be no
assurance that any losses suffered by Virginia BCBS on the health care insurance
policies issued by it under the open enrollment program would continue to be
aligned with this premium tax reduction.

BANKRUPTCY AND INSOLVENCY. In the event of a default on any debt incurred
by Trigon Healthcare or the bankruptcy of Trigon Healthcare, the creditors and
stockholders of Trigon Healthcare would have no right to proceed against the
assets of Trigon Insurance or any other subsidiary of Trigon Healthcare. If
Trigon Insurance were subject to a rehabilitation or liquidation proceeding,
such proceeding would be brought by the State Corporation Commission which would
act as the receiver with respect to such insurance company's property and
business. All creditors of Trigon Insurance, including, without limitation,
members and, if applicable, the various state guaranty associations, would be
entitled to payment in full from such assets before Trigon Healthcare, as a
stockholder, would be entitled to receive any distributions therefrom.

THE BLUE CROSS BLUE SHIELD LICENSE

In connection with the Demutualization, Trigon Healthcare and BCBSA will
enter into a new license agreement, pursuant to which the Company and its
subsidiaries have, and will continue to have after the Demutualization, the
exclusive right to use certain Blue Cross and Blue Shield service marks and
tradenames for all of their plans and products throughout

<PAGE>
Virginia other than a small portion of the northern Virginia suburbs adjacent to
Washington, D.C. The license requires a fee to be paid to BCBSA equal to total
association expenses allocated to members based upon enrollment and premium.
BCBSA is a national trade association of Blue Cross and Blue Shield licensees,
the primary function of which is to promote and preserve the integrity of the
Blue Cross and Blue Shield name and service marks as well as provide certain
coordination among plan and provider services. BCBSA has 62 primary licensee
members, each of which holds exclusive rights to use the Blue Cross and/or Blue
Shield name and service mark in specific geographic areas, subject to annual
licensing fees and certain other guidelines. Each BCBSA licensee is an
independent legal organization and is not responsible for obligations of other
BCBSA member organizations. Trigon uses other BCBSA licensees to provide certain
health care services to its members outside Virginia and provides service in
Virginia to customers of other BCBSA licensees.

The Company has no right to use the Blue Cross and Blue Shield service
marks and tradenames outside of its designated territory within the Commonwealth
of Virginia. The Company and its subsidiaries intend to conduct their businesses
outside of Virginia under the name "Trigon" without reference to the Blue Cross
and Blue Shield service marks and tradenames.

The Company's license from BCBSA will terminate if any person, without the
prior approval of a majority of the disinterested members of BCBSA, acquires
securities representing 20% or more of the voting control of the Company. In
addition, BCBSA may terminate the license if any person acquires securities
representing 5% or more of the outstanding voting stock of the Company, BCBSA
concludes that such stock ownership is detrimental to the Blue Cross and Blue
Shield service marks and tradenames and a supermajority of the disinterested
members of BCBSA vote for termination.

Trigon Healthcare's Articles will contain certain provisions which are
intended to prevent any holder from acquiring shares in excess of the limits set
forth in the Company's license agreement. See "Description of Common
Stock -- Certain Provisions of the Charter and Plan." However, there can be no
assurance that a court would enforce these provisions, or that if these
provisions were not enforced that the Company would retain the license from
BCBSA. If the BCBSA license were to be terminated, there would be a material
adverse effect on the Company's business and operations, which the Company does
not believe it can meaningfully quantify.

In June 1996 the license agreements between BCBSA and its licensees,
including the Company, were amended to prohibit a licensee from entering into
certain transactions which would result in an unlicensed entity obtaining
control of the licensee or acquiring a substantial portion of the licensee's
assets related to services provided under the Blue Cross or Blue Shield service
marks. The license agreements were also amended to require that a licensee pay
to BCBSA a specific amount upon termination of the license agreement, subject to
certain limited exceptions. The amount payable upon termination of the license
agreement is equal to $25 multiplied by the number of the licensee's members
receiving products or services sold or administered under the Blue Cross or Blue
Shield service marks, subject to reduction to the extent the payment of such fee
would cause such licensee to fall below certain capital requirements established
by the BCBSA.

RATING

Virginia BCBS is presently assigned a claims paying ability rating of
"AA-(Excellent)" by Standard & Poor's Rating Group. Standard & Poor's ratings
are based on an analysis of the financial condition and operations of an
insurance company and its ability to pay future claims. Such ratings are not
directed to the protection of investors and are subject to review and change
over time.

PROPERTIES

The Company is headquartered in Richmond, Virginia, where it owns a
four-story building with 265,000 square feet. The Company also owns an office
facility and warehouse in Roanoke, Virginia with 201,000 square feet and an
office facility in Fayetteville, North Carolina with 71,000 square feet. The
Company leases an additional 454,000 square feet at various other locations in
Richmond, Virginia. The Company also leases space at two other facilities in
Roanoke, Virginia comprising 52,000 square feet.

The Company leases 57,000 square feet for regional offices throughout
Virginia and 55,000 square feet for office space in Maryland, North Carolina,
Oregon, Illinois, Florida, West Virginia, Indiana, Pennsylvania, Missouri, New
Jersey, Texas and South Carolina.

<PAGE>
EMPLOYEES

As of September 30, 1996, the Company had 4,173 full-time employees. The
employees are primarily located in Richmond and Roanoke, Virginia, with
employees also located in Maryland, Missouri, New Jersey, Texas, North Carolina,
South Carolina, Oregon, Illinois, Florida, West Virginia, Indiana and
Pennsylvania. The Company believes that its relationship with its employees is
good. No employees are subject to collective bargaining agreements. In January
1997, the Company announced that it planned to eliminate 276 positions from its
workforce.

SERVICE MARKS

The Company has registered and maintains several service marks, trademarks
and tradenames at the federal level, in the Commonwealth of Virginia and in
certain other states. "Trigon," "Keycare" and "HealthKeepers" are included among
these marks. Although the Company considers its registered service marks,
trademarks and tradenames important in the operation of its business, the
business of the Company is not dependent on any individual service mark,
trademark or tradename. For a discussion of the Company's license to use certain
Blue Cross and Blue Shield service marks and tradenames, see "The Blue Cross
Blue Shield License."

<PAGE>
LEGAL PROCEEDINGS

In November 1993, the Company met with officials from the United States
Department of Labor (the "DOL") in response to the DOL's request for information
concerning the Company's policies on passing through the benefits of provider
discounts to self-funded employer groups whose health care plans are subject to
the Employee Retirement Income Security Act ("ERISA") and are administered by
the Company. The DOL advised the Company that the inquiry was part of a larger
review of Blue Cross and Blue Shield organizations that provide services to
self-funded plans. The Company responded in March and April 1994 to informal
requests from the DOL seeking additional information on the Company's handling
of provider discounts. In September 1995, the DOL notified the Company that the
DOL is of the view that the Company's retention of provider discounts during the
period from 1990 through 1993 and its failure to disclose the amount of these
discounts violated the applicable provisions of ERISA. The amount of the
provider discounts retained during this period is approximately $58.6 million.
Under applicable provisions of ERISA, the DOL may also assess a civil penalty
equal to 20% of any amounts recovered as a result of an ERISA violation. No
lawsuit has been filed by the DOL and the Company intends to continue
discussions with the DOL about this matter. The Company and the DOL have entered
into a tolling agreement with respect to this matter pursuant to which the
parties have agreed that no litigation will be instituted before February 1,
1997 and the applicable statute of limitations will be tolled until May 1, 1997.
The Company believes that its handling of provider discounts has been in
accordance with the terms of its agreements with self-funded employer groups and
applicable ERISA requirements. Due to the early stage of the DOL inquiries, the
Company cannot make an estimate of loss, if any (and has not established any
liability with respect thereto), or predict whether or not such inquiries will
result in a material adverse effect on the Company's results of operations in
any particular period. Although the ultimate resolution of this matter cannot be
estimated, the Company believes that it should not have a material adverse
effect on the Company's financial position.

The Company is also the defendant in two lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was obligated to
credit the self-funded plans with the full amount of the discounts that the
Company negotiated with facilities providing health care to members covered by
the plans. One suit seeks $750,000 in compensatory damages plus unspecified
punitive damages. The other suit seeks $1.1 million in damages. The Company is
also presently the subject of 16 other claims by self-funded employer groups
related to the Company's past practices regarding provider discounts, some of
which involve larger amounts of withheld discounts. The Company is communicating
with these groups, and lawsuits have not been filed in connection with these
claims. The Company believes that additional discount-related claims may be made
against it. Although the ultimate outcome of such claims and litigation cannot
be estimated, the Company believes that the discount-related claims and
litigation brought by these self-funded employer groups will not have a material
adverse effect on the financial condition of the Company. Due to the early
stages of these claims and litigation, however, the Company cannot make an
estimate of loss, if any, or predict whether or not such claims and litigation
will result in a material adverse effect on the Company's results of operations
in any particular period.

The Company and certain of its subsidiaries are involved in various other
legal actions occurring in the normal course of its business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the opinion of
Company management, after consultation with counsel responsible for such
litigation, the outcome of those actions is not expected to have a material
adverse effect on the financial condition of the Company. In general, the
Company believes that the increase in the managed care content of its products
has not materially affected its exposure to litigation relating to health care
coverage provided to its members.

<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of December 31, 1996
concerning the directors and executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ---- ---------------------------------------------------------------
<S> <C> <C>
Norwood H. Davis, Jr. 56 Chairman of Trigon Healthcare; Chairman of the Board of
Directors and Chief Executive Officer of Virginia BCBS
Lenox D. Baker, Jr., M.D. 55 Director
James K. Candler 61 Director
John Cole, Jr., M.D. 64 Director
John L. Colley, Jr., Ph.D. 66 Director
Robert M. Freeman 55 Director
William R. Harvey, Ph.D. 55 Director
Elizabeth G. Helm 65 Director
Gary A. Jobson 46 Director
Frank C. Martin, Jr. 64 Director
Donald B. Nolan, M.D. 56 Director
William N. Powell 52 Director
J. Carson Quarles 60 Director
R. Gordon Smith 58 Director
Jackie M. Ward 58 Director
Stirling L. Williamson, Jr. 61 Director
Phyllis L. Cothran 49 President of Trigon Healthcare; President and Chief Operating
Officer of Virginia BCBS
Ronald H. Bargatze 46 Executive Vice President and Chief Operating Officer,
Integrated Health Systems of Virginia BCBS
John C. Berry 59 Executive Vice President and Chief Operating Officer,
Government and Individual Business of Virginia BCBS
Manuel Deese 55 Executive Vice President and Chief Operating Officer, Major
Accounts of Virginia BCBS
Elmond A. Kenyon 48 Senior Vice President, Local Markets of Virginia BCBS
Paul F. Nezi 49 Senior Vice President, Marketing and Underwriting of Virginia
BCBS
Thomas G. Snead, Jr. 43 Treasurer of Trigon Healthcare; Senior Vice President and Chief
Financial Officer of Virginia BCBS
J. Christopher Wiltshire 42 Secretary of Trigon Healthcare; Senior Vice President, General
Counsel and Corporate Secretary of Virginia BCBS
</TABLE>

The Company's Board of Directors is divided into three classes, referred to
herein as Class I, Class II and Class III. John Cole, Jr., M.D., Robert M.
Freeman, Elizabeth G. Helm, Jackie M. Ward and Stirling L. Williamson, Jr. are
Class I directors, with their terms expiring at the Company's Annual Meeting of
Stockholders (the "Annual Meeting") in 1999. Lenox D. Baker, Jr., M.D., John L.
Colley, Jr., Norwood H. Davis, Jr., Frank C. Martin, Donald B. Nolan, M.D. and
R. Gordon Smith are Class II directors, with their terms expiring at the Annual
Meeting in 1997. James K. Candler, William R. Harvey, Gary A. Jobson, William N.
Powell and J. Carson Quarles are Class III directors, with their terms expiring
at the Annual Meeting in 1998. Directors of each Class serve until their
successors are duly elected and qualified. Pursuant to the Plan of
Demutualization, the Company will cause one nominee from a list submitted by the
Virginia Attorney General and one nominee from a list submitted by the Joint
Rules Committee of the Virginia General Assembly to be elected directors of the
Company before or within seven days after the effective date of the
Demutualization. These two nominees are Hunter B. Andrews and Hubert R.
Stallard. These two nominees will be elected as Class II directors and nominated
for election by the Company's stockholders at the Annual Meeting in 1997. In
order to keep the number of directors in each class as even as possible in
accordance with applicable Virginia law, Mr. Smith will be redesignated as a
Class III director and Mr. Davis will be redesignated as a Class I director.

<PAGE>
EMPLOYMENT HISTORY OF DIRECTORS AND EXECUTIVE OFFICERS

NORWOOD H. DAVIS, JR. joined the Company in 1968, and was elected to the
Board of Directors in 1975. Since 1989, he has served as Chairman of the Board
and Chief Executive Officer of Virginia BCBS. He became Chairman of Trigon
Healthcare in June 1995. Mr. Davis is a director of Signet Banking Corporation
(Richmond) and Hilb, Rogal & Hamilton Co. (Richmond).

LENOX D. BAKER, JR., M.D. was elected to the Board in 1985. He has been a
Norfolk cardiac and thoracic surgeon, and has been affiliated with Mid-Atlantic
Cardiothoracic Surgeons, Ltd., since 1979. He is also chief of the Division of
Cardiac and Thoracic Surgery at Sentara Hospitals, and an assistant professor of
surgery at the Medical College of Hampton Roads. Dr. Baker is President of the
Medical Staff at Sentara Norfolk General Hospital.

JAMES K. CANDLER was elected to the Board in 1984. He has been President
and owner of Candler Oil Company in Lynchburg since 1960. Mr. Candler is a
director of Central Health, Inc. and First Federal Savings Bank of Lynchburg.

JOHN COLE, JR., M.D. was elected to the Board in 1972 and is a past
Chairman. He is a Roanoke ear, nose, and throat specialist, and has been
President of Roanoke Ear, Nose and Throat Clinic, Inc. since 1990, prior to
which he held the position of Vice President beginning in 1975.

JOHN L. COLLEY, JR., PH.D. was elected to the Board in 1981. He is a past
Chairman. Dr. Colley has been the Almand R. Coleman Professor of Business
Administration at the University of Virginia's Darden School of Business
Administration since 1967.

ROBERT L. FREEMAN was elected to the Board in 1993. He has been Chairman of
Signet Banking Corporation since 1990 and served as Chief Executive Officer from
April 1989 to May 1996. Mr. Freeman is a director of MasterCard International
and Crown Central Petroleum.

WILLIAM R. HARVEY, PH.D. was elected to the Board in 1992. He has been
President of Hampton University in Hampton, Virginia, since 1978 and owner of
the Pepsi-Cola Bottling Company, Houghton, Michigan since 1986. Dr. Harvey is a
director of Signet Banking Corporation.

ELIZABETH G. HELM was elected to the Board in 1993. She has been President
of Glaize Developments, Inc. in Winchester, Virginia, since 1980. Ms. Helm is a
director of Signet Banking Corporation and Shenandoah Life Insurance Company.

GARY A. JOBSON was elected to the Board in 1987. He has been a marketing
and product development consultant through his company, Maritime Productions
since 1978. He is a director of the Blakeslee Group and Sunfish/Laser, Inc.

FRANK C. MARTIN, JR. was elected to the Board in 1975. He is Chairman,
Founder, and since 1970 has been Chief Executive Officer of Martin Research,
Inc., in Roanoke, Virginia.

DONALD B. NOLAN, M.D. was elected to the Board in 1983. He has been a
practicing neurologist in the Roanoke, Virginia area since 1971, and is
currently affiliated with the Roanoke Neurological Associates and is Director of
the Electro-Diagnostic Laboratory at Roanoke Memorial Hospital.

WILLIAM N. POWELL was elected to the Board in 1980. He has been President
of Salem Tools, Inc. since 1981, and is a director of Central Fidelity Bank
(regional) and the Mechanical Development Company, Inc.

J. CARSON QUARLES was elected to the Board in 1977. He has been Chairman of
the Board of Friendship Manor, Inc. in Roanoke, Virginia since 1981. At the end
of 1994 he retired from an eight-year term as President of the Southwestern
Region of Central Fidelity Bank.

R. GORDON SMITH was elected to the Board in 1995. He has been a partner
with McGuire, Woods, Battle & Boothe, L.L.P. in Richmond, Virginia since 1969.
Mr. Smith serves on the board of Scott & Stringfellow Financial, Inc.

JACKIE M. WARD was elected to the Board in 1993. She is a founder and has
served as Chief Executive Officer of Atlanta-based Computer Generation
Incorporated since 1970. Ms. Ward serves on the boards of NationsBank, Matria
Healthcare, Inc. and SCI Systems Inc.

STIRLING L. WILLIAMSON, JR. was elected to the Board in 1979. He has been
President of S.L. Williamson Company, Inc. in Charlottesville, Virginia since
1971. Mr. Williamson is a director of Jefferson National Bank.

<PAGE>
PHYLLIS L. COTHRAN joined the Company in 1972. She held various positions
in the Finance Department prior to becoming the Chief Financial Officer in 1981.
She was elected to her current position as President and Chief Operating Officer
of Virginia BCBS in November 1990. She became President of Trigon Healthcare in
June 1995. Ms. Cothran serves as a director of Ethyl Corporation, Tredegar
Industries, Inc. and Central Fidelity Banks, Inc.

RONALD H. BARGATZE has held a variety of positions since joining the
Company in 1974. From 1987 to 1990 he served as Vice President of Consolidated
Healthcare, Inc. until being named Senior Vice President and Chief Operating
Officer of the Small Business Unit of the Company in 1990. He became Executive
Vice President for Operations Support and Chief Operating Officer of the Small
Business Unit in 1992, and was appointed to his current position of Executive
Vice President and Chief Operating Officer of Integrated Health Systems in April
1994.

JOHN C. BERRY joined the Company in 1987. He served as Chief Operating
Officer of Government and Individual Business from 1987 through 1989 and as
Senior Vice President and Chief Operating Officer of Government and Individual
Business during 1990. In 1991, he was appointed to his current position of
Executive Vice President and Chief Operating Officer of Government and
Individual Business of Virginia BCBS.

MANUEL DEESE joined the Company in 1986 and retired effective January 1997.
He served as Senior Vice President of The Computer Company (a former subsidiary
of the Company) from 1986 through 1988, as Chief Benefit Administration and
Customer Service Officer during 1988 and 1989, and as Senior Vice President and
Chief Operating Officer of Major Accounts during 1990. In 1991, he was appointed
to his current position of Executive Vice President and Chief Operating Officer
of Major Accounts of Virginia BCBS. Mr. Deese serves on the boards of Central
Fidelity Banks, Inc. and American Filtrona Corp.

ELMOND A. KENYON joined the Company in October 1996 as Senior Vice
President, Local Markets of Virginia BCBS. Prior to joining the Company he was
employed by CIGNA Corporation since 1986. Since July 1995, he served CIGNA
Corporation as Vice President/General Manager, Cigna Health Care of Ohio. From
September 1994 to July 1995 he served as General Manager, Cigna Health of Ohio.
From June 1990 to September 1994, he served as a CIGNA Regional Marketing and
Sales Officer.

PAUL F. NEZI joined the Company in October 1996 as Senior Vice President,
Marketing and Underwriting of Virginia BCBS. Prior to joining the Company, he
served as Executive Vice President, Marketing Sales and Product Development of
Choice Care in Cincinnati, Ohio since 1993. From 1991 through 1992, he served as
Vice President and General Manager for the Advanced Imaging Products group of AM
Graphics, a division of AM International in Dayton, Ohio.

