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United States
Securities and Exchange CommissionWashington, D.C. 20549

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FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Period Ended September 30, 2002

Commission File Number 1-14177

COBALT CORPORATION(Exact name of registrant as specified in its charter)

|Wisconsin(State of incorporation)                                                      | 39-1931212(I.R.S. Employer Identification No.)
|-------------------------------------------------------------------------------------- | ----------------------------------------------
|401 West Michigan Street, Milwaukee, Wisconsin(Address of principal executive offices) | 53203-2896(Zip Code)                          

(414) 226-6900(Registrant's telephone number, including area code)

Indicate
by check mark whether registrant (1) has filed all documents and 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
ý    No o

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

Common
stock outstanding as of October 31, 2002 was 41,522,369

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COBALT CORPORATION        INDEX TO  QUARTERLY REPORT ON FORM 10-Q        For the Period Ended September 30, 2002

|PART I                                                                                        |  |   
|--------------------------------------------------------------------------------------------- |  | --
|Item 1. Financial Statements and Supplementary Data                                           |  | 3 
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 18
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 29
|Item 4. Controls and Procedures                                                               |  | 29
|PART II                                                                                       |  |   
|Other Information                                                                             |  | 31
|Signature Page                                                                                |  | 32
|Certifications                                                                                |  | 33

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COBALT CORPORATION  CONSOLIDATED BALANCE SHEETS  (UNAUDITED)

|                                    |                                                 | September 30,
2002   |         | December 31,
2001
|----------------------------------- | ----------------------------------------------- | -------------------- | ------- | -----------------
|
|ASSETS                              |                                                 |                      |         |                  
|Current assets:                     |                                                 |                      |         |                  
|                                    | Cash and cash equivalents                       |                      | $       | 63,179           
|                                    | Investmentsavailable-for-sale, at fair value   |                      |         | 347,121          
|                                    | Due from affiliates                             |                      |         | 6,417            
|                                    | Premium receivables                             |                      |         | 37,374           
|                                    | Due from clinics and providers                  |                      |         | 4,219            
|                                    | Other receivables                               |                      |         | 52,177           
|                                    | Prepaid expenses and other current assets       |                      |         | 30,488           
|                                    |                                                 |                      |         |                  
|                                    |                                                 | Total current assets |         |                  
|Noncurrent assets:                  |                                                 |                      |         |                  
|                                    | Investmentsheld-to-maturity, at amortized cost |                      |         | 12,688           
|                                    | Investments in affiliates, net                  |                      |         | 471              
|                                    | Property and equipment, net                     |                      |         | 30,526           
|                                    | Goodwill, net                                   |                      |         | 91,295           
|                                    | Prepaid pension                                 |                      |         | 58,557           
|                                    | Deferred income taxes                           |                      |         | 37,868           
|                                    | Other noncurrent assets                         |                      |         | 74,424           
|Assets from discontinued operations |                                                 |                      |        |                  
|                                    |                                                 |                      |         |                  
|Total assets                        |                                                 | $                    | 846,804 |                  
|                                    |                                                 |                      |         |                  

See
Notes to Interim Consolidated Financial Statements.

3

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COBALT CORPORATION  CONSOLIDATED BALANCE SHEETS  (UNAUDITED)

|                                           |                                            | September 30,
2002         |         | December 31,
2001 |        
|------------------------------------------ | ------------------------------------------ | -------------------------- | ------- | ----------------- | -------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY       |                                            |                            |         |                   |        
|Current liabilities:                       |                                            |                            |         |                   |        
|                                           | Medical and other benefits payable         |                            | $       | 195,929           |        
|                                           | Advance premiums                           |                            |         | 100,569           |        
|                                           | Due to affiliates                          |                            |         | 35                |        
|                                           | Payables and accrued expenses              |                            |         | 71,226            |        
|                                           | Short-term debt                            |                            |         | 3,425             |        
|                                           | Other current liabilities                  |                            |         | 42,707            |        
|                                           |                                            |                            |         |                   |        
|                                           |                                            | Total current liabilities  |         |                   | 413,891
|Noncurrent liabilities:                    |                                            |                            |         |                   |        
|                                           | Other benefits payable                     |                            |         | 53,734            |        
|                                           | Deferred income taxes                      |                            |         | 34,505            |        
|                                           | Postretirement benefits other than pension |                            |         | 17,930            |        
|                                           | Long-term debt                             |                            |         | 25,000            |        
|                                           | Other noncurrent liabilities               |                            |         | 16,480            |        
|Liabilities from discontinued operations   |                                            |                            |        |                   |        
|                                           |                                            |                            |         |                   |        
|                                           |                                            | Total liabilities          |         |                   | 561,540
|Shareholders' equity (Note K):             |                                            |                            |         |                   |        
|                                           | Preferred stock                            |                            |         |                  |        
|                                           | Common stock                               |                            |         | 259,309           |        
|                                           | Retained earnings (deficit)                |                            |         | 18,291            |        
|                                           | Accumulated other comprehensive income     |                            |         | 7,664             |        
|                                           |                                            |                            |         |                   |        
|                                           |                                            | Total shareholders' equity |         |                   | 285,264
|                                           |                                            |                            |         |                   |        
|Total liabilities and shareholders' equity |                                            | $                          | 846,804 |                   | $      
|                                           |                                            |                            |         |                   |        

See
Notes to Interim Consolidated Financial Statements.

4

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COBALT CORPORATION  CONSOLIDATED STATEMENTS OF OPERATIONS  (UNAUDITED)

|                                                   |                                                            | Three months ended
September 30, |                   | Nine months ended
September 30, |        
|-------------------------------------------------- | ---------------------------------------------------------- | -------------------------------- | ----------------- | ------------------------------- | -------
|
|
|Revenues:                                          |                                                            |                                  |                   |                                 |        
|                                                   | Health services revenue:                                   |                                  |                   |                                 |        
|                                                   |                                                            | Premium                          |                   | $                               | 344,737
|                                                   |                                                            | Government contract fees         |                   |                                 | 28,375 
|                                                   |                                                            | Other                            |                   |                                 | 12,579 
|                                                   | Investment results                                         |                                  |                   | 4,701                           |        
|                                                   |                                                            |                                  |                   |                                 |        
|                                                   |                                                            |                                  | Total revenues    |                                 |        
|Expenses:                                          |                                                            |                                  |                   |                                 |        
|                                                   | Medical and other benefits                                 |                                  |                   | 293,805                         |        
|                                                   | Selling, general, administrative and other                 |                                  |                   | 81,012                          |        
|                                                   | Interest                                                   |                                  |                   | 116                             |        
|                                                   | Amortization of goodwill                                   |                                  |                   |                                |        
|                                                   |                                                            |                                  |                   |                                 |        
|                                                   |                                                            |                                  | Total expenses    |                                 |        
|                                                   |                                                            |                                  |                   |                                 |        
|Operating income (loss) from continuing operations |                                                            |                                  | 15,459            |                                 |        
|Income from investment in affiliates, net of tax   |                                                            |                                  | 3                 |                                 |        
|                                                   |                                                            |                                  |                   |                                 |        
|Pretax income (loss) from continuing operations    |                                                            |                                  | 15,462            |                                 |        
|Income tax expense                                 |                                                            |                                  | 1,574             |                                 |        
|                                                   |                                                            |                                  |                   |                                 |        
|Income (loss) from continuing operations           |                                                            |                                  | 13,888            |                                 |        
|Income from discontinued operations:               |                                                            |                                  |                   |                                 |        
|                                                   | Income (loss) from discontinued operations, net of tax     |                                  |                   | (130                            | )      
|                                                   | Gain (loss) on sale of discontinued operations, net of tax |                                  |                   | (41                             | )      
|                                                   |                                                            |                                  |                   |                                 |        
|Net income (loss)                                  |                                                            | $                                | 13,717            |                                 | $      
|                                                   |                                                            |                                  |                   |                                 |        
|Earnings (loss) per share (EPS):                   |                                                            |                                  |                   |                                 |        
|                                                   | Basic EPS from continuing operations                       |                                  | $                 | 0.34                            |        
|                                                   | Basic EPS from discontinued operations                     |                                  |                   | (0.01                           | )      
|                                                   |                                                            |                                  |                   |                                 |        
|                                                   |                                                            |                                  | Total basic EPS   |                                 | $      
|                                                   |                                                            |                                  |                   |                                 |        
|                                                   | Diluted EPS from continuing operations                     |                                  | $                 | 0.33                            |        
|                                                   | Diluted EPS from discontinued operations                   |                                  |                   | (0.01                           | )      
|                                                   |                                                            |                                  |                   |                                 |        
|                                                   |                                                            |                                  | Total diluted EPS |                                 | $      
|                                                   |                                                            |                                  |                   |                                 |        

See
Notes to Interim Consolidated Financial Statements.

