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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2003

OR

¨ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-31513

WELLCHOICE, INC.

(Exact name of registrant as specified in its charter)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 83,490,477 shares of common stock, $0.01 par value, and one share of Class B common stock, $0.01 par value per share, as of July 23, 2003.

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WellChoice, Inc and Subsidiaries

INDEX TO FORM 10-Q

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PART I

FINANCIAL INFORMATION

WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets

See notes to consolidated financial statements.

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WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets

See notes to consolidated financial statements.

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WellChoice, Inc. and Subsidiaries

Consolidated Statements of Income

See notes to consolidated financial statements.

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WellChoice, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

See notes to consolidated financial statements.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

June 30, 2003

(Dollars in Thousands)

1. For-Profit Conversion and Initial Public Offering

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

The conversion was accounted for as a reorganization using the historical carrying values of the HealthChoice’s assets and liabilities. Immediately following the conversion, HealthChoice’s unassigned reserves were reclassified to par value of common stock and additional paid-capital. Concurrently, HealthChoice became a wholly-owned subsidiary of WellChoice. The costs of the conversion were recognized as an expense.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three month and six months period ended June 30, 2003 are not necessarily indicative of results that may be expected for the year ending December 31, 2003.

For further information, refer to the consolidated financial statements and footnotes thereto included in the WellChoice’s Annual Report on Form 10-K (File No. 001-31513), filed with the SEC for the fiscal year ended December 31, 2002.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

2. Basis of Presentation (continued)

The following table represents total other comprehensive income for the six months ended June 30, 2003 and 2002:

3. Market Stabilization Pools

The Company is required to participate in Market Stabilization and Stop Loss Pools (“Pools”) as established by the State of New York. Contributions and recoveries under the Pools are estimated based upon information received by the administrator of the Pools and are adjusted as new information becomes known. In June 2003, the Company received the data necessary to record a receivable in the amount of $44,000 related to Pool years 2000 through 2002, and the six months ended June 30, 2003. The Company believes the State of New York will place restrictions on the recoverable related to Pool years 2000 through 2002, and will require the Company to use the funds to ameliorate future Medicare Supplemental rate increases. Accordingly, we have established a premium stabilization reserve in the amount $39,200.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

4. Income Taxes

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

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

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

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

4. Income Taxes (continued)

At June 30, 2002 HealthChoice maintained a valuation allowance on its regular tax net operating loss carryforwards and certain other temporary differences due to uncertainty in its ability to utilize these assets within an appropriate period. The use of these assets was largely dependent on the conversion and future positive taxable income. Because the approval of HealthChoice’s plan of conversion by the New York State Insurance Department removed the uncertainty of the conversion, the Company concluded in the third quarter of 2002 that the valuation allowance related to these assets was no longer necessary.

Prior to January 1, 1987, HealthChoice was exempt from federal income taxes. With the enactment of the Tax Reform Act of 1986, HealthChoice, and all other Blue Cross and Blue Shield plans, became subject to federal income tax. Among other provisions of the Internal Revenue Code, these plans were granted a special deduction (the “833(b) deduction”) for regular tax calculation purposes.

The 833(b) deduction is calculated as the excess of 25% of the incurred claim and claim adjustment expenses for the tax year over adjusted surplus, as defined, limited to taxable income. The amount of 833(b) deductions utilized in each tax year is accumulated in an adjusted surplus balance. Once the cumulative adjusted surplus balance exceeds the 833(b) deduction for the current taxable year, the deduction is eliminated. As a result of the 833(b) deduction, HealthChoice has incurred no regular tax liability, but in profitable years, has paid taxes at the alternative minimum tax rate of 20%.

During the fourth quarter of 2002, the Company reevaluated its tax position for financial statement purposes related to HealthChoice’s ability to utilize the Section 833(b) deduction and determined that when HealthChoice converted to a for-profit entity, its ability to utilize the Section 833(b) deduction was uncertain. No authority directly addresses whether a conversion transaction will render the 833(b) deduction unavailable. The Company is aware, however, that the IRS has taken the position related to other Blue Cross Blue Shield plans that a conversion could result in the inability of a Blue Cross Blue Shield plan to utilize the 833(b) deduction. In light of the absence of governing authority, while the Company continues to take the deduction on its tax returns after the conversion, the Company has assumed, for financial statement reporting purposes, that the deduction will be disallowed. Accordingly, the Company’s income tax provision for the quarter ended June 30, 2003 assumes the utilization of approximately $19,000 regular operating loss carryforwards for financial reporting purposes in excess of those utilized for tax purposes.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

4. Income Taxes (continued)

The Company’s regular tax loss carryforwards for income tax purposes of $223,000 expire between the years 2003 and 2022. For financial reporting purposes, the Company’s regular net operating loss carryforwards are $46,000. The Company’s alternative minimum tax credit carryforward of $158,000 has no expiration date.

