----

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**United StatesSecurities and Exchange Commission****Washington, D.C. 20549**

**FORM 10-Q**

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

**For the Period Ended June 30,2001**

**Commission File Number 1-14177**

**COBALT CORPORATION******(Exact name of registrant as specified inits charter)

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

 

**(414) 226-6900**(Registrant's telephone number, includingarea code)

Indicate by check mark whether registrant(1) has filed all documents and reports required to be filed by Section 13, or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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**            Noo

Indicate the number of shares outstandingof each of the issuer's classes of common stock, as of the latest practicaldate:

**Commonstock outstanding as of July 31, 2001 was 40,421,143.**

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COBALT CORPORATION

INDEX TOQUARTERLY REPORT ON FORM 10-Q

For the Period Ended June 30, 2001

| **PART I**                                                                                  |   |
|---------------------------------------------------------------------------------------------|--------|
|                                                                                        |   |
| Financial Statements and  Supplementary Data                                                |   |
|                                                                                        |   |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                                                                        |   |
| Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|                                                                                        |   |
| **PART II**                                                                                 |   |
|                                                                                        |   |
| Other Information                                                                           |   |
|                                                                                        |   |
| Signature Page                                                                              |   |

**PART 1. FINANCIALINFORMATION****Item 1. Financial Statements**

**COBALT CORPORATION********CONSOLIDATED BALANCE SHEETS**

|                                                  | June  30,                                          |    | December  31, |    |
|-------------------------------------------------------|----------------------------------------------------|---------|---------------|---------|
|                                                  | 2001                                               |    | 2000          |    |
|                                                  |                                                    |         |               |    |
|                                                  | *(Unaudited)*                                      |    | *(Note A)*    |    |
|                                                  | *(In thousands)*                                   |
|                                                  |                                               |    |          |    |
| ASSETS                                                |                                               |    |          |    |
|                                                  |                                               |    |          |    |
| Current assets:                                       |                                               |    |          |    |
|                                                  |                                               |    |          |    |
|                                                  | Cash and cash equivalents                          | $       | 31,359        |    | $ | 1,305 |   |
|                                                  | Investments—available-for-sale, at fair value | 181,548 |          | 44,373  |   |
|                                                  | Due from affiliates                                | 6,123   |          | 12,896  |   |
|                                                  | Premium receivables                                | 42,797  |          | 3,325   |   |
|                                                  | Due from clinics and providers                     | 15,926  |          | 7,063   |   |
|                                                  | Other receivables                                  | 54,485  |          | 28,127  |   |
|                                                  | Prepaid expenses and other current assets          | 32,947  |          | 18,385  |   |
|                                                  |                                                    |         |               |    |
|                                                  | Total current assets                               | 365,185 |          | 115,474 |   |
|                                                  |                                               |    |          |    |
| Investments—held-to-maturity,  at amortized cost | 11,000                                             |    | -             |    |
| Investments in  affiliates                            | 99,814                                             |    | 105,609       |    |
| Property and  equipment, net                          | 37,838                                             |    | 25,139        |    |
| Goodwill                                              | 98,546                                             |    | 8,020         |    |
| Note receivable from  affiliate                       | -                                                  |    | 70,000        |    |
| Prepaid pension                                       | 48,167                                             |    | 36,471        |    |
| Deferred income taxes                                 | 28,302                                             |    | 19,067        |    |
| Other noncurrent  assets                              | 33,779                                             |    | 14,425        |    |
|                                                  |                                                    |         |               |    |
|                                                  | Total noncurrent assets                            | 357,446 |          | 278,731 |   |
|                                                  |                                                    |         |               |    |
|                                                  |                                               |    |          |    |
|                                                  |                                               |    |          |    |
|                                                  |                                                    |         |               |    |
| Total assets                                          | $                                                  | 722,631 |          | $       | 394,205 |   |
|                                                  |                                               |         |               |         |   |
|                                                       |                                                    |         |               |         |  |  |  |  |

See Notes to InterimConsolidated Financial Statements.

**COBALT CORPORATION********CONSOLIDATED BALANCE SHEETS**

|                                        | June  30,                                                                                                                                              |     | December  31,        |    |
|---------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|----------|----------------------|---------|
|                                        | 2001                                                                                                                                                   |     | 2000                 |    |
|                                        |                                                                                                                                                        |          |                      |    |
|                                        | *(Unaudited)*                                                                                                                                          |     | *(Note A)*           |    |
|                                        | *(In thousands)*                                                                                                                                       | * * |
|                                        |                                                                                                                                                   |     |                 |    |
| LIABILITIES  AND SHAREHOLDERS' EQUITY       |                                                                                                                                                   |     |                 |    |
|                                        |                                                                                                                                                   |     |                 |    |
| Current liabilities:                        |                                                                                                                                                   |     |                 |    |
|                                        |                                                                                                                                                   |     |                 |    |
|                                        | Medical and other benefits payable                                                                                                                     | $        | 214,322              |    | $ | 104,415 |   |
|                                        | Advance premiums                                                                                                                                       | 94,436   |                 | 40,745  |   |
|                                        | Due to affiliates                                                                                                                                      | 81       |                 | 910     |   |
|                                        | Payables and accrued expenses                                                                                                                          | 53,102   |                 | 29,597  |   |
|                                        | Short-term debt                                                                                                                                        | 14,176   |                 | -       |   |
|                                        | Other current liabilities                                                                                                                              | 18,504   |                 | 5,162   |   |
|                                        |                                                                                                                                                        |          |                      |    |
|                                        | Total current liabilities                                                                                                                              | 394,621  |                 | 180,829 |   |
|                                        |                                                                                                                                                   |     |                 |    |
| Noncurrent  liabilities:                    |                                                                                                                                                   |     |                 |    |
|                                        |                                                                                                                                                   |     |                 |    |
|                                        | Other benefits payable                                                                                                                                 | 42,971   |                 | -       |   |
|                                        | Deferred income taxes                                                                                                                                  | 28,302   |                 | 20,699  |   |
|                                        | Postretirement benefits other than pension                                                                                                             | 17,746   |                 | 12,722  |   |
|                                        | Other noncurrent liabilities                                                                                                                           | 15,068   |                 | 11,012  |   |
|                                        |                                                                                                                                                        |          |                      |    |
|                                        | Total liabilities                                                                                                                                      | 498,708  |                 | 225,262 |   |
|                                        |                                                                                                                                                   |     |                 |    |
| Shareholders' equity:                       |                                                                                                                                                   |     |                 |    |
|                                        |                                                                                                                                                   |     |                 |    |
|                                        | Common stock (no par value, no stated value, 48,371,048  issued, 7,949,904 held in treasury (see Note A) and 40,421,143 outstanding at  June 30, 2001) | 248,574  |       | -       |       |
|                                        | Retained earnings (deficit)                                                                                                                            | (22,999  | )                    | 170,907 |   |
|                                        | Accumulated other comprehensive loss                                                                                                                   | (1,652   | )                    | (1,964  | ) |
|                                        |                                                                                                                                                        |          |                      |    |
|                                        | Total shareholders' equity                                                                                                                             | 223,923  |                 | 168,943 |   |
|                                        |                                                                                                                                                        |          |                      |    |
|                                        |                                                                                                                                                   |     |                 |    |
| Total liabilities and  shareholders' equity | $                                                                                                                                                      | 722,631  |                 | $       | 394,205 |   |
|                                        |                                                                                                                                                        |     |                      |    |
|                                        |                                                                                                                                                   |     |                 |    |
|                                             |                                                                                                                                                        |          |                      |         |  |  |  |  |

See Notes to InterimConsolidated Financial Statements.