5

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COBALT CORPORATION  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)  (UNAUDITED)

|                              |                                                                | Number of
Common Shares                                      |                      | Common
Stock |         | Retained
Earnings
(Deficit) |   | Accumulated Other
Comprehensive
Income (Loss) |          | Total
Shareholders'
Equity |       
|----------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------ | -------------------- | ------------ | ------- | --------------------------- | - | --------------------------------------------- | -------- | -------------------------- | ------
|
|Balance at December 31, 2000  |                                                                |                                                             |                      | $            |        |                             | $ | 170,907                                       |          | $                          | (1,964
|                              | Capitalization of Wisconsin United for Health Foundation, Inc. |                                                              | 31,313,390           |              |         | 192,577                     |   |                                               | (192,577 | )                          |       
|                              | Issuance of common stockacquisition                           |                                                              | 9,096,303            |              |         | 55,938                      |   |                                               |         |                            |       
|                              | Issuance of common stockoptions                               |                                                              | 11,250               |              |         | 51                          |   |                                               |         |                            |       
|                              | Issuance of common stock401(k)                                |                                                              | 172,100              |              |         | 1,000                       |   |                                               |         |                            |       
|                              | Adjustments as a result of purchase accounting                 |                                                              |                     |              |         |                            |   |                                               | 82       |                            |       
|                              | Change in ownership of affiliates                              |                                                              |                     |              |         |                            |   |                                               | 1,320    |                            |       
|                              | Conversion of SAR's to options                                 |                                                              |                     |              |         |                            |   |                                               | 594      |                            |       
|                              | Comprehensive loss:                                            |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|                              |                                                                | Net loss                                                     |                      |             |         |                             |  |                                               |          | (22,305                    | )     
|                              |                                                                | Change in unrealized gains/losses on investments, net of tax |                      |             |         |                             |  |                                               |          |                           |       
|                              |                                                                |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|                              |                                                                |                                                              | Comprehensive loss   |              |         |                             |   |                                               |          |                            |       
|                              |                                                                |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|Balance at December 31, 2001  |                                                                | 40,593,043                                                   |                      | $            | 249,566 |                             | $ | (41,979                                       | )        | $                          | 635   
|                              | Issuance of common stockoptions                               |                                                              | 845,946              |              |         | 9,293                       |   |                                               |         |                            |       
|                              | Issuance of common stock401(k)                                |                                                              | 64,880               |              |         | 450                         |   |                                               |         |                            |       
|                              | Change in ownership of affiliates                              |                                                              |                     |              |         |                            |   |                                               | 1,304    |                            |       
|                              | Compensation expensestock options                             |                                                              |                     |              |         |                            |   |                                               | 134      |                            |       
|                              | Comprehensive income:                                          |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|                              |                                                                | Net income                                                   |                      |             |         |                             |  |                                               |          | 58,832                     |       
|                              |                                                                | Change in unrealized gains/losses on investments, net of tax |                      |             |         |                             |  |                                               |          |                           |       
|                              |                                                                |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|                              |                                                                |                                                              | Comprehensive income |              |         |                             |   |                                               |          |                            |       
|                              |                                                                |                                                              |                      |              |         |                             |   |                                               |          |                            |       
|Balance at September 30, 2002 |                                                                | 41,503,869                                                   |                      | $            | 259,309 |                             | $ | 18,291                                        |          | $                          | 7,664 
|                              |                                                                |                                                              |                      |              |         |                             |   |                                               |          |                            |       

See Notes to Interim Consolidated Financial Statements.

6

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COBALT CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS  (UNAUDITED)

|                           |                                                                                                                           | Nine months ended
September 30,                                                                                          |                                   
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------------
|
|
|Operating activities:      |                                                                                                                           |                                                                                                                          |                                   
|                           | Income (loss) from continuing operations                                                                                  |                                                                                                                          | $                                 
|                           | Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: |                                                                                                                          |                                   
|                           |                                                                                                                           | Depreciation and amortization                                                                                            |                                   
|                           |                                                                                                                           | Income from investment in affiliates, net of tax                                                                         |                                   
|                           |                                                                                                                           | Realized investment gains, net                                                                                           |                                   
|                           |                                                                                                                           | Deferred income taxes                                                                                                    |                                   
|                           |                                                                                                                           | Changes in operating accounts, net of discontinued operations, acquisitions and conversion/combination related activity: |                                   
|                           |                                                                                                                           |                                                                                                                          | Premium receivables               
|                           |                                                                                                                           |                                                                                                                          | Other receivables                 
|                           |                                                                                                                           |                                                                                                                          | Due from clinics and providers    
|                           |                                                                                                                           |                                                                                                                          | Medical and other benefits payable
|                           |                                                                                                                           |                                                                                                                          | Advance premiums                  
|                           |                                                                                                                           |                                                                                                                          | Due to/from affiliates, net       
|                           |                                                                                                                           |                                                                                                                          | Other, net                        
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|Investing activities:      |                                                                                                                           |                                                                                                                          |                                   
|                           | Acquisitions and Combination activity                                                                                     |                                                                                                                          |                                   
|                           | Proceeds from sale of investment in affiliate                                                                             |                                                                                                                          |                                   
|                           | Proceeds from sale of discontinued operations                                                                             |                                                                                                                          |                                   
|                           | Purchases of available-for-sale investments                                                                               |                                                                                                                          |                                   
|                           | Purchases of held-to-maturity investments                                                                                 |                                                                                                                          |                                   
|                           | Proceeds from maturity of held-to-maturity investments                                                                    |                                                                                                                          |                                   
|                           | Proceeds from sale and maturity of available-for-sale investments                                                         |                                                                                                                          |                                   
|                           | Additions to property and equipment, net                                                                                  |                                                                                                                          |                                   
|                           | Dividends from affiliate                                                                                                  |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|Financing activities:      |                                                                                                                           |                                                                                                                          |                                   
|                           | Proceeds from issuance of common stock                                                                                    |                                                                                                                          |                                   
|                           | Net borrowings of debt                                                                                                    |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|Discontinued Operations:   |                                                                                                                           |                                                                                                                          |                                   
|                           | Cash flows from discontinued operations                                                                                   |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|Cash and cash equivalents: |                                                                                                                           |                                                                                                                          |                                   
|                           | Increase during the period                                                                                                |                                                                                                                          |                                   
|                           | Balance at beginning of year                                                                                              |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   
|                           |                                                                                                                           |                                                                                                                          |                                   

See Notes to Interim Consolidated Financial Statements.

7

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COBALT CORPORATION  NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)

Note A. Basis of Presentation

The
accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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 ("GAAP") for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2001
and footnotes thereto included in the Cobalt Corporation ("Cobalt" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the
Securities and Exchange Commission ("SEC").

Cobalt
(formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of UWS and Blue Cross & Blue Shield United of Wisconsin
("BCBSUW") on March 23, 2001 (the "Combination"). On that date, BCBSUW converted from a service insurance corporation to a stockholder owned corporation. Upon conversion, BCBSUW became a
wholly-owned subsidiary of UWS through the combination of the two companies. At the time of conversion and the Combination, BCBSUW owned approximately 46.6% of UWS' outstanding common stock. In
exchange for the ownership of BCBSUW, Cobalt issued 31,313,390 shares of newly issued Company common stock to Wisconsin United for Health Foundation, Inc. (the "Foundation"). The Foundation was
established for the sole purpose of benefiting public health in Wisconsin from its earnings and investment in Cobalt.

The
Combination was accounted for as a purchase by BCBSUW of the remaining 9,096,303 shares of UWS that it did not already own at a market price of $6.15 per share on the closing date.
In accordance with GAAP, goodwill was recorded representing the excess of the market price over the
adjusted book value of UWS for the 53.4% of UWS that BCBSUW did not already own. For reporting purposes, the Combination is treated as a reverse purchase transaction, whereby BCBSUW becomes the
acquirer and reporting entity for public company reporting. The consolidated statements of operations, cash flows, and changes in shareholders' equity and comprehensive income (loss) for the three and
nine month periods ended September 30, 2002 reflect the operations of the combined UWS and BCBSUW entities. Results for the three month period ended March 31, 2001, which are reflected
in the consolidated financial statements for the nine months ended September 30, 2001, include only the operations of BCBSUW and its wholly-owned subsidiary, Government Health Services, LLC
("GHS") and minority interest in UWS and American Medical Security Group, Inc. ("AMSG"). GHS is a holding company that was recently formed to hold United Government Services, LLC ("UGS") and
Trust Solutions, LLC ("TS"). TS provides program integrity, consulting and safeguard services in connection with publicly funded health programs. Results for the six month period ended
September 30, 2001, included in the consolidated financial statements for the nine months ended September 30, 2001, reflect the operations of the combined UWS and BCBSUW entities. For
purposes of calculating earnings per common share ("EPS") of the Company, the 7,949,904 shares of Cobalt common stock owned by BCBSUW are accounted for as treasury stock. The pro forma statement of
operations for the nine months ended September 30, 2001 for Cobalt presented in Note E includes the operations of the former UWS and BCBSUW with elimination of intracompany transactions,
the

8

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recording of purchase accounting adjustments and the amortization of goodwill calculated as if the transaction was completed at the beginning of the reporting period.

Continuing
operations in the consolidated financial statements subsequent to the Combination include the accounts of the Company's majority owned insurance subsidiaries (BCBSUW, Compcare
Health Services Insurance Corporation ("CompcareBlue"), Unity Health Plans Insurance Corporation ("Unity"), Valley Health Plan, Inc. ("Valley"), United Wisconsin Insurance Company ("UWIC"), and
United Heartland Life Insurance Company ("UHLIC")) and other non-insurance subsidiaries (GHS, Meridian Resource Company, LLC ("MRC"), Comprehensive Receivables Group, Inc. ("CRG"),
United Wisconsin Proservices, Inc. ("Proservices"), United Heartland, Inc. ("UHI") and C.C. Holdings, LLC ("CC Holdings")). All intracompany transactions after March 31, 2001 have
been eliminated in consolidation.

