UICI - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 001-14953
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UICI
(Exact name of registrant as specified in its charter)

DELAWARE 75-2044750
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)

4001 MCEWEN DRIVE, SUITE 200 75244
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 392-6700

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(TITLE OF CLASS)
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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 Regulation 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 [X]

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 30, 2002 was $651.6 million. The number of shares
outstanding of $0.01 par value Common Stock, as of June 30, 2002 was 47,817,305.

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 11, 2003 was $270.5 million. The number of shares
outstanding of $0.01 par value Common Stock, as of March 11, 2003 was
46,970,166.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual proxy statement for the annual meeting of
stockholders are incorporated by reference into Part III.
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PART I

ITEM 1. BUSINESS

GENERAL

UICI (together with its subsidiaries, "UICI" or the "Company") offers
insurance (primarily health and life) and selected financial services to niche
consumer and institutional markets. The Company issues primarily health
insurance policies, covering individuals and families, to the self-employed,
association group, voluntary employer group and student markets. During 2002,
2001, and 2000, health insurance premiums were approximately $1,181.2 million,
$776.3 million and $644.6 million, respectively, representing 80%, 71% and 63%,
respectively, of UICI's total revenues in such periods.

The Company offers a broad range of health insurance products for
self-employed individuals and individuals who work for small businesses. The
Company's basic hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include both traditional
fee-for-service indemnity (choice of doctor) plans and preferred provider
organization ("PPO") plans, as well as other supplemental types of coverage. The
Company markets these higher deductible products through "dedicated" agency
sales forces comprised of independent contractor agents that primarily sell the
Company's products.

The Company has classified as its Group Insurance Division the operations
of its former Student Insurance Division and the operations of the Company's
recently acquired Star HRG business unit. For the student market, UICI offers
tailored health insurance programs that generally provide single school year
coverage to individual students at colleges and universities. The Company also
provides an accident policy for students at public and private schools in
kindergarten through grade 12. In the student market, the Company sells its
products through in-house account executives that focus on colleges and
universities on a national basis. The Company believes that it provides student
insurance plans to more universities than any other single insurer.

Effective February 28, 2002, the Company acquired the business of Star
Human Resources Group, Inc. and Star Administrative Services, Inc. (collectively
referred to by the Company as its "Star HRG" unit), a Phoenix, Arizona based
business specializing in the marketing and administration of limited benefit
plans for entry level, high turnover, hourly employees. Commencing March 1,
2002, a majority of health insurance policies offered under the Star HRG program
have been issued by The MEGA Life and Health Insurance Company (a wholly-owned
subsidiary of UICI).

UICI also issues through its Life Insurance Division life insurance and
annuity products to selected niche markets. The life insurance policies and
annuity products issued by UICI are marketed through independent agents
affiliated with UGA -- Association Field Services and Cornerstone America (the
Company's principal marketing divisions) and a third party agency.

In 2001 the Company began to develop long-term care and Medicare supplement
insurance products for the senior market and to establish distribution channels
for products targeted toward the senior market. For financial reporting purposes
the Company has established a Senior Market Division to segregate the reporting
of expenses incurred in connection with the development of senior market
products. To date, the Company's Senior Market Division has generated operating
losses and nominal revenues.

The Company conducts the business of the Self-Employed Agency Division,
Group Insurance Division, the Senior Market Division and the Life Insurance
Division through its wholly owned insurance company subsidiaries, The MEGA Life
and Health Insurance Company ("MEGA"), Mid-West National Life Insurance Company
of Tennessee ("Mid-West") and The Chesapeake Life Insurance Company
("Chesapeake"). MEGA is an insurance company domiciled in Oklahoma and is
licensed to issue health, life and annuity insurance policies in all states
except New York. Mid-West is an insurance company domiciled in Tennessee and is
licensed to issue health, life and annuity insurance policies in Puerto Rico and
all states except Maine, New Hampshire, New York, and Vermont. Chesapeake is an
insurance company domiciled in Oklahoma and is licensed to issue health and life
insurance policies in all states except New Jersey, New York and Vermont.

MEGA, Mid-West and Chesapeake are each currently rated "A- (Excellent)" by
A.M. Best. A.M. Best's ratings currently range from "A++ (Superior)" to "F
(Liquidation)." A.M. Best's ratings are based upon factors relevant to
policyholders, agents, insurance brokers and intermediaries and are not directed
to the protection of investors. At December 31, 2002, Fitch, Inc. had assigned
an insurer financial strength rating of "A" (Strong) to each of MEGA and
Mid-West. Fitch's ratings provide an overall assessment of an insurance
company's financial strength and security, and the ratings are used to support
insurance carrier selection and placement decisions. Fitch's ratings range from
"AAA" (Exceptionally Strong) to "D" (Distressed).

The Company's wholly-owned subsidiary, Academic Management Services Corp.
(formerly Educational Finance Group, Inc.) ("AMS"), markets, originates, funds
and services primarily federally guaranteed student loans and is a leading
provider of student tuition installment plans. AMS seeks to provide solutions
for college and graduate school students, their parents and the educational
institutions they attend. At December 31, 2002, UICI through AMS held
approximately $1.3 billion aggregate principal amount of student loans, of which
approximately 83.5% were federally guaranteed.

UICI holds a significant equity interest (approximately 45% of the issued
and outstanding shares at February 28, 2003) in Healthaxis, Inc., a publicly
traded corporation (Nasdaq: HAXS) that provides web-based connectivity and
applications solutions for health benefit distribution and administration. These
solutions, which consist primarily of software products and related services,
are designed to assist health insurance payers, third party administrators,
intermediaries and employers in providing enhanced services to members,
employees and providers.

The Company's operating segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of the Company's
Self-Employed Agency Division, the Group Insurance Division, the Life Insurance
Division (formerly the Company's OKC Division) and the Senior Market Division;
(b) the Financial Services segment, which includes the businesses of Academic
Management Services Corp. and the Company's investment in Healthaxis, Inc.; and
(c) Other Key Factors, which includes investment income not otherwise allocated
to the other segments, realized gains and losses, interest expense on corporate
debt, general expenses relating to corporate operations, variable stock
compensation, the results of the Company's former Barron Risk Management
Services, Inc. unit until its sale in September 2002, goodwill amortization and
other unallocated items. The operations of the Company's former United
CreditServ, Inc. subsidiary (through which UICI marketed credit support services
to individuals with no, or troubled, credit experience and assisted them in
obtaining a nationally recognized credit card), the Company's Special Risk
Division (through which the Company provided various niche health insurance
related products, including "stop loss," marine crew accident, organ transplant
and international travel accident products and various insurance intermediary
services and managed care services) and its UICI Administrators, Inc. unit
(through which, UICI provided underwriting, claims management and claims
administrative services to third party insurance carriers, third party
administrators, Blue Cross/Blue Shield organizations and self-administered
employer health care plans) have been separately classified as discontinued
operations for financial reporting purposes for all years presented.

The Company's principal executive offices are located at 4001 McEwen Drive,
Suite 200, Dallas, Texas 75244. The Company's telephone number is (972)
392-6700. Effective March 28, 2003, the Company will move its executive offices
to 9151 Grapevine Hwy, North Richland Hills, Texas 76180-5605, and the Company's
telephone number will be (817) 255-5200.

The Company's periodic SEC filings, including its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the
Company's web site at www.uici.net free of charge as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC.

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INSURANCE SEGMENT

SELF-EMPLOYED AGENCY DIVISION

Market. According to the Bureau of Labor Statistics, there were
approximately 12 million self-employed individuals in the United States at the
end of 2001. The Company has currently in force approximately 330,000 basic
health policies issued or coinsured by the Company. UICI believes that there is
significant opportunity to increase its penetration in this market.

Products. UICI's basic health insurance plan offerings include the
following:

- UICI's Basic Hospital-Medical Expense Plan has a $1.0 million lifetime
maximum benefit for all injuries and sicknesses and $500,000 lifetime
maximum benefit for each injury or sickness. Covered expenses are subject
to a deductible. Covered hospital room and board charges are reimbursed
at 100% up to a pre-selected daily maximum. Covered expenses for
inpatient hospital miscellaneous charges, same-day surgery facility,
surgery, assistant surgeon, anesthesia, second surgical opinion, doctor
visits, and ambulance services are reimbursed at 80% to 100% up to a
scheduled maximum. This type of health insurance policy is of a
"scheduled benefit" nature, and as such, provides benefits equal to the
lesser of the actual cost incurred for covered expenses or the maximum
benefit stated in the policy. These limitations allow for more certainty
in predicting future claims experience and thus future premium increases
for this policy are expected to be less than on the catastrophic policy.

- UICI's Catastrophic Hospital Expense Plan provides a $2.0 million
lifetime maximum for all injuries and sicknesses and a lifetime maximum
benefit for each injury or sickness ranging from $500,000 to $1.0
million. Covered expenses are subject to a deductible and are then
reimbursed at a benefit payment rate ranging from 50% to 100% as
determined by the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed at 100%
for the remainder of the period of confinement per calendar year. The
benefits for this plan tend to increase as hospital care expenses
increase and therefore the premiums for these policies are subject to
increase as overall hospital care expenses rise.

- UICI's Preferred Provider Plan incorporates managed care features of a
PPO, which are designed to control health care costs through negotiating
discounts with a PPO network. Benefits are structured to encourage the
use of providers with which the Company has negotiated lower fees for the
services to be provided. The savings from these negotiated fees reduce
the costs to the individual policyholders. The policies that provide for
the use of a PPO impose a higher deductible and co-payment if the
policyholder uses providers outside of the PPO network.

Each of the Company's basic insurance policies is available with a "menu"
of various options (including various deductible levels, coinsurance percentages
and limited riders that cover particular events such as outpatient accidents,
and doctors' visits), enabling the insurance product to be tailored to meet the
insurance needs and the budgetary constraints of the policyholder. The Company
offers as an optional benefit an Accumulated Covered Expense (ACE) rider that
provides for catastrophic coverage on the Company's Scheduled/Basic plans for
covered expenses under the contract that generally exceed $75,000 or, in certain
cases, $100,000. The ACE rider pays benefits at 100% after the stop loss is
reached up to the aggregate maximum amount of the contract.

During 2001, the Company developed and began to offer new ancillary product
lines that provide protection against short-term disability, as well as a
combination product that provides benefits for life, disability and critical
illness. These products have been designed to further protect against risks to
which the Company's core self-employed customer is typically exposed.

The Self-Employed Agency Division generated revenues of $1,035.9 million,
$713.3 million and $584.1 million (70%, 65% and 57% of total revenue) in 2002,
2001, and 2000, respectively.

Marketing and Sales. The Company's marketing strategy in the self-employed
market is to remain closely aligned with dedicated agent sales forces.
Substantially all of the health insurance products issued by the Company are
sold through independent contractor agents associated with the Company.

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The Company's agents are independent contractors, and all compensation that
agents receive from the Company is based upon the agents' levels of sales
production. UGA -- Association Field Services ("UGA") and Cornerstone America
("Cornerstone") (the Company's principal marketing divisions of MEGA and
Mid-West, respectively) are each organized into geographical regions, with each
geographical region having a regional director, two additional levels of field
leaders and writing agents (i.e., the agents that are not involved in leadership
of other agents).

UGA and Cornerstone are each responsible for the recruitment and training
of their field leaders and writing agents. UGA and Cornerstone generally seek
persons with previous sales experience. The process of recruiting agents is
extremely competitive. The Company believes that the primary factors in
successfully recruiting and retaining effective agents and field leaders are the
policies regarding advances on commissions, the quality of the leads provided,
the availability and accessibility of equity ownership plans, the quality of the
products offered, proper training, and agent incentives and support. Classroom
and field training with respect to product content is required and made
available to the agents under the direction of the Company's regulated insurance
subsidiaries.

The Company provides health insurance products to consumers in the
self-employed market in 44 states. A substantial portion of such products is
issued to members of various independent membership associations that endorse
the products and act as the master policyholder for such products. The two
principal membership associations in the self-employed market for which the
Company underwrites insurance are the National Association for the Self-Employed
("NASE") and the Alliance for Affordable Services ("AAS"). The associations
provide their membership with a number of endorsed benefits and products,
including health insurance underwritten by the Company. Subject to applicable
state law, individuals generally may not obtain insurance under an association's
master policy unless they are also members of the associations. UGA agents and
Cornerstone agents also act as enrollers of new members for the associations,
for which the agents receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of Ronald L. Jensen, the
Chairman of the Company) provides administrative and benefit procurement
services to the associations, and a subsidiary of the Company sells new
membership sales leads to the enrollers and video and print services to the
associations and to Specialized Association Services, Inc. See Note N of Notes
to Consolidated Financial Statements. In addition to health insurance premiums
derived from the sale of health insurance, the Company receives fee income from
the associations, including fees associated with the enrollment of new members,
fees for association membership marketing and administrative services and fees
for certain association member benefits. The agreements with these associations
requiring the associations to continue as the master policyholder and to endorse
the Company's insurance products to their respective members are terminable by
the Company and the associations upon not less than one year's advance notice to
the other party.

Recent articles in the popular press have been critical of association
group coverage. In December 2002, the National Association of Insurance
Commissioners (NAIC) convened a special task force to review association group
coverage, and the Company is aware that selected states are reviewing the laws
and regulations under which association group policies are issued. The Company
has also recently been named a party to three lawsuits challenging the nature of
the relationship between MEGA and NASE, the membership association that has
endorsed MEGA's health insurance products. See Note O of Notes to Consolidated
Financial Statements. While the Company believes it is providing association
group coverage in full compliance with applicable law, changes in the
relationship between the Company and the membership associations and/or changes
in the laws and regulations governing so-called "association group" insurance
(particularly changes that would subject the issuance of policies to prior
premium rate approval and/or require the issuance of policies on a "guaranteed
issue" basis) could have a material adverse impact on the financial condition,
results of operations and/or business of the Company.

UICI Marketing, Inc. (a wholly-owned subsidiary and the Company's direct
marketing group) generates sales prospect leads for both UGA and Cornerstone
agents. UICI Marketing administers two call centers staffing approximately 250
tele-service representatives. UICI Marketing has developed a marketing pool of
approximately seven million prospects from various data sources. Prospects
initially identified by UICI Marketing that are self employed, small business
owners or individuals may become a "qualified lead" by

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responding through one of UICI Marketing's traditional and internet lead
channels and by expressing an interest in learning more about health insurance.
UICI believes that the Company's agents, possessing the qualified leads' contact
information, are able to achieve a higher "close" rate than is the case with
unqualified prospects.

Policy Design and Claims Management. The Company's traditional indemnity
health insurance products are principally designed to limit coverages to the
occurrence of significant events that require hospitalization. This policy
design, which includes high deductibles, reduces the number of covered claims
requiring processing, thereby controlling administrative expenses. The Company
seeks to price its products in a manner that accurately reflects its
underwriting assumptions and targeted margins, and it relies on the marketing
capabilities of its dedicated agency sales forces to sell these products at
prices consistent with these objectives.

The Company maintains administrative centers with full underwriting, claims
management and administrative capabilities. The Company believes that by
processing its own claims it can better assure that claims are properly
processed and can utilize the claims information to periodically modify the
benefits and coverages afforded under its policies.

The Company has also developed an actuarial data warehouse, which is a
critical risk management tool that provides the Company's actuaries with rapid
access to detailed exposure, claim and premium data. This state-of-the-art
analysis tool enhances the actuaries' ability to design, monitor and adequately
price all of the Self-Employed Agency Division's insurance products.

Preferred Provider Products. In order to further control health care
costs, in 1995 the Company incorporated into certain of its health plans managed
care features of a PPO. These health plans incorporate managed care features of
a PPO through negotiated discounts with a PPO network. The health plans that
provide the PPO option generally provide a greater level of benefits for
services performed within the PPO network in the form of lower deductibles and
co-payments compared to out-of-network services. The value of the network
discount is reflected in the form of lower rates and discounts on covered
charges.

Coinsurance Arrangements. Prior to 1996, a substantial portion of the
health insurance policies sold by UGA agents were issued by AEGON USA, Inc.
("AEGON") and coinsured by the Company. Effective April 1, 1996, the Company
acquired the underwriting, claims management and administrative capabilities of
AEGON related to products coinsured by the Company. Following this transaction,
the agents of UGA began to market health insurance products directly for the
Company rather than through the coinsurance arrangement. The Company retains
100% of the premiums and pays all of the costs of such new policies. Under the
terms of its coinsurance agreement, AEGON has agreed to cede (i.e., transfer),
and the Company has agreed to coinsure, 60% of the health insurance sold by UGA
agents and issued by AEGON. The Company receives 60% of premiums collected and
is liable for 60% of commission expenses, administrative costs, claims payments,
premium taxes, legal expenses, extra-contractual charges and other payments. The
Company and AEGON agreed to maintain the coinsurance agreement for policies
issued by AEGON prior to April 1, 1996 and during the transition period ended in
1997. Commencing in May 2001, and in accordance with Assumption Reinsurance
Agreements with AEGON, the Company began to assume all of the remaining policies
from AEGON as approvals were received from state regulatory authorities. As of
December 31, 2002, approximately 78% of the remaining policies have been assumed
by the Company from AEGON, and the Company currently anticipates that the
balance of the remaining policies will be assumed during 2003. On the policies
that have been assumed, the Company has ceded 40% of the health insurance
business back to AEGON. The Company has agreed to acquire in 2003 the remaining
40% of the coinsured business from AEGON at a purchase price to be based on the
estimated present value of future profits from the business.

Acquisition of Health Blocks. Historically, the Company from time to time
acquired and may continue to acquire closed (i.e., no new policies) blocks of
health insurance policies or companies that own such blocks. These opportunities
were pursued on a case-by-case basis, and revenues from such blocks have
generally not represented a material portion of Self-Employed Agency Division
revenue.

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GROUP INSURANCE DIVISION

The Company has classified as its Group Insurance Division the operations
of its former Student Insurance Division and the Company's recently acquired
Star HRG business unit.

STUDENT INSURANCE DIVISION

Market. The student market consists primarily of students attending
colleges and universities in the United States and Puerto Rico and, to a lesser
extent, those attending public and private schools in grades kindergarten
through grade 12. Generally, the Company's marketing efforts have been focused
on college students whose circumstances are such that health insurance may not
otherwise be available through their parents. In particular, older
undergraduates, graduate and international students often have a need to obtain
insurance as "first-time buyers." According to industry sources, there are
approximately 2,500 four-year universities and colleges in the United States,
which have a combined enrollment of approximately 11.5 million students.
Typically, a carrier must be approved and endorsed by the educational
institution as a preferred vendor of health insurance coverage to the
institution's students. The Company believes that it has been authorized to
provide student health insurance plans by more universities than any other
single insurer.

Products. The insurance programs sold in the student market are designed
to meet the requirements of each individual school. The programs generally
provide coverage for one school year and the maximum benefits available to any
individual student enrolled in the program range from $10,000 to $1.0 million,
depending on the coverage level desired by the school.

The Company's Student Insurance Division underwrites, manages and pays
claims and administers policies for substantially all of its school clients.
Selected school clients administer and pay claims with respect to student
insureds attending their schools.

The Student Insurance Division had revenues of $167.4 million, $126.1
million and $111.5 million in 2002, 2001 and 2000, respectively, representing
approximately 11% of total Company revenues in each such year.

Marketing and Sales. The Company markets to colleges and universities on a
national basis through in-house account executives whose compensation is based
primarily on commissions. Account executives make presentations to the
appropriate school officials and the Company, if selected, is endorsed as the
provider of health insurance for students attending that school.

The kindergarten through grade 12 business is marketed primarily through
third party agents and brokers in Washington, Florida, Arizona, Louisiana,
Oklahoma, Texas, Colorado, Kansas, Oregon and California.

STAR HRG UNIT

Effective February 28, 2002, the Company acquired the business of Star
Human Resources Group, Inc. and STAR Administrative Services, Inc. (collectively
referred to by the Company as its "Star HRG" unit), a Phoenix, Arizona based
business specializing in the development, marketing, and administration of
limited benefit plans for entry level, high turnover, hourly employees.
Commencing March 1, 2002, the Star HRG unit became an operating division of
MEGA, and since March 1, 2002 the majority of the health insurance policies
offered under the Star HRG program has been issued by MEGA.

Market. Star HRG focuses its marketing efforts on two distinct markets:
employers with 500 or more eligible lives and employers with 10 - 499 eligible
lives and businesses utilizing contract workers. Star HRG's Starbridge program,
which accounts for approximately 98% of its revenues, constitutes an affordably
priced group of limited benefit plans designed to meet the needs of entry level,
high turnover, hourly employees at employers with 500 or more eligible lives.
The plans are designed to meet the needs of full or part-time employees and are
predominantly used for non-benefited classes of employees and newly hired
individuals who are not yet eligible for full-time benefits. Target industries
include national and regional restaurant chains, retail and convenience stores,
service stations, call centers, and various other outlets of the
service/hospitality industries.

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Through its Fundamental Care program (which accounts for approximately 2%
of Star HRG's revenues), Star HRG offers an affordably priced group of limited
benefit plans designed to meet the needs of workers in businesses with 10 - 499
eligible lives and businesses utilizing contract workers. The Fundamental Care
plans are designed to meet the needs of full or part-time workers and are
predominantly used for non-benefited classes of employees, the trucking
industry's owner/operators, and temporary/contract workers.

Products. Product offerings under both the Starbridge and Fundamental Care
programs include affordable limited benefit medical, dental, term life,
accidental death benefits, and short-term disability, as well as access to
discounted prescription, vision, and other health care related services.

The Star HRG unit reported revenues of $84.2 million in the ten months
ended December 31, 2002.

Marketing and Sales. Star HRG markets its products in all 50 states. Star
HRG markets directly to its employer clients through its dedicated sales force
of 17 Star HRG employees. Clients often retain independent insurance brokers to
facilitate the sales process.

Star HRG's sales efforts are supplemented by a full-service enrollment
center located in Phoenix, Arizona. To increase plan participation, the
enrollment center utilizes direct mail pieces, interactive voice response
technology and an in-bound/out-bound call center enrollment team.

LIFE INSURANCE DIVISION

Through the Company's Life Insurance Division (which is based in Oklahoma
City, Oklahoma), the Company offers life insurance and annuity products to
individuals. At December 31, 2002, the Life Insurance Division had over $3.1
billion of life insurance in force and approximately 284,000 individual
policyholders. The Life Insurance Division grew historically through
acquisitions of closed blocks of life insurance and annuity policies and, more
recently, through its efforts to market and sell new life insurance products. In
2002, 2001 and 2000, the Life Insurance Division generated revenues of $74.4
million, $94.9 million and $92.4 million, respectively, representing 5%, 9% and
9%, respectively, of total Company revenue in each such year. Included in 2002,
2001 and 2000 revenues for the Life Insurance Division were revenues of $6.3
million, $22.9 million and $17.2 million, respectively, generated by the
Company's workers' compensation business, which the Company exited in May 2001.

Marketing and Sales. Life insurance products are marketed and sold through
the Company's sales force of independent agents. Agents associated with both UGA
and Cornerstone are now offering specially designed life insurance products to
complement the portfolio of health-related products such agents already sell.
The Life Insurance Division has developed life insurance products to be sold
using its unique needs analysis computer program, "Blueprint for Life."(TM) The
Life Insurance Division hopes to leverage the Company's significant health
insurance customer base by positioning itself to offer those customers a
universal life, term life and final expense product designed to fit their
changing needs.

Acquired Blocks. Historically, the Company's Life Insurance Division grew
through opportunistic acquisitions of blocks of life insurance and annuities. In
an acquisition of a block of business, the Company assumes policy liabilities
and receives assets (net of the purchase price) sufficient, based on actuarial
assumptions, to cover such estimated future liabilities. The profitability of a
particular block of business depends on the amount of investment income from the
assets and the amount of premiums received less the amount of benefits and
expenses actually paid. The Company acquired its last block of life insurance
and annuities in 1994. Although the Company continues to analyze potential
transactions from time to time, the Company believes that the current climate
for acquisitions of blocks of life insurance and annuities has become very
competitive, making it more difficult to successfully complete acquisitions that
meet the Company's acquisition rate of return criteria.

In 1991, the Company entered into an agreement pursuant to which it
services a block of policies with life insurance and annuity reserves for an
unrelated company. At December 31, 2002, total life insurance and annuity
reserves for this block was $67.3 million, which reserves are not reflected on
the Company's consolidated balance sheet. The Company receives a fee for
servicing the policies and in 1997 also began to

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participate in 50% of the profits or losses on this business. The Company's
consolidated results of operations reflect the servicing fee currently earned
and the 50% profit participation.

In August 1994, the Company entered into a similar transaction, pursuant to
which the Company acquired a block of life insurance and annuity policies. In
conjunction with this acquisition, the Company ceded through a coinsurance
agreement 100% of the policy liabilities to an unrelated reinsurer. The
acquisition required no financial investment by the Company. In July 2001, the
reinsurer recovered its investment in this block and the coinsurance agreement
was terminated and the company at no cost recaptured all remaining policies.

College Fund Life Division. Through the College Fund Life Insurance
Division, based in Norcross, Georgia, the Company's Life Insurance Division has
historically offered an interest-sensitive whole life insurance product that has
generally been issued with an annuity rider and a child term rider. The child
term rider includes a special provision under which the Company commits to
provide private student loans to help fund the named child's higher education if
certain restrictions and qualifications are satisfied. Student loans have been
available in amounts up to $30,000 for students attending undergraduate school
and up to $30,000 for students attending graduate school. Loans made under this
rider are not funded or supported by the federal government. Qualified loans
with a Fair Isaac credit score of 570 and above are guaranteed as to principal
and interest by an independent guarantee agency. All other loans made under the
rider require additional guarantee fees to be paid by the borrower. As a part of
the program, MEGA and Mid-West are qualified lenders under the applicable
Department of Education regulations and make available, outside of the Company's
insurance subsidiaries' commitment under the rider, student loans under Federal
Family Education Loan (FFELP) Programs.

The Company has determined that, effective May 31, 2003, it will no longer
issue new life insurance policies under the College Fund Life Division program
and that, effective June 30, 2003, it will cease all operations at the Company's
Norcross, Georgia facility. In connection with such closedown, the Company
currently estimates that it will incur exit costs (consisting primarily of
employee severance, relocation expenses and lease termination and other costs)
in the amount of approximately $900,000, which costs will be expensed as
incurred over the period ending June 30, 2003 in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.

The Company through its College Fund Life Division has outstanding
commitments to fund student loans for the years 2003 through 2024. See Notes K
and O of Notes to Consolidated Financial Statements.

SENIOR MARKET DIVISION

In 2001 the Company began to develop long-term care and Medicare supplement
insurance products for the senior market and to establish distribution channels
for products targeted toward the senior market. The Company is currently
reinsuring 20% of its risk with respect to long-term care coverage on a
coinsurance basis with a third party reinsurer.