As a result of the conversion to a for-profit accident and health insurance company in 2002, the Company adjusted its deferred tax assets for temporary differences related to Empire HealthChoice Assurance, Inc’s liability for state and local taxes which resulted in the recognition of $5,374 deferred tax asset. In May 2003, the New York State Legislature enacted budget legislation that eliminates the net income portion of the New York State franchise tax applicable to every insurance company other than life insurance companies effective January 1, 2003. As a result, the Company’s tax provision for the three and six months ended June 30, 2003 was increased by $653, reflecting the reversal of the $5,374 deferred tax asset and $4,721 of franchise taxes incurred attributable to the previous three month period ended March 31, 2003.

5. Restructuring

During the second quarter of 2002, in connection with the Company’s Information Technology outsourcing agreement with IBM, the Company began the implementation of a restructuring plan relating to its information technology personnel. Certain employees were involuntarily terminated in accordance with a plan of termination, certain employees were retained by the Company and certain employees were transitioned to IBM. Severance and other costs accrued at June 30, 2002 relating to the plan of termination were $5,351. Payments related to these costs of approximately $3,196 were made through June 30, 2003. To help retain its employees and to help IBM retain its newly transitioned employees, the Company offered stay bonuses for these individuals. The estimated maximum cost of these bonuses assuming all individuals remain with the Company or IBM through the required dates, which range from 2003 to 2004, is approximately $8,518. At June 30, 2003, approximately $3,954 was accrued for these bonuses. The Company will recognize the cost of these stay bonuses in future periods as these employees provide service.

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

5. Restructuring (continued)

In November 2002, as part of the Company’s continuing focus on increasing overall productivity, and in part as a result of the implementation of the technology outsourcing strategy, the Company continued streamlining certain operations and adopted a plan to terminate approximately 500 employees across all segments of its business. Severance and other costs of $13,715 were accrued relating to the plan. Through June 30, 2003, payments related to these costs of $7,539 were made.

6. Contingencies

The Company is subject to a number of lawsuits, investigations and claims, some of which are class actions arising out of the conduct of its business. The Company believes that it has meritorious defenses in all of these matters and intends to vigorously defend its respective positions. The outcome of these matters is not currently predictable and the damages, if any, are also uncertain. The Company is also involved in and is subject to numerous claims, contractual disputes and uncertainties in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial condition.

7. Segment Information

WellChoice has two reportable segments: commercial managed care and other insurance products and services. The commercial managed care segment includes group preferred provider organization, or PPO, health maintenance organization, or HMO (including Medicare+Choice), exclusive provider organization, or EPO, and other products (principally dental only coverage) as well as the Company’s New York City and New York State PPO business. The New York City and New York State PPO business accounts for approximately 31% of the Company’s earned premium for the six months ended June 30, 2003.

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

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

7. Segment Information (continued)

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

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WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(Dollars in Thousands)

7. Segment Information (continued)

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

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of

WellChoice, Inc.

We have reviewed the accompanying consolidated balance sheet of WellChoice Inc. and subsidiaries (the “Company”) as of June 30, 2003, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 2003 and 2002, and the consolidated cash flows for the six-month periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of the Company as of December 31, 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 3, 2003, we expressed an unqualified opinion on those financial statements. In our opinion the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/    ERNST & YOUNG LLP

New York, New York

July 14, 2003

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The following discussion and analysis presents a review of WellChoice, Inc. and its subsidiaries (collectively, the “Company”) for the three and six months ended June 30, 2003 and 2002. This review should be read in conjunction with the consolidated financial statements and other data presented herein as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 on file with the Securities and Exchange Commission.