** **

**COBALT CORPORATION****CONSOLIDATED STATEMENTS OF OPERATIONS******(UNAUDITED)

|                                                  | Three  months ended                       |      | Six  months ended |    |
|-------------------------------------------------------|-------------------------------------------|-----------|-------------------|---------|
|                                                  | June  30,                                 | June  30, |
|                                                  | 2001                                      |      | 2000              |    | 2001 |   | 2000 |   |
|                                                  |                                           |           |                   |         |  |  |  |   |
|                                                  | *(In thousands, except  share data)*      |      |
|                                                  |                                      |      |              |    |   |   |   |   |
| Revenues:                                             |                                      |      |              |    |   |   |   |   |
|                                                  | Health services revenue:                  |      |              |    |   |   |   |   |   |
|                                                  | Premium revenue                           | $         | 369,131           |    | $ | 130,591 |   | $ | 519,153 |   | $ | 253,435 |   |
|                                                  | Government contract fees                  | 29,107    |              | 15,947  |   | 56,010 |   | 31,115 |   |
|                                                  | Other revenue                             | 17,628    |              | 6,324   |   | 25,330 |   | 12,168 |   |
|                                                  | Investment results                        | 3,505     |              | 2,562   |   | 5,569 |   | 4,973 |   |
|                                                  |                                           |      |                   |    |  |   |  |   |
|                                                  | Total revenues                            | 419,371   |              | 155,424 |   | 606,062 |   | 301,691 |   |
|                                                  |                                      |      |              |    |   |   |   |   |
| Expenses:                                             |                                      |      |              |    |   |   |   |   |
|                                                  |                                      |      |              |    |   |   |   |   |
|                                                  | Medical and other benefits                | 333,577   |              | 122,859 |   | 462,017 |   | 236,149 |   |
|                                                  | Selling, general,administrative and other | 88,074    |              | 41,221  |   | 143,009 |   | 81,291 |   |
|                                                  | Profit sharing on joint ventures          | 102       |              | -       |   | 102 |   | - |   |
|                                                  | Interest                                  | 207       |              | 133     |   | 207 |   | 196 |   |
|                                                  | Amortization of  goodwill                 | 1,752     |              | 147     |   | 1,933 |   | 260 |   |
|                                                  |                                           |      |                   |    |  |   |  |   |
|                                                  | Total expenses                            | 423,712   |              | 164,360 |   | 607,268 |   | 317,896 |   |
|                                                  |                                           |      |                   |    |  |   |  |   |
| Operating loss                                        | (4,341                                    | )         | (8,936            | )       | (1,206 | ) | (16,205 | ) |
|                                                  |                                      |      |              |    |   |   |   |   |
| Equity in net income  (loss) of affiliate, net of tax | 658                                       |      | 509               |    | (1,193 | ) | (130 | ) |
|                                                  |                                           |      |                   |    |  |   |  |   |
| Pre-tax loss                                          | (3,683                                    | )         | (8,427            | )       | (2,399 | ) | (16,335 | ) |
|                                                  |                                           |      |                   |    |  |   |  |   |
| Income tax expense                                    | 113                                       |      | -                 |    | 113 |   | - |   |
|                                                  |                                      |      |              |    |   |   |   |   |
| Net loss                                              | $                                         | (3,796    | )                 | $       | (8,427 | ) | $ | (2,512 | ) | $ | (16,335 | ) |
|                                                  |                                           |      |                   |    |  |   |  |   |
| Basic loss per common  share                          | $                                         | (0.09     | )                 | $       | (0.27 | ) | $ | (0.07 | ) | $ | (0.52 | ) |
|                                                  |                                           |      |                   |    |  |   |  |   |
| Diluted loss per  common share                        | $                                         | (0.09     | )                 | $       | (0.27 | ) | $ | (0.07 | ) | $ | (0.52 | ) |
|                                                  |                                           |      |                   |    |  |   |  |   |
|                                                  |                                      |      |              |    |   |   |   |   |
|                                                       |                                           |           |                   |         |  |  |  |  |  |  |  |  |  |  |  |

See Notes to InterimConsolidated Financial Statements.

**COBALT CORPORATION********CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ANDCOMPREHENSIVE INCOME (LOSS)******(UNAUDITED)

|                          | Common Shares  Outstanding                                      |       | Common  Stock |    | Retained  Earnings  (Deficit) |     | Accumulated Other  Comprehensive  Income (Loss) |   | Total  Shareholders'  Equity |   |
|-------------------------------|-----------------------------------------------------------------|------------|---------------|---------|-------------------------------|----------|-------------------------------------------------|--------|------------------------------|--------|
|                          |                                                                 |            |               |         |                               |          |                                                 |        |                              |   |
|                          | *(In thousands, except  share data)*                            | * *   |
|                          |                                                            |       |          |    |                          |     |                                            |   |                         |   |
| Balance at December  31, 2000 | -                                                               |       | $             | -       |                          | $        | 170,907                                         |   | $                            | (1,964 | ) | $ | 168,943 |   |
|                          | Capitalization of Wisconsin United for Health Foundation,  Inc. | 31,313,390 |          | 192,577 |                          | (192,577 | )                                               | -      |                         | -      |   |
|                          | Issuance of common stock - acquisition                          | 9,099,003  |          | 55,959  |                          | -        |                                            | -      |                         | 55,959 |   |
|                          | Issuance of common stock - options exercised                    | 8,750      |          | 38      |                          | -        |                                            | -      |                         | 38     |   |
|                          | Adjustments as a result of purchase accounting                  |       |          | -       |                          | 82       |                                            | -      |                         | 82     |   |
|                          | Change in ownership of affiliates                               |       |          | -       |                          | 1,101    |                                            | -      |                         | 1,101  |   |
|                          | Comprehensive loss:                                             |       |          |    |                          |     |                                            |   |                         |   |   |
|                          | Net loss                                                        |       |          | -       |                          | (2,512   | )                                               | -      |                         | (2,512 | ) |
|                          | Change in unrealized loss on investments                        |       |          | -       |                          | -        |                                            | 312    |                         | 312    |   |
|                          |                                                            |       |          |    |                          |     |                                            |   |                         |        |   |
|                          | Comprehensive loss                                              |       |          | -       |                          | -        |                                            | -      |                         | (2,200 | ) |
|                          |                                                            |            |               |         |                               |          |                                                 |        |                              |        |   |
| Balance at June 30,  2001     | 40,421,143                                                      |       | $             | 248,574 |                          | $        | (22,999                                         | )      | $                            | (1,652 | ) | $ | 223,923 |   |
|                          |                                                                 |            |               |         |                               |          |                                                 |        |                              |   |
|                               |                                                                 |            |               |         |                               |          |                                                 |        |                              |        |  |  |  |  |  |  |  |

See Notes to InterimConsolidated Financial Statements.

**COBALT CORPORATION********CONSOLIDATED STATEMENTS OF CASH FLOWS******(UNAUDITED)

|                        | Six  months ended                                                                          |     |
|-----------------------------|--------------------------------------------------------------------------------------------|----------|
|                        | June  30,                                                                                  |
|                        | 2001                                                                                       |     | 2000 |   |
|                        |                                                                                            |          |  |   |
|                        | *(In thousands)*                                                                           | * * |
| Operating activities:       |                                                                                       |     |   |   |
|                        | Net loss                                                                                   | $        | (2,512 | ) | $ | (16,335 | ) |
|                        | Adjustments to reconcile net loss to net cash provided by  (used in) operating activities: |     |     |   |     |
|                        | Equity in loss of affiliates                                                               | 1,193    |   | 130 |   |
|                        | Depreciation and amortization                                                              | 8,038    |   | 4,462 |   |
|                        | Realized investment (gains) losses                                                         | (79      | ) | (27 | ) |
|                        | Changes in operating accounts, net of acquisitions:                                        |     |   |   |   |
|                        | Premium receivables                                                                        | 6,974    |   | 482 |   |
|                        | Other receivables                                                                          | (5,717   | ) | (8,282 | ) |
|                        | Due from clinics and providers                                                             | 1,642    |   | 159 |   |
|                        | Medical and other benefits payable                                                         | (13,723  | ) | 10,790 |   |
|                        | Advance premiums                                                                           | 2,582    |   | 6,086 |   |
|                        | Due to affiliates, net                                                                     | (10,534  | ) | 5,428 |   |
|                        | Other, net                                                                                 | 4,546    |   | (9,373 | ) |
|                        |                                                                                            |          |  |   |
|                        | Net cash used in operating activities                                                      | (7,590   | ) | (6,480 | ) |
|                        |                                                                                       |     |   |   |
| Investing activities:       |                                                                                       |     |   |   |
|                        | Acquisition of  subsidiaries                                                               | 49,817   |   | (1,000 | ) |
|                        | Purchases of available-for-sale investments                                                | (75,921  | ) | (2,502 | ) |
|                        | Purchases of held-to-maturity investments                                                  | (1,303   | ) | - |   |
|                        | Proceeds from sale and maturity of available-for-sale  investments                         | 63,430   |   | 9,240 |   |
|                        | Proceeds from maturity of held-to maturity investments                                     | 250      |   | 655 |   |
|                        | Additions to property and equipment                                                        | (2,752   | ) | (1,613 | ) |
|                        |                                                                                            |          |  |   |
|                        | Net cash provided by investing activities                                                  | 33,521   |   | 4,780 |   |
|                        |                                                                                       |     |   |   |
| Financing activities:       |                                                                                       |     |   |   |
|                        | Proceeds from line of credit, net                                                          | 4,293    |   | (5,735 | ) |
|                        | Repayment of debt                                                                          | (170     | ) | - |   |
|                        |                                                                                            |          |  |   |
|                        | Net cash provided by (used in) financing activities                                        | 4,123    |   | (5,735 | ) |
|                        |                                                                                       |     |   |   |
| Cash and cash  equivalents: |                                                                                       |     |   |   |
|                        | Increase (decrease) during period                                                          | 30,054   |   | (7,435 | ) |
|                        | Balance at beginning of year                                                               | 1,305    |   | (5,054 | ) |
|                        |                                                                                            |          |  |   |
|                        | Balance at end of period                                                                   | $        | 31,359 |   | $ | (12,489 | ) |
|                        |                                                                                            |          |  |   |
|                             |                                                                                            |          |  |  |  |  |  |  |  |  |