In 2001 the Company entered into an agreement with an unaffiliated third
party to serve as administrator for the Company's senior age insurance products,
in which capacity the third party underwrote, billed, provided customer service
and administered claims for all long-term care and Medicare supplement insurance
products to be sold by the Company's two principal insurance subsidiaries. This
third party arrangement will effectively terminate in the second quarter of
2003. In March 2003, the Company will bring in house all underwriting, billing,
customer service and claims administration functions for all new long term care
applications submitted. Conversion of in-force long-term care and Medicare
supplement business will occur in the second quarter of 2003. Medicare
supplement sales were suspended in February 2003 until the conversion of
administrative functions to the Company's administration center is complete.

Senior market products are distributed through independent agents
affiliated with Guaranty Senior Assurance (a newly-formed division of MEGA) and
through independent agents affiliated with SeniorsFirst LLC, an agency

8

in which the Company holds a 50% ownership interest. The Company acquired its
50% interest in SeniorsFirst LLC on January 17, 2002 for a cash purchase price
of $8.0 million.

The Company's Senior Market Division generated revenues of $2.1 million in
2002 and nominal revenues in 2001. The Senior Market Division generated
operating losses of $7.5 million and $2.1 million in 2002 and 2001,
respectively. The Company currently anticipates that its Senior Market Division
will continue to generate operating losses in 2003.

FINANCIAL SERVICES SEGMENT

ACADEMIC MANAGEMENT SERVICES CORP.

The Company's wholly-owned subsidiary Academic Management Services Corp.
("AMS") (formerly Educational Finance Group, Inc.) markets, originates, funds
and services primarily federally guaranteed student loans and is the leading
provider of student tuition installment plans. AMS (which is based in Swansea,
Massachusetts) seeks to provide financing solutions for college and graduate
school students, their parents, and the educational institutions they attend. At
December 31, 2002, UICI through AMS held approximately $1.3 billion aggregate
principal amount of student loans, of which approximately 83.7% were federally
guaranteed.

AMS primarily makes federally guaranteed loans to students and parents
under the Federal Family Education Loan Program (the "FFELP Loan Program"). Four
types of loans are currently available under the FFELP Loan Program: (i) loans
made to students for which the federal government makes interest payments during
periods of school enrollment in order to reduce student interest costs
("Stafford Loans"); (ii) loans made to students for which the federal government
does not make such interest payments ("Unsubsidized Stafford Loans"); (iii)
supplemental loans made to parents of dependent students ("PLUS Loans"); and
(iv) loans to fund consolidation of certain federally-insured obligations of the
borrower ("Consolidation Loans"). These loan types vary as to eligibility
requirements, interest rates, repayment periods, loan limits and eligibility for
interest subsidies.

Stafford Loans are the primary loans extended under the FFELP Loan Program.
Students who are not eligible for Stafford Loans based on their economic
circumstances may be able to obtain Unsubsidized Stafford Loans. Parents of
students are able to obtain PLUS Loans in accordance with their credit standing.
Consolidation Loans are available to borrowers holding loans made under the
FFELP Loan Program and/or certain other federal programs for the purpose of
extending the repayment of such loans -- a primary objective being the reduction
of monthly payment size.

In addition to the various federally guaranteed loan programs, AMS offers
alternative student loans guaranteed by private insurers (which during 2002
aggregated approximately 8.6% of AMS' loan originations) and uninsured
alternative loans (which during 2002 aggregated approximately 1.0% of loan
originations).

AMS has initially funded its lending business primarily with secured lines
of credit and commercial paper facilities extended or administered by various
financial institutions. After initial funding, AMS typically refinances groups
of loans on a more structured basis by transferring loans to bankruptcy remote,
special purpose entities, which in turn issue debt securities secured by the
loans. In 1999, the Company created approximately $1.3 billion of such
structured funding facilities in three separate transactions. In January 2002,
the Company completed the issuance of $335.0 million principal amount of auction
rate notes secured by a pledge of federally- and privately-insured student loans
held in the AMS portfolio, and in August 2002, AMS completed the issuance of
$300.0 million principal amount of student loan asset- backed notes issued by a
special purpose entity, consisting of a series of Class A senior notes in the
aggregate principal amount of $288.0 million and a series of Class B subordinate
notes in the aggregate principal amount of $12.0 million. For financial
reporting and accounting purposes the facilities are classified as financings,
with the indebtedness represented by the debt securities recorded as liabilities
on the consolidated balance sheet of the Company, and the student loan assets
and cash and cash equivalents securing payment of such debt securities recorded
as assets on the consolidated balance sheet of the Company.

9

In addition, AMS may from time to time in the ordinary course of business
sell loans in its portfolio to various secondary market buyers. Decisions to
hold or sell loans at any point in time are based on a variety of strategic and
financial factors, one of the most prominent being the cash prices being offered
by buyers relative to the net present value of the loans if held in the
portfolio for duration. Sales of federally insured education loans have
typically produced gains on sale recognized in the periods in which the sales
occur. During 2002, AMS originated approximately $715.1 million in new loans and
sold $271.2 million principal amount of loans, and during 2001, AMS originated
approximately $717.6 million in new loans and sold $447.0 million principal
amount of loans.

AMS also designs, and markets monthly tuition installment payment plans for
secondary, college and graduate students. Marketed on behalf of and with the
endorsement of colleges, universities, and private secondary schools, tuition
installment plans enable parents to pay tuition and related school costs in
interest-free monthly installments.

Through its AMS Servicing Group unit (formerly EFG Technologies, Inc.)
based in Winston-Salem, North Carolina, AMS provides loan servicing and
administrative services on behalf of participating colleges and universities for
federal Perkins loans and privately insured loans. The Perkins Loan program
provides low-interest loans to assist needy students in financing the costs of
post-secondary education. AMS Servicing Group services approximately one million
loan accounts for approximately 600 colleges, universities and private lenders.

INVESTMENT IN HEALTHAXIS, INC.

At December 31, 2002, UICI held approximately 45% of the issued and
outstanding shares of common stock of Healthaxis, Inc. ("HAI") (Nasdaq: HAXS).
See Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note E of Notes to Consolidated Financial Statements.

HAI is an emerging technology service firm that provides web-based
connectivity and applications solutions for health benefit distribution and
administration. These solutions, which consist primarily of software products
and related services, are designed to assist health insurance payers, third
party administrators, intermediaries and employers in providing enhanced
services to members, employees and providers through the application of HAI's
flexible technology to legacy systems, either on a fully integrated or on an
application service provider (ASP) basis.

HAI generated gross revenues of $28.1 million, $43.8 million and $43.7
million in 2002, 2001 and 2000, respectively, of which 38%, 70% and 63% were
derived from services provided to the Company and its insurance company
affiliates. See Note E of Notes to Consolidated Financial Statements.

DISCONTINUED OPERATIONS

The Company has reflected as discontinued operations for financial
reporting purposes the results of its former United CreditServ sub-prime credit
card business, its Special Risk Division operations and its UICI Administrators,
Inc. unit.

UNITED CREDITSERV, INC.

Prior to 2000 the Company marketed credit support services to individuals
with no, or troubled, credit experience and assisted such individuals in
obtaining a nationally recognized credit card. The sub-prime credit card
activities of the Company were conducted through the Company's United
CreditServ, Inc. subsidiary ("United CreditServ"), and through United
CreditServ's wholly-owned subsidiaries United Credit National Bank ("UCNB") (a
special purpose national bank, based in Sioux Falls, South Dakota, chartered
solely to hold credit card receivables); Specialized Card Services, Inc.
(provider of account management and collections services for all of the
Company's credit card programs); United Membership Marketing Group, Inc.
("UMMG") (a Lakewood, Colorado-based provider of marketing, administrative and
support services for the Company's credit card programs); and UICI Receivables
Funding Corporation ("RFC"), a single-purpose, bankruptcy-remote entity through
which certain credit card receivables were securitized.

10

In March 2000, the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. On September 29, 2000, the
Company completed the sale of substantially all of the non-cash assets
associated with its United CreditServ credit card unit, including its credit
card receivables portfolios and its Sioux Falls, South Dakota servicing
operations, for a cash sales price of approximately $124.0 million, and on
January 29, 2001, the Company completed the voluntary liquidation of UCNB, in
accordance with the terms of a plan of voluntary liquidation approved by the
Office of the Comptroller of the Currency.

For the year ended December 31, 2002, 2001 and 2000, the Company's United
CreditServ reported income (loss) after tax (benefit) of $4.8 million, $3.7
million and $(23.4) million, respectively, which income (loss) has been
reflected in results from discontinued operations for all periods presented.
United CreditServ's results in 2002 included income (net of tax) in the amount
of $4.8 million, associated with a $7.4 million release of reserves in the three
months ended December 31, 2002 resulting from the Company's assessment of
certain favorable events related to credit card litigation matters. See Note O
of Notes to Consolidated Financial Statements. United CreditServ's results from
operations in 2001 included income (net of tax) in the amount of $3.7 million,
associated with the receipt of a $5.7 million cash payment representing the
deferred contingent portion of the purchase price in final settlement of the
September 2000 sale of substantially all of the non-cash assets associated with
its United CreditServ credit card unit. See Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations.

SPECIAL RISK DIVISION

In December 2001, the Company determined to exit the businesses of its
Special Risk Division by sale, abandonment or wind-down and the Company
designated and has classified its Special Risk Division as a discontinued
operation for financial reporting purposes. The Company's Special Risk Division
formerly specialized in certain niche health-related products (including "stop
loss", marine crew accident, organ transplant and international travel accident
products), various insurance intermediary services and certain managed care
services.

For the year ended December 31, 2002, 2001 and 2000, the Special Risk
Division reported losses (net of tax) in the amount of $(4.2) million, $(9.2)
million and $(2.9) million, which losses have been reflected in results from
discontinued operations for all periods presented. The Special Risk Division
loss in 2002 reflected a $6.5 million charge in the three months ended December
31, 2002 to reflect a reassessment and strengthening of claims reserves. In 2003
the Company will continue the wind-down of its former Special Risk Division.

UICI ADMINISTRATORS, INC,

Prior to 2002, UICI provided underwriting, claims management and claims
administrative services to third party insurance carriers, third party
administrators, Blue Cross/Blue Shield organizations and self-administered
employer health care plans. The Company formerly classified the operations of
its subsidiaries UICI Administrators, Inc. (a company engaged in the business of
providing third party benefits administration, including eligibility and billing
reconciliation), Insurdata Marketing Services, LLC (a subsidiary of the Company
engaged in the business of marketing third party benefits administration
services) and Barron Risk Management, Inc. (a company engaged in the business of
administration of workers' compensation and non-subscriber plans) as its Third
Party Administration ("TPA") Division.

On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the TPA Division, and on September 30, 2002, the
Company sold to an unaffiliated third party all of the capital stock of Barron
Risk Management Services, Inc., the sole remaining component of the Company's
former TPA Division. For financial reporting purposes, the results of operations
of UICI Administrators, Inc. have been reflected in discontinued operations for
all periods presented.

11

For the year ended December 31, 2002, 2001 and 2000, UICI Administrators,
Inc. reported income (losses) (net of tax) in the amount of $67,000, $(3.8)
million and $(1.2) million, which income (losses) have been reflected in results
from discontinued operations for all periods presented.

REINSURANCE

The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and coinsurance basis. The maximum retention by the Company on
one individual in the case of life insurance is $200,000. The Company uses
reinsurance for its health insurance business only for limited purposes. The
Company does not reinsure any health insurance issued in the self-employed
market.

Reinsurance agreements are intended to limit an insurer's maximum loss. The
ceding of reinsurance does not discharge the primary liability of the original
insurer to the insured. Although the Company, through coinsurance, assumes risks
under policies issued by AEGON, and has occasionally used assumption reinsurance
to acquire blocks of insurance from other insurers, it does not regularly assume
risks of other insurance companies. See "Business -- Health
Insurance-Coinsurance Arrangements."

COMPETITION

INSURANCE

The Company operates in highly competitive markets. The Company's insurance
subsidiaries compete with large national insurers, regional insurers and
specialty insurers, many of which are larger and have substantially greater
financial resources or greater claims paying ability ratings than the Company.
In addition to claims paying ability ratings, insurers compete on the basis of
price, breadth and flexibility of coverage, ability to attract and retain agents
and the quality and level of agent and policyholder services provided.

STUDENT LOANS

The student loan industry is highly competitive. The Company competes with
over 2,000 other lenders. Despite the large number of lenders, the top 100
lenders account for approximately 87% of new loan volume. The Company's
predominant competitor in the student loan industry is Sallie Mae, Inc. The
Company believes that the volume of new loans originated in 2002 would make it
one of the top 10 student loan lenders in 2002. The Company competes by
designing and offering an integrated package of government guaranteed and
privately guaranteed loan products.

REGULATORY AND LEGISLATIVE MATTERS

HEALTH CARE REFORM; PRIVACY INITIATIVES

The health care industry is one of the largest industries in the United
States and continues to attract much legislative interest and public attention.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Proposals that have been considered include cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, patients' bills of rights and requirements that
all businesses offer health insurance coverage to their employees. There can be
no assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the business, financial condition or results
of operations of the Company.

Recently adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, will have a significant impact on the Company's business
and future results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Privacy Initiatives."

12

INSURANCE REGULATION

The Company's insurance subsidiaries are subject to extensive regulation in
their states of domicile and the other states in which they do business under
statutes that typically delegate broad regulatory, supervisory and
administrative powers to insurance departments. The method of regulation varies,
but the subject matter of such regulation covers, among other things, the amount
of dividends and other distributions that can be paid by the Company's insurance
subsidiaries without prior approval or notification; the granting and revoking
of licenses to transact business; trade practices, including with respect to the
protection of consumers; disclosure requirements; privacy standards; minimum
loss ratios; premium rate regulation; underwriting standards; approval of policy
forms; claims payment; licensing of insurance agents and the regulation of their
conduct; the amount and type of investments that the Company's insurance
subsidiaries may hold, minimum reserve and surplus requirements; risk-based
capital requirements; and compelled participation in, and assessments in
connection with, risk sharing pools and guaranty funds. Such regulation is
intended to protect policyholders rather than investors.

The Company's insurance subsidiaries are required to file detailed annual
statements with the state insurance regulatory departments and are subject to
periodic financial and market conduct examinations by such departments. The most
recently completed financial examination for MEGA in Oklahoma (MEGA's domicile
state) was completed as of and for the three-year period ended December 31,
1998. The Oklahoma Department of Insurance is currently conducting a financial
examination of MEGA for the three-year period ended December 31, 2001. The most
recently completed financial examination for Mid-West in Tennessee (Mid-West's
domicile state) was completed as of and for the five-year period ended December
31, 1999. The most recently completed financial examination for Chesapeake in
Oklahoma (Chesapeake's domicile state) was completed as of and for the
three-year period ended December 31, 2000.

State insurance departments have also periodically conducted and continue
to conduct market conduct examinations of UICI's insurance subsidiaries. As of
December 31, 2002, either or both of MEGA and Mid-West were subject to ongoing
market conduct examinations and/or open inquiries with respect to marketing
practices in ten states. State insurance regulatory agencies have authority to
levy monetary fines and penalties resulting from findings made during the course
of such market conduct examinations. Historically, the Company's insurance
subsidiaries have from time to time been subject to such fines and penalties,
none of which individually or in the aggregate have had a material adverse
effect on the results of operations or financial condition of the Company.

The Company provides health insurance products to consumers in the
self-employed market in 44 states. A substantial portion of such products is
issued to members of various independent membership associations that endorse
the products and act as the master policyholder for such products. The two
principal membership associations in the self-employed market for which the
Company underwrites insurance are NASE and AAS. The associations provide their
membership with a number of endorsed benefits and products, including health
insurance underwritten by the Company. Subject to applicable state law,
individuals generally may not obtain insurance under an association's master
policy unless they are also members of the association. UGA agents and
Cornerstone agents also act as enrollers of new members for the associations,
for which the agents receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of Ronald L. Jensen, the
Chairman of the Company) provides administrative and benefit procurement
services to the associations, and a subsidiary of the Company sells new
membership sales leads to the enrollers and video and print services to the
associations and to Specialized Association Services, Inc. See Note N of Notes
to Consolidated Financial Statements. In addition to health insurance premiums
derived from the sale of health insurance, the Company receives fee income from
the associations, including fees associated with the enrollment of new members,
fees for association membership marketing and administrative services and fees
for certain association member benefits. The agreements with these associations
requiring the associations to continue as the master policyholder and to endorse
the Company's insurance products to their respective members are terminable by
the Company and the associations upon not less than one year's advance notice to
the other party.

13

Recent articles in the popular press have been critical of association
group coverage. In December 2002, the NAIC convened a special task force to
review association group coverage, and the Company is aware that selected states
are reviewing the laws and regulations under which association group policies
are issued. The Company has also recently been named a party to three lawsuits
challenging the nature of the relationship between MEGA and NASE, the membership
association that has endorsed MEGA's health insurance products. See Note O of
Notes to Consolidated Financial Statements. While the Company believes it is
providing association group coverage in full compliance with applicable law,
changes in the relationship between the Company and the membership associations
and/or changes in the laws and regulations governing so-called "association
group" insurance (particularly changes that would subject the issuance of
policies to prior premium rate approval and/or require the issuance of policies
on a "guaranteed issue" basis) could have a material adverse impact on the
financial condition, results of operations and/or business of the Company.

Many states have also enacted insurance holding company laws that require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of inter-corporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws, and the Company believes that such subsidiaries are in compliance in
all material respects with all applicable insurance holding company laws and
regulations.

Under the risk-based capital initiatives adopted in 1992 by the NAIC,
insurance companies must calculate and report information under a risk-based
capital formula. Risk-based capital formulas are intended to evaluate risks
associated with: asset quality; adverse insurance experience; loss from asset
and liability mismatching; and general business hazards. This information is
intended to permit regulators to identify and require remedial action for
inadequately capitalized insurance companies but is not designed to rank
adequately capitalized companies. At December 31, 2002, the risk-based capital
ratio of each of the Company's domestic insurance subsidiaries significantly
exceeded the ratio for which regulatory corrective action would be required.

The NAIC revised the Accounting Practices and Procedures Manual ("Manual")
in a process referred to as Codification. The revised Manual became effective
January 1, 2001. The domiciled states of the Company's principal domestic
insurance subsidiaries (Oklahoma and Tennessee) adopted the provisions of the
Manual. The Manual changed, to some extent, prescribed statutory accounting
practices and resulted in changes to the accounting practices that the Company's
domestic insurance subsidiaries use to prepare its statutory-basis financial
statements.

Statutory accounting changes adopted to conform to the provisions of the
Manual are reported as changes in accounting principles in the Company's
statutory-based financial statements. The cumulative effect of changes in
accounting principles is reported as an adjustment to unassigned funds (surplus)
in the period of the change in accounting principle. The cumulative effect is
the difference between the amount of statutory capital and surplus at the
beginning of the year and the amount of statutory capital and surplus that would
have been reported at that date if the new accounting principles had been
applied retroactively for all prior periods. As a result of these changes, the
Company's domestic insurance subsidiaries reported a change in accounting
principle, as an adjustment that increased statutory capital and surplus of
$18.6 million as of January 1, 2001. Included in this total adjustment is an
increase in statutory capital and surplus of $23.4 million related to deferred
tax assets.

The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined as
incurred claims divided by earned premiums. Most states in which the Company
writes insurance have adopted the loss ratios recommended by the NAIC but
frequently the loss ratio regulations do not apply to the types of health
insurance issued by the Company. The Company is unable to predict the impact of
(i) any

14

changes in the mandatory statutory loss ratios for individual or group policies
to which the Company may become subject, or (ii) any change in the manner in
which these minimums are computed or enforced in the future. Such changes could
result in a narrowing of profit margins and have a material adverse effect upon
the Company. The Company has not been informed by any state that it does not
meet mandated minimum ratios, and the Company believes that it is in compliance
with all such minimum ratios. In the event the Company is not in compliance with
minimum statutory loss ratios mandated by regulatory authorities with respect to
certain policies, the Company may be required to reduce or refund premiums,
which could have a material adverse effect upon the Company.

The NAIC and state insurance departments are continually reexamining
existing laws and regulations, including those related to reducing the risk of
insolvency and related accreditation standards. To date, the increase in
solvency-related oversight has not had a significant impact on the Company's
insurance business.

STUDENT LOAN OPERATIONS

A significant portion of the student loans originated by the Company are
made under the Federal Family Education Loan Program ("FFELP Loans"), which is
subject to periodic legislative reauthorization and interim revision by
legislation and regulation. FFELP Loans include Federal Stafford loans for
students and PLUS Loans to parents.

Compliance with legal or regulatory restrictions may limit the ability of
the Company's subsidiaries to conduct their operations. A failure to comply may
subject the affected subsidiary to a loss or suspension of a right to engage in
certain businesses or business practices, criminal or civil fines, an obligation
to make restitution or pay refunds or other sanctions, which could adversely
affect the manner in which the Company's subsidiaries conduct their business and
the Company's results of operations.

State and federal regulation is continually changing and the Company is
unable to predict whether or when any such changes will be adopted. It is
possible, however, that the adoption of such changes could adversely affect the
manner in which the Company's subsidiaries conduct their business and the
Company's financial condition or results of operations.

The Federal Higher Education Act of 1965, which authorizes and governs most
federal student aid and student loan programs, is subject to review and
reauthorization by the recently convened 108th Congress. Congress last
reauthorized the Higher Education Act in 1998. Congress initiated the
reauthorization process by holding hearings on reauthorization and higher
education finance issues in the Fall of 2002. It is currently anticipated that
additional hearings of various House and Senate subcommittees will take place
during the balance of 2003, leading to passage of some form of reauthorization
bill by the House and Senate and signing by the President in late 2003 - early
2004. While the Company believes that the Higher Education Act of 1965 will in
fact be reauthorized, there can be no assurance of the form that reauthorization
will take or the changes that the reauthorization bill will bring to the law and
regulations governing student finance.

EMPLOYEES

The Company had approximately 2,700 employees at February 14, 2003. The
Company considers its employee relations to be good. Agents associated with the
Company's UGA, Cornerstone, Guaranty Senior Assurance, CFLD Association Field
Services and SeniorsFirst field forces constitute independent contractors and
are not employees of the Company.

ITEM 2. PROPERTIES

The Company currently occupies three office buildings in Tarrant County,
Texas, comprising in the aggregate approximately 200,000 square feet of office
space. The Company's United CreditServ subsidiary owns two buildings in Sioux
Falls, South Dakota, comprising approximately 158,000 square feet, both of which
are leased to an unaffiliated third party. AMS owns two office buildings in
Swansea, Massachusetts, comprising approximately 60,000 square feet of office
space. In addition, the Company and its subsidiaries

15

lease office space at various locations, including its principal executive
office located at 4001 McEwen Drive, Dallas, Texas 75244.

Effective March 28, 2003, the Company will move its executive offices to a
new facility comprising approximately 123,000 square feet at 9151 Grapevine Hwy,
North Richland Hills, Texas 76180-5605.

ITEM 3. LEGAL PROCEEDINGS

See Note O of Notes to Consolidated Financial Statements, the terms of
which are incorporated by reference herein.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE COMPANY

The Chairman of the Company is elected, and all other executive officers
listed below are appointed by the Board of Directors of the Company at its
Annual Meeting each year or by the Executive Committee of the Board of Directors
to hold office until the next Annual Meeting or until their successors are
elected or appointed. None of these officers have family relationships with any
other executive officer or director.

17

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's shares are traded on the New York Stock Exchange ("NYSE")
under the symbol "UCI". The table below sets forth on a per share basis, for the
period indicated, the high and low closing sales prices of the Common Stock on
the NYSE.

As of February 28, 2003, there were approximately 13,700 holders of record
of Common Stock.

The Company has not paid cash dividends on its Common Stock to date. The
Company currently intends to retain all future earnings to finance continued
expansion and operation of its business and subsidiaries. Any decision as to the
payment of dividends to the stockholders of the Company will be made by the
Company's Board of Directors and will depend upon the Company's future results
of operations, financial condition, capital requirements and such other factors
as the Board of Directors considers appropriate.

In addition, dividends paid by the Company's domestic insurance
subsidiaries to the Company out of earned surplus in any year that are in excess
of limits set by the laws of the state of domicile require prior approval of
state regulatory authorities in that state. See Note M of the Notes to
Consolidated Financial Statements included herein.

During the year ended December 31, 2002, the Company issued 3,500 shares of
unregistered common stock pursuant to its 2001 Restricted Stock Plan.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data as of and for each of
the five years in the period ended December 31, 2002 have been derived from the
audited Consolidated Financial Statements of the Company. The following data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included herein.

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

(1) For all periods presented, the results of the Company's former sub-prime
credit card business, its Special Risk Division and its UICI Administrators,
Inc. unit have been classified as discontinued operations for financial
reporting purposes.

(2) The health loss ratio represents benefits, claims and settlement expenses
related to health insurance policies stated as a percentage of earned health
premiums. The health expense ratio represents underwriting, policy
acquisition costs and insurance expenses related to health insurance
policies stated as a percentage of earned health premiums. The health loss
ratio and the health expense ratio have been calculated to give effect to
changes in the manner in which the Company has classified certain fee income

19

derived from membership marketing services provided to the membership
associations that endorse the Company's health insurance products and
changes in the manner in which the Company has classified direct expenses
incurred by the Company in connection with generating other fee income at
the Self Employed Agency Division. See Note A of Notes to Consolidated
Financial Statements.

(3) Does not include restricted cash. See Note A of Notes to Consolidated
Financial Statements.

(4) Excludes the unrealized gains (losses) on available for sale securities,
which are reported in accumulated other comprehensive income (loss) as a
separate component of stockholders' equity.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto included herein.

The Company's operating segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of the Company's
Self-Employed Agency Division, the Group Insurance Division, the Life Insurance
Division (formerly the Company's OKC Division) and the Senior Market Division;
(b) the Financial Services segment, which includes the businesses of Academic
Management Services Corp. and the Company's investment in Healthaxis, Inc., and
(c) Other Key Factors, which includes investment income not allocated to the
other business segments, realized gains or losses on sale of investments, the
operations of the Company's AMLI Realty Co. subsidiary, minority interest,
interest expense on corporate debt, general expenses relating to corporate
operations, variable stock-based compensation, the results of the Company's
former Barron Risk Management Services, Inc. unit until its sale in September
2002, goodwill amortization and other unallocated items.