Note B. Management's Plan

In
order to assure the Company's regulated insurance subsidiaries continue to satisfy minimum capital and liquidity requirements, the Office of the Commissioner of Insurance of the State
of Wisconsin ("OCI") requested, management developed and the Cobalt Board of Directors approved a capital plan at the end of 2001 to improve the Company's position relative to minimum capital and
liquidity requirements. In October 2002, the Company received approval from the OCI and satisfied the $70.0 million obligation due BCBSUW from Cobalt. The debt obligation under the note
was satisfied in full through the transfer of all of the common stock of CompcareBlue. With this transaction, the Company has substantially completed all aspects of the capital plan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for further discussion on the capital plan.

Note C. Discontinued Operations

On
March 29, 2002, Cobalt sold 100% of the membership interest of its subsidiary, Innovative Resource Group, LLC ("IRG") to APS Healthcare Bethesda, Inc. ("APS"), for
$27.0 million ($17.0 million in cash and $10.0 million in a three-year note. The $10.0 million note was discounted to $8.5 million to yield 16% per
year). IRG was one of Cobalt's specialty companies, which provided behavioral health and medical management services. Accordingly, IRG is accounted for as a discontinued operation for all periods
presented. The purchase agreement also provides for certain bonuses/penalties to be received/paid between IRG and Cobalt based on revenues generated from Cobalt and affiliated entities in future
years. Under the agreement, certain subsidiaries of Cobalt entered into seven-year service agreements for the provision of services by IRG.

The
net gain on disposition of discontinued operations was $8.9 million, which includes a realized gain on the sale of $9.6 million, offset by a $0.7 million loss on
IRG's operations for the nine months ended September 30, 2002. The realized gain on the sale as of September 30, 2002 reflects additional tax expense of $0.2 million recorded
during the third quarter of 2002. The net gain on the sale could be adjusted further, based on any payments made in future periods in accordance with the purchase and sale agreement. Income from
discontinued operations amounted to $0.4 million and $0.5 million for the three and nine month periods ended September 30, 2001, respectively. This reflects activity for the
second and third quarters of 2001 only, since IRG was not considered part of Cobalt for financial reporting purposes prior to the Combination.

9

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Note D. Net Income (Loss) Per Share

|                                  |                                                      | Three months ended
September 30, |            | Nine months ended
September 30, | 
|--------------------------------- | ---------------------------------------------------- | -------------------------------- | ---------- | ------------------------------- | 
|
|Numerator (in thousands):         |                                                      |                                  |            |                                 | 
|                                  | Net income (loss)                                    |                                  | $          | 13,717                          | 
|                                  |                                                      |                                  |            |                                 | 
|Denominator:                      |                                                      |                                  |            |                                 | 
|                                  | Denominator for basic EPSWeighted average shares    |                                  |            | 41,272,729                      | 
|                                  | Effect of dilutive securitiesEmployee stock options |                                  |            | 1,352,574                       | 
|                                  |                                                      |                                  |            |                                 | 
|Denominator for diluted EPS       |                                                      |                                  | 42,625,303 |                                 | 
|                                  |                                                      |                                  |            |                                 | 
|Earnings (loss) per common share: |                                                      |                                  |            |                                 | 
|                                  | Basic                                                |                                  | $          | 0.33                            | 
|                                  | Diluted                                              |                                  | $          | 0.32                            | 

Basic
EPS excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing
net income by the weighted average number of common shares outstanding, adjusted for the effect of dilutive securities for stock options where the exercise price was less than the average market price
of the outstanding common shares for the period. When Cobalt reports a net loss, potentially dilutive securities are not included in the calculation of EPS because their inclusion would have an
antidilutive effect. EPS for the nine months ended September 30, 2001 was calculated based on 37,722,313 shares
outstanding, which assumes that the 31,313,390 newly issued shares to the Foundation were outstanding for the entire three months ended March 31, 2001.

Note E. Pro Forma Financial Information

The
following September 30, 2001 pro forma statement of operations for Cobalt includes the operations of UWS and BCBSUW with elimination of intracompany transactions, the
recording of

10

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purchase accounting adjustments and the amortization of goodwill calculated as if the Combination had been completed at the beginning of the reporting period.

PRO FORMA COBALT STATEMENT OF OPERATIONS

Nine months ended
September 30, 2001(In thousands)Revenues:Health services revenue:Premium

$
1,103,478Government contract fees


88,827Other


34,708Investment results


10,439Total revenues


1,237,452Expenses:Medical and other benefits


985,880Selling, general, administrative and other


247,522Interest


624Amortization of goodwill


4,565Total expenses


1,238,591Operating loss from continuing operations


(1,139
)Loss from investment in affiliates, net of tax


(46
)Pre-tax loss from continuing operations


(1,185
)Income tax expense


490Loss from continuing operations


(1,675
)Income from discontinued operations, net of tax


670Net loss

$
(1,005
)Earnings (loss) per share:Diluted EPS from continuing operations

$
(0.04
)Diluted EPS from discontinued operations


0.01Total diluted EPS

$
(0.03
)Weighted average shares outstanding:Basic and diluted


40,422,017


Note F. Investments

Investments
classified as available-for-sale at September 30, 2002 include convertible debentures and convertible preferred stock with a cost of
approximately $12.4 million. No convertible securities were held at December 31, 2001. The convertible securities are considered hybrid instruments, and the Company separately accounts
for the derivatives embedded therein. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging Activities," the embedded
derivatives are reflected in the balance sheet at fair value, and changes in fair value are recognized currently in investment results. The fair value of the embedded derivatives was approximately
$1.3 million at September 30, 2002. Investment results for both the three and nine months ended September 30, 2002 includes a gain of approximately $0.2 million from the
fair value adjustment relating to the embedded derivatives.

11

---

Investment
results for both the three and nine months ended September 30, 2002 includes realized losses of approximately $0.9 million representing declines in the market
value of certain corporate debentures that management determined to be other than temporary.

Note G. Investment in AMSG

During
the third quarter of 2002, the Company sold 207,900 shares of common stock of AMSG, realizing net proceeds of $3.1 million. On June 4, 2002, the Company sold
3,001,500 shares of common stock of AMSG in an underwritten public offering, realizing net proceeds of $50.3 million. These sales followed a March 22, 2002 repurchase by AMSG from the
Company of 1,400,000 shares of AMSG common stock, for which net proceeds amounted to $18.1 million. As a result of these transactions, the Company's ownership in AMSG decreased from 45.1% as of
December 31, 2001 to 13.2% as of September 30, 2002. Because the ownership percentage decreased below 20% and the Company no longer has the ability to exercise significant influence over
AMSG, the AMSG results subsequent to May 31, 2002 are no longer reported under the equity method of accounting in the Company's statement of operations and the investment in AMSG common stock
has been reclassified from investment in affiliates to investments available-for-sale at fair value in the Company's consolidated balance sheets subsequent to that date. The
remaining shares of AMSG common stock have a fair market value of $24.0 million ($14.14 per share) as of September 30, 2002, and the unrealized investment gain of $1.5 million at
that date is included, net of tax, in accumulated other comprehensive income in shareholders' equity.

The
following information was extracted from the unaudited condensed consolidated statements of operations accompanying the AMSG (NYSE: AMZ) press release dated October 30, 2002.
The periods presented include the periods during which Cobalt recorded its investment in AMSG under the equity method of accounting.

|                           |  | Three months ended
September 30, |         | Nine months ended
September 30, |  
|-------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|
|
|Premium revenue            |  | $                                | 204,399 |                                 | $
|Medical and other benefits |  |                                  | 144,000 |                                 |  
|Underwriting gain          |  |                                  | 60,399  |                                 |  
|Net income (loss)          |  |                                  | 3,504   |                                 |  

---

Note H. Property and Equipment

During
the third quarter of 2002, the Company recorded a non-cash pre-tax charge of $0.6 million to reduce the carrying amount of certain computer software
costs. This charge is included in selling, general, administrative and other expense in the accompanying consolidated statements of operations and is recorded in the insured and specialty products and
services segments. These costs were associated with certain capitalized software written off by the Company where the carrying value exceeded the value of the functionality.

Note I. Debt

On
August 7, 2002, Cobalt entered into a three-year revolving credit arrangement with M&I Marshall & Ilsley Bank ("M&I revolver"). This arrangement provides for
borrowings up to $30.0 million by Cobalt with the availability declining to $25.0 million after one year and to

12

---

$15.0 million after two years. The M&I revolver is collateralized by the common stock of BCBSUW. The M&I revolver bears interest at a rate of LIBOR plus 1.5% to 2.5% depending upon the timing
and amount of borrowings. A commitment fee of 3/8% annually is payable quarterly on the unused portion of the M&I revolver.

As
of September 30, 2002, the outstanding balance on the M&I revolver is $28.0 million at an interest rate of 4.3%. Funds drawn during the third quarter of 2002 were used
by Cobalt to repay certain intracompany balances and to repay the $6.0 million remaining balance on a term business note ("term note") with a commercial bank.

