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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ____________

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2002

                         Commission file number 1-14177

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

Registrant's telephone number, including area code: (414) 226-6900
Securities registered pursuant to Section 12(b) of the Act:

      Title of each class              Name of each exchange on which registered
      -------------------              -----------------------------------------
  Common Stock, no par value                    New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

     As of February 28, 2003, there were outstanding 41,817,960 shares of Common
Stock.

     The aggregate market value of the shares of our common stock held by
non-affiliates of the registrant on June 28, 2002 was $220,040,131 assuming
solely for purposes of this calculation that the Wisconsin United for Health
Foundation, Inc. and all directors and executive officers of the Registrant are
"affiliates." This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]

                       DOCUMENTS INCORPORATED BY REFERENCE
        Portions of Cobalt Corporation Proxy Statement dated on or about
                            April 24, 2003 (Part III)

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                               COBALT CORPORATION
                                    INDEX TO
                           ANNUAL REPORT ON FORM 10-K
                      For the Year Ended December 31, 2002



PART I

Item 1      Business...........................................................3
Item 2      Properties........................................................15
Item 3      Legal Proceedings.................................................15
Item 4      Submission of Matters to a Vote of Security Holders...............15
Item 4a     Executive Officers of the Registrant..............................16

PART II

Item 5      Market for Registrant's Common Equity.............................19
Item 6      Selected Consolidated Financial Data..............................20
Item 7      Management's Discussion and Analysis of Financial Condition
             and Results of Operations........................................21
Item 7a     Quantitative and Qualitative Disclosures about Market Risk........49
Item 8      Financial Statements and Supplementary Data.......................50
Item 9      Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure.........................................92

PART III

Item 10    Directors and Executive Officers of the Registrant.................92
Item 11    Executive Compensation.............................................92
Item 12    Security Ownership of Certain Beneficial Owners and Management.....92
Item 13    Certain Relationships and Related Transactions.....................92
Item 14    Controls and Procedures............................................92

PART IV

Item 15    Exhibits, Financial Statement Schedules, and Reports
            on Form 8-K.......................................................93
           Schedule II -  Condensed Financial Information of Registrant.......95
           Schedule IV - Reinsurance.........................................100
           Schedule V - Valuation and Qualifying Accounts....................101
Signatures...................................................................102
Certifications...............................................................103
Index to Exhibits............................................................105


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                                     PART I
ITEM 1.  Business

Available Information

     Cobalt Corporation's ("Cobalt," the "Company," or "we") Internet address is
http://www.cobaltcorporation.com/. We make available free of charge through our
Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, on the same day
they are electronically filed with, or furnished to, the Securities and Exchange
Commission. We are not including the information contained on or available
through our website as a part of, or incorporating such information by reference
into, this Annual Report on Form 10-K.

Overview

     This report and other documents or oral presentations prepared or delivered
by and on behalf of the Company contain or may contain "forward-looking
statements" within the meaning of the safe harbor provisions of the United
States Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements based upon management's expectations at the time such
statements are made and are subject to risks and uncertainties that could cause
the Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"forecast," "objective," "plan, " "possible," "potential," "project," and
similar expressions are intended to identify forward-looking statements.

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

     Cobalt's principal executive offices are located at 401 West Michigan
Street, Milwaukee, Wisconsin 53203 and its telephone number at that address is
(414) 226-6900.

     We are the leading managed care company in Wisconsin based on 2001 premium
statistics published by the Office of the Commissioner of Insurance of the State
of Wisconsin ("OCI") and offer a broad portfolio of managed care and insurance
products to employers, individuals and government entities. We have an exclusive
license to utilize the Blue Cross(R) and Blue Shield(R) service marks in
Wisconsin, giving us a unique position in that market. As of December 31, 2002,
we serviced 800,361 insured and self-funded members in our medical programs and
472,374 insured and self-funded members in our dental programs (including Claim
Management Services, Inc. ("CMSI") members as described below).

     BCBSUW offers underwritten products, including preferred provider
organizations ("PPO"), traditional indemnity products, and self-funded or
administrative services only programs. Compcare Health Services Insurance
Corporation ("CompcareBlue") operates the oldest health maintenance organization
("HMO") in Wisconsin, which operates under the service mark CompcareBlue(SM).
CMSI, a third party administrator ("TPA"), was acquired on December 31, 2002 to
enhance and expand our competitive position in the self-funded market. As of
December 31, 2002, CMSI provided administrative services for 211,654 medical and
135,823 dental members, approximately 70% of which are located in Wisconsin.

                                       3
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     We offer one of the largest provider networks in Wisconsin. Our customers
have the ability to access the leading physicians and hospitals in their
respective service areas, including Mayo Health System ("Mayo"), University
Health Care, Inc. ("UHC"), and Aurora Health Care, as demonstrated by the fact
that:

     o    the majority of the hospitals in our networks have received
          accreditation by the Joint Commission on Accreditation of Healthcare
          Organizations, an organization nationally recognized for its rigorous
          standards with respect to patient safety and quality initiatives;

     o    our network includes approximately 89% of board certified primary care
          physicians in our service areas, which exceeds the national average of
          82%, based on the National Committee for Quality Assurance ("NCQA")
          Quality Compass 2002(R); and

     o    as of December 31, 2002, approximately 86% of our managed care
          membership is insured through subsidiaries which have earned NCQA
          accreditation for having met certain NCQA quality parameters.

     We believe that our ability to offer a full spectrum of products and a
broad provider network to meet the needs and objectives of a wide range of
customers provides us with a competitive advantage.

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

     We market our medical and dental products through a salaried sales force
located throughout Wisconsin, as well as through independent agents and brokers,
and directly to customers via the internet. By integrating the marketing of our
medical products, we are able to offer a broad range of product choices to
health care consumers. We sell our specialty managed care products and services
through a variety of distribution channels to employer groups and providers,
principally in Wisconsin.


Our Strategy

     Over the past two years, we have taken steps that have resulted in
significant increases in profitability, including: discontinuing unprofitable
business lines; repricing or terminating unprofitable customer contracts;
improving underwriting discipline and pricing products appropriately to reflect
underlying cost trends; negotiating improved terms in our provider contracts;
and bolstering management in key areas. We intend to continue to pursue
improvements in our operating results through the implementation of the
following strategies:

     o    CAPITALIZE ON THE STRENGTH OF THE BLUE CROSS AND BLUE SHIELD BRANDS.
          We believe that our right to the exclusive use of the Blue Cross and
          Blue Shield brands in Wisconsin gives us a significant marketing
          advantage, and we intend to continue emphasizing these brands among
          prospective customers and members. According to the BlueCross
          BlueShield Association (the "Association"), the number of members
          insured by plans bearing the Blue Cross and Blue Shield brands has
          increased by approximately 29% nationwide since 1995. We leverage the
          strength of the Blue Cross and Blue Shield brands on a national basis
          by participating in the Association's BlueCard PPO program, a network
          of Blue Cross and Blue Shield plans ("Blue Plans"). The BlueCard PPO
          program allows us to compete with national health insurers for groups
          with employees outside of the Wisconsin market and provides our
          members and members of other Blue Cross and Blue Shield affiliates the
          opportunity to access care while away from home.


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     o    FOCUS ON CORE BUSINESS. We have made a strategic decision to focus on
          our core Blue Cross and Blue Shield branded and HMO businesses, where
          we believe significant opportunities exist for earnings growth. These
          businesses, which include both insured and self-funded products,
          together produced approximately 82% of our revenues and approximately
          73% of our pre-tax operating income reported by our four segments for
          the year ended December 31, 2002. On March 29, 2002, we sold our
          behavioral health and medical management subsidiary, Innovative
          Resource Group, LLC ("IRG"). In the future, we may sell other non-core
          specialty businesses. In addition, between March 1, 2002 and December
          31, 2002, we reduced our ownership of our former affiliate American
          Medical Security Group, Inc. ("AMSG"), a small group and individual
          health insurer, from 45.2% to 10.7% of AMSG's outstanding common
          stock, relieving us of a substantial capital requirement relating to
          AMSG. On January 3, 2003, we sold our remaining shares of AMSG common
          stock.

     o    EXPAND OPERATING MARGINS AND REALIZE OPERATING EFFICIENCIES. We intend
          to focus on expanding operating margins in our core businesses by
          continued improvement in underwriting techniques and product design,
          product pricing, and provider arrangements. We intend to pursue
          additional operating efficiencies through consolidation of
          administrative functions of BCBSUW, CompcareBlue, and certain
          specialty businesses.

     o    INCREASE MARKET SHARE. We intend to focus on increasing market share
          in Wisconsin through improving relationships with independent agents
          and brokers and through an increased emphasis on our core business
          (including the BlueCard PPO program) and our Medicare supplement
          product offerings, as well as the introduction of new products. We
          expect to accomplish this by leveraging our diverse customer base by
          cross-selling product offerings and pursuing opportunistic
          acquisitions of health insurers and managed care providers in
          Wisconsin.

Products and Services

     Insured and Self-Funded Medical Products

     We offer a wide range of insured and self-funded medical products,
including HMOs, PPOs, point-of-service ("POS") plans, indemnity products, and
Medicare supplement products. We design our products to meet the needs and
objectives of a wide range of customers, including employers, individuals, and
government entities. Our customers either contract with us to assume
underwriting risk or they self fund underwriting risk and rely on us for network
management and administrative services. Our products vary with respect to the
level of benefits provided, the costs to be paid by employers and members,
including deductibles and copayments, and the extent to which our members'
access to providers is subject to referral or preauthorization requirements.

     We provide our Blue Cross and Blue Shield branded products through BCBSUW
and our Blue Cross and Blue Shield branded HMO, CompcareBlue, which operates
primarily in the Milwaukee metropolitan area. We also provide private branded
products through our HMO subsidiaries, Valley Health Plan, Inc. ("Valley") and
Unity Health Plans Insurance Corporation ("Unity"), and TPA subsidiary, CMSI.
Valley operates primarily in northwestern Wisconsin, including the city of Eau
Claire, whereas Unity operates primarily in south central and southwestern
Wisconsin, including the city of Madison. CMSI operates in the Midwest, with the
majority of its operations in Green Bay, Wisconsin.

     We also participate in the BlueCard PPO program, a national network of Blue
Cross and Blue Shield plans. The BlueCard PPO program permits members of our
Blue Cross and Blue Shield branded health plans to receive health care services
from providers in the networks of other Blue Cross and Blue Shield plans. This
allows us to compete with national health insurers for groups with employees
outside the Wisconsin market. This also allows members to access care while away
from home. Through electronic communications, the "host" plan verifies
eligibility, pays the claim based on its local fee arrangement, and is then
reimbursed by the "home" plan for the claim as well as an administrative fee.
Absent an agreement between two plans, the Association determines the amount of
the administrative fee. Under this

                                       5
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arrangement, we are also able to generate revenue from provider network
management and claims repricing.

     As of December 31, 2002, our medical plan membership consisted of the
following (in numbers of covered individuals):

                                                     Insured         Self-Funded
                                                     Medical           Medical
           Product Offerings                         Members          Members(1)
           -----------------                         -------          ----------

           HMO..............................         151,627             4,674
           PPO..............................         166,078           279,494
           POS..............................          61,126            10,806
           Indemnity........................          19,758            48,551
           Medicaid.........................           4,351                --
           Medicare Supplement..............          53,896                --
                                                     -------           -------
                Total Medical...............         456,836           343,525
                                                     =======           =======
_______________
(1) Does not include member equivalents relating to host plan members who access
    medical care under the BlueCard PPO program.

     Specialty Managed Care Products and Services

     We are one of the largest providers of insured dental coverage in
Wisconsin. In Wisconsin, our dental HMO coverage is offered through
CompcareBlue, and dental indemnity coverage is offered through BCBSUW. These
dental HMO and indemnity benefit products are currently marketed under the
DentalBlue(R) brand name. We also offer dental indemnity coverage outside of
Wisconsin through another subsidiary. As of December 31, 2002 we had 300,329
insured dental members and 172,045 self-funded dental members.

     We offer group term life and accidental death and dismemberment coverages,
as well as dependent life benefits. Short and long-term disability products
provide income replacement for an employee who becomes disabled through a
non-work related event. As of December 31, 2002, we insured 114,151 disability
members and 132,524 life members.

     We provide worker's compensation insurance products and managed care
services to employees in Wisconsin, Illinois and Iowa. We also provide cost
containment services, including hospital bill audit, provider discount network
repricing, negotiations, diagnosis-related group validation, claims
administration audit, subrogation and recovery, electronic audit, collection and
fraud investigation, and recovery services to assist customers in reducing their
expenses and provide more cost effective health care delivery. Additionally, we
provide software and claim submission services for Medicare, Medicaid, private
insurers, third-party administrators, and re-pricers. We also provide
collections and receivables management services to hospitals and other
commercial clients. We generally provide these specialty managed care products
and services through wholly-owned subsidiaries.

     Government Services

     Through our subsidiary, Government Health Services, LLC ("GHS"), we provide
health care program administration and program safeguard services for the
Centers for Medicare & Medicaid Services, which we refer to as "CMS." In
connection with providing these services, we serve as the Medicare Part A
Intermediary and Regional Home Health Intermediary for numerous states and
territories, and serve as the national Intermediary for the Federally Qualified
Health Centers in all 50 states. In addition to providing services to the
Medicare program, we provide claim processing and administrative services in
conjunction with the Wisconsin Medicaid program and the Health Insurance Risk
Sharing Plan. Finally, we provide certain audit services under a separate
contract with the Association and certain state Medicaid agencies.

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<PAGE>

     The Association contracts with CMS to process Medicare Part A claims. We
have subcontracted with the Association to provide those services in various
states and territories. Until May 2002, that subcontract was held by BCBSUW,
which further subcontracted those services to our wholly-owned subsidiary,
United Government Services, LLC ("UGS").

     In May 2002, BCBSUW was granted a contract novation by CMS, enabling BCBSUW
to transfer the Medicare contract to UGS. We are the first Medicare Part A
processor to receive such a novation, and it is our understanding that we
received the novation based on the strength of our compliance program. The
novation provides for certain limitations on our liability relating to acts
subsequent to the novation. Also, the novation will facilitate the transfer of
the Medicare Part A processing business to another Blue Cross and Blue Shield
plan, should we determine to do so.

     Trust Solutions, LLC ("TS"), a wholly-owned subsidiary of GHS, provides
integrity, consulting and safeguard services in connection with publicly funded
health programs.

Sales and Marketing

     Marketing dual choice group health insurance products is generally a
two-step process. Presentations are made first to employers. Once selected by an
employer, we then directly solicit members from the employee base. During
periodic "open enrollments," when employees are permitted to change health care
programs, we use advertising and work site presentations to attract new members.
Virtually all of the group contracts are renewable annually. On full replacement
products such as POS and PPO, the marketing of the product consists of issuing a
quote or bid through the distribution channel and allowing the prospect to elect
to choose one of our product options. Presentations of our products are either
handled by the agent representing our company, or in combination with the agent
and the Cobalt company representative. After the employer elects a Cobalt
product, then we do worksite presentations to install, implement, and explain
the program to the employees of the new customer.

     Significant factors in product selection by employers and employees include
the composition of provider networks, quality of services, price, choice and
scope of benefits, and market presence. To the extent permitted by the OCI and
the federal government, we can offer an employer a wide spectrum of benefit
options. To address rising health care costs, some employers now consider a
variety of health care options to encourage employees to use the most
cost-effective form of health care services.

     We market our medical and dental products through a salaried sales force
located throughout Wisconsin, as well as through independent agents and brokers,
and directly to customers via the internet. By integrating the marketing of our
insured health and specialty managed care products and services, we are able to
offer a wide range of products and services to our customers. We sell our
specialty managed care products and services through a variety of distribution
channels to employer groups and providers throughout the United States.

     Our sales and marketing efforts have traditionally been organized
geographically. We have recently replaced this structure to pursue a coordinated
market segment approach that we believe will better enable us to increase market
share.

     Our pricing strategy is targeted to cover current and anticipated changes
in health care costs and operating costs and to achieve targeted profit margins.
To that end, in May 2002, we transferred primary responsibility for our
underwriting department to our Chief Actuary. We believe that the active role
our actuarial staff plays in the underwriting process will allow us to grow our
business while effectively managing the financial risks associated with our
products.

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Our Provider Network

     BCBSUW offers one of the largest provider networks in Wisconsin and
provides a diverse selection of primary care and specialty care physicians to
meet the health care needs of our members. CompcareBlue has an extensive
provider network in southeastern Wisconsin, and is the only HMO that contracts
with all eight of the largest multi-specialty clinics in Milwaukee, including
Aurora Health Care, the largest multi-specialty provider in Wisconsin, for the
provision of health care services to its members.

     A majority of Valley's medical and other benefits are provided under an
arrangement with Midelfort Clinic, Ltd. ("Midelfort") and its affiliate, Luther
Hospital, which are affiliated with Mayo and which we believe, based on the
national reputation of Mayo, are the leading medical service providers in Eau
Claire, Wisconsin. Unity contracts with Community Physicians' Network ("CPN"),
an independent physician association, and UHC. UHC contracts on behalf of the
University of Wisconsin Hospital and Clinics, the University of Wisconsin
Medical Foundation, and the University of Wisconsin School of Medicine. CPN and
UHC provide the majority of physician services for Unity's membership throughout
its 19 county service area.

     Our two largest HMOs have received NCQA accreditation. All of our HMOs
maintain higher than average satisfaction scores on clinical services. As a
result of our aggressive credentialing efforts, the percentage of our HMO
practitioners who are board certified is at or above the NCQA averages.

     BCBSUW contracts primarily on a discounted fee-for-service and fee schedule
basis. In discounted fee-for-service arrangements, we retain the risks
associated with utilization. However, such arrangements provide us with greater
pricing flexibility and opportunities to benefit by application of underwriting
on a group-specific or individual basis. Furthermore, fee schedule-based
compensation allows us to better target improvement in loss ratios through
product development, benefit modification, and medical management. CompcareBlue,
Valley, and Unity manage the cost of health care provided to members through
various methods of payment and risk-sharing programs with physician groups and
hospitals and through their respective utilization management programs. The
methods of payment consist of a combination of fee schedules, discounted
fee-for-service, and capitation arrangements. Capitation is an arrangement
whereby we pay medical providers a set fee per member per month in exchange for
providing health care services.

     Approximately 28% of the insured medical benefits provided by CompcareBlue,
Valley, and Unity were provided under capitated arrangements in 2000. In 2001,
this number decreased to 14% and in 2002 this number increased to 18%, as a
result of the cancellation of unprofitable non-capitated business in 2002. For
BCBSUW insured medical business, no significant benefits were provided under
capitated arrangements during 2000 through 2002.

     Pursuant to the provider agreements between Unity and Community Health
Systems, LLC ("CHS") and UHC, CHS has the option, exercisable on December 31,
2004, to repurchase its proportionate share of Unity for the current net worth
of the business being repurchased. UHC has the option, also exercisable on
December 31, 2004, to purchase its share of Unity for $0.5 million plus the
proportionate share of the net worth of Unity attributable to the UHC business,
less any unpaid amount of a maximum performance bonus specified in the
agreement. Exercise of the repurchase option ends the agreement with respect to
that party. If both repurchase options are exercised, we would have no ongoing
interest in Unity.

     Valley and Midelfort have entered into an extension of their arrangement
through December 31, 2005. Under the terms of the extension, Valley will no
longer be capitated for professional medical services. The extension grants
Midelfort an option to repurchase the capital stock of Valley for $0.4 million
plus 100% of the net equity of Valley as of the date of repurchase and
eliminates profit sharing between the parties.

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Medical Management

     We utilize a broad range of focused traditional cost containment and
advanced care management processes across our various product lines to improve
member health, to avoid health risks, and to lower costs. These include case
management, disease management, evidence based medical policy, return on
investment evaluation, targeted opportunities, and quality improvement programs.
Our case management philosophy is built on helping members confront a complex
care system to find the appropriate care in a timely and cost effective manner.
We believe this approach builds positive relationships with providers and
members, and helps us achieve cost savings.

     Our population-based disease management programs attempt to identify
members who have or are at risk to develop high cost chronic diseases and
conditions. Targeted members typically have high utilization of health care
services, which can result in significant costs. By identifying high risk
members and enrolling them in specialized programs involving patient education,
lifestyle modification, and intensive care management, we seek to improve
patient satisfaction, manage medical costs, and improve medical outcomes. These
programs currently include diabetes, congestive heart failure, asthma, and high
risk pregnancy. We plan to expand them in the future.

     We outsource the majority of our behavioral health, utilization, disease
and case management services to our former subsidiary, IRG, which we sold to APS
Healthcare Bethesda, Inc. ("APS") on March 29, 2002. Under APS, IRG manages our
local pharmacy network, pharmacy customer service, and pharmacy clinical
programs. WellPoint Pharmacy Management manages the majority of our pharmacy
claims processing and pharmaceutical manufacturer rebates.

Management Information Services

     Information systems management for our core health business is primarily
delivered under a facilities management agreement with Blue Cross Blue Shield of
South Carolina and Electronic Data Systems Corporation ("EDS"). Blue Cross Blue
Shield of South Carolina is responsible for administering information systems
supporting our claims processing. By working with another plan in the Blue Cross
and Blue Shield system, we are able to leverage system enhancements that support
the interchange of data across Blue Cross and Blue Shield plans, such as the
coordination of provider network arrangements on a national basis. We use EDS
information systems primarily to support our membership enrollment database. Our
specialty businesses use a variety of internal information systems specifically
designed for various product lines. Our agreement with Blue Cross Blue Shield of
South Carolina is in effect until October 2005, and our agreement with EDS is in
effect until October 2003.

     In 1999, and again in 2002, we received a letter from the holder of a
patent asserting that certain components of our information systems, including
our claims processing systems, infringe this patent. We are reviewing the merits
of this assertion. If we are found to infringe this patent, we could be required
to discontinue the infringing activity, which could disrupt our operations, and
could be required to pay damages for past activities and pay royalties for
future use, which could be substantial. As to certain components of our systems
that have been claimed to infringe the patent, we have a contractual right to
indemnification from the vendor of the systems for losses resulting from patent
infringement. However, we cannot be assured that the indemnification would be
sufficient to protect us in the event that a patent infringement claim is made
against us and is determined to be valid.


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<PAGE>

Competition

     The managed care industry is highly competitive. We believe the principal
competitive features affecting our ability to retain and increase our membership
include the strength of the Blue Cross and Blue Shield brands, our ability to
offer our customers a broad continuum of insured and self-funded products, and
access to a network of high quality providers. Portions of the Wisconsin market
are dominated by a small number of provider-owned health plans, with a
correspondingly large influence on the markets in which we compete. These
provider-owned health plans can often obtain favorable financial arrangements
that are not available to us. Some of our other competitors are larger, have
considerably greater financial resources and distribution capabilities, and
offer more diversified types of insurance coverage. Our key competitors include
Humana Inc., United Healthcare Insurance Company, Dean Health Plan, and
Physicians Plus.

Blue Cross and Blue Shield Licenses

     We are a licensee of the Association. The Association is a national trade
association of Blue Cross and Blue Shield licensees which strives to promote and
preserve the integrity of the Blue Cross and Blue Shield names and service marks
as well as provide certain coordination among plan and provider services. As a
licensee of the Association, we have the exclusive right to use the Blue Cross
and Blue Shield names and service marks for all of our products in Wisconsin.

     The licenses require us to pay an annual fee to the Association equal to
total association expenses allocated to Association members based upon
enrollment and premium. Each Association licensee is an independent legal
organization and is not responsible for obligations of other Association member
organizations. We do not have the right to use the Blue Cross and Blue Shield
names and service marks outside of our Blue Cross and Blue Shield service area,
except in certain limited circumstances.

     Each of BCBSUW, CompcareBlue, and UGS is also a licensee of the Association
by virtue of being a controlled affiliate of Cobalt. As required by the
Association, Cobalt has provided each of BCBSUW and CompcareBlue a guarantee of
their contractual and financial obligations to their customers. We have also
agreed to indemnify the Association and other Blue Cross and Blue Shield plans
against any claims asserted against such entities resulting from our activities
or the activities of any of our Blue Cross and Blue Shield licensed affiliates.

     Our license agreements require us to pay the Association a specific amount
upon termination of the license agreements, subject to certain limited
exceptions. The amount payable upon termination of our license agreement is
equal to $25 multiplied by the number of our members receiving products or
services sold or administered under the Blue Cross or Blue Shield names or
service marks. The fee would be reduced to the extent the payment of the fee
would cause us to fall below certain capital requirements established by the
Association.

     The Association could terminate our license agreements if we do not satisfy
its financial and service performance requirements or upon the occurrence of
other events described in the license agreements, some of which are outside of
our control. Termination events include, but are not limited to:

     o    failure to meet minimum capital and surplus thresholds and liquidity
          requirements of the Association;

     o    violation of the ownership limitations contained in our Amended and
          Restated Articles of Incorporation;

     o    termination of the voting trust and divestiture agreement between us
          and the Foundation before the Foundation's ownership of our common
          stock falls to less than 5%;

                                       10
<PAGE>

     o    the acquisition of our company without the prior consent of a majority
          of the other disinterested licensees of the Association and a majority
          of the then current weighted vote of the other disinterested licensees
          of the Association;

     o    failure by the Foundation to divest its shares of our common stock by
          the deadlines specified by the voting trust and divestiture agreement;

     o    a determination by the Association that fewer than 80% of our
          directors are independent; and

     o    failure to brand medical and dental business as required by the
          Association.

     Our Amended and Restated Articles of Incorporation and Amended and Restated
Bylaws include various provisions required by the Association for its for-profit
licensees. These provisions are designed to protect the independence of the
Association's for-profit licensees from any single stockholder.

     Because of our prior financial performance, the Association had included
BCBSUW, CompcareBlue and Cobalt in its Plan Performance Response Monitoring
Process ("PPRMP"). Based on our strong financial performance in 2002 and
increased capital and liquidity levels, the Association removed BCBSUW,
CompcareBlue and Cobalt from its PPRMP in early 2003.

     As of December 31, 2002, BCBSUW, CompcareBlue and Cobalt exceeded the
minimum capital and surplus thresholds and liquidity requirements of the
Association. The Association is entitled to terminate our license agreement with
the Association, including the right to use the Blue Cross and Blue Shield names
and service marks, if we fall below the licensure minimum statutory capital and
surplus thresholds or liquidity requirements.

Regulation

     General

     Government regulation of employee benefit plans, including health care
coverage, health plans, and our specialty managed care products, is a changing
area of law that varies from jurisdiction to jurisdiction and generally gives
responsible administrative agencies broad discretion. To comply with these
regulations, it may be necessary for us to make changes from time to time in our
services, products, structure, or operations. Additional government regulation
or future interpretation of existing regulations could increase the cost of our
compliance or otherwise affect our operations, products, profitability, or
business prospects.

     Federal legislation has significantly expanded regulation of group health
plans and health care coverage. The laws place restrictions on the use of
pre-existing conditions and eligibility restrictions based upon health status
and prohibit cancellation of coverage due to claims experience or health status.
Federal regulations also prohibit insurance companies from declining coverage to
small employers. Additional federal laws, which took effect in 1998, include
prohibitions against separate, lower dollar maximums for mental health benefits
and requirements relating to minimum coverage for maternity inpatient
hospitalization.

     Increasingly, states are considering various health care reform measures
which, if passed, may limit our ability and our health plans' ability to control
which providers are part of their networks and hinder their ability to manage
utilization and cost effectively. "Patient Protection" laws, which became
effective in Wisconsin in late 1998, established a prudent layperson standard
for coverage of emergency room care and provided extended access to providers
who are no longer part of the plan's network. A number of other states are
considering similar legislation. In his January 2003 State of the Union address,
President Bush expressed support for creating national association health plans,
known as "AHPs." AHPs would allow small businesses to buy into group health
insurance plans anywhere in the country. To facilitate such arrangements,
federal legislation would be necessary to supersede varying state insurance laws
that would otherwise make the operation of AHPs impracticable. Due to the fact
that AHPs would not be required to

                                       11
<PAGE>

accept all applicants regardless of health status, as health insurers are under
state insurance laws, AHPs could gain a competitive advantage. In addition,
President Bush also discussed an alternative Medicare HMO plan that would
include prescription drug coverage. If such a program were available to the
Medicare eligible population, it could negatively impact enrollment in our
Medicare Supplement products. At this time, we cannot predict whether
legislation enacting either or both of these proposals will ultimately be
adopted, precisely what form the legislation would take, or its specific impact
on our business.

     HIPAA

     The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes administrative provisions imposing significant requirements relating to
maintaining the privacy of medical information ("Privacy"), establishing uniform
health care provider and employer identifiers, requiring use of standardized
transaction formats ("Transactions"), and seeking protections for
confidentiality and security of patient data ("Security"). The Privacy and
Transactions provisions require implementation in 2003. Final HIPAA Security
rules were published on February 20, 2003, and the implementation and compliance
date is April of 2005. HIPAA is far-reaching and complex, and proper
interpretation and practice under the law continue to evolve. Consequently, our
efforts to measure, monitor, and adjust our business practices to comply with
HIPAA are ongoing. Compliance with HIPAA could require us to make significant
changes to our operations and failure to comply could subject us to civil and
criminal penalties. The costs of complying with HIPAA are likely to be
substantial.

     HMOs

     Wisconsin has enacted statutes regulating the activities of HMOs. The
implementing regulations provide for periodic financial reports from HMOs and
impose minimum capital or reserve requirements. In addition, certain of our
subsidiaries are required by state regulatory agencies to maintain restricted
cash reserves represented by interest-bearing instruments which are held by
trustees or state regulatory agencies to ensure that adequate financial
resources are maintained or to act as a fund for insolvencies of other HMOs in
the state.

     As a federally qualified HMO, CompcareBlue must file periodic reports with,
and is subject to periodic review by CMS. Our HMOs that have Medicaid contracts
are subject to both federal and state regulation regarding services to be
provided to Medicaid enrollees, payment for those services, and other aspects of
the Medicaid program. Medicaid has in force and/or has proposed regulations
relating to fraud and abuse, physician incentive plans, and provider referrals,
which may affect our operations.

     In the past, we have contracted with the Office of Personnel Management
("OPM") to cover federal employees under the Federal Employees Health Benefit
Plan. These contracts were subject to extensive regulation, including complex
rules relating to the premiums charged. OPM has the authority to retroactively
audit the rates charged and may seek premium refunds and other sanctions against
health plans participating in the program. Our health plans that have contracted
with OPM are subject to such audits and have in the past and may in the future
be requested to make such refunds. Given our participation in this and other
federal health care programs, we have implemented and place great importance
upon an effective compliance program.

     Capital Requirements

     Our insurance subsidiaries are subject to minimum capital requirements
imposed under the laws of the State of Wisconsin. These minimum capital
requirements are calculated under a prescribed compulsory and security surplus
computation based upon a percentage of underwritten premiums by line of
business. Wisconsin insurance laws also include minimum capital requirements
based on the Risk Based Capital for Insurers Model Act adopted by the National
Association of Insurance Commissioners ("NAIC"). The formula for calculating
such risk-based capital requirements is designed to take into account asset
risks, insurance risks, interest rate risks, and other relevant risks with
respect to the individual insurance company's business. Under these laws, our
insurance subsidiaries must submit a report of their risk-based

                                       12
<PAGE>

capital level as of the end of each calendar year. Insurers having less capital
than required by the risk-based capital model formula will be subject to varying
degrees of regulatory action depending on the level of capital inadequacy. The
regulatory action that may be imposed on an insurer includes requiring adoption
of a comprehensive financial plan, its examination and the issuance of a
corrective order by the state insurance commission, or placing the insurer under
state regulated control.

     At the request of the OCI, we prepared a plan of action in early 2002 for
strengthening the capital position of our insurance subsidiaries. We executed on
the plan and significantly improved our capital ratios during 2002. In early
2003, the OCI removed us from its heightened level of scrutiny. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management's Plan." Our insurance subsidiaries are currently in
compliance with the minimum capital requirements imposed under Wisconsin
insurance laws.

     In addition, the Association requires some of our insurance subsidiaries to
meet certain risk-based capital requirements, which are generally more stringent
than those imposed under Wisconsin insurance laws. As of December 31, 2002,
BCBSUW, CompcareBlue and Cobalt exceeded the minimum risk-based capital
requirements of the Association to maintain their licenses. See "Business - Blue
Cross and Blue Shield Licenses."

     Insurance Regulation

     Each of our insurance subsidiaries is subject to regulation by the
department of insurance in each state in which it is licensed. Regulatory
authorities exercise extensive supervisory power over insurance companies
relating to the licensing of insurance companies; the amount of capital which
must be maintained; the approval of forms and insurance policies used; the
nature of, and limitation on, an insurance company's investments; periodic
examination of the operations of insurance companies; the form and content of
annual statements and other reports required to be filed on the financial
condition of insurance companies; and the establishment of capital requirements
for insurance companies. In addition, our insurance subsidiaries are subject to
specific taxes and assessments, which can be subject to increase. Our insurance
company subsidiaries are required to file periodic statutory financial
statements in each jurisdiction in which they are licensed. Additionally, such
companies are examined periodically by the insurance departments of the
jurisdictions in which they are licensed to do business.