The statements contained in this discussion include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, or the PSLRA. When used in this Quarterly Report on Form 10-Q and in future filings by the Company with the Commission, in our press releases, presentations to securities analysts or investors, and in oral statements made by or with the approval of one of our executive officers, the words or phrases “believes,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions are intended to identify such forward-looking statements. Any of these forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements.

The discussion of risks described in “Item 1—Business” and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2002 and the following discussion contain certain cautionary statements regarding our business that investors and others should consider. These discussions are intended to take advantage of the “safe harbor” provisions of the PSLRA. Except to the extent otherwise required by federal securities laws, in making these cautionary statements, we are not undertaking to address or update each factor in future filings or communications regarding our business or operating results, and are not undertaking to address how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications. In addition, any of the matters discussed below may have affected our past, as well as current, forward-looking statements about future results. Any or all forward-looking statements in this report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors discussed below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed in our communications.

Overview

We are the largest health insurance company in the State of New York based on total preferred provider organization, or PPO, and health maintenance organization, or HMO, membership, which includes members under our insured and administrative services only, or self-funded, plans. We offer managed care and traditional indemnity products to approximately 4.8 million members. We have licenses with the Blue Cross Blue Shield Association which entitle us to the exclusive use of the Blue Cross and Blue Shield names and marks in ten counties in the New York City metropolitan area and in six counties in upstate New York, the non-exclusive right to use the Blue Cross and Blue Shield names and marks in one upstate New York county, the exclusive right to only the Blue Cross name and mark in seven upstate New York counties and the non-exclusive right to only the Blue Cross name in four upstate New York counties. We market our products and services using these names and marks in our New York service areas. We also market our managed care products in 16 counties in New Jersey under the WellChoice brand.

We offer our products and services to a broad range of customers, including large groups of more than 500 employees; middle market groups, ranging from 51 to 500 employees; small groups, ranging

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from two to 50 employees and individuals. Over one million of our members are covered through our national accounts, which include Fortune 500 companies.

Our revenue primarily consists of premiums earned and administrative service fees derived from the sale of managed care and traditional indemnity health benefits products to employer groups and individuals. Premiums are derived from insured contracts and administrative service fees are derived from self-funded contracts, under which we provide a range of customer services, including claims administration and billing and membership services. Revenue also includes administrative service fees earned under the BlueCard program for providing members covered by other Blue Cross and Blue Shield plans access to our network providers, reimbursements under our government contracts with the Centers for Medicare and Medicaid Services, or CMS, to act as a fiscal intermediary for Medicare Part A program beneficiaries and a carrier for Medicare Part B program beneficiaries, and investment income.

Our cost of benefits provided expense consists primarily of claims paid and claims in process and pending to physicians, hospitals and other healthcare providers and includes an estimate of amounts incurred but not yet reported. These costs include payments to primary care physicians, specialists, hospitals, pharmacies, outpatient care facilities and the costs associated with managing the extent of such care. Administrative expenses consist primarily of compensation expenses, commission payments to brokers and other general business expenses.

We report our operating results as two business segments: commercial managed care and other insurance products and services. Our commercial managed care segment accounted for 85.0% of our membership as of June 30, 2003. Our commercial managed care segment includes group PPO, HMO (including Medicare+Choice, which accounted for 9.6% of premium earned for the six months ended June 30, 2003), EPO, and other products (principally dental-only coverage) as well as our PPO business under our accounts with New York City and New York State. Our other insurance products and services segment consists of our indemnity and individual products. Our indemnity products include traditional indemnity products and government contracts with CMS to act as a fiscal intermediary and carrier. Our individual products include Medicare supplemental, state sponsored plans, government mandated individual plans and individual hospital-only and hospital and basic medical plans. We allocate administrative expenses, investment income and other income, but not assets, to our segments. Except when otherwise specifically stated or where the context requires, all references in this document to our membership include both our insured and self-funded membership. Our New York City and New York State account members are covered under insured plans.

Our future results of operations will depend in part on our ability to predict and control health care costs through underwriting criteria, utilization management, product design and negotiation of favorable provider and hospital contracts. Our ability to contain such costs may be adversely affected by changes in utilization rates, demographic characteristics, the regulatory environment, health care practices, inflation, new technologies, clusters of high-cost cases, continued consolidation of physician, hospital and other provider groups, acts of terrorism and bioterrorism or other catastrophes, including war, and numerous other factors. In addition, the regional concentration of our business may subject us to economic downturns in New York State and, in particular, the New York City metropolitan area. The inability to mitigate any or all of the above-listed or other factors may adversely affect our future profitability.