The operations of the Company's former United CreditServ, Inc. subsidiary
(through which UICI marketed credit support services to individuals with no, or
troubled, credit experience and assisted them in obtaining a nationally
recognized credit card), the Company's Special Risk Division (through which the
Company provided various niche health insurance related products, including
"stop loss," marine crew accident, organ transplant and international travel
accident products and various insurance intermediary services and managed care
services) and its UICI Administrators, Inc. unit (through which, UICI provided
underwriting, claims management and claims administrative services to third
party insurance carriers, third party administrators, Blue Cross/Blue Shield
organizations and self-administered employer health care plans) have been
separately classified as discontinued operations for financial reporting
purposes for all years presented.

SARBANES-OXLEY ACT OF 2002

On July 30, 2002, President Bush signed into law the Public Accounting
Reform and Investor Protection Act of 2002 -- commonly referred to as the
Sarbanes-Oxley Act of 2002 (the "Act"). The stated purpose of the Act is to
improve the independence and oversight of public accounting firms engaged in
practice before the Securities and Exchange Commission, to expand the scope and
timeliness of certain public disclosures by reporting companies, to strengthen
corporate governance practices by reporting companies, their directors and
executive officers and to increase the accountability of directors and executive
officers for violations of the securities laws. The Act, together with recent
proposals to amend the listing standards imposed by the New York Stock Exchange,
will have a significant impact on the corporate governance obligations of public
companies, including UICI.

In accordance with Section 302(a) of the Act, the Securities and Exchange
Commission adopted rules effective August 29, 2002 requiring an issuer's
principal executive officer and financial officer to certify the financial and
other information contained in an issuer's quarterly and annual reports. The
newly-adopted rules also require these officers to certify that they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of the issuer's internal controls, that they have made certain
disclosures to the issuer's auditors and the audit committee of the board of
directors about the issuer's internal controls, and that they have included
information in the issuer's quarterly and annual reports about their evaluation
and whether

20

there have been significant changes in the issuer's internal controls or in
other factors that could significantly affect internal controls subsequent to
the evaluation. The certifications required by Section 302(a) of the Act and
newly-adopted Rule 13a-14 under the Securities Exchange Act of 1934 of each of
Gregory T. Mutz (President and Chief Executive Officer of UICI) and Mark D.
Hauptman (Vice President and Chief Financial Officer of UICI) are included as
part of this Annual Report on Form 10-K.

In accordance with Section 906 of the Act, and in connection with the
filing of the Company's Annual Report on Form 10-K for the year ended December
31, 2002 (the "Report"), each of Gregory T. Mutz (President and Chief Executive
Officer of UICI) and Mark D. Hauptman (Vice President and Chief Financial
Officer of UICI) has also submitted to the SEC a statement certifying, to his
knowledge, that the Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and the information contained
in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.

RESULTS OF OPERATIONS -- OVERVIEW

Set forth below is a discussion of certain general matters affecting the
Company's historical and future results of operations.

ACADEMIC MANAGEMENT SERVICES CORP.

For the year ended December 31, 2002, UICI's Academic Management Services
Corp. subsidiary ("AMS") reported operating income of $7.4 million compared to
operating income of $5.4 million for the year ended December 31, 2001. During
2002, AMS benefited from a decrease in operating expenses (resulting primarily
from a reduction in interest expense on corporate borrowings) and increased
student loan spread income (i.e., the difference between interest earned on
outstanding student loans and interest expense associated with indebtedness
incurred to fund such loans). These increases in 2002 were partially offset by
lower realized gains on sale of loans and reduced fee revenue and yields on the
trust balances associated with AMS' tuition installment plan business, in each
case as compared to results in 2001.

The amount of student loan spread income that AMS may earn in any period
depends in large part upon the level of prevailing market interest rates
relative to the prescribed minimum rate that can be earned on AMS' student loan
portfolio. The benchmark for yields on federally guaranteed student loans is
reset annually in accordance with Department of Education regulations effective
July 1 for the succeeding twelve-month period. While yields on student loans are
indexed to the 91-day Treasury bill rate, the benchmark establishes a floor,
below which a lender's yield will not fall during the succeeding twelve-month
period. During the first six months of 2002, AMS benefited significantly from a
favorable prescribed minimum rate earned on its student loan portfolio. On July
1, 2002, the floor rates on loans made under the Federal Family Education Loan
Program (the "FFELP Loans") for the period July 1, 2002 through June 30, 2003
reset 193 basis points lower than the floor rates in effect for the period July
1, 2001 through June 30, 2002. Reflecting this downward adjustment on July 1,
2002 to the floor rate on FFELP Loans, AMS' student loan spread income declined
significantly from $17.1 million in the first half of 2002 to $9.8 million in
the second half of the year.

On July 1, 2003, the floor rates on FFELP Loans for the period July 1, 2003
through June 30, 2004 will again be reset. Based on current prevailing market
interest rates, the Company currently expects that spread income in 2003 will be
less than the level of spread income experienced in 2002. Due to the inherent
uncertainty surrounding spread income and the seasonality of its tuition
installment business, in any given financial period AMS may continue to rely on
gains from timely sales of student loans to remain profitable for such period.
AMS sold $271.2 million and $447.0 million principal amount of student loans
during the year ended December 31, 2002 and 2001, respectively, from which AMS
generated gains on sales in the amount of $5.9 million and $11.3 million,
respectively.

INVESTMENT IN HEALTHAXIS, INC.

At December 31, 2002, UICI held beneficially approximately 45% of the
issued and outstanding shares of Healthaxis, Inc. ("HAI") (formerly Provident
American Corporation) (Nasdaq: HAXS). See Note E of

21

Notes to Consolidated Financial Statements. HAI is an emerging technology
service firm that provides web-based connectivity and applications solutions for
health benefit distribution and administration. These solutions, which consist
primarily of software products and related services, are designed to assist
health insurance payers, third party administrators, intermediaries and
employers in providing enhanced services to members, employees and providers
through the application of HAI's flexible technology to legacy systems, either
on a fully integrated or on an application service provider ("ASP") basis.

The Company has accounted for its investment in HAI utilizing the equity
method and has recognized its ratable share of HAI income and loss (computed
prior to amortization of goodwill recorded in connection with the January 7,
2000 merger of Insurdata Incorporated (formerly a wholly-owned subsidiary of
UICI) with and into HealthAxis.com, the sole operating subsidiary of HAI). The
Company's carrying value of its investment in HAI was $4.9 million and $8.3
million at December 31, 2002 and 2001, respectively. See Note E of Notes to
Consolidated Financial Statements.

Until termination of a Services Agreement with HAI on June 15, 2002, the
Company constituted a significant customer of HAI. Under the Services Agreement,
HAI formerly provided information systems and software development services
(including administration of the Company's computer data center) to the Company
and its insurance company affiliates at HAI's cost of such services (including
direct costs of HAI personnel dedicated to providing services to the Company
plus a portion of HAI's overhead costs) plus a 10% mark-up. Pursuant to the
terms of the Services Agreement, UICI paid to HAI $8.1 million, $20.4 million
and $21.0 million in 2002, 2001 and 2000, respectively. In addition, HAI has
provided to the Company and its affiliates certain other information technology
services, including claims imaging and software-related services, for which UICI
paid to HAI $2.7 million, $10.1 million and $6.4 million in 2002, 2001 and 2000,
respectively. The aggregate amounts paid by UICI to HAI in 2002, 2001 and 2000,
respectively, represented 38%, 70% and 63% of HAI's total gross revenues of
$28.1 million, $43.8 million and $43.7 million in such years, respectively. See
Notes E and N of Notes to Consolidated Financial Statements.

CLOSEDOWN OF COLLEGE FUND LIFE DIVISION

Through its College First Alternative Loan Program, the Company's College
Fund Life Division (based in Norcross, Georgia) has historically offered an
interest-sensitive whole life insurance product that has generally been issued
with an annuity rider and a child term rider. The child term rider includes a
special provision under which the Company commits to provide private student
loans to help fund the named child's higher education if certain restrictions
and qualifications are satisfied.

The Company has determined that, effective May 31, 2003, it will no longer
issue new life insurance policies under the College Fund Life Division program
and that, effective June 30, 2003, it will cease all operations at the Company's
Norcross, Georgia facility. In connection with such closedown, the Company
currently estimates that it will incur exit costs (consisting primarily of
employee severance and relocation expenses and lease termination costs) in the
amount of approximately $900,000, which costs will be expensed as incurred over
the period ending June 30, 2003 in accordance with Financial Accounting
Standards Board "FASB" Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.

The Company through its College Fund Life Division has outstanding
commitments to fund student loans for the years 2003 through 2024. See Notes K
and O of Notes to Consolidated Financial Statements.

ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLES

In June 2001, FASB issued Statements No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The Company has
determined that it will review goodwill and intangible assets for impairment as
of November 1 of each year. Intangible assets with finite lives will continue

22

to be amortized over their estimated useful lives. Statement 142 also requires
that goodwill included in the carrying value of equity method investments no
longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In
accordance with Statement 142, the Company tested for goodwill impairment
effective January 1, 2002. As a result of the transitional impairment testing,
completed during the quarter ended June 30, 2002, the Company determined that
goodwill recorded in connection with the acquisition of Academic Management
Services Corp. ("AMS") and Barron Risk Management Services ("Barron") was
impaired in the aggregate amount of $6.9 million ($5.1 million net of tax). The
Company has reflected this impairment charge in its financial statements as a
cumulative effect of a change in accounting principle as of January 1, 2002 in
accordance with Statement No. 142. On September 30, 2002, the Company sold to an
unaffiliated third party all of the capital stock of Barron, in connection with
which for financial reporting purposes the Company recognized a nominal gain.

At December 31, 2002 and 2001, the Company had recorded goodwill in the
amount of $118.9 million and $104.7 million, respectively, and accumulated
amortization of $16.7 million and $18.7 million at December 31, 2002 and 2001,
respectively, resulting in net goodwill of $102.2 million and $86.0 million at
December 31, 2002 and 2001, respectively. The Company recorded goodwill
amortization expense in continuing operations in the amount of $4.5 million and
$6.1 million in 2001 and 2000, respectively, prior to effectiveness of Statement
142.

At December 31, 2002 and 2001, the Company had other intangibles in the
amount of $10.5 million and $-0-, respectively, and accumulated amortization of
$1.8 million and $-0- at December 31, 2002 and 2001, respectively, resulting in
net other intangibles of $8.7 million and $-0- at December 31, 2002 and 2001,
respectively. The Company recorded other intangibles amortization expense in
continuing operations in the amount of $1.8 million, $-0- and $-0- in 2002, 2001
and 2000, respectively.

ACCOUNTING FOR HEALTH POLICY ACQUISITION COSTS

The Company incurs various costs in connection with the origination and
initial issuance of its health insurance policies, including underwriting and
policy issuance costs, costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to agents). For financial
reporting purposes, underwriting and policy issuance costs with respect to
health policies issued through the Company's Self Employed Agency and Student
Insurance Divisions are expensed as incurred. Costs associated with generating
sales leads with respect to the health business issued through the Self Employed
Agency Division are capitalized and amortized over a two-year period, which
approximates the average life of a policy. The Company defers the portion of
commissions paid to agents and premium taxes with respect to the portion of
health premium collected but not yet earned, and the Company amortizes the
deferred expense over the period as and when the premium is earned. See Note A
of Notes to Consolidated Financial Statements.

With respect to health policies sold through the Company's Self Employed
Agency Division, commissions paid to agents with respect to first year policies
are higher than commissions paid to agents with respect to policies in renewal
years. Accordingly, during periods of increasing first year premium revenue
(such as occurred during 2002 and 2001), the Self Employed Agency Division's
overall operating profit margin will be negatively impacted by the higher
commission expense associated with first year premium revenue.

ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS

The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA -- Association Field
Services, New United Agency, Cornerstone America, Guaranty Senior Assurance,
SeniorsFirst and CFLD Association Field Services. Under EITF 96-18 "Accounting
for Equity Instruments that are issued to Other Than Employees for Acquiring or
in Connection with Selling Goods and Services," the Company has established a
liability for future unvested benefits under the Agent Plans and adjusts the
liability based on the market value of the Company's Common Stock. The
accounting treatment of the Company's Agent Plans will result in unpredictable
stock-based compensation charges, dependent upon fluctuations in the quoted
price of UICI common stock. These unpredictable fluctuations in stock based
compensation charges

23

may result in material non-cash fluctuations in the Company's results of
operations. See Note P of Notes to Consolidated Financial Statements.

SHARE REPURCHASE PROGRAM

At its regular meeting held on February 28, 2001, the Board of Directors of
the Company reconfirmed the Company's 1998 share repurchase program, in which it
initially authorized the repurchase of up to 4,500,000 shares of UICI common
stock from time to time in open market or private transactions. Through early
1999, the Company had previously purchased 198,000 shares of common stock
pursuant to the program. Following reconfirmation of the program, through
December 31, 2002, the Company had purchased an additional 2,000,000 shares
pursuant to the program (with the most recent purchase made on December 31,
2002) at an aggregate cost of $29.3 million, or $14.64 per share. Through March
11, 2003, the Company had purchased an additional 324,200 shares at an aggregate
cost of $4.9 million, or $15.02 per share. The timing and extent of additional
repurchases, if any, will depend on market conditions and the Company's
evaluation of its financial resources at the time of purchase.

CLOSEDOWN OF WORKERS' COMPENSATION BUSINESS

In May 2001, the Company determined to exit its workers compensation
business, in connection with which the Company incurred a charge in the three
months ended June 30, 2001 of $8.7 million associated with a strengthening of
reserves. In the fourth quarter of 2001, the Company also recorded a charge of
$1.3 million, which represented the Company's share of an assessment to all
workers' compensation insurance carriers by the Oklahoma Workers' Compensation
Court Administrator. Reflecting a subsequent repeal of the assessment, in the
first quarter of 2002 the Company reversed the $1.3 million charge and
strengthened claims reserves in an equivalent amount.

DISCONTINUED OPERATIONS

The Company's reported results in 2002, 2001 and 2000 reflected income
(loss) (net of tax) from discontinued operations (consisting of the Company's
former sub-prime credit card unit, the Special Risk Division and UICI
Administrators, Inc.) in the amount of $653,000 ($0.02 per diluted share),
$(9.3) million ($(0.19) per diluted share) and $(27.5) million ($(0.58) per
diluted share), respectively. Results from discontinued operations in 2002
included income (net of tax) at United CreditServ in the amount of $4.8 million,
associated with a $7.4 million release of reserves in the three months ended
December 31, 2002 resulting from the Company's assessment of certain favorable
events related to credit card litigation matters. See Note B of Notes to
Consolidated Financial Statements. The favorable 2002 results at United
CreditServ were offset in large part by a $(4.2) million loss (net of tax
benefit) at the Special Risk Division, which loss resulted from a $6.5 million
charge in the three months ended December 31, 2002 to reflect a reassessment and
strengthening of claims reserves.

United CreditServ, Inc. Through the Company's United CreditServ, Inc.
subsidiary ("United CreditServ"), prior to 2000 the Company marketed credit
support services to individuals with no, or troubled, credit experience and
assisted such individuals in obtaining a nationally recognized credit card. The
activities of United CreditServ were conducted primarily through its
wholly-owned subsidiaries United Credit National Bank ("UCNB") (a special
purpose national bank, based in Sioux Falls, South Dakota, chartered solely to
hold credit card receivables); Specialized Card Services, Inc. (provider of
account management and collections services for all of the Company's credit card
programs); United Membership Marketing Group, Inc. ("UMMG") (a Lakewood,
Colorado-based provider of marketing, administrative and support services for
the Company's credit card programs); and UICI Receivables Funding Corporation
("RFC"), a single-purpose, bankruptcy-remote entity through which certain credit
card receivables were securitized.

In March 2000, the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. On September 29, 2000, the
Company completed the sale of substantially all of the non-

24

cash assets associated with its United CreditServ credit card unit, including
its credit card receivables portfolios and its Sioux Falls, South Dakota
servicing operations, for a cash sales price of approximately $124.0 million,
and on January 29, 2001, the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the Office of the Comptroller of the Currency.

For the year ended December 31, 2002, 2001 and 2000, United CreditServ
reported income (loss) after tax of $4.8 million, $3.7 million and $(23.4)
million, respectively, which income (loss) has been reflected in results from
discontinued operations for all periods presented. United CreditServ's results
in 2002 reflected a $4.8 million (net of tax) release of reserves in the three
months ended December 31, 2002 as a result of the Company's assessment of
certain favorable events related to credit card litigation matters. See Note O
of Notes to Consolidated Financial Statements.

In addition to the cash sales price received at the September 2000 closing
of the sale of the non-cash assets associated with its United CreditServ credit
card unit, the sale transaction contemplated an incentive cash payment
contingent upon the post-closing performance of the ACE credit card portfolio
over a one-year period. United CreditServ's results in 2001 included income (net
of tax) in the amount of $3.7 million, associated with the receipt of a $5.7
million cash payment representing the deferred contingent portion of the
purchase price in final settlement of the September 2000 sale of substantially
all of the non-cash assets associated with its United CreditServ credit card
unit.

Special Risk Division. In December 2001, the Company determined to exit
the businesses of its Special Risk Division by sale, abandonment or wind-down
and the Company designated and has classified its Special Risk Division as a
discontinued operation for financial reporting purposes. The Company's Special
Risk Division formerly specialized in certain niche health-related products
(including "stop loss", marine crew accident, organ transplant and international
travel accident products), various insurance intermediary services and certain
managed care services.

For the year ended December 31, 2002, 2001 and 2000, the Special Risk
Division reported losses (net of tax) in the amount of $(4.2) million, $(9.2)
million and $(2.9) million. The Special Risk Division loss in 2002 reflected a
$6.5 million charge in the three months ended December 31, 2002 to reflect a
reassessment and strengthening of claims reserves. In 2003 the Company will
continue the wind-down of its former Special Risk Division.

UICI Administrators, Inc. Prior to 2002, UICI provided underwriting,
claims management and claims administrative services to third party insurance
carriers, third party administrators, Blue Cross/Blue Shield organizations and
self-administered employer health care plans. The Company formerly classified
the operations of its subsidiaries UICI Administrators, Inc. (a company engaged
in the business of providing third party benefits administration, including
eligibility and billing reconciliation), Insurdata Marketing Services, LLC (a
subsidiary of the Company engaged in the business of marketing third party
benefits administration services) and Barron Risk Management, Inc. (a company
engaged in the business of administration of workers' compensation and
non-subscriber plans) as its TPA Division. On January 17, 2002, the Company
completed the sale of UICI Administrators, Inc., the major component of the TPA
Division. For financial reporting purposes, the results of operations of UICI
Administrators, Inc. have been reflected in discontinued operations for all
periods presented.

SPECIAL 2000 COMPENSATION EXPENSE -- MODIFICATION OF UICI EXECUTIVE STOCK
PURCHASE PROGRAM

In January 2001, the Board of Directors of the Company adopted certain
modifications to the UICI Executive Stock Purchase Program (the "ESPP"), which
was initially adopted and implemented in December 1998 to afford directors and
key UICI executives the opportunity to purchase UICI common stock. See Note P of
Notes to Consolidated Financial Statements. In connection with the January 2001
modifications to the ESPP, for financial reporting purposes UICI recorded in the
quarter ended December 31, 2000 compensation expense in the amount of $4.8
million pre-tax, or $4.1 million net of tax.

25

RESULTS OF OPERATIONS

2002 COMPARED TO 2001

General

UICI reported revenues and income from continuing operations in 2002 of
$1.5 billion and $51.4 million ($1.05 per diluted share), respectively, compared
to 2001 revenues and income from continuing operations of $1.1 billion and $52.2
million ($1.09 per diluted share), respectively.

The Company reported net income in 2002 in the amount of $46.9 million
($0.96 per diluted share), compared to net income of $42.9 million ($0.90 per
diluted share) in 2001. Reported net income included income (losses) from
discontinued operations in 2002 and 2001 in the amount of $653,000 ($0.02 per
diluted share) and $(9.3) million ($(0.19) per diluted share), respectively.
Overall results in the full year ended December 31, 2002 also included a
goodwill impairment charge in the amount of $(5.1) million (net of tax) ($(0.11)
per diluted share), which has been reflected as a cumulative effect of a change
in accounting principle in accordance with recently adopted Financial Accounting
Standards Board ("FASB") Statement No. 142, Goodwill and Other Intangible
Assets.

Continuing Operations

Revenues. UICI's revenues increased to $1,479.0 million in 2002 from
$1,099.4 million in 2001, an increase of $379.6 million, or 35%, primarily as a
result of a significant increase in health premium revenue from $776.3 million
in 2001 to $1,181.2 million in 2002. The increase in health premium revenue in
2002 was offset by a 13% decrease in interest and investment income.

Health premiums. Health premium revenue increased to $1,181.2 million in
2002 from $776.3 million in 2001, an increase of $404.9 million, or 52%. The
increase in health premium revenue in 2002 was primarily attributable to an
increase (from $578.5 million in 2001 to $929.3 million in 2002) in submitted
annualized premium volume at the Self-Employed Agency ("SEA") Division), which
increase was due primarily to a 50% increase in the average number of writing
agents in 2002 compared to 2001 and a 6% increase in annualized premium volume
submitted per writing agent in 2002 compared to 2001. The Company defines
"submitted annualized premium volume" in any period as the aggregate annualized
premium amount associated with health insurance applications submitted by the
Company's agents in such period for underwriting by the Company.

Life premiums and other considerations. Life premiums and other
considerations decreased by 9% to $31.5 million in 2002 from $34.7 million in
2001. This decrease resulted primarily from reduced premiums and other
considerations from closed blocks of life and annuity business. The Company last
acquired a closed block of life insurance and annuities in 1994. Although the
Company believes that it can continue to explore acquisition opportunities and
continues to analyze potential transactions, the Company believes that the
current climate for acquisitions of blocks of life insurance and annuities has
become very competitive, making it more difficult to successfully complete
acquisitions that meet the Company's acquisition rate of return criteria.

Investment income. Despite a 10% increase in invested assets over the year
ended December 31, 2002, investment income remained relatively constant ($84.4
million in 2002 compared to $83.8 million in 2001) due to a decrease in yield on
invested assets resulting from lower prevailing market interest rates.

Other interest income. Other interest income (consisting primarily of
interest earned on the Company's AMS student loan portfolio) decreased by 25% to
$66.3 million in 2002 from $88.4 million in 2001. The decrease in other interest
income was due to declining market interest rates, resulting in a reduced yield
on funds held in connection with AMS' tuition payment programs and a reduced
yield on AMS' student loan portfolio.

Other income. Other income increased by 9% to $121.1 million in 2002 from
$111.0 million in 2001. Other income consists primarily of income derived by the
SEA Division from ancillary services and

26

membership marketing and administrative services provided to the membership
associations that endorse the Company's health insurance products, income
derived by AMS from tuition installment program fees, loan-servicing fees and
gains on loan sales, and fee income derived by the Company from its AMLI Realty
Co. subsidiary. In 2002, a 25% increase in other income at the SEA Division
(from $62.1 million in 2001 to $77.9 million in 2002) was offset by a 19%
decrease in other income at AMS (from $38.6 million in 2001 to $31.4 million in
2002).

Gains (losses) on sale of investments. The Company recognized losses on
sale of investments of $(5.6) million in 2002 compared to gains of $5.2 million
in 2001. During 2002 and 2001, the Company recorded impairment charges for
certain fixed income and equity securities in the amount of $14.7 million and
$3.5 million, respectively. The Company's 2002 impairment charge included a $6.1
million impairment charge associated with the Company's WorldCom, Inc. bond
holdings, which was recorded in the second quarter of 2002 as a result of
previously announced accounting irregularities at WorldCom, Inc., which charge
was partially offset by realized gains associated with other securities in the
portfolio. Included in 2001 gains is a $5.3 million gain related to the
Company's investment in AMLI Commercial Properties Trust ("ACPT") and $3.4
million in other gains from the Company's investment portfolio, which gains were
offset by impairment charges for certain investments in the amount of $3.5
million. During 2001, ACPT, an equity method investee in which the Company held
a 20% equity interest, sold substantially all of its assets for an aggregate
sale price of approximately $226.3 million. In connection with such sale, the
Company recognized a gain in the amount of $5.3 million.

The amount of realized gains or losses on the sale of investments is
affected by changes in interest rates, market trends and the timing of sales.
Losses are more likely during periods of increasing long-term interest rates. In
addition, due to decreasing long-term interest rates in 2002, the net unrealized
investment gain on securities classified as "available for sale", reported in
accumulated other comprehensive income as a separate component of stockholders'
equity and net of applicable income taxes, increased to $42.3 million at
December 31, 2002, from a net unrealized investment gain of $30.3 million at
December 31, 2001. The Company changed its method for accounting for its
investment in AMLI Residential effective June 30, 2001, from the equity method
to the investment method. The Company holds a 10% interest in AMLI Residential.
The effect of the accounting change was to increase the carrying value of AMLI
Residential on the consolidated balance sheet of the Company at June 30, 2001
from $22.6 million to $62.8 million; the accounting change had no effect on the
Company's results of operations for the year ended December 31, 2001. As a
result of the accounting change, the Company marks-to-market its investment in
AMLI Residential and accordingly, changes in the Company's carrying value of its
investment in AMLI Residential are recorded as unrealized gains (or losses) with
corresponding changes to the Company's stockholders' equity (net of tax). At
December 31, 2002 and 2001, the Company's carrying value of its investment in
AMLI Residential was $54.3 million and $64.3 million, respectively.

Benefits, claims, and settlement expenses. Benefits, claims and settlement
expenses increased to $774.6 million in 2002 from $531.0 million in 2001. The
46% increase in benefits, claims and settlement expenses was primarily due to
the significant increase in premium revenue at the SEA and Group Divisions
(including the incremental benefits, claims and settlement expenses associated
with the Company's Star HRG unit, which was acquired in February 2002).

Underwriting, policy acquisition costs and insurance expenses.
Underwriting, policy acquisition costs and insurance expenses increased by 56%
to $416.5 million in 2002 from $267.8 million in 2001. The increase in such
expenses was primarily due to the increase in first year premium revenue from
the SEA Division (with respect to which the Company records a higher commission
expense than with respect to premium revenue in policy renewal years) and
premium growth at the Group Division (including the incremental underwriting,
acquisition and insurance expenses associated with the Company's Star HRG unit,
which was acquired in February 2002).

Other expenses. Other expenses consist primarily of operating expenses at
AMS and direct expenses incurred by the Company in connection with generating
other income at the SEA Division. See Note A of

27

Notes to Consolidated Financial Statements. Other expenses increased to $126.7
million in 2002 from $119.1 million in 2001, primarily due to the increase in
SEA Division expenses.

Depreciation. Depreciation expense increased to $15.9 million in 2002 from
$14.1 million in 2001. The 13% increase in depreciation expense was primarily
due to additional depreciation associated with the capitalized costs of
technology initiatives and upgrades.