THOMAS G. SNEAD, JR. joined the Company in 1985. He served as Group
Financial Officer from 1989 to 1990, when he was appointed to his current
position of Senior Vice President and Chief Financial Officer of Virginia BCBS.
He became Treasurer and Chief Financial Officer of Trigon Healthcare in June
1995.

J. CHRISTOPHER WILTSHIRE joined the Company in October 1996 as Senior Vice
President, General Counsel and Corporate Secretary of Virginia BCBS. He also
became Secretary of Trigon Healthcare in October 1996. Prior to joining the
Company, he was employed by the law firm, McGuire, Woods, Battle & Boothe,
L.L.P. for 17 years, the last nine of them as partner.

EMPLOYMENT HISTORY OF NOMINEES FOR DIRECTOR

HUNTER B. ANDREWS has been an attorney in private practice for more than
five years. He was a member of the Virginia State Senate from 1964 to 1996. Mr.
Andrews is 75.

HUBERT R. STALLARD is President and Chief Executive Officer of Bell
Atlantic-Virginia, Inc., a position he has held for more than five years. He is
a director of NationsBank, N.A., Universal Corporation and Bell
Atlantic-Virginia, Inc. Mr. Stallard is 59.

OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS

None of the Directors or Executive Officers will individually own any
shares of Common Stock as a result of the Demutualization. However, certain
Directors are officers or owners of entities that will receive Common Stock in
the Demutualization. The aggregate number of such shares is expected to be
45,560 (less than 1% of the Common Stock to be issued in the Demutualization).
Information with respect to these shares follows. Mr. Candler is President and
owner of Candler Oil Company which is expected to receive 1,718 shares in the
Demutualization. Dr. Cole is President of Roanoke Ear, Nose and Throat Clinic,
Inc. which is expected to receive 611 shares in the Demutualization. Dr. Harvey
is President of

<PAGE>
Hampton University which is expected to receive 9,245 shares in the
Demutualization. Mr. Martin is Chairman and Chief Executive Officer of Martin
Research, Inc. which is expected to receive 488 shares in the Demutualization.
Mr. Powell is President of Salem Tools, Inc. which is expected to receive 6,841
shares in the Demutualization. Mr. Quarles is Chairman of the Board of
Friendship Manor, Inc. which is expected to receive 7,018 shares in the
Demutualization. Mr. Smith is a partner of McGuire, Woods, Battle & Boothe,
L.L.P. which is expected to receive 11,098 shares in the Demutualization. Mr.
Williamson is President of S.L. Williamson Company, Inc. which is expected to
receive 8,541 shares in the Demutualization.

COMPENSATION OF DIRECTORS

Directors who are officers or employees of the Company receive no
compensation as such for service as members of the Board of Directors or
committees thereof. Directors who are not officers or employees of the Company
receive a quarterly retainer of $3,500, a quarterly retainer of $250 to serve as
a Committee Chairman, a fee of $1,000 for each Board meeting attended, a fee of
$250 for attending a Committee meeting on a day on which a Board meeting is also
held, a fee of $500 for attending a Committee meeting on a day on which a Board
meeting is not held, a fee of $350 for attendance at a Board meeting held by
conference call and a fee of $100 for attending other Board related meetings.
Fees paid to Directors may be deferred under the Company's non-qualified
deferred compensation plan. See "Deferred Compensation."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Human Resource, Compensation and Employee Benefits Committee of the
Board of Directors includes: John L. Colley, Jr., Chairman, Lenox D. Baker, Jr.,
M.D., William R. Harvey, Elizabeth G. Helm, William N. Powell and Jackie M.
Ward. None of the Committee members is or was an officer or employee of the
Company. There are executives and directors of the Company that also serve on
the Board of Directors of other entities. However, there are no Compensation
Committee interlocks between the Company and other entities.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth the compensation paid by the Company to the
chief executive officer and the other four most highly compensated executive
officers of the Company for the year ended December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION PAYOUTS
---------------------------------------------- ------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($)(1) ($) ($)(2) ($) ($)(4)
- ------------------------------- ----- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Norwood H. Davis, Jr. 1996 $650,000 $ 0 $9,327 $ 0 $ 32,869
Chairman & CEO
Phyllis L. Cothran 1996 370,000 0 658 0 15,647
President & COO
Ronald H. Bargatze 1996 233,700 0 1,393 0 10,967
Executive VP & COO,
Integrated Health Systems
Manuel Deese (5) 1996 211,800 0 828 (3) 8,673
Executive VP & COO
Major Accounts
John C. Berry 1996 200,700 0 1,478 (3) 9,086
Executive VP & COO
Government & Individual
Business
</TABLE>

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

(1) Includes amounts deferred under the Company's 401(k), 401(k) Restoration and
nonqualified deferred compensation plans.

(2) None of the named individuals received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of the total of their
salary and bonus. Each named executive received a 1996 car allowance of
$9,400, which is not included above, but does exceed 25% of the aggregate
perquisite amount. Includes Medicare tax and related income tax

<PAGE>
gross-up paid by the Company for named executives on the present value of
their vested non-qualified Supplemental Executive Retirement Plan benefit
earned in 1996 in the amounts of $8,415 for Mr. Davis, $1,248 for Mr.
Bargatze, $735 for Mr. Deese, and $1,375 for Mr. Berry. Includes Medicare
tax and related income tax gross-up paid by the Company for named executives
with respect to Company contributions under the 401(k) non-qualified
Restoration Plan in the amounts of $393 for Mr. Davis, $195 for Ms. Cothran,
$145 for Mr. Bargatze, $93 for Mr. Deese, and $103 for Mr. Berry. Includes
income tax gross-up on spousal travel paid by the Company in the amount of
$463 for Ms. Cothran. Includes income tax gross-up paid by the Company on a
Company-sponsored non-cash Eagle Award of $519 for Mr. Davis.

(3) Long-term cash award earned in 1996 for the performance period January 1,
1994 through December 31, 1996 is not yet calculable.

(4) Includes matching contributions under the Company's 401(k) and 401(k)
Restoration Plans in the amount of $22,050 for Mr. Davis, $13,200 for Ms.
Cothran, $10,967 for Mr. Bargatze, $8,673 for Mr. Deese, and $9,086 for Mr.
Berry. Includes actuarial equivalent of the benefit to the executive from
payment of annual premiums by the Company under a split dollar life
insurance program in the amounts of $10,713 for Mr. Davis and $2,447 for Ms.
Cothran. Includes above-market interest credited for future payment on
deferred compensation in the amount of $106 for Mr. Davis.

(5) Mr. Deese retired from the Company effective January 1997.

The Long-Term Incentive Plan Table below provides information concerning
estimated award ranges for the cash plan initiated in 1996 based on the
performance period January 1, 1996 through December 31, 1998. The Company's
Long-Term Incentive Plan is based on 3-year overlapping performance cycles.

LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR (1)

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
NUMBER OF PERFORMANCE OR UNDER NON-STOCK PRICE BASED PLANS
UNITS OR OTHER OTHER PERIOD -----------------------------------
RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME # OR PAYOUT $ $ $
- ---------------------- --------------- ----------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Norwood H. Davis, Jr. N/A 1996-1998 $ 130,000 $260,000 $520,000
Phyllis L. Cothran N/A 1996-1998 64,750 129,500 259,000
Ronald H. Bargatze N/A 1996-1998 29,213 58,425 116,850
Manuel Deese N/A 1996-1998 26,475 52,950 105,900
John C. Berry N/A 1996-1998 25,088 50,175 100,350
</TABLE>

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

(1) Company strategic performance objectives are set in advance of the
three-year period and are measured at the end of the period. The current
performance objectives focus on earnings and the commercial medical loss
ratio over the three-year period. The awards are paid in a single lump sum
at the end of three years depending on the achievement of specified
performance measures. Each three-year cycle provides target awards between
10% and 40% of a participant's salary. Each objective will have a
performance range and potential payout from Threshold to Maximum.

The Plan of Demutualization contains provisions generally prohibiting
Virginia BCBS and Trigon Healthcare from adopting any stock-based compensation
plan, including any restricted stock, stock option or stock appreciation rights
plan, for directors or senior management prior to the effective date of the Plan
of Demutualization, and imposes restrictions on stock rights granted before
three months after expiration of the six-month lockup period following the
Offerings. The Company has accordingly not adopted any stock-based compensation
plan for directors or senior management to date, but expects that a stock option
or other stock-based compensation plan will be proposed for adoption, subject to
any required director and shareholder approvals, in 1997.

RETIREMENT PLAN

The Company sponsors a non-contributory retirement program (the "Retirement
Plan") for certain employees that is qualified under Internal Revenue Code
(section mark) 401(a) and subject to ERISA. The Company also sponsors the
Supplemental Executive Retirement Plan, which provides additional benefits,
payable out of general Company assets to certain employees. The benefits are
equal to the benefits these employees cannot receive under the qualified
retirement program because of Internal Revenue Code limits on benefits and
restrictions on participation by highly compensated employees.

<PAGE>
The following table shows the projected annual benefit (not including
offsets for primary social security) for the remuneration level and years of
credited service indicated that would be payable in the form of a straight life
annuity commencing at age 65 under the present benefit formula of the Retirement
Plan. The amounts shown include the benefits payable under the Retirement Plan
and the Supplemental Executive Retirement Plan.

PENSION PLAN TABLE (1)

<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 300,000 $ 90,000 $120,000 $150,000 $180,000 $180,000
350,000 105,000 140,000 175,000 210,000 210,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
500,000 150,000 200,000 250,000 300,000 300,000
550,000 165,000 220,000 275,000 330,000 330,000
600,000 180,000 240,000 300,000 360,000 360,000
650,000 195,000 260,000 325,000 390,000 390,000
700,000 210,000 280,000 350,000 420,000 420,000
750,000 225,000 300,000 375,000 450,000 450,000
800,000 240,000 320,000 400,000 480,000 480,000
850,000 255,000 340,000 425,000 510,000 510,000
900,000 270,000 360,000 450,000 540,000 540,000
950,000 285,000 380,000 475,000 570,000 570,000
1,000,000 300,000 400,000 500,000 600,000 600,000
</TABLE>

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

(1) Compensation covered by the retirement plans includes: W-2 earnings,
deferred compensation, 401(k) plan and 401(k) Restoration plan contributions
and amounts excluded from income under Section 125 of the Code (flexible
spending accounts and flex benefit amounts). Under the Retirement Plan's
formula, a participant's annual retirement benefit at normal retirement age
(65 years) is equal to 60% of the average of the participant's highest five
consecutive years' salary in the last ten years, minus 50% of the
participant's primary social security benefit, all multiplied by years of
credited service and divided by 30. Participants become vested in the plans
with five years of credited service. The Pension Plan Table and Summary
Compensation Table may be used to estimate pension benefits for each of the
named executive officers based on their credited years of service as of
December 31, 1996: Mr. Davis, 29 years; Ms. Cothran, 25 years; Mr. Bargatze,
20 years; Mr. Deese, 11 years; and Mr. Berry, 10 years. The covered
compensation under both the Retirement Plan and the Supplemental Executive
Retirement Plan for 1996 was: Mr. Davis, $785,611; Ms. Cothran, $462,225;
Mr. Bargatze, $381,872; Mr. Deese, $305,296; and Mr. Berry, $321,100.

DEFERRED COMPENSATION

The Company offers a non-qualified deferred compensation plan to all board
members and officers at or above the level of Vice President. Interest credited
to plan participants is funded through Company-owned life insurance. The plan is
called The Limited Fixed Return Plan. Interest rates are guaranteed in four-year
increments and are initially set at the dividend reinvestment rate specified by
the life insurance carrier. Those electing to defer may begin receiving benefit
payouts no sooner than age 55. As of December 31, 1996, 26 officers have
deferred a balance of $1,054,059. Interest credited in 1996 to the various
participants equaled $83,358. As of December 31, 1996, eight directors and three
past directors have deferred a balance of $1,651,022 and interest credited to
the various participants in 1996 equaled $128,585.

Mr. Davis also has a separately defined salary deferral plan established in
1989. To date $43,000 of his compensation has been deferred. No amounts were
deferred for 1996. Amounts deferred are invested by the Company in investments
selected by a Company-appointed investment manager. Mr. Davis bears all risk of
gain or loss with respect to the investments made. Distribution of plan assets
will be at the later of age 55 or termination of employment.

EMPLOYMENT AGREEMENTS

Norwood H. Davis, Jr., Chairman of the Board and Chief Executive Officer,
entered into an employment agreement with the Company as of March 13, 1996. This
agreement supersedes all prior agreements. Under Mr. Davis' agreement, his
employment is at will and he may resign at any time. Also, the Company may
discharge Mr. Davis at any time, with or

<PAGE>
without cause. Mr. Davis is entitled to receive an annual base salary of an
amount determined by the Board of Directors which can be adjusted upward each
year as determined by the Board of Directors. He is also eligible for an award
of incentive compensation each year. While employed by the Company, Mr. Davis is
entitled to Company benefits offered to all employees. In addition, the Company
will provide an automobile allowance, tax and financial planning services and
reimbursement for other business expenses. Also, if Mr. Davis becomes disabled
and is entitled to receive benefits under the Company's Long-Term Disability
Program, the Company will make supplemental monthly payments so that the entire
benefit is equal to 60% of his base salary. Under this agreement, Mr. Davis
agrees not to compete as an equity owner or employee with the Company or its
affiliates for three years after his resignation as an employee or his
termination with cause. The agreement also provides that upon termination of Mr.
Davis's employment for any reason (other than a termination resulting from his
resignation if he fails to give the Company at least six months' prior written
notice of the resignation), Mr. Davis is entitled to receive a severance payment
equal to three times the highest annual cash compensation received by him during
the three calendar years preceding the termination of his employment.

The employment agreement also sets forth an enhanced retirement benefit for
Mr. Davis. Under the enhanced benefit, the Company agrees to pay Mr. Davis an
amount equal to the difference between (i) the benefit Mr. Davis would receive
under the Retirement Plan and the Supplemental Executive Retirement Plan if Mr.
Davis had remained in the employ of the Company receiving credited service until
age 65 (3/10/2005) (assuming continued annual compensation at a rate equal to
his highest annual compensation during the three calendar years immediately
preceding retirement) and (ii) the benefit Mr. Davis actually receives under the
Retirement Plan and Supplemental Executive Retirement Plan. If retirement occurs
at or after age 61 (3/10/2001) 100% of the enhanced benefit is payable. If
retirement occurs at age 60 (3/10/2000) 96% of the difference between the
enhanced and basic benefit is payable. For each additional year of retirement
earlier than age 61 the percentage difference between the enhanced and basic
benefit decreases by four percentage points.

Phyllis L. Cothran, President and Chief Operating Officer, also has an
employment agreement which is similar to Mr. Davis', with the exception of the
special retirement benefits. Base salary for Ms. Cothran is determined annually
by the Chief Executive Officer and the Human Resources, Compensation and
Employee Benefits Committee of the Board of Directors. Ms. Cothran is eligible
to participate in the Company's Annual Incentive Program, Long-Term Incentive
Program, and in any similar incentive plans that are made available to senior
executives of the Company.

SEVERANCE AGREEMENTS

Certain executive officers of the Company, including Messrs. Bargatze,
Deese and Berry are provided severance agreements. The agreements generally
provide for payments to selected officers who resign or terminate (other than
for cause or in the case of death) and agree not to compete as an equity owner
or employee with the Company or its affiliates for a period of one year (two
years in the case of Mr. Bargatze) after such resignation or termination. Under
the agreement, severance benefits for eligible officers with less than five
years of continuous service will be six months salary, payable monthly following
resignation or termination. For eligible officers with five or more years of
continuous service, severance benefits consist of twelve months salary, payable
monthly following resignation or termination. Messrs. Bargatze, Deese and Berry
each have more than 5 years of continuous service. Mr. Bargatze's agreement
provides for twenty-four months of severance benefits. No material changes are
planned to the agreements for the named executive officers following the
Offerings, except that the severance agreements may be revised to include change
of control provisions customary for public companies.

DESCRIPTION OF CAPITAL STOCK

DESCRIPTION OF COMMON STOCK

The Company will have authorized 300 million shares of Class A Common
Stock, par value $.01 per share ("Common Stock"), 300 million shares of Class B
non-voting Common Stock, par value $.01 per share ("Non-Voting Common Stock")
and 75 million shares of Class C Common Stock, par value $.01 per share. It is
expected that 24.5 million shares of Common Stock will be issued to Eligible
Members in the Demutualization, and that 15.5 million shares of Common Stock
will be issued in the Offerings. See "Shares Eligible for Future Sale." No
shares of Non-Voting Common Stock or Class C Common Stock are expected to be
outstanding after completion of the Offerings. The Non-Voting Common Stock has
been authorized in connection with certain ownership and transfer restrictions
included in the Company's Articles. See "Certain Provisions of the Charter and
Plan." Prior to the Demutualization, no shares of stock of any class were
outstanding other than those held by Virginia BCBS. Holders of Common Stock and
Non-Voting Common Stock are entitled to share equally, share for share, in such
dividends as may be declared by the Board of Directors out of funds legally
available therefor after payment of dividends on any Preferred Stock
outstanding. See "Dividend Policy." Holders of Common Stock and Non-Voting
Common

<PAGE>
Stock have no preemptive rights to maintain their percentage of ownership in
future offerings or sales of stock of the Company. Subject to the voting
restrictions described below, holders of Common Stock are entitled to one vote
for each share of Common Stock held by them on all matters upon which the
Company's stockholders are entitled to vote. Holders of Non-Voting Common Stock
are not entitled to vote on any matter except as otherwise required by law. In
such circumstances, holders of Non-Voting Common Stock will be entitled to one
vote for each share of such stock held by them.

Class C Common Stock is authorized to be issued to the Commonwealth of
Virginia as part of the Commonwealth Payment in connection with the
Demutualization. See "The Demutualization -- The Commonwealth Payment." The
holder of the Class C Common Stock would be entitled to a one-tenth vote per
share on all matters upon which the Company's stockholders are entitled to vote.
Except as required by law, the holders of Common Stock and the holder of Class C
Common Stock would vote together as one group. Any Class C Common Stock issued
as a part of the Commonwealth Payment would be redeemable by the Company at any
time and, if not sooner redeemed, must be redeemed on June 30, 1998. The amount
paid to the Commonwealth of Virginia on redemption (the "Class C Redemption
Price") would equal the initial per share price of the Common Stock to the
public in the Offerings for each share of Class C Common Stock redeemed, plus
interest from the date of the Demutualization through the date of payment at a
rate per annum set by the Virginia Commissioner of Insurance and the Virginia
Attorney General. Trigon Healthcare would bear the expense of financial advisors
engaged to assist the Virginia Commissioner of Insurance and the Virginia
Attorney General in setting the interest rate for the Class C Redemption Price.
The Class C Redemption Price would be payable by delivery of an unsecured
promissory note with a due date of June 30, 1998, in form and substance
reasonably satisfactory to the Commonwealth of Virginia, in an amount equal to
the Class C Redemption Price and bearing interest at the same rate as used to
calculate the Class C Redemption Price. The Class C Common Stock would not be
transferable. The Commonwealth of Virginia also would not be able to grant any
revocable or irrevocable proxy to vote Class C Common Stock to any person other
than the chairman or president of the Company. The Class C Common Stock would
not be convertible into any other capital stock of the Company.