Debt
covenants under the M&I revolver include compliance with a minimum tangible net worth, minimum debt-service/liquidity ratio and risk-based capital
requirements on a quarterly basis. As of September 30, 2002, Cobalt is in compliance with all of the covenants included in the M&I revolver.

Note J. Comprehensive Income (Loss)

A
reconciliation from net income (loss) reported in the consolidated statements of operations to comprehensive income (loss) is stated below:

|                                                               |  | Three months ended
September 30, |         | Nine months ended
September 30, |  
|-------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|
|
|Net income (loss) per consolidated statements of operations    |  | $                                | 13,717  |                                 | $
|Change in unrealized gains/losses on investments, net of taxes |  |                                  | (14,387 | )                               |  
|                                                               |  |                                  |         |                                 |  
|Comprehensive income (loss)                                    |  | $                                | (670    | )                               | $
|                                                               |  |                                  |         |                                 |  

Note K. Shareholders' Equity

The
common stock of Cobalt has no par or stated value. The authorized, issued and outstanding shares of common stock are as follows:

|                  |                                                                 | September 30,
2002 |            | December 31,
2001
|----------------- | --------------------------------------------------------------- | ------------------ | ---------- | -----------------
|Number of shares: |                                                                 |                    |            |                  
|                  | Authorized                                                      |                    | 75,000,000 |                  
|                  | Issued (includes 7,949,904 subsidiary owned shares, see Note A) |                    | 49,453,773 |                  
|                  | Outstanding                                                     |                    | 41,503,869 |                  

In
addition, the Company has 1,000,000 authorized shares of no par value preferred stock, although no shares have been issued to date.

Note L. Segment Reporting

The
Company has four reportable business segments: insured medical products, specialty managed care products and services (previously reported as two separate segments, specialty risk
and specialty service), government services and self-funded products. Insured medical products include: full coverage, copayment, preferred provider organization, Medicare supplement,
interim coverage, health maintenance organization ("HMO") and point of service products sold primarily in Wisconsin. The specialty managed care products and services segment includes dental, life,
disability and workers' compensation products, along with electronic claim submission services, subrogation and hospital bill audit services and receivables management services. The specialty managed
care products and services are sold throughout the United States. The self-funded products consist of administrative services and

13

---

access to Cobalt's extensive provider networks and the BlueCard program. Government services include processing services for Medicare providers throughout the United States and for Medicaid in the
State of Wisconsin.

"Other
continuing operations" include activities not directly related to the business segments, unallocated corporate items (i.e. gain (loss) from investment in affiliates, amortization
of goodwill for periods prior to January 1, 2002 and unallocated overhead expenses) and intracompany eliminations. The Company evaluates segment performance based on profit or loss from
operations before income taxes. The accounting policies of the reportable segments are the same as those described in the Company's December 31, 2001 audited financial statements in the summary
of significant accounting policies.

Financial
data from continuing operations by segment is as follows:

|                         |                                              | Three months ended
September 30,                        |                    | Nine months ended
September 30, |     
|------------------------ | -------------------------------------------- | ------------------------------------------------------- | ------------------ | ------------------------------- | ----
|
|
|Health services revenue: |                                              |                                                         |                    |                                 |     
|                         | Insured medical products                     |                                                         | $                  | 311,386                         |     
|                         | Specialty managed care products and services |                                                         |                    | 46,504                          |     
|                         | Government services                          |                                                         |                    | 28,375                          |     
|                         | Self-funded products                         |                                                         |                    | 7,967                           |     
|                         | Other continuing operations                  |                                                         |                    | (8,541                          | )   
|                         |                                              |                                                         |                    |                                 |     
|                         |                                              |                                                         | Total consolidated |                                 | $   
|                         |                                              |                                                         |                    |                                 |     
|Investment results:      |                                              |                                                         |                    |                                 |     
|                         | Insured medical products                     |                                                         | $                  | 4,388                           |     
|                         | Specialty managed care products and services |                                                         |                    | 1,585                           |     
|                         | Government services                          |                                                         |                    | 144                             |     
|                         | Self-funded products                         |                                                         |                    | 6                               |     
|                         | Other continuing operations                  |                                                         |                    | (1,422                          | )   
|                         |                                              |                                                         |                    |                                 |     
|                         |                                              |                                                         | Total consolidated |                                 | $   
|                         |                                              |                                                         |                    |                                 |     
|Pre-tax income (loss):   |                                              |                                                         |                    |                                 |     
|                         | Insured medical products                     |                                                         | $                  | 11,337                          |     
|                         | Specialty managed care products and services |                                                         |                    | 3,326                           |     
|                         | Government services                          |                                                         |                    | 409                             |     
|                         | Self-funded products                         |                                                         |                    | 1,212                           |     
|                         | Other continuing operations:                 |                                                         |                    |                                 |     
|                         |                                              | Corporate holding company                               |                    |                                 | (825
|                         |                                              | Income (loss) from investment in affiliates, net of tax |                    |                                 | 3   
|                         |                                              |                                                         |                    |                                 |     
|                         |                                              |                                                         | Total consolidated |                                 | $   
|                         |                                              |                                                         |                    |                                 |     

14

---

|              |                                              | September 30,
2002 |                    | December 31,
2001
|------------- | -------------------------------------------- | ------------------ | ------------------ | -----------------
|
|Total assets: |                                              |                    |                    |                  
|              | Insured medical products                     |                    | $                  | 694,198          
|              | Specialty managed care products and services |                    |                    | 103,315          
|              | Government services                          |                    |                    | 31,547           
|              | Self-funded products                         |                    |                    | 17,273           
|              | Other continuing operations                  |                    |                    | 471              
|              |                                              |                    |                    |                  
|              |                                              |                    | Total consolidated |                  
|              |                                              |                    |                    |                  

Total
assets (excluding government services assets and investment in affiliates) are allocated by segment based on the percentage of revenue for the nine months ended
September 30, 2002 and pro forma revenues for the year ended December 31, 2001. Investment in affiliates, which are accounted for using the equity method, are classified in other
continuing operations. The decrease in other continuing operations assets since December 31, 2001 is due to the reduction in the investment in AMSG (see Note G). Reclassifications have
been made to the previously disclosed information to conform with the reporting of discontinued operations.

Transactions
with other operating segments are as follows:

|                         |                                              | Three months ended
September 30, |   | Nine months ended
September 30, |  
|------------------------ | -------------------------------------------- | -------------------------------- | - | ------------------------------- | -
|
|
|Health services revenue: |                                              |                                  |   |                                 |  
|                         | Insured medical products                     |                                  | $ | (2,681                          | )
|                         | Specialty managed care products and services |                                  |   | (5,804                          | )
|                         | Self-funded products                         |                                  |   | (56                             | )
|Investment results:      |                                              |                                  |   |                                 |  
|                         | Insured medical products                     |                                  |   | (1,330                          | )
|                         | Specialty managed care products and services |                                  |   | (151                            | )
|                         | Other continuing operations                  |                                  |   | (1                              | )

Note M. Recent Accounting Pronouncements

On
January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". Under the new statement, goodwill is no longer amortized but is subject to
annual impairment tests in accordance with the standard. As of June 30, 2002, management completed the Company's initial annual impairment test in accordance with SFAS No. 142 and
determined that no impairment of goodwill existed at that date. In addition, due to the Company's reduction of its investment in AMSG (see Note G) below 20%, no additional writedowns related to
impairment charges recorded by AMSG were required. Total goodwill amortization on continuing operations was $3.2 million for the nine months ended September 30, 2001. On a pro forma
basis (as if the Combination occurred at the beginning of the reporting period), goodwill amortization of $4.6 million would have been recorded for the nine months ended September 30,
2001.

15

---

The
following table illustrates net income (loss) and net income (loss) per share adjusted to exclude the effects of adopting SFAS No. 142:

|                                          |                       | Three months
ended
September 30, 2001 |       | Nine months
ended
September 30, 2001 |  
|----------------------------------------- | --------------------- | ------------------------------------- | ----- | ------------------------------------ | -
|
|Reported net income (loss)                |                       | $                                     | 1,057 |                                      | $
|Add back: Goodwill amortization           |                       |                                       | 1,530 |                                      |  
|                                          |                       |                                       |       |                                      |  
|Adjusted net income                       |                       | $                                     | 2,587 |                                      | $
|                                          |                       |                                       |       |                                      |  
|Diluted earnings (loss) per common share: |                       |                                       |       |                                      |  
|                                          | Reported EPS          |                                       | $     | 0.03                                 |  
|                                          | Goodwill amortization |                                       |       | 0.03                                 |  
|                                          |                       |                                       |       |                                      |  
|                                          | Adjusted EPS          |                                       | $     | 0.06                                 |  
|                                          |                       |                                       |       |                                      |  

On
January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement modifies existing
guidance governing the accounting for dispositions of company assets as discontinued operations in the accompanying consolidated financial statements. Refer to Note C for Discontinued
Operations of the Company.

In
June of 2002, the Financial Accounting Standards Board approved the issuance of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement
addresses financial accounting and reporting for costs associated with exit or disposal activities. The Company intends to adopt the provisions of SFAS No. 146 for all exit or disposal
activities that are initiated after December 31, 2002 in accordance with this statement.