See Notes to InterimConsolidated Financial Statements.

**COBALTCORPORATION****NOTES TOINTERIM CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

June 30, 2001

Note A. Basisof Presentation

             The accompanying unaudited interimconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of only normal recurring adjustments) considerednecessary for a fair presentation have been included.  Operating results for the three and six months ended June 30,2001 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2001. These interim consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements for the year ended December 31, 2000 and footnotes thereto includedin the Cobalt Corporation (“Cobalt”) Form 8-K, as filed with the Securities andExchange Commission (“SEC”).

             On March 23, 2001, Blue Cross &Blue Shield United of Wisconsin (“BCBSUW”) converted to a stock corporation andbecame a wholly owned subsidiary of United Wisconsin Services, Inc. (“UWS”),(the "combination").  UWS wasrenamed Cobalt Corporation, and in exchange for ownership of BCBSUW, Cobaltissued 31,313,390 shares of newly issued common stock to the Wisconsin Unitedfor Health Foundation, Inc. (the “Foundation”).

             The combination is treated as apurchase by BCBSUW of the 9,099,003 shares of UWS that it did not already ownat the market price of $6.15 per share as of the closing date.  Under generally accepted accounting principles(“GAAP”), the excess of the market price over the adjusted book value per shareof UWS was recorded as goodwill under the purchase method of accounting.  The 7,949,904 shares of Cobalt common stockowned by BCBSUW are treated as treasury stock for the purposes of calculatingearnings per share (“EPS”). Goodwill is being amortized over a period of 15years.

             Cobalt’s balance sheet as of June30, 2001 reflects the purchase accounting adjustments for the combinationtransaction, which was finalized March 23, 2001.  The balance sheet as of December 31, 2000 reflects onlyBCBSUW.  The combination is treated as areverse purchase whereby BCBSUW becomes the reporting entity.  Accordingly, the historical consolidatedstatements of operations for Cobalt include the operations of BCBSUW and itswholly owned subsidiary, United Government Services LLC (“UGS”).  The pro forma statements of operations forCobalt presented in Note C. include the operations of the former UWS and BCBSUWwith elimination of intercompany transactions, the recording of purchaseaccounting adjustments and the amortization of goodwill calculated as if thetransaction was completed at the beginning of the reporting period.

Note B. NetIncome (Loss) Per Share

             Basic EPS are computed by dividingnet income (loss) by the weighted average number of common sharesoutstanding.  Diluted EPS are computedby dividing net income by the weighted average number of common sharesoutstanding, adjusted for the potential dilutive effect of outstanding stockoptions.  When Cobalt reports a netloss, potentially dilutive securities are not included in the calculation ofEPS because their inclusion would have an antidilutive effect. The weightedaverage number of common shares outstanding used in both the calculation ofbasic and diluted EPS is 40,415,278 for the three months ended June 30, 2001and 36,341,914 for the six months ended June 30, 2001.

             Options to purchase 2,667,613 and2,644,312 common shares during the three and six months ended June 30, 2001,respectively, were not included in the computation of diluted earnings percommon share since the options’ exercise prices were greater than the averagemarket price of the outstanding common shares. In addition, 969,133 and 1,003,967 potentially dilutive common sharesfor the three and six months ended June 30, 2001, respectively, were notincluded because Cobalt had a net loss and their inclusion would have beenantidilutive.

Note C. ProForma Financial Information (Unaudited)

**PROFORMA COBALT STATEMENT OF OPERATIONS**

|                                                   | **Three months ended**                      |       | **Six months ended** |       |
|--------------------------------------------------------|---------------------------------------------|------------|----------------------|------------|
|                                                   | **June 30,**                                |       | **June 30,**         |       |
|                                                   | **2001**                                    |       | **2000**             |       | **2001** |   | **2000** |   |
|                                                   | **(Actual)**                                |       |                 |       |   |   |   |   |
|                                                   | ****                                        |            |                      |            |  |  |  |   |
|                                                   | *(In thousands, except share data)*         |       |
| Revenues:                                              |                                        |       |                 |       |   |   |   |   |
|                                                   | Health  services revenue:                   |       |                 |       |   |   |   |   |   |
|                                                   | Premium                                     | $          | 369,131              |       | $ | 305,674 |   | $ | 737,352 |   | $ | 619,110 |   |
|                                                   | Government  contract fees                   | 29,107     |                 | 15,947     |   | 56,010 |   | 31,115 |   |
|                                                   | Other                                       | 17,628     |                 | 16,452     |   | 35,742 |   | 31,465 |   |
|                                                   | Investment  results                         | 3,505      |                 | 3,271      |   | 7,019 |   | 6,535 |   |
|                                                   |                                        |            |                      |            |  |  |  |  |   |
|                                                   | Total  revenues                             | 419,371    |                 | 341,344    |   | 836,123 |   | 688,225 |   |
| Expenses:                                              |                                        |       |                 |       |   |   |   |   |
|                                                   | Medical  and other benefits                 | 333,577    |                 | 281,131    |   | 654,213 |   | 568,235 |   |
|                                                   | Selling,  general, administrative and other | 88,074     |                 | 70,215     |   | 177,785 |   | 140,656 |   |
|                                                   | Profit  sharing on joint venture            | 102        |                 | 318        |   | 102 |   | 232 |   |
|                                                   | Interest                                    | 207        |                 | 400        |   | 390 |   | 667 |   |
|                                                   | Amortization  of goodwill                   | 1,752      |                 | 1,526      |   | 3,478 |   | 3,008 |   |
|                                                   |                                        |            |                      |            |  |  |  |  |   |
|                                                   | Total  expenses                             | 423,712    |                 | 353,590    |   | 835,968 |   | 712,798 |   |
|                                                   |                                        |            |                      |            |  |  |  |  |   |
| Operating  income (loss)                               | (4,341                                      | )          | (12,246              | )          | 155 |   | (24,573 | ) |
| Equity  in net income (loss) of affiliates, net of tax | 658                                         |       | 1,069                |       | (1,627 | ) | 1,617 |   |
|                                                   |                                             |            |                      |            |  |  |  |   |
| Pre-tax  loss                                          | (3,683                                      | )          | (11,177              | )          | (1,472 | ) | (22,956 | ) |
| Income  tax expense                                    | 113                                         |       | 178                  |       | 590 |   | 356 |   |
|                                                   |                                             |            |                      |            |  |  |  |   |
|                                                   | Net  loss                                   | $          | (3,796               | )          | $ | (11,355 | ) | $ | (2,062 | ) | $ | (23,312 | ) |
|                                                   |                                        |            |                      |            |  |  |  |  |   |
| Loss  per share:                                       |                                        |       |                 |       |   |   |   |   |
|                                                   | Basic  and Diluted                          | $          | (0.09                | )          | $ | (0.28 | ) | $ | (0.05 | ) | $ | (0.58 | ) |
|                                                   |                                        |       |                 |       |   |   |   |   |
| Weighted  average shares outstanding:                  |                                        |       |                 |       |   |   |   |   |
|                                                   | Basic                                       | 40,415,278 |                 | 40,412,393 |   | 40,413,843 |   | 40,412,393 |   |
|                                                   | Diluted                                     | 40,415,278 |                 | 40,412,393 |   | 40,413,843 |   | 40,412,393 |   |
|                                                        |                                             |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