     We actively market insurance products to Medicare eligible individuals.
Medicare supplement (or Medigap) policies are regulated by the OCI and are the
subject of increasing regulation at the state level, as well as additional
legislation at the federal level. We continue to monitor and alter procedures to
comply with new laws and regulations.

     Under Wisconsin law, insurance companies must provide the OCI with advance
notice of any dividend that is more than 15% larger than any dividend for the
corresponding period of the previous year. In addition, the OCI may disapprove
any "extraordinary" dividend, defined as any dividend which, together with other
dividends paid by an insurance company in the prior twelve months, exceeds the
lesser of: (i) 10% of statutory capital and surplus as of the preceding December
31; (ii) with respect to a life insurer, net income less realized gains for the
calendar year preceding the date of the dividend; or (iii) with respect to a
non-life insurer, the greater of (A)(ii) above or (B) the aggregate net income
less realized gains for the three calendar years preceding the date of the
dividend less distributions made within the first two of those three years.

                                       13
<PAGE>

     Insurance Holding Company Regulations

     Cobalt is an insurance holding company and conducts business through
subsidiaries. As a result, it is subject to insurance holding company laws and
regulations that, among other things, generally require registration with the
department of insurance of the holding company's domiciliary state and the
filing of certain reports describing capital structure, ownership, financial
condition, certain intercompany transactions, and general business operations.
Various notice and reporting requirements generally apply to transactions
between companies within an insurance holding company system, depending on the
size and nature of the transactions. Certain state insurance holding company
laws and regulations require prior notice or, in certain circumstances, prior
approval, of certain acquisitions, and transactions between the regulated
companies, their parent holding companies and affiliates.

     Under Wisconsin law, acquisition or control of us, and thereby indirect
control of our insurance subsidiaries, requires the prior approval of the OCI.
"Control" is defined as the direct or indirect power to direct or cause the
direction of the management and policies of a person. Any purchaser of 10% or
more of the voting securities of a corporation is presumed to have acquired
control of the corporation and its subsidiaries unless the OCI, upon
application, determines otherwise.

     ERISA

     The provision of services to or through certain employee health benefit
plans is subject to the Employee Retirement Income Security Act of 1974
("ERISA"). ERISA is a complex set of federal laws and regulations that are
subject to periodic interpretation by the federal courts and the United States
Department of Labor. ERISA places certain controls on how our business units may
do business with employers covered by ERISA, particularly employers that
maintain self-funded plans. The Department of Labor is charged with the
enforcement of ERISA. There have been continued attempts to limit ERISA's
preemptive effect on state laws through proposed state and federal legislation,
regulations, and litigation. If such limitations were to be imposed, they might
increase our liability exposure relating to employee health benefits offered by
our health plans and specialty businesses and may permit greater state
regulation of other aspects of those businesses' operations.

Trademarks

     Blue Cross and Blue Shield are federally registered service marks of the
Association. Compcare(R) is a federally registered service mark of Cobalt. We
have filed for and maintain various other service marks and trade names at the
federal level and in Wisconsin. Although we consider our registered service
marks, trademarks, and trade names important in the operation of our business,
our business is not dependent on any individual service mark, trademark, or
trade name owned by us. CompcareBlue and BCBSUW use the Blue Cross and Blue
Shield service marks in their businesses, pursuant to a license agreement with
the Association, as our controlled affiliates. Termination of this license could
have a material adverse effect on us.

Employees

     As of December 31, 2002, we employed 3,259 full-time and 105 part-time
employees, of whom 458 were managerial and supervisory personnel. In addition,
we lease the services of 74 people who manage and operate one of our
subsidiaries. We consider our relations with our employees to be good.

Financial Information About Segments

     Certain financial information about our business segments may be found in
Note 20 to the consolidated financial statements included in Item 8.

                                       14
<PAGE>

ITEM 2.  Properties

     Our corporate headquarters are located in Milwaukee, Wisconsin in a 216,541
square foot leased building that is shared by our four reportable business
segments: insured medical products, specialty managed care products and
services, government services, and self-funded products. Each segment is charged
a proportionate share of the cost of this facility under service agreements.

     Three business segments (insured medical products, specialty managed care
products and services, and self-funded products) also share common facilities
and are charged a proportionate share of the cost of such facilities under
service agreements. These facilities are located in Eau Claire, Fond du Lac,
Evansville, and Oshkosh in approximately 88,500 combined leased square feet,
50,540 leased square feet in Waukesha, Wisconsin, 52,237 square feet in New
Berlin, Wisconsin, 36,750 square feet in West Allis, Wisconsin, 22,602 square
feet in Platteville, Wisconsin, 20,973 square feet in Stevens Point, Wisconsin,
15,270 square feet in Brookfield, Wisconsin, and one other location under 5,000
square feet. In addition, we lease and occupy 18,198 square feet in two
locations in Illinois and 10,776 square feet in four locations in Michigan. We
also own and occupy a 61,090 square foot facility in Pewaukee, Wisconsin, a
39,300 square foot facility in Sauk City, Wisconsin, and one additional location
under 5,000 square feet.

     Our government services segment leases and occupies 64,693 square feet in
three locations in California, and approximately 32,000 square feet in three
locations in Virginia and West Virginia. In addition, this segment leases and
occupies a total of seven other locations, all of which are under 5,000 square
feet. These facilities are located in Minnesota, New York, Wisconsin, Illinois,
and Michigan.

     In addition, in conjunction with our acquisition of the insurance
operations of Family Health Plan Cooperative ("FHP") in November 2000, we
assumed a 10-year lease for a 60,000 square-foot facility with an additional
10,000 square feet of storage space in Brookfield, Wisconsin. On March 29, 2002,
we assigned this lease to APS. However, we would remain liable in the event that
APS would default on this lease.

     In conjunction with the acquisition of CMSI on December 31, 2002, we
assumed a lease in Green Bay, Wisconsin for approximately 9,173 square feet of
office space. In addition, we acquired three properties owned by CMSI. Two of
the properties are located in Green Bay, Wisconsin, one of which is 15,340
square feet and the other is 16,700 square feet. The third property is located
in West Bend, Wisconsin and is 18,056 square feet. CMSI is included in our
self-funded segment.

ITEM 3.  Legal Proceedings

     We are currently, and from time to time, subject to claims and suits
arising in the ordinary course of business. Although the results of litigation
proceedings cannot be predicted with certainty, we believe that the ultimate
resolution of all current proceedings will not have a material adverse effect on
our financial condition or results of operations.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of 2002.

                                       15
<PAGE>

ITEM 4a.  Executive Officers of the Registrant

     Prior to September 25, 1998, UWS was a Wisconsin corporation that included
the operations of what is now Cobalt as well as the operations of AMSG. United
Wisconsin Services, Inc. prior to such date is referred to herein as the
"Predecessor". Cobalt was organized in May of 1998 for the purpose of owning and
operating the managed care companies and specialty business of the Predecessor.
On May 27, 1998, the board of directors of the Predecessor approved a formal
plan to contribute the managed care companies and specialty business to Cobalt
and spin off Cobalt to its shareholders (the "spin-off"). On September 25, 1998,
upon its formation in connection with the spin-off, Cobalt was originally named
Newco/UWS, Inc. It was subsequently renamed United Wisconsin Services, Inc.
following the spin-off, and was again renamed Cobalt Corporation in 2001. The
Predecessor was renamed American Medical Security Group, Inc. in connection with
the spin-off. The following table sets forth certain information with respect to
each of our executive officers.

          As of February 28, 2003, our executive officers were as follows:
<TABLE>
<CAPTION>
                Name               Age                     Title
                ----               ---                     -----
<S>                                <C>      <C>
          Stephen E. Bablitch      49       Chairman of the Board and Chief Executive Officer
          Michael E. Bernstein     42       President and Chief Operating Officer; and President of
                                             CompcareBlue
          Mark A. Caron            45       Senior Vice President and Chief Information Officer
          Timothy F. Cullen        59       Senior Vice President, Corporate & Public Affairs; and
                                             Chairman of Government Health Services, LLC
          Dennis G. Fallon         51       Senior Vice President, Sales and Marketing
          Lorna J. Granger         49       Senior Vice President, General Counsel and Corporate
                                             Secretary
          Gail L. Hanson           47       Senior Vice President, Treasurer and Chief Financial Officer
          Kathy A. Ledvina         44       Senior Vice President of Health Operations
          Michael J. Murray        43       Senior Vice President and Chief Actuary
          Kathryn K. Potos         51       Senior Vice President of Human Resources
          Penny J. Siewert         45       Senior Vice President  of Individual and Specialty Risk

</TABLE>

     Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed. There are no family
relationships among any of the directors and/or executive officers of Cobalt,
and there is no arrangement or understanding between any executive officer and
any other person pursuant to which such officer was or is to be selected as an
officer.

     Stephen E. Bablitch is the Chairman of the Board and Chief Executive
Officer of Cobalt. Mr. Bablitch was elected as Chairman of the Board and Chief
Executive Officer of Cobalt in December of 2002. Mr. Bablitch joined the
Predecessor in 1996 as General Counsel, Vice President, and Secretary. He was
elected Senior Vice President of Cobalt in May of 2001. He has served in various
capacities with subsidiaries of the Predecessor and Cobalt since 1996. Mr.
Bablitch was elected Chairman of the Board of BCBSUW in December of 2002 and a
director in March of 2001. Prior to being elected Chairman of the Board of
BCBSUW, Mr. Bablitch served as Senior Vice President since 2000. He also served
as General Counsel and Secretary of BCBSUW since 1996. Prior to joining the
Predecessor and BCBSUW, Mr. Bablitch was an attorney with Dewitt, Ross, and
Stevens, Madison, Wisconsin from 1991 to 1996. Prior to 1991, Mr. Bablitch had a
career in government as a prosecutor and served in the cabinet of a former
Wisconsin Governor.


                                       16
<PAGE>

     Michael E. Bernstein is President and Chief Operating Officer of Cobalt.
Mr. Bernstein was elected as President and Chief Operating Officer of Cobalt in
December of 2002. Prior to his election as President and Chief Operating
Officer, Mr. Bernstein served as Senior Vice President since February of 2000.
He was elected President of Compcare in July of 2001. He has served in various
capacities with Cobalt's subsidiaries since 1987. Mr. Bernstein was elected
President and Chief Operating Officer of BCBSUW in December of 2002 and a
director in March of 2001. Prior to his current position with BCBSUW, Mr.
Bernstein served as Senior Vice President of BCBSUW since March of 2000. Before
rejoining Cobalt and BCBSUW, Mr. Bernstein served as Executive Vice President
for the University of Wisconsin Medical Foundation in Madison, Wisconsin from
1998 through 1999. From 1996 to 1998, Mr. Bernstein was Senior Vice President at
University Health Care, Inc., Madison, Wisconsin. From 1987 to 1996, Mr.
Bernstein held a variety of positions with Cobalt's subsidiaries, beginning with
staff attorney and concluding with Regional Vice President.

     Mark A. Caron is Senior Vice President and Chief Information Officer of
Cobalt. Mr. Caron was elected a Senior Vice President in July of 2002. He has
served in various capacities with Cobalt's subsidiaries since 2002. Prior to
joining Cobalt, Mr. Caron served as a managing partner at Spring Valley
Technologies in Springvale, Maine from 2000 to 2002. From 1997 to 2000, Mr.
Caron served as Senior Vice President and Chief Information Officer of BlueCross
BlueShield of Massachusetts.

     Timothy F. Cullen is Senior Vice President of Corporate and Public Affairs
for Cobalt. Mr. Cullen was elected as Senior Vice President in December of 2002.
He previously served as Vice President since May of 2001. He was elected
President and Chief Operating Officer of the government programs division of
BCBSUW in 1991, and was elected Chairman of UGS in January of 1999. Mr. Cullen
currently serves as Chairman of Government Health Services, LLC, and was elected
to that position in August of 2002. Mr. Cullen has served in various capacities
with subsidiaries of the Predecessor and Cobalt since 1988. Prior to joining
Cobalt and BCBSUW, he was secretary of health and social services for the State
of Wisconsin from 1987 to 1988. From 1974 to 1986, Mr. Cullen was a Wisconsin
state senator and served three terms as senate majority leader.

     Dennis G. Fallon is Senior Vice President of Sales and Marketing for
Cobalt. He was elected Senior Vice President in December of 2002. He has served
in various capacities with Cobalt's subsidiaries since 2002. Prior to joining
Cobalt, Mr. Fallon was regional vice president of sales for Cigna HealthCare in
Atlanta, Georgia from 1997 to 2001. From 1995 to 1997, Mr. Fallon served as Vice
President and Chief Sales Officer at Empire Blue Cross Blue Shield, and also
held various director and officer level sales positions from 1992 to 1995. Prior
to joining Empire Blue Cross Blue Shield, Mr. Fallon was the Director of
Corporate General Sales of Horizon Blue Cross Blue Shield of New Jersey.

     Lorna J. Granger is Senior Vice President, General Counsel, and Corporate
Secretary of Cobalt. Ms. Granger's responsibilities include overseeing the legal
staff for Cobalt Corporation and its subsidiary, BCBSUW. She also serves as an
officer and director of various Cobalt subsidiaries, including BCBSUW and
Compcare. Prior to joining Cobalt in February 2003, Ms. Granger was the Managing
Partner of the Milwaukee and Waukesha offices of Michael Best & Friedrich LLP
since July of 2001, and was Partner from 1989 to July of 2001.

     Gail L. Hanson is Senior Vice President, Treasurer, and Chief Financial
Officer. Ms. Hanson is a Certified Public Accountant, holds a Chartered
Financial Analyst designation, and received an MBA from the University of
Chicago. Ms. Hanson was Treasurer of the Predecessor since 1987 and has been
Treasurer of Cobalt since its formation in 1998. She was elected a Vice
President of the Predecessor in 1996. Ms. Hanson was named Chief Financial
Officer of Cobalt effective August 1, 1999. She was elected Senior Vice
President in May of 2001. Ms. Hanson has also served in various capacities with
subsidiaries of the Predecessor and Cobalt since 1984. Ms. Hanson has been
Senior Vice President of BCBSUW since December of 2000; and Treasurer since
1987. Ms. Hanson had been Vice President of BCBSUW since 1996, Chief Financial
Officer since 1999, and Assistant Vice President since 1987, having joined
BCBSUW in 1984 as the Controller of United Wisconsin Insurance Company ("UWIC").
Prior to joining BCBSUW, Ms. Hanson was an audit manager with
PricewaterhouseCoopers LLP.


                                       17
<PAGE>

     Kathy A. Ledvina is Senior Vice President of Health Operations for Cobalt.
She was elected Senior Vice President in December of 2002. She has served in
various capacities with Cobalt's subsidiaries since 2002. Prior to joining
Cobalt, Ms. Ledvina was Director of Finance at Aurora Health Care from 1995 to
2002. Prior to joining Aurora Health Care, Ms. Ledvina served as Director of
Finance at CompcareBlue from 1993 to 1995 and Manager of Internal Audit of the
Predecessor from 1991 to 1993.

     Michael J. Murray is Senior Vice President and Chief Actuary of Cobalt. Mr.
Murray is a Fellow of the Society of Actuaries and a member of the American
Academy of Actuaries. Mr. Murray was elected a Senior Vice President in December
of 2002. He was elected as Vice President in June of 2001. Prior to joining
Cobalt, Mr. Murray was Vice President and Chief Actuary of HealthNow New York
Inc. in Buffalo, New York, (the parent company of Blue Cross & Blue Shield of
Western New York and Blue Shield of Northeastern New York) from 1996 to 2000.
Mr. Murray started his career in 1981 as an actuary with Aetna Insurance
Company, and held various positions directing the pricing, underwriting, and
reserving of group medical, dental, and HMO lines of business.

     Kathryn K. Potos is Senior Vice President of Human Resources for Cobalt.
Ms. Potos was elected as Senior Vice President in December of 2002. She was
elected as Vice President in May of 2001. Ms. Potos was Director of Human
Resources of the Predecessor from 1993 to 1998, having joined the Predecessor in
1992 as a staff attorney. Ms. Potos was previously employed with BCBSUW from
1998 to 2001 as Regional Vice President.

     Penny J. Siewert is Senior Vice President of Individual and Specialty Risk
for Cobalt. Ms. Siewert was elected Vice President of Regional Services of the
Predecessor in 1995 and Senior Vice President of Cobalt in May of 2001. Ms.
Siewert joined BCBSUW in 1977 and has served in various capacities. Ms. Siewert
was elected Vice President of Operations for BCBSUW in 1990, Vice President of
Special Markets in 1992, Vice President of Regional Services in 1995, and Senior
Vice President in March of 1999.


                                       18
<PAGE>

                                     PART II


ITEM 5.  Market For Registrant's Common Equity

     Cobalt's common stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "CBZ". The following table sets forth the per share high and
low sale prices for Cobalt's common stock as reported on the NYSE for the
periods after the March, 2001 combination of BCBSUW and UWS and for the UWS
common stock (NYSE: UWZ) for all periods prior to the Combination, along with
the cash dividends paid per share for those periods, respectively.

                                          High       Low     Cash Dividends Paid
                                          ----       ---     -------------------
Year ended December 31, 2002:
    First Quarter                         $9.05     $5.33              -
    Second Quarter                        23.45      8.65              -
    Third Quarter                         23.40     14.11              -
    Fourth Quarter                        18.70     12.15              -

Year ended December 31, 2001:
    First Quarter                         $7.99     $3.38              -
    Second Quarter                         8.00      4.90              -
    Third Quarter                          9.05      4.37              -
    Fourth Quarter                         7.00      3.99              -

     As of March 7, 2003, there were 216 shareholders of record of common stock.
Based on information obtained from Cobalt's transfer agent and from participants
in security position listings and otherwise, Cobalt has reason to believe there
are more than 3,300 beneficial owners of shares of common stock.

                                       19
<PAGE>

ITEM 6.  Selected Consolidated Financial Data

     The following selected financial data are derived from our consolidated
financial statements. The data should be read in conjunction with our
consolidated financial statements, the related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.

     We were formed in March 2001 as the successor to substantially all of the
operations of BCBSUW and UWS. Under accounting principles generally accepted in
the United States, our financial statements reflect the business and assets of
BCBSUW, without UWS, for periods through March 31, 2001, and the combined
businesses of BCBSUW and UWS for periods after that date. This presentation
limits the comparability of the financial and operating data set forth below.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                              -------------------------------------------------------------------
                                                 1998          1999         2000          2001            2002
                                              ----------    ----------   ----------   ------------    -----------
Statement of Operations Data(1):                        (Dollars in thousands, except per share data)
<S>                                             <C>          <C>          <C>          <C>           <C>
Revenues:
  Premium                                       $361,965     $418,949     $538,080     $1,255,391    $1,373,760
  Government services                             31,667       52,259       70,305        117,192       111,719
  Other                                           25,302       25,970       24,715         40,655        48,167
                                              ----------    ----------   ----------   ------------    -----------
      Total health services revenue              418,934      497,178      633,100      1,413,238     1,533,646
  Investment income, net                          11,886       10,496       10,092         11,637        14,845
  Net realized investment gains (losses)           1,615        8,014         (509)           845        (1,141)
                                              ----------    ----------   ----------   ------------    -----------
         Total revenues                          432,435      515,688      642,683      1,425,720     1,547,350
Expenses:
  Medical and other benefits                     297,885      376,814      497,822      1,119,218     1,166,671
  Selling, general, administrative and other     133,153      158,187      176,878        303,208       323,239
  Other(2)                                           115          744          922          5,697           675
                                              ----------    ----------   ----------   ------------    -----------
         Total expenses                          431,153      535,745      675,622      1,428,123     1,490,585
                                              ----------    ----------   ----------   ------------    -----------
Operating income (loss) from continuing
  operations                                       1,282      (20,057)     (32,939)        (2,403)       56,765
Income tax (expense) benefit                          78            -         (548)         1,871        (7,304)
Income (loss) from investment in
  affiliates, net of tax(3)                        3,991      (22,690)      (6,526)       (22,724)       15,556
                                              ----------    ----------   ----------   ------------    -----------
Income (loss) from continuing operations           5,351      (42,747)     (40,013)       (23,256)       65,017
Income from discontinued operations                    -            -            -            951         8,938
                                              ----------    ----------   ----------   ------------    -----------
Net income (loss)                               $  5,351     $(42,747)    $(40,013)    $  (22,305)    $  73,955
                                              ==========    ==========   ==========   ============    ===========

Diluted earnings (loss) per share from
  continuing operations(4)(5)                      $0.17       $(1.37)      $(1.28)        $(0.61)        $1.54
Total diluted earnings (loss) per
  share(4)(5)                                       0.17        (1.37)       (1.28)         (0.58)         1.75

Operating Statistics(1):
Total consolidated loss ratio(6)                    82.3%        89.9%        92.5%          89.2%         84.9%
Selling, general, administrative and other
  expense ratio(7)                                  31.8%        31.8%        27.9%          21.5%         21.1%
Net income (loss) margin(8)                          1.2%        (8.3)%       (6.2)%         (1.6)%         4.2%


                                                                     As of December 31,
                                                 1998          1999         2000          2001            2002
                                              ----------    ----------   ----------   ------------    -----------
Balance Sheet Data (1):                                                (In thousands)
Cash and investments(9)                         $109,447      $57,383      $45,678      $243,368         $436,360
Total assets                                     443,186      381,400      394,205       727,322          869,899
Long-term debt, including current portion              -            -            -         7,500           29,950
Total shareholders' equity                       250,991      200,109      168,943       208,222          302,519
____________
(1)  Prior to March 31, 2001, data reflect only the operations of BCBSUW, accounting for UWS and AMSG as investments in
     affiliates.
(2)  Includes interest and amortization of goodwill.
(3)  Includes UWS (prior to March 31, 2001) and AMSG.
(4)  When we report a net loss, potentially dilutive securities are not included in the calculation of earnings per
     share because their inclusion would have an antidilutive effect.
(5)  The 31,313,390 shares of our common stock issued to the Foundation in the Combination were used to calculate earnings per
     share for all periods prior to March 31, 2001.
(6)  Includes all insured products (medical, dental, disability, etc.). UWS is included in all periods subsequent to
     March 31, 2001. Prior to March 31, 2001, the ratio is based on BCBSUW only.
(7)  Represents selling, general, administrative and other expenses as a percentage of health services revenue.
(8)  Represents income (loss) from continuing operations as a percentage of total revenues.
(9)  Excludes investments in affiliates.

</TABLE>

                                       20
<PAGE>

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

     The following presents our management's discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. You should read this discussion in conjunction with our
consolidated financial statements and notes thereto and the information set
forth under the caption "Risk Factors." This discussion contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
significantly from those anticipated in these forward-looking statements.

Overview

     Cobalt Corporation ("Cobalt," the "Company," or "we") is the leading
managed care company in Wisconsin based on 2001 premium statistics published by
the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI")
and we offer a broad portfolio of managed care and insurance products to
employers, individuals, and government entities. We have an exclusive license to
utilize the Blue Cross and Blue Shield service marks in Wisconsin, giving us a
unique position in that market. As of December 31, 2002, we serviced 800,361
insured and self-funded members in our medical operations and 472,374 insured
and self-funded members in our dental programs (including in both cases members
obtained in the December 31, 2002 acquisition of Claim Management Services, Inc.
("CMSI")).

     During 1999 and 2000, we experienced large operating losses. These losses
were due primarily to our Medicare+Choice line of business and self-funded
business. Additionally, United Wisconsin Services, Inc. ("UWS") reported losses
in 2001 arising from its federal employee contracts and a conversion of certain
of its provider arrangements from capitation to a fee-for-service model. During
this period we also experienced difficulties in implementing new information
systems, which impaired our ability to identify trends indicating increasing
medical costs, leading to writing unprofitable contracts. These factors led to
increased medical loss ratios and resulting losses. In addition, the resulting
adverse effect on our capital position led to discussions with the OCI and the
BlueCross BlueShield Association (the "Association") regarding our plans for
capital improvement.

     To address these issues, we developed a plan to improve our core business
while divesting non-core businesses and assets. In our core business, we focused
on:

     o    discontinuing unprofitable business lines;

     o    repricing or terminating unprofitable customer contracts;

     o    improving underwriting techniques and pricing products appropriately
          to reflect underlying cost trends;

     o    negotiating improved terms in our provider contracts; and

     o    bolstering management in key areas.

     In implementing this plan, we exited the Medicare+Choice line of business
as of January 1, 2002 and elected to not renew certain unprofitable customer
contracts. We have also strengthened our senior actuarial and underwriting
staff, adopted more stringent underwriting standards, and applied these
standards to achieve better pricing for new contracts, as well as those
contracts up for renewal. In addition, we have negotiated more favorable
provider contracts and have improved our product mix by increasing enrollment in
our Medicare supplement business and reducing unprofitable self-funded
membership.

                                       21
<PAGE>

     We have divested certain non-core assets. We sold our behavioral health and
medical management subsidiary, Innovative Resource Group, LLC ("IRG"), for
approximately $27.0 million, resulting in a pre-tax gain of approximately $11.0
million. Additionally, during 2002, we reduced our investment in American
Medical Security Group, Inc. ("AMSG") common stock from 45.2% of the shares
outstanding to 10.7%, relieving us of our statutory capital requirement relating
to AMSG. On January 3, 2003, we sold our remaining shares of AMSG common stock.

     Through this strategy, we have improved our core operations. Although
resulting in decreased membership and premium revenue for Blue Cross & Blue
Shield United of Wisconsin ("BCBSUW") and our health maintenance organizations
("HMOs"), our strategy has substantially improved loss ratios and overall
profitability. Our income from continuing operations improved to $65.0 million
in 2002 from losses of $23.3 million in 2001 and $40.0 million in 2000. Had the
Combination occurred at the beginning of 2000 and the operations of the UWS
business been included for all periods presented, the improvement in overall
profitability between years would have been even greater. (See Item 8, Note 1 -
"Organization, Accounting for Conversion and Combination, and Basis of
Presentation.") During 2001, we experienced significant improvement in our core
operations, although we recorded a substantial loss, primarily due to a $25.2
million write-down of our minority investment in AMSG. We intend to continue our
strategy of focusing on our core business and pursuing opportunities to expand
margins, increase market share and divest additional non-core assets.

     For financial reporting purposes, we have been able to reduce income tax
expense through utilization of certain net operating loss carryforwards that
were subject to a full valuation allowance. The majority of such net operating
loss carryforwards were exhausted during the fourth quarter of 2002 for book
purposes, and our effective tax rate will therefore increase in 2003.

Capitated and Other Service Arrangements

     Compcare Health Services Insurance Corporation ("CompcareBlue"), Valley
Health Plan, Inc. ("Valley"), and Unity Health Plans Insurance Corporation
("Unity") utilize capitation and risk-sharing programs with certain physician
groups and hospitals to manage the cost of health care provided to members.
BCBSUW has not employed capitation or risk sharing arrangements to any
significant extent. Capitation is an arrangement whereby we pay medical
providers a set fee per member per month in exchange for providing health care
services.

     As of December 31, 2000 and for the year then ended, medical and other
benefits expense in the consolidated statements of operations and medical and
other benefits payable in the consolidated balance sheets do not include any
significant amounts relating to capitated arrangements as these periods were
prior to the combination of UWS and BCBSUW on March 23, 2001 (the
"Combination"). For the year ended December 31, 2001, medical and other benefits
expense included $94.3 million relating to capitated medical and dental
arrangements, representing 8% of the total medical and other benefits expense,
and medical and other benefits payable at December 31, 2001 included $4.3
million relating to capitated arrangements. For the year ended December 31,
2002, medical and other benefits expense included $105.2 million relating to
capitated medical and dental arrangements, representing 9% of total medical and
other benefits expense, and medical and other benefits payable at December 31,
2002 included $1.1 million relating to capitated arrangements.

     Costs associated with utilizing risk-sharing arrangements represented less
than 1% of total medical and other benefits expense for all periods presented.

                                       22
<PAGE>

Summary of Membership, Revenue, and Ratios

     The number of "members" is equivalent to the number of persons covered by
contracts in force. A covered person may be counted in more than one category.
Member equivalents relating to individuals who access medical care under the
BlueCard preferred provider organizations ("PPO") program are not included.

<TABLE>
<CAPTION>
                                                                          As of December 31,
                                                                2000             2001            2002
                                                             ------------    ------------   -------------
<S>                                                              <C>             <C>            <C>
  Membership at end of period:
     Insured medical products                                    255,289         530,480        456,836
     Self-funded medical products                                184,819         131,671        343,525
     Insured dental products                                     145,955         317,071        300,329
     Self-funded dental products                                  50,785          37,975        172,045
     Other insured products                                            -         275,495        246,675
                                                             ------------    ------------   -------------
            Total                                                636,848       1,292,692      1,519,410
                                                             ============    ============   =============
</TABLE>

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                               2000             2001              2002
                                                          ---------------   --------------    -------------
                                                                   (In thousands, except ratios)
<S>                                                          <C>              <C>              <C>
  Revenue:
      Insured medical products                               $510,638         $1,150,420       $1,240,082
      Self-funded products                                     24,716             28,067           30,638
      Specialty managed care products and services             29,922            142,009          185,110
      Government services                                      70,305            117,192          111,719
      Other operations(1)                                      (2,481)           (24,450)         (33,903)
                                                          ---------------   --------------    -------------
           Total health services revenue                      633,100          1,413,238        1,533,646
      Investment income, net                                   10,092             11,637           14,845
      Net realized investment gains (losses)                     (509)               845           (1,141)
                                                          ---------------   --------------    -------------
           Total                                             $642,683         $1,425,720       $1,547,350
                                                          ===============   ==============    =============

  Health services revenue (as a percentage of the total):
      Insured medical products                                  80.7%              81.4%            80.9%
      Self-funded products                                       3.9                2.0              2.0
      Specialty managed care products and services               4.7               10.0             12.0
      Government services                                       11.1                8.3              7.3
      Other operations(1)                                       (0.4)              (1.7)            (2.2)
                                                          ---------------   --------------    -------------
           Total                                               100.0%             100.0%           100.0%
                                                          ===============   ==============    =============

  Insured medical products:
      Loss ratio(2)                                             93.5%              90.6%            86.4%
      Selling, general, administrative, and other
        expense ratio(3)                                        12.0%               9.6%            11.2%
__________
(1) Consists primarily of intracompany eliminations.
(2) Insured medical benefit as a percentage of insured medical products revenue.
(3) Insured selling, general, administrative, and other expenses as a percentage of insured medical products revenue.
</TABLE>

Results of Operations

     All financial data in the Results of Operations section are gross numbers
and, therefore, are not net of intracompany eliminations.

                                       23
<PAGE>

Comparison of Results of Fiscal Year 2002 with Fiscal Year 2001

     Results for the fiscal year 2002 include the combined operations of BCBSUW
and UWS (also known as Cobalt) for the entire year, with BCBSUW's investment in
AMSG accounted for under the equity method as an investment in affiliate through
May 31, 2002. Results for the fiscal year 2001 include the operations of BCBSUW
for the entire year and UWS for the nine-month post-combination period, with
BCBSUW's investment in AMSG accounted for under the equity method as an
investment in affiliate.

   Total Revenues

     Total revenues in 2002 increased 8.5% to $1,547.4 million compared to
$1,425.7 million in 2001. This increase was primarily due to the Combination and
resultant inclusion of an additional quarter of the UWS business. Premium rate
increases on continuing insured medical products business, partially offset by a
decline in insured membership, was another factor contributing to the increase.

     Insured Medical Products

     Insured medical products revenue in 2002 increased 7.8% to $1,240.1 million
from $1,150.4 million in 2001. The increase in premium revenue in 2002 is
primarily due to the Combination and resultant addition of one quarter of the
UWS business. The number of insured medical members as of December 31, 2002
decreased to 456,836 from 530,480 as of December 31, 2001. The decrease in
membership in 2002 is primarily due to BCBSUW's exit from the Medicare+Choice
program, effective January 1, 2002, and cancellations of unprofitable business
in the Milwaukee market.

     Self-Funded Products

     Self-funded administrative fees in 2002 increased 8.9% to $30.6 million
from $28.1 million in 2001. Self-funded medical and dental membership increased
to 515,570 as of December 31, 2002 from 169,646 as of December 31, 2001. The
large increase in membership in 2002 is attributable to the acquisition of CMSI
on December 31, 2002. No revenue relating to CMSI was recorded during 2002. The
increase in administrative fees is attributable to increased volume in the
BlueCard PPO program, offset by cancellations of commercial groups. BlueCard PPO
program administrative fees in 2002 increased 60.0% to $13.4 million from $8.4
million in 2001. Under the BlueCard PPO program, we do not maintain membership
but receive an administrative fee and percentage of discounts for members from
other Blue Cross and Blue Shield plans ("Blue Plans") that access medical care
in Wisconsin.