Note N. Commitments and Contingencies

On
June 20, 2002, the Company filed a registration statement with the SEC covering the potential sale of 2.5 million newly issued shares of Cobalt common stock by the
Company and 5.0 million issued and outstanding shares of Cobalt common stock by the Foundation. The Company filed an amendment to the registration statement on July 9, 2002. In
conjunction with this offering, the Company is responsible for legal and accounting fees, printing and other out-of-pocket costs for all shares offered. Costs have been
capitalized as incurred. Capitalized costs would be offset against offering proceeds. On August 8, 2002, the Company withdrew its offering due to unfavorable market conditions. If the Company
is unable to complete an offering of primary shares during 2002, it will be required to expense offering costs of approximately $1.0 million.

In
2001, Cobalt entered into an engagement letter with an investment bank to provide advisory services in connection with potential financial transactions. This agreement was terminated
in March 2002. The engagement letter provided that Cobalt pay a fee in respect of a transaction effected within twelve months of termination equal to $3.5 million or a percentage of the
transaction value (as defined). This fee obligation could be claimed to extend to one of more of our asset dispositions effected in 2002, a stock offering and to subsequent transactions. No such claim
has been made, and the Company would dispute any claim, should one be made.

The
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") includes administrative provisions imposing significant new requirements relating to maintaining the privacy of
medical information ("Privacy"), establishing uniform health care provider and employer identifiers, requiring use of standardized transaction formats ("Transactions") and seeking protections for
confidentiality and security of patient data ("Security"). While the implementation deadlines for Privacy and Transactions will occur in 2003, there is no implementation deadline for Security at this
time because there have been no final Security regulations issued. The law is far-reaching and complex, and

16

---

proper interpretation and practice under the law continue to evolve. Consequently, our efforts to measure, monitor and adjust our business practices to comply with HIPAA are ongoing. Compliance with
HIPAA could require us to make significant changes to our operations and failure to comply could subject us to civil and criminal penalties. The costs of complying with HIPAA are likely to be
substantial.

Note O. Reclassifications

Certain
reclassifications have been made to the interim consolidated financial statements for 2001 to conform with the 2002 presentation, specifically regarding discontinued operations.

Note P. Subsequent Events

On
October 28, 2002, Cobalt announced that it intends to assist the Foundation in satisfying its contractual divestiture obligations by filing a shelf registration statement with
the SEC covering 6.5 million shares of Company stock owned by the Foundation as soon as practicable. In addition, the Company announced plans to include 0.5 million primary shares of
Cobalt common stock in the shelf registration. A shelf registration will permit the Foundation to sell its Cobalt shares from time to time through underwritten offerings, negotiated block transactions
or other means. The Foundation has advised the Company that it has no specific immediate plans to sell its shares, but that it intends to monitor market conditions after the effectiveness of the
registration statement and to sell stock opportunistically.

On
October 28, 2002, the Company announced that Thomas R. Hefty will step down as Chairman and CEO on December 1, 2002, and will retire two months thereafter. Consistent
with past practices in similar situations, the Management Review Committee of the Board of Directors approved the accelerated vesting of Mr. Hefty's stock options upon his retirement. As a
result, Cobalt will record an expense for the accelerated vesting in accordance with Accounting Principles Board Opinion No. 25 in the amount of 36,875 option shares multiplied by the
difference between quoted market value and the exercise price of $4.31 per share.

17

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Cobalt Corporation ("Cobalt" or the "Company") (formerly known as United Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of
UWS and Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") on March 23, 2001 (the "Combination"). See Note A, Basis of Presentation, for further discussion on the
Combination.

Cobalt
is the leading managed care company in Wisconsin, offering a broad portfolio of managed care and insurance products to employers, individuals and government entities. Cobalt has
an exclusive license to utilize the Blue Cross and Blue Shield service marks in Wisconsin, giving Cobalt a unique position in that market. As of September 30, 2002, Cobalt serviced 596,139
lives in the health insurance operations and 338,825 lives in the dental insurance programs.

BCBSUW
provides underwritten products, including preferred provider organizations ("PPO") and indemnity options, as well as self-funded, administrative services only
programs. Compcare Health Services Insurance Corporation ("CompcareBlue") operates the oldest health maintenance organization ("HMO") in Wisconsin.

Cobalt
offers one of the largest provider networks in Wisconsin. All of Cobalt's customers, including HMO members, have the ability to access the leading physicians and hospitals in
their respective service areas, including Mayo Health Systems, University Health Care and Aurora Health Care. Cobalt believes that its ability to offer a full spectrum of products and a broad provider
network to meet the needs and objectives of a wide range of customers provides Cobalt with a competitive advantage.

Cobalt
offers a variety of specialty managed care products, including dental, life and disability insurance. Cobalt is one of the largest providers of dental HMO and dental indemnity
coverage in Wisconsin. Cobalt also offers workers' compensation insurance and a variety of specialty managed care
services, including cost containment, health care electronic data interchange and receivables management services. These specialty managed care products and services are designed to complement
Cobalt's customers' employee benefit packages. Cobalt also processes Medicare claims as a Medicare Part A fiscal intermediary and a Regional Home Health intermediary for providers in numerous
states and several U.S. territories and as a national intermediary for the Federally Qualified Health Centers in all 50 states.

Cobalt
markets its medical and dental products through a salaried sales force located throughout Wisconsin, as well as through independent agents and brokers, and directly to customers
via the internet. By integrating the marketing of Cobalt's medical products, Cobalt is able to offer a broad range of product choices to health care consumers. Cobalt sells its specialty managed care
products and services to employer groups and providers, principally in Wisconsin, through a variety of distribution channels.

In
the discussion to follow, the number of "members" is equivalent to the number of persons covered by contracts in force as of the indicated date.

18

---

Summary of Membership and Ratios

As of September 30,2002

2001Membership:Insured medical products

460,901

540,324Specialty managed care products and services

556,982

593,967Self-funded products(1):Medical

135,238

130,449Dental

35,000

37,199Total membership

1,188,121

1,301,939Workers' CompensationPolicies in force

830

720Membership (as a percentage of the total):Insured medical products

38.8
%
41.5
%Specialty managed care products and services

46.9

45.6Self-funded products:Medical

11.4

10.0Dental

2.9

2.9Total membership

100.0
%
100.0
%


---

19

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Summary of Operating Results and Ratios

|                                                           |                                                 | Three months ended
September 30, |   | Nine months ended
September 30, |        
|---------------------------------------------------------- | ----------------------------------------------- | -------------------------------- | - | ------------------------------- | -------
|
|
|Revenues:                                                  |                                                 |                                  |   |                                 |        
|                                                           | Insured medical products                        |                                  | $ | 311,386                         |        
|                                                           | Specialty managed care products and services    |                                  |   | 46,504                          |        
|                                                           | Government services                             |                                  |   | 28,375                          |        
|                                                           | Self-funded products                            |                                  |   | 7,967                           |        
|                                                           | Other operations(2)                             |                                  |   | (8,541                          | )      
|                                                           |                                                 |                                  |   |                                 |        
|                                                           |                                                 | Total health services revenue    |   |                                 | 385,691
|                                                           | Investment results                              |                                  |   | 4,701                           |        
|                                                           |                                                 |                                  |   |                                 |        
|                                                           |                                                 | Total revenues                   |   | $                               | 390,392
|                                                           |                                                 |                                  |   |                                 |        
|Health services revenue (as a percentage of the total):    |                                                 |                                  |   |                                 |        
|                                                           | Insured medical products                        |                                  |   | 80.7                            | %      
|                                                           | Specialty managed care products and services    |                                  |   | 12.0                            |        
|                                                           | Government services                             |                                  |   | 7.4                             |        
|                                                           | Self-funded products                            |                                  |   | 2.1                             |        
|                                                           | Other operations(2)                             |                                  |   | (2.2                            | )      
|                                                           |                                                 |                                  |   |                                 |        
|                                                           |                                                 | Total                            |   |                                 | 100.0  
|                                                           |                                                 |                                  |   |                                 |        
|Operating loss ratio:                                      |                                                 |                                  |   |                                 |        
|                                                           | Insured medical products(3)                     |                                  |   | 86.6                            | %      
|Selling, general, administrative and other expense ratios: |                                                 |                                  |   |                                 |        
|                                                           | Insured medical products(4)                     |                                  |   | 11.1                            | %      
|                                                           | Government services(5)                          |                                  |   | 99.1                            | %      
|                                                           | Self-funded products(6)                         |                                  |   | 84.8                            | %      
|Combined loss and expense ratio:                           |                                                 |                                  |   |                                 |        
|                                                           | Specialty managed care products and services(7) |                                  |   | 96.1                            | %      

---

20

---

Cobalt's
revenues are derived primarily from premiums, while medical benefits constitute the majority of expenses. Profitability is directly affected by many factors including, among
others, premium rate adequacy, estimates of medical benefits, health care utilization, effective administration of benefit payments, operating efficiency, investment returns and federal and state laws
and regulations.

Results of Operations

Total Revenues

Total revenues for the three months ended September 30, 2002 decreased 6.3% to $390.4 million from $416.8 million for the three months ended
September 30, 2001. The decrease for the quarter is due primarily to a decrease of 8.7% in total membership between September 30, 2002 and September 30, 2001. The 2002 membership
decrease is the result of group cancellations in the insured medical segment, which were driven by large rate increases on unprofitable insured medical products business. For the nine months ended
September 30, 2002, total revenues increased 13.8% to $1,154.2 million, compared to $1,014.6 million for the nine months ended September 30, 2001. This increase was due
primarily to the Combination and resultant addition of the UWS business. Premium rate increases on continuing insured medical products business were another factor contributing to the increase.