Under Virginia law, extraordinary matters, such as amendments to the
Articles, mergers, share exchanges, sales of assets or dissolution, must be
approved by more than two-thirds of the votes entitled to be cast at a meeting
at which a quorum is present unless otherwise provided in the articles of
incorporation. The Company's Articles also will contain a provision that reduces
the shareholder vote required for amending the Articles in certain circumstances
from the statutory two-thirds vote generally applicable to a simple majority
vote. The majority vote will be applicable except for amendments subject to the
Supermajority Vote Requirement (as defined below) and when the effect of the
amendment is (a) to reduce the shareholder vote required to approve a merger, a
statutory share exchange, a sale of all or substantially all of the assets of
the Company or the dissolution of the Company, or (b) to delete all or any part
of such provision. In addition, the vote required by the provisions of the
Articles is necessary if such provisions require the approval of more than a
majority of the votes entitled to be cast. These higher vote provisions include
the Supermajority Vote Requirement described below. See "Certain Provisions of
the Charter and Plan -- Supermajority Vote Requirement."

PREFERRED STOCK

The Company will have authorized 50 million shares of Preferred Stock, no
par value. There are currently no shares of Preferred Stock outstanding, and
there are no agreements or understandings for the designation of any series of
Preferred Stock or the issuance of shares thereunder. The Board of Directors of
the Company, without further action by the stockholders, is authorized to
designate and issue in series Preferred Stock and to fix as to any series the
dividend rate, redemption rights and price, preference on dissolution, the terms
of any sinking fund, conversion rights, voting rights and any other preferences
or special rights and qualifications. Shares of Common Stock would be subject to
the preferences, rights and powers of any such shares of Preferred Stock as set
forth in the Company's Articles and the resolutions of the Board of Directors
establishing any such series of Preferred Stock. In addition to any voting
rights authorized by the Board of Directors, under Virginia law holders of
Preferred Stock, if and when issued, would be entitled to vote on certain
significant corporate actions, including amendments to the Articles, plans of
merger or plans of share exchange, if such actions would materially adversely
affect the holders of the Preferred Stock.

CERTAIN PROVISIONS OF THE CHARTER AND PLAN

The Company's Articles will contain certain provisions, described under
"Description of Ownership and Transfer Restrictions" and "Description of
Supermajority Vote Requirement" below, which are intended to prevent any holder
from acquiring shares in excess of the limits set forth in the Company's license
agreement with BCBSA. There can be no assurance that a court would enforce these
provisions, or that if these provisions were not enforced that Trigon Healthcare
would retain the license from BCBSA. See "Business -- The Blue Cross Blue Shield
License." In addition, the Plan of Demutualization provides that no stockholder
may, directly or indirectly, acquire beneficial ownership of 5% or more of the
Common Stock until 30 months after the Demutualization without the consent of
the Company's Board of Directors. This limitation

<PAGE>
will not prevent the issuance to any Eligible Member of the shares of Common
Stock to which such Eligible Member is entitled under the Plan of
Demutualization. However, any Eligible Member who receives more than 5% of the
Common Stock as a result of the Demutualization may not acquire, directly or
indirectly, any additional Common Stock until 30 months after the
Demutualization, unless at the time of such acquisition and immediately
following such acquisition, such Eligible Member would not, directly or
indirectly, own more than 5% of the Common Stock.

DESCRIPTION OF OWNERSHIP AND TRANSFER RESTRICTIONS. The Company's Articles
will provide that no person may "Beneficially Own" (as defined below) shares of
Capital Stock in excess of the Ownership Limit. Capital Stock means any class of
capital stock of Trigon Healthcare (other than Class C Common Stock), including
the Common Stock. For purposes of the Ownership and Transfer Restrictions the
Common Stock and Non-Voting Common Stock will be generally treated as a single
class of capital stock.

The "Ownership Limit" is 5% of each class of the outstanding Capital Stock,
unless the Continuing Directors give prior written approval to a greater
percentage for a specified stockholder. Continuing Directors are directors not
associated with persons owning shares in excess of the Ownership Limit and who
were in office before the date a person becomes owner of shares in excess of the
Ownership Limit or who were thereafter recommended to succeed a Continuing
Director by a majority of the Continuing Directors then in office. The Articles
will also provide that if the Company and the BCBSA agree in writing to a share
ownership limit in connection with the Company's license agreement with the
BCBSA greater than 5%, then the Ownership Limit in the Company's Articles will
automatically be increased to such higher percentage.

Any Transfer (as defined below) that, if effective, would result in any
person Beneficially Owning shares of a class of Capital Stock in excess of the
Ownership Limit will be void. If this restriction is held to be unenforceable,
shares of such class of Capital Stock in excess of the Ownership Limit
automatically become "Excess Securities" as described below. In addition, the
Board will have the right to convert Common Stock held by any person and that
person's associates that equals or exceeds the Ownership Limit into Non-Voting
Common Stock which will have no voting rights (except and only as conferred by
law) but which will otherwise have rights identical to the Common Stock.

These provisions are sometimes referred to in this Prospectus as the
"Ownership and Transfer Restrictions." The Articles will provide that the
Ownership and Transfer Restrictions will not impair the settlement of
transactions on the New York Stock Exchange or any other exchange or quotation
system over which the Common Stock is traded. The Articles will provide that a
person will be deemed the "Beneficial Owner" of and will be deemed to
"Beneficially Own" (subject to certain exclusions) any Capital Stock: (i) which
such person or any of such person's associates beneficially owns, directly or
indirectly, (ii) which such person or such person's associates has the right to
acquire or dispose of (either immediately or only after the passage of time),
(iii) which such person or such person's associates have the right to vote or
(iv) which is Beneficially Owned (under the concepts provided in the preceding
clauses) by any other person with whom such person (or such person's associates)
has any agreement, arrangement or understanding (other than customary
arrangements with and between underwriters and selling group members with
respect to a bona fide public offering of Capital Stock) relating to the
acquisition, holding, voting or disposition of any Capital Stock. The Articles
will also provide that the Company may require that Beneficial Owners of Capital
Stock provide the Company with such information as the Company may reasonably
request in order to ascertain whether any facts or circumstances which would or
might cause such person to be considered an associate for purposes of the
Articles of any other Beneficial Owner of Capital Stock.

If there is a purported Transfer or other change in capital structure of
the Company such that any person would Beneficially Own shares of a class of
Capital Stock in excess of the Ownership Limit (a "Purported Owner") and the
provisions of the Articles voiding such Transfers or prohibiting such ownership
are held to be unenforceable, then such shares in excess of the Ownership Limit
will be "Excess Securities." Excess Securities are automatically deemed to have
been converted into a separate class of Capital Stock and transferred to the
Company as trustee of a trust to hold such Excess Securities until disposition
as provided in the Articles. The Purported Owner has no rights in the Excess
Securities, except that the Purported Owner may designate a beneficiary of an
interest in the trust if (a) the Excess Securities would not be Excess
Securities in the hands of such beneficiary and (b) the price paid for such
interest does not exceed the price paid by the Purported Owner or the market
price for the Capital Stock on the date of the purported Transfer that resulted
in the Excess Securities. The Company will have a call on the Excess Securities
generally for 90 days after the purported Transfer that resulted in the Excess
Securities. The exercise price for this call is generally the lesser of (a) the
price per share in the transaction which created the Excess Securities or (b)
the market price for the Capital Stock to which the Excess Securities relate on
the date the Company exercises its call.

If the Company at any time determines in good faith that a purported
Transfer has taken place in violation of the Ownership and Transfer Restrictions
or that a person intends to acquire or Transfer or has attempted to acquire or
Transfer Beneficial Ownership of Capital Stock in violation of the Ownership and
Transfer Restrictions, the Company may take such

<PAGE>
action as it deems advisable to refuse to give effect to such Transfer,
including, but not limited to, refusing to give effect to such Transfer on the
books of the Company or instituting proceedings to enjoin such Transfer.

"Transfer" will be defined in the Articles as any sale, transfer, gift,
devise or other disposition of Capital Stock (including (i) the granting of any
option or entering into any agreement for the sale, transfer or other
disposition of such stock, (ii) the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable for
such stock or (iii) any transfer or other disposition as a result of a change in
marital status), whether directly or indirectly, voluntary or involuntary, and
whether by operation of law or otherwise.

Pursuant to the Articles, each certificate for Capital Stock will bear a
legend with respect to the Ownership and Transfer Restrictions.

The Ownership and Transfer Restrictions and the Supermajority Vote
Requirement (defined below) will terminate on the earlier of (i) the date on
which the Company ceases to be subject to any license agreement with the BCBSA
or (ii) the date on which the Company's license agreement with BCBSA no longer
contains provisions permitting termination if a person becomes Beneficial Owner
of a specified percentage of the Company's securities. These termination
provisions also apply to any future restriction added to the Company's Articles
to comply with the license agreement with BCBSA or any guideline or restriction
imposed by the BCBSA that limits the number of shares of the Company that may be
acquired or owned by any person or imposes a voting requirement higher than
Virginia law.

DESCRIPTION OF SUPERMAJORITY VOTE REQUIREMENT. The Articles will require
the affirmative vote of more than 75% (the "Supermajority Vote Requirement") of
each class of the outstanding shares of the Company entitled to vote to approve
the following amendments to the Articles: (i) amendments to the Ownership and
Transfer Restrictions, (ii) any amendments to the provisions of the Articles
providing for the Board of Directors to be divided into three classes, (iii) any
amendment permitting cumulative voting by the shareholders of the Company and
(iv) any amendment to the Supermajority Vote Requirement. The Supermajority Vote
Requirement will not, however, apply to any amendment to conform to a change to
the terms of the Company's license agreement with the BCBSA or to any amendment
required or permitted by the BCBSA. The Supermajority Vote Requirement will
become ineffective and of no further force and effect if the Company's license
agreement with the BCBSA is terminated and the Company and the BCBSA do not
enter into a replacement license agreement at such time. In addition, the
Supermajority Vote Requirement will also become ineffective and of no further
force and effect if the BCBSA ceases to require the Supermajority Vote
Requirement as a condition of the Company's license agreement.

VIRGINIA ANTI-TAKEOVER LAW

RESTRICTIONS ON AFFILIATED TRANSACTIONS. The VSCA requires the approval of
certain material transactions (an "Affiliated Transaction") between a Virginia
corporation and any beneficial holder of more than 10% of any class of its
outstanding voting shares (an "Interested Shareholder") by the other holders of
voting shares. Affiliated Transactions include any merger, share exchange or
material disposition of corporate assets not in the ordinary course of business
involving an Interested Shareholder, any dissolution of the corporation proposed
by or on behalf of an Interested Shareholder, or any reclassification, including
reverse stock splits, recapitalization or merger of the corporation with its
subsidiaries which increases the percentage of voting shares owned beneficially
by an Interested Shareholder by more than 5%.

For three years following the time that an Interested Shareholder becomes
an owner of more than 10% of the outstanding voting shares, a Virginia
corporation cannot engage in an Affiliated Transaction with such Interested
Shareholder without the approval of two-thirds of the voting shares other than
those shares beneficially owned by the Interested Shareholder, and the approval
of a majority of the "Disinterested Directors." A Disinterested Director means,
with respect to a particular Interested Shareholder, a member of the Company's
Board of Directors who was (1) a member on the date on which an Interested
Shareholder became an Interested Shareholder or (2) recommended for election by,
or was elected to fill a vacancy and received the affirmative vote of, a
majority of the Disinterested Directors then on the Board. At the expiration of
the three-year period, the statute requires approval of Affiliated Transactions
by two-thirds of the voting shares other than those beneficially owned by the
Interested Shareholder or by a majority of the Disinterested Directors. Such
approval is not required, however, if the transaction satisfies the fair price
requirements of the statute. In general, the fair price requirements provide
that the shareholders, other than the Interested Shareholder, must receive per
share consideration that is not less than the price paid by the Interested
Shareholder for its shares, the fair market value of the shares, or an amount
based upon these two amounts.

None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder whose acquisition of shares
making such person an Interested Shareholder was approved by a majority of the
corporation's Disinterested Directors.

<PAGE>
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its articles of
incorporation or bylaws providing that the Affiliated Transactions provisions
shall not apply to the corporation. The Company has not "opted out" of the
Affiliated Transactions provisions.

VOTING RESTRICTIONS ARISING FROM CONTROL SHARE ACQUISITIONS. The VSCA also
contains provisions governing "Control Share Acquisitions." These provide that
shares of a Virginia public issuer acquired in a transaction that would cause
the voting strength of the acquiring person and its associates to meet or exceed
any of three thresholds (20%, 33 1/3% or 50%) have no voting rights unless
granted by a majority vote of shares not owned by the acquiring person or any
officer or employee-director of the Virginia public issuer. An acquiring person
may require the Virginia public issuer to hold a special meeting of shareholders
to consider the matter within 50 days of the request.

TRANSFER AGENT AND REGISTRAR

The Company has appointed First Chicago Trust Company of New York as the
transfer agent and registrar for its Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

The 24.5 million shares of Common Stock distributed in the Demutualization
to Eligible Members will be subject to a six-month lockup. See "The
Demutualization -- Lockup Period." After expiration of the lockup period, the
shares of Common Stock distributed in the Demutualization will be eligible for
resale in the public market without restriction by Eligible Members who are not
"affiliates" of Virginia BCBS or Trigon Healthcare within the meaning of Rule
144 under the Securities Act of 1933. Local Virginia governments and school
boards are expected to receive approximately 3.1 million shares of Common Stock
in the Demutualization. Under current Virginia law, the Treasurer of each of
these entities may be held strictly liable for any decrease in value of the
Common Stock held by such entities after the end of the lockup period.
Consequently, unless the Virginia law is revised before the end of the lockup
period, the Company expects that substantially all these shares will be sold on
the day the lockup period ends. The Virginia General Assembly is currently
considering legislation to relax the strict liability standard with regard to
Common Stock held by the Treasurer of each of these entities; however, there can
be no assurance that such legislation will be enacted. In addition, Eligible
Members subject to ERISA are expected to receive approximately 12.2 million
shares of Common Stock in the Demutualization. ERISA plan fiduciaries have a
duty to diversify the investments of the ERISA plan to minimize the risk of
large losses, unless it is clearly prudent not to do so. For many ERISA plans,
the Common Stock will be the only asset of the plan. If an ERISA plan has no
assets other than Common Stock, the plan also may incur additional expenses for
government reporting if the Common Stock is not sold by the end of the plan year
in which the lockup period ends. Consequently, ERISA plans may be more likely
than other Eligible Members to sell Common Stock in the near term after the
lockup period ends.

Moreover, in accordance with the Plan of Demutualization, the Company will
for a period of 90 days, which may be extended by the Company, commencing no
earlier than six months and no later than 18 months after the Effective Date
provide for the public sale, at market prices and without brokerage commissions
or similar fees, of odd lot shares of Common Stock received pursuant to the Plan
of Demutualization by certain Eligible Members. In the alternative, these
Eligible Members will be able to purchase sufficient shares of Common Stock to
round up their holding to 100 shares. The Company will determine after the
Demutualization and at least 30 days before the program begins the maximum
number of shares of Common Stock received in the Demutualization, not to exceed
99, that will entitle such holder to participate in the program. See "The
Demutualization -- Commission-Free Sales and Round-Up Program." The Company also
will agree not to offer, sell or otherwise dispose of any shares of Common Stock
(or securities convertible into Common Stock) for a period of 180 days after the
date of this Prospectus without the prior written consent of the Underwriters,
subject to certain limited exceptions.

<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement"), and concurrently with the sale of 3,100,000
shares of Common Stock to the International Managers (as defined below), the
Company has agreed to sell, and the underwriters named below (the "U.S.
Underwriters"), acting through their representatives, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated, Dean Witter
Reynolds Inc., Morgan Stanley & Co. Incorporated and Wheat, First Securities,
Inc. (the "U.S. Representatives"), have severally agreed to purchase, the
aggregate number of shares of Common Stock set forth below opposite their
respective names. Under certain circumstances, the commitments of non-defaulting
U.S. Underwriters may be increased as set forth in the U.S. Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................................... 1,400,000
Alex. Brown & Sons Incorporated........................................................................ 1,400,000
Dean Witter Reynolds Inc............................................................................... 1,400,000
Morgan Stanley & Co. Incorporated...................................................................... 1,400,000
Wheat, First Securities, Inc........................................................................... 1,400,000
Bear, Stearns & Co. Inc................................................................................ 200,000
Credit Suisse First Boston Corporation................................................................. 200,000
Dillon, Read & Co. Inc................................................................................. 200,000
Donaldson, Lufkin & Jenrette Securities Corporation.................................................... 200,000
A.G. Edwards & Sons, Inc. ............................................................................. 200,000
Goldman, Sachs & Co. .................................................................................. 200,000
Hambrecht & Quist LLC.................................................................................. 200,000
Lazard Freres & Co. LLC................................................................................ 200,000
Montgomery Securities.................................................................................. 200,000
Oppenheimer & Co., Inc................................................................................. 200,000
PaineWebber Incorporated............................................................................... 200,000
Roberston, Stephens & Company LLC...................................................................... 200,000
Salomon Brothers Inc................................................................................... 200,000
Schroder Wertheim & Co. Incorporated................................................................... 200,000
Smith Barney Inc....................................................................................... 200,000
Wasserstein Perella Securities, Inc. .................................................................. 200,000
Anderson & Strudwick, Incorporated..................................................................... 100,000
Sanford C. Bernstein & Co., Inc........................................................................ 100,000
J.C. Bradford & Co..................................................................................... 100,000
Branch, Cabell & Co.................................................................................... 100,000
The Buckingham Research Group Incorporated............................................................. 100,000
Conning & Company...................................................................................... 100,000
Cowen & Company........................................................................................ 100,000
Craigie Incorporated................................................................................... 100,000
Dain Bosworth Incorporated............................................................................. 100,000
Davenport & Co. of Virginia, Inc....................................................................... 100,000
Dominick & Dominick, Incorporated...................................................................... 100,000
Fox-Pitt, Kelton Inc................................................................................... 100,000
Ferris, Baker Watts, Incorporated...................................................................... 100,000
Friedman, Billings, Ramsey & Co., Inc.................................................................. 100,000
Furman Selz LLC........................................................................................ 100,000
Interstate/Johnson Lane Corporation.................................................................... 100,000
Janney Montgomery Scott Inc............................................................................ 100,000
Legg Mason Wood Walker, Incorporated................................................................... 100,000
Piper Jaffray Inc. .................................................................................... 100,000
The Robinson-Humphrey Company, Inc..................................................................... 100,000
Scott & Stringfellow, Inc.............................................................................. 100,000
Vector Securities International, Inc................................................................... 100,000
-----------
Total...................................................................................... 12,400,000
-----------
-----------
</TABLE>

<PAGE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States and
Canada (the "International Managers"), for whom Merrill Lynch International,
Alex. Brown & Sons Incorporated, Dean Witter International Ltd., Morgan Stanley
& Co. International Limited, and Wheat, First Securities, Inc. are acting as
representatives (the "International Representatives"). Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 12,400,000 shares of Common Stock to the U.S. Underwriters, the
Company has agreed to sell to the International Managers, and the International
Managers have severally agreed to purchase, an aggregate of 3,100,000 shares of
Common Stock. Under certain circumstances as set forth in the International
Purchase Agreement, the commitments of non-defaulting International Managers may
be increased. The initial public offering price per share and the underwriting
discount per share are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.

In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers
(collectively, the "Underwriters"), respectively, have agreed, subject to the
terms and conditions set forth therein, including the delivery of opinions of
counsel and other customary conditions, to purchase all of the shares of Common
Stock being sold pursuant to each such Purchase Agreement if any of the shares
of Common Stock being sold pursuant to each such Purchase Agreement are
purchased. The closing with respect to the sale of the shares of Common Stock
sold pursuant to each Purchase Agreement is also a condition to the closing with
respect to the sale of shares of Common Stock sold pursuant to the other
Purchase Agreement.

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling concession.