The Conversion; Additional State and Local Taxes

In November 2002, our principal insurance subsidiary, “HealthChoice,” converted to for-profit status, which resulted in WellChoice becoming the publicly-traded parent company for that subsidiary and our other operating subsidiaries. We refer to the post-conversion HealthChoice as “Empire.” As a

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result of the conversion, we became a for-profit entity and are subject to New York state and local taxes that we were not previously required to pay. These include premium taxes on most non-HMO insured business and sales and use taxes (which are recorded as administrative expenses), as well as state and local income taxes.

Recent Developments

POS Product Launch. Consistent with our strategy to offer a broad continuum of managed care products in the New York market, during the second quarter of 2003, we launched a point of service, or POS, product to employer groups, focused primarily on small and middle market customers. The product, Direct POS, provides members with the ability to utilize services on an in or out of network basis. Our POS product has similar features to our Direct HMO product that permits members to access out-of-network specialists without a referral, and also allows members to access out-of-network providers in return for deductibles and/or co-insurance. We believe the POS product will complement our existing managed care product portfolio by offering employers an additional product within our family of managed care products to meet the needs of their employees. Our ability to successfully launch this product will depend in part upon our use of brokers in placing business with small and middle market accounts and expect that it may take several quarters for brokers to gain familiarity with this product offering.

New York State Budget Legislation. In May 2003, the New York State Legislature enacted budget legislation that directly impacts us. Specifically, the new law contains the following provisions:

During the six months ended June 30, 2003, the impact of the enacted legislation related to the increase in premium tax and the elimination of the income tax was to reduce our net income by approximately $5.2 million, or $0.06 per share. This impact was principally due to the reversal of deferred tax assets for temporary differences relating to our liability for state and local income taxes. The foregoing gives effect to the recoupment of the additional premium tax on the premiums charged to certain customers. Based on current membership data, we estimate the annualized impact of the increase in the assessment for bad debt and charity and the covered life assessment related to graduate medical expense would reduce our net income by approximately $1.8 million and $1.0 million, respectively. The foregoing gives effect to the recoupment of these additional expenses on the premiums charged to certain customers. We do not expect the impact of the enacted legislation related to the increase in sales tax to have a material impact on our financial statements.

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While we intend to mitigate or cover the effects of the increased costs resulting from the New York State budget legislation through, among other things, increased premiums, we may not be successful in whole or in part from those efforts. Moreover, our existing insured accounts could migrate to self-insured accounts where the administrative service fee revenues we receive from those customers are not subject to premium tax.

As a result of the elimination of the net income portion of the New York State franchise tax applicable to our New York accident and health insurance subsidiary, we expect to incur federal, state and local income taxes at the rate of approximately 40% of pre-tax net income.

Critical Accounting Policies and Estimates

The following is an explanation of our accounting policies considered most significant by management. These accounting policies require us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information is known. Actual results could differ materially from those estimates.

Revenue Recognition

Our membership contracts generally have one year terms and are subject to cancellation upon 60 days written notice. Premiums are generally due monthly and are recognized as revenue during the period in which we are obligated to provide services to our members. We record premiums received prior to such periods as unearned premiums. We record premiums earned net of an allowance for doubtful accounts. Premiums recorded for groups with certain funding arrangements are based upon the actual and estimated claims experience of these groups. Future adjustments to the claims experience of these groups will result in changes in premium revenue. Our estimated claim experience is based on a number of factors, including prior claims experience. These estimates are continually reviewed and adjusted based on actual claims experience. Any changes in these estimates are included in current period results. Funds received from these groups in excess of premiums recorded are reflected as liabilities on our balance sheet.

We recognize administrative service fees during the period the related services are performed. Administrative service fees consist of revenues from the performance of administrative services for self-funded contracts, reimbursements from our contracts with CMS under which we serve as an intermediary for the Medicare Part A program and a carrier for the Medicare Part B program, and fees earned under the BlueCard program. The revenue earned under our contracts with CMS is recorded net of an allowance for an estimate of disallowed expenses.