Health Services Revenue

Insured Medical Products.Insured medical products revenue for the three months ended September 30, 2002 decreased
7.6% to $311.4 million from $336.9 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, insured medical revenue increased
13.3% to $922.7 million from $814.3 million for the nine months ended September 30, 2001. The number of insured medical members as of September 30, 2002 decreased to
460,901 from 540,324 as of September 30, 2001. The decrease in both premium revenues and membership for the three months ended September 30, 2002 is primarily due to BCBSUW's exit from
the Medicare+Choice program effective January 1, 2002 and cancellations of unprofitable HMO business. The increase in premium revenue for the nine months ended September 30, 2002 is
primarily due to the Combination and resultant addition of the UWS business.

Self-funded Products.Self-funded administrative fees for the three months ended September 30,
2002 increased 25.0% to $8.0 million from $6.4 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, self-funded
administrative fees increased 9.0% to $23.0 million from $21.1 million for the nine months ended September 30, 2001. Self-funded membership increased slightly from
167,648 as of September 30, 2001 to 170,238 as of September 30, 2002. The significant increase in administrative fees is primarily attributable to increased volume in the BlueCard
program. Under the BlueCard program, the Company does not maintain membership but receives an administrative fee and percentage of discounts for members from other Blue Plans that access medical care
in Wisconsin.

Specialty Managed Care Products and Services.Specialty managed care products and services revenue for the three months ended
September 30, 2002 increased 3.1% to $46.5 million from $45.1 million for the three months ended September 30, 2001. This slight increase results primarily from premium
rate increases, offset by decreases in total membership due to cancellations in the dental, disability and life and accidental death and dismemberment lines. For the nine months ended
September 30, 2002, specialty managed care products and services revenue increased 40.7% to $137.3 million from $97.6 million for the nine months ended September 30, 2001
due primarily to the Combination and resultant addition of the UWS business.

21

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Government Services.Government services revenue for the three months ended September 30, 2002 decreased 13.4% to
$28.4 million from $32.8 million for the three months ended September 30, 2001. The decrease in revenues between the three months ended September 30, 2002 and the three
months ended September 30, 2001 is partially due to a decrease in funding for administration of the Medicare contract. This decrease amounted to $2.1 million during the three months
ended September 30, 2002. Additionally, in the third quarter of 2001, United Government Services, LLC ("UGS") incurred a one-time reimbursable expense of $1.7 million.
Since UGS is a cost reimbursed Medicare contractor, decreases in its expenses will result in corresponding decreases in revenue. Government services revenue for the nine months ended
September 30, 2002 decreased 4.1% to $85.2 million from $88.8 million for the nine months ended September 30, 2001.

Investment Results

Net investment results include investment income and realized gains (losses). Net investment results for the three months ended September 30, 2002
increased 34.3% to $4.7 million from $3.5 million for the three months ended September 30, 2001. Net investment results for the nine months ended September 30, 2002
increased 25.6% to $11.3 million from $9.0 million for the nine months ended September 30, 2001. Included in the net investment results for both the three and nine months ended
September 30, 2002 are $0.9 million in realized investment losses recorded in the third quarter of 2002 relating to market value declines determined to be
other-than-temporary. The increase in net investment results for the nine months ended September 30, 2002 is primarily due to an increase in invested assets resulting
from several factors, including the addition of the UWS invested assets at the Combination, proceeds from the sale of American Medical Security Group ("AMSG") shares during the first three quarters of
2002 (see Note G) and proceeds from the sale of Innovative Resource Group, LLC ("IRG") (see Note C) during the first quarter of 2002. Partially offsetting the increase in investment
income from invested assets was the elimination of BCBSUW investment income related to intracompany financing arrangements with UWS, subsequent to March 31, 2001, due to the Combination and a
decrease in interest rates on new investment purchases. The intracompany investment income for the three months ended March 31, 2001 (which does not get eliminated) amounted to
$1.3 million and is included in the statements of operations for the nine month period ended September 30, 2001. Average annual investment yields, excluding net realized gains,
investment income from affiliates and other interest income, were 4.6% and 4.8% for the three and nine months ended September 30, 2002, respectively, and 5.4% and 6.0% for the three and nine
months ended September 30, 2001, respectively.

Expense Ratios

Loss Ratio.The insured medical products loss ratio for the three months ended September 30, 2002 was 86.6% compared
with 91.6% for the three months ended September 30, 2001. For the nine months ended September 30, 2002, the insured medical products loss ratio was 87.2% compared with 91.0% for the nine
months ended September 30, 2001. The continued improvement in the insured medical products loss ratio is primarily due to improvement in the loss ratio for HMO business attributable to premium
rate increases in 2002, which also resulted in the cancellation of unprofitable business.

Selling, General, Administrative and Other Expense Ratio.The selling, general, administrative and other ("SGA") expense
ratio includes commissions, administrative expenses, premium taxes and other assessments and claim interest expense. For non-insurance subsidiaries, SGA includes operating expenses only.

The
insured medical products SGA expense ratio for the three months ended September 30, 2002 was 11.1% compared with 9.3% for the three months ended September 30, 2001. The
insured medical products SGA expense ratio for the nine months ended September 30, 2002 was 11.0% compared with

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9.6% for the nine months ended September 30, 2001. The increase in the SGA expense ratio for both the three and nine month periods ending September 30, 2002 resulted primarily from a
decrease in revenue from cancellation of unprofitable business that was not matched by a decrease in staff due to efforts to maintain service levels.

The
combined loss and expense ratio for specialty managed care products and services for the three months ended September 30, 2002 improved to 96.1% from 97.2% for the three
months ended September 30, 2001. The combined loss and expense ratio for specialty managed care products and services for the nine months ended September 30, 2002 improved to 96.7% from
97.7% for the nine months ended September 30, 2001. The improvement for both the three and nine month periods ended September 30, 2002 is due to the Combination and resultant addition of
the UWS specialty managed care products and services business, particularly the service related products such as subrogation, hospital bill audit and electronic claims services, which have run at a
lower overall operating expense ratio than the combined loss and expense ratio for the specialty insurance lines.

The
operating expense ratio for government services for the three months ended September 30, 2002 improved to 99.1% from 99.3% for the three months ended September 30,
2001. The expense ratio for government services for the nine months ended September 30, 2002 improved to 98.5% from 99.4% for the nine months ended September 30, 2001. The improved
expense ratio is primarily a result of
increased funding on an existing subcontract for Medicaid claim processing services. The increased funding resulted from a contract extension that became effective January 1, 2002.

The
operating expense ratio for self-funded products for the three months ended September 30, 2002 improved to 84.8% from 113.3% for the three months ended
September 30, 2001. The expense ratio for self-funded products for the nine months ended September 30, 2002 improved to 90.3% from 115.8% for the nine months ended
September 30, 2001. The improved expense ratio is primarily the result of an increase in the volume of business serviced under the BlueCard program. Under this program, the Company does not
maintain membership but receives an administrative fee and percentage of discounts for members from other Blue Plans that access services in Wisconsin. Costs associated with servicing this business
are significantly lower than the costs associated with servicing other self-funded accounts. In addition, increases in administrative fees on existing self-funded business have
also contributed to the improvement in the expense ratio.

SGA
expenses recorded at the corporate holding company for the nine months ended September 30, 2002 include an accrual for a $1.0 million contribution due to the Foundation
on February 1, 2003. In addition, SGA expenses for the nine months ended September 30, 2002 were offset by a favorable vendor settlement of $3.8 million recorded during the first
quarter.

Other Expenses

As a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 on January 1, 2002, there was no goodwill amortization
recorded for the three and nine months ended September 30, 2002. This compares with goodwill amortization of $1.5 million and $3.2 million recorded for the three and nine months
ended September 30, 2001, respectively. Goodwill amortization recorded for the three months ended September 30, 2001 primarily represents amortization related to the $65.6 million
recorded from the Combination, which was amortized on a straight-line basis over a period of 15 years. The reduction in goodwill between December 31, 2001 and
September 30, 2002 reflects adjustments to the tax related goodwill recorded from the Combination. These adjustments relate to the recognition of a valuation allowance on the net deferred
income tax asset that was previously recorded by UWS. The goodwill was adjusted downward during the nine months ended September 30, 2002 by $0.8 million to reflect changes in temporary
differences on the related net deferred tax asset.

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Income (Loss) from Investment in Affiliates

Income (loss) from investment in affiliates was insignificant for the three months ended September 30, 2002. This compares to the three months ended
September 30, 2001, in which the Company recognized income of $1.6 million, which was primarily comprised of equity in the AMSG affiliate. For the nine
months ended September 30, 2002, the income (loss) from investment in affiliates improved to a gain of $15.3 million compared to $0.4 million for the nine months ended
September 31, 2001. The results for the nine months ended September 30, 2002 are primarily comprised of the Company's equity in AMSG net income of $3.9 million combined with a net
gain of $9.8 million on the sale of 4.4 million shares of AMSG stock during the first two quarters. In addition, the Company recognized income of $1.6 million in the second
quarter of 2002, which relates primarily to its proportionate share of tax benefit recorded by Family Health Systems, Inc. ("FHS"), a 50% owned affiliate, due to a change in tax laws regarding
the carry-back of net operating losses. The results for the nine months ended September 30, 2001 are comprised primarily of BCBSUW's equity in UWS income for the three month period
ended March 31, 2001 (prior to the Combination) of $0.4 million, offset by equity in an insignificant year-to-date loss for AMSG. The decrease in the investment
in affiliates, net balance between September 30, 2002 and December 31, 2001 on the accompanying balance sheets results from the reclassification of the Company's investment in AMSG,
which is no longer reported under the equity method of accounting due to the Company's ownership percentage in AMSG decreasing below 20% (see Note G). Effective with the June 2002
balance sheet, the investment in AMSG is reported as an available-for-sale investment at fair market value.