**PRO FORMA MEMBERSHIP ANALYSIS:**

| Members at end of period:                     | **June 30,**                                |
|-----------------------------------------------|---------------------------------------------|
|                                          | **2001**                                    |   | **2000** |   |
|                                          | ****                                        | **** | **** |   |
|                                          | (Actual)                                    |   |   |   |
| Medical (by  product type):                   |                                        |   |   |   |
|                                          | HMO                                         | 216,707 |   | 197,482 |   |
|                                          | PPO                                         | 138,017 |   | 137,720 |   |
|                                          | Point of Service                            | 85,063 |   | 92,702 |   |
|                                          | Medicaid                                    | 4,217 |   | 3,957 |   |
|                                          | Medicare Risk                               | 10,978 |   | 14,091 |   |
|                                          | Other/Individual                            | 90,631 |   | 93,549 |   |
|                                          |                                             |  |  |   |
|                                          | Total insured members                       | 545,613 |   | 539,501 |   |
| Self-funded:                                  |                                        |   |   |   |
|                                          | Non-HMO                                     | 166,375 |   | 237,927 |   |
|                                          | HMO                                         | 5,305 |   | 6,568 |   |
|                                          |                                             |  |  |   |
|                                          | Total medical members                       | 717,293 |   | 783,996 |   |
|                                          |                                             |  |  |   |
|                                          |                                        |   |   |   |
| Specialty products  and services:             |                                        |   |   |   |
|                                          | UWG Life/AD&D                           | 162,559 |   | 165,621 |   |
|                                          | Dental                                      | 330,838 |   | 344,951 |   |
|                                          | Disability and other                        | 1,492,338 |   | 1,466,130 |   |
|                                          | Behavioral Health &  Medical Management | 119,032 |   | 121,356 |   |
|                                          |                                        |   |   |   |
| Workers’ Compensation policies in force: | 740                                         |   | 572 |   |
|                                               |                                             |  |  |  |  |  |  |

             Some of the trends and developmentsof the Cobalt business after the date of the combination, and BCBSUW and UWStogether on a pro forma basis from January 1, 2001 through the date of thecombination, as compared with pro forma combined statements of operations inthe comparable periods in 2000, are as follows:

             Premium revenue increases in 2001are attributable to the re-pricing of the HMO products. The increase in HMOmembership is primarily due to the acquisition of the insurance business ofFamily Health Plan during the fourth quarter of 2000, offset by Januarycancellations.  Despite the increase inpremium revenues, the loss ratio for the HMO segment also increased to 97.4% forthe three months ended June 30, 2001 from 93.3% for the three months ended June30, 2000, due to higher than anticipated medical cost trends.  The loss ratio was 94.0% and 93.4% for thesix  months ended June 30, 2001 and2000, respectively.

             The assumption of the State ofWisconsin life insurance business, which was reported in the specialty risksegment, was cancelled in November of 2000. This business accounted for approximately $5.5 million and $10.7 millionin premiums for the three months and six months ended June 30, 2000,  respectively, with a loss ratio of 94.3% and94.1%, respectively.  The cancellationof this business had a favorable impact on the overall loss ratio for thespecialty risk business, which improved to 75.4% and 75.2% for the three andsix months ended June 30, 2001, respectively, from 77.5% and 77.7% for thecomparable periods in 2000.

             Overall, the expense ratio forCobalt improved as a result of increased premium rates and continued costsaving measures being implemented.

             Included in the pro forma otheroperations for the six months ended June 30, 2001 is $3.8 million intransaction expenses related to the combination of BCBSUW and UWS, of which$2.6 million was recorded by BCBSUW and $1.2 million recorded by UWS.   These expenses were recorded in the firstquarter of 2001.

Note D. RelatedParty

             As disclosed in Note A., on March23, 2001 BCBSUW converted to a stock corporation and became a wholly ownedsubsidiary of UWS.  UWS was renamedCobalt Corporation, and in exchange for ownership of BCBSUW, Cobalt issued 31,313,390shares of newly issued common stock to the Foundation.

Note E.Investment in Affiliates

             Condensed Statements of Operationsas reported by American Medical Security Group, Inc. (“AMSG”) (NYSE:AMZ):

|                        | **Three months ended** |    | **Six  months ended** |   |
|-----------------------------|------------------------|---------|----------------------------|--------|
|                        | **June 30,**           |    | **June 30,**               |   |
|                        | **2001**               |    | **2000**                   |   | **2001** |   | **2000** |   |
|                        | ****                   | ****    | ****                       | ****   | **** | **** | **** |   |
|                        | *(In thousands)*       |    |
|                        |                   |    |                       |   |   |   |   |   |
| Premium  revenue            | $                      | 213,645 |                       | $      | 240,537 |   | $ | 436,115 |   | $ | 488,442 |   |
|                        |                   |    |                       |   |   |   |   |   |
| Medical  and other benefits | 156,174                |    | 181,512                    |   | 322,754 |   | 370,075 |   |
|                        |                   |    |                       |   |   |   |   |   |
| Underwriting  gain          | 57,471                 |    | 59,025                     |   | 113,361 |   | 118,367 |   |
|                        |                   |    |                       |   |   |   |   |   |
| Net  income (loss)          | 1,466                  |    | 2,575                      |   | (3,674 | ) | 3,919 |   |
|                             |                        |         |                            |        |  |  |  |  |  |  |  |  |

             As of June 30, 2001 and 2000,Cobalt owned 45.1% and 43.3%, respectively of AMSG.

Note F.Comprehensive Income (Loss)

             A reconciliation from net income(loss) reported in the Consolidated Statements of Operations to comprehensiveincome (loss) is stated below:

|                                                    | **Three months ended** |   | **Six months ended** |   |
|---------------------------------------------------------|------------------------|--------|----------------------|--------|
|                                                    | **June 30,**           |   | **June 30,**         |   |
|                                                    | **2001**               |   | **2000**             |   | **2001** |   | **2000** |   |
|                                                    | ****                   | ****   | ****                 | ****   | **** | **** | **** | **** |
|                                                    | *(In thousands)*       |   |
| Net  loss per Consolidated Statement of Operations      | $                      | (3,796 | )                    | $      | (8,427 | ) | $ | (2,512 | ) | $ | (16,335 | ) |
| Change  in unrealized loss on investments, net of taxes | (1,429                 | )      | (538                 | )      | 312 |   | (189 | ) |
|                                                    |                   |   |                 |   |   |   |   |   |
|                                                    |                        |        |                      |        |  |  |  |   |
| Comprehensive  loss                                     | $                      | (5,225 | )                    | $      | (8,965 | ) | $ | (2,200 | ) | $ | (16,524 | ) |
|                                                    |                        |        |                      |        |  |  |  |   |

             Comprehensive income (loss) isdefined as all changes in equity during the period except those resulting fromshareholder equity contributions and distributions.

Note G. SegmentReporting

             Cobalt has five reportable businesssegments: insured medical products, specialty risk products, specialty serviceproducts, self-funded products and government services. Insured medicalproducts include: full coverage, copayment, preferred provider organization,Medicare supplement and interim coverage and Health Maintenance Organization(“HMO”) and point of service products sold primarily in Wisconsin.  The specialty risk products include dental,life, disability and workers’ compensation products. The specialty serviceproducts include managed care consulting, electronic claim submission services,pharmaceutical management, managed behavioral health services, case managementand receivables management services. The specialty service products segmentincludes activity from UWS subsidiaries; and therefore, on a historical basisthis segment does not have any activity in it until the second quarter of2001.  The specialty products andservices are sold throughout the United States.  The self-funded products consist of administrative services andaccess to Cobalt’s extensive provider networks for uninsured contracts.Government services include processing services for Medicare providersthroughout the United States and for Medicaid in the State of Wisconsin.

