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essage from our President andCHIEF EXECUTIVE OFFICER

Our commitment to be the region’s premier health plan and determination tobe a world-class organization produced a year of significant accomplishmentsand solid financial results for Horizon Blue Cross Blue Shield of New Jersey in 2005. The company’s culture of execution allowed us to grow in anextremely competitive and challenging environment. This success is reflectednot only in quantitative performance metrics, but also in external recognitionof the positive impact Horizon BCBSNJ has on our customers, the industryand the community.

We are proud of the company’s top ranking, for the third year in a row, in the 2005 New Jersey HMO Performance Report. Another measure of our success is gaining and retaining customers. During 2005, enrollmentgrew by 106,000 members, raising the company’s total to over 3.2 millionmembers. At the same time, the company retained over 97 percent of itsmembers, which was the second highest retention percentage of all Blue Cross and Blue Shield Plans with similar levels of local market share.

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In 2005, the company also achieved solid financial results. Total revenues forthe year climbed to $6 billion from $5.5 billion in 2004. Underwritingincome, which excludes investment income, was $120.9 million. After taxoperating earnings were $219.8 million in 2005, representing a margin of 3.6 percent of total revenue.

In order to protect our 3.2 million members fromunforeseen health care costs, even in the case of a natural disaster, avian flu epidemic or terrorist attack,we continue to maintain a prudent level of capitalreserves. At year-end 2005, this safety net for ourmembers stood at nearly $1.3 billion. To put thisnumber in context, in 2005 Horizon BCBSNJ paidout $9.3 billion in total medical claims, including$4.8 billion for fully-insured members. HorizonBCBSNJ engages independent actuarial experts to validate that the company’s level of capital reserves isadequate to provide security to our 3.2 million members.

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Strong growth in total membership reflectsthe market’s recognition of Horizon Blue Cross Blue Shield of New Jersey’s commitment to providing our customerswith affordable, quality health care coverageand excellence in customer service.

ENROLLMENT GROWTH

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The company’s financial strength enabled it to maintain “A” ratings from Standard and Poor’s (S&P), a leadingcredit and financial ratings organization, and from Weiss Ratings, which tracks health and life insurers acrossthe country. These ratings not only provide assurance to our group and individual customers of HorizonBCBSNJ’s stability, but also are a requirement to win the business of many major employers who will only dobusiness with “A” rated health plans.

One of the key strategic decisions made in 2005 was the choice not to pursue a conversion of the company to afor-profit corporation. After lengthy discussions about this possibility, it becameclear that conversion could not be accomplished in a satisfactory manner thatwould have enabled the company to retain its Blue Cross and Blue Shieldlicense, a major strategic asset.

An unfortunate external event for the company and its customers during2005 was the increase of certain state taxes levied due to a revision of New Jersey tax law. This revision prevents Horizon BCBSNJ from applyingestablished tax law principles used by all other insurers in the state of New Jersey. The result is an incremental tax increase of $35 million over2004. This increase unfairly targets Horizon BCBSNJ members and exacerbates the health care cost crisis facing New Jersey. The company ischallenging this tax law revision in the courts.

Throughout 2005, the company remained focused on what is most important: serving the customers who depend on us everyday.

SERVING CUSTOMERS ANDPROMOTING HEALTH

Horizon BCBSNJ’s focus on serving our customershas allowed the company to grow in nearly everymarket in which we compete. Our customershave come to depend on the company’s dedication to both world-class service and clinical quality.

Our customers have come to depend on the company’s dedication to both world-classservice and clinical quality.

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In the area of customer service, we have focused on delivering a world-class experience using process redesignand innovative technology to drive improvements. These efforts are yielding significant results. According to amember survey conducted in late 2005, 85 percent of Horizon BCBSNJ members were satisfied or highly satisfied. While we always see room for improvement, this result is significantly ahead of the competition andcompares with a national average of 76 percent and a mid-Atlantic (New York, New Jersey and Pennsylvania)average of 80 percent.