The U.S. Underwriters propose to offer the shares of Common Stock to the
public initially 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 $.52 per share. The U.S. Underwriters may allow, and such dealers may
re-allow, a discount not in excess of $.10 per share on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The Company has granted the U.S. Underwriters and the International
Managers options to purchase up to 1,860,000 and 465,000 additional shares of
Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such options, which expire 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent the
U.S. Underwriters exercise their option, each of the U.S. 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 U.S. Underwriter bears to the total number of shares to be
purchased initially by the U.S. Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

At the request of the Company, the U.S. Underwriters have reserved up to
230,800 shares of Common Stock for sale at the initial public offering price to
certain officers and directors of the Company. The number of shares of Common
Stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the U.S. Underwriters to the general public on the same basis
as the other shares offered hereby. Certain individuals purchasing reserved
shares may be required to agree not to sell, offer or otherwise dispose of any
shares of Common Stock for a period of three months after the date of this
Prospectus.

The Company has agreed that it will not, without the prior written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, offer, sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for shares of Common Stock, other than the issuance
of Common Stock pursuant to the Plan of Demutualization and the sale to the
Underwriters of the shares of Common Stock in the Offerings, for a period of 180
days after the date of this Prospectus, subject to certain limited exceptions.
See "Shares Eligible for Future Sale."

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Merrill Lynch & Co. has from time to time performed investment banking
services for Virginia BCBS and has received fees in connection with such
services. Merrill Lynch & Co. is currently acting as financial advisor to
Virginia BCBS in connection with the Demutualization. In this regard, Virginia
BCBS has agreed to indemnify Merrill Lynch & Co. against certain liabilities.

<PAGE>
Wheat First Butcher Singer, Inc., an affiliate of one of the Underwriters,
is expected to receive 25,349 shares of Common Stock in the Demutualization.

Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
between the Company and the U.S. Representatives and the International
Representatives. Among the factors considered in such negotiations were an
assessment of the financial information contained herein, an evaluation of the
Company's management, the future prospects of the Company and the health care
industry in general, market prices of securities of companies engaged in
activities similar to those of the Company and the prevailing conditions in the
securities market. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offerings at or above the initial public offering
price.

The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TGH," subject to official notice of issuance. In
order to meet the requirements for the listing of the Common Stock on such
exchange, the U.S. Representatives and the International Representatives, on
behalf of the Underwriters, have undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.

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
sell shares of Common Stock to persons who are non-United States or non-Canadian
persons or to persons they believe intend to resell to persons who are
non-United States or non-Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to United States or Canadian persons or to persons
they believe intend to resell to United States or Canadian persons, except in
each case for transactions pursuant to the Intersyndicate Agreement which, among
other things, permits the Underwriters to purchase from each other and offer for
resale such number of shares of Common Stock as the selling Underwriter or
Underwriters and the purchasing Underwriter or Underwriters may agree.

LEGAL MATTERS

Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by McGuire, Woods,
Battle & Boothe, L.L.P., Richmond, Virginia. McGuire, Woods, Battle & Boothe,
L.L.P. provides health care coverage to its members and employees through Trigon
and certain of Trigon's subsidiaries, and McGuire, Woods, Battle & Boothe,
L.L.P. is expected to receive 11,098 shares of Common Stock of Trigon in the
Demutualization. R. Gordon Smith, a director of the Company, is a partner of
McGuire, Woods, Battle & Boothe, L.L.P. Certain legal matters relating to this
Offering will be passed upon for the Underwriters by Debevoise & Plimpton, New
York, New York.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1994 and 1995 and September 30, 1996 and for each of the years in the three-year
period ended December 31, 1995 and the nine months ended September 30, 1996 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP refers to changes in accounting
for investment securities, income taxes and postemployment benefits in 1993.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 (herein
together with all amendments and exhibits thereto called the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement,
and the exhibits and schedules thereto. Statements contained in the Prospectus
as to the contents of any contract or other document are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement and exhibits thereto filed by the Company with the Commission may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Room 1400, 75 Park Place,

<PAGE>
New York, New York 10007 and at Northwest Atrium Center, 500 West Madison Street
(Suite 1400), Chicago, Illinois 60661. The Commission maintains a World Wide Web
site at http://www.sec.gov containing reports, proxy and information statements
and other information regarding registrants, such as the Company, that file
electronically with the Commission. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.

The Company will register under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), at the time of or prior to the Offerings, and, in
accordance with the Exchange Act, thereafter will be required to file reports,
proxy statements and other information with the Commission. The Company intends
to furnish its stockholders with annual reports containing consolidated
financial statements audited by its certified public accountants and with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.

<PAGE>
GLOSSARY

CAPITATION. A fixed amount per individual that is paid periodically
(usually monthly) to a provider as compensation for providing comprehensive
health care service during the period. The fee is set by contract between a
prepaid health care plan and the provider.

COINSURANCE. Payment by a member of a fixed percent of liability for care
up to a fixed maximum limit.

COMMUNITY RATING. The practice of pooling the medical claims costs of
similar classes of insured groups, such as small business or individuals, as a
way of developing premium rates for a specific individual or business within
each pooled category.

COPAYMENTS. Payments by a member of a fixed amount for each service.

DEDUCTIBLE. Payment by a member of a specified initial portion of annual
medical costs incurred by the member.

DIAGNOSTIC RELATED GROUPS (DRG). A classification method that categorizes
services with respect to primary and secondary diagnosis, age and complications.

DISCOUNTED FEE-FOR-SERVICE. A payment program in which providers agree to
receive less than their standard fee for providing medical services to members.

ELIGIBLE MEMBER. An individual or entity holding a membership interest in
Virginia BCBS as of December 31, 1995.

FEE SCHEDULE PAYMENT PROGRAM. A payment program in which providers receive
no more than a specified fixed payment for any given covered service.

HEALTH MAINTENANCE ORGANIZATION (HMO). An organization that arranges the
delivery of comprehensive health care services for its members at a fixed
periodic payment.

INDEPENDENT PRACTICE ASSOCIATION (IPA) MODEL HMO. An HMO that contracts
directly with physicians in independent practices.

INPATIENT SERVICES. Services rendered in a hospital to a member who has
been admitted and occupies a hospital bed for the purpose of receiving medical
services.

MANAGED CARE. A health care financing and delivery arrangement designed to
provide health care through organized relationships with health care providers.

MEDICAL LOSS RATIO. The expression of medical claim expenses as a
percentage of premium revenues. Considered to be one measure of a managed care
company's effectiveness in controlling health care costs.

MEDICARE HMO. Managed care organizations that have entered into certain
contracts with the Health Care Financing Administration which agree to provide
enrolled beneficiaries with Medicare benefits in exchange for predetermined and
fixed monthly payments.

MEMBER. An individual or group covered by any of the Company's products.

PARTICIPATING PROVIDER (PAR). A provider who has signed an agreement with
the Company to provide health care services to members, usually at a discount.

POINT OF SERVICE (POS) PROGRAM. An option available on PPO network products
in which each member chooses a primary care physician who is responsible for
coordinating all health care services for the member.

PREFERRED PROVIDER ORGANIZATION (PPO). A network system in which selected
providers furnish health care services to enrolled members. Medical services in
the PPO network are typically provided at a greater discount than the PAR
network.

PRIMARY CARE PHYSICIAN. Under managed care programs, a designated general
practice provider who is responsible for coordinating the total health care
services of patients assigned to the provider by the managed care company.

PROVIDER PROFILING. The collection and analysis of claims and benefits
management data for the identification of cost, utilization and quality of care
characteristics of physicians, health care facilities and allied health
providers.

STOP-LOSS COVERAGE. Insurance which limits a company's liability to pay
health care costs above a designated amount.

TRADITIONAL INDEMNITY INSURANCE. A method for providing health care
services which does not generally attempt to control health care costs through
such techniques as contracted provider networks and utilization management.

UTILIZATION MANAGEMENT. Activities, including admission review, second
surgical opinion and provider profiling, that are intended to manage the use of
medical services by members to promote the efficient use of medical care.

<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996.................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995
and nine-month periods ended September 30, 1995 (unaudited) and 1996.............................................. F-4
Consolidated Statements of Changes in Surplus for the years ended December 31, 1993, 1994 and 1995 and nine months
ended September 30, 1996.......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995
and nine-month periods ended September 30, 1995 (unaudited) and 1996.............................................. F-6
Summary of Significant Accounting Policies............................................................................. F-7
Notes to Consolidated Financial Statements............................................................................. F-10
</TABLE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
BLUE CROSS AND BLUE SHIELD OF VIRGINIA:

We have audited the accompanying consolidated balance sheets of Blue Cross
and Blue Shield of Virginia and subsidiaries as of December 31, 1994 and 1995
and September 30, 1996, and the related consolidated statements of operations,
changes in surplus and cash flows for each of the years in the three-year period
ended December 31, 1995 and the nine months ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blue Cross
and Blue Shield of Virginia and subsidiaries as of December 31, 1994 and 1995
and September 30, 1996 and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1995 and the
nine months ended September 30, 1996 in conformity with generally accepted
accounting principles.

Effective December 31, 1993, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Effective January 1, 1993, the Company adopted the provisions of
SFAS No. 109, "Accounting for Income Taxes," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits."

/s/ KPMG PEAT MARWICK LLP

Richmond, Virginia
November 6, 1996
F-2
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
------------------------ SEPTEMBER 30, 1996 (NOTE
1994 1995 1996 18)
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash............................................................. $ 11,102 $ 29,263 $ 33,303 $ 67,139
Investment securities, at estimated fair value (note 3).......... 990,469 1,090,389 1,090,977 1,090,977
Premiums and other receivables (note 4).......................... 326,769 332,878 369,406 369,406
Deferred income taxes (note 10).................................. 3,218 -- 18,474 18,474
Other assets..................................................... 9,362 9,369 9,717 9,717
---------- ---------- ------------- -------------
TOTAL CURRENT ASSETS........................................ 1,340,920 1,461,899 1,521,877 1,555,713
---------- ---------- ------------- -------------
Property and equipment, net (note 5)............................... 43,914 44,794 51,514 51,514
Deferred income taxes (note 10).................................... 7,347 15,229 58,108 58,108
Goodwill and other intangibles, net (note 13)...................... -- 22,847 77,372 77,372
Restricted investments, at estimated fair value (note 3)........... 7,575 6,918 10,314 10,314
Other assets....................................................... 3,348 13,644 15,552 15,552
---------- ---------- ------------- -------------
TOTAL ASSETS................................................ $1,403,104 $1,565,331 $ 1,734,737 $ 1,768,573
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------

LIABILITIES AND SURPLUS
CURRENT LIABILITIES
Medical and other benefits payable (note 6)...................... $ 312,381 $ 372,815 $ 444,200 $ 444,200
Unearned premiums................................................ 102,240 97,789 98,558 98,558
Accounts payable and accrued expenses............................ 78,747 82,853 80,896 80,896
Deferred income taxes (note 10).................................. -- 13,968 -- --
Other liabilities (note 8)....................................... 176,530 170,711 153,103 153,103
Obligation for Commonwealth Payment (note 17).................... -- -- 87,500 --
---------- ---------- ------------- -------------
TOTAL CURRENT LIABILITIES................................... 669,898 738,136 864,257 776,757
---------- ---------- ------------- -------------
Obligation for Commonwealth Payment, noncurrent (note 17).......... -- -- 87,500 --
Obligations for employee benefits, noncurrent (note 11)............ 50,764 51,548 57,539 57,539
Medical and other benefits payable, noncurrent (note 6)............ 21,910 31,622 34,734 34,734
Long-term debt..................................................... -- -- -- 119,000
Minority interest in subsidiary.................................... 4,657 3,954 4,057 4,057
---------- ---------- ------------- -------------
TOTAL LIABILITIES........................................... 747,229 825,260 1,048,087 992,087
---------- ---------- ------------- -------------
SURPLUS
Common stock..................................................... -- -- -- 400
Capital in excess of par......................................... 745,388
Retained earnings................................................ 653,570 700,565 655,952 --
Net unrealized gain on investment securities, net of deferred
income taxes of $1,100, $21,242 and $16,517 (note 3).......... 2,305 39,506 30,698 30,698
---------- ---------- ------------- -------------
TOTAL SURPLUS............................................... 655,875 740,071 686,650 776,486
Commitments and contingencies (notes 7, 11, 13, 14, 15, 16 and
17)..............................................................
---------- ---------- ------------- -------------
TOTAL LIABILITIES AND SURPLUS............................... $1,403,104 $1,565,331 $ 1,734,737 $ 1,768,573
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
</TABLE>

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

F-3
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Premium and fee revenues
Commercial............................................. $1,050,157 $1,081,820 $1,157,899 $ 857,448 $ 985,127
Federal Employee Program............................... 279,058 303,250 329,243 248,109 265,587
Amounts attributable to self-funded arrangements....... 905,529 908,234 981,741 719,067 798,358
Less: amounts attributable to claims under self-funded
arrangements......................................... (815,488) (827,869) (897,954) (655,731) (731,062)
---------- ---------- ---------- ---------- ----------
1,419,256 1,465,435 1,570,929 1,168,893 1,318,010
Investment income (note 3)................................ 34,279 39,962 45,861 34,881 34,081
Net realized gains (note 3)............................... 26,199 12,793 52,976 34,833 50,685
Other revenues (note 9)................................... 30,555 45,467 55,176 41,096 37,666
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES....................................... 1,510,289 1,563,657 1,724,942 1,279,703 1,440,442
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Medical and other benefit costs (note 6)
Commercial............................................. 795,921 802,666 959,328 689,705 809,344
Federal Employee Program............................... 262,295 283,645 312,222 234,965 252,478
---------- ---------- ---------- ---------- ----------
1,058,216 1,086,311 1,271,550 924,670 1,061,822
Selling, general and administrative expenses (note 1)..... 308,412 322,391 346,353 247,059 283,704
Copayment refund program (note 14)........................ -- 36,432 47,073 46,702 --
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES............................. 1,366,628 1,445,134 1,664,976 1,218,431 1,345,526
---------- ---------- ---------- ---------- ----------
Income before income taxes, cumulative effects of changes in
accounting principles and extraordinary items............. 143,661 118,523 59,966 61,272 94,916
Income tax expense (benefit) (note 10)...................... 35,803 24,564 8,264 8,475 (46,751)
---------- ---------- ---------- ---------- ----------
Income before cumulative effects of changes in accounting
principles and extraordinary items........................ 107,858 93,959 51,702 52,797 141,667
Cumulative effect at January 1, 1993 of change in accounting
for income taxes (note 10)................................ 12,928 -- -- -- --
Cumulative effect at January 1, 1993 of change in accounting
for postemployment benefits, net of income taxes of $1,200
(note 11)................................................. (4,802) -- -- -- --
Extraordinary items -- demutualization costs and
Commonwealth Payment, net of income taxes of $347, $2,535,
$1,615 and $594 (note 17)................................. -- (644) (4,707) (2,999) (186,280)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)........................................... $ 115,984 $ 93,315 $ 46,995 $ 49,798 $ (44,613)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
UNAUDITED PRO FORMA INFORMATION (NOTE 18):
INCOME BEFORE EXTRAORDINARY ITEMS PER SHARE................. $ .86 $ 1.46
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 39,975,022 39,975,022
</TABLE>

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

F-4
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30,
1996

<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
INVESTMENT
RETAINED SECURITIES, TOTAL
EARNINGS NET SURPLUS
-------- ------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)

BALANCE AT JANUARY 1, 1993............................................................ $444,271 $ -- $ 444,271
Net income............................................................................ 115,984 -- 115,984
Adoption of SFAS No. 115.............................................................. -- 45,891 45,891
-------- ------------- ---------

BALANCE AT DECEMBER 31, 1993.......................................................... 560,255 45,891 606,146
Net income............................................................................ 93,315 -- 93,315
Change in unrealized gains (losses) on investment securities, net..................... -- (43,586) (43,586)
-------- ------------- ---------

BALANCE AT DECEMBER 31, 1994.......................................................... 653,570 2,305 655,875
Net income............................................................................ 46,995 -- 46,995
Change in unrealized gains (losses) on investment securities, net..................... -- 37,201 37,201
-------- ------------- ---------

BALANCE AT DECEMBER 31, 1995.......................................................... 700,565 39,506 740,071
Net loss.............................................................................. (44,613) -- (44,613)
Change in unrealized gains (losses) on investment securities, net..................... -- (8,808) (8,808)
-------- ------------- ---------

BALANCE AT SEPTEMBER 30, 1996......................................................... $655,952 $ 30,698 $ 686,650
-------- ------------- ---------
-------- ------------- ---------
</TABLE>

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

F-5
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)

(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>

NET CASH PROVIDED BY OPERATING ACTIVITIES
(note 12)........................................ $ 147,922 $ 122,646 $ 34,118 $ 55,444 $ 32,252
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment..... 2,252 89 25 16 35
Capital expenditures............................. (9,506) (12,543) (13,293) (10,847) (10,819)
Investment securities purchased.................. (1,836,934) (1,844,039) (2,694,188) (2,378,838) (2,180,759)
Proceeds from investment securities sold......... 1,355,573 1,192,725 1,531,862 1,432,200 2,133,101
Maturities of fixed income securities............ 350,398 538,413 1,178,232 947,622 136,853
Cash paid for purchase of subsidiaries, net of
cash acquired................................. (8,876) -- (26,762) (26,762) (82,496)
Cash paid for other investments.................. -- -- (7,500) -- --
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities.............. (147,093) (125,355) (31,624) (36,609) (4,085)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in outstanding checks in excess of bank
balance....................................... (3,628) 5,809 15,667 (10,645) (24,127)
Investment in subsidiary by minority
shareholder................................... 4,900 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities... 1,272 5,809 15,667 (10,645) (24,127)
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH............................... 2,101 3,100 18,161 8,190 4,040
CASH -- beginning of period........................ 5,901 8,002 11,102 11,102 29,263
----------- ----------- ----------- ----------- -----------
CASH -- end of period.............................. $ 8,002 $ 11,102 $ 29,263 $ 19,292 $ 33,303
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>

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

F-6
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996

GENERAL

Blue Cross and Blue Shield of Virginia (dba Trigon Blue Cross Blue Shield)
(the Company) is a mutual insurance company organized for the purpose of
managing and financing hospitalization, medical and other health benefits. The
Company is currently pursuing conversion to a stock insurance company as
described in note 17. The Company also processes claims for Medicare and
participates in a national contract with the U.S. Office of Personnel Management
to provide benefits to Federal employees within Virginia through the Federal
Employee Program (FEP). The Company owns 100% of HMO Virginia, Inc.,
HealthKeepers, Inc., Physicians Health Plan Inc., Mid-South Insurance Company,
Healthcare Support Corporation, Consolidated Healthcare, Inc., Consolidated
Holdings Corporation, Consolidated Investment Corporation, Trigon
Administrators, Inc., Health Communication Services, Inc., Health Management
Corporation, Monticello Life Insurance Company, Inc., Monticello Service Agency,
Inc. and Trigon Health Ventures, Inc. The Company owns 80% of Priority, Inc. and
51% of Peninsula Health Care, Inc. These subsidiaries include health maintenance
organizations (HMOs) and other companies which provide complementary products
and services to customers and non-customers of Blue Cross and Blue Shield of
Virginia. These products and services include third-party administration for
medical and workers' compensation, life and disability insurance, health
promotion, electronic data interchange and other products.

The Company follows Statement of Financial Accounting Standards (SFAS) No.
60, "Accounting and Reporting by Insurance Enterprises" as it relates to its
insurance business and Statement of Position 89-5, "Financial Accounting and
Reporting by Providers of Prepaid Healthcare Services" as it relates to its HMO
business. The significant accounting policies and practices followed by the
Company and its subsidiaries are as follows:

PRINCIPLES OF CONSOLIDATION

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

RISKS AND UNCERTAINTIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

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

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

INVESTMENT SECURITIES

Effective December 31, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All investment securities
are considered available for sale and are recorded at estimated fair value,
based on quoted market prices. The net unrealized gain or loss on investment
securities, net of deferred income taxes, is included as a separate component of
surplus. A decline in the fair

F-7
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

value of any investment security below cost, that is deemed other than
temporary, is charged to earnings resulting in a new cost basis for the
security. Costs of investments sold are determined on the first in, first out
basis.