             "Other Operations"include activities not directly related to the business segments, unallocatedcorporate items (i.e. equity in net income (loss) of affiliates, amortizationof goodwill and unallocated overhead expenses) and intercompanyeliminations.  Cobalt evaluates segmentperformance based on profit or loss from operations before income taxes. Theaccounting policies of the reportable segments are the same as those describedin the December 31, 2000 audited financial statements in the summary ofsignificant accounting policies.

Financial databy segment is as follows:

|                      | **Three months ended**      |    | **Six months ended** |   |
|---------------------------|-----------------------------|---------|----------------------|--------|
|                      | **June 30,**                |    | **June 30,**         |   |
|                      | **2001**                    |    | **2000**             |   | **2001** |   | **2000** |   |
|                      | ****                        | ****    | ****                 | ****   | **** | **** | **** |   |
|                      | *(In thousands)*            |    |
| Health  services revenue: |                        |    |                 |   |   |   |   |   |
|                      | Insured  medical            | $       | 334,000              |   | $ | 123,774 |   | $ | 477,318 |   | $ | 239,740 |   |
|                      | Specialty  risk products    | 41,397  |                 | 7,430  |   | 48,881 |   | 14,914 |   |
|                      | Specialty  service products | 15,487  |                 | -      |   | 15,487 |   | - |   |
|                      | Government  services        | 29,107  |                 | 15,947 |   | 56,010 |   | 31,115 |   |
|                      | Self-funded  products       | 7,003   |                 | 6,324  |   | 14,705 |   | 12,168 |   |
|                      | Other  operations           | (11,128 | )                    | (613   | ) | (11,908 | ) | (1,219 | ) |
|                      |                        |         |                      |        |  |  |  |  |   |
|                      | Total  consolidated         | $       | 415,866              |   | $ | 152,862 |   | $ | 600,493 |   | $ | 296,718 |   |
|                      |                        |         |                      |        |  |  |  |  |   |
|                      |                        |    |                 |   |   |   |   |   |   |
| Investment  results:      |                        |    |                 |   |   |   |   |   |
|                      | Insured  medical            | $       | 3,776                |   | $ | 2,147 |   | $ | 5,674 |   | $ | 4,167 |   |
|                      | Specialty  risk products    | 1,484   |                 | 128    |   | 1,583 |   | 259 |   |
|                      | Specialty  service products | 111     |                 | -      |   | 111 |   | - |   |
|                      | Government  services        | 130     |                 | 178    |   | 273 |   | 336 |   |
|                      | Self-funded  products       | 25      |                 | 109    |   | 40 |   | 211 |   |
|                      | Other  operations           | (2,021  | )                    | -      |   | (2,112 | ) | - |   |
|                      |                        |         |                      |        |  |  |  |  |   |
|                      | Total  consolidated         | $       | 3,505                |   | $ | 2,562 |   | $ | 5,569 |   | $ | 4,973 |   |
|                      |                             |         |                      |        |  |  |  |   |
|                      |                        |    |                 |   |   |   |   |   |
| Pre-tax  income (loss):   |                        |    |                 |   |   |   |   |   |
|                      | Insured  medical            | $       | (2,903               | )      | $ | (5,377 | ) | $ | 3,992 |   | $ | (8,217 | ) |
|                      | Specialty  risk products    | 1,634   |                 | (294   | ) | 1,727 |   | (494 | ) |
|                      | Specialty  service products | 1,130   |                 | -      |   | 1,130 |   | - |   |
|                      | Government  services        | 259     |                 | 301    |   | 600 |   | 517 |   |
|                      | Self-funded  products       | (897    | )                    | (2,826 | ) | (2,437 | ) | (6,607 | ) |
|                      | Other  operations           | (2,906  | )                    | (231   | ) | (7,411 | ) | (1,534 | ) |
|                      |                        |         |                      |        |  |  |  |  |   |
|                      | Total  consolidated         | $       | (3,683               | )      | $ | (8,427 | ) | $ | (2,399 | ) | $ | (16,335 | ) |
|                      |                        |         |                      |        |  |  |  |  |   |
|                           |                             |         |                      |        |  |  |  |  |  |  |  |  |  |  |

 

|           | **June 30,**                |   | **December 31,** |    |
|----------------|-----------------------------|--------|------------------|---------|
|           | **2001**                    |   | **2000**         |    |
|           | ****                        | ****   | ****             |    |
|           | *(In thousands)*            |   |
| Total  assets: |                        |   |             |    |
|           | Insured  medical            | $      | 546,508          |    | $ | 240,787 |   |
|           | Specialty  risk products    | 67,480 |             | 14,100  |   |
|           | Specialty  service products | 25,211 |             | -       |   |
|           | Government  services        | 21,609 |             | 22,061  |   |
|           | Self-funded  products       | 11,540 |             | 11,648  |   |
|           | Other  operations           | 50,283 |             | 105,609 |   |
|           |                             |   |                  |    |
|           |                        |   |             |    |
|           | Total  consolidated         | $      | 722,631          |    | $ | 394,205 |   |
|           |                             |   |                  |    |
|                |                             |        |                  |         |  |  |  |  |

             Total assets (excluding governmentservices assets and investment in affiliate) are allocated by segment based onthe percentage of pro forma revenue for the six months ended June 30, 2001 andhistorical revenue for the year ended December 31, 2000.  Investment in unconsolidated affiliates isclassified in other operations.

|                                                                      | **Three months ended** |     | **Six months ended** |   |
|---------------------------------------------------------------------------|------------------------|----------|----------------------|--------|
|                                                                      | **June 30,**           |     | **June 30,**         |   |
|                                                                      | **2001**               |     | **2000**             |   | **2001** |   | **2000** |   |
|                                                                      | ****                   | ****     | ****                 | ****   | **** | **** | **** |   |
|                                                                      | *(In thousands)*       | * * |
|                                                                      |                   |     |                 |   |   |   |   |   |
| Health  services revenue from transactions with other operating segments: |                   |     |                 |   |   |   |   |   |
|                                                                      | Insured  medical       | $        | (11,128              | )      | $ | (613 | ) | $ | (11,908 | ) | $ | (1,219 | ) |
|                                                                           |                        |          |                      |        |  |  |  |  |  |  |  |  |  |

Note H.Statutory Financial Information

             The Codification of StatutoryAccounting Principles (“Codification”) promulgated by the National Associationof Insurance Commissioners and adopted by the Office of the Commissioner ofInsurance for the State of Wisconsin took effect on January 1, 2001.  Codification impacts the calculation ofstatutory surplus for Cobalt’s insurance subsidiaries.  The impact varies by subsidiary with themost significant changes in surplus resulting from the treatment of deferredtax assets and health care and pharmacy rebate receivables.  The March 31, 2001 and June 30, 2001statutory financial statements fully reflect the implementation ofCodification.  Cobalt has taken certainactions including the reallocation of capital to mitigate the impact ofCodification on its subsidiaries.

             In order to satisfy certainintercompany receivables and continue to comply with minimum capital andlicensing standards, management has considered selling certain subsidiaries, aswell as some portion or all of its investment in American Medical SecurityGroup, Inc., or obtaining capital from outside sources.

Note I.  Recent Accounting Pronouncements

*             Financial Accounting Standards Board (“FASB”) #142**. *On June 29, 2001, the FASB approved theissuance of statement 142 “Goodwill and Other Intangibles.”  Management has reviewed the statement withrespect to the goodwill it carries on its balance sheet and the value ofBCBSUW’s investment in AMSG. Discontinuance of goodwill amortization, excluding its investment inAMSG, is estimated to reduce expense by approximately $1.7 million perquarter.  Cobalt will adopt FASB #142 onJanuary 1, 2002 and is currently in the process of analyzing the possiblegoodwill impairment.
             As of June 30, 2001BCBSUW owns 6.3 million shares in AMSG common stock representing a 45%ownership interest.  For generallyaccepted accounting principles, BCBSUW’s investment in AMSG is recorded usingthe equity method of accounting.  As ofJune 30, 2001, AMSG's book value per share was significantly higher than thequoted market value of a share of stock. The quoted market value of a share of stock is not the sole measurementbasis of the fair value of AMSG's reporting units.  Any write down of the goodwill balance by AMSG would result in areduction of the AMSG carrying value at BCBSUW and a reduction in BCBSUW’sstatutory capital and surplus.  Anyimpairment charge recognized as of January 1, 2002 would be reported as the cumulativeeffect of a change in accounting principle. Based on AMSG's current accounting policy of measuring goodwillimpairment based on undiscounted cash flows, there is no goodwill impairmentindicated.