Interest expense. Interest expense on corporate borrowings decreased to
$1.5 million in 2002 from $5.0 million in 2001. The decrease was due primarily
to the decreased level of borrowings outstanding during 2002 compared to 2001.
Interest expense on student loan obligations decreased to $41.5 million in 2002
from $69.4 million in 2001, a decrease of $27.9 million or 40%, primarily
resulting from a decline in prevailing market interest rates.

Operating Income. Income from continuing operations before federal income
taxes ("operating income") increased to $74.4 million in 2002 from $70.9 million
in 2001. Operating income (loss) for each of the Company's segments and
divisions was as follows:

Self-Employed Agency Division. Operating income at UICI's SEA Division
increased by 25% to $93.7 million in 2002 from $74.8 million in 2001.

In the 2002 period, the SEA Division continued to experience significant
increases in submitted annualized premium volume ($929.3 million in 2002
compared to $578.5 million in 2001), which increase was due primarily to a 50%
increase in the average number of writing agents in 2002 compared to 2001 and a
6% increase in annualized premium volume submitted per writing agent in 2002
compared to 2001. Total revenue at the SEA Division increased from $713.3
million in 2001 to $1,035.9 million in 2002 (a 45% increase). Operating income
as a percentage of SEA Division revenue in the year ended December 31, 2002 was
9.0% compared to 10.5% in the prior year. The lower operating margin during the
2002 period was attributable to higher effective commission rates due to the
increase in first year premium (which carries a higher commission rate compared
to renewal commissions), and lower investment and other income as a percentage
of total revenue. These factors were partially offset by lower administrative
expenses as a percentage of total revenue in 2002 and a slightly lower loss
ratio in 2002 compared to the loss ratio in 2001.

28

Group Insurance Division. The Company has classified the results of its
Student Insurance Division and its Star HRG unit as its Group Insurance
Division. For the year ended December 31, 2002, the Group Insurance Division
reported operating income of $15.0 million compared to operating income of $4.0
million in 2001. These increases were primarily attributable to the incremental
operating income associated with the Company's Star HRG unit, which was acquired
by the Company on February 28, 2002. An increase in earned premium revenue and
decrease in administrative expenses as a percentage of earned premium (offset by
a nominal increase in the loss ratio) at the Company's Student Insurance
Division also contributed to the increases in operating income at the Group
Insurance Division in the 2002 period.

Life Insurance Division. For the year ended December 31, 2002, the
Company's Life Insurance Division (which includes the results of the Company's
OKC life insurance operations and its College Fund Life Division) reported
operating income of $8.6 million compared to operating income of $7.4 million in
2001. The increase in operating income in the year ended December 31, 2002
compared to 2001 reflected the close down in May 2001 of the Company's workers'
compensation business, in connection with which the Company incurred in the
second quarter of 2001 a charge of $8.7 million associated with a strengthening
of reserves. Results at the Company's Life Insurance Division in 2001 also
reflected a $1.3 million charge in the fourth quarter of 2001 associated with
the Company's share of an assessment to all workers' compensation insurance
carriers. Reflecting a subsequent repeal of the assessment, in the first quarter
of 2002 the Company reversed the $1.3 million charge and strengthened claims
reserves in an equivalent amount. The charges in 2001 were partially offset by a
$5.2 million benefit resulting from an increase in the carrying value of student
loans generated by the College Fund Life Division. These factors favorably
affecting the 2002 results compared to 2001 results at the Life Insurance
Division were offset somewhat by increased administrative expenses associated
with the OKC operations in 2002 as compared to 2001.

The Company has determined that, effective May 31, 2003, it will no longer
issue new life insurance policies under the College Fund Life Division program
and that, effective June 30, 2003, it will cease all operations at the Company's
Norcross, Georgia facility. In connection with such closedown, the Company
currently estimates that it will incur exit costs (consisting primarily of
employee severance and relocation expenses and lease termination costs) in the
amount of approximately $900,000, which costs will be expensed as incurred over
the period ending June 30, 2003 in accordance with Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.

The Company through its College Fund Life Division has outstanding
commitments to fund student loans for the years 2003 through 2024. See Notes K
and O of Notes to Consolidated Financial Statements.

Senior Market Division. In 2001 the Company began to develop long-term
care and Medicare supplement insurance products for the senior market and to
establish distribution channels for products targeted toward the senior market.
For financial reporting purposes the Company has established a Senior Market
Division to segregate the reporting of expenses incurred in connection with the
development, administration, marketing and sales of senior market products. The
Company's Senior Market Division generated revenues of $2.1 million in 2002 and
nominal revenues in 2001. The Senior Market Division reported operating losses
of $(7.5) million and $(2.1) million in 2002 and 2001, respectively. The Company
currently anticipates that its Senior Market Division will continue to generate
operating losses in 2003.

The Company is currently reinsuring 20% of its risk with respect to
long-term care coverage on a coinsurance basis with a third party reinsurer. In
2001 the Company entered into an agreement with an unaffiliated third party to
serve as administrator for the Company's senior age insurance products, in which
capacity the third party underwrote, billed, provided customer service and
administered claims for all long-term care and Medicare supplement insurance
products to be sold by the Company's two principal insurance subsidiaries. This
third party arrangement will effectively terminate in the second quarter of
2003. In March 2003, the Company will bring in house all underwriting, billing,
customer service and claims administration functions for all new long term care
applications submitted. Conversion of in-force long-term care and Medicare
supplement business will occur in the second quarter of 2003. Medicare
supplement sales were suspended in February 2003 until the conversion of
administrative functions to the Company's administration center is complete.

29

Academic Management Services Corp. For the year ended December 31, 2002,
UICI's Academic Management Services Corp. subsidiary ("AMS") reported operating
income of $7.4 million compared to operating income of $5.4 million for the
comparable period in 2001. Set forth below is a summary comparative statement of
operations for AMS for the year ended December 31, 2002 and 2001:

The improvement in AMS' operating results for the year ended December 31,
2002 resulted primarily from a decrease in operating expenses (attributable
primarily to a reduction in interest expense on corporate borrowings) and
increased student loan spread income (i.e., the difference between interest
earned on outstanding student loans and interest expense associated with
indebtedness incurred to fund such loans) attributable to a favorable interest
rate environment. Spread income for the year 2002 was $26.9 million compared to
$19.2 million in 2001. These increases in 2002 were partially offset by lower
realized gains on sale of loans and reduced fee income and yields on the trust
balances associated with AMS' tuition installment plan business, in each case as
compared to results in 2001.

During the first six months of 2002, AMS benefited significantly from a
favorable prescribed minimum rate earned on its student loan portfolio. On July
1, 2002, the floor rates on loans made under the Federal Family Education Loan
Program ("FFELP Loans") for the period July 1, 2002 through June 30, 2003 reset
193 basis points lower than the floor rates in effect for the period July 1,
2001 through June 30, 2002. Reflecting this downward adjustment on July 1, 2002
to the floor rate on FFELP Loans, AMS' student loan spread income declined
significantly from $17.1 million in the first half of 2002 to $9.8 million in
the second half of the year.

On July 1, 2003, the floor rates on FFELP Loans for the period July 1, 2003
through June 30, 2004 will again be reset. Based on current prevailing market
interest rates, the Company currently expects that spread income in 2003 will be
less than the level of spread income experienced in 2002. As a result of the
variability of student loan spread income, AMS may continue to rely on gains
from timely sales of student loans to remain profitable during certain periods.
AMS sold $271.2 million and $447.0 million principal amount of student loans
during the year ended December 31, 2002 and 2001, respectively, from which AMS
generated gains on net sales in the amount of $5.9 million and $11.3 million,
respectively. During the year ended December 31, 2002, AMS originated $715.1
million principal amount of student loans, compared to $717.6 million principal
amount of student loans originated in the year ended December 31, 2001.

30

Fee income from AMS' tuition payment programs in the year ended December
31, 2002 was $12.8 million, compared to fee income in the year ended December
31, 2001 of $14.1 million. For the year ended December 31, 2002, investment
income on funds held in connection with tuition payment programs declined to
$3.9 million in 2002 from $6.6 million in 2001 as a result of lower prevailing
market interest rates (despite a 10% increase in average trust fund balance).

Operating expenses at AMS for the year December 31, 2002 were $54.9 million
compared to operating expenses of $59.0 million in 2001. The decrease in
operating expenses for year ended December 31, 2002 was primarily attributable
to reduced interest expense associated with non-student loan indebtedness and
reduced administrative expenses. For the year ended December 31, 2002, interest
expense on non-student loan indebtedness was $76,000 compared to interest
expense on non-student loan indebtedness of $2.2 million in 2001. On June 28,
2001, AMS paid off its remaining senior indebtedness in the amount of $14.3
million, the proceeds of which were utilized in 1999 to fund a portion of the
purchase price for AMS' tuition installment business.

Investment in Healthaxis, Inc. (formerly HealthAxis.com, Inc.) At December
31, 2002, the Company held approximately 45% of the issued and outstanding
shares of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"). The Company accounts for its
investment in HAI utilizing the equity method and, accordingly, recognizes its
ratable share of HAI income and loss (computed prior to amortization of goodwill
recorded by HealthAxis.com in connection with the January 7, 2000 merger of
Insurdata Incorporated (formerly a wholly-owned subsidiary of UICI) with and
into HealthAxis.com). See Note E of Notes to Consolidated Financial Statements.

The Company's carrying value of its investment in HAI was $4.9 million and
$8.3 million at December 31, 2002 and 2001, respectively. During the year ended
December 31, 2002, the Company's share of HAI's operating losses (computed prior
to amortization of merger related goodwill) was $(3.1) million, compared to its
share of operating losses of $(10.6) million in 2001. For the year ended
December 31, 2002, the total HAI segment loss in the amount of $(9.6) million
reflected the Company's share of HAI's operating losses ($3.1 million) plus a
$6.5 million impairment charge related to the adjustment to the carrying value
of the Company's investment in HAI taken in the second quarter of 2002.

Effective June 15, 2002, UICI and HAI terminated an information technology
services agreement, amended and restated as of January 3, 2000 (the "Services
Agreement"), pursuant to which HAI formerly provided information systems and
software development services (including administration of the Company's
computer data center) to the Company and its insurance company affiliates. See
Note E of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Substantially all of HAI's technical personnel formerly supporting UICI under
the Services Agreement were hired by UICI on June 17, 2002. Following the
transaction, UICI continues to hold approximately 45% of the issued and
outstanding shares of HAI. Because UICI constitutes a significant shareholder of
HAI, the aggregate amount of consideration paid to HAI by UICI for the early
termination of the Services Agreement (approximately $6.5 million) was reflected
for financial reporting purposes as a contribution by UICI to the capital of
HAI, the effect of which was to increase the Company's carrying value of its
investment in HAI. Effective June 30, 2002, UICI determined the carrying value
in its investment in HAI was impaired in the amount of $6.5 million and
therefore the investment was written down to an estimated realizable value. In
determining the estimated realizable value of its investment in HAI at June 30,
2002, the Company gave due consideration, among other things, to HAI's
recognition of an extraordinary gain in July 2002 in the amount of $16.4 million
associated with the early extinguishment of indebtedness, which extraordinary
gain was recorded by HAI in connection with the exchange of $27.5 million
aggregate principal amount of HAI's convertible debentures for $4.0 million in
cash and shares of a newly authorized series of HAI 2% convertible preferred
stock.

Other Key Factors. The Other Key Factors category includes (a) investment
income not allocated to other business segments, (b) interest expense on
non-student loan indebtedness, (c) general expenses relating to corporate
operations, (d) realized gains or losses on investments, (e) the operations of
the Company's

31

AMLI Realty Co. subsidiary, (f) minority interest, (g) variable stock-based
compensation, (h) operations that do not constitute reportable operating
segments (consisting primarily of Barron Risk Management, Inc, until it was sold
in September 2002) and (i) amortization of goodwill (with respect to periods
ended prior to January 1, 2002).

For the year ended December 31, 2002, Other Key Factors reported an
operating loss of $(33.1) million, compared to an operating loss of $(8.0)
million in 2001. The increase in operating loss for the year ended December 31,
2002 was attributable to various factors, including a $7.6 million decrease in
investment income not allocated to other segments (which in turn resulted from a
decrease in yield on invested assets), a $5.6 million realized loss on sale of
investments resulting primarily from a $6.1 million impairment charge taken in
the second quarter of 2002 associated with the Company's WorldCom, Inc. bond
holdings (compared to a realized gain of $5.2 million in the corresponding
period in 2001, and an increase in variable stock-based compensation expense of
$11.1 million (see discussion below). These factors contributing to the increase
in Other Key Factors operating loss in the year ended December 31, 2002 were
offset by the positive impact of the non-amortization of goodwill as required by
Statement No. 142 for all periods commencing after January 1, 2002. In the year
ended December 31, 2001, the Company recorded goodwill amortization in the
amount of $4.5 million.

During 2001, AMLI Commercial Properties Trust ("ACPT"), an equity method
investee in which the Company held a 20% equity interest, sold substantially all
of its assets for an aggregate sale price of approximately $226.3 million. In
connection with such sales, the Company recognized a gain in the amount of $5.3
million.

Effective June 30, 2001, the Company changed its method for accounting for
its investment in AMLI Residential Properties Trust (a publicly-traded (NYSE:
AML) real estate investment trust) ("AMLI Residential") from the equity method
to the investment method due to its decreased ownership interest to 10.3%. The
effect of the accounting change was to increase the carrying value of AMLI
Residential on the consolidated balance sheet of the Company at June 30, 2001
from $22.6 million to $62.8 million. As a result of the accounting change, the
Company no longer recorded its share of AMLI Residential's gains and losses but,
rather, marks-to-market its investment in AMLI Residential. Accordingly,
increases (or decreases) in the Company's carrying value of its investment in
AMLI Residential are now recorded as unrealized gains (or losses) with
corresponding increases (or decreases) to the Company's stockholders' equity
(net of tax). At December 31, 2002 and 2001, the Company's carrying value of its
investment in AMLI Residential was $54.3 million and $64.3 million,
respectively.

Variable Stock-Based Compensation. The Company maintains for the benefit
of its employees and independent agents various stock-based compensation plans,
in connection with which it records non-cash variable stock-based compensation
expense in amounts that depend and fluctuate based upon the market performance
of the Company's common stock. See Note P of Notes to Consolidated Financial
Statements.

In the year ended December 31, 2002, the Company recorded non-cash
stock-based compensation expense in the aggregate amount of $18.1 million, of
which $7.3 million was attributable to the ESOP feature of the Company's
Employee Stock Ownership and Savings Plan (the "Employee Plan"), $9.2 million
was attributable to the Company's stock accumulation plans established for the
benefit of its independent agents and $1.6 million was attributable to other
stock-based plans. In the year ended December 31, 2001, the Company recorded
non-cash stock-based compensation expense in the aggregate amount of $6.9
million, of which $3.0 million was attributable to the ESOP feature of the
Company's Employee Plan, $2.8 million was attributable to the Company's stock
accumulation plans established for the benefit of its independent agents and
$1.1 million was attributable to other stock-based plans. The significant
increases in non-cash variable stock-based compensation expense in the 2002
periods compared to the 2001 periods was attributable to the higher average
share price in 2002 compared to the average share price in 2001.

During the year ended December 31, 2002, the amount classified as stock
appreciation expense with respect to the Employee Plan represented the
incremental compensation expense associated with the allocation during the year
of 630,000 shares previously purchased in 2000 by the Employee Plan from the
Company at $5.25 per share ("$5.25 ESOP Shares") to fund the Company's matching
and supplemental

32

contributions to the ESOP. As and when the Company made matching and
supplemental contributions to the ESOP by allocating to participants' accounts
these $5.25 ESOP Shares, the Company recorded additional non-cash compensation
expense equal to the excess, if any, between the fair value of the shares
allocated and $5.25 per share. As of December 31, 2002, all $5.25 ESOP Shares
had been allocated to participants' accounts. Accordingly, in future periods the
Company will recognize no additional variable stock-based compensation
associated with the ESOP feature of the Employee Plan. The allocated $5.25 ESOP
Shares are considered outstanding for purposes of the computation of earnings
per share.

The Company also sponsors a series of stock accumulation plans established
for the benefit of the independent insurance agents and independent sales
representatives associated with its independent agent field forces, including
UGA -- Association Field Services, New United Agency, Cornerstone America,
Guaranty Senior Assurance, CFLD Association Field Services and SeniorsFirst. The
agent plans generally combine an agent-contribution feature and a Company-match
feature. Under EITF 96-18 "Accounting for Equity Instruments that are issued to
Other Than Employees for Acquiring or in Connection with Selling Goods and
Services," the Company has established a liability for future unvested benefits
under the plans and adjusts the liability based on the market value of the
Company's common stock. For the years ended December 31, 2002 and 2001, the
Company recorded total compensation expense associated with these agent plans in
the amount of $16.3 million and $6.6 million, respectively, of which $9.2
million and $2.8 million, respectively, represented the non-cash stock based
compensation expense associated with the adjustment to the liability for future
unvested benefits. See Note P of Notes to Consolidated Financial Statements.

The accounting treatment of the Company's agent plans will continue to
result in unpredictable stock-based compensation charges, primarily dependent
upon future fluctuations in the quoted price of UICI common stock. These
unpredictable fluctuations in stock based compensation charges may result in
material non-cash fluctuations in the Company's results of operations. Unvested
benefits under the agent plans vest in January of each year; accordingly, in
periods of general appreciation in the quoted price of UICI common stock, the
Company's cumulative liability, and corresponding charge to income, for unvested
stock-based compensation is expected to be greater in each successive quarter
during any given year.

2001 COMPARED TO 2000

General

UICI reported revenues and income from continuing operations in 2001 of
$1.1 billion and $52.2 million ($1.09 per diluted share), respectively, compared
to 2000 revenues and income from continuing operations of $1.0 billion and $33.3
million ($0.70 per diluted share), respectively.

The Company reported net income in 2001 in the amount of $42.9 million
($0.90 per diluted share), compared to net income of $5.7 million ($0.12 per
diluted share) in 2000, including losses from discontinued operations in 2001
and 2000 in the amount of $(9.3) million ($(0.19) per diluted share) and $(27.5)
million ($(0.58) per diluted share), respectively.

Continuing Operations

Revenues. UICI's revenues increased to $1,099.4 million in 2001 from
$1,018.8 million in 2000, an increase of $80.6 million, or 8%, primarily as a
result of a 20% increase in health premiums, from $644.6 million in 2000 to
$776.3 million in 2001. The increase in health premium revenue in 2001 was
offset by a 14% decrease in interest and investment income. Revenues in 2000
also were favorably impacted by a realized gain of $26.3 million from a sale of
HealthAxis.com shares completed in the first quarter of 2000.

Health premiums. Health premium revenue increased to $776.3 million in
2001 from $644.6 million in 2000, an increase of $131.7 million, or 20%. The
increase in health premium revenue in 2001 was primarily attributable to a 67%
increase in the Self-Employed Agency Division's ("SEA") submitted annualized
premium volume for the year (which the Company defines in any period as the
aggregate annualized premium amount associated with health insurance
applications submitted by the Company's agents in such period for

33

underwriting by the Company) ($578.5 million in 2001 compared to $346.7 million
in 2000) and an increase in policy retention rates.

Life premiums and other considerations. Life premiums and other
considerations decreased to $34.7 million in 2001 from $36.8 million in 2000, a
decrease of $2.1 million, or 6%. This decrease resulted primarily from reduced
premiums and other considerations from closed blocks of life and annuity
business. The Company last acquired a closed block of life insurance and
annuities in 1994. Although the Company believes that it can continue to explore
acquisition opportunities and continues to analyze potential transactions, the
Company believes that the current climate for acquisitions of blocks of life
insurance and annuities has become very competitive, making it more difficult to
successfully complete acquisitions that meet the Company's acquisition rate of
return criteria.

Investment income. Investment income decreased to $83.8 million in 2001
from $89.8 million in 2000, a decrease of $6.0 million, or 7%. The decrease was
due to reduced yield on the Company's investment portfolio and a reduction in
average outstanding short-term investments, due primarily to the use of cash to
reduce outstanding borrowings during the year.

Other interest income. Other interest income (consisting primarily of
interest earned on the Company's student loan portfolio) decreased to $88.4
million in 2001 from $111.4 million in 2000, a decrease of $23.0 million, or
21%. The decrease was due to declining market interest rates, resulting in a
reduced yield on funds held in connection with AMS' tuition payment programs and
a reduced yield on AMS' student loan portfolio.

Other income. Other income decreased to $111.0 million in 2001 from $111.9
million in 2000, a decrease of $900,000. Other income consists primarily of
income derived by the SEA Division from ancillary services and membership
marketing and administrative services provided to the membership associations
that endorse the Company's health insurance products, income derived by AMS from
tuition installment program fees, loan-servicing fees and gains on loan sales,
and fee income derived by the Company from its AMLI Realty Co. subsidiary.
National Motor Club (which was sold in July 2000) generated $19.4 million in
other income (primarily membership fees) in the seven-month period ended July
2000. The decrease in other income in 2001 attributable to the sale of National
Motor Club in 2000 was offset somewhat by a 29% increase in other income at the
SEA Division (from $48.0 million in 2000 to $62.1 million in 2001).

Gain on sale of HealthAxis.com stock. On March 14, 2000, the Company sold
in a private sale to an institutional purchaser 2,000,000 shares of
HealthAxis.com common stock. In connection with the sale of such shares, the
Company recognized a pre-tax gain in the amount of $26.3 million.

Gains (losses) on sale of investments. The Company recognized gains on
sale of investments of $5.2 million in 2001 compared to losses of $(1.9) million
in 2000. Included in 2001 gains is a $5.3 million gain related to the Company's
investment in Amli Commercial Properties Trust ("ACPT") and $3.4 million in
gains from the Company's investment portfolio, which were offset by impairment
charges for certain investments in the amount of $3.5 million. During 2001,
ACPT, an equity method investee, in which the Company held a 20% equity
interest, sold substantially all of its assets for an aggregate sale price of
approximately $226.3 million. In connection with such sale, the Company
recognized a gain in the amount of $5.3 million.

The amount of realized gains or losses on the sale of investments is
affected by changes in interest rates, market trends and the timing of sales.
Losses are more likely during periods of increasing long-term interest rates. In
addition, due to decreasing long-term interest rates in 2001, the net unrealized
investment gain on securities classified as "available for sale" (which
unrealized gains are reported in accumulated other comprehensive income as a
separate component of stockholders' equity and net of applicable income taxes)
increased to $30.3 million at December 31, 2001, from a net unrealized
investment loss of $(10.1) million at December 31, 2000. The Company changed its
method for accounting for its investment in AMLI Residential effective June 30,
2001, from the equity method to the investment method. The Company holds a 10%
interest in AMLI Residential. The effect of the accounting change was to
increase the carrying value of AMLI Residential on the consolidated balance
sheet of the Company at June 30, 2001 from $22.6 million to

34

$62.8 million; the accounting change had no effect on the Company's results of
operations for the year ended December 31, 2001. As a result of the accounting
change, the Company marks-to-market its investment in AMLI Residential and
accordingly, changes in the Company's carrying value of its investment in AMLI
Residential are recorded as unrealized gains (or losses) with corresponding
changes to the Company's stockholders' equity (net of tax). At December 31,2001
and 2000, the Company's carrying value of its investment in AMLI Residential was
$64.3 million and $23.1 million, respectively.

Benefits, claims, and settlement expenses. Benefits, claims and settlement
expenses increased to $531.0 million in 2001 from $439.7 million in 2000, an
increase of $91.3 million, or 21%. The increase in benefits, claims and
settlement expenses was primarily due to the increase in premium revenue from
the SEA and Group Divisions and the strengthening of reserves associated with
the Company's workers compensation business. In May 2001 the Company
discontinued its workers compensation business, in connection with which the
Company incurred a charge of $8.7 million associated with a strengthening of
reserves.

Underwriting, policy acquisition costs and insurance
expenses. Underwriting, policy acquisition costs and insurance expenses
increased to $267.8 million in 2001 from $225.2 million in 2000, an increase of
$42.6 million, or 19%. The increase was primarily due to increased commission
expense attributable to the growth in first year premium revenue in the SEA
Division (with respect to which the Company records a higher commission expense
than with respect to premium revenue in policy renewal years).

Other expenses. Other expenses consist primarily of operating expenses at
AMS and direct expenses incurred by the Company in connection with generating
other income at the SEA Division. Other expenses decreased to $119.1 million in
2001 from $129.0 million in 2000, a decrease of $9.9 million or 8%. The decrease
was primarily due to the sale of National Motor Club ("NMC") in July 2000. NMC
incurred $17.2 million in other expenses for the seven-month period ended July
2000.

Depreciation. Depreciation expense increased to $14.1 million in 2001 from
$13.3 million in 2000, an increase of $800,000 or 6%. The increase was primarily
due to additional depreciation associated with the capitalized costs of
technology initiatives and upgrades.

Interest expense. Interest expense on corporate borrowings decreased to
$5.0 million in 2001 from $13.6 million in 2000, a decrease of $8.6 million. The
decrease was due primarily to the decreased level of borrowings outstanding
during 2001 compared to 2000. Interest expense on student loan obligations
decreased to $69.4 million in 2001 from $101.6 million in 2000, a decrease of
$32.2 million or 32%, primarily resulting from a decline in prevailing market
interest rates.

Operating Income. Income from continuing operations before federal income
taxes ("operating income") increased to $70.9 million in 2001 from $69.4 million
in 2000. Operating income (loss) for each of the Company's segments and
divisions was as follows:

Self-Employed Agency Division. Operating income at UICI's SEA Division
increased by 6% to $74.8 million in 2001 from $70.9 million in 2000.

The Company's SEA Division in 2001 experienced a 67% increase in submitted
annualized premium volume over 2000 levels ($578.5 million in 2001 compared to
$346.7 million in 2000). Total revenue at the SEA Division increased from $584.1
million in 2000 to $713.3 million in 2001, a 22% increase. Operating income as a
percentage of revenue decreased to 10.5% in 2001 from 12.1% in 2000. This
decrease in operating margin was attributable primarily to a significant
increase in first year earned premium revenue (with respect to which the Company
records a higher commission expense than with respect to earned premium revenue
in policy renewal years) and a nominal increase in loss ratio in 2001 compared
to 2000.

Group Insurance Division (formerly Student Insurance Division). For the
year ended December 31, 2001, the Group Insurance Division reported operating
income of $4.0 million compared to an operating loss of $(1.9) million in 2000.
The increase in operating income for the year ended December 31, 2001 was
attributable to a 13% increase in earned premium revenue, continued improvement
in loss ratios, and improvement in administrative efficiencies.