In less visible areas, we also continue to deliver high performance. For example,Horizon BCBSNJ’s mailroom received the United States Postal Service certification for Mail Preparation Total Quality Management with a perfectscore of 100 percent. For our customers that means improved efficiency andreduced mail time.

We recognize that delivering a world-class customer experience requires operational excellence throughout the end-to-end processes that impact ourmembers, group customers, physicians, hospitals and other important stakeholders. We are in the third year of an ambitious process redesign effort,and are continuing to evaluate how we do our work across the enterprise in the interest of becoming more effective and efficient.

In 2005, we continued in our commitment to the health of our members, andthe quality of care received across New Jersey. Our World Class ClinicalQuality Program emphasizes preventive care as an essential part of helping ourmembers get healthy and stay healthy. From reminders about important

screenings to case management for serious conditions,Horizon BCBSNJ’s Health and Wellness EducationProgram provides our members with the most up-to-date medical information about their conditionas well as information about the most effective evidence-based treatments to help improve their quality of life.

Horizon BCBSNJ provides treatment programs foreligible members with chronic conditions such asasthma, diabetes, chronic kidney disease,

According to a member survey

conducted in late2005, 85 percent of

Horizon BCBSNJmembers were

satisfied or highly satisfied ... this resultis significantly ahead

of the competitionand compares with a national average

of 76 percent.

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heart failure, depression and coronary artery disease. Our member outreach program, which employs call technology developed by Eliza Corporation, was selected by Harvard Medical School and the Blue Cross andBlue Shield Association to receive a BlueWorks Award for the innovative and effective way we remind our members to get their flu shots and important health screenings, such as mammograms.

Combating obesity was also a priority for Horizon BCBSNJ in 2005. Health experts estimate that approximately130 million Americans, or 64 percent of the U.S. population, are overweight or obese. Nearly 60 percent of allAmerican adults do not get the recommended amount of exercise, andnearly 25 percent do not exercise at all. Obesity can lead to, and aggravate,other chronic health conditions including heart disease, hypertension anddiabetes. Obesity also adds to health care costs. In New Jersey alone, $2.34 billion is spent on health care related to obesity, the tenth highestamount in the nation.

American children are now battling obesity and its devastating consequences.More young children and adolescents are being diagnosed with health problems that were once considered only adult concerns, such as highblood pressure, Type 2 Diabetes and heart disease. Obesity now rivalssmoking and substance abuse as a key concern for parents.

With our Shape It Up program, we continued to address childhood obesityby reaching out to over 150 schools and more than 51,000 New Jersey students through an innovative and engaging program that teaches nutritionand exercise to encourage and inspire them for a lifetime of good health. In 2005, Horizon BCBSNJ expanded this program to include Shape It Up Days, in whichfollow-up sessions were conducted for students inpartnership with local minor league baseball teams.

Programs like Shape It Up are helping to changethe public’s perception of what it takes to achievegood health and how individual actions are perhapsthe most critical factor in realizing that goal.

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Partnering with the medical community is another effective way Horizon BCBSNJ promotes good health. As part of our $5 million Horizon Health Connections initiative, we developed the New Jersey InfectionPrevention Partnership Program for our network hospitals. According to the Centers for Disease Control andPrevention, approximately 6 percent of all hospital patients acquire an infection during their hospital stay thatresults in almost half of all major patient complications in hospitals. Hospital-acquired infections are responsible for approximately 88,000 deaths a year. To prevent hospital-acquired infections, Horizon BCBSNJand several of our network hospitals are working with MedMined, Inc. to combine data mining and artificial

intelligence in a program that has proved highly effective in other states.

For our network physicians, the Horizon Health Connections initiative hasfocused on increasing the use of technology to reduce costs and increase efficiencyand safety. To foster a simpler, more common sense approach to health care,Horizon BCBSNJ provided over a thousand physicians in our network with personal digital assistants or PDAs, which are used for electronic prescribing.Electronic prescribing has been proven to reduce errors and save time for physicians and patients.

Earlier this year, Horizon BCBSNJ entered into a partnership with The RAND Corporation to test electronic prescription drug technology aspart of the New Jersey E-Prescribing Action Coalition. This important initiative was announced by U.S. Department of Health and Human ServicesSecretary, Mike Leavitt.