     Specialty Managed Care Products and Services

     Specialty managed care products and services revenue in 2002 increased
30.4% to $185.1 million from $142.0 million in 2001 primarily due to the
Combination and resultant addition of one quarter of the UWS business. Premium
rate increases, offset by decreases in total membership due to cancellations in
the dental, disability, life, and accidental death and dismemberment lines, were
other factors contributing to the 2002 results.

     Government Services

     Government services revenue in 2002 decreased 4.7% to $111.7 million from
$117.2 million in 2001. The decrease in revenues between 2002 and 2001 is
largely due to a $7.4 million decrease in Medicare reimbursement partially
offset by an approximately $1.9 million increase in Medicaid claim processing
services. The decrease in Medicare revenue is largely attributable to
implementing several expense reduction measures that saved the Medicare program
$5.7 million between December 31, 2001 and December 31, 2002. Additionally, we
recorded a one-time reimbursement of $1.7 million in 2001. The Medicaid revenues
increased approximately $1.9 million due to new funding levels obtained from a
contract extension effective January 1, 2002.

                                       24
<PAGE>

   Investment Income and Realized Investment Gains (Losses)

     Net investment income and realized investment gains (losses) in 2002
increased 9.6% to $13.7 million from $12.5 million in 2001. Included in net
realized investment gains (losses) in 2002 are $3.2 million in losses relating
to fixed income investments for which impairment in value was deemed to be
other-than-temporary. The increase in net investment income and realized
investment gains (losses) in 2002 is primarily due to an increase in invested
assets resulting from several factors, including the addition of one quarter of
earnings on the UWS invested assets due to the Combination, and investment
income on proceeds from the sales of AMSG shares and IRG. Partially offsetting
the increase in investment income from invested assets was the elimination of
BCBSUW investment income related to intracompany financing arrangements with
UWS, subsequent to March 31, 2001, due to the Combination and a decrease in
interest rates on new investment purchases. Average annual investment yields,
excluding net realized investment gains, investment income from affiliates, and
other interest income, were 4.4% in 2002 and 5.8% in 2001.

     Average invested assets in 2002 increased 98.2% to $330.0 million from
$166.5 million in 2001. The improvement in 2002 is primarily due to favorable
cash flow from operations and proceeds from the sale of AMSG shares and the sale
of IRG.

     At December 31, 2002, lower than investment grade bonds represented 4.3% of
our investment portfolio.

   Expense Ratios

     Loss Ratio

     The insured medical products loss ratio in 2002 was 86.4% compared with
90.6% in 2001. The continued improvement in the insured medical products loss
ratio is primarily due to the exiting of unprofitable business in the Milwaukee
market and improved underwriting discipline.

     Selling, General, Administrative, and Other Expense Ratio

     For our insurance subsidiaries, the selling, general, administrative, and
other ("SGA") expense ratio includes commissions, administrative expenses,
premium taxes and other assessments, and claim interest expense. For
non-insurance subsidiaries, the SGA expense ratio includes operating expenses
only.

     The insured medical products SGA expense ratio in 2002 was 11.2% compared
with 9.6% in 2001. The increase in the SGA expense ratio in 2002 resulted
primarily from a decrease in revenue from cancellation of unprofitable business
that was not matched by a decrease in staff due to efforts to maintain service
levels. Fourth quarter 2002 SGA expenses included $2.5 million related to the
consolidation of operating centers, of which $2.3 million related to the insured
medical segment.

     The expense ratio for self-funded products in 2002 improved to 91.8% from
113.9% in 2001. The improved expense ratio is primarily the result of an
increase in the volume of business serviced under the BlueCard PPO program.
Costs associated with servicing this business are significantly lower than the
costs associated with servicing other self-funded accounts. In addition,
increases in administrative fees on existing self-funded business have
contributed to the improvement in the expense ratio.

     The combined loss and expense ratio for specialty managed care products and
services in 2002 improved to 95.6% from 98.0% in 2001. The improvement in 2002
is primarily due to a decrease in the combined loss and expense ratio for the
specialty insurance lines, which is a result of the loss ratio for our
disability business improving in 2002 to 64.3% from 85.6% in 2001. This
significant improvement is due to rate increases and favorable claims
experience.

                                       25
<PAGE>

     The operating expense ratio for government services in 2002 improved to
98.6% from 99.3% in 2001. The improved expense ratio is primarily a result of
the increased funding on an existing subcontract for the Medicaid claim
processing services. The increased funding resulted from a contract extension
that became effective January 1, 2002.

     SGA expenses recorded at the corporate holding company in 2002 include an
accrual for a $1.0 million contribution due the Wisconsin United for Health
Foundation, Inc. (the "Foundation") on February 1, 2003. In addition, during the
fourth quarter of 2002, $1.2 million of offering expenses were recorded due to
our decision not to sell any shares of Cobalt stock in the Foundation's offering
in early 2003. Offsetting these charges was a favorable vendor settlement of
$3.8 million recorded during the first quarter of 2002.

   Other Expenses

     As a result of the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 on January 1, 2002, there was no goodwill amortization recorded
in 2002. This compares with goodwill amortization of $5.1 million recorded in
2001.

   Income (Loss) from Investment in Affiliates

     In 2002, the income from investment in affiliates improved to $15.6 million
compared to a loss of $22.7 million in 2001. The results in 2002 were primarily
comprised of our equity in AMSG net income of $3.8 million combined with a net
gain of $10.0 million on the sale of 4.4 million shares of AMSG stock during the
first two quarters. As a result of the sale of these shares, our percentage
ownership of AMSG stock decreased below 20% and therefore, the remaining
investment was no longer reported under the equity method of accounting as of
June 1, 2002. A gain on the subsequent sale of an additional 0.5 million shares
was recorded in realized investment gains. In addition, we recognized income of
$1.6 million in the second quarter of 2002, which relates primarily to our
proportionate share of tax benefit recorded by Family Health Systems, Inc.
("FHS"), a 50% owned affiliate, due to a change in tax laws regarding the
carry-back of net operating losses.

     The $22.7 million loss in 2001 is primarily comprised of equity in AMSG
earnings of $2.0 million for 2001 and BCBSUW's share of UWS earnings of $0.4
million for the first quarter of 2001 (prior to the Combination), offset by a
$25.2 million write-down of the investment in AMSG to its market value as of
December 31, 2001. This write-down was deemed appropriate based on management's
decision to no longer classify the investment in AMSG as a strategic long-term
asset. The decrease in the investment in affiliates balance between 2002 and
2001 in the accompanying consolidated balance sheets primarily results from the
sale of AMSG shares and the reclassification of our remaining investment in
AMSG, which is no longer reported under the equity method of accounting.
Effective with the June 2002 balance sheet, the investment in AMSG is reported
as an available-for-sale investment at fair market value.

   Income Taxes

     Income tax expense for financial reporting purposes in 2002 was reduced
through utilization of certain net operating loss carryforwards that were
subject to a valuation allowance that had been established by a charge to income
tax expense. The majority of such net operating loss carryforwards were
exhausted for book purposes during the fourth quarter of 2002, and our effective
tax rate for financial reporting purposes will therefore increase in 2003. In
2002, we recorded current tax expense of $7.8 million offset by a deferred tax
benefit of $0.5 million. In 2001, we recorded a current income tax benefit of
$2.2 million offset by deferred tax expense of $0.3 million.

   Income (Loss) from Discontinued Operations

     Income from discontinued operations in 2002 consisted of the first quarter
net operating loss of IRG of $0.7 million and an after-tax gain on the sale of
IRG on March 29, 2002 in the amount of $9.6 million.

                                       26
<PAGE>

   Net Income (Loss)

     In 2002, net income improved to $74.0 million compared to a net loss of
$22.3 million for 2001. The enhanced operating results reflect improvement of
$59.2 million in operating income from continuing operations, improvement of
$38.3 million in income from investment in affiliates, and improvement of $8.0
million in income from discontinued operations, offset by a $9.2 million
increase in income taxes. The improvement in operating income from continuing
operations primarily reflects improvement in the insured medical products loss
ratio (resulting from exiting the Medicare+Choice program, cancellations of
unprofitable business, and premium rate increases), increased volume in the
BlueCard PPO program, and the $3.8 million favorable vendor settlement recorded
as a reduction to SGA expenses, offset by the $1.0 million contribution to the
Foundation, and $1.2 million in offering expenses. The improvement in income
from investment in affiliates reflects net realized gains of $10.0 million on
the sale of certain AMSG shares, along with the $1.6 million in income related
to FHS and improved 2002 operating results at AMSG. The income from discontinued
operations primarily reflects the net realized gain of $9.6 million on the sale
of IRG.

Comparison of Results of Fiscal Year 2001 with Fiscal Year 2000

     The results for 2001 include the operations of the combined UWS and BCBSUW
entities effective March 31, 2001 with AMSG continuing to be accounted for using
the equity method. Prior to March 31, 2001, the results include the operations
of BCBSUW and its investment in UWS and AMSG accounted for using the equity
method. The comparison between 2001 and 2000 is largely explained by the
addition of UWS results for the last three quarters of 2001 following the
Combination.

   Total Revenues

     Total revenues in 2001 increased 121.8% to $1,425.7 million from $642.7
million in 2000. The increase in 2001 is due primarily to the Combination and
the resultant addition of the UWS business. UWS contributed $686.8 million in
revenue in 2001 or 106.9% of the total 121.8% increase for the year. Other
factors contributing toward the increase in 2001 include premium rate increases
on the insured medical product business, the re-pricing of self-funded products,
and new government fee based contracts.

     Insured Medical Products

     Insured medical products revenue in 2001 increased 125.3% to $1,150.4
million from $510.6 million in 2000. The increase in 2001 is primarily due to
the Combination and the resultant addition of UWS business.

     The addition of UWS premiums resulted in an increase to premium revenue for
2001 of $574.4 million or 112.5% of the total 125.3% increase. The number of
insured medical members in 2001 increased 107.8% to 530,480 from 255,289 in
2000. The total membership increase of 275,191 reflects a decrease of 18,474
members in BCBSUW insured medical membership, offset by the addition of 293,665
members from the UWS insured medical business.


                                       27
<PAGE>

     Self-Funded Products

     Self-funded administrative fees in 2001 increased 13.8% to $28.1 million
from $24.7 million in 2000. The increase in 2001 results from an increase of
approximately 60% in the administrative fee per member per month due to the
targeted re-pricing of self-funded business in order to eliminate unprofitable
business. The pricing increases were partially offset by a reduction in non-HMO
self-funded membership.

     Specialty Managed Care Products and Services

     Specialty managed care products and services revenue in 2001 increased
374.9% to $142.0 million from $29.9 million in 2000. The increase in 2001
primarily resulted from the addition of $113.4 million in revenues from the UWS
specialty business, which includes life, accidental death and dismemberment,
dental, disability, workers' compensation products, along with electronic claim
submission, cost containment, and receivables management services. The number of
specialty managed care members in 2001 increased to 592,566 from 145,955 in
2000. The total increase in membership of 446,611 reflects a decrease of 13,981
members in BCBSUW insured dental membership, offset by the addition of 460,592
members from the UWS specialty risk business.

     Government Services

     Government services revenue in 2001 increased 66.7% to $117.2 million from
$70.3 million in 2000. The increase from 2000 to 2001 is attributable to
significant growth in the volume of Medicare claims processed, due to being
awarded additional government contracts. Effective December 1, 2000, United
Government Services, LLC, ("UGS") became the Medicare Part A Intermediary for
certain additional states and U.S. territories. In addition, also effective
December 1, 2000, UGS became the Regional Home Health Intermediary for certain
additional states and U.S. territories.

   Investment Income and Realized Investment Gains (Losses)

     Net investment income and realized investment gains (losses) in 2001
increased 30.2% to $12.5 million from $9.6 million in 2000. The addition of UWS
increased the 2001 investment income and realized investment gains (losses) by
$7.9 million. However, offsetting this increase was the elimination of BCBSUW
investment income related to intracompany financing arrangements with UWS,
subsequent to March 31, 2001, due to the Combination. This intracompany
investment income amounted to $5.5 million in 2000, as compared to $1.3 million
in 2001, based on the amount recorded through March 31, 2001. Average annual
investment yields, excluding net realized investment gains, intracompany
investment income and other interest income were 5.8% and 7.0% for 2001 and
2000, respectively.

     Average invested assets in 2001 increased 254.3% to $166.5 million from
$47.0 million in 2000. The improvement in 2001 is due primarily to the
Combination and resultant addition of UWS at the end of the first quarter of
2001.

     At December 31, 2001, lower than investment grade bonds represented 0.4% of
our investment portfolio.

     Net investment gains (losses) are realized in the normal investment process
in response to market opportunities. Realized gains were $0.8 million in 2001
compared to realized losses of $0.5 million in 2000.

                                       28
<PAGE>

   Expense Ratios

     Loss Ratio

     The insured medical products loss ratio for 2001 (which consists of the
BCBSUW insured medical business for the full twelve months, and the HMO business
after March 31, 2001) was 90.6%, compared with 93.5% for 2000 (which includes
only the BCBSUW business). The decrease in the medical loss ratio in 2001 is
primarily the result of pricing increases and other cost control measures
instituted in response to higher than anticipated medical utilization and cost
trends. In addition, the higher loss ratio for 2000 also reflects the effect of
a premium deficiency reserve of $3.6 million recorded during the second half of
2000 on the Medicare+Choice business. The premium deficiency reserve amount
recorded as of December 31, 2000 represented estimated losses throughout 2001.
The remainder of the premium deficiency reserve was reversed in 2001, as a
result of our exiting the business effective January 1, 2002.

     The BCBSUW medical loss ratio for 2001 (excluding HMO business) was 85.7%,
compared with 93.5% for 2000. This improvement is partially attributable to a
reduction in the medical loss ratio in the Medicare+Choice business to 94.8% in
2001 from 127.3% in 2000, on comparable revenues. The loss ratio for 2001 for
the HMO business was 94.4% compared with 95.2% in 2000. The slight improvement
is the result of our re-pricing efforts and reduction of unprofitable business.

     Selling, General, Administrative, and Other Expense Ratio

     The insured medical products SGA expense ratio for 2001 was 9.6% compared
with 12.0% for 2000. The improved SGA expense ratio in 2001 is the result of
additional expense control measures instituted, combined with a higher premium
base in 2001 due to pricing increases. In addition, the insured medical products
SGA ratio in 2000 includes the effect of a $2.4 million write-off of deferred
acquisition costs related to the Medicare+Choice business.

     The self-funded products expense ratio for 2001 improved to 113.9% from
144.7% in 2000. This improvement is due to continued efforts to eliminate
unprofitable business through price increases.

     The combined loss and expense ratio for specialty managed care products and
services in 2001 improved to 98.0%, compared with 100.0% for 2000. The 2000
ratio includes only the BCBSUW dental business, whereas the 2001 ratio includes
both BCBSUW dental and the UWS specialty managed care products and services
business. The UWS specialty business includes cost containment services and
electronic claims services, which typically run at a lower overall operating
expense ratio, thus improving the combined ratio.

     The expense ratio for government services in 2001 and 2000 remained
constant at 99.3%.

   Other Expenses

     Goodwill amortization totaling $5.1 million and $0.6 million was recorded
for 2001 and 2000, respectively. Of the total $5.1 million of goodwill
amortization recorded for 2001, $3.3 million relates to $65.6 million of
goodwill recorded in 2001 for the Combination as a result of purchase
accounting, which until the effective date of SFAS No. 142 was being amortized
on a straight-line basis over a period of 15 years. In addition, the 2001
amortization expense includes amortization related to the 1999 purchase by
BCBSUW of 1.4 million additional shares of UWS stock, which had been amortized
on a straight-line basis over a period of 15 years. Amortization expense for
2000 included amortization related to the purchase by BCBSUW of the 1.4 million
additional shares of UWS stock discussed above. In addition, goodwill
amortization has been recorded for various past acquisitions of subsidiaries and
additional insurance business.

                                       29
<PAGE>

   Loss from Investment in Affiliates

     The loss from investment in affiliates increased to $22.7 million in 2001
from $6.5 million in 2000. The $22.7 million loss in 2001 is comprised of our
pro rata share of AMSG's net income of $2.0 million for 2001, BCBSUW's share of
UWS income of $0.4 million for the first quarter of 2001, and other affiliate
net income of $0.1 million, offset by a $25.2 million write-down of the
investment in AMSG to its market value as of December 31, 2001. This write-down
was deemed appropriate based on management's decision to no longer classify the
investment in AMSG as a strategic long-term asset. The 2000 loss from investment
in affiliates of $6.5 million is comprised of a $7.6 million loss related to
UWS, offset by a $1.1 million equity share in the net income of AMSG.

   Income Taxes

     We recorded an income tax benefit of $1.9 million in 2001 compared to tax
expense of $0.5 million in 2000. The tax benefit recorded in 2001 was greater
than a benefit calculated at the federal statutory income tax rate due primarily
to the reversal of an accrual during 2001 in the amount of $1.5 million that was
no longer deemed necessary. This accrual had been established by UWS prior to
the Combination to cover estimated income tax exposures for the 1987 to 1994 tax
years. Based on an analysis of tax liabilities performed at the end of 2001,
management determined that the $1.5 million accrual was redundant with our full
valuation allowance against net deferred tax assets, and the accrual was
reversed into income.

     We recorded income tax expense of $0.5 million in 2000 compared to a tax
benefit of $11.5 million calculated at the federal statutory rate, due primarily
to the recording of a valuation allowance of $14.9 million on net deferred tax
assets. The valuation allowance was recorded because management could not
conclude that it was "more likely than not" that tax benefits from the 2000 loss
would be realized due to a history of prior losses at BCBSUW.

   Income from Discontinued Operations

     Income from discontinued operations for 2001 of $1.0 million includes IRG's
net operating results for the nine months ended December 31, 2001.

   Net Loss

     Consolidated net results improved in 2001 to a loss of $22.3 million
compared to a loss of $40.0 million in 2000. The $22.3 million net loss in 2001
was the combination of an operating loss of $2.4 million and a loss from
investment in affiliates of $22.7 million as discussed above, offset by an
income tax benefit of $1.9 million and an after-tax gain on discontinued
operations of $1.0 million. The improved 2001 operating results reflect
improvement in the insured loss and SGA ratios, increases in administrative fees
on the self-funded business and continued growth in government contract business
over the prior year.

     As of December 31, 2001, a full valuation allowance was established against
net deferred tax assets. We had a current income tax benefit of $2.2 million in
2001 compared to no current income tax expense or benefit in 2000. We recorded a
deferred tax expense of $0.4 million in 2001 and $0.5 million in 2000, which
related to a valuation allowance from a prior period.

Liquidity and Capital Resources

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

                                       30
<PAGE>

     Our operating cash flow improved in 2002 compared to 2001. Cash provided by
continuing operations improved to $55.6 million for the year ended December 31,
2002 from $11.1 million in cash provided by continuing operations for the year
ended December 31, 2001. This reflects improved operating results in all four of
our reporting business segments and improved cash collections related to
balances due from clinics and providers. Cash used in investing activities for
the year ended December 31, 2002 includes net proceeds of $73.9 million from the
sale of 4.9 million shares of AMSG common stock, of which $68.6 million is
reflected in proceeds from sale of investment in affiliate in our 2002 audited
consolidated statement of cash flows. In addition, $17.0 million in cash
proceeds were received from the sale of IRG. Cash used in investment activities
for 2002 included $15.3 million cash used to acquire CMSI offset by $2.2 million
cash acquired, and $10.8 million of net investments in property and equipment.
Cash provided from financing activities during 2002 included net borrowings made
of $22.1 million and proceeds received from the exercise of stock options of
$7.3 million. The majority of the strong positive cash inflows for the year
ended December 31, 2002 were used to purchase available-for-sale securities.

     To meet periodic cash flow requirements, we make borrowings under our bank
line of credit ("LOC"). The line of credit is with a commercial bank and has an
interest rate equal to the London Interbank Offered Rate ("LIBOR"), plus 2.0%,
adjusted monthly with interest payments due monthly. The LOC permits aggregate
borrowings among certain subsidiaries, excluding the corporate holding company,
up to $20.0 million. At December 31, 2002, the outstanding balance on this LOC
was $7.5 million. The LOC terminates, and all borrowings then outstanding are
due, on April 30, 2003.

     We also currently have a three-year revolving credit facility ("revolver")
from M&I Marshall & Ilsley Bank that originated on August 7, 2002 and provides
up to $30.0 million of available credit to us with the availability declining by
$5.0 million after one year and an additional $10.0 million after two years. The
revolver bears interest at a rate of LIBOR plus 1.50% to 2.50% depending on the
timing and amount of borrowings. We have pledged the stock of our BCBSUW and
CompcareBlue subsidiaries as collateral for the revolver. Our outstanding
balance on the revolver was $30.0 million as of December 31, 2002.

     In addition, we had a term business note ("term note") with a commercial
bank for $7.5 million originated on December 31, 2001, which was repaid in full
in the third quarter of 2002. The term note had a rate of interest equal to
LIBOR plus 1.5%, with payment of principal and interest due in quarterly
installments beginning June 30, 2002.

     Interest expense on the LOC, revolver and the term note discussed above
totaled $0.7 million and $0.6 million for the years ended December 31, 2002 and
2001, respectively.

     The Association requires BCBSUW and CompcareBlue to maintain a prescribed
liquidity ratio of certain liquid assets to average monthly expenses, as
defined, in accordance with licensure requirements of the Association. BCBSUW
and CompcareBlue maintained these required levels as of December 31, 2002.

     Our investment portfolio consists primarily of investment-grade bonds and
government securities, and has a limited exposure to equity securities. At
December 31, 2002, $350.6 million or 90.7% of our total investment portfolio was
invested in bonds and government securities compared with $178.2 million or
93.0% at December 31, 2001. Our investment in AMSG common stock represented
approximately 5.0% of the total investment portfolio as of December 31, 2002. On
January 3, 2003, we sold our remaining investment in AMSG shares, netting
proceeds of $18.7 million, which were reinvested in bonds and government
securities. The bond portfolio had an average quality rating by Moody's Investor
Service of "Aa3" at December 31, 2002 and "Aa2" at December 31, 2001. At
December 31, 2002, $373.9 million or 96.7% of our total investment portfolio was
classified as available-for-sale compared with $180.7 million or 94.3% at
December 31, 2001. The market value of the total investment portfolio was
greater than amortized cost by $14.3 million and $0.3 million at December 31,
2002 and December 31, 2001, respectively.


                                       31
<PAGE>

     Unrealized gains and losses on bonds classified as available-for-sale are
included as a component of shareholders' equity, net of applicable deferred
income taxes. We have no investments in mortgage loans, non-publicly traded
securities (except for investments related to our affiliates), or real estate
held for investment.

     We have an outstanding line-of-credit in the amount of $15.0 million
available to Health Professionals of Wisconsin, Inc., an affiliate of University
Health Care, Inc. ("UHC"), which is a key provider for Unity. The balance was
$3.0 million as of December 31, 2002. Interest is calculated using the quarterly
prime rate and is due and payable annually on November 1.

Statutory Capital

     We are required to maintain certain levels of statutory capital and surplus
under the National Association of Insurance Commissioners ("NAIC") Risk Based
Capital ("RBC")requirements. Wisconsin insurers are also subject to compulsory
and security surplus requirements based upon a percentage of underwritten
premiums, with the applicable percentage determined by line of business. In
addition to statutory capital requirements, we, BCBSUW and CompcareBlue are
required to maintain certain capital levels as determined by the Association. As
of December 31, 2002 all of our insurance subsidiaries exceed the minimum
capital requirements imposed by the State of Wisconsin and the Association.

Management's Plan

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

     The outstanding common stock of CompcareBlue provided the collateral for
approximately $70 million we borrowed from BCBSUW. This intracompany balance has
been eliminated in our consolidated balance sheets as of December 31, 2002 and
2001. In October 2002, we satisfied the $70 million obligation due BCBSUW
through the transfer of all of the common stock of CompcareBlue to BCBSUW.

     We have substantially completed all aspects of the capital plan,
significant provisions of which included the following:

     o    Sell certain owned non-regulated subsidiaries for cash and/or notes
          prior to October 1, 2002. On March 29, 2002, we sold our behavioral
          health and medical management subsidiary, IRG, for $27.0 million, of
          which $17.0 million was received in cash.

     o    Reduce BCBSUW's investment in AMSG common stock from 45% of the shares
          outstanding to less than 20% through public or private offerings
          during 2002. We reduced our investment in AMSG to 10.7% as of December
          31, 2002, raising $73.9 million in net proceeds at BCBSUW. On January
          3, 2003, we sold our remaining investment in AMSG, raising an
          additional $18.7 million in net proceeds at BCBSUW.


                                       32
<PAGE>

     o    Obtain debt financing from one or more institutional lenders to fund
          holding company liquidity needs, including the repayment of the
          collateralized intracompany debt obligations between Cobalt and its
          regulated subsidiaries. We have obtained a $30.0 million revolver.
          During the third quarter of 2002, we repaid our intracompany
          obligation to United Wisconsin Insurance Company ("UWIC") of $22.8
          million. As noted above, the remaining intracompany obligation between
          Cobalt and BCBSUW was satisfied through the contribution of
          CompcareBlue to BCBSUW.

     o    Achieve our 2002 projected core earnings, which anticipated breakeven
          operating results for CompcareBlue for the year ending December 31,
          2002 as compared to an operating loss of $32.5 million for the year
          ended December 31, 2001. We exceeded our projected core earnings for
          the year ended December 31, 2002, including progress toward obtaining
          breakeven results for CompcareBlue for the year ended December 31,
          2002.

     Non-compliance with minimum capital requirements or any of the requirements
described above may subject us to various regulatory actions by the OCI,
including, among others, revocation of our licenses to sell insurance products
in Wisconsin and placing us under state regulatory control. See Item 1,
"Business -- Regulation -- Capital Requirements." In addition, the Association
has termination rights if our subsidiary licensees' capital falls below the
lowest licensure minimum capital levels or liquidity requirements established by
the Association. See Item 1, "Business -- Blue Cross and Blue Shield Licenses."
Our insurance subsidiaries are currently in compliance with the capital
requirements calculated as required by the OCI and the Association.

Inflation

     Health care costs have been rising and are expected to continue to rise at
a rate that exceeds the consumer price index. Our cost control measures,
risk-sharing incentive arrangements with medical care providers, and premium
rate increases are designed to reduce the adverse effect of medical cost
inflation on our operations. In addition, we utilize our ability to apply
appropriate underwriting criteria in selecting groups and individuals and in
controlling the utilization of health care services. However, we cannot be
certain that these efforts will fully offset the impact of inflation or that
premium revenue increases will equal or exceed increasing health care costs.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowances for doubtful accounts, deferred tax assets,
impairment of investments, goodwill impairment, medical and other benefits
payables, and litigation and tax contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

     Allowance for Doubtful Accounts

     A significant portion of our receivable balances result from balances due
from small and large employers, individuals, and providers of medical services.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments or retroactivity in
reporting membership cancellations. If the financial condition of our customers
were to deteriorate or if significant employee turnover were to occur among
insured employers, resulting in an impairment of their ability to make payments,
additional allowances may be required.

                                       33
<PAGE>

     Deferred Income Taxes

     We account for income taxes using the liability method. Accordingly, we
record deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between financial statement carrying
amounts and tax bases of assets and liabilities. In addition, we record a
valuation allowance to reduce deferred tax assets to an amount that we believe
is more likely than not to be realized. This determination involves the use of
estimates and assumptions, including an estimate of future taxable income. To
the extent that future taxable income or other factors differ from initial
expectations, an adjustment to recorded amounts may be required.

     Impairment of Investments

     Investments in debt and equity securities, as well as investment in
affiliates, are reviewed periodically by our management to determine whether any
declines in the market value of individual securities are deemed other than
temporary. Any impairments deemed other than temporary are recorded as a
reduction of the historical cost of the respective investment and as a realized
loss in our consolidated statement of operations.

     Prior to the reduction of our ownership of AMSG common stock to 14.9% on
June 4, 2002, our investment in AMSG was accounted for under the equity method
of accounting. At December 31, 2001, we owned 6,309,525 shares of the
outstanding common stock (45% ownership) of AMSG. Our per share carrying value
as of December 31, 2001 was $16.44 based on our share of AMSG's equity. Pursuant
to GAAP, we wrote down our investment in AMSG to the current market value of
such stock ($12.45 per share as of December 31, 2001) as a charge to operations
due to our evaluation and announcement that our holdings in AMSG no longer
represented a strategic investment and that we planned an orderly reduction of
our ownership. Effective upon the reduction of our ownership of AMSG common
stock to less than 20%, we changed our accounting for our investment in AMSG
from the equity method to the fair value method. Under the fair value method,
our investment in AMSG is recorded at market value, with any changes in market
value being recorded as an unrealized gain or loss.

     Goodwill Impairment

     On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," under which we are required to analyze recorded goodwill for possible
impairment on a periodic basis. In assessing the recoverability of our goodwill
and other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets not previously recorded.
Based on our most recent analysis, we have not recorded any impairment charges.

     Medical and Other Benefits Payable

     Medical and other benefits payable consist primarily of loss reserves
established under a complex estimation process utilizing company-specific,
industry-wide, and general economic information and data. The estimation process
also involves continuous monitoring and evaluation of the submission,
adjudication, and payment cycles of claims. We develop an estimate of ultimate
claims based upon historical experience and other available information as well
as assumptions about emerging trends, which vary by class of business.
Significant assumptions used in the estimation process include trends in loss
costs and changes in member demographics, utilization, provider contract terms
and reimbursement strategies, frequency and severity of claims incurred, known
and adjudicated claims, changes in the timing of the reporting of losses, and
expected costs to settle unpaid claims.

                                       34
<PAGE>

     Due to the numerous factors influencing this liability, we develop a series
of estimates based upon generally accepted actuarial projection methodologies
using various scenarios with respect to claim submission and payment patterns
and cost trends. Our policy is to record our best estimate of medical and other
benefits payable that adequately provides for future payments of claims incurred
but not paid under moderately adverse conditions. Deviations (positive or
negative) between actual experience and estimates used to establish the
liability are recorded in the period of claim payment. We continually monitor
the reasonableness of the assumptions and judgments used in prior estimates by
comparison with actual claim patterns and consider this information in future
estimates.

     The loss reserve recorded at December 31, 2001, 2000, and 1999 exceeded
actual claims paid in the subsequent period by $22.9 million, $10.6 million, and
$7.8 million, respectively.

     Subsequent to September 11, 2001, we observed significant variability in
our claims patterns. Experience for claims incurred appeared to be artificially
low, and we attributed a portion of this variability to an estimated increase in
lag times between the dates claims were incurred and submitted to us. In
addition, we anticipated increased utilization relating to business we were
exiting at the end of 2001, including certain CompcareBlue groups and
Medicare+Choice. Our ultimate experience relating to these matters was more
favorable than estimated.

     Our December 31, 2000 loss reserves contemplated, among other estimates,
continued deterioration in claim experience on Medicare+Choice consistent with
that experienced earlier in the year. Actual claims paid were less than
anticipated. The net medical and other benefits payable assumed from UWS during
2001 developed slightly unfavorably due to the transition of provider contracts
from a capitated to fee for service basis.

     During late 1999, we overestimated claim payment lag times in connection
with a claim adjudication system conversion. This resulted in favorable
development of December 31, 1999 estimated benefits payable.

     Medical and other benefits paid can also be significantly impacted by the
outcomes from court decisions, interpretations by regulatory authorities, and
legislative changes involving healthcare matters. As a result, amounts
ultimately paid may differ from initial estimates that did not consider such
outcomes.


                                       35
<PAGE>

     Litigation

     We and our affiliates are involved in various legal actions occurring in
the normal course of business. We accrue our best estimate of the probable cost
for the resolution of these claims. These estimates are developed in
consultation with internal and outside legal counsel who are handling our
defense in these matters and are based upon a combination of litigation and
settlement strategies. To the extent additional information arises or strategies
change, it is possible that our best estimate of our probable liability in these
matters may change. In the opinion of management, we have made adequate
provision for losses, which may result from these actions. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in our assumptions related
to these proceedings. We recognize the costs of legal defense in the periods
incurred. Accordingly, the future costs of defending claims are not included in
our estimated liability.

     Tax Matters

     We frequently face challenges from domestic tax authorities regarding the
amount of taxes due. These challenges include questions regarding the timing and
amount of deductions and the allocation of income. In evaluating the exposure
associated with our various filing positions, we record reserves for probable
exposures when identified. Based on our evaluation of our tax positions, we
believe we have appropriately accrued for probable exposures and there are no
reasonably possible amounts due in excess of the amounts accrued. To the extent
we were to prevail in matters for which accruals have been established or be
required to pay amounts in excess of amounts accrued, our income tax expense in
a given financial statement period may be materially impacted.