Certain of the Company's investment securities are denominated in foreign
currencies. The Company enters into forward currency contracts and foreign
currency options to hedge the effect of fluctuations in foreign currency
exchange rates. Realized and unrealized gains and losses on these contracts are
recognized consistent with and offset foreign exchange gains and losses on the
underlying investments being hedged. Accordingly, forward currency contracts and
foreign currency options are recorded at fair value.

SOFTWARE DEVELOPMENT COSTS

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

PROPERTY AND EQUIPMENT

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

GOODWILL AND OTHER INTANGIBLES

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

Amortization charged to operations was $1,399,000 for the year ended
December 31, 1995 and $730,000 (unaudited) and $2,915,000 for the nine-month
periods ended September 30, 1995 and 1996, respectively. Accumulated
amortization at December 31, 1995 and September 30, 1996 was $1,399,000 and
$4,314,000, respectively.

MEDICAL AND OTHER BENEFITS PAYABLE

The Company establishes liabilities for claims in process of review and
claims incurred but not reported. These liabilities are based on historical
payment patterns using actuarial techniques. In addition, processing costs are
accrued as operating expenses based on an estimate of the costs necessary to
process these claims. The methods for making these estimates and for
establishing the resulting liabilities are continually reviewed and updated, and
any adjustments resulting therefrom are reflected in current operations. While
the ultimate amount of claims and the related expenses paid are dependent on
future developments, management is of the opinion that the liabilities for
claims and claims processing costs are adequate to cover such claims and
expenses. A liability or receivable for hospital settlements is also maintained,
which represents the estimate of the amount to be paid to or received from
hospitals upon the annual settlement of their contracts with the Company.

REVENUES

All of the Company's individual and certain of the Company's group
contracts provide for the individual or the group to be fully insured. Premiums
for these contracts are billed in advance of the respective coverage periods and
are initially recorded as premium receivables and as unearned income. Unearned
premiums are recognized as earned in the period of coverage.

Certain other groups have contracts that provide for the group to be at
risk for all or a portion of their claims experience. Most of these self-funded
groups purchase aggregate and/or specific stop-loss coverage. In exchange for a
premium, the group's aggregate liability is capped for the year or the group's
liability on any one participant is capped for the year. The Company charges
self-funded groups an administrative fee which is based on the number of members
in a group or the

F-8
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED

group's claims experience. Under the Company's self-funded arrangements, amounts
due are recognized based on incurred claims plus administrative and other fees
and any stop-loss premiums. In addition, accounts for certain self-funded groups
are charged or credited with interest expense or income as provided by the
groups' contracts.

AGENCY CONTRACTS

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

POSTRETIREMENT/POSTEMPLOYMENT BENEFITS

Pension costs are accrued in accordance with Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions" and are funded
based on the minimum contribution requirements of the Employee Retirement Income
Security Act of 1974. The actuarial cost method used is the projected unit
credit method.

The Company provides certain health and life insurance benefits to retired
employees. These benefits are accrued in accordance with Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions."

The Company also provides certain disability related postemployment
benefits. These benefits are accrued in accordance with Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits."

INCOME TAXES

The Company is subject to Federal income tax as a stock property and
casualty insurance company under the provisions of the Tax Reform Act of 1986.
The Company is not subject to state income taxes; however, certain subsidiaries
of the Company are subject to state income taxes.

Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes"
and has reported the cumulative effect of that change in the method of
accounting for income taxes in the 1993 consolidated statement of operations.
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.

RECLASSIFICATIONS

Certain amounts for 1994 and 1995 have been reclassified to conform with
classifications adopted for 1996.

F-9

<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

Consistent with the financial statement presentation, the following notes
include information related to the consolidated balance sheets as of December
31, 1994 and 1995, and September 30, 1996 and information related to the
consolidated statements of operations and cash flows for each of the years in
the three-year period ended December 31, 1995 and the nine-month periods ended
September 30, 1995 (unaudited) and 1996.

(1) AGENCY CONTRACTS

The Company acts as an administrative agent for processing claims for certain
agencies and other plans. Claims processed for others and the related
reimbursed operating expenses, which are subject to their audit, were as
follows for the years ended December 31, 1993, 1994 and 1995 and the
nine-month periods ended September 30, 1995 (unaudited) and 1996 (in
thousands):

(2) STATUTORY FINANCIAL STATEMENTS

The Company is required to file financial statements with, and is subject to
audit by, the Commonwealth of Virginia, Bureau of Insurance. Such financial
statements are prepared in accordance with statutory accounting practices
prescribed or permitted by the Commonwealth of Virginia, Bureau of Insurance
which differ from generally accepted accounting principles under which the
accompanying consolidated financial statements have been prepared.
Significant differences resulting from these accounting practices include
certain investment valuation reserves recognized under statutory accounting
as well as certain assets (primarily property and equipment) and deferred
income taxes not recognized under statutory accounting practices. While the
Bureau of Insurance has the authority to permit insurers to deviate from
prescribed statutory accounting practices, the Company has not received, nor
requested, approval to adopt any such deviations. In accordance with the
Insurance Code of Virginia (the Code), the Company's statutory surplus is
reduced by excess Category 2 investments. The Company's Category 2
investments consist primarily of domestic equity investments that exceed a
specified percentage of admitted assets and all foreign denominated
investments. At December 31, 1994 and 1995, this reduction in statutory
surplus due to excess Category 2 investments approximated $35,000,000 and
$92,000,000, respectively. There were no excess Category 2 investments at
September 30, 1996.
F-10
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(2) STATUTORY FINANCIAL STATEMENTS -- Continued
The Company's statutory surplus and net income approximated (in thousands):

<TABLE>
<CAPTION>
Statutory surplus at:
<S> <C>
December 31, 1994....................................................... $538,000
December 31, 1995....................................................... 478,000
September 30, 1996 (unaudited).......................................... 600,000

Statutory net income for the periods ended:
December 31, 1993....................................................... $102,000
December 31, 1994....................................................... 113,000
December 31, 1995....................................................... 83,000
September 30, 1995 (unaudited).......................................... 80,000
September 30, 1996 (unaudited).......................................... 54,000
</TABLE>

The Company is required by the Commonwealth of Virginia, Bureau of Insurance
to maintain a statutory surplus balance of at least $4,000,000.

In addition, the Commonwealth of Virginia adopted the National Association of
Insurance Commissioners (NAIC) Risk Based Capital Act in 1995. Under this
Act, a company's risk-based capital (RBC) is calculated by applying certain
factors to various asset, premium and reserve items. If a company's
calculated RBC falls below certain thresholds, regulatory intervention or
oversight is required. The Company's RBC level as calculated in accordance
with the NAIC RBC Instructions at December 31, 1995 exceeds all RBC
thresholds.
F-11
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(3) INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair
value of investment securities were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies........................................................... $174,592 $ 59 $ 2,191 $ 172,460
Mortgage-backed obligations of U.S. government agencies.............. 40,945 23 1,878 39,090
Other mortgage-backed and asset-backed securities.................... 158,667 442 6,724 152,385
Domestic corporate bonds............................................. 89,246 630 4,829 85,047
Short-term debt securities with maturities of less than one year..... 18,101 -- 98 18,003
Foreign
Debt securities issued by foreign governments........................ 91,581 1,112 4,820 87,873
Foreign corporate bonds.............................................. 14,591 331 893 14,029
Short-term debt securities with maturities of less than one year..... 1,486 -- 24 1,462
-------- ---------- ---------- ---------
Total fixed income........................................................ 589,209 2,597 21,457 570,349
-------- ---------- ---------- ---------
Equities
Domestic equity securities.............................................. 219,735 18,812 9,652 228,895
Foreign equity securities............................................... 185,695 26,461 13,356 198,800
-------- ---------- ---------- ---------
Total equities............................................................ 405,430 45,273 23,008 427,695
-------- ---------- ---------- ---------
$994,639 $ 47,870 $ 44,465 $ 998,044
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
Unrestricted.............................................................. $987,038 $ 47,853 $ 44,422 $ 990,469
Restricted................................................................ 7,601 17 43 7,575
-------- ---------- ---------- ---------
$994,639 $ 47,870 $ 44,465 $ 998,044
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
</TABLE>

F-12
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(3) INVESTMENT SECURITIES -- Continued

<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies....................................................... $ 95,110 $ 1,686 $ -- $ 96,796
Mortgage-backed obligations of U.S. government agencies.......... 27,001 1,317 9 28,309
Other mortgage-backed and asset-backed securities................ 177,137 2,590 688 179,039
Domestic corporate bonds......................................... 117,258 2,394 206 119,446
Short-term debt securities with maturities of
less than one year............................................. 114,452 472 737 114,187
Foreign
Debt securities issued by foreign governments.................... 88,924 6,676 765 94,835
Foreign corporate bonds.......................................... 12,249 441 45 12,645
Short-term debt securities with maturities of
less than one year............................................. 7,835 38 103 7,770
---------- ---------- ---------- ----------
Total fixed income.................................................... 639,966 15,614 2,553 653,027
---------- ---------- ---------- ----------
Equities
Domestic equity securities.......................................... 168,735 37,496 4,645 201,586
Foreign equity securities........................................... 226,278 35,902 21,437 240,743
---------- ---------- ---------- ----------
Total equities........................................................ 395,013 73,398 26,082 442,329
---------- ---------- ---------- ----------
Derivative instruments................................................ 1,580 696 325 1,951
---------- ---------- ---------- ----------
$1,036,559 $ 89,708 $ 28,960 $1,097,307
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Unrestricted.......................................................... $1,029,656 $ 89,693 $ 28,960 $1,090,389
Restricted............................................................ 6,903 15 -- 6,918
---------- ---------- ---------- ----------
$1,036,559 $ 89,708 $ 28,960 $1,097,307
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

F-13
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(3) INVESTMENT SECURITIES -- Continued

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed income
Domestic
U.S. Treasury securities and obligations of U.S. government
agencies....................................................... $ 117,132 $ 233 $ 253 $ 117,112
Mortgage-backed obligations of U.S. government agencies.......... 40,148 580 305 40,423
Other mortgage-backed and asset-backed securities................ 284,717 712 741 284,688
Domestic corporate bonds......................................... 141,050 622 678 140,994
Short-term debt securities with maturities of
less than one year............................................. 149,346 52 39 149,359
Foreign
Debt securities issued by foreign governments.................... 45,769 2,983 328 48,424
Foreign corporate bonds.......................................... 6,287 278 81 6,484
Short-term debt securities with maturities of
less than one year............................................. 9,785 1 35 9,751
---------- ---------- ---------- ----------
Total fixed income.................................................... 794,234 5,461 2,460 797,235
---------- ---------- ---------- ----------
Equities
Domestic equity securities.......................................... 121,763 30,468 1,129 151,102
Foreign equity securities........................................... 137,815 22,077 9,176 150,716
---------- ---------- ---------- ----------
Total equities........................................................ 259,578 52,545 10,305 301,818
---------- ---------- ---------- ----------
Derivative instruments................................................ 264 2,202 228 2,238
---------- ---------- ---------- ----------
$1,054,076 $ 60,208 $ 12,993 $1,101,291
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Unrestricted.......................................................... $1,043,760 $ 60,208 $ 12,991 $1,090,977
Restricted............................................................ 10,316 -- 2 10,314
---------- ---------- ---------- ----------
$1,054,076 $ 60,208 $ 12,993 $1,101,291
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

Short-term investments consist principally of commercial paper and money
market investments. Derivative instruments consist of foreign currency
forward transactions, foreign currency options and covered call options.

The amortized cost and estimated fair value of fixed income securities at
September 30, 1996, by contractual maturity, are shown below (in thousands).
Maturities of mortgage-backed securities and collateralized mortgage
obligations have been included below based upon estimated cash flows,
assuming no change in the current interest rate environment.

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------- ---------
<S> <C> <C>
Due in one year or less....................................................... $334,172 $ 334,431
Due after one year through five years......................................... 326,865 327,590
Due after five years through ten years........................................ 102,464 104,772
Due after ten years........................................................... 30,733 30,442
-------- ---------
$794,234 $ 797,235
-------- ---------
-------- ---------
</TABLE>

Included in investment securities at September 30, 1996 are $4,421,905, at
estimated fair value, of U.S. Treasury securities held by the Commonwealth of
Virginia to meet security deposit requirements related to the Company and its
HMO subsidiaries. In addition, U.S. Treasury and other high quality
securities in the amount of $5,891,898, at estimated fair value, are held by
various states to meet security deposit requirements related to Monticello
Life Insurance Company, Inc. and Mid-South Insurance Company.

F-14
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(3) INVESTMENT SECURITIES -- Continued
The major components of investment income were as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest on bonds................................................ $26,444 $31,980 $37,789 $27,482 $26,827
Interest on short-term investments............................... 2,947 6,557 9,764 7,986 5,336
Dividends........................................................ 11,345 9,629 7,652 6,232 9,187
------- ------- ------- ----------- -------
40,736 48,166 55,205 41,700 41,350
Investment expenses.............................................. 5,176 5,546 5,757 4,051 4,591
Group interest credits........................................... 1,281 2,658 3,587 2,768 2,678
------- ------- ------- ----------- -------
Investment income................................................ $34,279 $39,962 $45,861 $34,881 $34,081
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
</TABLE>

Gross realized gains and losses are summarized as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Gross realized gains
Fixed income securities........................................ $16,864 $ 7,611 $13,890 $ 9,406 $ 7,566
Equity securities.............................................. 34,259 43,384 58,938 47,666 63,493
Derivative instruments......................................... -- -- 11,430 2,544 528
------- ------- ------- ----------- -------
51,123 50,995 84,258 59,616 71,587
------- ------- ------- ----------- -------
Gross realized losses
Fixed income securities........................................ 6,073 14,821 9,081 8,481 8,661
Equity securities.............................................. 18,851 23,381 15,520 12,413 12,208
Derivative instruments......................................... -- -- 6,681 3,889 33
------- ------- ------- ----------- -------
24,924 38,202 31,282 24,783 20,902
------- ------- ------- ----------- -------
Net realized gains............................................. $26,199 $12,793 $52,976 $34,833 $50,685
------- ------- ------- ----------- -------
------- ------- ------- ----------- -------
</TABLE>

Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed income securities or cost for equity
securities. A summary of the net increase (decrease) in unrealized gains,
less deferred income taxes, is as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Fixed income securities........................................ $(27,877) $ 31,921 $ (10,060)
Equity securities.............................................. (39,319) 25,051 (5,076)
Derivative instruments......................................... -- 371 1,603
Provision for deferred income taxes............................ 23,610 (20,142) 4,725
-------- -------- -------------
$(43,586) $ 37,201 $ (8,808)
-------- -------- -------------
-------- -------- -------------
</TABLE>

F-15
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(4) PREMIUMS AND OTHER RECEIVABLES

Premiums and other receivables were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Premiums...................................................... $ 63,059 $ 71,369 $ 70,989
Self-funded group receivables................................. 88,917 110,564 150,832
Federal Employee Program...................................... 155,444 126,258 122,348
Medicare...................................................... 1,524 1,154 77
Investment income receivable.................................. 8,718 8,534 8,643
Other......................................................... 9,107 14,999 16,517
-------- -------- -------------
$326,769 $332,878 $ 369,406
-------- -------- -------------
-------- -------- -------------
</TABLE>

(5) PROPERTY AND EQUIPMENT

Property and equipment were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Land and improvements......................................... $ 973 $ 973 $ 2,977
Buildings and improvements.................................... 30,384 30,586 37,790
Furniture and equipment....................................... 64,036 67,440 73,717
Computer software............................................. 9,934 12,641 14,300
-------- -------- -------------
105,327 111,640 128,784
Less accumulated depreciation and amortization................ 61,413 66,846 77,270
-------- -------- -------------
$ 43,914 $ 44,794 $ 51,514
-------- -------- -------------
-------- -------- -------------
</TABLE>

F-16
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(6) MEDICAL AND OTHER BENEFITS PAYABLE

Medical and other benefits payable were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Medical and other benefits payable -- current
Commercial and FEP
Claims reported but not paid............................. $ 20,045 $ 20,730 $ 21,595
Claims incurred but not reported......................... 179,222 208,129 256,431
-------- -------- -------------
199,267 228,859 278,026
Self-funded
Claims reported but not paid............................. 13,606 14,334 15,420
Claims incurred but not reported......................... 121,053 127,661 154,292
-------- -------- -------------
134,659 141,995 169,712
Medical and other benefits payable -- noncurrent (all
commercial)................................................. 21,910 31,622 34,734
-------- -------- -------------
355,836 402,476 482,472
Liability for claims processing costs......................... 16,023 16,582 17,335
Receivable for hospital settlements........................... (37,568) (14,621) (20,873)
-------- -------- -------------
334,291 404,437 478,934
Less medical and other benefits payable -- noncurrent......... (21,910) (31,622) (34,734)
-------- -------- -------------
$312,381 $372,815 $ 444,200
-------- -------- -------------
-------- -------- -------------
</TABLE>

A summary of the activity for commercial and FEP medical and other benefits
payable is as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Medical and other benefits payable at beginning of
period........................................... $ 345,492 $ 359,355 $ 355,836 $ 355,836 $ 402,476
Self-funded........................................ (139,654) (138,344) (134,659) (134,659) (141,995)
---------- ---------- ---------- ---------- ----------
Balance at beginning of period..................... 205,838 221,011 221,177 221,177 260,481
---------- ---------- ---------- ---------- ----------
Liabilities acquired with Mid-South................ -- -- -- -- 33,828
Incurred related to
Current year..................................... 1,103,941 1,095,014 1,275,583 931,536 1,069,752
Prior years...................................... (45,725) (8,703) (4,033) (6,866) (7,930)
---------- ---------- ---------- ---------- ----------
Total incurred..................................... 1,058,216 1,086,311 1,271,550 924,670 1,061,822
---------- ---------- ---------- ---------- ----------
Paid related to
Current year..................................... 900,025 948,660 1,083,170 752,455 851,748
Prior years...................................... 143,018 137,485 149,076 149,790 191,623
---------- ---------- ---------- ---------- ----------
Total paid......................................... 1,043,043 1,086,145 1,232,246 902,245 1,043,371
---------- ---------- ---------- ---------- ----------
Balance at end of period........................... 221,011 221,177 260,481 243,602 312,760
Self-funded at end of period....................... 138,344 134,659 141,995 136,495 169,712
---------- ---------- ---------- ---------- ----------
Medical and other benefits payable at end of
period........................................... $ 359,355 $ 355,836 $ 402,476 $ 380,097 $ 482,472
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

The Company uses paid claims and completion factors based on historical
payment patterns to estimate incurred claims. Changes in payment patterns and
claims trends can result in changes to prior years' claims estimates. During
1992, the

F-17
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(6) MEDICAL AND OTHER BENEFITS PAYABLE -- Continued
Company experienced a change in the payment patterns as a result of its
migration to a new claims processing system. The ultimate effect of the
migration on the completion factors differed from the effect estimated by the
Company, resulting in a change in the Company's original estimate of incurred
claims in 1992. The change in estimate was recorded in 1993.