Horizon BCBSNJ is committed to working with New Jersey physicians toimprove the quality of care received by patients. A critical step is to establish objective, scientifically-valid measures that can be used to assess quality and track progress.

In 2005, we began distributing physician performancereports to assist our participating network practices inimproving their performance and documentingimprovements. These performance reports are

Horizon

BCBSNJ is

committed to

working with

New Jersey

physicians to

improve the

quality of care

received by

patients.

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available for specialties including Gastroenterology, Obstetrics and Gynecology, Orthopedic Surgery,Pulmonology, Urology, Cardiology, Internal Medicine, Family Practice and Pediatrics.

GROWING MARKETS

January 1, 2006 marked the beginning of the new Medicare Part D prescription drug program. Horizon BCBSNJmade a major commitment to this program with extensive preparations throughout 2005. In addition toinvesting in the infrastructure to support the Medicare Part D program,Horizon BCBSNJ took on a leadership role in helping New Jersey seniorsunderstand their choices. The company led educational sessions across thestate and sponsored a public television program on New Jersey Network(NJN) to help seniors make informed decisions. By the time the Part Dprogram went live on January 1, 2006, Horizon BCBSNJ covered over132,000 seniors. By the end of this year, we expect to cover more than175,000 seniors in the Medicare Part D program.

Horizon BCBSNJ’s dental program is also a significant offering, withmembership in 2005 reaching 1.1 million. Given the growing evidence ofthe link between oral health and overall physical health, we have continuedto promote preventive dental care for all of our members. Our dentalprogram is expanding in New York and Pennsylvania as well as New Jersey.The dental sales team works closely with the medical sales team to offer a full complement of employee benefits that provide a total solution foremployers.

Another growing business is Horizon CasualtyServices Inc., a certified New Jersey workers’compensation managed care organization.Horizon Casualty Services experienced 27 percentrevenue growth in 2005, with outstanding financial results attributable to new and in-forceclients and the company’s re-entry into the provision of personal injury protection (PIP)medical care network services for automobileinsurers. Workers’ compensation and automobile

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insurers and employers that maintain self-funded programs can select Horizon Casualty Services to administerworkers’ compensation and PIP benefits for covered employees.

These customers use the company’s contracted network of hospitals, ambulatory surgical centers, physicians andother health care professionals who specialize in the treatment of injuries sustained on the job or in auto accidents to achieve the prompt, safe return to work and maximum productivity of their employees.

Horizon BCBSNJ has continued its commitment to the publicly insuredthrough its Horizon NJ Health business. Horizon NJ Health is the state’slargest managed health care company serving the publicly insured. In 2005, our Medicaid membership grew to over 281,000 members. This growth is aresult of responsive customer service and extensive community outreach toensure access to appropriate care for the women, men and children Horizon NJ Health serves.

HEALTH CARE AFFORDABILITY

Unfortunately, 2005 was another year of rapidly rising health care costs. While thenational average of an 8.9 percent increase in health care costs was down slightlyfrom the 2004 increase of 9.7 percent, this still represents a multiple of overallinflation. Rising health care costs are driven by a combination of factorsincluding an aging population and new technologies for diagnosing and treatingillness. Rising health care costs drive increases in health care premiums andcause more and more employers and individuals to drop their coverage.

Nationally, the percentage of workers covered by theiremployer’s health plan dropped to 66 percent overalland to 50 percent for firms with fewer than 20 employees. These percentages compare to 67 percent and 57 percent respectively, in 2000.As a result, the number of Americans who are uninsured continues to rise, reaching 45.8 million in 2004, with 1.3 million uninsured people living in New Jersey.

... the percentage of workers covered by their employer’s healthplan dropped to 66 percent overall

and to 50 percent for firms withfewer than 20 employees.