     The Tax Reform Act of 1986 made all Blue Cross organizations taxable as of
January 1, 1987 and included certain tax benefits designed to ease the burden of
becoming a taxable entity. These benefits included opening reserve adjustments
and asset basis step-ups to fair market value. The net result of these benefits
was that our 1987 income tax return reported a net operating loss that was
carried back to 1984 and then carried forward. Certain issues with respect to
net operating loss carryforwards and other matters were raised in the federal
audit of our 1984 through 1986 tax returns. To resolve these issues, we executed
a formal Closing Agreement with the Internal Revenue Service ("IRS") on April
27, 1993, and we subsequently filed amended federal income tax returns for 1987
through 1992 consistent with the provisions of the Closing Agreement.

     Our amended federal income tax return for 1987 was reviewed in a subsequent
IRS audit in which certain benefits agreed to by the IRS in the Closing
Agreement were challenged by the Field Service Branch of the IRS. We believe
that the Closing Agreement is binding on both us and the IRS. We are currently
litigating this matter and expect to prevail. The litigation is pending in the
United States Court of Federal Claims. BCBSUW and the government have filed
cross-motions for partial summary judgment on the Closing Agreement issue. The
briefing with respect to those motions concluded in June 2002, and the parties
are awaiting the court's decision on the motions.

     The IRS' challenge of the Closing Agreement resulted in proposed income tax
deficiencies, and we paid approximately $11.6 million as a deposit to close the
1987 to 1992 tax years to further assessment of tax. We were not required to
make this payment, and characterize it as a deposit or advance and fully expect
that it will be returned upon resolution of the dispute.

     The status of this matter, the accounting treatment and the timing of the
return of our deposit are reviewed on a periodic basis with our tax advisors,
legal counsel, and independent auditors. We will not be able to completely close
any tax year that is impacted by the 1987 loss carry-back or carry-forward until
the litigation is resolved.

                                       36
<PAGE>

     In addition, the IRS has proposed adjustments to all of our tax years from
1987 forward claiming that deductions for the write-off of certain intangible
assets on hand as of January 1, 1987 are not allowable. This is a national issue
with the IRS and is currently being litigated by another Blue Plan. This issue
may prevent us from closing tax years even after the above litigation with the
IRS is settled. The benefits of this deduction have not been recorded in our
consolidated financial statements. Should this issue be resolved in our favor,
either individually or as to Blue Plans generally, a benefit will be recorded.
Our consolidated financial statements also do not reflect the potential tax
benefits that could result from a $193 million deduction taken on our 2001
federal income tax return relating to the transfer of the stock of BCBSUW to the
Foundation on March 23, 2001. The IRS recently revoked favorable private letter
rulings issued to other Blue Plans in similar situations, and additional
guidance is expected from the IRS. We are awaiting additional developments and
guidance in this area before considering recording an income tax benefit from
this deduction.

Risk Factors

     A number of factors specific to Cobalt or related to our business may
impact our financial performance and the performance of Cobalt common stock.
Among these factors are the following:

OUR INSURANCE SUBSIDIARIES ARE SUBJECT TO MINIMUM CAPITAL REQUIREMENTS. OUR
FAILURE TO MEET THESE REQUIREMENTS COULD SUBJECT US TO REGULATORY ACTIONS OR
RESULT IN THE TERMINATION OF OUR BLUE CROSS AND BLUE SHIELD LICENSE AGREEMENTS.

     Our insurance subsidiaries are subject to minimum capital requirements
imposed under the laws of the State of Wisconsin. These laws include minimum
capital requirements based upon a percentage of underwritten premiums by line of
business. Wisconsin insurance laws also include minimum capital requirements
based on the RBC for Insurers Model Act adopted by the NAIC and require our
insurance subsidiaries to report their results of RBC calculations to the state
insurance departments and the NAIC. Any failure by one of our insurance
subsidiaries to meet the minimum capital requirements imposed under Wisconsin
law will subject it to corrective action, which could include the adoption of a
comprehensive financial plan, examination and revocation of its license to sell
insurance products in Wisconsin, or placing the subsidiary under state
regulatory control. See Item 1, "Business -- Regulation -- Capital
Requirements."

     At the request of the OCI, we prepared a plan of action in early 2002 for
strengthening the capital position of our insurance subsidiaries. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management's Plan." Our insurance subsidiaries are currently in
compliance with the minimum capital requirements imposed under Wisconsin law,
calculated as required by the OCI.

     Our right to use the Blue Cross and Blue Shield names and service marks in
our service area is derived from a license agreement we have with the
Association. The Association imposes certain financial and service performance
standards on Cobalt, our BCBSUW subsidiary, and CompcareBlue, including capital
requirements based on RBC.

     The Association's capital requirements are generally more stringent than
those imposed under Wisconsin law and are currently based on the Health
Organization Risk-Based Capital calculations prescribed by the NAIC.

                                       37
<PAGE>

     The Association has termination rights if our Blue Cross and Blue Shield
branded licensees' capital falls below minimum capital level. See Item 1,
"Business -- Blue Cross and Blue Shield Licenses." Currently, all of our Blue
Cross and Blue Shield licensees maintain RBC in excess of the minimum capital
level.

     During 2002, Cobalt executed on its capital plan, which has improved the
capital levels of CompcareBlue, Cobalt and BCBSUW and the liquidity levels of
CompcareBlue and BCBSUW. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Management's Plan."

     Any new minimum capital requirements adopted in the future by the
Association or by the OCI may require us to increase our capital levels, which
we may not be able to do.

OUR BLUE CROSS AND BLUE SHIELD LICENSE AGREEMENTS COULD TERMINATE UPON THE
OCCURRENCE OF EVENTS SPECIFIED IN THE LICENSE AGREEMENTS, AND TERMINATION WOULD
SIGNIFICANTLY HARM OUR BUSINESS.

     Under license agreements with the Association, we have the right to use the
Blue Cross and Blue Shield names and service marks in our Blue Cross and Blue
Shield service area and to participate in the BlueCard PPO Program. We believe
that our exclusive right to use the Blue Cross and Blue Shield names and service
marks provides us with an important marketing advantage in our service area.
Loss of these licenses would significantly harm our ability to compete in our
markets and subject us to a significant monetary penalty to the Association.

     The Association could terminate our license agreements if we do not satisfy
its financial and service performance requirements or if other events described
in the license agreements, some of which are outside of our control, occur.
These events include, but are not limited to:

     o    failure to meet capital and liquidity requirements of the Association;

     o    violation of the ownership limitations contained in our Amended and
          Restated Articles of Incorporation and described below;

     o    termination of the voting trust and divestiture agreement between us
          and the Foundation before the Foundation's ownership of our common
          stock falls to less than 5%;

     o    the acquisition of our company without the prior consent of a majority
          of the other disinterested licensees of the Association and a majority
          of the then current weighted vote of the other disinterested licensees
          of the Association;

     o    failure by the Foundation to divest its shares of our common stock by
          the deadlines specified by the voting trust and divestiture agreement;

     o    a determination by the Association that fewer than 80% of our
          directors are independent; and

     o    failure to brand medical and dental business as required by the
          Association.

     Our Amended and Restated Articles of Incorporation include ownership
limitations required by the Association. Under these ownership limitations:

     o    no institutional owner may beneficially own 10% or more of the
          combined voting power of all of our outstanding securities;

     o    no non-institutional owner may beneficially own 5% or more of the
          combined voting power of all of our outstanding securities; and

                                       38
<PAGE>

     o    no person may own 20% or more of all of our outstanding equity
          securities (regardless of voting power).

     Although we believe that these limitations are enforceable under Wisconsin
law for a corporation like ours, we are not aware of any case in which a court
has specifically addressed this issue. If one of our shareholders violates the
ownership limitations and disputes their enforceability and a court does not
enforce the provisions of our Amended and Restated Articles of Incorporation, we
could lose our licenses to use the Blue Cross and Blue Shield names and service
marks.

WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY, AND OUR QUARTERLY OPERATING
RESULTS MAY FLUCTUATE SIGNIFICANTLY.

     Although we reported net income for the year ended 2002, we experienced net
losses in each of the years ended December 31, 1999, 2000, and 2001. During this
time period, we experienced operational difficulties that led to these losses
and corresponding decreases in our capital. In an effort to remedy these
difficulties, we have devoted significant resources to improving our core
operations while divesting non-core assets. Nevertheless, we cannot assure you
that we will be able to achieve sustained profitability. If we incur additional
losses, we could have difficulty satisfying our minimum capital requirements
under Wisconsin law. In addition, our relationship with the Association could be
adversely affected and our stock price could decline. Moreover, our quarterly
results of operations could fluctuate significantly due to a variety of factors,
including steps we are taking to enhance our core operations, as well as from
inherent aspects of our business, such as the need to make current estimates of
future claims. These fluctuations could adversely affect the price or liquidity
of our common stock.

OUR RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
INCREASE PREMIUMS TO OFFSET INCREASES IN OUR HEALTH CARE COSTS.

     Health care costs in recent years have generally increased substantially
year-over-year, and we expect that they will continue to do so in the future.
Our results of operations depend on our ability to increase premiums to offset
increases in our health care costs. Although we attempt to base the premiums we
charge on our estimate of future health care costs, we may not be able to charge
adequate premiums as a result of competition, government regulations, and other
factors. Our results of operations could be adversely affected if we are unable
to set premium rates at appropriate levels or adjust premium rates in the event
our health care costs increase.

AN ONGOING REDUCTION IN THE NUMBER OF SUBSCRIBERS TO OUR HEALTH CARE PROGRAMS
MAY REDUCE OUR REVENUE AND PROFITABILITY.

     Overall membership in our health benefits plans has decreased substantially
recently, in large part due to our efforts to eliminate unprofitable business.
No state or federal regulatory body has expressed concern to us over our
divestiture of unprofitable business. A further reduction in the number of
subscribers to our health care programs could adversely affect our financial
position, results of operations, and cash flows. Factors that could contribute
to a loss of membership include:

     o    failure to obtain new customers or failure to retain existing
          customers;

     o    premium increases or benefit changes;

     o    reduction in our provider network;

     o    our exit from business lines or markets;

     o    reductions in work force by existing customers; and

     o    negative publicity or news coverage about us or other managed care
          companies.

                                       39
<PAGE>

OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
ACCURATELY ESTIMATE AND CONTROL FUTURE HEALTH CARE COSTS.

     Most of the premium revenue we receive is based upon rates set before we
deliver services. As a result, our ability to price contracts profitably largely
depends on our ability to accurately estimate and control future health care
costs. Factors that may cause health care costs to exceed our estimates include:

     o    an increase in the cost of health care services and supplies,
          including pharmaceuticals;

     o    higher than expected utilization of health care services by our
          insured members;

     o    periodic renegotiation of contracts with hospitals, physicians, and
          other providers;

     o    the occurrence of catastrophes or epidemics;

     o    changes in the demographics of our members and medical trends
          affecting them;

     o    new mandated benefits or other regulatory changes that increase our
          costs; and

     o    other unforeseen occurrences.

     In addition to actual benefits paid, our medical and other benefits expense
for any period includes our estimate of reported and unreported claims and
related expenses for the period. The reserves we establish for these expenses
are based upon assumptions concerning a number of factors, including prior
claims experience, maturity of markets, complexity of products and stability of
provider networks, trends in health care costs, our underwriting criteria,
enrollment in our plans, expenses, general economic conditions, and other
factors. Actual experience will likely differ from assumed experience, and to
the extent the actual claims experience is less favorable than estimated based
on our underlying assumptions, our incurred losses would increase and future
earnings could be adversely affected.

     We make adjustments, if necessary, to benefit expenses in the period during
which the actual claim costs are ultimately determined or when criteria used to
estimate the incurred but not reported ("IBNR") change. We utilize the services
of independent actuaries to calculate and review the adequacy of our benefit
liabilities, in addition to using internal resources. We cannot be sure that our
IBNR estimates are adequate or that adjustments to such IBNR estimates will not
harm our results of operations. Further, our inability to accurately estimate
IBNR may also affect our ability to take timely corrective actions, further
exacerbating the negative impact on our results.

     Although we maintain reinsurance to protect us against severe or
catastrophic medical claims, we cannot assure you that such reinsurance coverage
will be adequate or available in the future or that the cost of such reinsurance
will not limit our ability to obtain it.

                                       40
<PAGE>

OUR PROFITABILITY WILL DECLINE IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS
WITH CERTAIN SIGNIFICANT PROVIDER GROUPS OR IF WE ARE UNABLE TO ENTER INTO
AGREEMENTS WITH ADDITIONAL PROVIDERS ON FAVORABLE TERMS.

     Our profitability depends upon our ability to contract on cost-effective
terms with hospitals, physicians, and other health care providers. Our provider
contracts typically provide for automatic term renewals unless either party
notifies the other of its intention not to renew within 90 days prior to the
expiration of the contract's term. If we fail to obtain health care provider
contracts, or renew those we have, on favorable terms, we may lose some of our
members or incur higher medical costs. In addition, our inability to contract
with providers, or the inability of providers to provide adequate care, could
significantly harm us.

     Our Unity and Valley HMOs rely in large part on three separate health care
provider systems for the provision of health care services to their members. Our
largest five providers of our core Blue Cross and Blue Shield branded and HMO
business, in terms of claims paid and incurred for the year ended December 31,
2002, are Aurora Healthcare, UHC, Covenant Healthcare, Columbia St. Mary's, and
Luther/Midelfort. These top five providers collectively accounted for 40.4% of
our medical and other benefits expense for our core business during that period.
If one or more of our relationships with these systems were to be terminated, we
would be adversely affected. See Item 1, "Business -- Our Provider Network."

COMPETITION IN OUR INDUSTRY MAY DECREASE OUR PROFITABILITY.

     We operate in a highly competitive environment which may affect our ability
to maintain or increase our membership or premium rates or to contract with
providers on attractive terms. We face competition from other managed care
companies, hospitals, health care facilities, and other health care providers,
some of which have substantially greater financial and other resources than we
have.

     Our managed care operations may encounter competition from companies with
broader or narrower geographical markets, each of which could provide a
competitor with specific competitive advantages, such as greater cost control,
lower prices, or greater market share. Our financial condition or results of
operations may be adversely affected by significantly lower premiums by any
major competitor or by any other limitation on our ability to maintain or
increase our membership or premium levels.

     In certain markets, we compete with organizations which have a substantial
market share. In other markets, competing health plans may be owned by
providers. Portions of the Wisconsin market are dominated by a relatively small
number of provider-owned health plans, with a large influence on the markets in
which we compete. Organizations with sizable market share or provider-owned
plans may be able to obtain favorable financial arrangements from health care
providers that are not available to us. Without such arrangements, we may not be
able to compete effectively in such markets.

     In addition, legislation has been introduced in the U.S. House of
Representatives that is intended to increase competition for government
contracts for processing claims for the Medicare program. Similar legislation
may be introduced in the U.S. Senate as a stand-alone program or as part of a
larger Medicare reform package. Our UGS subsidiary serves as a fiscal
intermediary for the Medicare program. If this legislation is adopted, it could
affect our ability to compete effectively for Medicare contracts.

                                       41
<PAGE>

OUR BUSINESS IS DEPENDENT IN PART ON THE SERVICE OF NON-EXCLUSIVE INDEPENDENT
AGENTS AND BROKERS WHO MAY REFER THEIR BUSINESS TO OUR COMPETITORS.

     We depend in part on the services of independent agents and brokers in the
marketing of health care plans, particularly to individual and small employer
group members. Independent agents and brokers are typically not exclusively
dedicated to one company and market health care products of our competitors. In
addition, we face intense competition for the services and allegiance of
independent agents and brokers. These persons may choose to direct business to
other managed care companies or may direct less desirable sales prospects to us.

THE HEALTH BENEFITS INDUSTRY IS SUBJECT TO NEGATIVE PUBLICITY, WHICH CAN
ADVERSELY AFFECT OUR PROFITABILITY.

     The health benefits industry is subject to negative publicity. Negative
publicity may result in increased regulation and legislative review of industry
practices, which may further increase our costs of doing business and adversely
affect our profitability by:

     o    adversely affecting our ability to market our products and services;

     o    requiring us to change our products and services; or

     o    increasing the regulatory burdens under which we operate.

     In addition, as long as we use the Blue Cross and Blue Shield names and
marks in marketing our health benefits products and services, any negative
publicity concerning the Association or other Association licensees may
adversely affect us and the sale of our health benefits products and services.

FAILURE TO PROPERLY MAINTAIN THE INTEGRITY OF OUR PROPRIETARY INFORMATION AND
INFORMATION SYSTEMS COULD RESULT IN THE LOSS OF CUSTOMERS OR DECREASE OUR
PROFITABILITY.

     Our business depends in part on our ability to maintain, or access through
outsourcing arrangements with third parties, information systems and to ensure
the continued integrity of our proprietary information. Moreover, the
collection, dissemination, and use of patient data is the subject of national
and state legislation. If we do not maintain or access effective and efficient
information systems, then we could experience adverse consequences, which
include:

     o    inadequate information on which to base pricing and underwriting
          decisions;

     o    the loss of existing customers;

     o    difficulty in attracting new customers;

     o    customer and provider disputes;

     o    regulatory problems; or

     o    increases in administrative expenses.

     We use third party service providers for claims processing and enrollment
functions, and therefore have only limited control over data management
associated with these functions.

                                       42
<PAGE>

HEALTH CARE DEVELOPMENTS OR AN ECONOMIC DOWNTURN IN WISCONSIN MAY HARM OUR
RESULTS.

     We conduct business primarily within the State of Wisconsin. Therefore, our
business may be more sensitive to local or state conditions, such as pricing
dynamics, health care developments, or general economic conditions, than
organizations servicing larger, more diverse markets. For example, national
competitors could subsidize losses in the Wisconsin market with profits from
other markets in which they operate. We may be competitively disadvantaged, or
otherwise harmed, by our Wisconsin focus, although we are not dependent on a
small number of major contracts.

OUR INVESTMENT PORTFOLIO IS SUBJECT TO VARYING ECONOMIC AND MARKET CONDITIONS,
AS WELL AS REGULATION.

     We depend on our investment portfolio as a source of liquidity to pay
medical claims and fund other expenses. In addition, returns on our investment
portfolio have historically contributed significantly to our net income. Our
investment portfolio consists primarily of fixed maturity securities, short-term
investments, and indexed mutual funds. The market value of our investments
varies from time to time depending on factors relating specifically to the
issuers of the securities as well as to more general factors such as prevailing
interest rates and economic and market conditions. Fluctuations in the market
value of our investment portfolio could adversely affect our liquidity. These
fluctuations could also reduce our investment return or result in losses when we
sell investments to fund our cash needs, which could adversely affect our
overall profitability.

     Our regulated subsidiaries are subject to state laws and regulations that
require diversification of their investment portfolios and limit the amount of
investments in certain investment categories. While we have adopted an
investment policy intended to facilitate compliance with statutory and
regulatory requirements, our failure to comply with these laws and regulations
might cause investments exceeding regulatory limitations to be treated as
non-admitted assets for purposes of measuring statutory surplus and risk-based
capital, and, in some instances, require the sale of those investments.

A DOWNGRADE IN OUR SUBSIDIARIES' RATINGS MAY ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     In February 2002, A.M. Best downgraded its rating of our insurance
subsidiaries to B+ ("Very Good," which is the 6th highest rating out of 16
categories). A.M. Best ratings evaluate an insurer's financial strength and
ability to pay claims. A.M. Best ratings are not recommendations to buy, sell or
hold securities. The A.M. Best rating principally impacts our ability to
underwrite workers' compensation business. When the rating of UWIC, which
underwrites our workers' compensation product, was downgraded from A-
("Excellent," which is the 4th highest rating out of 16 categories) to B++
("Very Good," which is the 5th highest rating out of 16 categories) in June
2001, we arranged with a reinsurer to use its insurance company, which had an A+
("Superior," which is the 2nd highest rating out of 16 categories) rating by
A.M. Best, to serve as underwriter for customers that required the higher rating
for their workers' compensation coverage. In exchange for the use of the
reinsurer's license, we were required to increase the portion of the workers'
compensation business ceded to the underwriter from 20% to 35%. We intend to
continue to write workers' compensation insurance, but any future downgrade of
the rating of our subsidiaries, should one occur, or our inability to access an
"A" rated underwriter on acceptable terms, could negatively impact our ability
to underwrite workers' compensation business to customers that require the "A"
rating for their workers' compensation coverage.

                                       43
<PAGE>

WE CONDUCT BUSINESS IN A HEAVILY REGULATED INDUSTRY, AND CHANGES IN REGULATIONS
OR VIOLATIONS OF REGULATIONS COULD SIGNIFICANTLY HARM US.

     Our business is heavily regulated on federal, state and local levels as we
discuss under Item 1, "Business -- Regulation." For example, we need to obtain
and maintain regulatory approvals to market many of our products. Delays in
obtaining or failure to obtain or maintain these approvals could significantly
harm us.

     We are also subject to various governmental reviews, audits, and
investigations designed to monitor our compliance with applicable rules and
regulations. Any adverse review, investigation, or audit findings could result
in:

     o    damage to our reputation in various markets;

     o    increased difficulty in selling our products and services;

     o    loss of a license to act as an insurer or HMO or to otherwise provide
          a service;

     o    loss of the right to participate in various federal programs,
          including the Medicare supplement programs; or

     o    imposition of fines, penalties, and other sanctions.

     Legislation or other regulatory reform that increases the regulatory
requirements imposed on us may significantly harm our business or results of
operations in the future. Legislative or regulatory changes that could
significantly harm us and our subsidiaries include:

     o    legislation that holds insurance companies, HMOs, or managed care
          companies liable for adverse consequences of medical decisions;

     o    limitations on premium levels;

     o    increases in minimum capital, reserves, and other financial viability
          requirements;

     o    impositions of fines or other penalties for the failure to promptly
          pay claims;

     o    prohibitions or limitations on provider financial incentives and
          provider risk-sharing arrangements;

     o    imposition of more stringent standards of review of our coverage
          determinations;

     o    new benefit mandates;

     o    increases in taxes or assessments; and

     o    limitations on the ability to manage care and utilization due to "any
          willing provider" and direct access laws that limit or eliminate
          product features that encourage members to seek services from
          contracted providers or through referral by a primary care provider.

     A portion of our revenues relate to Medicare supplement programs. Changes
in these programs, particularly changes affecting enrollment or changes in
premium payment or reimbursement levels, could significantly harm our business
and decrease our profitability.

                                       44
<PAGE>

AS A MEDICARE FISCAL INTERMEDIARY, OUR UGS SUBSIDIARY IS SUBJECT TO COMPLEX
REGULATIONS. IF IT FAILS TO COMPLY WITH THESE REGULATIONS, IT MAY BE EXPOSED TO
CRIMINAL SANCTIONS AND SIGNIFICANT CIVIL PENALTIES.

     Our UGS subsidiary serves as a fiscal intermediary for the Medicare
program. The laws and regulations governing fiscal intermediaries for the
Medicare program are complex and subject to interpretation and can expose a
fiscal intermediary to penalties for non-compliance. Fiscal intermediaries may
be subject to criminal fines, civil penalties, or other sanctions as a result of
periodic audits or reviews. Other companies in this business have recently been
subject to significant fines and censures for non-compliance. While we believe
that we are in compliance in all material respects with the regulations
governing fiscal intermediaries, we cannot assure you of this.

COSTS OF COMPLIANCE WITH PRIVACY LAWS COULD ADVERSELY AFFECT OUR BUSINESS AND
RESULTS OF OPERATIONS.

     Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes administrative provisions imposing significant requirements relating to
maintaining the privacy of medical information ("Privacy"), establishing uniform
health care provider and employer identifiers, requiring use of standardized
transaction formats ("Transactions"), and seeking protections for
confidentiality and security of patient data ("Security"). The Privacy and
Transactions provisions require implementation in 2003. Final HIPAA Security
rules were published on February 20, 2003, and the implementation and compliance
date is April of 2005. HIPAA is far-reaching and complex, and proper
interpretation and practice under the law continue to evolve. Consequently, our
efforts to measure, monitor, and adjust our business practices to comply with
HIPAA are ongoing. Compliance with HIPAA could require us to make significant
changes to our operations and failure to comply could subject us to civil and
criminal penalties. The costs of complying with HIPAA are likely to be
substantial.

WE ARE SUBJECT TO LITIGATION, INCLUDING LITIGATION BASED ON NEW OR EVOLVING
LEGAL THEORIES, THAT COULD SIGNIFICANTLY AFFECT OUR RESULTS OF OPERATIONS.

     Due to the nature of our business, we are subject to a variety of legal
actions relating to our business operations, including:

     o    disputes over coverage or claims adjudication;

     o    vicarious liability for medical malpractice claims;

     o    disputes with our providers or agents over compensation and
          termination of contracts;

     o    disputes related to our non-risk business, including actions alleging
          breach of fiduciary duties, claim administration errors or other
          violations of federal or state laws;

     o    customer audits of our compliance with our plan obligations; and

     o    disputes with taxing authorities regarding our tax liabilities.

     In addition, plaintiffs continue to bring new types of legal claims against
managed care companies. Recent court decisions and legislative activity increase
our exposure to these types of claims. In some cases, plaintiffs may seek class
action status and substantial economic, non-economic, or punitive damages. The
loss of even one of these claims, if it resulted in a significant damage award,
could have a significant adverse effect on our financial condition or results of
operations. This risk of potential liability may make reasonable settlements of
claims more difficult to obtain. We cannot determine with any certainty what new
theories of recovery may evolve or what their impact may be on the managed care
industry in general or on us in particular. We believe we have made adequate
reserves in our financial statements against all litigation known to us, but we
cannot be certain our estimates of probable outcomes of such litigation will
prove to be accurate.

                                       45
<PAGE>

     We currently have, and expect to maintain, liability insurance coverage for
some of the potential legal liabilities we may incur. Potential liabilities that
we incur may not, however, be covered by insurance, our insurers may dispute
coverage, our insurers may be unable to meet their obligations, or the amount of
our insurance coverage may be inadequate. We cannot assure you that we will be
able to obtain insurance coverage in the future, or that insurance will continue
to be available on a cost effective basis, if at all.

     We are also subject to other types of claims and potential claims, which
could have a material adverse effect on our financial condition and results of
operations. See Item 3, "Legal Proceedings" and Item 1, "Business - Management
Information Systems."

AS A HOLDING COMPANY, WE ARE DEPENDENT ON DIVIDENDS FROM OUR SUBSIDIARIES.

     We are a holding company whose assets consist largely of the outstanding
shares of common stock of our subsidiaries. As a holding company, we depend on
dividends from our insurance company subsidiaries. The ability of our insurance
subsidiaries to pay dividends is subject to regulation under Wisconsin law. See
Item 1 "Business - Regulation - Insurance Regulation." Our ability to pay our
shareholders dividends in the future and meet our obligations, including paying
operating expenses and debt service on our outstanding and future indebtedness,
will depend upon the receipt of dividends from our subsidiaries. An inability of
our subsidiaries to pay dividends in the future in an amount sufficient for us
to meet our financial obligations may materially adversely affect our business,
financial condition, and results of operations.

PROVISIONS IN OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS AND
WISCONSIN LAW MAY MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, AND
MY LIMIT OR ELIMINATE INCREASES IN STOCK PRICE BASED ON "TAKEOVER" SPECULATION.

     Our Amended and Restated Articles of Incorporation and Bylaws include
provisions required by the Association for its for-profit licensees, which the
Association designed to protect the independence of its for-profit licensees
from any single shareholder. These provisions include ownership limitations that
prohibit institutional investors from owning 10% or more of the voting power of
our outstanding securities and prohibit other investors from owning 5% or more
of the voting power of our outstanding securities. The approximately 60% of our
outstanding shares currently owned by the Foundation are exempt from these
limitations; however, at least 80% of our directors must be independent
directors who are not affiliated or associated with the Foundation or any
shareholder that owns our shares in excess of the ownership limits.

     These provisions may make it more difficult for a third party to acquire us
in a transaction that our board of directors has not negotiated or approved but
in which our shareholders may receive a premium for their shares. Also, these
provisions can deter a party from acquiring a significant ownership position in
us prior to submitting an offer to our board of directors, and, as a result, our
common stock may trade at lower prices relative to other companies that do not
have similar ownership limitations in their charter documents.

     In addition, Wisconsin insurance law prohibits any person from acquiring
control of us, and thus indirect control of our insurance subsidiaries, without
the prior approval of the OCI. Any purchaser of 10% or more of the voting
securities of a corporation is presumed to have acquired control of the
corporation unless the OCI determines otherwise. Therefore, even if the
provisions of our Amended and Restated Articles of Incorporation and Bylaws
described above were amended, repealed or held to be unenforceable, any person
wishing to acquire control of us or of any substantial portion of our
outstanding shares, with or without the approval of our board of directors or
shareholders, would first be required to obtain the approval of the OCI.

                                       46
<PAGE>

     As mentioned in Item 1, "Business - Blue Cross and Blue Shield Licenses",
if a non-Blue entity were to acquire Cobalt, our license with the Association
could be terminated. If terminated, Cobalt would have to pay a fee equal to $25
multiplied by the number of our members receiving products or services sold or
administered under the Blue Cross or Blue Shield names or service marks. The fee
would be reduced to the extent the payment of the fee would cause us to fall
below certain capital requirements established by the Association.

REGISTRATION RIGHTS OF THE FOUNDATION AND THE OVERSIGHT OF THE OCI MAY INHIBIT
OUR ABILITY TO RAISE FUNDS THROUGH EQUITY OFFERINGS.

     We may desire the flexibility to raise funds quickly by selling our common
stock in the equity markets for general corporate purposes or to take advantage
of acquisition and other investment opportunities that may arise in the future.
The Registration Rights Agreement that we entered into with the Foundation in
the Combination could limit or make more difficult our ability to raise funds
through equity offerings.

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

     Our failure to raise additional equity capital when required could:

     o    restrict our future growth, both internally and through acquisitions;

     o    inhibit our ability to invest in technology and other products and
          services that we may need;

     o    adversely affect our ability to compete in the markets we serve; and

     o    restrict the availability of capital for our subsidiaries.

OUR DIRECTORS ARE GENERALLY ABLE TO CONTROL THE OUTCOMES OF MATTERS, OTHER THAN
CHANGE OF CONTROL PROPOSALS, THAT ARE SUBMITTED TO OUR SHAREHOLDERS FOR A VOTE
AS LONG AS THE FOUNDATION BENEFICIALLY OWNS A SUBSTANTIAL PERCENTAGE OF THE
OUTSTANDING SHARES OF OUR COMMON STOCK.

     As of February 28, 2003, the Foundation beneficially owns approximately 60%
of the outstanding shares of our common stock. The Foundation has placed all of
its shares in a voting trust for a trustee to vote and dispose of under the
terms of the Voting Trust and Divestiture Agreement.

     The trustee of the voting trust must, as a general matter, vote all of the
Foundation's shares held in the voting trust as directed by a majority of our
independent directors and a majority of all of our directors on all proposals or
matters that may come before our shareholders, except for matters relating to
proposed combination and sale transactions if our shareholders will not own a
majority of the shares of the resulting company. Thus, except for votes relating
to business combination or sale transactions, so long as the Foundation
beneficially owns a number of shares sufficient to control the outcome of a
shareholder vote and more than 20% of our outstanding shares, our board of
directors will be able to control the outcome of most matters brought before our
shareholders for a vote. In addition, so long as the Foundation beneficially
owns more than 20% of our outstanding shares, any amendment to the Articles of
Incorporation or Bylaws requires approval by the OCI.

     In any election of directors, the trustee of the voting trust must vote the
Foundation's shares in favor of each nominee approved by a majority of our
directors who are deemed to be "independent" under the Association's standards
and a majority of all of our directors. As a result, our directors will likely
be able to ensure their re-election and designate their successors for as long
as the Foundation owns a substantial number of shares of our common stock.

                                       47
<PAGE>

WE WILL NOT BE ABLE TO SELL OR MERGE WITHOUT THE APPROVAL OF THE FOUNDATION AS
LONG AS THE FOUNDATION BENEFICIALLY OWNS 50% OR MORE OF THE OUTSTANDING SHARES
OF OUR COMMON STOCK.

     Any acquisition of Cobalt will require the approval of our board of
directors and the holders of a majority of the shares of our common stock. As
long as the Foundation beneficially owns more than 50% of our common stock, it
will be able, by itself, to block any such proposed transaction even if our
board of directors and other shareholders would otherwise favor the transaction.
In addition, for so long as the Foundation beneficially owns at least 20% of our
outstanding shares, we must consult with the Foundation prior to soliciting, or
upon receiving, a business combination proposal which, if consummated, would
result in our then existing shareholders owning less than a majority of the
outstanding shares of the resulting company. The Foundation is expected to vote
its shares of our common stock on proposed merger and sale transactions based
upon its best interests. The interests of the Foundation in a merger or sale
transaction may be different from the interests of other shareholders.

TRADING VOLUME FOR OUR COMMON STOCK HAS BEEN LIMITED, AND SIGNIFICANT SALES OF
OUR COMMON STOCK BY THE FOUNDATION, OR THE EXPECTATION OF THESE SALES, COULD
CAUSE OUR STOCK PRICE TO FALL.

     From the completion of the Combination on March 23, 2001 through December
31, 2002, the average daily trading volume of our common stock was 51,735 shares
per day. Given the limited trading volume of our common stock, significant sales
of our common stock by the Foundation, or the expectation of these sales, could
cause our stock price to fall.