Cost of Benefits Provided

Cost of benefits provided includes claims paid, claims in process and pending, and an estimate for unreported claims for charges for healthcare services for enrolled members during the period. These costs include payments to primary care physicians, specialists, hospitals, pharmacies, outpatient care facilities and the costs associated with managing the extent of such care. Costs of benefits are reported net of pharmacy rebates, coordination of benefits and pool recoveries.

We are required to estimate the total amount of claims that have not been reported or that have been received, but not yet adjudicated, during any accounting period. These estimates, referred to as unpaid claims on our balance sheet, are recorded as liabilities.

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We estimate claim reserves in accordance with Actuarial Standards of Practice promulgated by the Actuarial Standards Board, the committee of the American Academy of Actuaries that establishes the professional guidelines and standards for actuaries to follow. A degree of judgment is involved in estimating reserves. We make assumptions regarding the propriety of using existing claims data as the basis for projecting future payments. Factors we consider include medical cost trends, the mix of products and benefits sold, internal processing changes and the amount of time it took to pay all of the benefits for claims from prior periods. To the extent the actual amount of these claims is greater than the estimated amount based on our underlying assumptions, such differences would be recorded as additional cost of benefits provided in subsequent accounting periods and our future earnings would be adversely affected. To the extent the claims experience is less than estimated based on our underlying assumptions, such differences would be recorded as a reduction in cost of benefits provided in subsequent accounting periods.

Management believes that the amount of unpaid claims is adequate to cover our ultimate liability for unpaid claims as of June 30, 2003. Actual claim payments and other items, however, may differ from established estimates. Assuming a hypothetical 1% difference between our June 30, 2003 estimates of unpaid claims and actual claims payable for prospectively rated business, net income for the three months ended June 30, 2003, would increase or decrease by approximately $1.5 million and earnings per share would increase or decrease by approximately $0.02 per share.

Taxes

We account for income taxes using the liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the financial reporting and tax basis of assets and liabilities. We record a valuation allowance to reduce our deferred tax asset to the amount we believe is more likely than not to be realized. This determination, which requires considerable judgment, is based on a number of assumptions including an estimate of future taxable income. If future taxable income or other factors are not consistent with our expectations, an adjustment to our deferred tax asset may be required in the future. Any such adjustment would be charged or credited to income in the period such determination was made.

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Selected Membership Data and Results of Operations

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

As of June 30, 2003, total enrollment was 4.8 million members, of which, commercial managed care enrollment was 4.1 million members or 85.0% of total enrollment. Total enrollment and commercial managed care enrollment increased 3.3% and 10.7%, respectively, from June 30, 2002 to June 30, 2003. Our enrollment growth of 19.5%, or 372,000 members, in group PPO, HMO, EPO and other was

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primarily due to a combination of new membership in national customer accounts in our PPO and EPO products and the migration of members enrolled in our indemnity products to our commercial managed care products. Enrollment in other insurance products and services declined 25.0% or approximately 240,000 members to approximately 700,000 members due, in part, to the continued migration of members to commercial managed care products. The migration of fully-insured business to self-funded business as well as new self-funded business resulted in a 5.7% decrease in fully-insured business and a 24.2% increase in self-funded business. The migration to self-funded business is most noticeable in large group PPO and indemnity products. New self-funded national account business accounted for 144,000 new members.

As of June 30, 2003, our New York State account covered approximately 989,000 members, or 20.6% of our total membership and 24.3% of our commercial managed care membership, and our New York City account covered approximately 814,000 members, or 17.0% of our total membership and 20.0% of our commercial managed care membership. The pricing of our products provided to New York State and New York City have historically been renegotiated annually. Effective January 1, 2003, we agreed to new pricing with New York State covering a three-year period through December 31, 2005, though both parties retain the right to terminate the contract on six months’ notice. For more than a year, the New York City account has been subject to a competitive bid process that is open to us and to third parties and involves renegotiation with respect to rates. We had rates in place initially through December 31, 2002 and then new rates were negotiated for the first six months of 2003, with respect to our PPO product with the New York City. The contract awarded to the winner of the competitive bid process had been expected to commence July 1, 2003, but has been delayed. We are in the process of negotiating rates that would apply subsequent to June 30, 2003. The loss of one or both of the New York City and New York State accounts would result in reduced membership and revenue and require us to reduce, reallocate or absorb administrative expenses associated with these accounts.

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