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Horizon BCBSNJ is taking a number of steps to address the health care affordability crisis. We developed several innovative products to give customers more options for affordable coverage and engage members asinformed health care consumers. In January 2006, we introduced our second-generation Horizon MyWayconsumer-directed health care products. These products offer lower premiums that are attractive to both smalland large employers. Perhaps even more importantly, these products give the consumer more financial responsibility and flexibility to spend their health care dollars as they see fit. While consumer-directed healthcare products are not a “silver bullet” for rising health care costs, early evidence suggests that individuals in theseplans do more research and ask more questions about their health and treatment options than people in traditional health plans. Horizon BCBSNJsupports our Horizon MyWay customers with objective, online healthinformation and a 24-hour nurse hotline to help them make decisions.

In addition to consumer-directed health care, other products such as ourHorizon HMO Access and Horizon Basic and Essential plans, offer lower-costcoverage options for small employers and individuals, respectively.

In order to expand coverage for individual and small employer customers,we continue to work with the state to develop meaningful legislative reform.Absent such reform, these markets continue to shrink as costs rise and peopleand businesses drop coverage because they cannot afford insurance or simplydecide that they are better off going uncovered. There are a number ofalternatives that have proven effective in other states, and Horizon BCBSNJwill continue to advocate for individual and small group reforms that canbroaden the reach of health insurance to more New Jersey residents.

In 2005, Horizon BCBSNJ continued its multi-year Health Care Dollars and $enseprogram, an initiative that educates all stakeholdersabout the health care cost crisis and how thechoices we all make can help keep costs down.

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LEADING WITH TECHNOLOGY

For a number of years, Horizon BCBSNJ has made significant investments in technology to improve our operations and better serve our customers. One of our largest initiatives over the past several years has been therecently completed consolidation of five core claims systems to two: QBlue and NASCO®´´. The company’sinnovative use of technology was recognized by CMP Media in InformationWeek 500, for the seventh year in arow. In 2005, Horizon BCBSNJ was one of only three insurers ranked in the top 100.

This achievement reflects Horizon BCBSNJ’s commitment to using innovativetechnology to improve the experience of our customers, hospitals, physiciansand other stakeholders. We’ve enhanced our Online Services and ourInteractive Voice Response system and partnered with health information leaders like WebMD®´´´ to give our members an array of options to get theinformation they need and help them navigate the health care system. Through new technology, we are simplifying interactions, improving our effectiveness and providing higher levels of service to our 3.2 million members.

SUPPORTING THE COMMUNITY

As the leading health insurer in the state, we are a part of all the communitiesin New Jersey. And, we share the same hopes and dreams, and daily strugglesof residents trying to make New Jersey a better place to live, work and raise afamily. In 2005, the Horizon Foundation for New Jersey furthered that goal – through $1.5 million in financial support to more than 50 charitable

organizations. Additionally, corporate charitable,community and sponsorship giving from HorizonBCBSNJ totaled $1.6 million last year. Our employeesprovided their own support – walking to raise moneyfor the March of Dimes, racing to support disabledyouth and taking an icy plunge to benefit the Special Olympics.

We’re proud to be a vital part of the New Jersey economy. A recent study developed by FairleighDickinson University highlighted Horizon BCBSNJ’s

We’ve enhanced

our Online

Services and

our Interactive

Voice Response

system and

partnered with

health information

leaders like

WebMD ...

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... we take pride inreaching highereach year toimprove the healthcare experience forour customers.Every day, thewomen and men atHorizon BCBSNJstrive to improve all facets of our business ...

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many contributions to the state’s economy. This includes adding almost $4.2 billion to the New Jersey economy in 2003 through the payment of health care claims, as an employer and as a purchaser of goods and services. That year, the company contributed to creating or maintaining almost 105,000 jobs. In 2005,Horizon BCBSNJ incurred $141.9 million in Federal and state taxes and assessments of which $64.2 millionwere paid to New Jersey. We believe the company’s local presence brings tremendous value not only to our customers but also to New Jersey as a whole. In an industry where some have lost sight of the local nature ofhealth care delivery, Horizon BCBSNJ is committed to being the world-class, locally-based health plan New Jersey deserves.