Life Insurance Division. For the year ended December 31, 2001, the
Company's Life Insurance Division reported operating income of $7.4 million
compared to operating income of $13.1 million in 2000. The decrease in operating
income for the year ended December 31, 2001 was primarily attributable to the
discontinuation in May 2001 of the Company's workers compensation business (in
connection with which the Company incurred a charge of $8.7 million in the
second quarter associated with a strengthening of reserves) increased
administration costs associated with investment in new life products and a
charge of $1.3 million in the fourth quarter representing the Company's share of
an assessment to all workers' compensation insurance carriers by the Oklahoma
Workers' Compensation Court Administrator. Reflecting a subsequent repeal of the
assessment, in the first quarter of 2002 the Company reversed the $1.3 million
charge and strengthened claims reserves in an equivalent amount. These charges
in 2001 were partially offset by a $5.2 million increase in the second quarter
in the carrying value of student loans generated by the Company's College Fund
Life Division, a unit of the Life Insurance Division.

Senior Market Division. In 2001 the Company established a Senior Market
Division to segregate the reporting of expenses incurred in connection with the
development of insurance products for the senior market (including long term
care and Medicare supplement products), and the development of distribution
channels for the products. For the year ended December 31, 2001, the Company
realized nominal revenues associated with this Division, and the Company has
expensed developmental costs as incurred.

National Motor Club. On July 27, 2000, the Company completed the sale of
its 97% interest in NMC Holdings, Inc. (the parent of National Motor Club of
America, Inc.) to an investor group consisting of

36

members of the family of Ronald L. Jensen (including Mr. Jensen). See Notes C
and N of Notes to the Consolidated Financial Statements.

Academic Management Services Corp. For the year ended December 31, 2001,
UICI's AMS reported operating income of $5.4 million compared to an operating
loss of $(24.6) million for the comparable period in 2000. Set forth below is a
summary comparative statement of operations for AMS for the year ended December
31, 2001 and 2000:

The significant improvement in operating results for the year ended
December 31, 2001 resulted primarily from increased student loan spread income
(i.e., the difference between interest earned on outstanding student loans and
interest expense associated with indebtedness incurred to fund such loans)
attributable to a favorable interest rate environment, increased gains on sales
of loans and continued efforts to reduce operating expenses.

While declining market interest rates throughout 2001 resulted in decreased
interest income on AMS' student loan portfolio and decreased investment income
from funds on deposit in AMS' tuition installment plan trust account, declining
market interest rates throughout 2001 benefited AMS by significantly lowering
its costs of borrowing, resulting in improved spreads on AMS' student loan
portfolio. Spread income for the year 2001 was $19.2 million compared to $6.6
million for the prior year.

During 2001, AMS benefited significantly from a favorable prescribed
minimum rate earned on its student loan portfolio. The benchmark for yields on
federally guaranteed student loans is reset annually in accordance with
Department of Education regulations effective July 1 for the succeeding
twelve-month period. While yields on student loans are indexed to the 91-day
Treasury bill rate, the benchmark establishes a floor, below which a lender's
yield will not fall during the succeeding twelve-month period. On July 1, 2001,
the floor rates on loans made under the Federal Family Education Loan Program
("FFELP Loans") for the period July 1, 2001 through June 30, 2002 reset 220
basis points lower than the floor rates for the period July 1, 2000 through June
30, 2001. Nevertheless, due to rapidly declining market interest rates, shortly
before September 30, 2001 the rate that AMS earned on its student loan portfolio
again fell to the statutorily prescribed minimum rate, and the continued decline
in prevailing market interest rates over the three months ended December 31,
2001 had the effect of continuing to reduce AMS' overall borrowing costs. As a
result,

37

AMS' spread income in the fourth quarter of 2001 in the amount of $7.5 million
exceeded spread income of $3.2 million earned in the third quarter of 2001 and
spread income of $696,000 earned in the fourth quarter of 2000.

AMS sold $447.0 million and $765.0 million principal amount of student
loans during the year ended December 31, 2001 and 2000, respectively, from which
AMS generated gains on net sales in the amount of $11.3 million and $7.8
million, respectively. While AMS sold a lesser principal amount of loans in 2001
than in 2000, the higher net gain in 2001 resulted from lower deferred loan
origination costs associated with sold loans in 2001 compared to 2000.

Fee income from AMS' tuition payment programs in the year ended December
31, 2001 was $14.1 million, compared to fee income in the year ended December
31, 2000 of $11.9 million. For the year ended December 31, 2001, an increase in
fees attributable to additional tuition payment accounts and the imposition of
late fees on delinquent accounts were offset by a decline in investment income
from tuition payment program funds held in trust, as a result of lower
prevailing market interest rates. Investment income on funds held in connection
with tuition payment programs declined to $6.6 million in 2001 from $8.0 million
in 2000 (despite a 16% increase in the average trust fund balance).

AMS also reduced operating expenses by $15.8 million in the year ended
December 31, 2001, compared to operating expenses in 2000. This reduction in
operating expenses was primarily attributable to the closing in September 2000
of AMS' San Diego facility, reduced interest expense associated with non-student
loan indebtedness, and reduced administrative expenses. For the year ended
December 31, 2001, interest expense on non-student loan indebtedness was $2.2
million, compared to interest expense on non-student loans of $4.4 million in
the year ended December 31, 2000. On June 28, 2001, AMS paid off its remaining
senior indebtedness in the amount of $14.3 million, the proceeds of which were
utilized in 1999 to fund a portion of the purchase price for AMS' tuition
installment business.

Due to the inherent uncertainty surrounding spread income, in any given
financial period AMS may continue to rely on gains from timely sales of student
loans to remain profitable for such period.

Investment in Healthaxis, Inc. (formerly HealthAxis.com, Inc.) At December
31, 2001, the Company held approximately 47% of the issued and outstanding
shares of Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"). The Company accounts for its
investment in HAI utilizing the equity method and, accordingly, recognizes its
ratable share of HAI income and loss (computed prior to amortization of goodwill
recorded by HealthAxis.com in connection with the January 7, 2000 merger of
Insurdata Incorporated (formerly a wholly-owned subsidiary of UICI) with and
into HealthAxis.com). See Note E of Notes to Consolidated Financial Statements.

During the year ended December 31, 2001, the Company's share of HAI's
operating losses (computed prior to amortization of merger related goodwill) was
$(10.6) million, compared to its share of operating losses of $(15.6) million in
2000. At December 31, 2001, the Company's carrying value of its investment in
HAI was $8.3 million.

Other Key Factors. The Other Key Factors category includes (a) investment
income not allocated to other business segments, (b) interest expense on
non-student loan indebtedness, (c) general expenses relating to corporate
operations, (d) realized gains or losses on sale of investments, (e) the
operations of the Company's AMLI Realty Co. subsidiary, (f) minority interest
expense, (g) variable stock-based compensation, (h) operations that do not
constitute reportable operating segments (consisting primarily of the remaining
portion of the Company's former TPA Division and (i) amortization of goodwill.
Operating losses for the year ended December 31, 2001 attributable to this
category were $(8.0) million compared to $(1.3) million for the comparable
period in 2000. The increase in operating losses was primarily attributable to a
$7.5 million increase in corporate technology expenses, a $1.7 million increase
in variable stock compensation, a $3.7 million increase in minority interest
expense attributable to AMS' return to profitability in 2001, and a $3.5 million
impairment charge from the Company's investment portfolio. These increases were
partially offset by $3.4 million in realized gains from the Company's investment
portfolio (excluding the impairment charge) and a $5.3 million gain recognized
in 2001 on the sale of the Company's interest in

38

AMLI Commercial Properties Trust. The amount of realized gains or losses on the
sale of investments is a function of interest rates, market trends and the
timing of sales.

During 2001, AMLI Commercial Properties Trust, an equity method investee in
which the Company held a 20% equity interest, sold substantially all of its
assets for an aggregate sale price of approximately $226.3 million. In
connection with such sales, the Company recognized a gain in the amount of $5.3
million.

The Company changed its method for accounting for its investment in AMLI
Residential Properties Trust (a publicly-traded (NYSE: AML) real estate
investment trust) ("AMLI Residential") from the equity method to the investment
method effective June 30, 2001 due to its decreased ownership interest to 10.3%.
The effect of the accounting change was to increase the carrying value of AMLI
Residential on the consolidated balance sheet of the Company at June 30, 2001
from $22.6 million to $62.8 million. As a result of the accounting change, the
Company no longer records its share of AMLI Residential's gains and losses but,
rather, marks-to-market its investment in AMLI Residential. Accordingly,
increases (or decreases) in the Company's carrying value of its investment in
AMLI Residential are now recorded as unrealized gains (or losses) with
corresponding increases (or decreases) to the Company's stockholders' equity
(net of tax). At December 31, 2001 and 2000, the Company's carrying value of its
investment in AMLI Residential was $64.3 million and $23.1 million,
respectively.

Variable Stock-Based Compensation. The Company maintains for the benefit
of its employees and independent agents various stock-based compensation plans,
in connection with which it records non-cash variable stock-based compensation
expense in amounts that depend and fluctuate based upon the market performance
of the Company's common stock. In the year ended December 31, 2001, the Company
recorded non-cash stock-based compensation expense in the aggregate amount of
$6.9 million, of which $3.0 million was attributable to the ESOP feature of the
Company's Employee Stock Ownership and Savings Plan, $2.8 million was
attributable to the Company's stock accumulation plans established for the
benefit of its independent agents and $1.1 million was attributable to other
stock-based plans. See Note P of Notes to Consolidated Financial Statements.

QUARTERLY RESULTS

The following table presents the information for each of the Company's
fiscal quarters in 2002 and 2001, as restated to reflect classification of the
sale of UICI Administrators, Inc. (the major component of the Company's Third
Party Administration Division) as a discontinued operation. The results of
operations of UICI Administrators, Inc. (together with the results of operations
of United CreditServ, Inc. and the Company's Special Risk Division) are
reflected in discontinued operations for all periods presented. This information
is unaudited and has been prepared on the same basis as the audited Consolidated
Financial Statements of the Company included herein and, in management's
opinion, reflects all adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.

Computation of earnings (loss) per share for each quarter is made
independently of earnings (loss) per share for the year.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL

The Company's primary sources of cash have been premium revenues from
policies issued, investment income, fees and other income, and borrowings to
fund student loans. The primary uses of cash have been payments for benefits,
claims and commissions under those policies, operating expenses, stock
repurchases and the funding of student loans. During 2002, the Company generated
net cash provided by operations on a consolidated basis in the amount of $266.0
million, compared to net cash provided by operations in the amount of $189.7
million in 2001. During 2000, the Company used net cash in operations of $21.3
million.

UICI is a holding company, the principal assets of which are its
investments in its separate operating subsidiaries, including its regulated
insurance subsidiaries. The holding company's ability to fund its cash
requirements is largely dependent upon its ability to access cash, by means of
dividends or other means, from its subsidiaries. The laws governing the
Company's insurance subsidiaries restrict dividends paid by the Company's
domestic insurance subsidiaries in any year. Inability to access cash from its
subsidiaries could have a material adverse effect upon the Company's liquidity
and capital resources.

At December 31, 2002 and 2001, UICI at the holding company level held cash
and cash equivalents in the amount of $22.4 million and $57.3 million,
respectively. The Company currently estimates that, through December 31, 2003,
the holding company will have operating cash requirements in the amount of
approximately $58.0 million. The Company currently anticipates that these cash
requirements at the holding company level will be funded by cash on hand, cash
received from interest income, the balance of dividends to be paid from domestic
and offshore insurance companies and tax sharing reimbursements from
subsidiaries (which will be partially offset by holding company operating
expenses).

The Company reduced its consolidated short and long-term indebtedness
(exclusive of indebtedness secured by student loans) from $25.3 million at
December 31, 2001 (of which $19.4 million constituted indebtedness of the
holding company) to $9.5 million at December 31, 2002 (of which $7.9 million

40

constituted the Company's 8.75% Senior Notes, which are obligations of the
holding company). See Note J of Notes to Consolidated Financial Statements. In
addition, during 2002 the Company utilized approximately $29.3 million to
repurchase 2,000,000 shares of its common stock pursuant to its previously
announced share repurchase program, which was reconfirmed by the Board of
Directors of the Company at its July 31, 2002 meeting.

In June 2001, AMS paid off its remaining senior indebtedness in the amount
of $14.3 million, the proceeds of which were utilized in 1999 to fund a portion
of the purchase price for AMS' tuition installment business. At December 31,
2000, this senior indebtedness was outstanding in the amount of $21.3 million
and was reflected as corporate debt (i.e., non-student loan indebtedness) on the
Company's consolidated balance sheet.

SOURCES OF CASH

On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. Loans outstanding under the facility will bear
interest at the option of the Company at prime plus 1% or LIBOR plus 1%. The
Company intends to utilize the proceeds of the facility for general working
capital purposes. The Company has not to date borrowed any funds under the
facility.

Effective April 2, 2002, the Company and Mr. Jensen entered into a
transaction designed to effectively transfer the Company's 80% interest in
SunTech Processing Systems, LLC ("STP") to Mr. Jensen and to terminate the
Company's active participation in, and limit the Company's financial exposure
associated with, the Sun Litigation. See Note N of Notes to Consolidated
Condensed Financial Statements -- Sun Litigation. As part of the transaction, on
April 2, 2002, Mr. Jensen made a total payment to UICI of $15.6 million and
granted to UICI various indemnities against possible losses that UICI might
incur resulting from the Sun Litigation. For financial reporting purposes, the
Company recorded no gain or loss in connection with this transaction and will
continue to include the accounts of STP in its consolidated financial statements
until final distribution of cash proceeds from the sale and liquidation of STP
or such time as Mr. Jensen shall exercise the option to acquire UICI's 80%
membership interest in STP. Because the Company has assigned all of its rights
to any cash proceeds from the sale and liquidation of STP, the Company has
established and will continue to record a liability equal to the total cash and
cash equivalents on deposit in the registry of the Court in the Sun Litigation
(which amount was $21.9 million at December 31, 2002 and is reflected as
restricted cash on the Company's consolidated balance sheet).

At August 15, 2002, all remaining options initially granted to agents and
employees in August 1998 under the UICI 1998 employee and agent stock option
plans vested and became exercisable. All such options were exercisable at an
option price of $15.00 per UICI share and remained exercisable during the period
ended on January 13, 2003. During the year ended December 31, 2002, the Company
at the holding company level derived cash proceeds in the amount of $10.7
million from the exercise of 711,960 stock options granted under the 1998 plans.
At December 31, 2002, a total of 736,975 options remained exercisable under the
1998 plans. Subsequent to December 31, 2002 and prior to termination on January
13, 2003, 590,463 options were exercised, from which the Company at the holding
company level derived cash proceeds in the amount of $8.9 million.

USES OF CASH

On January 17, 2002, the Company completed the purchase, for a cash
purchase price of $8.0 million, of a 50% interest in SeniorsFirst, a
Dallas-based career agency specializing in the sale of long-term care and
Medicare supplement insurance products.

Effective February 28, 2002, the Company acquired all of the outstanding
capital stock of Star Human Resources Group, Inc. and STAR Administrative
Services, Inc. (collectively referred to by the Company as its "Star HRG" unit),
a Phoenix, Arizona based business specializing in the marketing and
administration of limited benefit plans for entry level, high turnover, hourly
employees for an initial cash purchase price of

41

$25.0 million, plus additional contingent consideration based on the future
annualized performance of Star HRG measured over the three-month period ending
May 31, 2003. The contingent consideration will be in an amount not to exceed
$15.0 million and is payable, at the Company's option, in cash or by delivery of
UICI's 6.0% convertible subordinated notes due March 1, 2012 plus, in each case,
interest payable in cash computed at a rate of 6% from the initial closing.

Effective June 15, 2002, UICI and HAI terminated a Services Agreement. See
Note E of Notes to Consolidated Condensed Financial Statements. As part of the
termination arrangement, UICI made a one-time payment to HAI in the amount of
$6.5 million and tendered 500,000 shares of HAI common stock to HAI.

In 2002 the Company incurred $13.8 million of capitalized construction
costs and investments in furniture and fixtures associated with an expansion of
its facilities in North Richland Hills, Texas. The Company currently anticipates
that it will incur additional costs of approximately $6.4 million in 2003 to
complete the facilities expansion project.

On July 1, 2002, the Company exercised an option to purchase from an
affiliated party 369,174 shares of Common Stock at a call price of $32.25 per
share, or $11.9 million in the aggregate. See Notes M and N of Notes to
Consolidated Financial Statements.

During the year ended December 31, 2002, the Company purchased an
additional 2,000,000 UICI shares pursuant to its 1998 share repurchase program
at an aggregate cost of $29.3 million, or $14.64 per weighted average share.

STUDENT LOAN CREDIT FACILITIES AND RESTRICTED CASH

The Company's consolidated balance sheet reflects significant assets
(consisting primarily of federally guaranteed and alternative (i.e.,
non-federally guaranteed) student loans and restricted cash) and liabilities
(consisting primarily of indebtedness under secured student loan credit
facilities) attributable to the student loan financing and origination
activities of the Company's AMS subsidiary and College Fund Life Insurance
Division.

At December 31, 2002 and 2001, the Company, through AMS and the College
Fund Life Insurance Division, had outstanding an aggregate of $1,752.6 million
and $1,506.2 million of indebtedness under secured student loan credit
facilities, of which $1,726.1 million and $1,242.8 million were issued by
bankruptcy-remote special purpose entities (each, an "SPE" or "Special Purpose
Entity") which are included in the Company's Consolidated Financial Statements.
At December 31, 2002 and 2001, indebtedness outstanding under secured student
loan credit facilities (including indebtedness issued by Special Purpose
Entities) was secured by federally guaranteed and alternative (i.e.,
non-federally guaranteed) student loans in the carrying amount of $1,430.8
million and $1,276.1 million, respectively, and by a pledge of cash, cash
equivalents and other qualified investments in the amount of $222.5 million and
$129.4 million, respectively. All such indebtedness issued under secured student
loan credit facilities is reflected as student loan indebtedness on the
Company's consolidated balance sheet; all such student loans pledged to secure
such facilities are reflected as student loan assets on the Company's
consolidated balance sheet; and all such cash, cash equivalents and qualified
investments specifically pledged under the student loan credit facilities are
reflected as restricted cash on the Company's consolidated balance sheet.

A trust created for the benefit of participants in AMS' tuition installment
program held invested assets in the amount of approximately $156.7 million and
$141.7 million at amortized cost (which approximated market) at December 31,
2002 and 2001, respectively, all of which assets are classified as restricted
cash on the Company's consolidated balance sheet. AMS is entitled to the
interest earned on the funds held in the trust as well as tuition budgeting
program fees deposited into the trust. The funds are invested in U.S. Treasury
securities, government agency securities, high-grade commercial paper, and money
market funds of insured depository institutions at December 31, 2002.

42

Set forth below is a summary unaudited pro forma December 31, 2002 balance
sheet of UICI, adjusted to exclude certain assets (student loans and restricted
cash) and certain liabilities (student loan credit facilities) associated with
the Company's AMS and College Fund Life Division) operations:

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

(1) Obligations under AMS' master repurchase agreement and credit facility are
partially (approximately $13.0 million at December 31, 2002) guaranteed by
the Company.

(2) A trust created for the benefit of participants in AMS' tuition installment
program held invested assets in the amount of approximately $156.4 million
and $141.7 million at amortized cost (which approximated market) at December
31, 2002 and 2001, respectively, all of which assets are classified as
restricted cash on the Company's consolidated balance sheet. See Note A of
Notes to Consolidated Financial Statements.

(3) Represents cash and cash equivalents required to be held by College Fund
Life Division to support certain loan servicing obligations under College
Fund Life Division's SPE financing.

(4) Includes negative equity in the AMS SPE financings, which is attributable to
permitted financing of student loans through AMS SPE financings in excess of
par value.

In 2002, the Company completed two structured student loan credit
financings in the aggregate amount of $635.0 million. See Note K of Notes to
Consolidated Financial Statements for a summary of the terms of the Company's
student loan credit facilities.

43

INVESTMENTS

General. The Company's Investment Committee monitors the investment
portfolio of the Company and its subsidiaries. The Investment Committee receives
investment management services from external professionals.

Investments are selected based upon the parameters established in the
Company's investment policies. Emphasis is given to the selection of high
quality, liquid securities that provide current investment returns. Maturities
or liquidity characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be consistent with the
duration of the policy liabilities. Consistent with regulatory requirements and
internal guidelines, the Company invests in a range of assets, but limits its
investments in certain classes of assets, and limits its exposure to certain
industries and to single issuers.

Investments are reviewed quarterly (or more frequently if certain
indicators arise) to determine if they have suffered an impairment of value that
is considered other than temporary. Management's review considers the following
indicators of impairment: fair value is significantly below cost; the decline in
fair value is attributable to specific adverse conditions affecting a particular
investment; the decline in fair value is attributable to specific conditions,
such as conditions in an industry or in a geographic area; the decline in fair
value has existed for an extended period of time; downgrades by rating agencies
from investment grade to non-investment grade; the financial condition of the
issuer has deteriorated and dividends have been reduced or eliminated or
scheduled interest payments have not been made. Management monitors investments
where two or more of the above indicators exist and investments are identified
by the Company in economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of determination.

Set forth below is a summary of the Company's investments by category at
December 31, 2002 and 2001:

Investment accounting policies. The Company has classified its entire
fixed maturity portfolio as "available for sale." This classification requires
the portfolio to be carried at fair value with the resulting unrealized gains or
losses, net of applicable income taxes, reported in accumulated other
comprehensive income as a separate component of stockholders' equity. As a
result, fluctuations in fair value, which is affected by changes in interest
rates, will result in increases or decreases to the Company's stockholders'
equity.

During 2002, 2001 and 2000, the Company recorded impairment charges for
certain fixed and equity securities in the amount of $14.7 million, $3.5 million
and $-0-, respectively. The Company's 2002 impairment charge included a $6.1
million impairment charge associated with the Company's WorldCom, Inc. holdings,
which was recorded in the second quarter of 2002 as a result of previously
announced accounting irregularities at WorldCom, Inc. At June 30, 2002, UICI's
insurance company subsidiaries held an aggregate of $7.525 million principal
amount of WorldCom Inc. bonds, of which $4.0 million principal amount matures in

44

2005 and $3.525 million principal amount matures in 2031. During the three
months ended September 30, 2002, the Company's insurance company subsidiaries
sold all of their WorldCom Inc. bonds for a nominal loss (giving effect to the
$6.1 million impairment charge taken in the second quarter of 2002).

Fixed maturity securities. Fixed maturity securities accounted for 81.2%
and 76.3% of the Company's total investments at December 31, 2002 and 2001,
respectively. Fixed maturity securities at December 31, 2002 consisted of the
following:

Included in the fixed maturity portfolio is a concentration of
mortgage-backed securities, including collateralized mortgage obligations and
mortgage-backed pass-throughs. To limit its credit risk, the Company invests in
mortgage-backed securities that are rated investment grade by the public rating
agencies. The Company's mortgage-backed securities portfolio is a conservatively
structured portfolio that is concentrated in the less volatile tranches, in the
form of planned amortization classes, sequential payment and commercial
mortgage-backed securities. The Company seeks to minimize prepayment risk during
periods of declining interest rates and minimize duration extension risk during
periods of rising interest rates. The Company has less than 1% of its investment
portfolio invested in the more volatile tranches.

As of December 31, 2002 and 2001, $1,058.7 million (or 97.3%) and $883.3
million (or 95.0%), respectively, of the fixed maturity securities portfolio was
rated BBB or better (investment grade) and $29.4 million (or 2.7%) and $45.9
million (or 5.0%), respectively, of the fixed maturity securities portfolio was
invested in below investment grade securities (rated less than BBB). A quality
distribution for fixed maturity securities at December 31, 2002 is set forth
below:

45

The Company regularly monitors its investment portfolio to attempt to
minimize its concentration of credit risk in any single issuer. Set forth in the
table below is a schedule of all investments representing greater than 1% of the
Company's aggregate investment portfolio at December 31, 2002 and 2001.

The Company's short-term investments are held in a diversified
institutional money market fund that invests solely in the highest quality
United States dollar denominated money market securities of domestic and foreign
issuers.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
the Company evaluates its estimates, including those related to health and life
insurance claims and reserves, bad debts, investments, intangible assets, income
taxes, financing operations and contingencies and litigation. The Company bases
its 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. For a more detailed
discussion on the application of these and other accounting policies, see Note A
of Notes to Consolidated Financial Statements in Item 14 of this Annual Report
on Form 10-K, beginning on page F-8.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

CLAIMS RESERVES

The Company establishes liabilities for benefit claims that have been
reported but not paid and claims that have been incurred but not reported under
health and life insurance contracts. These reserves are developed using
actuarial principles and assumptions that consider a number of items, including
historical and current claim payment patterns, product variations, the timely
implementation of appropriate rate increases and seasonality.

The Company uses the developmental method to estimate claims reserves. This
method applies completion factors to paid claims in order to estimate the
ultimate claim payments. These completion factors are derived from historical
experience and are dependent on the incurred dates of the paid claims.

The SEA Division assigns original incurred dates for the paid claims
utilized in the estimation of the claim reserves. This original incurred date
technique results in estimating a liability for all medical services related to
an accident or illness incurred prior to the end of the period, even though the
medical services may not be received by the insured until a later financial
reporting period. In addition to the developmental reserves, various additional
claim reserves are estimated as appropriate. The additional claim reserves
estimate liabilities for situations, such as excess pending claims inventory and
disputed claims.

46

The Group Insurance Division assigns incurred dates based on the date of
service. This method estimates the liability for all medical services received
by the insured prior to the end of the applicable financial period. Appropriate
adjustments are made in the completion factors to account for pending claim
inventory changes and contractual continuation of coverage beyond the end of the
financial period.

The Company estimates the relevant items, based primarily on historical and
current data, and uses this information to determine the assumptions underlying
its claims reserve calculations. An extensive degree of judgment is used in this
estimation process. For health care costs payable, the reserve balances and the
related benefit expenses are highly sensitive to changes in the assumptions used
in the reserve calculations. With respect to health claims, the items that have
the greatest impact on the Company's financial results are the medical cost
trend, which is the rate of increase in health care costs and the unpredictable
variability in actual experience. Any adjustments to prior period reserves are
included in the benefit expense of the period in which the need for the
adjustment becomes known. Due to the considerable variability of health care
costs and actual experience, adjustments to health reserves occur each quarter
and are sometimes significant.