Income (Loss) from Discontinued Operations

Income from discontinued operations for the nine months ended September 30, 2002 consisted of the first quarter net operating loss of IRG of
$0.7 million and an after-tax realized gain on the sale of IRG to APS Healthcare Bethesda, Inc. ("APS") on March 29, 2002 (see Note C) in the amount of
$9.6 million, including a tax-related adjustment recorded during the third quarter of 2002.

Net Income (Loss)

Consolidated net income improved for the three months ended September 30, 2002 to $13.7 million compared to $1.1 million for the three months
ended September 30, 2001. The $13.7 million of income for the three months ended September 30, 2002 was the combination of $15.5 million in operating income from continuing
operations, offset by income tax expense on continuing operations of $1.6 million and a tax adjustment of $0.2 million from discontinued operations. For the nine months ended
September 30, 2002, net income improved to a gain of $58.8 million compared to a net loss of $1.5 million for the same period in 2001. The enhanced operating results reflect
improvement of $40.6 million in operating income from continuing operations, improvement of $14.9 million in income from investment in affiliates and improvement of $8.4 million
in income from discontinued operations, offset by a $3.7 million increase in income taxes. The improvement in operating income from continuing operations primarily reflects improvement in the
insured medical products loss ratio (resulting from exiting the Medicare+Choice program, cancellations of unprofitable business and premium rate increases), increased volume in the BlueCard program
and the $3.8 million favorable vendor settlement recorded as a reduction to SGA expenses, offset by the $1.0 million contribution to the Foundation. The improvement in income from
investment in affiliates reflects year-to-date net realized gains of $9.8 million on the sale of AMSG shares during both the first and second quarters of 2002, along
with the $1.6 million in income related to FHS and improved 2002 operating results at AMSG. The income from discontinued operations primarily reflects the net realized gain of
$9.6 million on the sale of IRG.

As
of September 30, 2002, Cobalt had federal net operating loss carry-forwards of approximately $74 million available to offset future taxable income. The Company has been
able to reduce income tax

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expense through utilization of certain net operating loss carryforwards. After certain of these net operating loss carry-forwards are fully utilized, the Company's effective tax rate will increase.
Cobalt had a current tax expense of $5.3 million and a deferred tax benefit of $3.7 million for the three months ended September 30, 2002 on continuing operations. For the nine
months ended September 30, 2002, Cobalt recorded current tax expense of $7.6 million and a deferred tax benefit of $3.7 million. The Company recorded current and deferred income
tax expense in the amount of $0.2 million for both the three and nine month periods ended September 30, 2001.

Liquidity and Capital Resources

Cobalt's sources of cash flow consist primarily of health services revenues and investment income. The primary uses of cash include medical and other benefit
payments, as well as operating expense payments. Positive cash flows are invested pending future payments of medical and other benefits and other operating expenses. Cobalt's investment policies are
designed to maximize yield, preserve principal and provide liquidity to meet anticipated payment obligations.

Cobalt's
operating cash flow improved during the nine months ended September 30, 2002, in comparison with the nine months ended September 30, 2001. Cash provided by
continuing operations improved to $33.1 million from $0.1 million in cash used in continuing operations for the nine months ended September 30, 2001. This reflects improved
operating results in all four of the Company's reportable business segments, an increase in the advance premium balance and improved cash collections related to balances due from clinics and providers
and other receivables. Cash provided by investing activities for the nine months ended September 30, 2002 includes proceeds of $71.5 million from the sale of 4.6 million shares of
AMSG common stock (see Note G) and $17.0 million in cash proceeds received from the sale of IRG (see Note C). The majority of the strong positive cash inflows during the nine
months ended September 30, 2002 were used to purchase available-for-sale investment securities.

On
August 7, 2002, Cobalt entered into a three-year revolving credit arrangement with M&I Marshall & Ilsley Bank ("M&I revolver"), which allows borrowings up to
$30.0 million. This M&I revolver provides up to $30.0 million of available credit to Cobalt with the availability declining to $25.0 million after one year and to
$15.0 million after two years. The M&I revolver bears interest at a rate of LIBOR plus 1.50% to 2.50% depending upon the timing and amount of borrowings. Cobalt's outstanding balance on the M&I
revolver was $28.0 million as of September 30, 2002. The Company also has a bank line-of-credit ("LOC") in which certain subsidiaries, excluding the corporate
holding company, can participate. The LOC permits aggregate borrowings up to $20.0 million, with company specific maximums, for the participating companies. Cobalt's outstanding balance of the
LOC was $0.4 million as of September 30, 2002.

In
addition, the Company had a term business note ("term note") for the corporate holding company with a commercial bank for $7.5 million that originated on December 31,
2001. The term note was fully repaid in 2002, including a final payment of $6.0 million during the quarter ended September 30, 2002.

Interest
expense on the bank LOC, M&I revolver and the term note discussed above totaled $0.1 million for the three months ended September 30, 2002 and $0.2 million
for the three months ended September 30, 2001. Interest expense totaled $0.4 million for both the nine months ended September 30, 2002 and 2001.

The
BlueCross BlueShield Association (the "Association") requires BCBSUW and CompcareBlue to maintain a prescribed liquidity ratio of certain liquid assets to average monthly expenses,
as defined, in accordance with licensure requirements of the Association. BCBSUW and CompcareBlue maintained these required levels as of September 30, 2002.

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Cobalt's
investment portfolio consists primarily of investment-grade and high-yield bonds, bond-related mutual funds and government securities and has a limited
exposure to equity securities and convertible securities (bonds and preferred stocks). At September 30, 2002, $309.4 million or 86.0% of Cobalt's total investment portfolio was invested
in bonds, bond-related mutual funds and government securities compared with $188.1 million or 98.1% at December 31, 2001. Investments classified as
available-for-sale at September 30, 2002 include convertible debentures and convertible preferred stock with a cost of approximately $12.4 million. No convertible
securities were held at December 31, 2001. The convertible securities are considered hybrid instruments, and the Company separately accounts for the derivatives embedded therein. In accordance
with SFAS No. 133, "Accounting for Derivatives and Hedging Activities" the embedded derivatives are reflected in the balance sheet at fair value, and changes in fair value are recognized
currently in investment results. The fair value of the embedded derivatives was approximately $1.3 million at September 30, 2002. The bond portfolio had an average quality rating by
Moody's Investor Service of "Aa3" at September 30, 2002 and December 31, 2001. At September 30, 2002, $347.1 million or 96.5% of Cobalt's total investment portfolio was
classified as available-for-sale, compared with $180.7 million or 93.4% as of December 31, 2001. The market value of the total investment portfolio was greater
than amortized cost by $13.6 million at September 30, 2002 and $0.3 million at December 31, 2001. For both the three and nine month periods ended September 30, 2002,
realized gains related to the embedded derivatives were $0.2 million. Cobalt had no investments in mortgage loans, non-publicly traded securities (except for investments related to
its affiliates) or real estate held for investment for all periods presented.

Cobalt
has an outstanding LOC in the amount of $15.0 million as of September 30, 2002 available to Health Professionals of Wisconsin, Inc. The receivable balance was
$3.0 million and $4.6 million as of September 30, 2002 and September 30, 2001, respectively. Interest on the LOC is calculated using the prime rate.

Cobalt
holds a note receivable from APS in the amount of $10.0 million that originated on March 29, 2002 related to the sale of IRG. The note has a stated interest rate of
prime plus 3.5% per annum payable annually and is due on June 30, 2005 or upon closing of an initial public offering by APS, whichever comes first. The $10.0 million note was discounted
to $8.5 million to yield 16% per year.

As
of September 11, 1998, UWS entered into a $70.0 million note obligation due to BCBSUW with an original maturity date of April 30, 2001 in connection with the
spin-off in 1998 of AMSG's managed care companies and specialty business. Cobalt pledged the common stock of its CompcareBlue subsidiary as collateral for the note obligation. The maturity
date was subsequently extended to January 2, 2003 at an interest rate of 7.38% on February 14, 2002. This note is included by BCBSUW in determining its statutory capital and surplus.
Effective with the Combination for purposes of Cobalt's GAAP financial statements, the principal amount of this note, together with all related interest expenses, are eliminated in consolidation. In
October 2002, the Company received approval from the OCI and satisfied the $70.0 million obligation due BCBSUW from Cobalt. The debt obligation under the note was satisfied in full
through the transfer of all of the common stock of CompcareBlue.

Under
the OCI order issued in connection with the Combination, Cobalt is required to obtain the approval of the OCI prior to any issuance of its common stock. This approval is required
until the OCI determines that its oversight is no longer necessary to protect the Foundation against improper dilution of its equity interest.