With our 73-year history of dedication and excellence in providing healthcare coverage for generations of New Jersey families and businesses, we takepride in reaching higher each year to improve the health care experience forour customers. Every day, the women and men at Horizon BCBSNJ striveto improve all facets of our business – whether it’s offering new products orenhancing customer service or supporting our physicians, hospitals andother health care professionals – the goal is the same: to make doing business with us as easy and positive as possible.

And that’s Making Healthcare Work.

Bill MarinoMay 2006

Increased enrollment to more than 3.2 MILLION MEMBERS.

Reaffirmed “A” ratings from Standard and Poor’s and Weiss Ratings.

Developed the next generation of HORIZON MYWAYconsumer-directed health plans.

Introduced four MEDICARE PART D prescription drug plans.

Ranked 1ST in the category of Service Oriented Computing for Technology Managers Forum’s 2005 BEST PRACTICE AWARDS.

Named to the prestigious INFORMATIONWEEK 500 for the 7th straight year. Once again, we ranked among the TOP 100 IT COMPANIES in the nation, coming in at number 76.

Received the 2005 FREEDOM TO COMPETE AWARD from the EqualEmployment Opportunity Commission in recognition of our Supervisor Candidate Development Program.

Achieved the BEST HEDIS®´´´´ QUALITY SCORES in New Jersey.

Recognition for Horizon NJ Health for the BEST MEDICAL MANAGEMENT

among all New Jersey Medicaid plans.

Received BEST OF BLUE AWARDS for our Shape It Up and Advertising programs.

Awarded “LOW COST HIGH PERFORMANCE” status for Federal Employee Program (FEP).

Received the United States Postal Service certification for MAIL PREPARATION

TOTAL QUALITY MANAGEMENT with a perfect score of 100 Percent.

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HORIZON HEALTHCARE SERVICES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS

As of December 31, 2005 and 2004(in thousands)

ASSETS 2005 2004

Current assets:Cash and cash equivalents $ 248,024 $ 172,421 Investments available-for-sale, at fair value 865,182 752,177Investments held-to-maturity, at amortized cost 93,221 88,696 Premiums and other receivables, net 455,532 411,904 Deferred income taxes 18,208 9,388 Prepaid expenses and other current assets 74,530 61,624

Total current assets 1,754,697 1,496,210

Investments held-to-maturity, at amortized cost 1,067,675 944,982 Restricted investments, at amortized cost 194,535 181,710 Property and equipment, net 74,164 86,948 Other assets 57,158 55,833

Total assets $ 3,148,229 $ $ 2,765,683

LIABILITIES AND CAPITAL RESERVES

Current liabilities: Medical and other benefits payable $ 740,336 $ 658,354 Unearned premiums 108,422 123,192 Accounts payable and accrued expenses 335,948 255,790 Managed cash overdrafts 304,626 271,978 Income taxes payable – 27,540 Other current liabilities 155,980 126,973

Total current liabilities 1,645,312 1,463,827

Obligations for employee benefits 162,256 154,484 Mortgage payable, less current portion 27,518 28,962 Other liabilities 18,095 19,189

Total liabilities 1,853,181 1,666,462

Commitments and contingencies

Capital reserves:Retained earnings 1,258,028 1,044,277Accumulated other comprehensive income 37,020 54,944

Total capital reserves 1,295,048 1,099,221

Total liabilities and capital reserves $ 3,148,229 $ 2,765,683

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HORIZON HEALTHCARE SERVICES, INC. AND SUBSIDIARIESCONSOLIDATED INCOME STATEMENTS

For the Years Ended December 31, 2005, 2004 and 2003(in thousands)

2005 2004 2003

Revenues:Insured premiums $ 5,543,312 $ 5,077,316 $ 4,708,211 Administrative service-fee income 343,277 319,402 275,507 Other revenues 17,364 14,210 13,395

Total operating revenues 5,903,953 5,410,928 4,997,113

Investment income 100,990 86,874 78,088 Net realized gains 20,334 6,374 7,204

Total revenues 6,025,277 5,504,176 5,082,405

Expenses:Medical and other benefit costs 4,754,208 4,406,782 3,937,990 Selling, general and administrative expenses 1,028,803 877,236 921,237