ACCOUNTING FOR HEALTH POLICY ACQUISITION COSTS

The Company incurs various costs in connection with the origination and
initial issuance of its health insurance policies, including underwriting and
policy issuance costs, costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to agents). For financial
reporting purposes, underwriting and policy issuance costs with respect to
health policies issued through the Company's Self Employed Agency and Student
Insurance Divisions are expensed as incurred. Costs associated with generating
sales leads with respect to the health business issued through the Self Employed
Agency Division are capitalized and amortized over a two-year period, which
approximates the average life of a policy. The Company defers the portion of
commissions paid to agents and premium taxes with respect to the portion of
health premium collected but not yet earned, and the Company amortizes the
deferred expense over the period as and when the premium is earned. See Note A
of Notes to Consolidated Financial Statements.

With respect to health policies sold through the Company's Self Employed
Agency Division, commissions paid to agents with respect to first year policies
are higher than commissions paid to agents with respect to policies in renewal
years. Accordingly, during periods of increasing first year premium revenue
(such as occurred during 2002), the Self Employed Agency Division's overall
operating profit margin will be negatively impacted by the higher commission
expense associated with first year premium revenue.

The Company monitors and assesses the recoverability of capitalized health
policy acquisition costs on a quarterly basis.

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

In June 2001, FASB issued Statements No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The Company has
determined that it will review goodwill and intangible assets for impairment as
of November 1 of each year or more frequently if certain indicators arise. An
impairment loss would be recorded in the period such determination was made.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives. Statement 142 also requires that goodwill included in
the carrying value of equity method investments no longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In
accordance with Statement No. 142, the Company tested for goodwill impairment
effective January 1, 2002. As a result of the transitional impairment testing,
completed during the quarter ended June 30, 2002, the Company determined that
goodwill recorded in connection with the acquisition of Academic Management
Services Corp. ("AMS") and Barron Risk Management Services ("Barron") was
impaired in the aggregate amount of $6.9 million

47

($5.1 million net of tax). The Company has reflected this impairment charge in
its financial statements as a cumulative effect of a change in accounting
principle as of January 1, 2002 in accordance with Statement No. 142. On
September 30, 2002, the Company sold to an unaffiliated third party all of the
capital stock of Barron, in connection with which for financial reporting
purposes the Company recognized a nominal gain.

Historically, the Company generally had amortized the excess of cost over
the underlying value of the net assets of companies acquired on a straight-line
basis over twenty to twenty-five years. The Company continually reevaluated the
propriety of the carrying amount of goodwill, as well as the amortization period
to determine whether current events and circumstances warrant adjustments to the
carrying value and/or revised estimates of useful life. The Company assessed the
recoverability of goodwill based upon several factors, including management's
intention with respect to the operations to which the goodwill relates and those
operations' projected future income and undiscounted cash flows. An impairment
loss would be recorded in the period such determination was made.

At December 31, 2002 and 2001, the Company had goodwill in the amount of
$118.9 million and $104.7 million, respectively, and accumulated amortization of
$16.7 million and $18.7 million at December 31, 2002 and 2001, respectively,
resulting in net goodwill of $102.2 million and $86.0 million at December 31,
2002 and 2001, respectively. The Company recorded goodwill amortization expense
in continuing operations in the amount of $4.5 million and $6.1 million in 2001
and 2000, respectively.

At December 31, 2002 and 2001, the Company had other intangibles in the
amount of $10.5 million and $-0-, respectively, and accumulated amortization of
$1.8 million and $-0- at December 31, 2002 and 2001, respectively, resulting in
net other intangibles of $8.7 million and $-0- at December 31, 2002 and 2001,
respectively. The Company recorded other intangibles amortization expense in
continuing operations in the amount of $1.8 million, $-0- and $-0- in 2002, 2001
and 2000, respectively.

ACCOUNTING FOR AGENT STOCK ACCUMULATION PLANS

The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA -- Association Field
Services, New United Agency, Cornerstone America, Guaranty Senior Assurance,
SeniorsFirst and CFLD Association Field Services. Under EITF 96-18 "Accounting
for Equity Instruments that are issued to Other Than Employees for Acquiring or
in Connection with Selling Goods and Services," the Company has established a
liability for future unvested benefits under the Agent Plans and adjusts the
liability based on the market value of the Company's Common Stock. The
accounting treatment of the Company's Agent Plans will result in unpredictable
stock-based compensation charges, dependent upon fluctuations in the quoted
price of UICI common stock. These unpredictable fluctuations in stock based
compensation charges may result in material non-cash fluctuations in the
Company's results of operations. See Note P of Notes to Consolidated Financial
Statements.

INVESTMENTS

The Company has classified its investments in securities with fixed
maturities as available for sale. Investments in equity securities and
securities with fixed maturities have been recorded at fair value, and
unrealized investment gains and losses are reflected in stockholders' equity.
Investment income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed quarterly to
determine if they have suffered an impairment of value that is considered other
than temporary. If investments are determined to be impaired, a loss is
recognized at the date of determination.

Testing for impairment of investments also requires significant management
judgment. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgment elements. The discovery of
new information and the passage of time can significantly change these
judgments. Revisions of impairment judgments are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining

48

fair value and assessing investment impairment. The same influences tend to
increase the risk of potentially impaired assets.

Investments are reviewed quarterly (or more frequently if certain
indicators arise) to determine if they have suffered an impairment of value that
is considered other than temporary. Management's review considers the following
indicators of impairment: fair value is significantly below cost; the decline in
fair value is attributable to specific adverse conditions affecting a particular
investment; the decline in fair value is attributable to specific conditions,
such as conditions in an industry or in a geographic area; the decline in fair
value has existed for an extended period of time; downgrades by rating agencies
from investment grade to non-investment grade; the financial condition of the
issuer has deteriorated and dividends have been reduced or eliminated or
scheduled interest payments have not been made. Management monitors investments
where two or more of the above indicators exist and investments are identified
by the Company in economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of determination.

The Company seeks to match the maturities of invested assets with the
payment of expected liabilities. By doing this, the Company attempts to make
cash available as payments become due. If a significant mismatch of the
maturities of assets and liabilities were to occur, the impact on the Company's
results of operations could be significant.

DEFERRED TAXES

The Company establishes a valuation allowance when management believes,
based on the weight of the available evidence, that it is more likely than not
that some portion of the deferred tax asset will not be realized. Realization of
the net deferred tax asset is dependent on generating sufficient future taxable
income. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. During 2002 the Company determined that it
was more likely than not that it would be able to realize its deferred tax
assets. Accordingly, the Company eliminated or released the remaining valuation
allowance related to the operating loss carryover of AMS. In the event that the
Company were to determine that it would not be able to realize all or part of
its net deferred tax asset in the future, a valuation allowance would be
recorded to reduce its deferred tax assets to the amount that it believes is
more likely than not to be realized. Recording a valuation allowance would
result in a charge to income in the period such determination was made. The
Company will consider future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need to record a valuation allowance. In
the event the Company were to determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made.

DISCONTINUED OPERATIONS

The Company has reflected as discontinued operations for financial
reporting purposes the results of its former United CreditServ sub-prime credit
card business, its Special Risk Division operations and its UICI Administrators,
Inc. unit. The Company has established a liability for losses on disposal of the
discontinued operations. The liability for losses on disposal established by the
Company at December 31, 2002 (which is reflected, in the case of United
CreditServ, in "other liabilities" on the Company's consolidated balance sheet
and, in the case of the Special Risk Division and UICI Administrators, as "net
liabilities of discontinued operations, including reserve for losses on
disposal" on the Company's consolidated balance sheet) represents the Company's
current estimate of all additional losses (including asset write-downs,
estimated losses on the sale of the business and/or the assets and continuing
operating losses through the date of sale or shut down) that it believes it will
incur as part of any sale or shut down of the discontinued operations. The
Company regularly monitors and reassesses its estimates for losses on disposal,
and if and when such estimates change, the Company will make appropriate
adjustments to the liability.

49

LOSS CONTINGENCIES

The Company is subject to proceedings and lawsuits related to insurance
claims and other matters. See Note O of Notes to Consolidated Financial
Statements. The Company is required to assess the likelihood of any adverse
judgments or outcomes to these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is made after careful analysis of each individual issue. The
required reserves may change in the future due to new developments in each
matter or changes in approach, such as a change in settlement strategy in
dealing with these matters.

PRIVACY INITIATIVES

Recently-adopted legislation and regulations governing the use and security
of individuals' nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the Company's business and
future results of operations.

GRAMM-LEACH-BLILEY ACT AND STATE INSURANCE LAWS AND REGULATIONS

The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The recent Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or "GLBA") includes several privacy provisions and
introduces new controls over the transfer and use of individuals' nonpublic
personal data by financial institutions, including insurance companies,
insurance agents and brokers and certain other entities licensed by state
insurance regulatory authorities. Additional federal legislation aimed at
protecting the privacy of nonpublic personal financial and health information is
proposed and over 400 state privacy bills are pending.

GLBA provides that there is no federal preemption of a state's insurance
related privacy laws if the state law is more stringent than the privacy rules
imposed under GLBA. Accordingly, state insurance regulators or state
legislatures will likely adopt rules that will limit the ability of insurance
companies, insurance agents and brokers and certain other entities licensed by
state insurance regulatory authorities to disclose and use non-public
information about consumers to third parties. These limitations will require the
disclosure by these entities of their privacy policies to consumers and, in some
circumstances, will allow consumers to prevent the disclosure or use of certain
personal information to an unaffiliated third party. Pursuant to the authority
granted under GLBA to state insurance regulatory authorities to regulate the
privacy of nonpublic personal information provided to consumers and customers of
insurance companies, insurance agents and brokers and certain other entities
licensed by state insurance regulatory authorities, the National Association of
Insurance Commissioners has recently promulgated a new model regulation called
Privacy of Consumer Financial and Health Information Regulation. Some states
issued this model regulation before July 1, 2001, while other states must pass
certain legislative reforms to implement new state privacy rules pursuant to
GLBA. In addition, GLBA requires state insurance regulators to establish
standards for administrative, technical and physical safeguards pertaining to
customer records and information to (a) ensure their security and
confidentiality, (b) protect against anticipated threats and hazards to their
security and integrity, and (c) protect against unauthorized access to and use
of these records and information. However, no state insurance regulators have
yet issued any final regulations in response to such security and
confidentiality requirements. The privacy and security provisions of GLBA will
significantly affect how a consumer's nonpublic personal information is
transmitted through and used by diversified financial services companies and
conveyed to and used by outside vendors and other unaffiliated third parties.

Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and quality
of products and services, and those regulations could adversely affect the
growth of the online financial services industry. If Internet use does not grow
as a result of privacy or security concerns, increasing regulation or for other
reasons, the growth of UICI's Internet-based business would be hindered. It is
not possible at this time to assess the impact of the privacy provisions on
UICI's financial condition or results of operations.

50

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

The federal Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains provisions requiring mandatory standardization of certain
communications between health plans (including health insurance companies),
electronic clearinghouses and health care providers who transmit certain health
information electronically. HIPAA requires health plans to use specific
data-content standards, mandates the use of specific identifiers (e.g., national
provider identifiers and national employer identifiers) and requires specific
privacy and security procedures. HIPAA authorized the Secretary of the federal
Department of Health and Human Services ("HHS") to issue standards for the
privacy and security of medical records and other individually identifiable
patient data.

In December 2000, HHS issued final regulations regarding the privacy of
individually-identifiable health information. This final rule on privacy applies
to both electronic and paper records and imposes extensive requirements on the
way in which health care providers, health plan sponsors, health insurance
companies and their business associates use and disclose protected information.
Under the new HIPAA privacy rules, the Company will now be required to (a)
comply with a variety of requirements concerning its use and disclosure of
individuals' protected health information, (b) establish rigorous internal
procedures to protect health information and (c) enter into business associate
contracts with other companies that use similar privacy protection procedures.
The final rules do not provide for complete federal preemption of state laws,
but, rather, preempt all contrary state laws unless the state law is more
stringent. These rules must be complied with by April 14, 2003.

Sanctions for failing to comply with standards issued pursuant to HIPAA
include criminal penalties of up to $250,000 per violation and civil sanctions
of up to $25,000 per violation. Due to the complex and controversial nature of
the privacy regulations, they may be subject to court challenge, as well as
further legislative and regulatory actions that could alter their effect.

In August 2000, HHS published for comment proposed rules related to the
security of electronic health data, including individual health information and
medical records, for health plans, health care providers, and health care
clearinghouses that maintain or transmit health information electronically. The
proposed rules would require these businesses to establish and maintain
responsible and appropriate safeguards to ensure the integrity and
confidentiality of this information. The standards embraced by these rules
include the implementation of technical and organization policies, practices and
procedures for security and confidentiality of health information and protecting
its integrity, education and training programs, authentication of individuals
who access this information, system controls, physical security and disaster
recovery systems, protection of external communications and use of electronic
signatures. These proposed rules have not yet become final.

UICI is currently reviewing the potential impact of the HIPAA privacy
regulations on its operations, including its information technology and security
systems. The Company cannot at this time predict with specificity what impact
(a) the recently adopted final HIPAA rules governing the privacy of
individually-identifiable health information and (b) the proposed HIPAA rules
for ensuring the security of individually-identifiable health information may
have on the business or results of operations of the Company. However, these new
rules will likely increase the Company's burden of regulatory compliance with
respect to our life and health insurance products and other information-based
products, and may reduce the amount of information the Company may disclose and
use if the Company's customers do not consent to such disclosure and use. The
Company does not currently believe that the restrictions and duties imposed by
the recently adopted final rules on the privacy of individually-identifiable
health information, or the proposed rule on security of individually-
identifiable health information, will have a material adverse effect on UICI's
business and future results of operations.

INCOME TAXES

The Company's effective tax rate from continuing operations was 31.0% for
2002 compared to 26.4% for 2001 and 52.0% for 2000. The 2002 effective tax rate
varied from the federal tax rate of 35%, primarily due to the release of the
remaining valuation allowance on the operating loss carryover of AMS. The 2001
effective

51

tax rate varied from the federal tax rate of 35%, primarily due to the decrease
in the valuation allowance related to the partial utilization by AMS of its
operating loss carryover and a release of a reserve for taxes on undistributed
earnings from its subsidiaries that were previously less than 80% owned and are
now wholly owned. The 2000 effective tax rate varied from the federal tax rate
of 35%, primarily due to the significant operating loss at AMS, for which the
Company was not able to recognize a tax benefit. AMS entered the Company's
consolidated group for tax purposes on August 3, 2001. Prior to that date AMS
filed a separate tax return. As of December 31, 2002, the Company has recognized
a net deferred tax asset of $4.6 million. Realization of the net deferred tax
asset is dependent on generating sufficient taxable income. Although realization
is not assured, management believes it is more likely than not that the net
deferred tax asset will be realized based on anticipated profits and available
tax planning strategies. See Note L of Notes to Consolidated Financial
Statements.

OTHER MATTERS

The state of domicile of each of the Company's domestic insurance
subsidiaries imposes minimum risk-based capital requirements that were developed
by the NAIC. The formulas for determining the amount of risk-based capital
specify various weighting factors that are applied to financial balances and
premium levels based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of a company's regulatory total adjusted capital, as
defined, to its authorized control level risk-based capital, as defined.
Companies' specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. At December 31,
2002, the risk-based capital ratio of each of the Company's domestic insurance
subsidiaries significantly exceeded the ratios for which regulatory corrective
action would be required.

Dividends paid by domestic insurance companies out of earned surplus in any
year are limited by the law of the state of domicile. See Item 5 -- Market for
Registrant's Common Stock and Related Stockholder Matters and Note M of Notes to
the Consolidated Financial Statements.

INFLATION

Inflation historically has had a significant impact on the health insurance
business. In recent years, inflation in the costs of medical care covered by
such insurance has exceeded the general rate of inflation. Under basic hospital
medical insurance coverage, established ceilings for covered expenses limit the
impact of inflation on the amount of claims paid. Under catastrophic hospital
expense plans and preferred provider contracts, covered expenses are generally
limited only by a maximum lifetime benefit and a maximum lifetime benefit per
accident or sickness. Thus, inflation may have a significantly greater impact on
the amount of claims paid under catastrophic hospital expense and preferred
provider plans as compared to claims under basic hospital medical coverage. As a
result, trends in health care costs must be monitored and rates adjusted
accordingly. Under the health insurance policies issued in the self-employed
market, the primary insurer generally has the right to increase rates upon 30-60
days written notice and subject to regulatory approval in some cases.

The annuity and universal life-type policies issued directly and assumed by
the Company are significantly impacted by inflation. Interest rates affect the
amount of interest that existing policyholders expect to have credited to their
policies. However, the Company believes that the annuity and universal life-type
policies are generally competitive with those offered by other insurance
companies of similar size, and the investment portfolio is managed to minimize
the effects of inflation.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, superseding FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144
provides guidance on differentiating between assets held and used, held for
sale, and held for disposal other than by sale. Statement 144 requires a
three-step approach for recognizing and measuring the

52

impairment of assets to be held and used and also superseded the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
regarding discontinued operations. Statement 144 became effective for the
Company's fiscal year beginning January 1, 2002.

In June 2001, the FASB issued Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. Statement 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 requires that these assets be reviewed for
impairment at least annually. The Company has determined that it will review
goodwill and intangible assets for impairment as of November 1 of each year or
more frequently if certain indicators arise. An impairment loss would be
recorded in the period such determination was made. Intangible assets with
finite lives will continue to be amortized over their estimated useful lives.
Statement No. 142 also requires that goodwill included in the carrying value of
equity method investments no longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In
accordance with Statement 142, the Company tested for goodwill impairment
effective January 1, 2002. As a result of the transitional impairment testing,
completed during the quarter ended June 30, 2002, the Company determined that
goodwill recorded in connection with the acquisition of Academic Management
Services Corp. ("AMS") and Barron Risk Management Services ("Barron") was
impaired in the aggregate amount of $6.9 million ($5.1 million net of tax). The
Company has reflected this impairment charge in its financial statements as a
cumulative effect of a change in accounting principle as of January 1, 2002 in
accordance with Statement No. 142. On September 30, 2002, the Company sold to an
unaffiliated third party all of the capital stock of Barron, in connection with
which for financial reporting purposes the Company recognized a nominal gain.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement 146 is effective for exit
or disposal activities initiated after December 31, 2002. The impact of
implementation on our financial position or results of operations is not
expected to be material.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year end. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The impact of implementation on our financial position or
results of operations is not expected to be material.

In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. Statement 148 amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The amendments to Statement 123 are effective
for financial statements for fiscal years ending after December 15, 2002.
Earlier application of the transition provisions is permitted for entities with
a fiscal year ending prior to December 15, 2002. The Company has historically
accounted for the stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. On January
1, 2003, the Company adopted Statement No. 123 for all employee awards granted
or modified on or after January 1, 2003, and began measuring the compensation
cost of stock-

53

based awards under the fair value method. The Company adopted the transition
provisions that require expensing options prospectively in the year of adoption.
Existing awards will continue to follow the intrinsic value method prescribed by
APB 25. Assuming award levels and fair values similar to past years, the impact
of adoption is not material on results of operations. This change will primarily
impact the accounting for stock options.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements set forth herein or incorporated by reference herein
from the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform; the ability to predict and effectively
manage claims related to health care costs; and reliance on key management and
adequacy of claim liabilities.

The Company's future results will depend in large part on accurately
predicting health care costs incurred on existing business and upon the
Company's ability to control future health care costs through product and
benefit design, underwriting criteria, utilization management and negotiation of
favorable provider contracts. Changes in mandated benefits, utilization rates,
demographic characteristics, health care practices, provider consolidation,
inflation, new pharmaceuticals/technologies, clusters of high-cost cases, the
regulatory environment and numerous other factors are beyond the control of any
health plan provider and may adversely affect the Company's ability to predict
and control health care costs and claims, as well as the Company's financial
condition, results of operations or cash flows. Periodic renegotiations of
hospital and other provider contracts coupled with continued consolidation of
physician, hospital and other provider groups may result in increased health
care costs and limit the Company's ability to negotiate favorable rates. In
addition, the Company faces competitive and regulatory pressure to contain
premium prices. Fiscal concerns regarding the continued viability of
government-sponsored programs such as Medicare and Medicaid may cause decreasing
reimbursement rates for these programs. Any limitation on the Company's ability
to increase or maintain its premium levels, design products, implement
underwriting criteria or negotiate competitive provider contracts may adversely
affect the Company's financial condition or results of operations.

The Company's insurance subsidiaries are subject to extensive regulation in
their states of domicile and the other states in which they do business under
statutes that typically delegate broad regulatory, supervisory and
administrative powers to state insurance departments and agencies. State
insurance departments have also periodically conducted and continue to conduct
financial and market conduct examinations and other inquiries of UICI's
insurance subsidiaries. State insurance regulatory agencies have authority to
levy monetary fines and penalties resulting from findings made during the course
of such examinations and inquiries. Historically, the Company's insurance
subsidiaries have from time to time been subject to such regulatory fines and
penalties. While none of such fines or penalties individually or in the
aggregate have to date had a material adverse effect on the results of
operations or financial condition of the Company, the Company could be adversely
affected by increases in regulatory fines or penalties an/or changes in the
scope, nature and/or intensity of regulatory scrutiny and review.

The Company provides health insurance products to consumers in the
self-employed market in 44 states. A substantial portion of such products is
issued to members of various independent membership associations that endorse
the products and act as the master policyholder for such products. The two
principal membership associations in the self-employed market for which the
Company underwrites insurance are the National Association for the Self-Employed
("NASE") and the Alliance for Affordable Services ("AAS"). The associations
provide their membership with a number of endorsed benefits and products,
including health insurance underwritten by the Company. Subject to applicable
state law, individuals generally may not obtain insurance under an association's
master policy unless they are also members of the associations. UGA agents and
Cornerstone agents also act as enrollers of new members for the associations,
for which the agents receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of Ronald

54

L. Jensen. the Chairman of the Company) provides administrative and benefit
procurement services to the associations, and a subsidiary of the Company sells
new membership sales leads to the enrollers and video and print services to the
associations and to Specialized Association Services, Inc. See Note N of Notes
to Consolidated Financial Statements. In addition to health insurance premiums
derived from the sale of health insurance, the Company receives fee income from
the associations, including fees associated with the enrollment of new members,
fees for association membership marketing and administrative services and fees
for certain association member benefits. The agreements with these associations
requiring the associations to continue as the master policyholder and to endorse
the Company's insurance products to their respective members are terminable by
the Company and the associations upon not less than one year's advance notice to
the other party.

Recent articles in the popular press have been critical of association
group coverage. In December 2002, the National Association of Insurance
Commissioners (NAIC) convened a special task force to review association group
coverage, and the Company is aware that selected states are reviewing the laws
and regulations under which association group policies are issued. The Company
has also recently been named a party to three lawsuits challenging the nature of
the relationship between MEGA and the National Association for the Self-Employed
(NASE), the membership association that has endorsed MEGA's health insurance
products. See Note O of Notes to Consolidated Financial Statements. While the
Company believes it is providing association group coverage in full compliance
with applicable law, changes in the relationship between the Company and the
membership associations and/or changes in the laws and regulations governing
so-called "association group" insurance (particularly changes that would subject
the issuance of policies to prior premium rate approval and/or require the
issuance of policies on a "guaranteed issue" basis) could have a material
adverse impact on the financial condition, results of operations and/or business
of the Company.

The Company's Academic Management Services Corp. business could be
adversely affected by changes in the Federal Higher Education Act of 1965, which
authorizes and governs most federal student aid and student loan programs,
and/or changes in other relevant federal or state laws, rules and regulations.
The Higher Education Act is subject to review and reauthorization by the
recently convened 108th Congress. Congress last reauthorized the Higher
Education Act in 1998. While the Company believes that the Higher Education Act
of 1965 will in fact be reauthorized, there can be no assurance of the form that
reauthorization will take or the changes that the reauthorization bill will
bring to the law and regulations governing student finance.

In addition, existing legislation and future measures by the federal
government may adversely affect the amount and nature of federal financial
assistance available with respect to loans made through the U.S. Department of
Education. Finally, the level of competition currently in existence in the
secondary market for loans made under the Federal Loan Programs could be
reduced, resulting in fewer potential buyers of the Federal Loans and lower
prices available in the secondary market for those loans.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded.

The primary market risk to the Company's investment portfolio is interest
rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
liabilities. The Company's investment portfolio consists mainly of high quality,
liquid securities that provide current investment returns. The Company believes
that the annuity and universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The Company does not
anticipate significant changes in the primary market risk exposures or in how
those exposures are managed in the future reporting periods based upon what is
known or expected to be in effect in future reporting periods.

Profitability of the student loans is affected by the spreads between the
interest yield on the student loans and the cost of the funds borrowed under the
various credit facilities. Although the interest rates on the

55

student loans and the interest rate on the credit facilities are variable, the
gross interest earned by lenders on Stafford student loans uses the results of
91-day T-bill auctions as the base rate, while the base rate on the credit
facilities is LIBOR. The effect of rising interest rates on earnings on Stafford
loans is generally small, as both revenues and costs adjust to new market
levels. In addition to Stafford loans, the Company holds PLUS loans on which the
interest rate yield is set annually beginning July 1 through June 30 by
regulation at a fixed rate. The Company had approximately $192.3 million
principal amount of PLUS loans outstanding at December 31, 2002. The fixed yield
on PLUS loans was 6.79% for the twelve months ended June 30, 2002 and was reset
to 4.86% for the twelve months beginning July 1, 2002. These loans are financed
with borrowings whose rates are subject to reset, generally monthly. During the
twelve months beginning July 1, 2002, the cost of borrowings to finance this
portion of the student loan portfolio could rise or fall, while the rate earned
on the student loans will remain fixed.

Sensitivity analysis is defined as the measurement of potential loss in
future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. "Near
term" is defined as a period of time going forward up to one year from the date
of the consolidated financial statements.

In this sensitivity analysis model, the Company uses fair values to measure
its potential loss. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments included in the model. For invested assets,
duration modeling is used to calculate changes in fair values. Duration on
invested assets is adjusted to call, put and interest rate reset features.

The sensitivity analysis model produces a loss in fair value of market
sensitive instruments of $41.4 million based on a 100 basis point increase in
interest rates as of December 31, 2002. This loss value only reflects the impact
of an interest rate increase on the fair value of the Company's financial
instruments.

The Company has not used derivative financial instruments in managing its
market risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The audited consolidated financial statements of the Company and other
information required by this Item 8 are included in this Form 10-K beginning on
page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

As previously disclosed in a Current Report on Form 8-K (as amended in a
Form 8-K/A) dated August 26, 2002, on August 26, 2002, UICI dismissed Ernst &
Young LLP as its independent accountants and selected KPMG LLP as its new
independent accountants effective August 26, 2002. The Company's Audit Committee
participated in and approved the decision to change independent accountants.

The reports of Ernst & Young LLP on the financial statements for each of
the two fiscal years ended December 31, 2001 and 2000 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.