(7) LEASES

The Company has noncancelable operating leases for real estate and equipment
that expire over the next nine years and provide for purchase or renewal
options. Future minimum lease payments under noncancelable operating leases
as of December 31, 1995 are (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
- -------------------------------------------------------------------------------
<S> <C>
1996........................................................................... $10,545
1997........................................................................... 7,575
1998........................................................................... 5,138
1999........................................................................... 3,629
2000........................................................................... 2,639
Later years through 2004....................................................... 7,277
-------
Total minimum lease payments................................................... $36,803
-------
-------
</TABLE>

Total rental expense for operating leases for the years ended December 31,
1993, 1994 and 1995 and the nine-month periods ended September 30, 1995 and
1996 was $15,746,000, $14,979,000, $15,243,000, $10,502,000 (unaudited) and
$10,325,000, respectively. There were no significant changes in operating
lease commitments as of September 30, 1996.

(8) OTHER LIABILITIES

Other liabilities were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Outstanding checks in excess of bank balance.................. $ 34,878 $ 50,545 $ 26,418
Subscriber related liabilities................................ 2,998 4,732 1,993
Unearned premium income -- Federal Employee Program........... 103,862 70,541 74,006
Self-funded group deposits.................................... 19,136 18,315 17,094
Current income taxes payable.................................. 9,050 2,704 12,116
Other......................................................... 6,606 23,874 21,476
-------- -------- -------------
$176,530 $170,711 $ 153,103
-------- -------- -------------
-------- -------- -------------
</TABLE>

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

F-18
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(9) OTHER REVENUES

Other revenues include those revenues earned by the Company's non-core
subsidiaries. A summary by type of revenue is included below (in thousands):

(10) INCOME TAXES

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." As
permitted under SFAS No. 109, prior years' financial statements have not
been restated. The cumulative effect of this change, as of January 1, 1993,
increased net income by $12,928,000 and is reported separately in the
consolidated statement of operations.

Income tax expense (benefit) attributable to income before income taxes,
cumulative effects of changes in accounting principles and extraordinary
items substantially all of which is federal, consists of (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -----------------------
1993 1994 1995 1995 1996
------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current.................................................. $40,025 $21,160 $ 19,206 $10,864 $ 20,393
Deferred................................................. (4,222) 3,404 (10,942) (2,389) (67,144)
------- ------- -------- ----------- --------
$35,803 $24,564 $ 8,264 $ 8,475 $(46,751)
------- ------- -------- ----------- --------
------- ------- -------- ----------- --------
</TABLE>

The differences between the statutory federal income tax rate and the
actual tax rate applied to income before income taxes, cumulative effects
of changes in accounting principles and extraordinary items are as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- --------------------
1993 1994 1995 1995 1996
----- ----- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Statutory federal tax rate............................................. 35.0% 35.0% 35.0% 35.0% 35.0%
Tax exempt investment income........................................... (1.0) (0.9) (1.2) (0.9) (0.6)
Section 833 deduction.................................................. (34.1) (2.4) -- -- --
Change in valuation allowance.......................................... 22.8 (13.5) (19.4) (19.9) (84.8)
Other, net............................................................. 2.2 2.5 (0.6) (0.4) 1.1
----- ----- ----- ----------- -----
Effective tax rate..................................................... 24.9% 20.7% 13.8% 13.8% (49.3)%
----- ----- ----- ----------- -----
----- ----- ----- ----------- -----
</TABLE>

The Company qualifies for a federal income tax deduction under IRC Section
833. This deduction is equal to the amount by which 25% of the sum of
claims and expenses exceeds tax basis adjusted surplus. Prior to 1994, the
effect of this deduction was to significantly reduce regular taxable income
and subject the Company to alternative minimum tax.

F-19
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(10) INCOME TAXES -- Continued
The components of the deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1995 and September 30, 1996 are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets
Employee benefits plans........................................................ $ 19,818 $ 20,595 $22,992
Insurance reserves............................................................. 21,915 27,132 26,474
Alternative minimum tax credit carryforward.................................... 58,532 48,494 34,019
Property and equipment......................................................... 2,793 6,187 6,280
Other.......................................................................... 1,491 1,623 4,164
-------- -------- -------------
Total deferred tax assets........................................................ 104,549 104,031 93,929
Less valuation allowance....................................................... 92,085 80,476 --
-------- -------- -------------
Net deferred tax assets.......................................................... 12,464 23,555 93,929
-------- -------- -------------
Deferred tax liabilities
Investment securities.......................................................... 1,214 21,482 16,792
Other.......................................................................... 685 812 555
-------- -------- -------------
Total deferred tax liabilities................................................... 1,899 22,294 17,347
-------- -------- -------------
Net deferred tax asset........................................................... $ 10,565 $ 1,261 $76,582
-------- -------- -------------
-------- -------- -------------
</TABLE>

Net deferred tax assets as of December 31, 1994 and 1995 included a
valuation allowance of $92.1 million and $80.5 million, respectively. This
valuation allowance reflected the uncertainty as to the realizability of
the alternative minimum tax credit carryforward and the tax effect of
deductible temporary differences that management believed might not be
offset by future taxable income. The Company had sufficient taxable income
in the available carryback periods and future taxable income from reversing
taxable temporary differences to realize the recorded net deferred tax
assets.

The valuation allowance consisted principally of two components. The first
component related to the corporate alternative minimum tax credit
carryforward. The corporate minimum tax credit can only be used to reduce
regular corporate income tax, and then can only be utilized to reduce the
regular tax amount to the corporate minimum tax amount. The Section 833
deduction may reduce regular tax so that the corporate minimum tax is being
paid in the future. In this case the corporate minimum tax credit cannot be
utilized and consequently may not be realized. It is difficult to predict
the amount of Section 833 deduction which will be available in the future
because it is determined by the interplay of several factors. Accordingly,
the Company has been recognizing the corporate minimum tax credit when it
is actually utilized on the corporate income tax return.

The other component of the valuation allowance related to deductible
temporary differences which will not be deductible until well into the
future. Primarily, these temporary differences related to retiree medical
obligations and certain medical cost reserves. As of September 30, 1996 the
valuation allowance was eliminated as the Demutualization (note 17) makes
it more likely than not that the assets will be realized.

(11) EMPLOYEE BENEFIT PLANS

The Company has a noncontributory defined benefit pension plan which is
funded through the Blue Cross National Retirement Trust (the Trust), a
collective investment trust for the retirement programs of its
participating employers. An employee may become eligible for participation
after one year of continuous service and attainment of age 21.

The Company's funding policy is to annually contribute amounts to the Trust
sufficient to meet the minimum funding requirements outlined in the
Employee Retirement Income Security Act of 1974, plus any additional
amounts the Company may contribute from time to time. For the years ended
December 31, 1993, 1994 and 1995 and the nine-month periods ended September
30, 1995 and 1996, the Company made contributions to the Trust in the
amounts of

F-20
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(11) EMPLOYEE BENEFIT PLANS -- Continued
$6,818,000, $8,096,000, $7,716,000, $4,133,000 (unaudited) and $3,970,000,
respectively. Assets in the Trust are primarily equity securities, U.S.
Treasury Bonds and Notes, U.S. Government Agency securities, corporate
bonds, real estate funds and short-term investments.

Pension expense included the following components (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1993 1994 1995 1995 1996
------- ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Service cost -- benefits earned during the period............... $ 5,501 $ 6,063 $ 6,705 $ 5,029 $ 5,665
Interest cost on projected benefit obligation................... 4,781 5,501 6,507 4,880 5,574
Actual return on plan assets.................................... (3,879) (4,817) (12,194) (9,146) (4,602)
Net amortization and deferral................................... 405 355 6,926 5,195 (110)
------- ------- -------- ----------- -------
Net periodic pension expense.................................... $ 6,808 $ 7,102 $ 7,944 $ 5,958 $ 6,527
------- ------- -------- ----------- -------
------- ------- -------- ----------- -------
</TABLE>

The following table sets forth the pension plan's funded status at December
31, 1994 and 1995 and September 30, 1996 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- --------- -------------
<S> <C> <C> <C>
Accumulated benefit obligation, including vested benefits of $46,181, $57,652,
and $59,638.................................................................... $(55,219) $ (68,015) $ (70,297)
-------- --------- -------------
-------- --------- -------------
Projected benefit obligation for service rendered to date........................ $(84,412) $(103,766) $(101,471)
Plan assets at fair value........................................................ 59,163 77,948 87,929
-------- --------- -------------
Excess of projected benefit obligation over assets............................... (25,249) (25,818) (13,542)
Unrecognized net asset at January 1, 1987 being recognized over 17 years......... (1,005) (895) (812)
Unrecognized prior service cost.................................................. 870 784 719
Unrecognized net loss............................................................ 16,651 16,968 2,116
-------- --------- -------------
Accrued pension cost............................................................. $ (8,733) $ (8,961) $ (11,519)
-------- --------- -------------
-------- --------- -------------
</TABLE>

The weighted average discount rate was 7.5%, 7.25% and 7.75% at December
31, 1994 and 1995 and September 30, 1996, respectively. The expected long
term rate of return on assets was 9.0% at December 31, 1994 and 1995 and
September 30, 1996. Age-related rates ranging from 3.5% to 7.0% were used
for the rate of increase in future compensation levels at December 31, 1994
and 1995 and September 30, 1996.

The Company also has an Employee Thrift Plan under which employees who have
completed six months of service may elect to contribute up to 16% of their
salaries. Participants have the option of investing in several
international and domestic investment funds. The Company contributes an
amount equal to 50% of the participant's contributions limited to 3% of the
employee's compensation. The Company's contributions are fully vested to
the participant after three years of contributing participation. For the
years ended December 31, 1993, 1994 and 1995 and the nine-month periods
ended September 30, 1995 and 1996, the Company's contribution to the
Employee Thrift Plan approximated $2,658,000, $2,954,000, $3,153,000,
$2,412,000 (unaudited) and $2,547,000, respectively.

In addition to providing pension benefits, the Company provides certain
health and life insurance benefits for retired employees. All of the
Company's retirees with fifteen years of service are eligible for these
benefits. This postretirement benefit plan is funded through the Blue Cross
National Retirement Trust (the Trust). For the years ended December 31,
1993, 1994 and 1995, the Company made contributions to the Trust in the
amounts of $4,100,000, $2,700,000 and $2,500,000, respectively. No
contributions were made to the Trust for the nine-month period ended
September 30, 1996.

F-21
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(11) EMPLOYEE BENEFIT PLANS -- Continued
The following table presents the funded status of the plan including the
accumulated postretirement benefit obligation by type of participant at
December 31, 1994 and 1995 and September 30, 1996 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Retirees.......................................................................... $ (6,606) $ (6,033) $ (7,367)
Fully eligible active plan participants........................................... (3,816) (4,605) (4,305)
Other active plan participants.................................................... (15,528) (17,592) (19,664)
-------- -------- -------------
Accumulated postretirement benefit obligation..................................... (25,950) (28,230) (31,336)
Plan assets at fair value......................................................... 7,066 10,036 11,967
-------- -------- -------------
Excess of accumulated postretirement benefit obligation over plan assets.......... (18,884) (18,194) (19,369)
Unrecognized net (gain) loss...................................................... (1,369) (2,282) (3,137)
Unrecognized prior service cost................................................... (7,094) (6,433) (5,937)
-------- -------- -------------
Accrued postretirement benefit cost............................................... $(27,347) $(26,909) $ (28,443)
-------- -------- -------------
-------- -------- -------------
</TABLE>

Postretirement benefit expense for the years ended December 31, 1993, 1994
and 1995 and the nine-month periods ended September 30, 1995 (unaudited)
and 1996 included the following components (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------------
1993 1994 1995 1995 1996
------ ------ ------ ----------- ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Service cost -- benefits attributed to service during the period..... $2,398 $2,078 $2,128 $ 1,596 $1,780
Interest cost on accumulated postretirement benefit obligation....... 1,841 1,688 1,843 1,382 1,533
Expected return on plan assets....................................... -- (266) (622) (467) (757)
Amortization of prior service cost................................... (661) (661) (661) (496) (496)
Amortization of (gains) losses....................................... 80 -- -- -- (22)
------ ------ ------ ----------- ------
Net periodic postretirement benefit expense.......................... $3,658 $2,839 $2,688 $ 2,015 $2,038
------ ------ ------ ----------- ------
------ ------ ------ ----------- ------
</TABLE>

For measurement purposes, a 5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for September 30, 1996.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point would increase the accumulated
postretirement benefit obligation as of September 30, 1996 by $5,550,000
and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense would increase by $709,000 for
September 30, 1996.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at December 31, 1994 and 1995
and 7.25% at September 30, 1996. The rate of increase in future
compensation levels used in determining the accumulated postretirement
benefit obligation ranged from 3.5% to 7.0% at December 31, 1994 and 1995
and September 30, 1996.

The Company also provides certain disability related postemployment
benefits. In 1993, the Company adopted the provisions of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect
as of January 1, 1993 of this change in accounting was to decrease net
income by $4,802,000. For the year ended December 31, 1993, the effect of
SFAS No. 112 on net income was not material. Prior to 1993, the Company
recognized the cost of providing these benefits on a cash basis. Under the
new method of accounting, the Company accrues the benefits when it becomes
probable that such benefits will be paid and when sufficient information
exists to make reasonable estimates of the amounts to be paid.

F-22
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(12) ADDITIONAL CASH FLOW INFORMATION

The reconciliation of net income to net cash provided by operating
activities and supplemental disclosures of cash flow information for the
years ended December 31, 1993, 1994 and 1995 and for the nine-month periods
ended September 30, 1995 (unaudited) and 1996 were as follows (in
thousands):

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss).......................................... $115,984 $ 93,315 $ 46,995 $ 49,798 $(44,613)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities,
net of effects from purchase of subsidiaries:
Depreciation and amortization............................ 18,158 12,226 10,960 6,954 12,991
Increase (decrease) in allowance for doubtful accounts
receivable............................................ (758) (673) 468 (160) (1,018)
Increase in accounts receivable.......................... (831) (64,064) (5,989) (21,627) (31,652)
Increase in other assets................................. (676) (4,926) (2,531) (667) (1,745)
Increase (decrease) in medical and other benefits
payable............................................... 4,291 (2,604) 68,945 46,250 40,669
Increase (decrease) in unearned premiums................. 1,830 (4,198) (5,252) 180 (3,484)
Increase (decrease) in accounts payable and accrued
expenses.............................................. 5,954 26,393 4,106 (19,175) (5,347)
Increase (decrease) in other liabilities................. 28,859 74,839 (22,774) 28,189 6,623
Increase (decrease) in deferred income taxes............. (15,070) 3,403 (8,030) (2,659) (70,597)
Increase in obligation for Commonwealth Payment.......... -- -- -- -- 175,000
Increase (decrease) in minority interest................. -- (243) (703) (341) 103
Increase in obligations for employee benefits............ 9,083 2,007 784 3,511 5,991
(Gain) loss on disposal of assets........................ 7,297 (36) 115 24 16
Realized investment gains, net........................... (26,199) (12,793) (52,976) (34,833) (50,685)
-------- -------- -------- ----------- --------
Net cash provided by operating activities.................. $147,922 $122,646 $ 34,118 $ 55,444 $ 32,252
-------- -------- -------- ----------- --------
Cash paid during the period for:
Interest................................................. $ 1,380 $ 6,930 $ 15,390 $ 5,013 $ 3,129
Income taxes............................................. 33,245 26,672 20,061 20,051 12,184
-------- -------- -------- ----------- --------
-------- -------- -------- ----------- --------
</TABLE>

(13) ACQUISITION ACTIVITY

In May 1995, the Company acquired 80% of the outstanding stock of Priority
Health Care, Inc. (subsequently renamed Priority, Inc.) (Priority) for
approximately $24.2 million including acquisition related costs. The
acquisition has been accounted for as a purchase and, accordingly, the
results of operations of Priority, which are not material to the Company,
are included in the consolidated financial statements since the date of
acquisition. Goodwill arising from the acquisition amounted to $21.1
million. No proforma information has been provided since Priority's results
of operations prior to the Company's acquisition were not material to the
Company.

In November 1995, the Company paid $5,500,000 for a 50% interest in Primary
Care First, L.L.C. (PCF) and related assets. PCF was formed for the purpose
of managing and developing primary care physician networks in the Richmond
and South Hampton Roads areas of Virginia. The Company has also committed
to provide up to $3,500,000 to PCF for development of additional primary
care physician networks. This investment is accounted for under the equity
method and is included in other assets. The excess of the Company's cost
over its underlying equity in PCF and related assets amounted to $5,500,000
and is being amortized over 15 years.

F-23
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(13) ACQUISITION ACTIVITY -- Continued
In February 1996, the Company purchased all of the outstanding shares of
Mid-South Insurance Company (Mid-South) for approximately $85.6 million.
Mid-South is a Fayetteville, North Carolina based life and health insurance
company. The acquisition was accounted for as a purchase and, accordingly,
the results of operations of Mid-South are included in the consolidated
financial statements since the date of acquisition. Goodwill and other
intangible assets arising from the transaction amounted to $56.7 million
and are being amortized over periods not exceeding 25 years. No proforma
information has been provided since Mid-South's results of operations prior
to the Company's acquisition were not material to the Company.

(14) COPAYMENT REFUND PROGRAM

The Company conducted a Copayment Refund Program (the Copayment Program) in
accordance with an agreement with the State Corporation Commission dated
September 22, 1994. During the Copayment Program, members who had paid
coinsurance on services rendered at the Company's network facilities from
January 1, 1984 through December 31, 1993 were eligible for a refund.
Refunds represented the difference between the member's original
coinsurance payment, which had been based on the facility's undiscounted
charges, and an adjusted coinsurance payment calculated using the Company's
average discount percentage at the facility. The Company changed its
methodology on January 1, 1994, to calculate coinsurance payments using the
average percentage discount. Costs incurred under the Copayment Program
included refunds, interest and administrative costs associated with the
Copayment Program that the Company would not otherwise have incurred. In
addition, the Company agreed to pay a $5,000,000 civil forfeiture to the
Commonwealth of Virginia which has been included in the cost of the
Copayment Program. The cost of the Copayment Program in 1994 was $36.4
million or $30.0 million, net of income taxes.

The Virginia General Assembly enacted legislation, effective July 1, 1994,
that requires all insurers and HMOs to calculate coinsurance payments on
the basis of their negotiated reimbursement rates with facilities.

In accordance with an agreement with the State Corporation Commission dated
November 17, 1995, the Company re-opened the Copayment Program. As part of
the re-opening of the Copayment Program, the Company mailed refunds to
approximately 300,000 members who had not filed a claim under the original
program and for whom the Company had an address. In addition, the Company
announced that it has determined that there are approximately 200,000
former members for whom the Company does not have an address who are
eligible for refunds. Under this new agreement, any amounts not paid by
December 31, 1996 will be escheated to the Commonwealth of Virginia as
unclaimed property. The cost of the re-opening of the Copayment Program was
$47.1 million or $40.6 million, net of income taxes.

(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK

The carrying amounts of cash, premiums receivable, medical costs payable,
unearned premiums and other liabilities approximate fair value because of
the short maturity of these instruments. The fair values of investment
securities are estimated based on quoted market prices.

The Company enters into foreign currency forward transactions and foreign
currency options to manage its exposure to fluctuations in foreign currency
exchange rates. The forward contracts involve the exchange of one currency
for another at a future date and typically have maturities of six months or
less. The counterparties to these transactions are major international
financial institutions. The Company may incur a loss with respect to these
transactions to the extent that a counterparty fails to perform under a
contract and exchange rates have changed since the inception of the
contract. At September 30, 1996, the Company had forward exchange contracts
outstanding to purchase approximately $25.8 million in foreign currencies
and to sell approximately $12.3 million in foreign currencies (primarily
German Mark, Japanese Yen, Danish Krone, Swedish Krona and British Pound).
All of these contracts have maturities of six months or less. The gross
unrealized gains and losses related to these contracts at September 30,
1996 aggregated $447,848 and $211,436, respectively. Foreign currency
options to sell approximately $35.9 million of foreign currencies (Japanese
Yen and German Mark) at set prices were outstanding at September 30, 1996.
These options expire within twelve months. The

F-24
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK -- Continued
gross unrealized gains and losses related to these options at September 30,
1996 aggregated $1,741,287 and $11,360, respectively.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investment securities
and premiums receivable. All of the investment securities are managed
within established guidelines which limit the amounts which may be invested
with one issue. The Company primarily conducts business within the
Commonwealth of Virginia; therefore premiums receivable are concentrated
with companies and individuals within Virginia.