     The Foundation is obligated to reduce its ownership of our common stock to
50% of the outstanding shares by March 23, 2004 and to 20% by March 23, 2006. If
the Foundation fails to meet its divestiture requirements, we are entitled to
arrange for the sale of the Foundation's shares. The Foundation has the right to
require us to periodically file registration statements covering sales of stock
by the Foundation.

OUR STOCK AND THE STOCKS OF OTHER COMPANIES IN THE HEALTH CARE INDUSTRY ARE
SUBJECT TO STOCK PRICE AND TRADING VOLUME VOLATILITY.

     From time to time, the stock price and the number of shares traded of
companies in the health care industry experience periods of significant
volatility. Company-specific issues and developments generally in the health
care industry and in the regulatory environment may cause this volatility. Our
stock price may fluctuate in response to a number of events and factors,
including:

     o    quarterly variations in operating results;

     o    changes in financial estimates and recommendations by securities
          analysts;

     o    operating and stock price performance of other companies that
          investors may deem comparable;

     o    press releases or publicity relating to us or our competitors or
          relating to trends in our markets;

     o    acquisitions and financings in our industry; and

     o    sales of stock by insiders.

                                       48
<PAGE>

ITEM 7a.  Quantitative and Qualitative Disclosures about Market Risk

     Because of our investment policies, the primary market risks associated
with our portfolio are interest rate risk, credit risk, and the risk related to
fluctuations in equity prices. With respect to interest rate risk, a reasonably
near-term rise in interest rates could negatively affect the fair value of our
bond portfolio. However, because we consider it unlikely that we would need or
choose to substantially liquidate our portfolio, we believe that such an
increase in interest rates would not have a material impact on future earnings
or cash flows. In addition, we are exposed to the risk of loss related to
changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception may affect the value
of financial instruments.

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

     We use a sensitivity model to assess the interest rate risk of our fixed
income investments. The model includes all fixed income securities and
incorporates assumptions regarding the impact of changing interest rates on
expected cash flows for certain financial assets with prepayment features, such
as callable bonds and mortgage-backed securities. The reduction in the fair
value of Cobalt's modeled financial assets resulting from a hypothetical
instantaneous 100 basis point increase in the U.S. Treasury yield curve is
estimated at $13.3 million as of December 31, 2002.

                                       49
<PAGE>

ITEM 8.  Financial Statements and Supplementary Data







   Report of Independent Auditors ............................................51

   Consolidated Balance Sheets as of December 31, 2002 and 2001...............52
   Consolidated Statements of Operations for the years ended
    December 31, 2002, 2001, and 2000.........................................53
   Consolidated Statements of Changes in Shareholders' Equity
    and Comprehensive Income (Loss) for the years ended
    December 31, 2002, 2001, and 2000.........................................54
   Consolidated Statements of Cash Flows for the years ended
    December 31, 2002, 2001, and 2000.........................................55
   Notes to Consolidated Financial Statements ................................56



                                       50
<PAGE>

                         Report of Independent Auditors


Board of Directors
Cobalt Corporation

     We have audited the accompanying consolidated balance sheets of Cobalt
Corporation (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2002. Our audits also include the financial statement
schedules listed in the index at Item 15(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 2002 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

     As discussed in Notes 2, 6 and 23 to the consolidated financial statements,
in 2002 the Company adopted Statement of Financial Accounting Standards No. 141,
Business Combinations, and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.







Milwaukee, Wisconsin
February 11, 2003



                                       51
<PAGE>

                               Cobalt Corporation

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                       2002          2001
                                                                                ----------------------------
                                                                                      (In thousands)
                                    ASSETS
<S>                                                                                <C>            <C>
Current assets:
   Cash and cash equivalents                                                       $  49,710      $  51,669
   Investments--available-for-sale, at fair value                                    373,870        180,692
   Due from affiliates                                                                     -          5,091
   Premium receivables (net of allowances of $1,437 and $2,371)                       40,971         33,486
   Due from clinics and providers (net of allowances of $6,693 and $9,124)             3,750         11,922
   Other receivables (net of allowances of $2,997 and $3,715)                         49,417         49,138
   Prepaid expenses and other current assets                                          35,805         30,150
                                                                                ----------------------------
Total current assets                                                                 553,523        362,148

Noncurrent assets:
   Investments--held-to-maturity, at amortized cost                                   12,780         11,007
   Investment in affiliates                                                               50         79,466
   Property and equipment, net                                                        34,167         31,411
   Goodwill, net                                                                     102,908         92,066
   Prepaid pension                                                                    66,142         53,837
   Deferred income taxes                                                              33,528         29,385
   Reinsurance recoverables                                                           48,237         34,961
   Other noncurrent assets                                                            18,564         13,724
Assets from discontinued operations                                                        -         19,317
                                                                                ----------------------------
Total assets                                                                        $869,899       $727,322
                                                                                ============================

         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Medical and other benefits payable                                               $198,101       $220,038
   Advance premiums                                                                   92,277         88,495
   Due to affiliates                                                                      35             59
   Payables and accrued expenses                                                      74,641         49,582
   Short-term debt                                                                    12,451         12,369
   Other current liabilities                                                          35,465         29,521
                                                                                ----------------------------
Total current liabilities                                                            412,970        400,064

Noncurrent liabilities:
   Other benefits payable                                                             56,777         47,282
   Deferred income taxes                                                              36,142         29,259
   Postretirement benefits other than pension                                         18,042         18,005
   Long-term debt                                                                     25,000          3,000
   Other noncurrent liabilities                                                       18,449         16,421
Liabilities from discontinued operations                                                   -          5,069
                                                                                ----------------------------
Total liabilities                                                                    567,380        519,100

Shareholders' equity:
   Preferred stock (no par value, 1,000,000 shares authorized)                             -              -
   Common stock (see Note 15)                                                        261,482        249,566
   Retained earnings (deficit)                                                        33,280        (41,979)
   Accumulated other comprehensive income                                              7,757            635
                                                                                ----------------------------
Total shareholders' equity                                                           302,519        208,222
                                                                                ----------------------------
Total liabilities and shareholders' equity                                          $869,899       $727,322
                                                                                ============================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       52
<PAGE>

<TABLE>
<CAPTION>
                               Cobalt Corporation

                      Consolidated Statements of Operations


                                                            Year Ended December 31,
                                                      2002           2001            2000
                                                 ----------------------------------------------
                                                       (In thousands, except share data)
Revenues:
<S>                                                <C>            <C>              <C>
    Premium                                        $1,373,760     $1,255,391       $538,080
    Government services                               111,719        117,192         70,305
    Other                                              48,167         40,655         24,715
                                                 ----------------------------------------------
       Total health services revenue                1,533,646      1,413,238        633,100
    Investment income, net                             14,845         11,637         10,092
    Net realized investment gains (losses)             (1,141)           845           (509)
                                                 ----------------------------------------------
      Total revenues                                1,547,350      1,425,720        642,683

Expenses:
   Medical and other benefits                       1,166,671      1,119,218        497,822
   Selling, general, administrative and other         323,239        303,208        176,878
   Interest                                               675            561            300
   Amortization of goodwill                                 -          5,136            622
                                                 ----------------------------------------------
      Total expenses                                1,490,585      1,428,123        675,622
                                                 ----------------------------------------------

Operating income (loss) from
  continuing operations                                56,765         (2,403)       (32,939)
Income tax (expense) benefit                           (7,304)         1,871           (548)
Income (loss) from investment in affiliates,
  net of tax                                           15,556        (22,724)        (6,526)
                                                 ----------------------------------------------
Income (loss) from continuing operations               65,017        (23,256)       (40,013)
Income (loss) from discontinued operations,
  net of tax                                             (680)           951              -
Gain on sale of discontinued operations,
  net of tax expense of $1,127                          9,618              -              -
                                                 ----------------------------------------------
Net income (loss)                                  $   73,955    $   (22,305)     $ (40,013)
                                                 ==============================================

Weighted average common shares                     41,093,967     38,434,459
Diluted weighted average common shares             42,229,727     38,434,459

Earnings (loss) per common share:
   Basic EPS from continuing operations                 $1.58         $(0.61)
   Basic EPS from discontinued operations                0.22           0.03
                                                 -------------------------------
      Total basic EPS                                   $1.80         $(0.58)
                                                 ===============================

   Diluted EPS from continuing operations               $1.54         $(0.61)
   Diluted EPS from discontinued operations              0.21           0.03
                                                 -------------------------------
      Total diluted EPS                                 $1.75         $(0.58)
                                                 ===============================


See accompanying notes to consolidated financial statements.

</TABLE>


                                       53
<PAGE>

<TABLE>
<CAPTION>
                                                   Cobalt Corporation

                              Consolidated Statements of Changes in Shareholders' Equity and
                                               Comprehensive Income (Loss)


                                                  Common Stock
                                           ---------------------------
                                                                                                        Accumulated
                                               Common                    Retained                          Other           Total
                                               Shares       Common       Earnings    Comprehensive     Comprehensive   Shareholders'
                                            Outstanding      Stock      (Deficit)    Income (Loss)     Income (Loss)      Equity
                                           -----------------------------------------------------------------------------------------
                                                                         (In thousands, except share data)
<S>                                          <C>          <C>            <C>           <C>                   <C>          <C>
Balance at January 1, 2000                            -   $      -       $206,315                            $(6,206)     $200,109
Net loss                                              -          -        (40,013)     $(40,013)                   -       (40,013)
Change in unrealized gains/losses on
   investments, net of tax                            -          -              -         4,242                4,242         4,242
Change in ownership of affiliates                     -          -          4,605             -                    -         4,605

                                                                                  -------------------
Comprehensive loss                                                                     $(35,771)
                                                                                  ===================

                                           ---------------------------------------                    ------------------------------
Balance at December 31, 2000                          -          -        170,907                             (1,964)      168,943
Net loss                                              -          -        (22,305)     $(22,305)                   -       (22,305)
Change in unrealized gains/losses on
   investments, net of tax                            -          -              -         2,599                2,599         2,599
Capitalization of Wisconsin United for
   Health Foundation, Inc.                   31,313,390    192,577       (192,577)                                 -             -
Issuance of common stock - acquisition        9,096,303     55,938              -                                  -        55,938
Issuance of common stock - options
   exercised                                     11,250         51              -                                  -            51
Issuance of common stock - 401(k)               172,100      1,000              -                                  -         1,000
Change in ownership of affiliates                     -          -          1,402                                  -         1,402
Conversion of SAR to options                          -          -            594                                  -           594

                                                                                  -------------------
Comprehensive loss                                                                     $(19,706)
                                                                                  ===================

                                           ---------------------------------------                    ------------------------------
Balance at December 31, 2001                 40,593,043    249,566        (41,979)                               635       208,222
Net income                                            -          -         73,955       $73,955                    -        73,955
Change in unrealized gains/losses on
   investments, net of tax                            -          -              -         7,462                7,462         7,462
Minimum liability SERP, net of tax                    -          -              -          (340)                (340)         (340)
Issuance of common stock - options
   exercised                                    986,661      7,313              -                                  -         7,313
Tax benefit from stock options exercised              -      3,975              -                                  -         3,975
Issuance of common stock - 401(k)                64,880        450              -                                  -           450
Change in ownership of affiliates                     -          -          1,304                                  -         1,304
Stock option amortization                             -        178              -                                  -           178

                                                                                  -------------------
Comprehensive income                                                                   $ 81,077
                                                                                  ===================

                                           ---------------------------------------                    ------------------------------
Balance at December 31, 2002                 41,644,584   $261,482      $  33,280                            $ 7,757      $302,519
                                           =======================================                    ==============================


See accompanying notes to consolidated financial statements.
</TABLE>

                                       54
<PAGE>

<TABLE>
<CAPTION>
                                        Cobalt Corporation

                              Consolidated Statements of Cash Flows


                                                                       Year Ended December 31,
                                                                   2002          2001         2000
                                                               ----------------------------------------
                                                                            (In thousands)
Operating activities
<S>                                                                <C>         <C>           <C>
   Income (loss) from continuing operations                        $ 65,017    $ (23,256)    $(40,013)
   Adjustments to reconcile income (loss) from continuing
     operations to net cash provided by operating activities:
       Depreciation and amortization                                 11,629       16,840        8,669
       Premium deficiency reserve-Medicare+Choice                         -       (3,617)       3,617
       Write-off of deferred acquisition costs-Medicare+Choice            -            -        2,434
       Write-off of computer equipment and software                    (880)        (329)        (223)
       (Income) loss from investment in affiliates, net of tax      (15,556)      22,724        6,526
       Realized investment (gains) losses, net                        1,141         (845)         509
       Deferred income tax expense (benefit)                           (506)         358          548
       Changes in operating accounts, net of
        discontinued operations, acquisitions and Combination
         related activity:
          Premium receivables                                         2,741       14,051         (509)
          Other receivables                                             348       (1,522)      (5,943)
          Due from clinics and providers                              8,172        5,302         (610)
          Medical and other benefits payable                        (12,442)       1,888       25,162
          Advance premiums                                            3,782       (2,229)       9,598
          Due to/from affiliates, net                                (2,643)      (9,494)      (1,612)
          Other, net                                                 (5,189)      (8,736)         147
                                                               ----------------------------------------
            Net cash provided by continuing operations               55,614       11,135        8,300
                                                               ----------------------------------------

Investing activities
  Acquisitions and Combination activity                             (13,128)      48,843       (1,013)
  Proceeds from sale of investment in affiliate                      68,636            -            -
  Proceeds from sale of discontinued operations                      17,000            -            -
  Purchases of available-for-sale investments                      (248,914)    (155,701)      (8,553)
  Purchases of held-to-maturity investments                          (7,379)      (1,488)           -
  Proceeds from maturity of held-to-maturity investments              5,480          325          655
  Proceeds from sale and maturity of available-for-sale
     investments                                                    100,828      146,418       26,261
  Additions to property and equipment, net                          (10,842)      (5,631)      (8,116)
  Dividend from unconsolidated affiliate                                552            -            -
                                                               ----------------------------------------
           Net cash (used in) provided by investing activities      (87,767)      32,766        9,234
                                                               ----------------------------------------

Financing activities
  Proceeds from issuance of common stock                              7,763        1,030            -
  Net borrowings (repayments) of debt                                22,082        5,463      (11,175)
                                                               ----------------------------------------
           Net cash provided by (used in) financing activities       29,845        6,493      (11,175)

Discontinued Operations
  Net cash provided by (used in) discontinued
     operations                                                         349          (30)           -
                                                               ----------------------------------------

Cash and cash equivalents
  Increase (decrease) during year                                    (1,959)      50,364        6,359
  Balance at beginning of year                                       51,669        1,305       (5,054)
                                                               ----------------------------------------
     Balance at end of year                                        $ 49,710    $  51,669    $   1,305
                                                               ========================================

See accompanying notes to consolidated financial statements.

</TABLE>

                                       55
<PAGE>

                               Cobalt Corporation

                   Notes to Consolidated Financial Statements


1. Organization, Accounting for Conversion and Combination, and Basis of
Presentation

     Cobalt Corporation ("Cobalt" or the "Company") (formerly known as United
Wisconsin Services, Inc. ("UWS")) was created as a result of the combination of
UWS and Blue Cross & Blue Shield United of Wisconsin ("BCBSUW") on March 23,
2001 (the "Combination"). On that date, BCBSUW converted from a service
insurance corporation to a shareholder owned corporation. Upon conversion,
BCBSUW became a wholly-owned subsidiary of UWS through a combination of the two
companies. At the time of the conversion and combination, BCBSUW owned 7,949,904
shares representing approximately 46.6% of UWS' outstanding common stock. In
exchange for the ownership of BCBSUW, Cobalt issued 31,313,390 shares of newly
issued Company common stock to the Wisconsin United for Health Foundation, Inc.
(the "Foundation"). The Foundation was established for the sole purpose of
benefiting public health in Wisconsin from its earnings in the investment in
Cobalt. As of December 31, 2002, the Foundation owned 75.2% of the total
outstanding Company common stock (see Note 14, "Stock Offerings").

     The Combination was accounted for as a purchase by BCBSUW of the remaining
9,096,303 shares of UWS that it did not already own at a market price of $6.15
per share on the closing date. In accordance with accounting principles
generally accepted in the United States ("GAAP"), goodwill was recorded
representing the excess of the market price over the adjusted book value of UWS
for the 53.4% of UWS that BCBSUW did not already own. Total goodwill recorded by
Cobalt as a result of the Combination amounted to $65,577,000, of which
$21,651,000 related to the recognition of a valuation allowance on the net
deferred income tax assets recorded by UWS prior to the Combination.

     For financial reporting purposes, the Combination was treated as a reverse
purchase transaction, whereby BCBSUW became the acquirer and reporting entity
for public company reporting. The consolidated statements of operations, cash
flows, and changes in shareholders' equity and comprehensive income (loss) for
the year ended December 31, 2001, reflect the operations of the combined UWS and
BCBSUW entities effective March 31, 2001 with American Medical Security Group,
Inc ("AMSG") accounted for using the equity method. Prior to March 31, 2001, the
consolidated financial statements include the operations of BCBSUW, its
wholly-owned subsidiary, United Government Services, LLC ("UGS") and BCBSUW's
investment in UWS and AMSG. During 2002, Government Health Services, LLC ("GHS")
was formed to hold UGS and Trust Solutions, LLC ("TS").

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

     The Company acquired all of the outstanding stock of Claim Management
Services, Inc. ("CMSI"), a third-party administrator of self-funded employee
benefit plans with annual revenue of approximately $22.0 million, on December
31, 2002 (see Note 23). The accompanying consolidated balance sheet includes the
accounts of CMSI as of that date. Consolidated results of operations will
include CMSI for periods subsequent to the acquisition date.


                                       56
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


1. Organization, Accounting for Conversion and Combination, and Basis of
Presentation (Continued)

     The Company offers full coverage, co-payment, preferred provider
organization ("PPO"), and health maintenance organization ("HMO") products to
groups, and offers Medicare supplement, indemnity, and HMO coverage options to
individuals. The Company is also a leading provider of managed health care
services and employee benefit products, HMO products, dental, life, disability
and workers' compensation products, managed care consulting, electronic claim
submission services, and receivables management services. UGS is a government
contractor and processes Medicare claims for providers in all 50 states and is
currently the largest Part A Medicare processor in the nation. TS provides
integrity, consulting, and safeguard services in connection with publicly funded
health programs.

     Included are the pro forma (unaudited) consolidated statements of
operations of the Company for the years ended December 31, 2001 and 2000,
presented as if the Combination had occurred at the beginning of each year
presented. Pro forma basic and diluted EPS calculations are based on the pro
forma weighted average of the Company's outstanding common stock during the
period presented.

                 PRO FORMA (UNAUDITED) STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                     2001              2000
                                                              -------------------------------------
                                                               (In thousands, except share data)
Revenues:
  Health services revenue:
<S>                                                              <C>                <C>
     Premium                                                     $1,472,238         $1,283,237
     Government services                                            117,192             70,305
     Other                                                           45,290             41,778
  Investment income, net                                             12,810             13,642
  Net realized investment gains (losses)                              1,091             (1,434)
                                                              -------------------------------------
       Total revenues                                             1,648,621          1,407,528
Expenses:
  Medical and other benefits                                      1,311,185          1,188,525
  Selling, general, administrative and other                        331,615            279,478
  Interest                                                              744              1,306
  Amortization of goodwill                                            6,470              5,464
                                                              -------------------------------------
       Total expenses                                             1,650,014          1,474,773
                                                              -------------------------------------
Operating loss from continuing operations                            (1,393)           (67,245)
Income tax benefit                                                    1,574                677
Income (loss) from investment in affiliates, net of tax             (23,158)               766
                                                              -------------------------------------
Loss from continuing operations, net of tax                         (22,977)           (65,802)
Income from discontinued operations, net of tax                       1,122              1,578
                                                              -------------------------------------
Pro forma net loss                                               $  (21,855)        $   (64,224)
                                                              =====================================


Weighted average common shares                                   40,453,690         40,412,393
Diluted weighted average common shares                           40,453,690         40,412,393

Pro forma basic and diluted earnings (loss) per common share:
  Continuing operations                                              $(0.56)            $(1.63)
  Discontinued operations                                              0.02               0.04
                                                              -------------------------------------
Total pro forma basic and diluted EPS                                $(0.54)            $(1.59)
                                                              =====================================
</TABLE>


                                       57
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)

2.  Significant Accounting Policies

Cash and Cash Equivalents

     The Company actively manages its cash and cash equivalents position to
maintain optimal asset levels. Cash and cash equivalents include operating cash
and short-term investments with original maturities of three months or less.
These amounts are recorded at cost, which approximates fair value.

Investments

     Investments are classified as either held-to-maturity or
available-for-sale. Investments that the Company has the intent and ability to
hold to maturity are designated as held-to-maturity and are stated at amortized
cost. All other investments are classified as available-for-sale and are stated
at estimated fair value based on quoted market prices. The net unrealized gain
or loss on investment securities classified as available-for-sale, net of
deferred income taxes, is included in accumulated other comprehensive income
(loss) in shareholders' equity. Realized gains and losses from the sale of
available-for-sale securities are calculated using the first-in, first-out
basis. Included in investments classified as available-for-sale at December 31,
2002 are convertible debentures and convertible preferred stock. No convertible
securities were held at December 31, 2001. The convertible securities are
considered hybrid instruments, and the Company separately accounts for the
derivatives embedded therein. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivatives and Hedging
Activities," the embedded derivatives are reflected in the accompanying
consolidated balance sheets at fair value, and changes in fair value are
recognized currently as realized investment gains (losses).

     Investments in affiliates in which the Company does not have control, but
has the ability to exercise significant influence over operating and financial
policies, are accounted for by the equity method.

     When the fair value of an investment is lower than its cost and such
decline is determined to be other-than-temporary, the carrying value of the
investment is written down to fair value and the write-down is recorded as a
realized loss.

Receivables

     Receivables, consisting of premium receivables, due from clinics and
providers, and other receivables, are stated at net realizable value, net of
allowances for uncollectible amounts, based upon historical collection trends
and management's best estimate of the ultimate collectibility.

Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, which is 3 years for computer equipment and
software, 5 to 10 years for furniture and other equipment, 30 years for land
improvements, and 10 to 40 years for buildings and building improvements. Any
gain or loss realized upon retirement or disposal is reflected in selling,
general, administrative, and other expenses in the Company's consolidated
statement of operations. On an on-going basis, the Company reviews events or
changes in circumstances that may indicate that the carrying value of an asset
may not be recoverable.

                                       58
<PAGE>
                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

Goodwill

     The Company's goodwill represents the excess of the market value over the
adjusted book value for UWS common stock acquired by BCBSUW and the excess of
cost over the fair value of other businesses acquired. Beginning January 1, 2002
with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill is no longer amortized, and is tested for impairment annually. Prior to
January 1, 2002, goodwill was amortized using the straight-line method over its
estimated life of 16 years.

Deferred Acquisition Costs

     Certain costs of acquiring new insurance policies for workers' compensation
and certain individual health products have been deferred. Deferred acquisition
costs of $16,280,000 and $9,488,000 at December 31, 2002 and 2001, respectively,
are included in other current and noncurrent assets and are being amortized over
the estimated premium-paying periods of the related policies. Acquisition costs
of $10,862,000, $4,467,000, and $2,661,000 were capitalized in 2002, 2001, and
2000, respectively. Deferred acquisition costs of $4,070,000, $3,384,000, and
$2,289,000 were amortized during 2002, 2001, and 2000, respectively.

     In addition to the amortization above, during 2000 the Company wrote-off
$2,434,000 of deferred acquisition costs associated with the Medicare+Choice
line of business.

Medical and Other Benefits

     The Company contracts with various health care providers for the provision
of certain medical care services to its members and generally compensates those
providers on a fee-for-service basis or pursuant to certain risk-sharing
arrangements. Medical and other benefits expense also consists of capitation
expenses, health and disability benefit claims, and life insurance benefits.
Medical and other benefits payables consist primarily of loss reserves
established for reported and unreported claims and accrued capitation fees and
adjustments, which are unpaid as of the balance sheet date, under a complex
estimation process utilizing company-specific, industry-wide, and general
economic information and data. The estimation process also involves continuous
monitoring and evaluation of the submission, adjudication, and payment cycles of
claims. The Company estimates ultimate claims based upon historical experience
and other available information as well as assumptions about emerging trends,
which vary by class of business. Significant assumptions used in the estimation
process include trends in loss costs and changes in member demographics,
utilization, provider contract terms and reimbursement strategies, frequency and
severity of claims incurred, known and adjudicated claims, changes in the timing
of the reporting of losses, and expected costs to settle unpaid claims.

     Due to the numerous factors influencing this liability, the Company
develops a series of estimates based upon generally accepted actuarial
projection methodologies using various scenarios with respect to claim
submission and payment patterns and cost trends. The Company's policy is to
record management's best estimate of medical and other benefits payable that
adequately provides for future payments of claims incurred but not paid under
moderately adverse conditions. Deviations (positive or negative) between actual
experience and estimates used to establish the liability are recorded in the
period of claim payment. The Company continually monitors the reasonableness of
the assumptions and judgments used in prior estimates by comparison with actual
claim patterns and considers this information in future estimates.

     Medical and other benefits paid can also be significantly impacted by the
outcomes from court decisions, interpretations by regulatory authorities, and
legislative changes involving healthcare matters. As a result, amounts
ultimately paid may differ from initial estimates that did not consider such
outcomes.

                                       59
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

     The Company's year-end medical and other benefits payable are substantially
satisfied through claim payments in the subsequent year. Any adjustments to
prior period estimates are reflected in the current period. Capitation
represents fixed payments on a per member per month basis to participating
physicians, dentists, other medical specialists, and hospital systems as
compensation for providing comprehensive health or dental care services. The
portion of medical and other benefits payable pertaining to long-term
disability, workers' compensation, and certain life insurance products, which is
estimated to be paid more than one year from the balance sheet date, is included
as other benefits payable on the accompanying consolidated balance sheets.

     The Company records a liability for future policy benefits relating to
certain individual product contracts when premium revenue is recognized. As of
December 31, 2002, approximately $2.0 million of such reserves were recorded and
are included in Medical and Other Benefits Payable in the accompanying
consolidated balance sheets.

Premium Deficiency Reserves

     Premium deficiency reserves ("PDR") are recognized when it is probable that
the future costs associated with a group of existing contracts will exceed the
anticipated future premiums on those contracts. For purposes of determining
whether a premium deficiency exists, contracts are grouped in a manner
consistent with the Company's method of acquiring, servicing, and measuring
profitability of such contracts. The Company calculates expected PDR based on
budgeted revenues and applicable expenses excluding investment income.

     As a result of management's assessment of the profitability of its
Medicare+Choice line of business, the Company recorded a provision of $3,617,000
in 2000 for probable future losses (premium deficiency). Effective January 1,
2002, the Company exited this business, therefore no PDR was needed as of
December 31, 2001 or thereafter.

Reinsurance

     Certain premiums and benefits are assumed from and ceded to other insurance
companies under various reinsurance agreements. The ceded reinsurance agreements
provide the Company with increased capacity to write larger risks and maintain
its exposure to loss within its capital resources. The ceding company is
contingently liable on reinsurance ceded in the event that the reinsurers do not
meet their contractual obligations.

Employment Benefit Plans

     The Company has two defined benefit pension plans covering a majority of
its work force. The plans provide pension payments based primarily on years of
service and employee compensation. Pension costs are accrued in accordance with
SFAS No. 87, "Employers' Accounting for Pensions," and are funded based on the
minimum contribution requirements of the Employee Retirement Income Security Act
of 1974. The actuarial cost method used is the projected unit credit method.

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

                                       60
<PAGE>
                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

Revenue Recognition

     Health services premiums are recognized as revenue in the period in which
enrollees are entitled to care. Managed care consulting revenues are generally
recognized when services are rendered. Case management revenues are recognized
when services are billed. Receivables management revenues are recognized when
cash is received.

     As a fiscal intermediary for Medicare, the Company is reimbursed for
administrative costs incurred in providing this service. In addition, the
Company also administers various uninsured programs sponsored by federal and
certain state governments (including State of Wisconsin Medicaid as a
subcontractor) and private corporations, for which the Company receives
administrative fees. These revenues are recognized as the services are
performed.

     Retrospective premium adjustments are recognized for certain groups for
which actual claims experience differs from that which was anticipated when the
related premium rates were established. Financial arrangements vary based upon
the group and line of insurance involved. The amount of premium that was subject
to retrospective premium adjustments in 2002, 2001, and 2000, was $17,483,000,
$14,365,000, and $16,441,000, respectively.

     Premiums are typically billed to insureds in advance of the respective
coverage periods and are included in premium receivable upon the effective date
of coverage. Premiums received from insureds but not yet earned under the policy
are recorded as advance premiums and earned pro-rata throughout the policy
period.

Income Taxes

     In accordance with SFAS No. 109, "Accounting for Income Taxes," deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and tax credit carryforwards. Deferred tax assets and liabilities are
measured using tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recorded on deferred tax assets when management determines that it
is "more likely than not" that the tax benefits will not be realized.

Self-funded Business

     Administrative expenses include costs associated with maintenance of
membership records, claim processing and payment, coordination of benefits,
billing/cash collection, and other services on self-funded business. In
addition, administrative expenses include amounts incurred in conjunction with
the BlueCard PPO program administered by the Company. The Company is reimbursed
for claims paid and a fee is received for the administrative costs associated
with providing these services. Under the BlueCard PPO program, the Company does
not maintain membership but receives an administrative fee and percentage of
discounts for members from other Blue plans that access medical care in
Wisconsin. Benefits paid on self-funded programs were $697,691,000,
$561,194,000, and $522,566,000 in 2002, 2001, and 2000, respectively, and are
excluded from the accompanying consolidated statements of operations.
Administrative fees received, related to these programs, totaled $30,638,000,
$28,067,000, and $24,716,000 in 2002, 2001, and 2000, respectively, and are
included in other revenue in the accompanying consolidated statements of
operations.

                                       61
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

Risks and Uncertainties

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

     Regulatory initiatives undertaken at the state or federal level to reform
the health care industry and/or to reduce the escalation in health care costs or
to make health care more accessible, could adversely affect the Company's
profitability.

Earnings Per Share

     Basic earnings per share ("EPS") is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated
similarly, except that it includes the dilutive effect of the assumed exercise
of stock options. Stock options are not considered in the calculation of EPS in
loss years because their inclusion would have an antidilutive effect. The
7,949,904 shares of Cobalt Corporation common stock owned by BCBSUW are
accounted for as if they were treasury stock, and are not included in the
calculation of outstanding shares. EPS for the year ended December 31, 2001 was
calculated based on 38,434,459 weighted average shares outstanding, which
assumes that the 31,313,390 of newly issued shares to the Foundation were
outstanding for the entire three months ended March 31, 2001. EPS was not
presented for the year ended December 31, 2000 because the Company was a service
insurance corporation.

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                2002           2001             2000
                                                         ---------------------------------------------------
                                                         (In thousands, except share and per share data)
<S>                                                          <C>           <C>                <C>
   Income (loss) from continuing operations                     $65,017      $(23,256)        $(40,013)
   Income from discontinued operations                            8,938           951                -
                                                         ---------------------------------------------------
   Net income (loss)                                            $73,955      $(22,305)        $(40,013)
                                                          ==================================================
Denominator:
   Denominator for basic EPS-weighted average shares         41,093,967    38,434,459
   Effect of dilutive securities-employee stock options
                                                              1,135,760             -
                                                          --------------------------------
      Denominator for diluted EPS                            42,229,727    38,434,459
                                                          ================================

Earnings (loss) per common share:
  Basic EPS from continuing operations                            $1.58        $(0.61)
  Basic EPS from discontinued operations                           0.22          0.03
                                                          --------------------------------
    Total basic EPS                                               $1.80        $(0.58)
                                                          ================================

  Diluted EPS from continuing operations                          $1.54        $(0.61)
  Diluted EPS from discontinued operations                         0.21          0.03
                                                          --------------------------------
    Total diluted EPS                                             $1.75        $(0.58)
                                                          ================================

</TABLE>

                                       62
<PAGE>
                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

Stock Based Compensation

     At December 31, 2002, the Company had a stock option plan as described in
Note 18. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards of stock-based compensation plans.
SFAS No. 123 allows two alternative accounting methods: (1) a fair value based
method, or (2) an intrinsic value based method which is prescribed by Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company has elected to account for
its stock-based incentive plans and awards under APB No. 25, and has adopted the
disclosure requirements of SFAS No. 123, as amended. Under APB No. 25, no
stock-based employee compensation cost is reflected in net income to the extent
that stock options granted have an exercise price equal to the market value of
the underlying common stock on the date of the grant and no modifications are
made to option terms subsequent to their grant date.

     The following table illustrates the effect on net income and earnings
(loss) per share as if the Company had applied the fair value expense
recognition provisions of SFAS No. 123.