In addition, in connection with its audits of the Company's financial
statements for each of the years ended December 31, 2001 and 2000 and the
subsequent interim period through August 26, 2002, there were no disagreements
with Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused Ernst & Young LLP to make reference thereto in their report on the
financial statements for such years.

Except as described in the next succeeding paragraphs, during each of the
years ended December 31, 2001 and 2000 and the subsequent interim period through
August 26, 2002, there were no reportable events (as defined in Regulation S-K
Item 304(a)(1)(v)).

56

In a letter dated April 4, 2000 to the Audit Committee of the Company's
Board of Directors, Ernst & Young LLP advised the Company that, during the
course of and in connection with Ernst & Young LLP's audit of the Company's
consolidated financial statements as of, and for the year ended, December 31,
1999, Ernst & Young LLP had noted certain matters involving the Company's
internal controls and its operations that Ernst & Young LLP considered to be
"reportable conditions" and "material weaknesses" under standards established by
the American Institute of Certified Public Accountants.

In particular, Ernst & Young LLP identified material weaknesses at the
Company's former United CreditServ, Inc. credit card operations and UICI's
Academic Management Services Corp. (formerly Educational Finance Group, Inc.)
subsidiary ("AMS") and a reportable condition with respect to UICI. With respect
to UICI's credit card operations, Ernst & Young LLP identified as material
weaknesses the failure to maintain credit card account-by-account detail of a
liability account and the failure to conduct regular periodic reconciliations of
that account, lack of segregation of duties with respect to preparation and
review of the calculation of the credit card loan loss reserve, certain credit
card aging matters, and failure to maintain a proper review and approval process
for general ledger entries. With respect to UICI's AMS operations, Ernst & Young
LLP identified as material weaknesses AMS' failure to maintain timely and
accurate accounting records for the purchasing and originating of student loans,
the failure to reconcile on a regular periodic basis its student loan
receivables assets with the records of the student loan servicers, certain
inadequacies in AMS' systems leading to delays in closing AMS' books on a timely
basis, the lack of a formal review and approval process on the part of UICI (the
parent) with respect to transactions entered into by AMS (the subsidiary), and
certain inadequacies in AMS' methodologies for accounting for deferred student
loan premiums and origination costs. With respect to UICI, Ernst & Young LLP
identified as a reportable condition that the likelihood was high that related
party transactions would not be properly recorded.

UICI's Audit Committee discussed the nature of these material weaknesses
and the reportable condition with Ernst & Young LLP and directed that the
recommendations contained in the April 4, 2000 letter be adopted and that
corrective action be taken. During the course of 2000, management completed the
corrective action. UICI's credit card operations (which had been designated as a
discontinued operation for financial reporting purposes effective December 31,
1999) effectively ceased doing business in February 2000, and with respect to
AMS the Company undertook an extensive reconciliation of its loan ledger with
its servicing records and implemented a procedure of regular and periodic
reconciliations thereafter. At the parent level, UICI's Board of Directors
adopted enhanced procedures designed to ensure the proper identification,
approval and reporting of related party transactions. As indicated above, Ernst
& Young LLP subsequently delivered an unqualified opinion with respect to the
UICI consolidated financial statements as of, and for the year ended December
31, 2000.

The Company authorized Ernst & Young LLP to respond fully to inquiries of
the Company's new accountants concerning these matters.

The Company provided Ernst & Young LLP with a copy of the disclosure made
under Item 4 of the previously filed Form 8-K/A and requested that Ernst & Young
LLP furnish it with a letter addressed to the Securities and Exchange Commission
stating whether or not it agreed with the above statements. A copy of such
letter, dated September 27, 2002, was filed as Exhibit 16 to the Form 8-K/A and
is incorporated herein by reference.

During the years ended December 31, 2001 and 2000 and the subsequent
interim period through August 26, 2002, neither the Company nor anyone on its
behalf consulted with KPMG LLP regarding: (i) either the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any matter that was either the subject of a disagreement, as
that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event, as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.

57

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See the Company's Proxy Statement to be filed in connection with the 2003
Annual Meeting of Shareholders, of which the section entitled "Election of
Directors" is incorporated herein by reference.

For information on executive officers of the Company, reference is made to
the item entitled "Executive Officers of the Company" in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

See the Company's Proxy Statement to be filed in connection with the 2003
Annual Meeting of Stockholders, of which the subsection entitled "Executive
Compensation" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to common
stock that may be issued under UICI's equity compensation plans as of December
31, 2002:

Equity Compensation Plan Information:

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

(1) Includes the UICI 1987 Stock Option Plan and the Company's 2001 and 2000
Restricted Stock Plans. Under the terms of the Company's 2001 and 2000
Restricted Stock Plans, the Company may issue an additional 188,750 shares
and 44,941 shares of restricted stock, respectively.

(2) Includes the UICI 1998 Employee Stock Option Plan and the Company's 1998
Agent Stock Option Plan, pursuant to which all employees of and agents
contracted with the Company in August 1998 received options to purchase UICI
Common Stock at an exercise price of $15.00 per share. All unexercised
options under these plans expired on January 12, 2003, and no further grants
of stock options will be made under these plans. Also includes options
granted under the AMLI Realty Co. employee stock option plan, which options
were converted into the right to receive shares of the Company's Common
Stock in connection with the Company's acquisition of AMLI Realty Co. in
1996. An aggregate of 58,526 shares of UICI common stock are issuable upon
exercise of the options initially granted under the AMLI Realty Co. plan.
The options have a weighted average exercise price of $12.43. No further
grants of stock options will be made under this plan. See Note P of Notes to
Consolidated Financial Statements for additional information concerning the
Company's stock incentive plans.

See the Company's Proxy Statement to be filed in connection with the 2003
Annual Meeting of Stockholders, of which the subsection entitled "Nominees" and
the subsection entitled "Beneficial Ownership of Common Stock" are incorporated
herein by reference.

58

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See the Company's Proxy Statement to be filed in connection with the 2003
Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference. See
Note N of Notes to Consolidated Financial Statements.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the filing date of this report, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness and design of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective. In addition, there
have been no significant changes in internal controls or in other factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.

Disclosure controls and procedures are defined in Rule 13a-14(c) of the
Exchange Act as controls and other procedures designed to ensure that
information required to be disclosed in Exchange Act reports is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. The Company's disclosure
controls and procedures were designed to ensure that material information
related to the Company, including its consolidated subsidiaries, is made known
to management, including the Chief Executive Officer and Chief Financial
Officer, in a timely manner.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements

The following consolidated financial statements of UICI and subsidiaries
are included in Item 8:

Financial Statement Schedules

Schedule II -- Condensed Financial Information of Registrant December 31,
2002, 2001 and 2000:
UICI (Parent Company)..................................... F-89
Schedule -- Supplementary Insurance Information......................... F-92
III
Schedule IV -- Reinsurance................................................. F-94
Schedule V -- Valuation and Qualifying Accounts........................... F-95

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

59

Exhibits:

The response to this portion of Item 15 is submitted as a separate section
of this report beginning on page 64.

(b) Reports on Form 8-K

1. Current Report on Form 8-K dated and filed October 30, 2002

2. Current Report on Form 8-K dated and filed November 13, 2002

3. Current Report on Form 8-K dated and filed February 6, 2003

4. Current Report on Form 8-K dated and filed March 3, 2003

60

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.

UICI

By /s/ GREGORY T. MUTZ*
------------------------------------
Gregory T. Mutz,
President, Chief Executive Officer,
and Director

Date: March 27, 2003

Pursuant to the requirements of Securities Exchange 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.

61

CERTIFICATION OF GREGORY T. MUTZ, CHIEF EXECUTIVE OFFICER OF UICI,
PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Gregory T. Mutz, certify that:

1. I have reviewed this Annual Report on Form 10-K of UICI;

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 officer 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 we 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 officer 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 officer 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.

/s/ GREGORY T. MUTZ
--------------------------------------
Gregory T. Mutz
President and Chief Executive Officer
UICI

Date: March 27, 2003

62

CERTIFICATION OF MARK D. HAUPTMAN, CHIEF FINANCIAL OFFICER OF UICI,
PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Mark D. Hauptman, certify that:

1. I have reviewed this Annual Report on Form 10-K of UICI;

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 officer 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 we 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 officer 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 officer 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.

/s/ MARK D. HAUPTMAN
--------------------------------------
Mark D. Hauptman
Vice President, Chief Accounting
Officer
and Chief Financial Officer
UICI

Date: March 27, 2003

63

EXHIBIT INDEX

NOTE FOR READERS OF FORM 10-K

This copy of the Annual Report on Form 10-K only includes a copy of Exhibit
21. UICI will provide a copy of any exhibit upon written request. All requests
should be mailed to the address on Page 1 or to [email protected].

70

ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15(A)(1) AND (2), (C), AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS

YEAR ENDED DECEMBER 31, 2002

UICI

AND

SUBSIDIARIES
DALLAS, TEXAS

F-1

REPORT OF INDEPENDENT AUDITORS

Board of Directors
UICI

We have audited the accompanying consolidated balance sheet of UICI and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2002. In connection with our audit of the
consolidated financial statements, we have audited the financial statement
schedules listed in the Index at Item 15(a). These consolidated financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UICI and subsidiaries at December 31, 2002, and the consolidated results of
their operations and their cash flows for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. 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 Note A to the Consolidated Financial Statements, the
Company changed its method of accounting for goodwill and other intangible
assets in 2002 as a result of the adoption of FASB Statement No. 142, Goodwill
and Other Intangible Assets.

KPMG LLP

Dallas, Texas
March 3, 2003

F-2

REPORT OF INDEPENDENT AUDITORS

Board of Directors
UICI

We have audited the accompanying consolidated balance sheet of UICI and
subsidiaries (the "Company") as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 2001. Our audits also
included 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 and schedules 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 audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
UICI and subsidiaries at December 31, 2001, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2001, 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.

ERNST & YOUNG LLP

Dallas, Texas
February 6, 2002

F-3

UICI AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.
F-4

UICI AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

F-5

UICI AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See notes to consolidated financial statements.
F-6

UICI AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.
F-7

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of UICI and its
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.

NATURE OF OPERATIONS

The Company offers insurance (primarily health and life) and selected
financial services to niche consumer and institutional markets. The Company
issues primarily health insurance policies, covering individuals and families,
to the self-employed, association group, voluntary employer group and student
markets. Information on the Company's operations by segment is included in Note
R.

Through its Self-Employed Agency Division ("SEA Division"), the Company
offers a broad range of health insurance products for self-employed individuals
and individuals who work for small businesses. The Company's basic
hospital-medical and catastrophic hospital expense plans are designed to
accommodate individual needs and include both traditional fee-for-service
indemnity (choice of doctor) plans and preferred provider organization plans, as
well as other supplemental types of coverage. The Company markets these higher
deductible products through "dedicated" agency sales forces comprised of
independent contractor agents that primarily sell the Company's products.

The Company has classified as its Group Insurance Division the operations
of its former Student Insurance Division and the operations of the Company's
recently acquired Star HRG business unit. For the student market, UICI offers
tailored health insurance programs that generally provide single school year
coverage to individual students at colleges and universities. The Company also
provides an accident policy for students at public and private schools in
kindergarten through grade 12. In the student market, the Company sells its
products through in-house account executives that focus on colleges and
universities on a national basis. Effective February 28, 2002, the Company
acquired the business of Star Human Resources Group, Inc. and STAR
Administrative Services, Inc. (collectively referred to by the Company as its
"Star HRG" unit), a Phoenix, Arizona based business specializing in the
development, marketing, and administration of limited benefit plans for entry
level, high turnover, hourly employees.

Through its Life Insurance Division, the Company offers life insurance and
annuity products to individuals through its dedicated field force.

In 2001 the Company began to develop long-term care and Medicare supplement
insurance products for the senior market. The Company is currently reinsuring
20% of its risk with respect to long-term care coverage on a coinsurance basis
with a third party reinsurer. Senior market products are distributed through
independent agents affiliated with Guaranty Senior Assurance (a division of The
MEGA Life and Health Insurance Company) and through independent agents
affiliated with SeniorsFirst LLC, an agency in which the Company holds a 50%
ownership interest.

Academic Management Services Corp. ("AMS") (a wholly-owned subsidiary of
the Company) provides financial solutions for college students and the
educational institutions they attend by offering an integrated package of
student loans and student loan servicing. UICI also holds a significant equity
interest (approximately 45% of the issued and outstanding shares at December 31,
2002) in Healthaxis, Inc., a publicly traded corporation (Nasdaq: HAXS) that
provides web-based connectivity and applications solutions for health benefit
distribution and administration.

UICI is a holding company, and the Company conducts its insurance
businesses through its wholly owned insurance company subsidiaries, The MEGA
Life and Health Insurance Company ("MEGA"), Mid-West National Life Insurance
Company of Tennessee ("Mid-West") and The Chesapeake Life Insurance Company
("Chesapeake"). MEGA is an insurance company domiciled in Oklahoma and is
licensed to issue

F-8

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

health, life and annuity insurance policies in all states except New York.
Mid-West is an insurance company domiciled in Tennessee and is licensed to issue
health, life and annuity insurance policies in Puerto Rico and all states except
Maine, New Hampshire, New York, and Vermont. Chesapeake is an insurance company
domiciled in Oklahoma and is licensed to issue health and life insurance
policies in all states except New Jersey, New York and Vermont.

The Company's Other Key Factors segment includes (a) investment income not
allocated to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on sale of investments, (e) the operations of the
Company's AMLI Realty Co. subsidiary, (f) minority interest, (g) variable
stock-based compensation, (h) operations that do not constitute reportable
operating segments (consisting primarily of Barron Risk Management Services,
Inc. the remaining portion of the Company's former TPA Division) until its sale
by the Company in September 2002, and (i) amortization of goodwill (with respect
to periods ended prior to January 1, 2002).

DISCONTINUED OPERATIONS

The Company has reflected as discontinued operations for financial
reporting purposes for all periods presented the results of its former United
CreditServ sub-prime credit card business, its Special Risk Division operations
and its former UICI Administrators, Inc. unit. See Note B of Notes to
Consolidated Financial Statements.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.

BASIS OF PRESENTATION

The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP"). The more significant variances between GAAP and statutory accounting
practices prescribed or permitted by regulatory authorities for insurance
companies are: fixed maturities are carried at fair value for investments
classified as available for sale for GAAP rather than generally at amortized
cost; the deferral of new business acquisition costs, rather than expensing them
as incurred; the determination of the liability for future policyholder benefits
based on realistic assumptions, rather than on statutory rates for mortality and
interest; the recording of reinsurance receivables as assets for GAAP rather
than as reductions of liabilities; and the exclusion of non-admitted assets for
statutory purposes. (See Note M for stockholders' equity and net income from
insurance subsidiaries as determined using statutory accounting practices.)

INVESTMENTS

Investments are valued as follows:

Fixed maturities consist of bonds and notes issued by governments,
businesses, or other entities, mortgage and asset backed securities and similar
securitized loans. All fixed maturity investments are classified as available
for sale and carried at fair value.

Equity securities consist of common and non-redeemable preferred stocks and
are carried at fair value.

Mortgage and collateral loans are carried at unpaid balances, less
allowance for losses.

Policy loans are carried at unpaid balances.
F-9

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Short-term investments are carried at fair value, which approximates cost.

The Company accounts for its investment in Healthaxis, Inc. on the equity
method, and, accordingly, the Company's investment in Healthaxis is stated at
the Company's cost, as adjusted for contributions or distributions and the
Company's share of Healthaxis, Inc.'s income or loss.

Realized gains and losses on sales of investments are recognized in net
income on the specific identification basis and include write downs on those
investments deemed to have an other than temporary decline in fair values.
Unrealized investment gains or losses on securities carried at fair value, net
of applicable deferred income tax, are reported in accumulated other
comprehensive income (loss) as a separate component of stockholders' equity and
accordingly have no effect on net income (loss).

Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Short-term financial instruments are classified as investments in the
Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.

Investments are reviewed quarterly to determine if they have suffered an
impairment of value that is considered other than temporary. If investments are
determined to be impaired, a loss is recognized at the date of determination.

CASH AND CASH EQUIVALENTS

The Company classifies as cash and cash equivalents unrestricted cash on
deposit in banks and invested temporarily in various instruments with maturities
of three months or less at the time of purchase.

STUDENT LOANS

Student loans (consisting of student loans originated and student loans
purchased) are carried at their unpaid principal balances (less any applicable
allowance for losses) plus capitalized loan origination costs and, in the case
of student loans purchased in the secondary market at a premium to par, plus
unamortized premiums.

Capitalized loan origination costs consisted of the incremental direct
costs associated with originating student loans, which were principally
origination fees charged by the U.S. Department of Education. Capitalized loan
origination costs and premiums on purchased loans are amortized over the life of
the underlying loans or included in the calculation of gain or loss if loans are
sold in the secondary market. The Company had deferred student loan origination
costs in the amount of $10.9 million and $12.1 million at December 31, 2002 and
2001.

DEFERRED ACQUISITION COSTS

The Company incurs various costs in connection with the origination and
initial issuance of its health and life insurance policies and annuities,
including underwriting and policy issuance costs, costs associated with lead
generation activities and distribution costs (i.e., sales commissions paid to
agents).

With respect to health policies issued through the Company's Self Employed
Agency and Group Insurance Divisions, for financial reporting purposes
underwriting and policy issuance costs are expensed as incurred. Costs
associated with generating sales leads with respect to the health business
issued through the Self Employed Agency Division are capitalized and amortized
over a two-year period, which approximates the average life of a policy. The
Company defers the portion of commissions paid to agents and premium taxes with
respect to the portion of health premium collected but not yet earned, and the
Company amortizes the deferred expense over the period as and when the premium
is earned.

F-10

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Policy acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying period of the
related policies, in proportion to the ratio of the annual premium revenue to
the total premium revenue anticipated. Such anticipated premium revenue, which
is modified to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For universal life-type
and annuity contracts, capitalized costs are amortized in proportion to the
ratio of a contract's annual gross profits to total anticipated gross profits.

The cost of business acquired through acquisition of subsidiaries or blocks
of business is determined based upon estimates of the future profits inherent in
the business acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income is considered in
determining whether a premium deficiency exists. The amortization period is
adjusted when estimates of current or future gross profits to be realized from a
group of products are revised.

The following is an analysis of deferred acquisition costs:

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

(a) The discount rate used in the amortization of the costs of policies acquired
ranges from 7% to 8%.

The amortization for the next five years and thereafter of capitalized
costs of policies acquired at December 31, 2002 is estimated to be as follows:

RESTRICTED CASH

At December 31, 2002 and 2001, the Company held restricted cash in the
amount of $410.2 million and $295.2 million, respectively. Restricted cash
consisted primarily of funds held by AMS for the benefit of participants in AMS'
tuition budgeting program and funds securing AMS and College Fund Life Insurance
Division student loan credit facilities held in bankruptcy-remote, special
purpose entities in the amount of $220.4 million and $127.3 million as of
December 31, 2002 and 2001, respectively, which cash may be used only for
repayment of associated borrowings and/or acquisitions of additional student
loans. See Note K.

F-11

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A subsidiary of AMS has entered into a trust agreement with a bank for the
safekeeping of payments received from participants in AMS' tuition budgeting
program. All funds are held in trust for the benefit of the participants. AMS is
entitled to the interest earned on the funds held in the trust as well as
tuition budgeting program fees deposited into the trust. The trust held invested
assets in the amount of approximately $156.7 million and $141.7 million at
amortized cost (which approximated market) at December 31, 2002 and 2001,
respectively. The funds are invested in U.S. Treasury securities, government
agency securities, high-grade commercial paper, and money market funds of
insured depository institutions at December 31, 2002 and 2001.

At December 31, 2002 and 2001, the Company's 80%-owned subsidiary, SunTech
Processing Systems, LLC ("STP"), held funds in the amount of $21.9 million and
$21.8 million, respectively, in an account designated by a court registry, all
of which funds are reflected as restricted cash at such dates. Because the
Company has assigned all of its rights to any cash proceeds from the sale and
liquidation of STP, the Company has established and has recorded a corresponding
liability in the amount of $21.9 million and $21.8 million at December 31, 2002
and 2001, respectively, equal to the total cash and cash equivalents on deposit
in the court registry. See Notes N and O of Notes to Consolidated Financial
Statements.

Set forth below is a summary of restricted cash held by the Company at
December 31, 2002 and 2001:

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company establishes an allowance for potential losses that could result
from defaults or write-downs on various assets. The reserves are maintained at a
level that the Company believes is adequate to absorb estimated losses.

The Company's allowance for losses is as follows:

F-12

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment includes buildings, leasehold improvements,
furniture, software and equipment, all of which are reported at depreciated cost
that is computed using straight line and accelerated methods based upon the
estimated useful lives of the assets (generally 3 to 7 years for furniture,
software and equipment and 30 to 39 years for buildings). Real estate held for
sale (consisting of Sioux Falls buildings) is reported at fair value.

In 2002 the Company incurred $13.8 million of capitalized construction
costs and investments in furniture and fixtures associated with an expansion of
its facilities in North Richland Hills, Texas. The Company currently anticipates
that it will incur additional costs of approximately $6.4 million in 2003 to
complete the facilities expansion project.

GOODWILL AND OTHER INTANGIBLES

In June 2001, FASB issued Statements No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
Statement 142 requires that these assets be reviewed for impairment at least
annually, or more frequently if certain indicators arise. The Company has
determined that it will review goodwill and intangible assets for impairment as
of November 1 of each year or more frequently if certain indicators arise. An
impairment loss would be recorded in the period such determination was made.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives. Statement 142 also requires that goodwill included in
the carrying value of equity method investments no longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In
accordance with Statement 142, the Company tested for goodwill impairment
effective January 1, 2002. As a result of the transitional impairment testing,
completed during the quarter ended June 30, 2002, the Company determined that
goodwill recorded in connection with the acquisition of Academic Management
Services Corp. ("AMS") and Barron Risk Management Services ("Barron") was
impaired in the aggregate amount of $6.9 million ($5.1 million net of tax). The
Company has reflected this impairment charge in its financial statements as a
cumulative effect of a change in accounting principle as of January 1, 2002 in
accordance with Statement No. 142. On September 30, 2002, the Company sold to an
unaffiliated third party all of the capital stock of Barron, in connection with
which for financial reporting purposes the Company recognized a nominal gain.

See Note G for a description of the pro forma impact to the Company's net
income for the years ended December 31, 2002, 2001 and 2000 as a result of the
non-amortization provisions of Statement 142.

F-13

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Historically, the Company generally had amortized the excess of cost over
the underlying value of the net assets of companies acquired on a straight-line
basis over twenty to twenty-five years. The Company continually reevaluated the
propriety of the carrying amount of goodwill, as well as the amortization period
to determine whether current events and circumstances warrant adjustments to the
carrying value and/or revised estimates of useful life. The Company assessed the
recoverability of goodwill based upon several factors, including management's
intention with respect to the operations to which the goodwill relates and those
operations' projected future income and undiscounted cash flows. An impairment
loss would be recorded in the period such determination was made.

At December 31, 2002 and 2001, the Company had recorded goodwill in the
amount of $118.9 million and $104.7 million, respectively, and accumulated
amortization of $16.7 million and $18.7 million at December 31, 2002 and 2001,
respectively, resulting in net goodwill of $102.2 million and $86.0 million at
December 31, 2002 and 2001, respectively. The Company recorded goodwill
amortization expense in continuing operations in the amount of $4.5 million and
$6.1 million in 2001 and 2000, respectively, prior to effectiveness of Statement
142.

At December 31, 2002 and 2001, the Company had other intangibles in the
amount of $10.5 million and $-0-, respectively, and accumulated amortization of
$1.8 million and $-0- at December 31, 2002 and 2001, respectively, resulting in
net other intangibles of $8.7 million and $-0- at December 31, 2002 and 2001,
respectively. The Company recorded other intangibles amortization expense in
continuing operations in the amount of $1.8 million, $-0- and $-0- in 2002, 2001
and 2000, respectively.

FUTURE POLICY AND CONTRACT BENEFITS AND CLAIMS

Traditional life insurance future policy benefit liabilities are computed
on a net level premium method using assumptions with respect to current
investment yield, mortality, withdrawal rates, and other assumptions determined
to be appropriate as of the date the business was issued or purchased by the
Company. Future contract benefits related to universal life-type and annuity
contracts are generally based on policy account values. Claims liabilities
represent the estimated liabilities for claims reported plus claims incurred but
not yet reported. The liabilities are subject to the impact of actual payments
and future changes in claim factors; as adjustments become necessary they are
reflected in current operations.

The Company uses the developmental method to estimate claims reserves. This
method applies completion factors to paid claims in order to estimate the
ultimate claim payments. These completion factors are derived from historical
experience and are dependent on the incurred dates of the paid claims.

The SEA Division assigns original incurred dates for the paid claims
utilized in the estimation of the claim reserves. This original incurred date
technique results in estimating a liability for all medical services related to
an accident or illness incurred prior to the end of the period, even though the
medical services may not be received by the insured until a later financial
reporting period. In addition to the developmental reserves, various additional
claim reserves are estimated as appropriate. The additional claim reserves
estimate liabilities for situations, such as excess pending claims inventory and
disputed claims.

The Group Insurance Division assigns incurred dates based on the date of
service. This method estimates the liability for all medical services received
by the insured prior to the end of the applicable financial period. Appropriate
adjustments are made in the completion factors to account for pending claim
inventory changes and contractual continuation of coverage beyond the end of the
financial period.

RECOGNITION OF PREMIUM REVENUES AND COSTS

Premiums on traditional life insurance are recognized as revenue when due.
Benefits and expenses are matched with premiums so as to result in recognition
of income over the term of the contract. This matching is accomplished by means
of the provision for future policyholder benefits and expenses and the deferral
and
F-14

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortization of acquisition costs. Revenues for universal life-type and annuity
contracts consist of charges for the cost of insurance, policy administration
and surrender charges assessed during the year. Contract benefits that are
charged to expense include benefit claims incurred in the period in excess of
related contract balances, and interest credited to contract balances.

UNEARNED PREMIUMS

Premiums on health insurance contracts are recognized as earned over the
period of coverage on a pro rata basis.

OTHER INTEREST INCOME

Other interest income consists primarily of interest earned on the
Company's AMS student loan portfolio.

OTHER INCOME

Other income consists primarily of income derived by the SEA Division from
ancillary services and membership marketing and administrative services provided
to the membership associations that endorse the Company's health insurance
products, income derived by AMS from tuition installment program fees, loan-
servicing fees and gains on loan sales, and fee income derived by the Company
from its AMLI Realty Co. subsidiary. Income is recognized as services are
provided. Effective December 31, 2002, the Company determined to reclassify into
other income certain fees received by the Company from membership marketing
services provided by the SEA Division to the membership associations that
endorse the Company's health insurance products, which fees had previously been
classified for financial reporting purposes as premium. The corresponding
amounts in the 2001 and 2000 financial statements have been reclassified to
conform to the 2002 financial statement presentation.