(16) LEGAL PROCEEDINGS

In November 1993, the Company met with officials from the United States
Department of Labor (the DOL) in response to the DOL's request for
information concerning the Company's policies on passing through the
benefits of provider discounts to self-funded employer groups whose health
care plans are subject to the Employee Retirement Income Security Act
(ERISA) and are administered by the Company. The DOL advised the Company
that the inquiry was part of a larger review of Blue Cross and Blue Shield
organizations that provide services to self-funded plans. The Company
responded in March and April 1994 to informal requests from the DOL seeking
additional information on the Company's handling of provider discounts. In
September 1995, the DOL notified the Company that the DOL is of the view
that the retention of provider discounts during the period from 1990
through 1993 and its failure to disclose the amount of these discounts by
the Company violated the applicable provisions of ERISA. The amount of the
provider discounts retained during this period is approximately $58.6
million. Under applicable provisions of ERISA, the DOL may also assess a
civil penalty equal to 20% of any amounts recovered as a result of an ERISA
violation. No lawsuit has been filed by the DOL and the Company intends to
continue discussions with the DOL about this matter. The Company and the
DOL have entered into a tolling agreement with respect to this matter
pursuant to which the parties have agreed that no litigation will be
instituted before February 1, 1997 and the applicable statute of
limitations will be tolled until May 1, 1997. The Company believes that its
handling of provider discounts has been in accordance with the terms of its
agreements with self-funded employer groups and applicable ERISA
requirements. Due to the early stage of the DOL inquiries, the Company
cannot make an estimate of loss, if any (and has not established any
liability with respect thereto), or predict whether or not such inquiries
will result in a material adverse effect on the Company's results of
operations in any particular period. Although the ultimate resolution of
this matter cannot be estimated, the Company believes that it should not
have a material adverse effect on the Company's financial position.

The Company is also the defendant in two lawsuits that have been filed by
self-funded employer groups in connection with the Company's past practices
regarding provider discounts. The suits claim that the Company was
obligated to credit these self-funded plans with the full amount of the
discounts that the Company negotiated with facilities providing health care
to their groups. One suit seeks $750,000 in compensatory damages plus
unspecified punitive damages. The other suit seeks $1.1 million in damages.
The Company is also presently the subject of 16 other claims by self-funded
employer groups related to the Company's past practices regarding provider
discounts, some of which involve larger amounts of withheld discounts. The
Company is communicating with these groups, and lawsuits have not been
filed in connection with these claims. The Company believes that additional
discount-related claims may be made against it. Although the ultimate
outcome of such claims and litigation cannot be estimated, the Company
believes that the discount-related claims and litigation will not have a
material adverse effect on the financial condition of the Company. Due to
the early stages of these claims and litigation, however, the Company
cannot make an estimate of loss, if any, or predict whether or not such
claims and litigation will result in a material adverse effect on the
Company's results of operations in any particular period.

In August 1994, three of the Company's members filed a complaint against
the Company in the United States District Court for the Eastern District of
Virginia contending that when the Company negotiated discounts with
hospitals, it should have shared those discounts with its members through
lower copayments and deductibles. The plaintiffs also sought certification
of a class consisting of all of the Company's members who paid copayments
and deductibles. The

F-25
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(16) LEGAL PROCEEDINGS -- Continued
complaint sought damages under various theories of state law, treble
damages under the Racketeer Influenced and Corrupt Organizations Act and
attorney's fees. The Company filed a motion to dismiss the complaint which
was granted by the District Court. The plaintiffs appealed the ruling to
the United States Fourth Circuit Court of Appeals which affirmed the
ruling. Plaintiffs have the right to petition the United States Supreme
Court for a writ of certiorari. Although the ultimate resolution of this
suit cannot be predicted with certainty, the Company believes that, in view
of the refunds made by the Company under the Copayment Program, the
resolution of this litigation should not result in losses that would have a
material adverse effect on the financial condition of the Company.

The Company and certain of its subsidiaries are involved in various legal
actions occurring in the normal course of its business. While the ultimate
outcome of such litigation cannot be predicted with certainty, in the
opinion of Company management, after consultation with counsel responsible
for such litigation, adequate provision has been made for losses that may
result from those actions and, accordingly, the outcome of those actions is
not expected to have a material adverse effect on the consolidated
financial condition of the Company.

(17) PLAN OF DEMUTUALIZATION

The Company is currently pursuing conversion from a mutual insurance
company to a stock insurance company under a Plan of Demutualization (the
Demutualization). Under the Demutualization, the Company will be converted
to a stock insurance corporation, will change its name to Trigon Insurance
Company and will become a wholly-owned subsidiary of Trigon Healthcare,
Inc., a newly formed holding company. The membership interest of the
Company's eligible members will be converted in the Demutualization into
common stock of Trigon Healthcare, Inc., or in certain circumstances, cash.
To demutualize, the Company is required by Virginia law to obtain approval
from those individuals or entities holding membership interests in the
Company as of a specified record date (voting members) and to obtain
approval from the Virginia State Corporation Commission, which regulates
the Company. The Company's voting members approved the Plan of
Demutualization at a special meeting of voting members held on September 6,
1996. On November 5, 1996, the State Corporation Commission entered a final
order approving the Plan of Demutualization after a public hearing was held
to consider the Plan of Demutualization. The Company expects that the
Demutualization will be effective in early 1997.

The Plan of Demutualization requires, simultaneously with the
Demutualization, an initial public offering of common stock. In addition,
under Virginia law a payment to the Commonwealth of Virginia in the amount
of $175 million must be made (the Commonwealth Payment). At least one-half
of this amount must be made in cash and the remainder will be made in cash
or shares of Class C Common Stock. Any Class C Common Stock issued as part
of the Commonwealth Payment will be redeemable at any time and, if not
sooner redeemed, must be redeemed on June 30, 1998 at the initial per share
price of the Common Stock in the initial public offering, plus interest
from the date of the Demutualization through the date of payment at a rate
per annum set by the Virginia Commissioner of Insurance and the Virginia
Attorney General. The Commonwealth Payment has been accrued as an
extraordinary charge as of September 30, 1996. The Company expects to use
proceeds of the public offering to pay $87.5 million of the Commonwealth
Payment and to fund the balance from borrowings under a revolving credit
facility or other available cash.

(18) UNAUDITED PRO FORMA INFORMATION

The pro forma balance sheet information gives effect to the following
transactions as if such transactions had occurred on September 30, 1996:

(Bullet) Issuance of 24.5 million shares of common stock to eligible
members pursuant to the Demutualization.

(Bullet) Payment of $91.3 million to certain eligible members in lieu of
shares of common stock.

(Bullet) Issuance of 15.5 million shares of common stock in a public
offering with estimated net proceeds of $187.2 million.

(Bullet) Payment of $175 million in cash as the Commonwealth Payment.

(Bullet) The borrowing of $119.0 million under a revolving credit facility
to fund a portion of the Commonwealth Payment.

(Bullet) Estimated additional nonrecurring expenses of $6.0 million related
to the Demutualization.

F-26
<PAGE>
BLUE CROSS AND BLUE SHIELD OF VIRGINIA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1995 AND SEPTEMBER 30, 1996

(18) UNAUDITED PRO FORMA INFORMATION -- Continued
The pro forma earnings per share information reflected in the statements of
operations gives effect to the following transactions as if such
transactions had occurred on January 1, 1995:

(Bullet) Issuance of 24.5 million shares of common stock to eligible
members pursuant to the Demutualization.

(Bullet) Issuance of 15.5 million shares of common stock in a public
offering.

(Bullet) Adjustment of tax expense to reflect the Company's 35% federal
statutory tax rate.

(Bullet) Adjustment to reflect the interest on the $119.0 million borrowing
under the revolving credit agreement at 6% per annum.

F-27

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

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 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 AN 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>
Prospectus Summary........................................ 4
Risk Factors.............................................. 11
The Company............................................... 16
The Demutualization....................................... 17
Use of Proceeds........................................... 20
Dividend Policy........................................... 20
Capitalization............................................ 21
Selected Consolidated Financial and Operating Data........ 22
Unaudited Pro Forma Consolidated Financial Information.... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 29
Business.................................................. 41
Legal Proceedings......................................... 62
Management................................................ 63
Description of Capital Stock.............................. 69
Shares Eligible for Future Sale........................... 73
Underwriting.............................................. 74
Legal Matters............................................. 76
Experts................................................... 76
Additional Information.................................... 76
Glossary.................................................. 78
Index to Consolidated Financial Statements................ F-1
</TABLE>

UNTIL FEBRUARY 24, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

15,500,000 SHARES

[Trigon Logo here] TRIGON HEALTHCARE, INC.
COMMON STOCK
------------------------

PROSPECTUS

------------------------
MERRILL LYNCH & CO.

ALEX. BROWN & SONS
INCORPORATED

DEAN WITTER REYNOLDS INC.

MORGAN STANLEY & CO.
INCORPORATED

WHEAT FIRST BUTCHER SINGER
JANUARY 30, 1997

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

<PAGE>

Filed Pursuant to Rule 424(b)(1)
File Number 333-09773

PROSPECTUS

15,500,000 SHARES

[Trigon Logo here] TRIGON HEALTHCARE, INC.

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

All of the 15,500,000 shares of Common Stock offered hereby are being
offered by Trigon Healthcare, Inc. ( "Trigon" or the "Company"). Of the
15,500,000 shares of Common Stock offered hereby, 3,100,000 shares are being
offered outside the United States and Canada by the International Managers and
12,400,000 shares are being offered in a concurrent offering in the United
States and Canada by the U.S. Underwriters. The initial public offering price
and the underwriting discount per share will be identical for both offerings
(together, the "Offerings"). See "Underwriting."

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

[CAPTION]
<TABLE>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share........................................... $13.00 $.84 $12.16
Total (3)........................................... $201,500,000 $13,020,000 $188,480,000
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $1,300,000.

(3) The Company has granted the U.S. Underwriters and the International Managers
options, exercisable within 30 days after the date of this Prospectus, to
purchase up to an additional 1,860,000 shares and 465,000 shares of Common
Stock, respectively, solely, to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $231,725,000, $14,973,000 and
$216,752,000, respectively. See "Underwriting."
------------------------

MERRILL LYNCH INTERNATIONAL
ALEX. BROWN & SONS
INTERNATIONAL
DEAN WITTER INTERNATIONAL LTD.
MORGAN STANLEY & CO.
INTERNATIONAL

WHEAT FIRST BUTCHER SINGER
------------------------

The date of this Prospectus is January 30, 1997.

<PAGE>

[Graphic here] [Graphic here] [Graphic here]

NET
SIZE WORKS DIVERSITY

[Trigon logo]

A Managed Health Care Company

Blue Cross(Register mark) and Blue Shield(Register mark) are registered
tradenames, trademarks and service marks of the Blue Cross and Blue Shield
Association.

<PAGE>
PROSPECTUS SUMMARY

THE COMPANY

OVERVIEW

<PAGE>
TRANSITION TO MANAGED CARE

GROWTH STRATEGY

The Company is pursuing the following growth strategy:

THE DEMUTUALIZATION

<PAGE>
RISK FACTORS

THE OFFERINGS

</TABLE>
<TABLE>
<S> <C> <C>
Common Stock Offered by the Company:

U.S. Offering....................................... 12,400,000 shares

International Offering.............................. 3,100,000 shares
-----------

Total............................................ 15,500,000 shares
-----------
-----------

Common Stock to be outstanding after the Offerings.... 39,975,022 shares (1)
</TABLE>

New York Stock Exchange Symbol........................ TGH
</TABLE>

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

(1) Includes 24,475,022 shares of Common Stock to be issued in the
Demutualization. See "The Demutualization" and "Unaudited Pro Forma
Consolidated Financial Information."

<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

<CAPTION>
PRO FORMA
AS ADJUSTED (10)
----------------
SEPTEMBER 30,
1996
----------------
<S> <C>

(6) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.

<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BEFORE PURCHASING ANY OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.

ESCALATING HEALTH CARE COSTS AND THE HEALTH CARE INDUSTRY

COMPETITION

GOVERNMENT REGULATION

POTENTIAL ADVERSE REACTION TO THE DEMUTUALIZATION

POTENTIAL RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS

CONCENTRATION OF BUSINESS IN VIRGINIA

<PAGE>
POTENTIAL LOSS OF BLUE CROSS AND BLUE SHIELD SERVICE MARKS AND TRADENAMES

LEGAL PROCEEDINGS

CERTAIN CHARTER AND STATE LAW PROVISIONS

LIMITATION ON DIVIDENDS; LIQUIDITY OF THE HOLDING COMPANY

NO PRIOR PUBLIC MARKET

SHARES ELIGIBLE FOR FUTURE SALE

<PAGE>
the lockup period ends. Consequently, ERISA plans may be more likely than other
Eligible Members to sell Common Stock in the near term after the lockup period
ends.

<PAGE>
THE COMPANY

In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon has the largest number of HMO members in Virginia. Trigon's
total HMO enrollment has grown from 60,154 members at December 31, 1991 to
251,399 members as of September 30, 1996, representing a compound annual growth
rate of 35.1%. The Company's PPO network system is the largest in Virginia.
Trigon's total PPO enrollment has grown from 396,584 members at December 31,
1991 to 774,473 members as of September 30, 1996, representing a compound annual
growth rate of 15.1%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 55.1% as of September 30,
1996. Trigon's more traditional products are offered through its PAR network,
which is the Company's largest network. As a result of the Company's strategy of
encouraging members to migrate to its more tightly managed networks, total
membership in the PAR network decreased from 951,020 members at December 31,
1991 to 615,655 members at September 30, 1996. Trigon also offers several
specialty health care and related products, such as dental, wellness, mental
health and life, accident and disability insurance coverage.

Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon Healthcare will be the holding company
for Trigon Insurance, which is the successor company to Virginia BCBS.

The mailing address for the Company's Corporate Headquarters is P.O. Box
27401, Richmond, VA 23279. Its telephone number is (804) 354-7000.

<PAGE>
THE DEMUTUALIZATION

HISTORY

BACKGROUND OF THE DEMUTUALIZATION

PROCESS OF DEMUTUALIZATION

THE COMMONWEALTH PAYMENT

<PAGE>
Commonwealth Payment is in addition to any shares of Common Stock to which the
Commonwealth of Virginia is entitled as an Eligible Member.

FEDERAL INCOME TAX CONSEQUENCES OF THE DEMUTUALIZATION

For other potential federal income tax consequences of the Demutualization,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."

CASH PAYMENTS

LOCKUP PERIOD

<PAGE>
COMMISSION-FREE SALES AND ROUND-UP PROGRAM

USE OF PROCEEDS

DIVIDEND POLICY

<PAGE>
CAPITALIZATION

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

(2) No shares of the Company's Class B non-voting Common Stock, $.01 par value
or Class C Common Stock are expected to be outstanding upon completion of
the Offerings.

<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

1996
---------
<S> <C>

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

<PAGE>
statements should approximate the 35% federal statutory rate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Income Taxes."

(3) During 1991, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions." The cumulative effect at January 1, 1991 of the change in
accounting for postretirement benefits was a charge of $21.9 million to net
income. During 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The cumulative effect at January 1,
1993 of the change in accounting for postemployment benefits was a charge of
$4.8 million to net income. During 1993, the Company also adopted SFAS No.
109, "Accounting for Income Taxes." The cumulative effect at January 1, 1993
of the change in accounting for income taxes was a $12.9 million increase in
net income.

(4) For the years ended December 31, 1994 and 1995, the Company recognized
extraordinary charges of $644,000 and $4.7 million net of income taxes of
$347,000 and $2.5 million, for costs incurred in connection with the
Demutualization. During the nine-month periods ended September 30, 1995 and
1996, the Company recognized extraordinary charges of $3.0 million, and
$11.3 million, net of income taxes of $1.6 million and $594,000,
respectively, for costs incurred in connection with the Demutualization. For
the nine months ended September 30, 1996, the Company also recognized an
extraordinary charge for the $175 million obligation to the Commonwealth of
Virginia in connection with the Demutualization as required by Virginia law.
See "The Demutualization -- The Commonwealth Payment."

(5) Medical loss ratio represents, for each period, the ratio of medical costs
to premium revenues for such period.

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

(4) Represents the reclassification of the retained earnings of the mutual
insurance company to reflect conversion to a stock company.

(7) The number of shares used in the calculation of unaudited pro forma income
before extraordinary items per common share is as follows:

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

(a) Assumes that $91.3 million is paid to certain Eligible Members who
receive cash in lieu of shares of Common Stock.

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

MEDICAL LOSS RATIOS

<PAGE>
MEMBERSHIP BY NETWORK SYSTEM

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

<PAGE>
PREMIUM AND PREMIUM EQUIVALENTS BY NETWORK SYSTEM AS A PERCENT OF TOTAL

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

(1) "Other" members include enrollment from Medicare supplemental plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

RECENT DEVELOPMENTS

The information above for the year ended December 31, 1996 is based on
preliminary unaudited data prepared by the Company and is subject to adjustment.

<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996

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

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

QUARTERLY RESULTS

OPERATING STATISTICS BY QUARTER (UNAUDITED)

- ---------------
(1) Revenue from operations includes premium and fee revenues and other
revenues.
(2) Operating income excludes the effects of the Copayment Program.

LIQUIDITY AND CAPITAL RESOURCES

As a holding company, the Company will depend principally upon dividends
received from its subsidiaries to meet its liquidity needs (including any future
dividends). The Virginia insurance laws limit the payment of dividends by
insurers such as Trigon Insurance, the Company's principal operating subsidiary.
See "Business -- Regulation."

INCOME TAXES

REINSURANCE

RECENT ACCOUNTING PRONOUNCEMENT

INFLATION

<PAGE>
BUSINESS

THE COMPANY

As of September 30, 1996, the Company's network systems consisted of: HMO
networks which, with 251,399 members, are the Company's most tightly managed and
cost efficient networks; the PPO networks which, with 774,473 members, offer
greater choice of providers than Trigon's HMOs and may include a POS feature;
and the PAR network which, with 615,655 members, is the Company's broadest and
most flexible network. The Company also serves 218,814 additional members
through Medicare supplemental plans (128,006 members), third-party
administration of health care claims (40,383 members) and through Mid-South
Insurance Company, a Fayetteville, North Carolina-based health and life
insurance company, which was acquired by the Company in 1996 (50,425 members).
Within the Company's managed care product offerings, customers may choose
between at-risk arrangements (in which the Company bears the cost of providing
specified health care services for a fixed payment) and self-funded arrangements
(in which the customer bears all or a portion of the risk). As of September 30,
1996, 47.6% of members were covered under at-risk arrangements and 41.8% were
covered under self-funded arrangements, with the remaining 10.6% covered under
the FEP, administered under contract with the BCBSA.