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                         2002                2001
                                                               ----------------------------------------
                                                                 (In thousands, except per share data)
<S>                                                                    <C>                 <C>
Net income (loss) as reported                                          $73,955             $(22,305)
Less pro forma stock based compensation expense
  determined under fair value based method, net of tax                  (2,004)                (265)
                                                                -----------------------------------------
Pro forma net income (loss)                                            $71,951             $(22,570)
                                                                =========================================
Basic earnings (loss) per share:
    Continuing operations, as reported                                   $1.58               $(0.61)
    Continuing operations, pro forma                                      1.53                (0.62)
    Discontinued operations, as reported                                  0.22                 0.03
    Discontinued operations, pro forma                                    0.22                 0.03

Diluted earnings (loss) per share:
    Continuing operations, as reported                                    1.54                (0.61)
    Continuing operations, pro forma                                      1.51                (0.62)
    Discontinued operations, as reported                                  0.21                 0.03
    Discontinued operations, pro forma                                    0.21                 0.03
</TABLE>

     As calculated using the Black-Scholes model, the weighted average fair
value of granted options, in which the exercise price equaled the market price
on the date of the grant, was $6.88 per share for 2002 and $3.69 for 2001. Prior
to the Combination, the Company had no stock based compensation programs other
than a stock appreciation rights ("SAR") plan (see Note 18). Thus, proforma
information has not been presented for the year ended December 31, 2000.


                                               Year Ended December 31,
                                               2002              2001
                                         ------------------------------------
Assumptions:
   Risk-free interest rate                     5.22%            5.44%
   Dividend yield                              0.42%            0.67%
   Volatility factor                           0.57             0.55
   Weighted average expected life              6 years         6 years


                                       63
<PAGE>
                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


2.  Significant Accounting Policies (Continued)

     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Since the Company's stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

Use of Estimates

     The accompanying consolidated financial statements have been prepared in
accordance with GAAP, which requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The more significant estimates include
medical and other benefits payable, carrying value of investments, fair value of
goodwill and intangible assets, tax assets and liabilities, litigation and
settlement costs, and allowance for doubtful accounts. Actual results could
differ from those estimates.

Recent Accounting Pronouncements

     In June of 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." This statement addresses financial accounting and reporting costs
associated with exit or disposal activities and generally requires costs to be
recognized when a liability is incurred. The Company intends to adopt the
provisions of SFAS No. 146 for all exit or disposal activities that are
initiated after December 31, 2002 in accordance with this statement. For exit
and disposal activities initiated prior to December 31, 2002, the Company
followed existing accounting guidance contained in Emerging Issues Task Force
("EITF"), "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)," under which costs are recognized at the date the entity commits
to an exit plan.

     In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends certain
disclosure requirements of SFAS No. 123. The Company has complied with the
revised disclosure requirements in these notes to consolidated financial
statements and does not intend to change to a fair value based method of
accounting for stock options at this time.

Reclassifications

     Certain reclassifications have been made to the consolidated financial
statements for 2001 and 2000 to conform to the 2002 presentation including
reporting of discontinued operations (see Note 21).

                                       64
<PAGE>
                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


3.  Medical and Other Benefits Payable

     The components of the change in medical and other benefits payable, net of
reinsurance, are as follows:

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                     2002          2001           2000
                                                                 -------------------------------------------
                                                                               (In thousands)
<S>                                                              <C>            <C>             <C>
Net medical and other benefits payable at beginning of year      $  238,326     $  104,415      $ 75,637
Net medical and other benefits payable assumed from UWS
   through the Combination                                                -        141,617             -

Components of medical and other benefits expense:
   Estimated costs incurred-current year                          1,189,573      1,129,768       505,597
   Changes in prior year estimates                                  (22,902)       (10,550)       (7,775)
                                                                 -------------------------------------------
Medical and other benefits expense                                1,166,671      1,119,218       497,822
                                                                 -------------------------------------------

Payments related to:
   Current year                                                   1,011,959        943,887       411,973
   Prior years                                                      173,478        183,037        57,071
                                                                 -------------------------------------------
Total paid                                                        1,185,437      1,126,924       469,044
                                                                 -------------------------------------------

Net medical and other benefits payable at end of year            $  219,560     $  238,326      $104,415
                                                                 ===========================================
</TABLE>

     The net medical and other benefits payable above excludes reinsured
reserves of $35,318,000 and $28,994,000 as of December 31, 2002 and 2001,
respectively. There were no reinsured reserve balances as of December 31, 2000.
Reinsured reserves are classified as assets in the accompanying consolidated
balance sheets. Changes in prior year estimates and payments related to prior
years in the 2001 column in the above table include amounts relating to claims
incurred prior to 2001 for BCBSUW and claims incurred prior to March 31, 2001
for the former UWS companies. Net medical and other benefits payable at December
31, 2002 and 2001 include discounted reserves, net of reinsurance, of
$13,895,000 and $11,865,000, respectively (net of discount of $4,791,000 and
$4,295,000, respectively) for disability and waiver of premiums claims. These
reserves were discounted using a weighted average discount rate of 6.5% and 6.9%
for 2002 and 2001, respectively.

                                       65
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


3.   Medical and Other Benefits Payable (Continued)

     Subsequent to September 11, 2001, the Company observed significant
variability in its claims patterns. Experience for claims incurred appeared to
be artificially low, and the Company attributed a portion of this variability to
an estimated increase in lag times between the dates claims were incurred and
submitted to the Company. In addition, the Company anticipated increased
utilization relating to business it was exiting at the end of 2001, including
certain CompcareBlue groups and Medicare+Choice. The Company's ultimate
experience relating to these matters was more favorable than estimated.

     The Company's December 31, 2000 loss reserves contemplated, among other
estimates, continued deterioration in claim experience on Medicare+Choice
consistent with that experienced earlier in the year. Actual claims paid were
less than anticipated. The net medical and other benefits payable assumed from
UWS during 2001 developed slightly unfavorably due to the transition of provider
contracts from a capitated to fee for service basis.

     During late 1999, the Company overestimated claim payment lag times in
connection with a claim adjudication system conversion. This resulted in
favorable development of December 31, 1999 estimated benefits payable.

4.  Investments

     The amortized cost, gross unrealized gains (losses), and estimated fair
values of investments are as follows:

<TABLE>
<CAPTION>
                                                                    Gross           Gross
                                                  Amortized      Unrealized       Unrealized      Estimated
                                                     Cost           Gains           Losses       Fair Values
                                             ---------------------------------------------------------------
                                                                     (In thousands)
<S>                                                <C>              <C>            <C>             <C>
At December 31, 2002:
   Available-for-sale:
      Fixed maturity:
        U.S. Treasury securities                   $115,109         $ 5,180        $    (1)        $120,288
        Foreign securities                            9,961             707           (108)          10,560
        Corporate debt securities                   157,924           7,477         (1,661)         163,740
        Mortgage-backed securities                   41,849           1,377            (21)          43,205
                                             ---------------------------------------------------------------
                                                    324,843          14,741         (1,791)         337,793
                                             ---------------------------------------------------------------
      Equity securities:
        Embedded conversion options                   1,479               -              -            1,479
        Mutual funds-fixed income                    10,919             184              -           11,103
        Common and preferred stock                   22,959           1,020           (484)          23,495
                                             ---------------------------------------------------------------
                                                     35,357           1,204           (484)          36,077
                                             ---------------------------------------------------------------
                                                    360,200          15,945         (2,275)         373,870
   Held-to-maturity:
      U.S. Treasury securities                       12,780             672              -           13,452
                                             ---------------------------------------------------------------
                                                   $372,980         $16,617        $(2,275)        $387,322
                                             ===============================================================
</TABLE>

                                       66
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


4.  Investments (Continued)

<TABLE>
<CAPTION>
                                                                    Gross           Gross
                                                  Amortized      Unrealized       Unrealized      Estimated
                                                     Cost           Gains           Losses       Fair Values
                                             ---------------------------------------------------------------
                                                                     (In thousands)
<S>                                                <C>                <C>         <C>               <C>
At December 31, 2001:
   Available-for-sale:
      Fixed maturity:
        U.S. Treasury securities                   $ 23,088           $ 193       $   (394)         $22,887
        State and municipal securities                  100               2              -              102
        Foreign securities                            7,336             135           (151)           7,320
        Corporate debt securities                    84,857           1,373           (771)          85,459
        Mortgage-backed securities                   51,818             426           (818)          51,426
                                             ---------------------------------------------------------------
                                                    167,199           2,129         (2,134)         167,194
      Equity securities:
        Mutual funds-fixed income                     9,839              31              -            9,870
        Common and preferred stock                    3,760              11           (143)           3,628
                                             ---------------------------------------------------------------
                                                     13,599              42           (143)          13,498
                                             ---------------------------------------------------------------
                                                    180,798           2,171         (2,277)         180,692
   Held-to-maturity:
      U.S. Treasury securities                       11,007             392             (2)          11,397
                                             ---------------------------------------------------------------
                                                   $191,805          $2,563        $(2,279)        $192,089
                                             ===============================================================
</TABLE>

     The amortized cost and estimated fair values of debt securities at December
31, 2002, by contractual maturity, are shown in the following tables. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations.

                                                    Amortized        Estimated
                                                      Cost          Fair Values
                                                  ------------------------------
                                                          (In thousands)
   Available-for-sale:
      Due in one year or less                        $ 12,631         $ 12,807
      Due after one through five years                108,528          112,556
      Due after five through ten years                 90,901           95,310
      Due after ten years                              70,934           73,915
                                                  ------------------------------
                                                      282,994          294,588
      Mortgage-backed securities                       41,849           43,205
                                                  ------------------------------
                                                     $324,843         $337,793
                                                  ==============================


   Held-to-maturity:
      Due in one year or less                         $     -          $     -
      Due after one through five years                 12,780           13,452
                                                  ------------------------------
                                                      $12,780          $13,452
                                                  ==============================


                                       67
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


4.  Investments (Continued)

     Net investment income consists of the following:

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                    2002           2001         2000
                                                              --------------------------------------------
                                                                            (In thousands)
<S>                                                               <C>           <C>          <C>
Interest on fixed maturities                                      $13,725       $  8,514     $  2,729
Dividends on equity securities                                        674            474          775
Interest on cash equivalents and other investment income            1,323          1,628          100
                                                              --------------------------------------------
Gross investment income                                            15,722         10,616        3,604
Investment expenses                                                (1,177)          (879)        (229)
Interest income from affiliates                                         -          1,273        5,494
Other investment income                                               300            627        1,223
                                                              --------------------------------------------
   Investment income, net                                         $14,845        $11,637      $10,092
                                                              ============================================
</TABLE>

     Net realized investment gains and losses consist of the following:

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                   2002           2001          2000
                                                              --------------------------------------------
                                                                            (In thousands)

<S>                                                                <C>          <C>           <C>
Realized gains-available for sale securities                       $ 4,866      $ 2,990       $   638
Realized losses-available for sale securities                       (2,813)      (2,145)       (1,147)
Realized losses-other than temporary impairment charges             (3,194)           -             -
                                                              --------------------------------------------
    Net realized investment gains (losses)                         $(1,141)     $   845       $  (509)
                                                              ============================================
</TABLE>

     Proceeds from sales of equity securities classified as available-for-sale
during 2002, 2001, and 2000 were $17,920,000, $10,571,000, and $6,134,000,
respectively. Proceeds from sales of fixed maturities classified as
available-for-sale during 2002, 2001, and 2000, excluding maturities, were
$81,092,000, $133,193,000, and $19,652,000, respectively.

     Unrealized gains (losses) are computed as the difference between estimated
fair value and amortized cost for fixed maturities classified as
available-for-sale or cost for equity securities. A summary of the net change in
unrealized gains/losses, less deferred income taxes, which is included in
accumulated other comprehensive income (loss), is as follows:

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                      2002          2001          2000
                                                                  -----------------------------------------
                                                                               (In thousands)
<S>                                                                  <C>         <C>             <C>
   Fixed maturities                                                  $12,955     $   (11)        $1,577
   Equity securities                                                     821        (250)          (716)
   Deferred income tax benefit (expense)                              (5,454)        (77)          (302)
   Unrealized gain (losses) of affiliates                               (860)      2,937          3,683
                                                                  -----------------------------------------
                                                                     $ 7,462     $ 2,599         $4,242
                                                                  =========================================
</TABLE>

     At December 31, 2002, the insurance subsidiaries had debt securities on
deposit with various state insurance departments with carrying values of
approximately $12,780,000, which are classified as investments held-to-maturity
in the accompanying consolidated balance sheets.

                                       68
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


4.  Investments (Continued)

     The Company participates in securities lending programs whereby blocks of
securities, which are returnable to the Company on short-term notice and are
included in investments, are loaned to third parties, primarily major brokerage
firms. The Company requires a minimum of 102% of the fair value of the loaned
securities to be separately maintained as collateral for the loans. Securities
with a cost or amortized cost of $80,987,000 and $11,269,000 and estimated fair
value of $84,509,000 and $11,409,000 were on loan under the programs at December
31, 2002 and 2001, respectively.

5.  Investment in Affiliates

     Investment in affiliates consisted of the following:

                                                        December 31,
                                                   2002              2001
                                                 ----------------------------
                                                       (In thousands)

      AMSG                                          $ -            $78,554
      Other                                          50                912

                                                 ----------------------------
      Total                                         $50            $79,466
                                                 ============================

     Income (loss) from investment in affiliates, net of tax, consisted of the
following:

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                    2002           2001         2000
                                                              --------------------------------------------
                                                                            (In thousands)

Equity (loss) in earnings:
<S>                                                               <C>           <C>            <C>
   AMSG                                                           $ 3,857       $  1,919       $ 1,078
   UWS                                                                  -            433        (7,604)
   Other                                                            1,718             87             -
Other-than-temporary impairment charge - AMSG                           -        (25,163)            -
Realized gain (loss) on sale of AMSG shares                         9,981              -             -
                                                              --------------------------------------------
   Income (loss) from affiliates, net of tax                      $15,556       $(22,724)      $(6,526)
                                                              ============================================
</TABLE>

Investment in AMSG

     AMSG offers small group PPO and life products. The Company accounted for
its investment in AMSG under the equity method of accounting through May 31,
2002. Because of decreased ownership and the fact that the Company no longer had
the ability to exercise significant influence over AMSG, the equity method of
accounting was discontinued subsequent to May 31, 2002 and the investment in
AMSG was reclassified in the Company's consolidated balance sheets from
investment in affiliates to investments available-for-sale.

     During 2002, the Company sold a total of 4,927,448 shares of AMSG
(including 1,400,000 shares repurchased by AMSG), reducing its ownership to
1,382,077 shares, or 10.7%, at December 31, 2002, with a fair market value of
$19,321,000 ($13.98 per share). The unrealized investment gain on these shares
of $989,000 is included, net of tax, in accumulated other comprehensive income
in shareholders' equity. On January 3, 2003, the Company sold its remaining
investment in AMSG.

                                       69
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


5.  Investment in Affiliates (Continued)

     As noted above, income (loss) from investment in affiliates, net of tax, in
the Company's consolidated statement of operations for the year ended December
31, 2002 included a gain of $9,981,000, net of tax expense of $1,109,000,
resulting from the sale of 4,401,500 shares of AMSG during the first and second
quarters of 2002. Also included in income (loss) from investment in affiliates
for the year ended December 31, 2001, is a loss of $25,163,000 relating to a
write-down of the Company's investment in AMSG to market value as of December
31, 2001. At December 31, 2001, the market value of AMSG stock was $12.45 per
share. This write-down was deemed appropriate based on management's decision in
December 2001 to no longer classify its investment in AMSG as a strategic
long-term asset.

     AMSG repurchased 1,400,000, 367,262, and 1,261,870 shares of its
outstanding common stock for cash amounts of $18,130,000, $2,216,000, and
$8,292,000 in 2002, 2001, and 2000, respectively. AMSG's repurchase of common
stock from parties other than the Company increased the Company's percentage
ownership of AMSG. Increases in the Company's share of net assets of AMSG
resulting from these share repurchases are reported in the accompanying
consolidated statements of changes in stockholders' equity and comprehensive
income (loss) during periods in which the Company recorded its investment in
AMSG under the equity method of accounting.

    Summarized financial information for AMSG is as follows:

                   Condensed AMSG Consolidated Balance Sheet

                                                             December 31,
                                                                 2001
                                                       -------------------------
                                                            (In thousands)

       Total assets                                              $473,015
                                                       =========================

       Total liabilities                                         $243,615
       Shareholders' equity                                       229,400
                                                       -------------------------
         Total liabilities and shareholders' equity              $473,015
                                                       =========================

     Included in AMSG's total assets was $103,934,000 of goodwill and other
intangible assets as of December 31, 2001.

     Information for the six months ended June 30, 2002, as reported in the
unaudited statements of operations included in AMSG's (NYSE: AMZ) report on Form
10-Q dated August 13, 2002, is presented below. The periods presented include
the periods during which the Company recorded its investment in AMSG under the
equity method of accounting.

                                       70
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


5.  Investment in Affiliates (Continued)

              Condensed AMSG Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                    Six Months Ended
                                                        June 30,         Year Ended December 31,
                                                        2002(1)            2001           2000
                                                   -------------------------------------------------
                                                      (unaudited)
                                                                    (In thousands)
    Health services revenues:
<S>                                                        <C>          <C>             <C>
       Premium revenues                                    $385,188     $838,672        $951,071
       Other revenue                                         10,343       21,285          20,112
    Investment results                                        7,785       16,664          18,682
                                                   -------------------------------------------------
    Total revenues                                          403,316      876,621         989,865

    Expenses:
    Medical and other benefits                              260,991      601,942         724,613
    Selling, general and administrative                     123,052      257,742         251,767
    Interest                                                    957        2,877           3,584
    Amortization of goodwill and intangibles                    365        3,628           3,785
                                                   -------------------------------------------------
    Total expenses                                          385,365      866,189         983,749

    Pretax income                                            17,951       10,432           6,116
    Income tax expense                                       (7,280)      (6,257)         (3,447)
                                                   -------------------------------------------------
    Income before cumulative effect of a
       change in accounting principle                        10,671        4,175           2,669
    Cumulative effect of a change in
       accounting principle                                 (60,098)           -               -
                                                   -------------------------------------------------
    Net income (loss)                                      $(49,427)    $  4,175        $  2,669
                                                   =================================================
___________________
(1)  AMSG net income subsequent to May 31, 2002 is no longer reported under the equity method of accounting
     in the Company's statement of operations. Net income for the five months ended May 31, 2002
     amounted to $9.1 million.
</TABLE>

Investment in UWS

     The Company's investment in UWS through the Combination (see Note 1) was
included in investment in affiliates. The Company owned approximately 46.6% of
the total UWS shares outstanding as of December 31, 2000 and prior to the
Combination.

                                       71
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


5.  Investment in Affiliates (Continued)

     Summarized financial information for UWS is as follows:

               Condensed UWS Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                         Three Month
                                                        Period Ended     Year Ended
                                                          March 31,      December 31,
                                                            2001             2000
                                                       ---------------------------------
                                                                (In thousands)
Revenues:
Health services revenues:
<S>                                                        <C>            <C>
   Premium revenue                                         $219,164       $753,095
   Other revenue                                              5,961         21,638
Investment results                                            2,757          8,119
                                                       ---------------------------------
Total revenues                                              227,882        782,852
                                                       ---------------------------------

Expenses:
   Medical and other benefits                               194,207        697,871
   Selling, general, administrative and other                29,810        107,945
   Interest                                                   1,521          6,500
   Amortization of goodwill                                     190            470
                                                       ---------------------------------
Total expenses                                              225,728        812,786
                                                       ---------------------------------

Operating income (loss) from continuing operations            2,154        (29,934)
Income tax (expense) benefit                                 (1,395)        12,037
Loss from investment in affiliate, net of tax                     -           (312)
                                                       ---------------------------------
Income (loss) from continuing operations                        759        (18,209)
Income from discontinued operations, net of tax                 171          1,781
                                                       ---------------------------------
Net income (loss)                                          $    930      $ (16,428)
                                                       =================================
</TABLE>

6.  Goodwill

     On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the new statement, goodwill is no longer amortized but
is subject to annual impairment tests. As of June 30, 2002, management completed
the Company's initial annual impairment test and determined that no impairment
of goodwill existed at that date. The Company updated its analysis and
determined that no impairment existed at December 31, 2002. Total goodwill
amortization on continuing operations was $5,136,000 and $622,000 for the years
ended December 31, 2001 and 2000, respectively. Accumulated amortization was
$7,455,000 at December 31, 2002 and 2001. On a pro forma basis (as if the
Combination occurred at the beginning of the reporting period), goodwill
amortization of $6,470,000 and $5,464,000 would have been recorded for the years
ended December 31, 2001 and 2000, respectively.

     During 2002, the Company recorded additional goodwill of $13,026,000
relating to the acquisition of CMSI (see Note 23). In addition, goodwill
relating to the Combination was reduced by $2,175,000 relating to a
corresponding decrease in a portion of the valuation allowance established
against net deferred income tax assets recorded by UWS prior to the Combination.


                                       72
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


6.  Goodwill (Continued)

     The amount of goodwill recorded by the Company by segment as of December
31, 2002 was (in thousands):

     Insured medical products                                        $63,090
     Specialty managed care products and services                     26,792
     Government services                                                   -
     Self-funded products                                             13,026
                                                                  -----------
         Total                                                      $102,908
                                                                  ===========

     There were no significant changes in the allocation of goodwill between
segments during 2002.

     The following table illustrates net income (loss) and net income (loss) per
share adjusted to exclude the effects of goodwill amortization in accordance
with SFAS No. 142:

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                                    2001                2000
                                                            ----------------------------------------
                                                            (In thousands, except per share data)
<S>                                                               <C>                 <C>
  Reported net loss                                               $(22,305)           $(40,013)
  Add back: Goodwill amortization                                    5,136                 622
                                                            ----------------------------------------
  Adjusted net loss                                               $(17,169)           $(39,391)
                                                            ========================================

  Basic and diluted earnings (loss) per common share:
      Reported EPS                                                  $(0.58)
      Goodwill amortization                                           0.13
                                                            ---------------------
      Adjusted EPS                                                  $(0.45)
                                                            =====================

</TABLE>

7.  Provider Arrangements

     The Company is a party to certain provider arrangements in conjunction with
Unity and Valley, which include profit-sharing payments to certain providers and
repurchase provisions. Management believes that control of Unity and Valley is
not temporary because exercise of the repurchase options is not probable.
Repurchase would not provide a substantial economic benefit to the option
holders and would require regulatory approval pursuant to change of control
regulations.

     Under the terms of the Valley purchase and sale agreement, as amended, the
seller retained an option to repurchase all of the capital stock of Valley as of
December 31, 2005, at a price equal to Valley's net assets plus $400,000.

     Pursuant to the terms of the Unity purchase agreements, as amended, the
sellers retained options to repurchase the net assets of the acquired companies
as of December 31, 2004. These agreements provide for an extension through
December 31, 2009. One seller has the option to repurchase a portion of Unity's
business for $500,000 plus the proportionate share of the net worth of such
business less any unpaid amount of the maximum performance bonuses. The maximum
performance bonuses are limited to $650,000 in total, of which $200,000 for 2002
has been accrued and $125,000 for 2001 has been paid. The other seller has the
option to repurchase the remainder of the Unity business (as well as the legal
entity) at a price equal to the net assets of such business.

                                       73
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


7.  Provider Arrangements (Continued)

     Total revenues subject to repurchase options, pursuant to the various
purchase agreements, were $289,259,000 for 2002. Profit sharing expenses related
to these provider arrangements are calculated based on the profitability of the
respective subsidiary and totaled $1,685,000 in 2002. Net income subject to
repurchase options, pursuant to those provider arrangements, totaled $5,399,000
for 2002. Total assets and total net assets subject to repurchase options were
$75,598,000 and $31,113,000, respectively, at December 31, 2002. The Company had
no business subject to repurchase options for the periods prior to the
Combination (see Note 1).

8.  Property and Equipment

     Property and equipment are stated at cost less accumulated depreciation as
follows:

                                                        December 31,
                                                     2002           2001
                                                ------------------------------
                                                       (In thousands)

 Land and land improvements                         $  1,658      $  1,316
 Building and building improvements                   14,971        11,351
 Computer equipment and software                      53,393        48,875
 Furniture and other equipment                        24,846        21,646
                                                ------------------------------
                                                      94,868        83,188
 Less accumulated depreciation                       (60,701)      (51,777)
                                                ------------------------------
                                                    $ 34,167      $ 31,411
                                                ==============================

     Depreciation expense related to property and equipment totaled $10,021,000,
$9,800,000, and $6,278,000 in 2002, 2001, and 2000, respectively.

     During 2002, 2001, and 2000, the Company reduced the carrying amount of
certain computer software costs to net realizable value through a charge to
income in the amount of $880,000, $329,000, and $223,000, respectively. This
charge is included in selling, general, administrative, and other expense in the
accompanying consolidated statements of operations and is reflected primarily in
the Company's insured medical products and specialty managed care products and
services segments.

9.  Reinsurance

     Amounts assumed from and ceded to other insurance companies are summarized
as follows:

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                                      2002          2001         2000
                                                                  ----------------------------------------
                                                                              (In thousands)
<S>                                                                  <C>           <C>          <C>
Reinsurance assumed:
   Insurance premiums                                                $39,923       $20,438      $3,497
   Medical and other benefits                                         25,530        13,889       2,543

Reinsurance ceded:
   Insurance premiums                                                $34,409       $17,649        $429
    Medical and other benefits                                        20,429        12,933         116
</TABLE>

     Reinsurance contracts are accounted for in a manner consistent with the
underlying business.

                                       74
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


9.  Reinsurance (Continued)

     The Company has reinsurance recoverable amounts outstanding of $54,223,000
and $45,377,000 as of December 31, 2002 and 2001, respectively, included in
other current assets and reinsurance recoverables in the accompanying
consolidated balance sheets based on the expected settlements.

     The Company employs quota share and excess of loss reinsurance with
third-party reinsurers as follows:

<TABLE>
<CAPTION>
           Quota Share                                         Ceding Percentage
----------------------------------    --------------------------------------------------------------------
<S>                                   <C>
Workers' Compensation:
    Wisconsin                         20% pre July 1, 2001, 35% effective July 1, 2001
    Illinois                          60%

         Excess of Loss                                           Retention
----------------------------------    -------------------------------------------------------------------

Workers' Compensation                 $250,000
Life                                    75,000
Long-term disability                    75,000 on claims incurred prior to October 1, 2001
                                         3,500 monthly  benefit on claims  incurred  after October 1, 2001
Medical:
   Valley                               150,000
   Unity                                225,000
   CompcareBlue                         400,000
   BCBSUW                               500,000
</TABLE>

10.  Debt

     Debt outstanding was as follows:

                                                           December 31,
                                                     2002               2001
                                                  ------------------------------
                                                          (In thousands)

Term note, due 2002                                 $   -             $ 7,500
Revolving credit agreement, due 2003-2005            29,950                 -
Bank line of credit, due 2003                         7,500             7,850
Accrued interest                                          1                19
                                                  ------------------------------
Total debt                                           37,451            15,369
Less current portion                                 12,451            12,369
                                                  ------------------------------
Long-term debt                                      $25,000           $ 3,000
                                                  ==============================

     On December 31, 2001, the Company originated a term business note ("term
note") for the corporate holding company with a commercial bank for $7,500,000.
The term note had an adjustable rate of interest with payment of principal and
interest due February 15, 2002. The term note was extended and renegotiated,
with payment of principal and interest due in quarterly installments beginning
June 30, 2002 and ending June 30, 2003. Interest was calculated at a rate equal
to the London Interbank Offered Rate ("LIBOR") plus 1.5%, adjusted monthly.
Interest expense recorded during 2002 on the term note was $152,000 at a
weighted average interest rate of 3.36%. During 2002, the note was repaid in
full by the Company.

                                       75
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


10.  Debt (Continued)

     During 2002, the Company entered into a three-year revolving credit
arrangement ("revolver") with a commercial bank. This revolver provides for
borrowings up to $30,000,000 by the Company with the availability declining to
$25,000,000 after one year and to $15,000,000 after two years. The revolver is
collateralized by the common stock of BCBSUW and CompcareBlue. The revolver
bears interest at a rate of LIBOR plus 1.5% to 2.5% depending on the timing and
amount of the borrowings. A commitment fee of 3/8% annually is payable quarterly
on the unused portion of the revolver.

     As of December 31, 2002, the outstanding balance on the revolver is
$29,950,000 and bears interest at a rate of 3.94%. Funds drawn on the revolver
during 2002 were used by Cobalt to repay certain intracompany balances and to
repay the remaining balance of $6,000,000 due on the term note. Interest expense
recorded during 2002 on the revolver was $396,000 at a weighted average interest
rate of 4.30%. The current portion of the revolver ($4,950,000) has been
classified as short-term debt in the accompanying consolidated balance sheets as
of December 31, 2002, and the remaining $25,000,000 balance is classified as
long-term debt.

     Debt covenants under the revolver include compliance with a minimum
tangible net worth, minimum debt-service/liquidity ratio, and risk-based capital
("RBC") requirements (see Note 15) on a quarterly basis. As of December 31,
2002, the Company is in compliance with the covenants of the revolver.

     The Company also has a line-of-credit ("LOC") with a commercial bank, which
permits aggregate borrowings among certain subsidiaries, excluding the corporate
holding company, up to $20,000,000. The LOC has an adjustable rate with interest
payments due monthly. The outstanding LOC balance was $7,500,000 and $7,850,000
as of December 31, 2002 and 2001, respectively. Interest expense on the LOC was
$126,000, $560,000, and $300,000 in 2002, 2001, and 2000, respectively. The
weighted average interest rate on the LOC was 3.89%, 3.90%, and 8.10% in 2002,
2001, and 2000, respectively.

     The schedule of principal payments on debt is as follows (in thousands):

             2003                               $12,451
             2004                                10,000
             2005                                15,000
             Thereafter                               -
                                               ----------
             Total debt                          37,451
             Less-current portion                12,451
                                               ----------
             Long-term debt                     $25,000
                                               ==========

11.  Related-Party Transactions

     During 1998, UWS entered into a $70,000,000 note obligation due to BCBSUW
in connection with the spin-off in 1998 of AMSG's managed care companies and
specialty business. UWS pledged the common stock of CompcareBlue as collateral
for the note obligation. Interest was payable quarterly at a rate equal to 9.75%
and 8.06% as of December 31, 2001 and 2000, respectively. The note was amended
and the maturity date was extended to January 2, 2003 at an interest rate of
7.38% on February 14, 2002. In October 2002, the $70,000,000 obligation due
BCBSUW was satisfied in full through the transfer to BCBSUW of all of the common
stock of CompcareBlue.

     As a result of the Combination, this intra-company note and related accrued
interest is eliminated in the accompanying consolidated balance sheets as of
December 31, 2001. Interest income received totaled $5,494,000 in 2000. Interest
income of $1,339,000 received prior to Combination in 2001 is included in the
accompanying consolidated statement of operations. Interest income subsequent to
March 31, 2001 has been eliminated in the accompanying consolidated statement of
operations.

                                       76
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


11.  Related-Party Transactions (Continued)

     The Company and Health Care Service Corporation ("HCSC") (the parent
corporation of BlueCross BlueShield of Illinois) each owned a 50% interest in
United Heartland of Illinois, Inc. ("UHIL"), a managing general agent for
workers' compensation business in Illinois. Premium receivable related to UHIL
of $4,952,000 at December 31, 2001 is reported in Due from Affiliates in the
accompanying consolidated balance sheets. Effective December 31, 2002, the
Company acquired the remaining 50% interest in UHIL from HCSC in return for
assuming certain lease obligations equal to the equity value of HCSC's interest
in UHIL. UHIL was dissolved and its operations were combined with UWIC at that
date.

12.  Income Taxes

     The Company and its subsidiaries file a consolidated federal income tax
return. Separate state income tax returns are filed by each subsidiary, except
GHS and CC Holdings, which are limited liability companies and are included in
their parent's state income tax filings.

     The Company had net federal income tax receivables of $6,376,000 and
$10,314,000 at December 31, 2002 and 2001, respectively, included in prepaid
expenses and other current assets. These amounts include a payment of
$11,576,000 made to the Internal Revenue Service ("IRS") to close the 1987 to
1992 tax years with respect to further audit assessments. The Company was not
required to make this payment and is disputing the 1987 proposed tax adjustments
on which the assessments were based. A motion for partial summary judgment has
been filed with the U.S. Court of Federal Claims, and the Company expects to
prevail in this matter.

     As of December 31, 2002, the Company has federal tax loss carryforwards
totaling $63,652,000 and related alternative minimum tax ("AMT") loss
carryforwards totaling $43,554,000, both of which expire in the years 2018
through 2020. The Company has state net business loss carryforwards totaling
$105,180,000 at December 31, 2002, which expire in the years 2011 through 2017.
The income tax benefits related to the majority of these tax carryforwards have
been recognized in prior years' financial statements. As a result, the eventual
use of these tax carryovers will not materially affect income tax expense. These
tax loss carryforwards do not include amounts relating to the Company's
intangibles deductions or conversion payment deduction, as discussed below.