Note J.Reclassifications

             Certain reclassifications have beenmade to the consolidated financial statements for 2000 to conform with the 2001presentation.

Note K. Subsequent Events

*             Retention of Bear, Stearns &Co. Inc. *On July30, 2001, Cobalt announced that it had retained the investment banking firm ofBear, Stearns & Co. Inc. to consider strategic alternatives in response toinquiries from other Blue Cross and Blue Shield plans about the possiblepurchase of the company.

**COBALT CORPORATION MANAGEMENT'SDISCUSSION AND ANALYSIS OF****FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**Overview**

             The registrant, formerly known asUWS (a Wisconsin corporation), was renamed Cobalt Corporation upon completionof the combination of BCBSUW and UWS on March 23, 2001.  BCBSUW was organized in 1939 and provideshealth and dental insurance coverage and related services to both the privateand public sectors. BCBSUW offers full coverage, co-payment, preferred providerorganization, Medicare supplement and interim coverage options to groups andindividuals. BCBSUW is the only health insurer in the state operating full-serviceregional sales and customer service centers. Through BCBSUW’s wholly ownedsubsidiary UGS, BCBSUW is a government contractor and processes Medicare claimsfor providers in all 50 states and is currently the largest Part AMedicare processor in the nation. Cobalt is also a leading provider of managed health care services andemployee benefit products through the historical UWS subsidiaries, which alsoprovide HMO products, dental, life, disability and workers’ compensationproducts, managed care consulting, electronic claim submission services,pharmaceutical management, managed behavioral health services, case managementand receivables management services. The activity from the UWS subsidiaries isreflected in the discussion below for periods after March 31, 2001.  Since the combination is accounted for underGAAP as a purchase by BCBSUW of the 53.4% of UWS it did not already own, BCBSUWis considered the registrant for SEC accounting purposes, and thus, activityreported for periods through March 31, 2001 represents BCBSUW activity only.

             The following Management’sDiscussion and Analysis should be read in conjunction with the auditedconsolidated financial statements for the year ended December 31, 2000 andfootnotes thereto included in the Cobalt Form 8-K, as filed with the SEC.

             In the discussion below, the numberof "members" is equivalent to the number of persons covered bycontracts in force.

**Summary of Membershipand Ratios**
 **June 30,**  **2001** **2000**  ************ Membership  at end of period:     Insured  medical545,613 253,105  Specialty risk products1,041,239 150,158  Specialty  service products1,063,528 -  Self–funded  products171,680 237,927    Total  membership2,822,060 641,190   Workers’  Compensation – Policies in force740 -           Membership  (as a percentage of the total):     Insured  medical19.3%39.5% Specialty  risk products36.9 23.4  Specialty  service products37.7 -  Self–funded  products6.1 37.1    Total  membership100.0%100.0%  
**Summary of OperatingResults and Ratios**
 **Three months ended**** ** **Six months ended**  **June 30,** **June 30,**  **2001** **2000** **2001** **2000**  ****************************  *(In thousands)*  Revenue:         Insured  medical$334,000 $123,774 $477,318 $239,740  Specialty  risk products41,397 7,430 48,881 14,914  Specialty  service products15,487 - 15,487 -  Government  services29,107 15,947 56,010 31,115  Self–funded  products7,003 6,324 14,705 12,168  Intercompany  eliminations(11,128)(613)(11,908)(1,219)   Total  health services revenue415,866 152,862 600,493 296,718  Investment  results3,505 2,562 5,569 4,973    Total  revenue$419,371 $155,424 $606,062 $301,691   Health  services revenue   (as a percentage of  the total):         Insured  medical80.3%81.0%79.5%80.8% Specialty  risk products10.0 4.9 8.1 5.0  Specialty  service products3.7 - 2.6 -  Government  services7.0 10.4 9.3 10.5  Self–funded  products1.7 4.1 2.5 4.1  Intercompany  eliminations(2.7)(0.4)(2.0)(0.4)   Total100.0%100.0%100.0%100.0%  Operating  ratios:         Insured  medical loss ratio(1)92.3%94.8%90.5%94.0% Specialty  risk products loss ratio(1)75.4%82.4%75.9%80.3%         Selling,  general, and administrative expense:         Insured  medical SGA ratio(2)9.5%11.1%9.8%11.0% Specialty  risk products SGA ratio(2)24.3%23.0%23.8%24.5% Government  services SGA ratio(3)99.6%99.2%99.4%99.4%         Self–funded  admin. fees per member per month$14.03 $8.86 $14.43 $8.39 Self–funded  SGA per member per month$15.88 $12.95 $16.86 $13.08 
(1)         Insuredmedical and other benefits as a percentage of premium revenue.

(2)         Insuredselling, general and administrative expenses as a percentage of premiumrevenue.

(3)         Governmentservices selling, general and administrative expenses as a percentage ofgovernment services revenue.

             Cobalt's revenues are derivedprimarily from premiums, while medical benefits constitute the majority ofexpenses. Profitability is directly affected by many factors including, amongothers, premium rate adequacy, estimates of medical benefits, health careutilization, effective administration of benefit payments, operatingefficiency, investment returns and federal and state laws and regulations.

***Results of Operations***

TotalRevenues

             Total revenues for the three monthsended June 30, 2001 increased 169.9% to $419.4 million from$155.4 million for the three months ended June 30, 2000.  For the six months ended June 30, 2001,total revenues increased 100.9% to $606.1 million, compared to $301.7 millionfor the six months ended June 30, 2000. This increase was due primarily to the addition of the UWS revenues,which resulted from the March 23, 2001 combination of BCBSUW and UWS to formCobalt.  UWS contributed $234.2 millionin revenue for the three months ended June 30, 2001 or 150.7% of the total169.9% increase for the quarter.  Otherfactors contributing toward the increase include premium rate increases on theBCBSUW medical insurance business, the re-pricing of self-funded products andnew government fee based contracts.

             Health Services Revenue

             *Insured Medical Revenue.  *Insured medical premium for the three months endedJune 30, 2001 increased 169.8% to $334.0 million from $123.8 millionfor the three months ended June 30, 2000. The increase is primarily due to growth in membership resulting from theaddition of UWS business.  The additionof UWS premiums resulted in an increase to premiums for the three months endedJune 30, 2001 of $188.2 million or 152.0% of the total 169.8% increase.  Also contributing toward the total increasein premium is an increase in average premium revenue per member per month.  Average insured medical premium per memberfor the three months ended June 30, 2001 increased 25.2% from the same periodin 2000.  The number of insured medicalmembers as of June 30, 2001 increased 115.6% to 545,613 from 253,105 as of June30, 2000.  For the six months ended June30, 2001, insured medical premium increased 99.1% to $477.3 million from$239.7 million for the six months ended June 30, 2000. Average insuredmedical premium per member for the six months ended June 30, 2001 increased22.2% from the same period in 2000.  Theaverage number of insured medical members for the six months ended June 30,2001 increased 63.0% to 396,144 from 243,080 for the six months ended June 30,2000.

             *Specialty Risk Products. *Specialty risk premium for the three months ended June30, 2001 increased 559.5% to $41.4 million from $7.4 million for the threemonths ended June 30, 2000. The increase primarily resulted from the additionof $34.0 million in revenues from the UWS specialty risk lines including life,accidental death and dismemberment, dental, disability, workers’ compensationand behavioral health. The number of specialty risk members as of June 30, 2001increased to 1,041,239 from 150,158 as of June 30, 2000.  The total increase in membership of 891,081reflects a slight decrease of 9,999 members in BCBSUW insured dentalmembership, offset by the addition of 901,080 members from the UWS specialtyrisk lines.  For the six months endedJune 30, 2001, specialty risk premium increased to $48.8 million from $14.9million for the six months ended June 30, 2000, also primarily attributable tothe addition of the UWS business.

             *Specialty Service Products. *Health services revenue for the three and six monthperiods ended June 30, 2001 includes $15.5 million related to the UWS specialtyservice products, which include workers’ compensation TPA business, subrogationand receivables collection, audit, electronic claims, and medical, pharmacy andbehavioral health management services.