In 1990 the Company began to institute greater managed care controls in all
of its product lines and networks, focusing in particular on its PPO and HMO
networks and, depending on market readiness, designing, pricing and marketing
its products to encourage members to migrate into these more tightly managed
networks where the Company is better able to manage health care costs. While
members decide which network to select, the Company generally offers more
attractive rates in its more tightly managed networks to encourage members to
choose these products. This strategy contributed to accelerated enrollment
growth for the Company's HMO and PPO networks and a decline in enrollment in the
Company's more traditional PAR network, resulting in a compound annual growth
rate in total enrollment of 2.7% from December 31, 1991 through September 30,
1996. Trigon operates six HMOs which are licensed to serve most areas of
Virginia. Trigon has the largest number of HMO members in Virginia. Trigon's
total HMO enrollment has grown from 60,154 members at December 31, 1991 to
251,399 members as of September 30, 1996, representing a compound annual growth
rate of 35.1%. The Company's PPO network system is the largest in Virginia.
Trigon's total PPO enrollment has grown from 396,584 members at December 31,
1991 to 774,473 members as of September 30, 1996, representing a compound annual
growth rate of 15.1%. Membership in the Company's HMOs and PPOs increased from
27.9% of total enrollment at December 31, 1991 to 55.1% as of September 30,
1996. Trigon's more traditional products are offered through its PAR network,
which is the Company's largest network. As a result of the Company's strategy of
encouraging members to migrate to its more tightly managed networks, total
membership in the PAR network decreased from 951,020 members at December 31,
1991 to 615,655 members at September 30, 1996. Trigon also offers several
specialty health care and related products, such as dental, wellness, mental
health and life, accident and disability insurance coverage.

Trigon has the largest membership base in Virginia, which generally allows
the Company to negotiate contracts with its Virginia providers that specify
favorable rates and incorporate utilization management and other cost controls.
As a result of its extensive networks, managed care expertise and broad product
offerings, the Company competes favorably in all of its Virginia lines of
business, including the individual, small, mid-sized and large employer groups
and state and federal agency markets. Trigon has exclusive rights to use the
Blue Cross and Blue Shield service marks and tradenames for purposes of doing
business throughout Virginia other than certain northern Virginia suburbs
adjacent to Washington, D.C. As a result of the Demutualization to be effective
concurrently with the Offerings, Trigon will be the holding company for Trigon
Insurance, which will be the successor company to Virginia BCBS.

MANAGED HEALTH CARE INDUSTRY

THE VIRGINIA MARKET

STRATEGY

The Company is pursuing the following growth strategy:

<PAGE>
MANAGED CARE MARKETING AND OPERATIONS

NETWORK SYSTEMS

The following table sets forth the number of members in each of the
Company's product groups for the last five years and for the nine month periods
ended September 30, 1995 and 1996.

MEMBERSHIP BY NETWORK SYSTEM

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

(1) "Other" members include enrollment from Medicare supplement plans,
out-of-state student health care coverage and Mid-South members, after its
acquisition in February 1996.

<PAGE>
NETWORK SYSTEMS UTILIZATION STATISTICS (1)

<S> <C> <C> <C> <C> <C> <C>
Inpatient days per thousand
members......................... 356 329 299 278 266 245
Admissions per thousand members... 76 69 64 64 66 63
</TABLE>

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

(1) Includes PAR, PPO and HMO network members (medical, surgical and maternity
admissions only).

(2) Calculated using total number of inpatient days and inpatient admissions
from October 1, 1995 through September 30, 1996 divided by average
enrollment, in thousands, for the same period.

Within the Company's network product offerings, employer groups may choose
various funding options ranging from at-risk to partially or fully self-funded
financial arrangements. While self-funded customers participate in Trigon's
networks, the claims are not underwritten by Trigon but are funded by the
groups. Self-funded arrangements are typically utilized by large and mid-size
groups. In addition, most self-funded groups purchase aggregate and/or claim
specific stop loss coverage. In exchange for a premium, the group's aggregate
liability is capped for the year or the group's liability on any one episode of
care is capped. Trigon charges self-funded groups an administrative fee which is
based on the number of members in a group or the group's claims experience.
Under the Company's self-funded arrangements, amounts due are recognized based
on incurred claims plus administrative and other fees and any stop-loss
premiums.

The following is a more detailed description of the principal features of
the Company's networks and the health care plans based on these networks.

HMO NETWORKS

<PAGE>
new, less expensive technologies or by creating additional networks or
contracts, such as networks for ambulatory care, to reduce provider costs.

PPO NETWORKS

As with its HMO network, Trigon further manages health care costs by
reviewing monthly cost and utilization trends within its PPO networks.

PAR NETWORK

SPECIALTY MANAGED HEALTH CARE PLANS

RELATED BUSINESSES

GOVERNMENT PROGRAMS

INFORMATION SYSTEMS

<PAGE>
COMPETITION

The health care industry is highly competitive both in Virginia and in
other states in the southeastern and mid-Atlantic United States into which the
Company principally intends to expand. Managed care companies, including large,
well-capitalized companies which market managed care products nationwide, have
targeted the southeastern and mid-Atlantic regions of the United States as being
favorable for expansion, and have begun entering Virginia and markets targeted
by Trigon in increasing numbers. In some cases, new market entrants, as well as
existing health care companies, have competed with the Company for business by
offering very favorable pricing terms to customers. This increased pricing
pressure has adversely affected the Company's medical loss ratio during 1995 and
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General." The Company is facing this increased
competition in the areas in which it is licensed to use the Blue Cross and Blue
Shield service marks and tradenames, as well as the areas in which it operates
without these service marks and tradenames. In areas outside of its licensed
territory, the Company's ability to successfully compete may be adversely
affected by its inability to use the Blue Cross and Blue Shield service marks
and tradenames, by the presence of competitors that are able to use such service
marks and tradenames in the areas, and by the Company's lack of substantial
market share or established provider networks in these areas. The Company also
faces competition from a trend among health care providers to combine and form
their own networks in order to contract directly with employer groups and other
prospective customers to provide health care services. There is no assurance
that such overall increased competition will not exert strong pressures upon
Trigon's profitability, its ability to increase enrollment or its ability to
successfully pursue growth in areas both within and outside of Virginia.

INVESTMENTS

<PAGE>
At September 30, 1996 the investment portfolio was comprised of the
following (in thousands):

As of September 30, 1996, the composition of the Company's fixed income
investment securities by rating is as follows (in thousands):

<TABLE>
<CAPTION>
ESTIMATED PERCENT OF
RATING (1) FAIR VALUE TOTAL
- -------------------------------------------------- -------------- ----------

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

(1) Ratings are assigned primarily by Standard & Poor's Corporation when
available, with the remaining ratings assigned by Moody's Investor Service,
Inc.

<TABLE>
<CAPTION>
PERCENT
OF
TOTAL PERCENT OF ESTIMATED FAIR
COUNTRY PORTFOLIO FOREIGN PORTFOLIO VALUE
- ----------------------------------------- --------- ----------------- --------------

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

(1) Represents investments in six U.S. dollar-denominated investment funds which
invest primarily in investment securities of non-U.S. companies.

REGULATION

As of December 31, 1995, Virginia BCBS' RBC level as calculated in
accordance with the NAIC RBC instructions exceeded all RBC thresholds.

North Carolina, Mid-South's domiciliary state, similarly restricts the
payment of dividends by their domiciliary insurance companies.

THE BLUE CROSS BLUE SHIELD LICENSE

RATING

PROPERTIES

<PAGE>
EMPLOYEES

SERVICE MARKS

<PAGE>
LEGAL PROCEEDINGS

<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of December 31, 1996
concerning the directors and executive officers of the Company.

<PAGE>
EMPLOYMENT HISTORY OF DIRECTORS AND EXECUTIVE OFFICERS

FRANK C. MARTIN, JR. was elected to the Board in 1975. He is Chairman,
Founder, and since 1970 has been Chief Executive Officer of Martin Research,
Inc., in Roanoke, Virginia.

EMPLOYMENT HISTORY OF NOMINEES FOR DIRECTOR

HUNTER B. ANDREWS has been an attorney in private practice for more than
five years. He was a member of the Virginia State Senate from 1964 to 1996. Mr.
Andrews is 75.

OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS

COMPENSATION OF DIRECTORS

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

COMPENSATION OF EXECUTIVE OFFICERS

SUMMARY COMPENSATION TABLE

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

(1) Includes amounts deferred under the Company's 401(k), 401(k) Restoration and
nonqualified deferred compensation plans.

(3) Long-term cash award earned in 1996 for the performance period January 1,
1994 through December 31, 1996 is not yet calculable.

(5) Mr. Deese retired from the Company effective January 1997.

LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR (1)

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

RETIREMENT PLAN

PENSION PLAN TABLE (1)

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

DEFERRED COMPENSATION

EMPLOYMENT AGREEMENTS

SEVERANCE AGREEMENTS

DESCRIPTION OF CAPITAL STOCK

DESCRIPTION OF COMMON STOCK

PREFERRED STOCK

CERTAIN PROVISIONS OF THE CHARTER AND PLAN

Pursuant to the Articles, each certificate for Capital Stock will bear a
legend with respect to the Ownership and Transfer Restrictions.

VIRGINIA ANTI-TAKEOVER LAW

TRANSFER AGENT AND REGISTRAR

The Company has appointed First Chicago Trust Company of New York as the
transfer agent and registrar for its Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Moreover, in accordance with the Plan of Demutualization, the Company will
for a period of 90 days, which may be extended by the Company, commencing no
earlier than six months and no later than 18 months after the Effective Date
provide for the public sale, at market prices and without brokerage commissions
or similar fees, of odd lot shares of Common Stock received pursuant to the Plan
of Demutualization by certain Eligible Members. In the alternative, these
Eligible Members will be able to purchase sufficient shares of Common Stock to
round up their holding to 100 shares. The Company will determine after the
Demutualization and at least 30 days before the program begins the maximum
number of shares of Common Stock received in the Demutualization, not to exceed
99, that will entitle such holder to participate in the program. See "The
Demutualization -- Commission-Free Sales and Round-Up Program." The Company also
will agree not to offer, sell or otherwise dispose of any shares of Common Stock
(or securities convertible into Common Stock) for a period of 180 days after the
date of this Prospectus without the prior written consent of the Underwriters,
subject to certain limited exceptions.

CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a non-U.S. holder. For purposes of this discussion, the term "non-U.S.
holder" means any beneficial owner of Common Stock that is, for United States
federal income tax purposes, (i) a nonresident alien individual, (ii) a foreign
corporation, (iii) a foreign estate or trust, or (iv) a foreign partnership.

This discussion does not address all aspects of United States federal
income and estate taxation nor does it consider any specific facts and
circumstances that may apply to a particular non-U.S. holder or address any
state, local or non-U.S. tax considerations that may be relevant to a non-U.S.
holder. Furthermore, the following discussion is based on current provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and administrative and judicial interpretations as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. ACCORDINGLY, EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX
ADVISER WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX
CONSEQUENCES OF OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX
CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION TO WHICH
SUCH HOLDER MAY BE SUBJECT.

DIVIDENDS

Dividends paid to a non-U.S. holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate (or a
lower rate if prescribed by an applicable tax treaty), unless the dividends are
effectively connected with the conduct of a trade or business in the United
States by the non-U.S. holder. To determine the applicability of a tax treaty
providing for a lower rate of (or an exemption from) United States withholding
tax, dividends paid to an address in a foreign country are presumed, under
current Treasury Regulations, to be paid to a resident of that country, absent
knowledge to the contrary.

To take advantage of the exemption from withholding tax for "effectively
connected dividends" provided in the preceding paragraph, under current Treasury
Regulations the non-U.S. holder must comply with certain certification and
disclosure requirements (including filing an Internal Revenue Service ("IRS")
Form 4224 with the payor of the dividend). Dividends that are effectively
connected with the conduct of a trade or business in the United States and
exempt from withholding generally will be taken into account in determining the
non-U.S. holder's United States federal income tax on a net income basis in the
same manner as if such holder were a resident of the United States. A non-U.S.
holder that is a corporation may also be subject to a "branch profits" tax at a
rate of 30% (or such lower rate as may be specified by an applicable tax treaty)
on the repatriation from the United States of the earnings and profits
attributable to its income that is effectively connected to a United States
trade or business, subject to certain adjustments and the relevant provisions of
any applicable tax treaty.

In April 1996, Treasury Regulations were proposed that would change certain
of the certification and disclosure requirements described in the preceding two
paragraphs (the "1996 Proposed Regulations"). The changes set forth in the 1996
Proposed Regulations would not materially affect a non-U.S. holder's ability to
qualify for an exemption from withholding tax with respect to distributions paid
on the Common Stock that are "effectively connected" with its conduct of a trade
or business in the United States. However, under the 1996 Proposed Regulations,
a non-U.S. holder would be required to file certain certifications under
penalties of perjury to obtain the benefit of any applicable tax treaty
providing for a lower rate (or an exemption from) the United States withholding
tax on dividends. The 1996 Proposed Regulations would generally apply to
distributions paid on Common Stock made after December 31, 1997.

GAIN ON DISPOSITION

Generally, a non-U.S. holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such holder's Common
Stock unless (i) the non-U.S. holder is engaged in a trade or business within
the United States and the gain is effectively connected with such business (and,
if an applicable tax treaty so provides, is attributable to a permanent
establishment maintained by the non-U.S. holder in the United States); (ii) the
non-U.S. holder is an individual who holds the Common Stock as a capital asset
and is present in the United States for 183 days or more in the taxable year of
the disposition and who meets certain other conditions; (iii) the non-U.S.
holder is an individual who is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain United States expatriates; or (iv) the Company is
or has been a "United States real property holding corporation" as defined in
Section 897 of the Code and the non-U.S. holder held, directly or indirectly at
any time during the five-year period ending on the date of disposition, more
than 5% of the Common Stock. The Company does not believe that it is, has been
or is likely to become a U.S. real property holding corporation.

<PAGE>

ESTATE TAX

Shares of Common Stock owned by an individual non-U.S. holder at the time
of his or her death, including shares that the non-U.S. holder previously
transferred by gift while retaining certain rights and powers, will be
includible in his or her gross estate for United States federal estate tax
purposes unless an applicable estate tax treaty provides otherwise.

BACKUP WITHHOLDING AND INFORMATION REPORTING

DIVIDENDS. Under current Treasury Regulations, generally, distributions
paid on Common Stock to a non-U.S. holder at an address outside the United
States will be exempt from United States federal backup withholding tax and
United States information reporting requirements (other than the reporting of
dividend payments subject to the withholding tax discussed under "Dividends"
above). Under the 1996 Proposed Regulations, generally, distributions paid on
Common Stock will be exempt from such backup withholding and information
reporting requirements only if the non-U.S. holder provides certain
certifications under penalties of perjury.

BROKER SALES. Payments of proceeds from the sale of Common Stock by a
non-U.S. holder made to or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding. Payments of
proceeds from the sale of Common Stock by a non-U.S. holder to or through a
United States office of a broker (and, with respect to information reporting,
certain foreign offices, including the foreign office of a United States broker)
are currently subject to information reporting and backup withholding unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes its entitlement to an exemption.

REFUNDS. A non-U.S. holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing an appropriate claim for
refund with the IRS.

<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement"), and concurrently with the sale of
12,400,000 shares of Common Stock to the U.S. Underwriters (as defined below),
the Company has agreed to sell, and the underwriters named below (the
"International Managers"), acting through their representatives, Merrill Lynch
International, Alex. Brown & Sons Incorporated, Dean Witter International Ltd.,
Morgan Stanley & Co., International Limited, Wheat, First Securities, Inc. (the
"International Representatives"), have severally agreed to purchase, the
aggregate number of shares of Common Stock set forth below opposite their
respective names. Under certain circumstances, the commitments of non-defaulting
International Managers may be increased as set forth in the International
Purchase Agreement.

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
- ----------------------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch International.............................................................. 620,000
Alex. Brown & Sons Incorporated.......................................................... 620,000
Dean Witter International Ltd. .......................................................... 620,000
Morgan Stanley & Co. International Limited............................................... 620,000
Wheat, First Securities, Inc............................................................. 620,000
---------
Total........................................................................ 3,100,000
---------
---------
</TABLE>

The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States and Canada (the "U.S.
Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., Morgan Stanley & Co.
Incorporated, and Wheat, First Securities, Inc. are acting as representatives
(the "U.S. Representatives"). Subject to the terms and conditions set forth in
the U.S. Purchase Agreement, and concurrently with the sale of 3,100,000 shares
of Common Stock to the International Managers, the Company has agreed to sell to
the U.S. Underwriters, and the U.S. Underwriters have severally agreed to
purchase, an aggregate of 12,400,000 shares of Common Stock. Under certain
circumstances as set forth in the U.S. Purchase Agreement, the commitments of
non-defaulting U.S. Underwriters may be increased. The initial public offering
price per share and the underwriting discount per share are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.

In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters
(collectively, the "Underwriters"), respectively, have agreed, subject to the
terms and conditions set forth therein, including the delivery of opinions of
counsel and other customary conditions, to purchase all of the shares of Common
Stock being sold pursuant to each such Purchase Agreement if any of the shares
of Common Stock being sold pursuant to each such Purchase Agreement are
purchased. The closing with respect to the sale of the shares of Common Stock
sold pursuant to each Purchase Agreement is also a condition to the closing with
respect to the sale of shares of Common Stock sold pursuant to the other
Purchase Agreement.

The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the initial public offering price, less an
amount not greater than the selling commission.

The International Managers propose to offer the shares of Common Stock to
the public initially 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 $.52 per share. The International Managers may allow, and such dealers
may re-allow, a discount not in excess of $.10 per share on sales to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The Company has granted the International Managers and the U.S.
Underwriters options to purchase up to 465,000 and 1,860,000 additional shares
of Common Stock, respectively, at the initial public offering price, less the
underwriting discount. Such options, which expire 30 days after the date of this
Prospectus, may be exercised solely to cover over-allotments. To the extent the
International Managers exercise their option, each of the International Managers
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 International Managers bears to the total
number of shares to be purchased initially by the International Managers.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

<PAGE>

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

Wheat First Butcher Singer, Inc., an affiliate of one of the Underwriters,
is expected to receive 25,349 shares of Common Stock in the Demutualization.

Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price was determined through negotiations
between the Company and the International Representatives and the U.S.
Representatives. Among the factors considered in such negotiations were an
assessment of the financial information contained herein, an evaluation of the
Company's management, the future prospects of the Company and the health care
industry in general, market prices of securities of companies engaged in
activities similar to those of the Company and the prevailing conditions in the
securities market. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offerings at or above the initial public offering
price.

The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "TGH," subject to official notice of issuance. In
order to meet the requirements for the listing of the Common Stock on such
exchange, the International Representatives and the U.S. Representatives, on
behalf of the Underwriters, have undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.

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
sell shares of Common Stock to persons who are non-United States or non-Canadian
persons or to persons they believe intend to resell to non-United States or
non-Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to United States or Canadian persons or to persons they believe intend to
resell to United States or Canadian persons, except in each case for
transactions pursuant to the Intersyndicate Agreement which, among other things,
permits the Underwriters to purchase from each other and offer for resale such
number of shares of Common Stock as the selling Underwriter or Underwriters and
the purchasing Underwriter or Underwriters may agree.

Each International Manager has agreed that (i) it has not offered or sold
and, for a period of six months following consummation of the Offerings, will
not offer or sell any shares of Common Stock in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied with and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom and (iii) it has only issued or passed on and will
only issue or pass on in the United Kingdom any document received by it in
connection with the issuance of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or to a person to whom the document may
otherwise lawfully be issued or passed on.

Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.

<PAGE>

LEGAL MATTERS

EXPERTS

ADDITIONAL INFORMATION

The Company will register under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") at the time of or prior to the Offerings, and, in
accordance with the Exchange Act, thereafter will be required to file reports,
proxy statements and other information with the Commission. The Company intends
to furnish its stockholders with annual reports containing consolidated
financial statements audited by its certified public accountants and with
quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.

<PAGE>

GLOSSARY