     The Company had net federal and state income tax payments (refunds) of
$1,518,000, $368,000, and $(194,000) in 2002, 2001, and 2000, respectively.

     The components of income tax expense (benefit) are as follows:

                                         Year ended December 31,
                                    2002          2001          2000
                                ------------------------------------------
                                             (In thousands)

Current:
   Federal                         $ 6,513       $(2,359)      $    -
   State                             1,298           130            -
                                ------------------------------------------
                                     7,811        (2,229)           -
Deferred:
   Federal                          (2,416)          183          548
   State                             1,909           175            -
                                ------------------------------------------
                                      (507)          358          548
                                ------------------------------------------
      Total                        $ 7,304       $(1,871)        $548
                                ==========================================

                                       77
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


12.  Income Taxes (Continued)

     The Company is entitled to an income tax deduction resulting from the
exercise of non-qualified employee stock options. The tax benefits related to
these deductions amounted to $3,975,000, $0, and $0 for the years ended December
31, 2002, 2001, and 2000, respectively. These benefits were recorded as an
increase to common stock and are not included in the table above.

     The Company's federal income tax returns are routinely audited by the IRS.
The 1984 and 1986 through 1992 (excluding 1990) tax years are closed to further
tax assessments. All years from 1993 to present were open as of December 31,
2002. In management's opinion, adequate tax liabilities have been established
for all open audit years.

     The recorded tax assets and liabilities do not reflect potential tax
benefits which may result from income tax deductions claimed from 1987 to 2000
relating to the write-off of certain intangible assets held as of January 1,
1987. The IRS has disallowed these deductions and is currently litigating
whether similar deductions taken by other Blue Cross plans are allowable. This
litigation may prevent the Company from closing tax years even after the 1987
litigation is resolved. In addition, the recorded tax assets and liabilities do
not reflect the potential tax benefits of a $192,577,000 deduction taken on the
Company's 2001 income tax return related to the transfer of 100% of the stock of
BCBSUW to the Foundation as a condition of the conversion to for-profit status
that took place on March 23, 2001. Although the IRS had previously ruled that
similar transfers by other Blue Cross plans were tax deductible, it recently
revoked or retracted those rulings. Until additional guidance is provided by the
courts or the IRS regarding these matters, no tax benefit will be recorded.

     A reconciliation of income tax expense (benefit) computed at the federal
statutory rate to recorded income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                                         2002         2001         2000
                                                                     ---------------------------------------
                                                                                 (In thousands)
<S>                                                                   <C>          <C>           <C>
   Tax applicable to operating income (loss) at federal statutory     $ 19,868     $  (895)      $(11,529)
    rate
   Change in valuation allowance                                       (18,705)     (1,495)        14,877
   Goodwill amortization                                                     -       1,436            218
   State income and franchise taxes, net of federal benefit              2,085         198         (2,602)
   Additional (reversal) accrued taxes                                   4,400      (1,453)             -
   Other, net                                                             (344)        338           (416)
                                                                     ---------------------------------------
                                                                      $  7,304     $(1,871)      $    548
                                                                     =======================================
</TABLE>

     A portion of the Company's deferred tax valuation allowance represents
amounts recorded through charges to income tax expense. Subsequent reversals of
such amounts are credited to income tax expense. Such reversals reflected in
income tax expense (benefit) in the accompanying consolidated statements of
operations during the years ended December 31, 2002 and 2001, were $18.7 million
and $1.5 million, respectively, due primarily to the Company's utilization of
net operating loss carryforwards.

     The deferred tax valuation allowance also includes amounts related to the
net deferred tax assets of UWS at the date of the Combination. This valuation
allowance increased goodwill by $22.1 million at that date. Subsequent reversals
of this valuation allowance are recorded as reductions to goodwill. At December
31, 2002 and 2001, the remaining Combination date valuation allowance was $19.9
million and $22.1 million, respectively.

                                       78
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


12.  Income Taxes (Continued)

     Significant components of the Company's federal and state deferred tax
liabilities and assets are as follows:

<TABLE>
<CAPTION>
                                                     December 31, 2002            December 31, 2001
                                                ----------------------------------------------------------
                                                    Federal        State        Federal         State
                                                ----------------------------------------------------------
                                                                     (In thousands)
Deferred tax liabilities:
<S>                                               <C>             <C>          <C>            <C>
   Claims-based receivables                       $  (1,711)      $    (133)   $  (2,476)     $    (427)
   Pension accrual                                  (21,079)         (4,692)     (17,950)        (4,027)
   Deferred acquisition costs                        (4,894)         (1,101)      (2,567)          (579)
   Interest expense                                  (1,555)           (351)      (1,555)          (351)
   Goodwill                                          (1,140)           (189)           -              -
   Federal effect of state taxes                       (755)              -       (1,838)             -
   AMSG basis difference                               (735)         (1,109)      (3,202)        (5,209)
   Unrealized gain on investments                    (4,782)           (285)           -              -
   Prepaid expenses                                  (3,385)           (735)      (3,515)          (748)
   Other, net                                          (455)            (99)      (1,089)          (169)
                                                ----------------------------------------------------------
Total deferred tax liabilities                      (40,491)         (8,694)     (34,192)       (11,510)

Deferred tax assets:
   Post-retirement benefits other than pensions       6,486           1,437        5,257          1,179
   Deferred gain on sale of building                    639             144          822            186
   Relocation expenses                                  838             189            -              -
   State insurance fund accrual                       1,025             231            -              -
   Employee benefits                                  5,805           1,289        6,886          1,538
   Medical and other benefits payable
     discounting                                      3,695             626        4,080            740
   Net operating loss carryforwards                  22,278           8,310       49,794         20,183
   Bad debt reserve allowance                         2,718             606        2,784            626
   Depreciation                                         100              30            -              -
   AMT credit                                         3,783               -        2,963              -
   Advance premium discounting                        5,558           1,094        5,424          1,132
   Other, net                                         2,483             665        2,362            478
                                                ----------------------------------------------------------
         Subtotal                                    55,408          14,621       80,372         26,062
   Valuation allowance                              (15,725)         (8,738)     (46,180)       (14,552)
                                                ----------------------------------------------------------
Deferred tax assets after valuation allowance        39,683           5,883       34,192         11,510
                                                ----------------------------------------------------------
Net deferred tax liabilities                      $    (808)      $  (2,811)   $       -      $       -
                                                ==========================================================
</TABLE>

13.  Government Contracts

     The Company, through GHS, provides administrative, program integrity, and
consulting services in connection with publicly funded health care programs.
These services are provided through two subsidiaries of GHS: UGS and TS. Through
UGS, the Company serves as a fiscal intermediary for Medicare and a provider of
claim processing and administrative services in conjunction with various other
government programs. Through TS, the Company provides benefit integrity and data
analysis services as a Program Safeguard Contractor ("PSC") for Medicare.


                                       79
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


13.  Government Contracts (Continued)

     Claims processed and administrative fees received related to these services
were as follows:

                                                 Year ended December 31,
                                          2002         2001         2000
                                      --------------------------------------
                                                   (In thousands)
UGS:
  Number of claims processed                53,964       47,140       36,320
  Amount of claims paid                $29,535,621  $25,255,210  $13,194,510
  Administrative fees received            $110,550     $117,192      $70,305

TS:
  Administrative fees received              $1,169          $ -          $ -

     As a Medicare fiscal intermediary and PSC, the Company is subject to
regulations covering allowable cost reimbursements and operating procedures. The
laws and regulations governing fiscal intermediaries and PSCs are complex and
subject to interpretation. The Company believes that it is in material
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation, as well as significant regulatory actions including fines in
excess of fees received, significant penalties, and exclusions from being a
government contractor for these programs.

14.  Commitments and Contingencies

Long-Term Contract

     On October 1, 1998, the Company entered into an agreement with a vendor to
obtain certain electronic data processing services for the Company. The
agreement had an initial term of five years, with options for two additional
one-year renewal periods, which have been exercised. Expenses related to this
arrangement were $10,421,000, $13,405,000, and $14,986,000 in 2002, 2001, and
2000, respectively.

Operating Leases

     The Company has operating leases for office space, electronic data
processing equipment, automobiles, software, and terminal lines. Future minimum
payments under noncancelable operating leases with initial or remaining terms in
excess of one year at December 31, 2002 were as follows (in thousands):

          2003                      $ 8,956
          2004                        7,605
          2005                        6,072
          2006                        3,511
          2007                        1,659
          Thereafter                  2,522
                                   ----------
             Total                  $30,325
                                   ==========

     Rental expense totaled $15,528,000, $13,835,000, and $9,538,000 in 2002,
2001, and 2000, respectively.

                                       80
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


14.  Commitments and Contingencies (Continued)

     In conjunction with the assignment of a lease to a third party, the Company
has guaranteed the payment of the remaining lease payments in the event that the
assignee is unable to pay the lessor the payments due under the lease
agreements. Annual lease payments under this assigned lease are approximately
$925,000 annually and the lease term runs through 2010.

Extension of Credit

     The Company has an outstanding revolving line-of-credit in the amount of
$15,000,000 available to Health Professionals of Wisconsin, Inc., which
originated in 1997. The outstanding balance at December 31, 2002 and 2001 was
$3,000,000. Interest is accrued based on the quarterly prime rate, with interest
payments due annually on November 1. Interest income amounted to $132,000,
$308,000, and $451,000 for the years ended December 31, 2002, 2001, and 2000,
respectively.

     At December 31, 2002, the Company had an outstanding letter of credit of
$10,278,000, which expires on July 31, 2003, issued primarily to support a
portion of its workers' compensation line of business. There have been no
draw-downs under this letter of credit.

Litigation

     The Company is involved in various legal actions occurring in the normal
course of business. In the opinion of management, adequate provision has been
made for losses that may result from these actions and, accordingly, the outcome
of these proceedings is not expected to have a material adverse effect on the
consolidated financial statements.

HIPAA

     The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes administrative provisions imposing significant requirements relating to
maintaining the privacy of medical information ("Privacy"), establishing uniform
health care provider and employer identifiers, requiring use of standardized
transaction formats ("Transactions"), and seeking protections for
confidentiality and security of patient data ("Security"). The Privacy and
Transactions provisions require implementation in 2003. Final HIPAA Security
rules were published on February 20, 2003, and the implementation and compliance
date is April of 2005. HIPAA is far-reaching and complex, and proper
interpretation and practice under the law continue to evolve. Consequently, the
Company's efforts to measure, monitor, and adjust its business practices to
comply with HIPAA are ongoing. Compliance with HIPAA could require the Company
to make significant changes to its operations and failure to comply could
subject the Company to civil and criminal penalties. The costs of complying with
HIPAA are likely to be substantial.

Stock Offerings

     The Foundation is required to decrease its percentage ownership of Cobalt
to 50% by March 23, 2004 and 20% by March 23, 2006. The Company is responsible
for all legal and accounting fees, printing, and other out-of-pocket costs
associated with the offerings to facilitate these sales. During 2002, the
Company filed a shelf registration statement with the Securities and Exchange
Commission ("SEC") covering the potential sale of up to 0.5 million shares of
Cobalt common stock by the Company and up to 6.5 million shares of outstanding
Cobalt common stock held by the Foundation. During February of 2003, the
Foundation sold 6.3 million shares of Cobalt common stock realizing proceeds of
approximately $71.9 million. The Company did not sell any shares of common stock
in conjunction with this transaction. As a result, the Company expensed offering
costs of approximately $1.2 million during the fourth quarter of 2002.

                                       81
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


15.  Shareholders' Equity

Common Stock

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

                                                      December 31,
                                                 2002              2001
                                            ---------------------------------

   Authorized                                 75,000,000        75,000,000
   Issued (includes 7,949,904 shares
      owned by BCBSUW, see Note 1)            49,594,488        48,542,947
   Outstanding                                41,644,584        40,593,043

Statutory Financial Information (unaudited)

     The Company's insurance subsidiaries are required to file financial
statements with the Office of the Commissioner of Insurance of the State of
Wisconsin ("OCI") and other state insurance regulators. Such financial
statements are prepared in accordance with statutory accounting practices
("SAP") prescribed or permitted by the OCI, which differ from GAAP under which
the accompanying consolidated financial statements are prepared. Significant
differences between SAP and GAAP include certain valuations of investments,
calculations of discounted claim reserves, non-recognition of certain assets
(primarily health-care receivables, premium receivables greater than 90 days,
property and equipment, and certain intracompany receivable balances), and
recognition of deferred income tax assets based on criteria, which vary from
GAAP. While the OCI has the authority to permit insurers to deviate from
prescribed SAP, none of the Company's insurance subsidiaries regulated by the
OCI have received approval to adopt any such practices.

     Wisconsin insurance regulations also require the maintenance of a minimum
compulsory surplus based on a percentage of premiums written. As of December 31,
2002, all of the Company's insurance subsidiaries exceeded the regulatory
minimum compulsory and security surplus, calculated as prescribed by the OCI. In
addition, the Company's insurance subsidiaries are subject to RBC requirements
promulgated by the National Association of Insurance Commissioners. The RBC
requirements establish minimum levels of capital and surplus based upon the
insurer's operations and investment risk. At December 31, 2002, the Company was
in compliance with these capital surplus requirements. The Company is also
required to maintain certain capital and liquidity levels in conjunction with
the licensing of certain products by the Association. As of December 31, 2002,
Cobalt, BCBSUW and CompcareBlue exceeded the minimum standards to maintain its
license.

     Dividends paid by insurance subsidiaries are limited by state insurance
regulations. The insurance regulator in the state of domicile may disapprove any
dividend which, together with other dividends paid by an insurance company in
the prior twelve months, exceeds the regulatory maximum as computed for the
insurance company based on its statutory surplus and net income. The aggregate
amount available for dividends in 2003 without regulatory approval is
$18,928,000.

                                       82
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


16.  Management's Plan

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

     The Company has substantially completed all aspects of the capital plan,
significant provisions of which included the following:

     o    Sell certain non-regulated subsidiaries owned by the Company for cash
          and/or notes prior to October 1, 2002. On March 29, 2002, the Company
          sold its behavioral health and medical management subsidiary,
          Innovative Resource Group, LLC ("IRG") (see Note 21).
     o    Reduce BCBSUW's investment in AMSG common stock from 45% of the shares
          outstanding to less than 20% through public or private offerings
          during 2002. The Company reduced its investment in AMSG to 10.7% as of
          December 31, 2002, raising $73.9 million in net proceeds at BCBSUW. On
          January 3, 2003, the Company sold its remaining investment in AMSG
          raising an additional $18.7 million in net proceeds at BCBSUW.
     o    Obtain debt financing at the Company's corporate holding company from
          one or more institutional lenders to fund holding company liquidity
          needs including the repayment of the collateralized intracompany debt
          obligations between the holding company and its regulated
          subsidiaries. The Company has obtained a $30.0 million revolver (see
          Note 10). During the third quarter of 2002, the Company repaid its
          intracompany obligation to UWIC of $22.8 million. In October 2002, the
          $70.0 million note between the Company and BCBSUW was satisfied
          through the contribution of CompcareBlue to BCBSUW.
     o    Achieve the Company's 2002 projected core earnings, which anticipated
          breakeven operating results for CompcareBlue for the year ending
          December 31, 2002 as compared to an operating loss of $32.5 million
          for the year ended December 31, 2001. The Company exceeded its
          projected core earnings for the year ended December 31, 2002,
          including progress toward obtaining breakeven results for
          CompcareBlue.

17.  Fair Value and Concentration of Credit Risk of Financial Instruments

     The carrying amount of cash and cash equivalents approximate fair value
because of their short-term nature. The carrying values of long-term debt are
considered to be carried on the financial statements at their estimated fair
value because they were entered into recently and/or they are at variable
interest rates, which generally fluctuate with interest rate trends. The fair
values of investment securities (see Note 4) are estimated based on quoted
market prices.

     Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investment securities.
Investment securities are managed within established guidelines that limit the
amount invested in securities of a single issuer.

                                       83
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


18.  Employee Benefit Plans

Pension and Postretirement Benefits

     The Company and certain of its subsidiaries participate in two defined
benefit pension plans, the Cobalt Corporation Pension Plan (the "Plan") and the
UGS Pension Plan (the "UGS Plan"). Prior to the Combination, the Plan had been
named the UWSI/BCBSUW Pension Plan, a multiple employer plan sponsored by BCBSUW
and the former UWS. Coincident with the Combination and the aforementioned Plan
name change, the Company assumed the assets and liabilities of the Plan and
became the sole sponsor. The Plan and the UGS Plan utilize a measurement date of
September 30 and December 31, respectively.

     The Plan and the UGS Plan provide retirement benefits to covered employees
based primarily on compensation and years of service. The Company contributed
$6,392,000 and $3,514,000 to the UGS Plan in 2002 and 2001, respectively. No
contributions were made to any of the plans in 2000.

     The Company also has postretirement benefit plans to provide medical,
dental, and vision benefits, and life insurance for certain groups of retired
employees. Such plans were amended in 1997 to limit the Company's financial
contribution in future periods. No benefits will be provided for individuals
hired after the effective dates of these amendments.

     The financial information below includes both the Plan and the UGS Plan.

     The following table summarizes the change in the pension and postretirement
benefit obligations:

<TABLE>
<CAPTION>
                                                            Pension                  Postretirement
                                                  ----------------------------  --------------------------
                                                     2002            2001           2002        2001
                                                  ----------------------------  --------------------------
                                                                      (In thousands)
<S>                                               <C>             <C>             <C>         <C>
Benefit obligation at beginning of year           $ 108,519       $ 82,614        $ 19,285    $14,318
Benefit obligation assumed from UWS through
 the Combination                                          -         22,080               -      3,398
Service cost                                          4,918          4,879             521        501
Interest cost                                         7,292          6,732           1,310      1,151
Plan amendments                                         169              -               -         32
Actuarial (gains) losses                              3,607         (1,168)          2,853      1,198
Sale of subsidiary                                        -              -            (159)         -
Benefits paid                                        (9,049)        (6,618)         (2,092)    (1,313)
                                                  ----------------------------  --------------------------
Benefit obligation at end of year                 $ 115,456       $108,519        $ 21,718    $19,285
                                                  ============================  ==========================
</TABLE>

     The pension and postretirement plans' assets are comprised primarily of
debt, equity, and other marketable securities, including 700,000 shares of
Cobalt Corporation common stock, held by the Plan, with a fair value of
$9,660,000 and $4,466,000 at December 31, 2002 and 2001, respectively.

                                       84
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


18.  Employee Benefit Plans (Continued)

     The following table summarizes the change in the pension and postretirement
plan assets:

<TABLE>
<CAPTION>
                                                            Pension                     Postretirement
                                                  ----------------------------    ---------------------------
                                                       2002          2001            2002          2001
                                                  ----------------------------    ---------------------------
                                                                        (In thousands)
<S>                                                  <C>            <C>                <C>        <C>
  Fair value of plan assets at beginning of year     $153,850       $129,724           $1,854     $ 2,380
  Fair value of plan assets assumed from UWS
   through the Combination                                  -         39,729                -           -
  Employer contributions                                6,392          3,514            1,330         583
  Actual return on plan assets                         (4,122)       (12,499)              15         204
  Benefits paid                                        (9,049)        (6,618)          (2,148)     (1,313)
                                                  ----------------------------    ---------------------------
  Fair value of plan assets at end of year           $147,071       $153,850           $1,051     $ 1,854
                                                  ============================    ===========================
</TABLE>

     The following table provides a reconciliation of the funded status of the
plans to the prepaid pension and postretirement costs:

<TABLE>
<CAPTION>
                                                        Pension                     Postretirement
                                             ------------------------------   ----------------------------
                                                  2002           2001             2002          2001
                                             ------------------------------   ----------------------------
                                                                    (In thousands)
<S>                                               <C>           <C>               <C>           <C>
Funded status of plan at end of year              $31,615       $45,331           $(20,667)     $(17,431)
Unrecognized net transition asset                       -          (506)                 -             -
Unrecognized prior service cost                    (5,544)       (7,445)              (260)         (228)
Unrecognized net (gain) loss                       40,071        16,457              2,592          (346)
Post-measurement date employer
  contributions                                         -             -                293             -
                                             ------------------------------   ----------------------------
Prepaid (accrued) at end of year                  $66,142       $53,837           $(18,042)     $(18,005)
                                             ==============================   ============================
</TABLE>

     Weighted-average assumptions used in developing the projected benefit
obligations are as follows:

                                                              December 31,
                                                             2002       2001
                                                          ----------------------
Pension:
   Discount rate                                             6.50 %     7.00%
   Rate of compensation increase                             4.75       4.75
   Expected rate of return on Plan assets                    8.75       9.25

Postretirement:
   Discount rate                                             6.50%      7.00%
   Health care cost trend:
     Initial                                                 9.50      10.50
     Ultimate                                                5.50       5.50
   Expected return on Plan:
     Union plan assets                                       8.00%      8.00%

     The unrecognized net asset was amortized over the remaining estimated
service lives of participating employees at January 1, 1986: 15.4 years for
salaried employees and 16.9 years for hourly employees. As of December 31, 2002,
the asset has been fully amortized.

                                       85
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


18.  Employee Benefit Plans (Continued)

     The effect of a hypothetical 1% increase in the health care cost trend rate
would be a $1,366,000 increase in the benefit obligation at December 31, 2002.
The effect of a hypothetical 1% decrease in the health care cost trend would be
a $1,270,000 decrease in the benefit obligation at December 31, 2002. The
initial health care cost trend rate is expected to decrease by 1.0% per year to
an ultimate trend rate of 5.5% at December 31, 2006.

     The components of the pension credit and postretirement benefit cost, which
are included in selling, general, administrative, and other expenses in 2002,
2001, and 2000, are as follows:

<TABLE>
<CAPTION>
                                                   Pension                           Postretirement
                                      -----------------------------------   ---------------------------------
                                         2002       2001        2000           2002      2001        2000
                                      -----------------------------------   ---------------------------------
                                                                  (In thousands)
<S>                                   <C>        <C>         <C>             <C>        <C>         <C>
Service cost                          $  4,918   $  4,751    $  2,393        $   521    $   501     $  284
Interest cost                            7,292      6,687       5,129          1,310      1,152        890
Expected return on plan assets         (15,748)   (13,956)    (10,283)          (116)      (143)      (184)
Net amortization of transition
   asset                                  (506)    (1,264)     (1,087)             -          -          -
Amortization of prior service cost      (1,691)    (1,530)     (1,013)           (97)       (75)      (120)
Amortization of unrecognized
   gain                                   (137)         -           -              -        (24)        (2)
                                      -----------------------------------   ---------------------------------
Pension (credit) and
   postretirement benefit cost        $ (5,872)  $ (5,312)   $ (4,861)        $1,618     $1,411     $  868
                                      ===================================   =================================
</TABLE>

Defined Contribution and Bonus Plans

     The Company sponsors defined contribution plans whereby the Company
contributes a percentage of participants' qualifying compensation up to certain
limits, as defined by the plans. The Company match is made in Cobalt Corporation
common stock and cash. Participant directed contributions in Cobalt Corporation
common stock are limited to 30% of the participants' contributions exclusive of
the Company match. The Company also provides benefits under various other
profit-sharing and bonus programs. Expenses related to such plans and programs
totaled $17,937,000, $10,612,000, and $2,337,000 in 2002, 2001, and 2000,
respectively.

Stock-Based Compensation Plans

     Certain employees of the Company participated in a SAR plan, based upon the
market value of Cobalt common stock. On December 12, 2001, all 647,390
outstanding SARs were converted to nonqualified stock options of an equal
number, and at an exercise price equal to the original strike price of the SARs.
As of that date, 347,890 of the outstanding SARs were vested and 281,556 of the
SARs had a strike price lower than the current market price. The SARs liability
outstanding was reclassified to retained earnings upon conversion of the SARs to
options.

     The Company has a stock-based compensation plan covering employees and
directors that allows for option grants of up to 8,700,000 shares of common
stock and cash as incentive or nonqualified stock options. Stock options granted
vest at 25% per year over a four-year period.

                                       86
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


18.  Employee Benefit Plans (Continued)

     Stock option activity for all plans is as follows:

<TABLE>
<CAPTION>
                                                                                     Weighted Average
                                                                 Option             Exercise Price Per
                                                                 Shares                    Share
                                                            ----------------       ---------------------

<S>                                                            <C>                       <C>
Outstanding at January 1, 2001                                          -                $     -
Options assumed from UWS through Combination                    3,606,496                    9.39
Conversion of SARs                                                647,390                    5.70
Granted                                                            49,000                    6.12
Exercised                                                         (11,250)                   4.58
Cancelled                                                      (1,018,125)                  13.16

Outstanding at December 31, 2001                                3,273,511                    7.43
Granted                                                         1,606,500                   11.47
Exercised                                                      (1,062,889)                   8.06
Cancelled                                                         (53,125)                   5.27
                                                            ----------------
Outstanding at December 31, 2002                                3,763,997                    9.00
                                                            ================

</TABLE>

     Options, with respect to 4,936,003 shares, were available for grant as of
December 31, 2002.

     Other information regarding nonqualified stock options outstanding and
exercisable as of December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                           Options Outstanding                      Options Exercisable
                              ----------------------------------------------     ---------------------------
                                                  Weighted
                                                   Average
                                                  Remaining      Weighted                        Weighted
                                                 Contractual      Average                         Average
        Range of                  Number            Life         Exercise           Number       Exercise
     Exercise Prices            Outstanding      (in years)        Price          Exercisable      Price
--------------------------    ----------------------------------------------     ---------------------------
<S>  <C>       <C>                <C>                <C>           <C>              <C>             <C>
     $  4.31 - $  5.19            884,250            9.02          $4.32            355,000         $4.32
        5.50 -    6.00             66,000            9.66           5.68             24,000          5.68
        6.15 -    6.87             29,000           10.31           6.27              9,250          6.25
        7.19 -    8.50          1,829,100            9.98           8.04            606,375          7.70
        9.61 -   13.42            469,316            4.83          11.50            469,316         11.50
       14.04 -   17.35             78,331           10.17          16.00             18,331         14.89
       18.00 -   22.80            408,000           11.50          19.88                  -             -
                              ----------------------------------------------     ---------------------------

     $ 4.31 - $22.80            3,763,997            9.62          $9.00          1,482,272         $8.14
                              ==============================================     ===========================
</TABLE>

     At December 31, 2001, 1,955,261 outstanding options were exercisable with a
weighted average exercise price of $8.71 per share.

                                       87
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


     19.  Quarterly Financial Information (unaudited)

     Selected quarterly financial data in 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                     Quarter
                                       ---------------------------------------------------------------------
                                           First        Second         Third        Fourth        Total
                                       ---------------------------------------------------------------------
                                                      (In thousands, except per share data)
<S>                                         <C>          <C>           <C>        <C>           <C>
2002
Continuing operations:
   Total revenues                           $380,970     $382,881      $390,392   $393,107      $1,547,350
   Pretax income                              14,424       23,886        15,462     18,549          72,321
   Net income                                 13,244       22,762        13,888     15,123          65,017
   Diluted EPS                                  0.32         0.54          0.33       0.35            1.54

Discontinued operations:
   Net income (loss)                           9,359         (250)         (171)         -           8,938
   Diluted EPS                                  0.23        (0.01)        (0.01)         -            0.21
Net income                                    22,603       22,512        13,717     15,123          73,955
Diluted EPS                                     0.55         0.53          0.32       0.35            1.75

2001
Continuing operations:
   Total revenues                           $186,691     $411,021      $416,839   $411,169      $1,425,720
   Pretax income (loss)                        1,284       (3,913)          868    (23,366)        (25,127)
   Net income (loss)                           1,284       (3,931)          693    (21,302)        (23,256)
   Diluted EPS                                  0.04        (0.09)         0.02      (0.52)          (0.61)
Discontinued operations:
   Net income (loss)                               -          135           364        452             951
   Diluted EPS                                     -            -          0.01       0.01            0.03
Net income (loss)                              1,284       (3,796)        1,057    (20,850)        (22,305)
Diluted EPS                                     0.04        (0.09)         0.03      (0.51)          (0.58)
</TABLE>


20.  Segment Reporting

     The Company has four reportable business segments: insured medical
products, specialty managed care products and services (previously reported as
two separate segments, specialty risk and specialty service), government
services, and self-funded products. Insured medical products include full
coverage, copayment, PPO, Medicare supplement, interim coverage, HMO, and
point-of-service ("POS") products sold primarily in Wisconsin. The specialty
managed care products and services segment includes dental, life, disability,
and workers' compensation products, along with managed care consulting,
electronic claim submission services, subrogation and hospital bill audit
services, and receivables management services. The specialty managed care
products and services are sold throughout the United States. The self-funded
products consist of administrative services and access to Cobalt's extensive
provider networks for uninsured contracts and the BlueCard Program. Government
services include processing services for Medicare providers throughout the
United States and for Medicaid in the states of Wisconsin, Hawaii, and Michigan,
as well as providing integrity, consulting, and safeguard services in connection
with publicly funded health programs.

     "Other continuing operations" include activities not directly related to
the business segments, unallocated corporate items (i.e. income (loss) from
investment in affiliates, amortization of goodwill, and unallocated overhead
expenses), and intracompany eliminations. The Company evaluates segment
performance based on income or loss from operations before income taxes.


                                       88
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


20.  Segment Reporting (Continued)

     Financial data from continuing operations by segment is as follows:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                 2002            2001          2000
                                            ---------------------------------------------
                                                            (In thousands)
<S>                                           <C>             <C>             <C>
Health services revenue:
   Insured medical products                   $1,240,082      $1,150,420      $510,638
   Specialty managed care products
      and services                               185,110         142,009        29,922
   Government services                           111,719         117,192        70,305
   Self-funded products                           30,638          28,067        24,716
   Eliminations                                  (33,903)        (24,450)       (2,481)
                                            ---------------------------------------------
      Total                                   $1,533,646      $1,413,238      $633,100
                                            =============================================


Investment income and realized
  investment gains (losses):
   Insured medical products                     $ 12,149        $ 13,641      $  8,014
   Specialty managed care products
      and services                                 5,979           4,701           473
   Government services                               819             752           705
   Self-funded products                               24              55           391
   Corporate holding company and other                64             (79)            -
   Eliminations                                   (5,331)         (6,588)            -
                                            ---------------------------------------------
         Total                                  $ 13,704        $ 12,482      $  9,583
                                            =============================================


Operating income (loss):
   Insured medical products                     $ 39,858        $  8,790      $(20,553)
   Specialty managed care products
       and services                               13,676           7,522           408
   Government services                             2,375           1,572         1,230
   Self-funded products                            2,508          (3,834)      (10,694)
   Corporate holding company                         296         (13,677)            -
   Other                                          (1,948)         (2,776)       (3,330)
                                            ---------------------------------------------
         Total                                  $ 56,765        $ (2,403)     $(32,939)
                                            =============================================

</TABLE>

                                       89
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


20.  Segment Reporting (Continued)

     Eliminations by operating segments presented above are as follows:

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                               2002             2001           2000
                                          -----------------------------------------------
                                                           (In thousands)
<S>                                           <C>             <C>              <C>
Health services revenue:
   Insured medical products                   $(10,747)       $(15,860)        $(2,481)
   Specialty managed care products
      and services                             (22,935)         (8,590)              -
   Self-funded products                           (221)              -               -
                                       -----------------------------------------------
  Total                                       $(33,903)       $(24,450)        $(2,481)
                                          ===============================================

Investment income and realized
 investment gains (losses):
   Insured medical products                   $ (4,782)       $ (6,588)    $         -
   Specialty managed care products
      and services                                (549)              -               -
                                          -----------------------------------------------
  Total                                        $(5,331)        $(6,588)    $         -
                                          ===============================================

     Total assets from continuing operations (excluding Government services
assets, investment in affiliate, and goodwill) are allocated by segment based on
the percentage of revenue for the year ended December 31, 2002 and proforma
revenue for the year ended December 31, 2001.

                                                                 December 31,
                                                             2002            2001
                                                        --------------------------------
                                                                (In thousands)
Total assets from continuing operations by segment:
 Insured medical products                                     $688,380         $521,249
 Specialty managed care products and
    services                                                   120,167           69,556
 Government services                                            32,860           26,843
 Self-funded products                                           28,442           10,891
 Investment in affiliates                                           50           79,466
                                                        --------------------------------
   Total                                                      $869,899         $708,005
                                                        ================================
</TABLE>

21.  Discontinued Operations

     On March 29, 2002, Cobalt sold its behavioral health and medical management
subsidiary, IRG, for $17 million in cash and a $10 million (par value)
three-year note, which was discounted to yield a market interest rate at the
time of sale. As a result, IRG is accounted for as a discontinued operation for
all periods presented. The purchase agreement also provides for certain
bonuses/penalties to be received/paid between IRG and Cobalt based on IRG
revenues generated from Cobalt in future years. In addition, the agreement
required certain subsidiaries of Cobalt to enter into seven-year service
agreements for the provision of services by IRG.