             *Government Services. *Government services revenue for the three months ended June30, 2001 increased 83.0% to $29.1 million from $15.9 million for the threemonths ended June 30, 2000.  GovernmentServices revenue for the six months ended June 30, 2001 increased 80.1% to$56.0 million from $31.1 million for the six months ended June 30, 2000.  The increase from 2000 to 2001 is attributableto significant growth in the volume of Medicare claims processed, due to beingawarded additional government contracts. Effective December 1, 2000, UGS became the Medicare Part A Intermediaryfor the states of California, Nevada and Hawaii, and the territories of Guam,Mariana Islands and American Somoa.  Inaddition, also effective December 1, 2000, UGS became the Regional Home HealthIntermediary for the states of California, Nevada, Arizona, Hawaii, Oregon,Idaho, Washington, and Alaska, and the territory of Guam.

             *Self-funded Products.* Self-funded administrative fees for the three months ended June 30, 2001increased 11.1% to $7.0 million from $6.3 million for the three months endedJune 30, 2000. The average self-funded administrative fee per member per monthfor the three months ended June 30, 2001 increased 58.4% to $14.03 from $8.86for the three months ended June 30, 2000. The number of self-funded members asof June 30, 2001 decreased 27.8% to 171,680 from 237,927 as of June 30, 2000.The increase in fee per member in 2001 and decrease in total members for 2001is due to aggressive pricing on targeted group contracts and subsequent loss ofunprofitable business.  For the sixmonths ended June 30, 2001, self-funded administrative fees increased 20.5% to$14.7 million from $12.2 million for the six months ended June 30, 2000.  The average self-funded administrative feeper member per month for the six months ended June 30, 2001 increased 72.0% to$14.43 from $8.39 for the six months ended June 30, 2000.

InvestmentResults

             Net investment results includeinvestment income and realized gains (losses) on the sale of investments. Netinvestment results for the three months ended June 30, 2001 increased 34.6% to$3.5 million from $2.6 million for the three months ended June 30,2000, primarily due to the addition of the UWS business. Average annualinvestment yields, excluding net realized gains, investment income fromaffiliates and other interest income were 6.2% for the three months ended June30, 2001, compared to 6.8% for the three months ended June 30, 2000.  Net investment results for the six monthsended June 30, 2001 increased 12.0% to $5.6 million from $5.0 millionfor the six months ended June 30, 2000.

             Average invested assets for thethree months ended June 30, 2001 increased 308.5% to $210.4 million,compared to $51.5 million for the three months ended June 30, 2000. Theimprovement during the three months ended June 30, 2001 is primarily the resultof acquisition of UWS at the end of first quarter, which increased Cobalt’sinvested assets by an additional $188.8 million as of June 30, 2001.

             Investment gains (losses) arerealized in the normal investment process in response to market opportunities.Investment gains of $0.1 million were realized for the three and six monthperiods ended June 30, 2001.  Realizedgains were insignificant for the three and six month periods ending June 30,2000.

ExpenseRatios

             *Loss Ratio. *Theinsured medical loss ratio for the three months ended June 30, 2001 was 92.3%,compared with 94.8% for the three months ended June 30, 2000.  For the six months ended June 30, 2001, theinsured medical loss ratio was 90.5%, compared with 94.0% for the six monthsended June 30, 2000.  The decrease inthe medical loss ratio is primarily the result of pricing increases institutedin response to higher than anticipated medical utilization and cost trends,along with a $2.7 million release in the premium deficiency reserve on theMedicare Risk business during the six months ended June 30, 2001.  This improvement also reflects the increasesin the level of government reimbursements, the implementation of pricingincreases and other cost control measures on the Medicare Risk business.

             The specialty risk products lossratio improved to 75.4% for the three months ended June 30, 2001 compared to82.4% for the three months ended June 30, 2000.  The ratio also improved for the six months ended June 30, 2001 to75.9% from 80.3% for the six months ended June 30, 2000.  Results for the prior periods were entirelycomprised of the BCBSUW insured dental line which showed slight increases inthe loss ratios to 84.0% and 81.4% for the three and six month periods endedJune 30, 2001, respectively.  Theoverall improvement during the second quarter of 2001 resulted from theaddition of the UWS specialty risk product line, which ran at a loss ratio of73.5% for the three months ended June 30, 2001.  This loss ratio was relatively consistent with past results forthe UWS specialty product lines, which on a stand alone basis, ran at lossratios of 73.8% and 77.1% for the six months ended June 30, 2001 and 2000,respectively.

             *Selling, General and Administrative Expense Ratio*. The selling, general and administrative("SGA") expense ratio includes commissions, administrative expenses,premium taxes and other assessments and claim interest expense. The insuredmedical SGA expense ratio for the three months ended June 30, 2001 was 9.5%,compared with 11.1% for the three months ended June 30, 2000.  The insured medical SGA expense ratio for thesix months ended June 30, 2001 was 9.8%, compared with 11.0% for the six monthsended June 30, 2000. The improved SGA expense ratio in 2001 is the result ofexpense control measures instituted, combined with a higher premium base in2001 due to pricing increases. The specialty risk products SGA ratio increasedto 24.3% for the three months ended June 30, 2001 from 23.0% for the threemonths ended June 30, 2000. For the six months ended June 30, 2001, the specialtyrisk products SGA ratio was 23.8% compared to 24.5% for the six months endedJune 30, 2000.  The change in the ratioreflects changes in the mix of specialty risk business due to the addition ofthe UWS business.

             The average self-funded SGA expenseper member per month increased 22.6% for the three months ended June 30, 2001to $15.88 from $12.95 for the three months ended June 30, 2000.  The average self-funded SGA expense permember per month increased 28.9% for the six months ended June 30, 2001 to $16.86from $13.08 for the six months ended June 30, 2000.  The decrease in the self-funded membership caused the SGA expenseper member per month to increase. Additional expense reduction measures are currently targeted in thisarea.

*             Operating Expense Ratio. *Theoperating expense ratio for Government services for the three months ended June30, 2001 increased to 99.6% from 99.2% for the three months ended June 30,2000.   The operating expense ratio forGovernment services stayed constant at 99.4% for the six months ended June 30,2001 and June 30, 2000.

OtherExpenses

             BCBSUW has a bank line of credit,in which Cobalt subsidiaries participate, that permits aggregate borrowings upto $20 million. Interest expense, related to the bank line of credit, was $0.2million and $0.1 million for the three months ended June 30, 2001 and June 30,2000, respectively. Interest expense was $0.2 million for the six months endedJune 30, 2001 and June 30, 2000.

             Goodwill amortization totaling $1.8million and $0.1 million has been recorded for the three months ended June 30,2001 and 2000, respectively.  For thesix months ended June 30, 2001 and 2000, goodwill amortization totaling $1.9million and $0.3 million, respectively, has been recorded.  Goodwill amortization for the three monthsended June 30, 2001 primarily relates to $75.1 million in goodwill recorded in2001 for Cobalt as a result of purchase accounting, which is being amortized ona straight line basis over a period of 15 years.  Amortization expense for the three and six month periods endedJune 30, 2000 includes amortization related to the purchase by BCBSUW of 1.4million additional shares of UWS stock. The excess of cost over the fair value of net assets acquired wasrecorded as goodwill by BCBSUW and was amortized on a straight line basis overa period of 15 years.  As a result ofpurchase accounting, this goodwill was transferred to Cobalt during the firstquarter of 2001 and is included in the $75.1 million of Cobalt goodwilldiscussed above.  In addition, goodwillamortization has been recorded for various past acquisitions of subsidiariesand additional insurance business completed by UWS and BCBSUW.

             Profit sharing expenses of $0.1million were recorded for the three and six month periods ended June 30, 2001,which relate to two HMO joint venture provider arrangements within the UWSinsured medical segment.