Statutory Capital

Cobalt is required to maintain certain levels of statutory capital and surplus under the National Association of Insurance Commissioners ("NAIC") Risk Based
Capital ("RBC") requirements.

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Wisconsin insurers are also subject to compulsory and security surplus requirements based upon a percentage of underwritten premiums, with the applicable percentage determined by line of business. In
addition to statutory capital requirements, Cobalt, BCBSUW and CompcareBlue are required to maintain certain levels as determined by the Association. Cobalt, BCBSUW and CompcareBlue were in compliance
with these requirements as of September 30, 2002.

Included
in the statutory capital of certain insurance subsidiaries of Cobalt are particular interests in, or obligations of, affiliates. United Wisconsin Insurance Company ("UWIC"), a
wholly-owned subsidiary of CompcareBlue, previously recorded as an admitted asset an intracompany secured note from Cobalt in the amount of $22.8 million payable by October 1, 2002. This
obligation was repaid by Cobalt in full on September 9, 2002.

Management's Plan

Operating losses incurred during 1999 through 2001 reduced the statutory surplus of Cobalt's insurance subsidiaries. Despite these operating losses and the
implementation of changes in statutory accounting ("Codification") effective January 1, 2001, the Company complied with minimum capital and liquidity requirements of the OCI and the
Association, during 2001, 2000 and 1999. The Company maintained compliance, in part, by contributing regulated and non-regulated subsidiaries to regulated entities and by collateralizing
certain intracompany debt obligations with the common stock of affiliated entities. Following a review by the OCI of these intracompany transactions, Cobalt agreed with the OCI as to how these
transactions should be treated for surplus and capital calculations. In addition, at the request of the OCI, the Company prepared a plan of action to satisfy these intracompany obligations and
strengthen the Company's capital to assure that the Company's insurance subsidiaries continue to satisfy the minimum capital and liquidity requirements of the OCI and the Association.

The
outstanding common stock of CompcareBlue provided the collateral for approximately $70 million borrowed by Cobalt from BCBSUW through September 30, 2002. This
intracompany balance has been eliminated in the accompanying consolidated balance sheets. However, the intracompany balances continued to be an obligation of Cobalt to BCBSUW ($70.0 million) in
the statutory-basis financial statements of BCBSUW as of September 30, 2002. In October 2002, the Company received approval from the OCI and satisfied the $70.0 million obligation
due BCBSUW from Cobalt. The debt obligation under the note was satisfied in full through the transfer of all of the common stock of CompcareBlue.

Management
provided to and discussed the capital plan with the OCI and the Association. With the Company's transfer of CompcareBlue to satisfy fully the debt obligations under the
$70.0 million note due BCBSUW from the Company, the Company has substantially completed all aspects of the capital plan discussed below:



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In
addition, the Company has agreed with the OCI not to enter into certain intracompany transactions, including loans, guarantees, reinsurance arrangements, and other operational and
financial arrangements, and the insurance subsidiaries are prohibited from paying any dividends, without the approval of the OCI. The Company has also agreed to adhere to certain practices in
conducting and accounting for affiliate transactions, notably involving the lending practices previously described. The Company will not use uncollateralized, non-operating intracompany
balances in complying with minimum capital and liquidity requirements. The Company has reflected the revised practices in the December 31, 2001 and the 2002 quarterly regulated subsidiary
statutory-basis financial statements filed with the OCI and other regulatory agencies. The Company has also agreed not to enter into any new reinsurance arrangements with third parties without the
approval of the OCI.

As
of September 30, 2002, the Company's insurance subsidiaries were in compliance with the capital requirements prescribed by the OCI. The Company expects that its insurance
subsidiaries will maintain compliance throughout 2002. Non-compliance with minimum capital and liquidity requirements or any of the requirements described above may subject the Company to
various regulatory actions by the OCI, including, among others, revocation of the Company's licenses to sell insurance products in Wisconsin and placing the Company under state regulatory control.

Certain
of the Company's insurance subsidiaries are also subject to minimum capital levels for licensure established by the Association. All such subsidiaries were in compliance with
such requirements at September 30, 2002.

Inflation

Health care costs have been rising and are expected to continue to rise at a rate that exceeds the consumer price index. The Company's cost control measures,
risk-sharing incentive arrangements with medical care providers and premium rate increases are designed to reduce the adverse effect of medical cost inflation on its operations. In
addition, the Company utilizes 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 these efforts will fully
offset the impact of inflation or that premium revenue increases will equal or exceed increasing health care costs.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of these consolidated financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including those related to allowances for doubtful accounts, deferred tax assets, impairment of investments, goodwill impairment, medical and other benefits
payable and litigation and tax contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be

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reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.

A
discussion of certain accounting policies and estimates deemed by the Company to be critical to an understanding of the Company's financial condition and results of operations is
contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2001.

Cautionary Statement

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of the United States
Private Securities Litigation Reform Act of 1995. Forward-looking statements can generally be identified because they are preceded by or include words like "anticipate," "believe," "estimate,"
"expect," "forecast," "objective," "plan," "possible," "potential," "project" and similar expressions. Forward-looking statements are statements based upon management's expectations at the time such
statements are made and are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those contemplated in the statements. Those risks and
uncertainties include rising health care costs, business conditions, impact of elimination of memberships, competition in the managed care industry, developments in health care reform and other
regulatory issues. Readers are cautioned not to place undue reliance on the forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Because of its investment policies, the primary market risks associated with Cobalt's portfolio are interest rate risk, credit risk and the risk related to
fluctuations in equity prices. With respect to interest rate risk, a rise in interest rates could negatively affect the fair value of Cobalt's bond portfolio. However, because Cobalt considers it
unlikely that it would need or choose to substantially liquidate its portfolio, Cobalt believes that such an increase in interest rates would not have a material impact on future earnings or cash
flows. In addition, Cobalt is exposed to market risk related to changes in an issuer's credit rating or credit perception.

The
overall goal of the investment portfolio is to support the ongoing operations of Cobalt. Cobalt's philosophy is to manage assets to maximize total return over a
multiple-year time horizon, subject to appropriate levels of risk. Cobalt manages these risks by establishing gain and loss tolerances, targeting asset-class allocations, diversifying
among asset classes and segments within various asset classes and using performance measurement and reporting.

Cobalt
uses a sensitivity model to assess the interest rate risk of its fixed income investments. The model includes all fixed income securities held as of September 30, 2002 and
incorporates assumptions regarding the impact of changing interest rates on expected cash flows for certain financial assets with prepayment features, such as callable bonds and mortgage-backed
securities. The reduction in fair value of Cobalt's modeled financial assets resulting from a hypothetical instantaneous 100 basis point increase in the U.S. Treasury yield curve is estimated at
$11.9 million as of September 30, 2002.

Item 4. Controls and Procedures

The registrant's certifying officers have evaluated the effectiveness of the design and operation of the Company's internal controls and disclosure controls and
procedures within 90 days prior to the date of this quarterly report. Based upon that review, the certifying officers have concluded that the internal controls and disclosure controls and
procedures are effectively operating to ensure that material information relating to the Company and its consolidated subsidiaries is made known to such officers by others within those entities,
particularly during the period in which this quarterly report was being

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prepared. The review of internal controls and disclosure controls and procedures did not reveal any significant deficiencies in the design or operation, which could adversely affect the Company's
ability to record, process, summarize and report financial data. The Company did not discover any material weaknesses in these controls or procedures, nor did the Company discover any fraud of any
kind involving management or other employees who have a significant role in the Company's internal controls. There were no significant changes in the internal controls or in other factors that could
significantly affect internal controls subsequent to the date of evaluation, including any corrective actions taken with regard to significant deficiencies or material weaknesses, and there are no
corrective actions contemplated as of the date of this report. The Company did not identify any significant
changes that need to be made to ensure the effectiveness of the internal controls or the disclosure controls and procedures. Nor did the Company identify any other factors that could materially affect
the internal controls occurring after the date of our certification.

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PART II. OTHER INFORMATION

Cobalt Corporation

Item 1. Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K



| |  | 10.1 |  | Loan Agreement by and between M&I Marshall & Ilsley Bank and Cobalt dated as of August 7, 2002.(1)                                                
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.2 |  | Pledge Agreement by and between M&I Marshall & Ilsley Bank and Cobalt dated as of August 7, 2002.                                                 
| |  | 10.3 |  | Assignment and Assumption Agreement by and between Cobalt and BCBSUW, effective October 1, 2002.                                                  
| |  | 10.4 |  | Registration Rights Agreement letter by and between Cobalt and the Foundation dated November 1, 2002.                                             
| |  | 99.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| |  | 99.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|November 13, 2002 |  | COBALT CORPORATION
|----------------- |  | ------------------
|                  |  | By:               

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CERTIFICATIONS

I,
Thomas R. Hefty, certify that:





|Date: November 13, 2002 |  | By: |  | /s/THOMAS R. HEFTYThomas R. Hefty Chairman of the
Board & CEO
|----------------------- |  | --- |  | -------------------------------------------------------------

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I,
Gail L. Hanson, certify that:





|Date: November 13, 2002 |  | By: |  | /s/GAIL L. HANSONGail L. Hanson Senior Vice President,
Treasurer & CFO
|----------------------- |  | --- |  | ----------------------------------------------------------------------

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