Total expenses 5,783,011 5,284,018 4,859,227

Income before income tax expense 242,266 220,158 223,178

Income tax expense (28,515) (47,335) (52,100)

Net income $ 213,751 $ 172,823 $ 171,078

VINCENT J. GIBLINChairman of the Board, Horizon Blue Cross Blue Shield of New Jersey and President, International Union ofOperating Engineers

ARISTIDES W. GEORGANTASExecutive Vice President (Retired), Chase Manhattan Corporation

ALFRED C. KOEPPEPresident and CEO, Newark Alliance

BARBARA BELL COLEMANPresident, BBC Associates, LLC

EMMANUEL A. KAMPOURISChairman, President and CEO (Retired),American Standard Companies, Inc.

LEO J. ROGERS, JR.Director (Retired), George RothmanInstitute, Fairleigh Dickinson University

JAMES A. SKIDMORE, JR.Chairman and CEO,Science Management Co., LLC

WILLIAM J. MARINOPresident and Chief Executive Officer,Horizon Blue Cross Blue Shield of New Jersey

LAWRENCE R. CODEYPresident and COO (Retired),Public Service Electric and Gas Company

PETER G. STEWART, ESQ.Attorney-at-Law and Senior Partner,Carella, Byrne, Bain, Gilfillan, Cecchi,Stewart and Olstein

DANIEL J. MCCARTHY, ESQ.Attorney-at-Law and Partner, Rogut McCarthy Troy, LLC

THOMAS J. DEVERINFormer New Jersey State Assemblyman

JOSEPH D. BILLOTTI, M.D.Orthopedic Surgeon

(NOT PICTURED)

ERIC B. SHUFFLER, ESQ.Principal, Tipping Point StrategiesEffective December 8, 2005

(NOT PICTURED)

BARRY R. MANDELBAUM, ESQ.Senior Partner, Mandelbaum, Salsburg,Gold, Lazaris and Discenza P.C.Effective December 16, 2005

Left to Right

KENNETH A. BRAUSEVice President, Strategy and Development

PATRICK J. GERAGHTYSenior Vice President, Service

CHRISTOPHER M. LEPREVice President, Major Accounts Market

JACKIE R. JENNIFERVice President, Customer Service

ROBERT A. MARINOSenior Vice President, Market Business Units

WILLIAM J. MARINOPresident and Chief Executive Officer

CHRISTY W. BELLSenior Vice President, Healthcare Management

JOHN W. CAMPBELLSenior Vice President, General Counsel and Secretary

DONNA M. CELESTINIVice President, Healthcare Services

CHARLES C. EMERY, JR., Ph.D.Senior Vice President, Information SystemsChief Information Officer

RICHARD G. POPIEL, M.D., MBAVice President and Chief Medical Officer, Health Affairs

ROBERT J. PURESSenior Vice President, AdministrationChief Financial Officer and Treasurer

MICHAEL MURRAYVice President and Chief Actuary, Actuarial

LAWRENCE B. ALTMANVice President, Corporate Marketing and Communications

CAROL A. BANKSVice President, State Health Benefits Program

DAVID R. HUBERVice President, Financial Planning and Analysis

MARGARET COONSVice President, Human Resources

ROBERT E. MEEHANVice President, Consumer and Commercial Markets

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Horizon Blue Cross Blue Shield of New Jersey and its subsidiaries, Horizon Healthcare of New Jersey, Inc.,Horizon Healthcare Dental, Inc. and Horizon Casualty Services, Inc., are all independent licensees of the Blue Cross and Blue Shield Association.

® Registered marks of the Blue Cross and Blue Shield Association.®´ and SM Registered and service marks of Horizon Blue Cross Blue Shield of New Jersey.®´´ Registered mark of National Account Service Company.®´´´ Registered mark of WebMD, Inc.®´´´´ Registered trademark of the National Committee for Quality Assurance.

© 2006 Horizon Blue Cross Blue Shield of New JerseyThree Penn Plaza East, Newark, New Jersey 07105