NetIncome (Loss)

             Consolidated net results improvedfor the three months ended June 30, 2001 to a loss of $3.8 million compared toa loss of $8.4 million for the three months ended June 30, 2000.   For the six months ended June 30, 2001, thenet results improved to a loss of $2.5 million compared to a loss of $16.3million in 2000.  The $3.8 million lossfor the three months ended June 30, 2001 was the combination of a $4.5 millionafter tax operating loss offset by a $0.7 million equity in the net income of affiliates, net of tax.  The $4.5 million after tax operating lossreflects improvement in the insured loss and SGA ratios and continued growth ingovernment contract business over the prior year.  In addition, $2.6 million in transaction expenses incurred byBCBSUW related to the combination were recorded during the first quarter of2001.

             As of June 30, 2001, Cobalt had netoperating loss carry-forwards of approximately $140 million available to offsetfuture taxable income.  A full valuationallowance has been established against net deferred tax assets.

**Liquidity and Capital Resources**

             Cobalt's sources of cash flowconsist primarily of health services revenues and investment income. Theprimary use of cash includes medical and other benefit payments, as well asoperating expense payments. Positive cash flows are invested pending futurepayments of medical and other benefits and other operating expenses. Cobalt'sinvestment policies are designed to maximize yield, preserve principal andprovide liquidity to meet anticipated payment obligations.

             Cobalt's cash flow reflects anadditional $50.0 million in cash and cash equivalents for the six months endedJune 30, 2001 as a result of the acquisition of UWS.

             As a Primary Licensee of theBlueCross BlueShield Association (the “Association”), Cobalt is required tomaintain a prescribed liquidity ratio of certain liquid assets to averagemonthly expenses, as defined, in accordance with licensure requirements of theAssociation.  BCBSUW and Compcare HealthServices Insurance Corporation are both considered larger controlled affiliatelicensees by the Association and must also adhere to these requirements.  Cobalt maintained these required levels asof June 30, 2001.

             Cobalt's investment portfolioconsists primarily of investment-grade bonds and government securities and hasa limited exposure to equity securities. At June 30, 2001, $188.6 million or97.0% of Cobalt's total investment portfolio was invested in bonds comparedwith $36.5 million or 66.2% at June 30, 2000. The bond portfolio had anaverage quality rating by Moody's Investor Service of "Aa2" and “A1”at June 30, 2001 and June 30, 2000, respectively.  At June 30, 2001, $181.5 million or 94.3% of Cobalt’s totalinvestment portfolio was classified as available-for-sale compared with $55.1million or 100.0% as of June 30, 2000.  The market value of the total investment portfolio, which includes stocksand bonds, was less than amortized cost by $0.8 million and $0.7 millionat June 30, 2001 and June 30, 2000, respectively. Unrealized gains and losseson bonds classified as available-for-sale are included as a component ofsurplus, net of applicable deferred taxes. Cobalt has no investments inmortgage loans, no non-publicly traded securities (except for investmentsrelated to its affiliates), real estate held for investment or financialderivatives (except for principal-only strips of U.S. Government securities).

             Cobalt has an outstanding line ofcredit in the amount of $15.0 million as of June 30, 2001 available toHealth Professionals of Wisconsin, Inc. The balance was $4.6 million and $6.0 million as of June 30,2001 and June 30, 2000, respectively. Interest on the line of credit iscalculated using prime rate.

             Cobalt is required to maintaincertain levels of statutory capital and surplus under the NAIC Risk BasedCapital (“RBC”) requirements. Wisconsin insurers are also subject to compulsoryand security surplus requirements based upon the amount and type of premiumswritten. In addition to statutory capital requirements, Cobalt is required tomaintain certain levels as determined by the Association.  Cobalt was in compliance with theserequirements as of June 30, 2001.  Inorder to satisfy certain intercompany receivables and continue to comply withminimum capital and licensing standards, management has considered sellingcertain subsidiaries, as well as some portion of all of its investment in AmericanMedical Security Group, Inc., or obtaining capital from outside sources.

             The Health Insurance Portabilityand Accountability Act of 1996 (“HIPAA”) includes administrative simplificationprovisions directed at simplifying electronic data interchange throughstandardizing transactions, establishing uniform health care provider, payerand employer identifiers and seeking protections for confidentiality andsecurity of patient data. Under the new HIPAA privacy rules, Cobalt will now berequired to (1) comply with a variety of requirements concerning its use anddisclosure of individuals’ protected health information, (2) establish specificinternal procedures to protect health information and (3) enter into businessassociate contracts with those companies to whom protected health informationis disclosed.  Violations of these rulescould subject Cobalt to significant penalties. Compliance with HIPAA regulations require systems enhancements, trainingand administrative effort.  The finalrules do not provide for complete federal preemption of state laws, but ratherpreempt all contrary state laws unless the state law is more stringent.  HIPAA could expose Cobalt to additionalliability for, among other things, violations by its business associates.

**Quantitativeand Qualitative Disclosures about Market Risk**

             Because of Cobalt's investmentpolicies, the primary market risks associated with Cobalt's portfolio areinterest rate risk, credit risk and the risk related to fluctuations in equityprices. With respect to interest rate risk, a reasonably near-term rise ininterest rates could negatively affect the fair value of Cobalt's bondportfolio.  However, because Cobaltconsiders it unlikely that Cobalt would need or choose to substantiallyliquidate its portfolio, Cobalt believes that such an increase in interestrates would not have a material impact on future earnings or cash flows. Inaddition, Cobalt is exposed to the risk of loss related to changes in creditspreads. Credit spread risk arises from the potential that changes in anissuer's credit rating or credit perception may affect the value of financialinstruments.

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

             Cobalt uses a sensitivity model toassess the interest rate risk of its fixed income investments. The modelincludes all fixed income securities held and incorporates assumptions regardingthe impact of changing interest rates on expected cash flows for certainfinancial assets with prepayment features, such as callable bonds andmortgage-backed securities. Since last reported as of March 31, 2001, nosignificant changes have occurred in the determination of the reduction in thefair value of Cobalt’s modeled financial assets as a result of a hypotheticalinstantaneous 100 basis point increase in market interest rates.

**PART II.  OTHERINFORMATION**

**CobaltCorporation**

**Item 1.**             **Legal Proceedings**

                           None

**Item 2.**             **Changes inSecurities**

                           None

**Item 3.**              **DefaultsUpon Senior Securities**

                           None

**Item 4.**             **Submission of Matters to a Vote ofSecurity Holders**

                           The Annual Meeting ofShareholders of Cobalt was held on May 31, 2001, at which the following matterswere voted upon:
       Broker  For Against Abstain Non-Votes      Nominees  for Director        Three-Year  Term        Expiring  2004         Thomas  R. Hefty40,090,415 — 61,372 —  Janet  D. Steiger40,091,571 — 60,216 —  Kenneth  M.Viste40,092,588 — 59,199 — 
The term of office of the following otherDirectors continued after the meeting: Barry K. Allen, James L. Forbes, MichaelS. Joyce, D. Keith Ness and William C. Rupp, M.D.

**Item5.              OtherInformation**

                           None
**Item 6.****Exhibits and Reports on Form  8-K**    (a)Exhibits     10.1(a)Executive Severance Agreement Tier I (Thomas  R. Hefty)      10.1(b)Executive Severance Agreement Tier II (Stephen  E. Bablitch, Gail L. Hanson, Penny J. Siewert and three other key employees)      10.1(c)Executive Severance Agreement Tier III (James  E. Hartert and six other key employees)    
 

** **
 (b)Reports on Form 8-K     The Company filed a current report on Form 8-K  on April 9, 2001, reporting a change of control of the registrant and  acquisition of assets as a result of the combination.     The following financial statements were filed  with the Form 8-K:     a.Financial Statements of Blue Cross & Blue  Shield United of Wisconsin       (i)Financial Statements of Blue Cross & Blue  Shield United of Wisconsin    •            Schedule  IV – Reinsurance    •            Schedule  V – Valuation and Qualifying Accounts   (ii)Selected Financial Data for Blue Cross &  Blue Shield United of Wisconsin   (iii)Management’s Discussion and Analysis of  Financial Condition and Results of Operations for Blue Cross & Blue  Shield United of Wisconsin       b.Pro Forma Financial Information   (i)Unaudited Pro Forma Balance Sheet   (ii)Unaudited Pro Forma Statement of Operations
** **

**SIGNATURE**

             Pursuant to the requirements of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
  August  14, 2001COBALT  CORPORATION     By:  /s/ Gail L. Hanson  Gail  L. Hanson Senior  Vice President, Treasurer and Chief  Financial Officer