     Since IRG was not considered part of Cobalt for financial reporting
purposes until the Combination, there were no operations to report for
discontinued operations for the three months ended March 31, 2001 and the year
ended December 31, 2000.

                                       90
<PAGE>

                               Cobalt Corporation

             Notes to Consolidated Financial Statements (Continued)


22.  Consolidation of Operating Centers

     During the fourth quarter of 2002, the Company announced a plan to
consolidate certain operating centers, which will result in the closing of two
centers in 2003. During the fourth quarter of 2002, the Company recorded a
pre-tax charge of $2,502,000 related to this consolidation in accordance with
EITF No. 94-3. This charge is included in selling, general, administrative, and
other expenses in the accompanying consolidated statement of operations.

23.  Acquisition of Claim Management Services, Inc.

     On December 31, 2002, the Company purchased all of the outstanding stock of
CMSI, a third party administrator of self-funded employee benefit plans. CMSI is
headquartered in Green Bay, Wisconsin and recorded revenue and pre-tax income
for the year ended December 31, 2002 of $21,965,000 and $2,316,000,
respectively.

     The purchase price consisted of a cash payment of $15,281,000 and 149,098
shares of common stock of AMSG, plus a possible earn-out of up to $3,000,000
based on CMSI's earnings over the next three years. Any payments made under the
earn-out provision will be recorded as additional purchase price.

     Goodwill in the amount of $13,026,000 was recorded in connection with this
acquisition, representing the excess of the purchase price over the book value
of net assets acquired. The Company is in the process of obtaining third-party
valuations of assets acquired, and the allocation of the purchase price to
intangible and other assets in accordance with SFAS No. 141, "Business
Combinations," is subject to refinement.

                                       91
<PAGE>

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure

         None.

                                    PART III

ITEM 10.  Directors and Executive Officers of the Registrant

     Information required by this item with respect to directors is included
under the heading "Election of Directors" in the Company's definitive Proxy
Statement, to be dated on or about April 24, 2003, relating to the Annual
Meeting of Shareholders currently scheduled for June 4, 2003, (the "2003 Proxy
Statement") which will be filed with the Commission separately pursuant to Rule
14a-6 under the 1934 Act and in accordance with General Instruction G(3) to Form
10-K, not later than 120 days after the end of the Company's fiscal year, and
which section is hereby incorporated by reference. Information with respect to
executive officers of the Company appears at the end of Part I of this Annual
Report on Form 10-K.

ITEM 11.  Executive Compensation

     Information required by this item is included under the heading "Executive
Compensation" in the 2003 Proxy Statement, which section is hereby incorporated
herein by reference.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

     Information required by this item is included under the headings "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the 2003 Proxy Statement, which sections are hereby
incorporated by reference.

ITEM 13.  Certain Relationships and Related Transactions

     Information required by this item is included under the heading "Certain
Transactions" in the 2003 Proxy Statement, which section is hereby incorporated
by reference.

ITEM 14.  Controls and Procedures

     Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and our Chief Financial Officer, based on their evaluation of the
effectiveness of our disclosure controls and procedures as of a date within 90
days of the filing of this Annual Report on Form 10-K, have concluded that our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to us and our consolidated subsidiaries would be
made known to them by others within those entities.

     Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the date of their evaluation,
nor were there any significant deficiencies or material weaknesses in our
internal controls. As a result, no corrective actions were required or
undertaken.


                                       92
<PAGE>

                                     PART IV

ITEM 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1 and 2. Financial statements and financial statement schedules

                                                                      Page(s) in
                                                                       Form 10-K
                                                                        Report
                                                                        ------
The following consolidated financial statements of Cobalt
   Corporation and subsidiaries are included in Item 8:

Report of Independent Auditors..........................................   51
Consolidated Balance Sheets at December 31, 2002 and  2001..............   52
Consolidated Statements of Operations for the years ended
   December 31, 2002, 2001 and 2000.....................................   53
Consolidated Statements of Changes in Shareholders' Equity and
   Comprehensive Income (Loss) for the years ended
   December 31, 2002, 2001 and 2000.....................................   54
Consolidated Statements of Cash Flows for the years ended
   December 31, 2002, 2001 and 2000.....................................   55
Notes to Consolidated Financial Statements..............................   56

The following financial statement schedules of Cobalt Corporation and
   subsidiaries are included in Item 15(d):

   Schedule II - Condensed Financial Information of Registrant..........   95
   Schedule IV -Reinsurance.............................................  100
   Schedule V - Valuation and Qualifying Accounts.......................  101

      All other schedules for which provision is made in applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

   3.  Exhibits

     Reference is made to the separate Exhibit Index contained on pages 105
through 108 herein.

(b)  We filed the following Current Reports on Form 8-K with the Securities and
     Exchange Commission during the fourth quarter of fiscal 2002 and the first
     quarter of fiscal 2003 through the date of this Annual Report on Form 10-K:

       (i)    Form 8-K dated November 8, 2002, as amended by our Form 8-K/A
              filed on January 24, 2003, relating to the filing of our
              Registration Statement on Form S-3 (Reg. No. 333-101111).

       (ii)   Form 8-K dated on November 15, 2002, announcing the consolidation
              of our claims and customer service department offices.

       (iii)  Form 8-K dated December 31, 2002, relating to the acquisition of
              Claim Management Services, Inc.

       (iv)   Form 8-K dated January 23, 2003, reaffirming previously issued
              earnings guidance for 2002 and revising earnings guidance for
              2003.

       (v)    Form 8-K dated on February 4, 2003, relating to the execution of
              an underwriting agreement in connection with an offering of our
              common stock by Wisconsin United for Health Foundation, Inc.


                                       93
<PAGE>

       (vi)   Form 8-K dated on February 11, 2003, announcing the release of
              earnings for the fourth quarter and full year 2002 and increasing
              previously issued earnings guidance for 2003.


(c)  Exhibits

          Reference is made to the separate Exhibit Index contained on pages 105
          through 108 herein.


(d)  Financial Statement Schedules

     Reference is made to the financial statement schedules contained on pages
95 through 99 herein.


                                       94
<PAGE>

<TABLE>

                                                                                                                SCHEDULE II



                                         COBALT CORPORATION
                              CONDENSED FINANCIAL INFORMATION OF REGISTRANT

           Condensed balance sheets of Cobalt Corporation (the "Company") (parent company only) as of
       December 31, 2002 and 2001, and the condensed statements of operations and cash flow for the year ended
               December 31, 2002 and nine month period ended December 31, 2001 are as follows:

<CAPTION>
                                      CONDENSED BALANCE SHEETS

ASSETS

                                                                                         As of December 31,
                                                                                2002                            2001
                                                                       --------------------------------------------------------
                                                                                           (In thousands)
<S>                                                                    <C>                           <C>
Cash and cash equivalents                                              $                1,883        $                  101
Investment in affiliates                                                              268,349                       262,116
Due from affiliates                                                                       849                             -
Accounts receivable                                                                       808                           738
Goodwill, net                                                                          67,035                        72,104
Other assets                                                                           17,628                        13,661
                                                                       --------------------------------------------------------

                  Total assets                                         $              356,552        $              348,720
                                                                       ========================================================


LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Notes payable to affiliates                                         $                    -        $               92,000
   Due to affiliates                                                                        -                        24,699
   Debt                                                                                29,951                         7,519
   Payables, accrued expenses and other liabilities                                    24,082                        16,280
                                                                       --------------------------------------------------------

       Total liabilities                                                               54,033                       140,498

Shareholders' equity:
   Common stock                                                                       261,482                       249,566
   Retained earnings (deficit)                                                         33,280                       (41,979)
   Accumulated other comprehensive income                                               7,757                           635
                                                                       --------------------------------------------------------

       Total shareholders' equity                                                     302,519                       208,222
                                                                       --------------------------------------------------------

                  Total liabilities and shareholders' equity           $              356,552        $              348,720
                                                                       ========================================================

</TABLE>

See accompanying notes to condensed financial statements

                                       95

<PAGE>

<TABLE>
                                                                                                    SCHEDULE II



                                             COBALT CORPORATION
                                CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                       CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>

                                                                                                        Nine Month
                                                                        Year Ended                     Period Ended
                                                                     December 31, 2002               December 31, 2001
                                                                ------------------------------------------------------------
                                                                                      (In thousands)
<S>                                                                <C>                               <C>
Revenues:
   Investment income, net                                          $                27               $              13
   Net realized investment gains                                                    37                               -
                                                                ------------------------------------------------------------

      Total revenues                                                                64                              13

Expenses:
   Other operating (expense reimbursements) expenses                            (4,508)                          2,949
   Interest                                                                      4,276                           6,867
   Amortization of goodwill                                                          -                           3,874
                                                                ------------------------------------------------------------

      Total expenses                                                              (232)                         13,690
                                                                ------------------------------------------------------------

Operating income (loss) from continuing operations                                 296                         (13,677)
Income tax benefit                                                               1,289                             634
Income (loss) from investment in affiliates, net of tax                         63,432                         (11,497)
                                                                ------------------------------------------------------------

Income (loss) from continuing operations                                        65,017                         (24,540)

Income (loss) from discontinued operations, net of tax                            (680)                            951
Gain on sale of discontinued operations, net of tax                              9,618                               -
                                                                ------------------------------------------------------------

Net income (loss)                                                  $            73,955               $         (23,589)
                                                                ============================================================

See accompanying notes to condensed financial statements

</TABLE>

                                       96
<PAGE>

<TABLE>
                                                                                                   SCHEDULE II

                               COBALT CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                        CONDENSED STATEMENTS OF CASH FLOW
<CAPTION>

                                                                                                             Nine Month
                                                                               Year Ended                   Period Ended
                                                                            December 31, 2002            December 31, 2001
                                                                         ------------------------------------------------------
                                                                                            (In thousands)
<S>                                                                      <C>                          <C>
Operating activities:
   Net income (loss) from continuing operations                          $             65,017         $          (24,540)
   Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
      (Income) loss from investment in affiliates net of tax                          (63,432)                    11,497
      Depreciation and amortization                                                     1,003                      4,206
      Write-off of computer equipment and software                                        198                          -
      Realized investment gains                                                           (37)                         -
      Deferred income tax expense (benefit)                                            (2,245)                     2,435
      Changes in other operating accounts:
         Due to/from affiliates, net                                                      (22)                     9,130
         Other receivables                                                                (70)                         -
         Other, net                                                                     6,430                      4,312
                                                                         ------------------------------------------------------

            Net cash provided by operating activities                                   6,842                      7,040

Investing activities:
   Acquisition related activity                                                             -                       (650)
   Purchases of available for sale investments                                         (5,044)                         -
   Proceeds from sale of available for sale investments                                 5,036                          -
   Capital contribution to subsidiary                                                 (12,434)                   (11,000)
   Additions to property and equipment, net                                              (813)                      (529)
                                                                         ------------------------------------------------------

            Net cash used in investing activities                                     (13,255)                   (12,179)

Financing activities:
   Net proceeds (repayment) on notes payable to affiliates                            (22,000)                     7,500
   Issuances of common stock                                                            7,763                      1,030
   Net proceeds (repayment) on debt                                                    22,432                     (2,164)
                                                                         ------------------------------------------------------

            Net cash provided by financing activities                                   8,195                      6,366
                                                                         ------------------------------------------------------

Cash and cash equivalents:
   Increase during period                                                               1,782                      1,227
   Balance at beginning of period                                                         101                     (1,126)
                                                                         ------------------------------------------------------

   Balance at end of period                                              $              1,883         $              101
                                                                         ======================================================

See accompanying notes to condensed financial statements

</TABLE>


                                       97
<PAGE>

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

COBALT CORPORATION (PARENT COMPANY ONLY)

Notes to Condensed Financial Statements

1.  Basis of Presentation

     The accompanying parent company only condensed statements of operations and
statements of cash flow reflect activity for the year ended December 31, 2002
and nine month period ended December 31, 2001, subsequent to the combination of
the former United Wisconsin Services, Inc. ("UWS") and Blue Cross & Blue Shield
United of Wisconsin ("BCBSUW") on March 23, 2001, which created Cobalt
Corporation ("Cobalt," the "Company," or "we"). Thus, the amount of net income
presented differs from the amount reflected in the Company's consolidated
statement of operations for the year ended December 31, 2001, which also
includes the operations of BCBSUW and its wholly-owned subsidiary, Government
Health Services, LLC ("GHS"), and BCBSUW's investment in UWS and American
Medical Security Group, Inc. ("AMSG") for the three month period ended March 31,
2001 (see note 1 of notes to consolidated financial statements).

     In the parent company only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since date of acquisition. The Company's share of net income (loss)
of its unconsolidated subsidiaries is included in the condensed statement of
operations using the equity method.

     Parent company only financial statements should be read in conjunction with
the Company's consolidated financial statements.

2.  Notes Payable to Affiliates

     Notes payable to affiliates as of December 31, 2001 consisted of
intracompany note obligations of Cobalt to BCBSUW of $70.0 million and United
Wisconsin Insurance Company ("UWIC") of $22.0 million. During the third quarter
of 2002, the Company repaid its intracompany obligation to UWIC of $22.8
million, including $0.8 million of accrued interest. In October, 2002 the $70.0
million between the Company and BCBSUW was satisfied through the contribution of
Compcare Health Services Insurance Corporation ("CompcareBlue") to BCBSUW (see
notes 11 and 16 of notes to consolidated financial statements).

3.  Debt

     Debt as of December 31, 2001 consisted primarily of a term business note
originated by the Company on December 31, 2001 with a commercial bank for
$7,500,000. The term note had an adjustable rate of interest with payment of
principal and interest due February 15, 2002. The term note was extended and
renegotiated, with payment of principal and interest due in quarterly
installments beginning June 30, 2002 and ending June 30, 2003. Interest was
calculated at a rate equal to the London Interbank Offered Rate ("LIBOR") plus
1.5%, adjusted monthly. During 2002, the note was repaid in full by the Company.

     During 2002, the Company entered into a three-year revolving credit
arrangement with a commercial bank. This arrangement provides for borrowings up
to $30,000,000 by the Company with the availability declining to $25,000,000
after one year and to $15,000,000 after two years. The revolver is
collateralized by the common stock of BCBSUW and CompcareBlue. The revolver
bears interest at a rate of LIBOR plus 1.5% to 2.5% depending on the timing and
amount of the borrowings. A commitment fee of 3/8% annually is payable quarterly
on the unused portion of the revolver. As of December 31, 2002, the outstanding
balance on the revolver is $29,950,000 and bears interest at a rate of 3.94%
(see note 10 of notes to consolidated financial statements).

                                       98
<PAGE>

SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED

COBALT CORPORATION (PARENT COMPANY ONLY)

Notes to Condensed Financial Statements - (Continued)

4.  Discontinued Operations

     On March 29, 2002, Cobalt sold its behavioral health and medical management
subsidiary, Innovative Resource Group, LLC ("IRG"), for $17 million in cash and
a $10 million (par value) three-year note, which was discounted to yield a
market interest rate at the time of sale. As a result, IRG is accounted for as a
discontinued operation for all periods presented on the accompanying
parent-company-only statements of operations. On the parent-company-only balance
sheet as of December 31, 2001, $11,354,000 has been included in investment in
affiliates and $2,894,000 in goodwill related to discontinued IRG operations.
The purchase agreement also provides for certain bonuses/penalties to be
received/paid between IRG and Cobalt based on IRG revenues generated from Cobalt
in future years. In addition, the agreement required certain subsidiaries of
Cobalt to enter into seven-year service agreements for the provision of services
by IRG.

                                       99
<PAGE>

<TABLE>

                                                                                                                SCHEDULE IV


<CAPTION>
                                                       COBALT CORPORATION

                                                           REINSURANCE



                                                                                                                      Percentage
                                                           Ceded to             Assumed                                of amount
                                         Gross               other            from other                              assumed to
                                        amount             companies           companies           Net amount             net
                                     --------------     ----------------    ----------------     ---------------     --------------
                                                                           (In thousands)
<S>                                <C>                <C>                 <C>                  <C>                            <C>
Year ended December 31, 2000:
   Life insurance in force         $             0    $               0   $               0    $              0               0.0%
                                     ==============     ================    ================     ===============     ==============

   Premiums:
     Health and disability         $       535,012    $             429   $           3,497    $        538,080               0.6%
     Life                                        0                    0                   0                   0               0.0%
                                     --------------     ----------------    ----------------     ---------------
       Total premiums              $       535,012    $             429   $           3,497    $        538,080               0.6%
                                     ==============     ================    ================     ===============     ==============

Year ended December 31, 2001:
   Life insurance in force         $        17,629    $       1,544,772   $       6,886,135    $      5,358,992             128.5%
                                     ==============     ================    ================     ===============     ==============

   Premiums:
     Health and disability         $     1,259,226    $          15,810   $           5,373    $      1,248,789               0.4%
     Life                                      130                1,839              15,065              13,356             112.8%
                                     --------------     ----------------    ----------------     ---------------
       Total premiums              $     1,259,356    $          17,649   $          20,438    $      1,262,145               1.6%
                                     ==============     ================    ================     ===============     ==============

Year ended December 31, 2002:
   Life insurance in force         $        27,141    $       1,594,362   $       6,093,156    $      4,525,935             134.6%
                                     ==============     ================    ================     ===============     ==============

   Premiums:
     Health and disability         $     1,368,178    $          31,614   $          21,347    $      1,357,911               1.6%
     Life                                       68                2,795              18,576              15,849             117.2%
                                     --------------     ----------------    ----------------     ---------------
       Total premiums              $     1,368,246    $          34,409   $          39,923    $      1,373,760               2.9%
                                     ==============     ================    ================     ===============     ==============
</TABLE>


                                                               100
<PAGE>

<TABLE>
<CAPTION>
                                                                                                                SCHEDULE V
                                                       COBALT CORPORATION

                                               VALUATION AND QUALIFYING ACCOUNTS




                                                       Balances          Net
                                                       acquired        charges
                                      Balance          through        (credits)      Write-offs                        Balance
                                     beginning           the            to net         against                         end of
                                     of period        Combination       income        allowance         Other          period
                                     -----------     ------------   -------------    -----------     -----------    -----------
                                                                            (In thousands)
<S>                                  <C>             <C>            <C>              <C>             <C>            <C>
Year ended December 31, 2000:
 Allowance for possible losses on:
  Premium receivables                $       147     $          -   $          80    $         -     $         -    $       227
  Due from clinics and providers           1,220                -            (374)             -               -            846
  Other                                    4,248                -            (187)             -               -          4,061
                                     -----------     ------------   -------------    -----------     -----------    -----------
    Total allowance                  $     5,615     $          -   $        (481)   $         -     $         -    $     5,134
                                     ===========     ============   =============    ===========     ===========    ===========

Year ended December 31, 2001:
 Allowance for possible losses on:
  Premium receivables                $       227     $      2,304   $         417    $      (577)    $         -    $     2,371
  Due from clinics and providers             846            9,380           1,285         (2,387)              -          9,124
  Other                                    4,061              640             174         (1,160)              -          3,715
                                     -----------     ------------   -------------    -----------     -----------    -----------
    Total allowance                  $     5,134     $     12,324   $       1,876    $    (4,124)    $         -    $    15,210
                                     ===========     ============   =============    ===========     ===========    ===========

Year ended December 31, 2002:
 Allowance for possible losses on:
  Premium receivables                $     2,371     $          -   $        (934)   $         -     $         -    $     1,437
  Due from clinics and providers           9,124                -          (1,759)          (672)              -          6,693
  Other                                    3,715                -            (258)          (460)              -          2,997
                                     -----------     ------------   -------------    -----------     -----------    -----------
    Total allowance                  $    15,210     $          -   $      (2,951)   $    (1,132)    $         -    $    11,127
                                     ===========     ============   =============    ===========     ===========    ===========
</TABLE>

                                      101
<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        COBALT CORPORATION

                                        By: /s/ Stephen E. Bablitch
                                           -------------------------------------
                                           Stephen E. Bablitch, Chairman and
                                           Chief Executive Officer

                                        Date: March 21, 2003

     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>

      Signature                                   Title                                        Date

<S>                                         <C>                                          <C>
/s/ Stephen E. Bablitch                     Chairman, and Chief Executive                March 21, 2003
----------------------------------------    Officer (Principal  Executive Officer)
Stephen E. Bablitch                         and Director


/s/ Gail L. Hanson                          Senior Vice President and Chief Financial    March 21, 2003
----------------------------------------    Officer (Principal Financial Officer and
Gail L. Hanson                              Chief Accounting Officer)


/s/Richard A. Abdoo                         Director                                     March 21, 2003
----------------------------------------
Richard A. Abdoo

/s/Barry K. Allen                           Director                                     March 21, 2003
----------------------------------------
Barry K. Allen

/s/James L. Forbes                          Director                                     March 21, 2003
----------------------------------------
James L. Forbes

/s/Michael S. Joyce                         Director                                     March 21, 2003
----------------------------------------
Michael S. Joyce

/s/Dr. D. Keith Ness                        Director                                     March 21, 2003
----------------------------------------
Dr. D. Keith Ness

/s/Dr. William C. Rupp                      Director                                     March 21, 2003
----------------------------------------
Dr. William C. Rupp

/s/Janet D. Steiger                         Director                                     March 21, 2003
----------------------------------------
Janet D. Steiger

/s/Dr. Kenneth M. Viste, Jr.                Director                                     March 21, 2003
----------------------------------------
Dr. Kenneth M. Viste, Jr.

</TABLE>

                                      102
<PAGE>


CERTIFICATIONS
--------------

I, Stephen E. Bablitch, certify that:

1.   I have reviewed this annual report on Form 10-K of Cobalt Corporation;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:  March 21, 2003                       By: /s/ Stephen E. Bablitch
                                                --------------------------------
                                                Stephen E. Bablitch
                                                Chairman and Chief
                                                Executive Officer


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CERTIFICATIONS
--------------

I, Gail L. Hanson, certify that:

1.   I have reviewed this annual report on Form 10-K of Cobalt Corporation;

2.   Based on my knowledge, this annual report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this annual report
          is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:  March 21, 2003

                                             By: /s/ Gail L. Hanson
                                                --------------------------------
                                                Gail L. Hanson
                                                Senior Vice President,
                                                Treasurer & CFO


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<PAGE>

                               COBALT CORPORATION
                                INDEX TO EXHIBITS

Exhibit
Number    Document Description (1)
------    ------------------------

2.1       Exchange Agreement, dated December 22, 2000, by and among Cobalt
          Corporation (f/k/a United Wisconsin Services, Inc. and also f/k/a
          Newco/UWS, Inc.) ("Cobalt"), Wisconsin BC Holdings, LLC, and Blue
          Cross & Blue Shield United of Wisconsin ("BCBSUW") (including the
          proposed Amended and Restated Articles of Incorporation and Bylaws of
          Cobalt, attached as Exhibits A and B thereto). Other schedules and
          exhibits to the Exchange Agreement have not been filed therewith. The
          Registrant agrees to furnish a copy of any omitted schedule or exhibit
          to the Securities and Exchange Commission upon request.(7)

2.2       Stock Purchase Agreement, dated as of March 19, 2002, by and among
          Cobalt, BCBSUW and American Medical Security Group, Inc. ("AMSG"),
          Schedules and exhibits to the Stock Purchase Agreement have not been
          filed therewith. The Registrant agrees to furnish a copy of any
          omitted schedule or exhibit to the Securities and Exchange Commission
          upon request. (11)

2.3       Stock Purchase Agreement, dated December 31, 2002, by and among West
          Bend Mutual Insurance Company, Claim Management Services, Inc. and
          BCBSUW. Schedules and exhibits to the Stock Purchase Agreement have
          not been filed therewith. The Registrant agrees to furnish a copy of
          any omitted schedule or exhibit to the Securities and Exchange
          Commission upon request.

3.1       Amended and Restated Articles of Incorporation of Cobalt. (9)

3.2       Second Amended and Restated Bylaws of Cobalt.

10.1      Federal Income Tax Allocation Agreement, dated March 23, 2001, by and
          among Cobalt, Unity Health Plans Insurance Corporation ("Unity'),
          Hometown Insurance Services, Inc., HMO-W, Inc., Valley Health Plan,
          Inc. ("Valley"), Compcare Health Services Insurance Corporation
          ("Compcare"), United Wisconsin Insurance Company ("UWIC"), Meridian
          Marketing Services, Inc., United Heartland, Inc. ("UH"), United
          Wisconsin Proservices, Inc. ("Proservices"), Comprehensive Receivables
          Group, Inc. ("CRG"), Michigan Healthcare Collections, Inc., CNR
          Partners, Inc., Heartland Dental Plan, Inc. ("HDP"), and BCBSUW. (2)

10.2      Tax Indemnification and Allocation Agreement, dated September 11,
          1998, by and between United Wisconsin Services, Inc. (n/k/a American
          Medical Security Group, Inc.) ("AMSG") and Cobalt. (2)

10.3      Second Amended and Restated Joint Venture Agreement by and among
          Unity, BCBSUW, Cobalt, University Health Care, Inc. ("U-Care"),
          University Community Clinics, Inc. (f/k/a Health Professionals, Inc.),
          and Health Professionals of Wisconsin, Inc., dated September 30, 1999
          (as amended October 29, 1999). (4)

10.4      Amended and Restated Joint Venture Agreement by and among Unity,
          BCBSUW, Cobalt and Community Health Systems, LLC ("CHS"), dated
          October 25, 1999. (5)

10.5      Information System Service Agreement between Blue Cross Blue Shield of
          South Carolina and BCBSUW, dated August 23, 1996, as amended January
          1, 1997, May 6, 1997, May 18, 1998, March 28, 2000, June 1, 2000 and
          February 18, 2002. (2)

10.6      Form of Trademark Assignment Agreement by and among AMSG, Cobalt and
          United Wisconsin Life Insurance Company ("UWLIC"). (2)

10.7      Cobalt's Equity Incentive Plan as revised. (13)

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10.8      2002 Management Incentive Plan.

10.9      Cobalt's Deferred Compensation Plan for Directors. (2)

10.10     Cobalt Voluntary Deferred Compensation Plan. (3)

10.11     Cobalt Deferred Compensation Trust. (2)

10.12     Cobalt/BCBSUW Supplemental Executive Retirement Plan. (2)

10.13     Assumption and Administration Agreement by and among Wellmark, Inc.,
          Wellmark Community Insurance, Inc., BCBSUW and UWIC, effective June 1,
          2000. (6)

10.14     Form of 2001 Supplemental Incentive Plan Award Agreement, effective
          January 1, 2001. (8)

10.15     Voting Trust and Divestiture Agreement dated March 23, 2001 by and
          between Cobalt, Wisconsin United for Health Foundation, Inc.,
          Wisconsin BC Holding LLC and Marshall & Ilsley Trust Company. (9)

10.16     Registration Rights Agreement dated March 23, 2001 by and between
          Cobalt and Wisconsin United for Health Foundation, Inc. (9)

10.17     Executive Severance Agreement Tier I (Thomas R. Hefty). (10)

10.18     Executive Severance Agreement Tier II (Gail L. Hanson, Timothy F.
          Cullen and two other key employees). (10)

10.19     Executive Severance Agreement Tier III (James E. Hartert and seven key
          employees). (10)

10.20     Supplemental Retirement Agreement dated as of June 1, 2001 between
          Cobalt and Thomas R. Hefty. (10)

10.21     Purchase and Sale Agreement, effective March 29, 2002, by and among
          APS Healthcare Bethesda, Inc., CC Holdings LLC, Innovative Resource
          Group, LLC and Cobalt Corporation. (12)

10.22     Indemnification Agreement, effective March 1, 2002, by and between
          Cobalt Corporation and United Government Services, LLC. (13)

10.23     Novation Agreement entered into as of May 29, 2002, by and between
          BCBSUW, United Government Services, LLC, the BlueCross BlueShield
          Association and the Department of Health and Human Services. (13)

10.24     Employment Agreement effective May 29, 2002, between Stephen E.
          Bablitch and Cobalt Corporation. (13)

10.25     Employment Agreement effective May 29, 2002, between Michael E.
          Bernstein and Cobalt Corporation. (13)

10.26     Amended and Restated Executive Severance Agreement for Stephen E.
          Bablitch. (13)

10.27     Amended and Restated Executive Severance Agreement for Michael E.
          Bernstein. (13)

10.28     Loan Agreement by and between M&I Marshall & Ilsley Bank and Cobalt
          dated as of August 7, 2002. (13)

10.29     Pledge Agreement by and between M&I Marshall & Ilsley Bank and Cobalt
          dated as of August 7, 2002. (14)

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10.30     Registration Rights Agreement letter by and between Cobalt and the
          Foundation dated November 1, 2002. (14)

10.31     Form of Blue Cross License Agreement, as amended, executed by Cobalt
          on March 23, 2001. (15)

10.32     Form of Blue Shield License Agreement, as amended, executed by Cobalt
          on March 23, 2001. (15)

10.33     Form of Blue Cross Controlled Affiliate License Agreement, as amended,
          executed by BCBSUW, Compcare Health Services Insurance Corporation
          ("Compcare") and United Government Services, LLC ("UGS") on March 23,
          2001. (15)

10.34     Form of Blue Shield Controlled Affiliate License Agreement, as
          amended, executed by BCBSUW, Compcare and UGS on March 23, 2001. (15)

10.35     Wisconsin Blue Cross/Blue Shield License Addendum, dated as of March
          23, 2001, by and between Cobalt and Blue Cross and Blue Shield
          Association. (15)

10.36     Revolving Credit Agreement, dated June 20, 1997, by and among Health
          Professionals of Wisconsin, Inc., University Community Clinics and
          BCBSUW. (15)

10.37     Cobalt Restricted Stock Award Agreement.

10.38     Joint Venture Agreement, dated January 1, 2003, by and between Cobalt,
          Valley, Luther Hospital, Mayo Health System, and Midelfort.

10.39     Services Agreement, effective September 16, 2002, by and between
          Cobalt and BCBSUW and James Hartert, MD.

21        Subsidiaries of Cobalt.

23.1      Consent of Ernst & Young LLP.

99.1      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

99.2      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

99.3      Definitive Proxy Statement for Cobalt's 2003 Annual Meeting of
          Shareholders (which will be filed with the Commission under Regulation
          14A within 120 days after the end of the Company's fiscal year and
          which is incorporated by reference herein to extent indicated in this
          Form 10-K).

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

(1)       Cobalt Corporation was organized in May of 1998 for the purpose of
          owning and operating the managed care companies and specialty business
          of its predecessor, United Wisconsin Services, Inc. On May 27, 1998,
          the board of directors of United Wisconsin Services, Inc. approved a
          formal plan to contribute the managed care companies and specialty
          business to Cobalt and spin off Cobalt to its shareholders. Upon its
          formation in connection with the spin-off, Cobalt was originally named
          Newco/UWS, Inc. It was subsequently renamed United Wisconsin Services,
          Inc. following the spin-off, and was again renamed Cobalt Corporation
          in 2001. The original United Wisconsin Services, Inc. was renamed
          American Medical Security Group, Inc. in connection with the spin-off.
          As a result, Cobalt is currently party to certain documents referenced
          in this Exhibit Index that were executed in the name of Cobalt's
          predecessors, Newco/UWS, Inc. or United Wisconsin Services, Inc.
          Similarly, American Medical Security Group, Inc. is currently party to
          certain documents referenced in this Exhibit Index that were executed
          in the name of its predecessor, United Wisconsin Services, Inc.

(2)       Incorporated by reference to Cobalt's Registration Statement on Form
          10 declared effective September 11, 1998.

(3)       Incorporated by reference to Cobalt's Quarterly Report on Form 10-Q
          for the period ended September 30, 1998.

(4)       Incorporated by reference to Cobalt's Quarterly Report on Form 10-Q
          for the period ended September 30, 1999.

(5)       Incorporated by reference to Cobalt's Annual Report on Form 10-K for
          the year ended December 31, 1999.

(6)       Incorporated by reference to Cobalt's Quarterly Report on Form 10-Q
          for the period ended June 30, 2000.

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(7)       Incorporated by reference to Cobalt's Registration Statement on Form
          S-4 (No. 333-52674) filed December 22, 2000.

(8)       Incorporated by reference to Cobalt's Annual Report on Form 10-K for
          the year ended December 31, 2000.

(9)       Incorporated by reference to Cobalt's Current Report on Form 8-K filed
          April 9, 2001.

(10)      Incorporated by reference to Amendment No. 1 to Cobalt's Quarterly
          Report on Form 10-Q for the period ended June 30, 2001.

(11)      Incorporated by reference to Cobalt's Current Report on Form 8-K filed
          March 26, 2002.

(12)      Incorporated by reference to Cobalt's Current Report on Form 8-K filed
          April 2, 2002.

(13)      Incorporated by reference to Cobalt's Quarterly Report on Form 10-Q
          for the period ended June 30, 2002.

(14)      Incorporated by reference to Cobalt's Quarterly Report on Form 10-Q
          for the period ended September 30, 2002.

(15)      Incorporated by reference to Cobalt's Registration Statement on Form
          S-3 (Reg. No. 333-90866).

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