UNDERWRITING, POLICY ACQUISITION COSTS AND INSURANCE EXPENSES

Underwriting, policy acquisition costs and insurance expenses consist of
direct expenses incurred across all insurance lines in connection with issuance,
maintenance and administration of in-force insurance policies, including
amortization of deferred policy acquisition costs, commissions paid to agents,
administrative expenses and premium taxes. Effective December 31, 2002, the
Company determined to reclassify from underwriting, policy acquisition costs and
insurance expenses to other expenses the direct expenses incurred by the Company
in connection with generating other income at the SEA Division. The
corresponding amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 financial statement presentation.

OTHER EXPENSES

Other expenses consist primarily of operating expenses at AMS and direct
expenses incurred by the Company in connection with generating other income at
the SEA Division. Effective December 31, 2002, the Company determined to
reclassify to other expenses from underwriting, policy acquisition costs and
insurance expenses the direct expenses incurred by the Company in connection
with generating other income at the SEA Division. The corresponding amounts in
the 2001 and 2000 financial statements have been reclassified to conform to the
2002 financial statement presentation.

REINSURANCE

Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance receivables and prepaid reinsurance premiums are reported as assets.
The cost of reinsurance is accounted for over the terms of the underlying
reinsured policies using assumptions consistent with those used to account for
the policies.

F-15

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING EXPENSE

The cost of advertising is expensed as incurred. The Company incurred $13.0
million, $4.7 million and $2.2 million in advertising costs in 2002, 2001, and
2000, respectively.

FEDERAL INCOME TAXES

Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end. In the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax asset in the future, a valuation allowance would be recorded to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. Recording a valuation allowance would result in a charge to income in
the period such determination was made. The Company would consider future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the continued need for the recorded valuation allowance. In the event
the Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made.

COMPREHENSIVE INCOME

Included in comprehensive income is the reclassification adjustments for
realized losses included in net income of $(8.3) million ($(5.4) million net of
tax), $(1.2) million ($(780,000) net of tax and $(2.6) million ($(1.7) million
net of tax), for the years ended December 31, 2002, 2001, and 2000,
respectively.

GUARANTY FUNDS AND SIMILAR ASSESSMENTS

The Company is assessed amounts by state guaranty funds to cover losses of
policyholders of insolvent or rehabilitated insurance companies, by state
insurance oversight agencies to cover the operating expenses of such agencies
and by other similar legislative entities. These mandatory assessments may be
partially recovered through a reduction in future premium taxes in certain
states. At December 31, 2002 and 2001, the Company had accrued $2.2 million and
$2.5 million, respectively, to cover the cost of these assessments. The Company
expects to pay these assessments over a period of up to five years, and the
Company expects to realize the allowable portion of the premium tax offsets
and/or policy surcharges over a period of up to 10 years. The Company paid
guaranty fund assessments in the amount of $1.3 million, $1.1 million, and $1.3
million in 2002, 2001, and 2000, respectively.

NEW PRONOUNCEMENTS

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement 146 is effective for exit
or disposal activities initiated after December 31, 2002. The impact of
implementation on the Company's financial position or results of operations is
not expected to be material.

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year end. The disclosure requirements in this Interpretation
are effective for financial statements of

F-16

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interim or annual periods ending after December 15, 2002. The impact of
implementation on our financial position or results of operations is not
expected to be material.

In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. Statement 148 amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The amendments to Statement 123 are effective
for financial statements for fiscal years ending after December 15, 2002.
Earlier application of the transition provisions is permitted for entities with
a fiscal year ending prior to December 15, 2002. The Company has historically
accounted for the stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. On January
1, 2003, the Company adopted Statement No. 123 for all employee awards granted
or modified on or after January 1, 2003, and began measuring the compensation
cost of stock-based awards under the fair value method. The Company adopted the
transition provisions that require expensing options prospectively in the year
of adoption. Existing awards will continue to follow the intrinsic value method
prescribed by APB 25. Assuming award levels and fair values similar to past
years, the impact of adoption is not material on results of operations. This
change will primarily impact the accounting for stock options. The following
table illustrates the effect on net income as if the fair-value-based method had
been applied to all outstanding and unvested awards in each period.

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, superseding FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144
provides guidance on differentiating between assets held and used, held for
sale, and held for disposal other than by sale. Statement 144 requires a
three-step approach for recognizing and measuring the impairment of assets to be
held and used and also superseded the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, regarding discontinued operations. Statement
144 became effective for the Company's fiscal year beginning January 1, 2002.

In June 2001, the FASB issued Statements No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
arising from business combinations completed after June 30, 2001. Statement 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives. Statement 142 requires that these assets be reviewed for
impairment at least annually. The Company has determined that it will review
goodwill and intangible assets for impairment as of November 1 of each year.
Intangible assets with finite lives will continue to be amortized over their
estimated
F-17

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

useful lives. Statement 142 also requires that goodwill included in the carrying
value of equity method investments no longer be amortized.

The Company adopted Statements 141 and 142 on January 1, 2002. In
accordance with Statement No. 142, the Company tested for goodwill impairment
effective January 1, 2002. As a result of the transitional impairment testing,
completed during the quarter ended June 30, 2002, the Company determined that
goodwill recorded in connection with the acquisition of Academic Management
Services Corp. ("AMS") and Barron Risk Management Services ("Barron") was
impaired in the aggregate amount of $6.9 million ($5.1 million net of tax). The
Company has reflected this impairment charge in its financial statements as a
cumulative effect of a change in accounting principle as of January 1, 2002 in
accordance with Statement No. 142. On September 30, 2002, the Company sold to an
unaffiliated third party all of the capital stock of Barron, in connection with
which for financial reporting purposes the Company recognized a nominal gain.

RECLASSIFICATION

Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 financial statement presentation. The
Company has reflected as discontinued operations for financial reporting
purposes the results of operations of its UICI Administrators, Inc. unit.

NOTE B -- DISCONTINUED OPERATIONS

The Company has reflected as discontinued operations for financial
reporting purposes the results of its former sub-prime credit card business, its
Special Risk Division operations and its UICI Administrators, Inc. unit.

UNITED CREDITSERV, INC.

Prior to 2000 the Company marketed credit support services to individuals
with no, or troubled, credit experience and assisted such individuals in
obtaining a nationally recognized credit card. The sub-prime credit card
activities of the Company were conducted through the Company's United
CreditServ, Inc. subsidiary ("United CreditServ"), and through United
CreditServ's wholly-owned subsidiaries United Credit National Bank ("UCNB") (a
special purpose national bank, based in Sioux Falls, South Dakota, chartered
solely to hold credit card receivables); Specialized Card Services, Inc.
(provider of account management and collections services for all of the
Company's credit card programs); United Membership Marketing Group, Inc.
("UMMG") (a Lakewood, Colorado-based provider of marketing, administrative and
support services for the Company's credit card programs); and UICI Receivables
Funding Corporation, a single-purpose, bankruptcy-remote entity through which
certain credit card receivables were securitized.

In March 2000, the Board of Directors of UICI determined, after a thorough
assessment of the unit's prospects, that UICI would exit from its United
CreditServ sub-prime credit card business and, as a result, the United
CreditServ unit was reflected as a discontinued operation for financial
reporting purposes effective December 31, 1999. On September 29, 2000, the
Company completed the sale of substantially all of the non-cash assets
associated with its United CreditServ credit card unit, including its credit
card receivables portfolios and its Sioux Falls, South Dakota servicing
operations, for a cash sales price of approximately $124.0 million. The Company
retained United CreditServ's Texas collections facility, and UICI continues to
hold United CreditServ's building and real estate in Sioux Falls, South Dakota.
The Company has leased the Sioux Falls facilities to the purchaser of the credit
card assets pursuant to a long-term lease. UICI also retained the right to
collect approximately $250.0 million face amount of previously written off
credit card receivables. In connection with the sale, UICI or certain of its
subsidiaries retained substantially all liabilities and contingencies associated
with its credit card business, including liability for payment of all
certificates of deposit issued by UCNB, loans payable and liabilities associated
with pending litigation and other claims.

F-18

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 29, 2001, the Company completed the voluntary liquidation of
UCNB, in accordance with the terms of a plan of voluntary liquidation approved
by the Office of the Comptroller of the Currency.

For the year ended December 31, 2002, 2001 and 2000, United CreditServ
reported income (loss) after tax of $4.8 million, $3.7 million and $(23.4)
million, respectively, which income (loss) has been reflected in results from
discontinued operations for all periods presented. United CreditServ's results
in 2002 reflected a $7.4 million release of reserves in the three months ended
December 31, 2002 resulting from the Company's assessment of certain favorable
events related to credit card litigation matters. See Note O of Notes to
Consolidated Financial Statements.

In addition to the cash sales price received at the September 2000 closing
of the sale of the non-cash assets associated with its United CreditServ credit
card unit, the sale transaction contemplated an incentive cash payment
contingent upon the post-closing performance over a one-year period of the
credit card portfolio transferred in the sale. United CreditServ's results in
2001 included income (net of tax) in the amount of $3.7 million, associated with
the receipt of a $5.7 million cash payment representing the deferred contingent
portion of the purchase price in final settlement of the September 2000 sale of
substantially all of the non-cash assets associated with its United CreditServ
credit card unit.

Set forth below is a summary of the operating results of the United
CreditServ business for each of the years ended December 31, 2002, 2001 and
2000, respectively.

F-19

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a summary of the financial condition of United
CreditServ as of December 31, 2002 and 2001:

At December 31, 2000, the then remaining assets of the United CreditServ
discontinued operations in the amount of $54.3 million (consisting of cash and
short-term investments in the amount of $27.8 million and other assets in the
amount of $26.5 million) were reclassified from discontinued operations to cash
and other assets, respectively, on the Company's consolidated balance sheet, and
the remaining liabilities of the discontinued operations in the amount of $53.0
million (consisting of notes payable in the amount of $4.3 million and other
liabilities in the amount of $48.7 million) were reclassified to notes payable
and other liabilities, respectively, on the Company's consolidated balance
sheet. At December 31, 2002 and 2001 the remaining assets and liabilities of the
United CreditServ discontinued operations are reflected in the respective
categories as noted above.

SPECIAL RISK DIVISION

In December 2001, the Company determined to exit the businesses of its
Special Risk Division by sale, abandonment or wind-down and the Company
designated and has classified its Special Risk Division as a discontinued
operation for financial reporting purposes. The Company's Special Risk Division
formerly specialized in certain niche health-related products (including "stop
loss", marine crew accident, organ transplant and international travel accident
products), various insurance intermediary services and certain managed care
services.

For the year ended December 31, 2002, 2001 and 2000, the Special Risk
Division reported losses (net of tax) in the amount of $(4.2) million, $(9.2)
million and $(2.9) million. The Special Risk Division loss in 2002 reflected a
$6.5 million charge in the three months ended December 31, 2002 to reflect a
reassessment and strengthening of claims reserves. In 2003 the Company will
continue the wind-down of its former Special Risk Division.

F-20

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a summary of the operating results of the Special Risk
Division for each of the years ended December 31, 2002, 2001 and 2000,
respectively:

Set forth below is a summary of the financial condition of the Special Risk
Division as of December 31, 2002 and 2001:

The net liabilities associated with the Special Risk Division discontinued
operations at December 31, 2002 and 2001 in the amount of $24.4 million and
$35.9 million, respectively, are reflected on the Company's consolidated balance
sheet under the caption "net liabilities of discontinued operations, including
reserve for losses on disposal."

UICI ADMINISTRATORS, INC.

Prior to 2002, UICI provided underwriting, claims management and claims
administrative services to third party insurance carriers, third party
administrators, Blue Cross/Blue Shield organizations and self-

F-21

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

administered employer health care plans. The Company formerly classified the
operations of its subsidiaries UICI Administrators, Inc. (a company engaged in
the business of providing third party benefits administration, including
eligibility and billing reconciliation), Insurdata Marketing Services, LLC (a
subsidiary of the Company engaged in the business of marketing third party
benefits administration services) and Barron Risk Management, Inc. (a company
engaged in the business of administration of workers' compensation and non-
subscriber plans) as its Third Party Administration ("TPA") Division.

On January 17, 2002, the Company completed the sale of UICI Administrators,
Inc., the major component of the Company's Third Party Administration business
unit. In the three months ended December 31, 2001, the Company recognized an
impairment charge of $2.3 million to its long-lived assets associated with the
UICI Administrators, Inc. unit, of which $700,000 represented a write-down of
fixed assets (which was reflected in depreciation for the full year and fourth
quarter of 2001) and $1.6 million represented a write-down of goodwill (which
was reflected in goodwill amortization for the full year and fourth quarter of
2001). As a result of the charge in the fourth quarter of 2001, the Company
recognized no gain or loss on the sale of UICI Administrators, Inc.

For the year ended December 31, 2002, 2001 and 2000, UICI Administrators,
Inc. reported income (losses) (net of tax) in the amount of $67,000, $(3.8)
million and $(1.2) million, which income (losses) have been reflected in results
from discontinued operations for all periods presented. The income in 2002
represents income earned through January 17, 2002 (the date of sale of the UICI
Administrators, Inc. unit).

The net assets associated with UICI Administrators, Inc. discontinued
operations at December 31, 2001 in the amount of $1.5 million are reflected on
the Company's consolidated balance sheet as net liabilities of discontinued
operations.

NOTE C -- ACQUISITIONS AND DISPOSITIONS

On January 17, 2002, the Company completed the purchase, for a cash
purchase price of $8.0 million, of a 50% interest in SeniorsFirst, a
Dallas-based career agency specializing in the sale of long-term care and
Medicare supplement insurance products. In connection with the acquisition, the
Company recorded non-amortizable goodwill in the amount of $6.1 million and
amortizable intangible assets in the amount of $1.6 million.

Effective February 28, 2002, the Company acquired all of the outstanding
capital stock of Star Human Resources Group, Inc. and STAR Administrative
Services, Inc. (collectively referred to by the Company as its "Star HRG" unit),
a Phoenix, Arizona based business specializing in the marketing and
administration of limited benefit plans for entry level, high turnover, hourly
employees. Commencing March 1, 2002, health insurance policies offered under the
Star HRG program have been issued by The MEGA Life and Health Insurance Company,
a wholly-owned subsidiary of UICI. UICI acquired Star HRG for an initial cash
purchase price of $25.0 million, plus additional contingent consideration based
on the future annualized performance of Star HRG measured over the three-month
period ending May 31, 2003. The contingent consideration will be in an amount
not to exceed $15.0 million and is payable, at the Company's option, in cash or
by delivery of UICI's 6.0% convertible subordinated notes due March 1, 2012
plus, in each case, interest payable in cash computed at a rate of 6% from the
initial closing. In connection with the acquisition, the Company recorded
non-amortizable goodwill in the amount of $17.5 million and amortizable
intangible assets in the amount of $8.9 million.

On April 25, 2002, the Company sold its 50% ownership interest in
Resolution Reinsurance Intermediaries, LLC ("Res Re"), a reinsurance
intermediary formerly constituting a part of the Company's Special Risk business
unit. The purchaser of the 50% interest constituted the remaining 50% equity
holder in Res Re and the unit's chief executive officer. The sale was structured
as a liquidation by Res Re of UICI's 50% ownership interest for a total
liquidation price of $650,000, payable at closing in cash in the amount of

F-22

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$150,000 and by delivery of a promissory note issued by Res Re in the amount of
$500,000. The note bears interest, payable quarterly, at 5.00% per annum, is
payable in annual principal installments in the amount of $75,000 on each of
March 31, 2003; March 31, 2004; and March 31, 2005, with a final balloon payment
of principal due on March 31, 2006, and is secured by a pledge of 100% of the
membership interest in Res Re. In October 2002, the Company received in advance
the $75,000 annual principal installment due March 31, 2003.

On September 30, 2002, the Company sold to an unaffiliated third party all
of the capital stock of Barron Risk Management Services, Inc., a company engaged
in the business of administration of workers' compensation and non-subscriber
plans and the sole remaining component of the Company's former Third Party
Administration unit. For financial reporting purposes the Company recognized a
nominal gain in connection with the transaction.

On August 3, 2001, the Company completed the acquisition from AMS' former
chief executive officer of the remaining 25% common stock interest in AMS it did
not already own for a purchase price of $750,000. For additional consideration,
the former chief executive officer and certain former employees of AMS agreed,
for a three-year period ending in August 2004, not to engage in any business
competitive with AMS' tuition installment or student loan servicing businesses.
These former executives and their affiliates further agreed to pay to AMS fees
in prescribed amounts in connection with the origination and consolidation of
certain student loans over a three-year period ending in August 2004.

Effective May 31, 2001, WinterBrook Holdings, Inc. (a wholly-owned
subsidiary of the Company) sold its 44% minority interest in Cassidy Employee
Benefit Services, LLC ("Cassidy") to Cassidy for $140,000 in cash. The remaining
equity holders of Cassidy constituted members of Cassidy management.

Effective April 1, 2001, Specialized Card Services, Inc. ("SCS"), an
indirect wholly-owned subsidiary of the Company, entered into an agreement with
an unaffiliated third party to form Genesis Financial Solutions, Inc. ("GFS"), a
company engaged in the business of collecting charged off consumer debt. In
exchange for 50% of the common stock in GFS and $3.0 million liquidation value
of preferred stock, SCS contributed to GFS the business operations of its Harker
Heights, Texas collection facility at net book value and certain previously
written-off credit card receivables. Effective July 1, 2002, GFS redeemed the
preferred stock held by the Company in exchange for GFS' promissory note
maturing February 28, 2006.

On July 27, 2000, the Company sold to an investor group consisting of
members of the family of Ronald L. Jensen (the Company's Chairman) (including
Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"),
the parent company of its National Motor Club of America unit, for a purchase
price of $56.8 million, representing 97% of the value of NMC as determined by
independent appraisal. The purchase price was paid at closing in cash in the
amount of $21.8 million and by delivery of a promissory note (the "NMC Note")
issued by the NMC Buyer in the principal amount of $35.0 million. See Note N.
The $12.6 million, net of tax, received in excess of the net book value of NMC
was reflected as an increase to additional paid in capital.

Effective July 31, 2000, a wholly-owned subsidiary of the Company sold all
of its outstanding shares of UMMG for a purchase price in the amount of $25,000
in cash, with an additional amount of up to $2.0 million payable over the next
five years, contingent upon the performance of the business. The purchaser is an
entity controlled by the former President of UMMG. UMMG is a Lakewood,
Colorado-based provider of marketing, administrative and support services for
the Company's credit card programs. In addition, on July 31, 2000, UICI signed a
credit agreement with the purchaser, pursuant to which it agreed to lend to the
purchaser up to $1.0 million on a revolving basis. As of December 31, 2000, the
Company had advanced to the purchaser $1.0 million under the credit agreement.
The purchaser subsequently defaulted on its obligations under the credit
agreement. On October 17, 2001, UICI obtained a court-ordered judgment against
the purchaser for the full amount of principal and accrued interest owing on the
indebtedness outstanding under

F-23

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the credit agreement. The Company has entered into a settlement agreement with
the purchaser, pursuant to which the Company has agreed to stay enforcement of
its judgment pending final effectiveness of a proposed settlement of the
Gray-related litigation. See Note O of Notes to Consolidated Financial
Statements.

Effective July 1, 2000, the Company sold the assets of WinterBrook
HealthCare Management, LLC (a company engaged in repricing of insurance claims)
to an unrelated party for a sales price of $1.9 million. The Company recognized
a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in
connection with this sale. For financial reporting purposes, the $1.5 million
gain is included in the results of operations of the TPA Division and has
accordingly been reflected in discontinued operations for year ending December
31, 2000.

In 1997, pursuant to the terms of a Sale and Administration Agreement, the
Company sold certain tangible assets associated with its third party
administrator business to Healthcare Management Administrators, Inc. ("HMA")
(which is owned by Mr. Jensen) and also agreed to assign associated rights and
benefits of licenses of third party administrator business. The purchase price
received by the Company was $641,000, which approximated book value of the net
assets sold. In accordance with the terms of a Management and Option Agreement,
dated as of April 1, 1999, HMA and Mr. Jensen granted to the Company an option
to purchase certain assets, subject to certain corresponding liabilities,
associated with the third party administration business of HMA. The option was
exercisable on or before January 30, 2000 at an option price equal to the book
value of the net tangible assets of HMA to be purchased plus assumption of an
obligation to pay WinterBrook VSO, LLC (a company controlled by Mr. Jensen)
certain commissions payable over a five year term in an amount not to exceed
$4.2 million. The Company delivered notice of exercise of the option on January
25, 2000, and the Company completed the purchase of the assets associated with
HMA's third party administration business on February 3, 2000, at a renegotiated
purchase price equal to $4.0 million (representing the recorded net book value
of the assets purchased) plus $500,000, representing repayment to Mr. Jensen of
cash advances made to HMA subsequent to December 31, 1999. The Company recorded
$1.9 million in goodwill in connection with this acquisition, of which, at
December 31, 2001, $1.9 million had been amortized.

The assets of HMA comprised a part of the assets of UICI Administrators,
Inc., which was sold by the Company in January 2002.

For financial reporting purposes, the acquisitions described above were
accounted for using the purchase method of accounting, and, as a result, the
assets and liabilities acquired were recorded at fair value on the dates
acquired. The Consolidated Statement of Operations for the year of the
acquisition includes the results of operations of each acquired company from
their respective dates of acquisition. The effect of these acquisitions on the
Company's results of operations was not material. Accordingly, pro forma
financial information has not been presented.

F-24

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE D -- INVESTMENTS

A summary of net investment income is set forth below:

Realized gains and (losses) and the change in unrealized investment gains
and (losses) on fixed maturity and equity security investments are summarized as
follows:

Gross unrealized investment gains pertaining to equity securities were
$33.1 million, $42.6 million and $639,000 at December 31, 2002, 2001 and 2000,
respectively. Gross unrealized investment losses pertaining to equity securities
were $4.4 million, $599,000 and $2.6 million at December 31, 2002, 2001 and
2000, respectively.

The increase in gross unrealized investment gains to $42.6 million in 2001
from $639,000 in 2000 was principally due to the change in the Company's method
for accounting for its investment in AMLI Residential, effective June 30, 2001,
from the equity method to the investment method. See further discussion on AMLI
Residential later in this footnote under equity securities.

F-25

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and fair value of investments in fixed maturities are as
follows:

Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from quotation services.

The amortized cost and fair value of fixed maturities at December 31, 2002,
by contractual maturity, are shown below. Fixed maturities subject to early or
unscheduled prepayments have been included based upon their contractual maturity
dates. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.

Proceeds from the sale and call of investments in fixed maturities were
$452.8 million, $224.6 million and $148.0 million for 2002, 2001 and 2000,
respectively. Gross gains of $17.8 million, $5.0 million and $1.3 million, and
gross losses of $11.9 million, $2.8 million and $5.0 million were realized on
the sale and call of fixed maturity investments during 2002, 2001 and 2000,
respectively. Proceeds from the sale of equity investments were $15.7 million,
$15.8 million and $12.6 million for 2002, 2001 and 2000, respectively. Gross

F-26

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

gains of $1.1 million, $1.3 million and $1.1 million and gross losses of
$681,000, $1.2 million and $867,000 were realized on sales of equity investments
during 2002, 2001 and 2000, respectively.

During 2002, 2001 and 2000, the Company recorded impairment charges for
certain fixed and equity securities in the amount of $14.7 million, $3.5 million
($3.0 million for fixed maturities and $541,000 for equity securities) and $-0-,
respectively. The Company's 2002 impairment charge included a $6.1 million
impairment charge associated with the Company's WorldCom, Inc. bond holdings,
which was recorded in the second quarter of 2002 as a result of previously
announced accounting irregularities at WorldCom, Inc. At June 30, 2002, UICI's
insurance company subsidiaries held an aggregate of $7.525 million principal
amount of WorldCom Inc. bonds, of which $4.0 million principal amount matures in
2005 and $3.525 million principal amount matures in 2031. During the three
months ended September 30, 2002, the Company's insurance company subsidiaries
sold all of their WorldCom Inc. bonds for a nominal loss (giving effect to the
$6.1 million impairment charge taken in the second quarter of 2002).

Following is a summary of the Company's equity securities:

Included in Common stocks - affiliate caption is the Company's investment
in AMLI Residential. The Company changed its method for accounting for its
investment in AMLI Residential effective June 30, 2001, from the equity method
to the investment method due to a decrease in its ownership interest occurring
during the year ended December 31, 2000. The effect of the accounting change was
to increase the carrying value of AMLI Residential on the consolidated balance
sheet of the Company at June 30, 2001 from $22.6 million to $62.8 million; the
accounting change had no effect on the Company's results of operations for the
year ended December 31, 2001. As a result of the accounting change, the Company
marks-to-market its investment in AMLI Residential and accordingly, changes in
the Company's carrying value of its investment in AMLI Residential are recorded
as unrealized gains (or losses) with corresponding changes to the Company's
stockholders' equity (net of tax). At December 31, 2002 and 2001, the Company's
ownership interest in AMLI Residential was 10.5% and 10.2%, respectively, and
the Company's carrying value of its investment in AMLI Residential was $54.3
million and $64.3 million, respectively.

During 2001, AMLI Commercial Properties Trust ("ACPT"), an equity method
investee in which the Company held a 20% equity interest, sold substantially all
of its assets for an aggregate sale price of approximately $226.3 million. In
connection with such sale, the Company recognized its proportionate share of the
gain in the amount of $5.3 million.

The fair value, which represents carrying amounts, of equity securities are
based on quoted market prices. For equity securities not actively traded, market
values are estimated using values obtained from quotation services.

The carrying amounts of the Company's investments in mortgage, collateral
and policy loans approximate fair value, which is estimated using a discounted
cash flow analysis, at a rate currently being offered for similar loans to
borrowers with similar credit ratings.

F-27

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying values for mortgage and collateral loans are net of allowance
of $324,000 and $1.2 million for 2002 and 2001, respectively.

The Company minimizes its credit risk associated with its fixed maturities
portfolio by investing primarily in investment grade securities. Included in
fixed maturities is a concentration of mortgage and asset backed securities. At
December 31, 2002, the Company had a carrying amount of $332.0 million of
mortgage and asset backed securities, of which $198.4 million were government
backed, $103.6 million were rated AAA, $9.9 million were rated AA, $11.9 million
were rated A, $3.8 million were rated BBB, and $4.4 million were rated below
investment grade by external rating agencies. At December 31, 2001, the Company
had a carrying amount of $292.8 million of mortgage and asset backed securities,
of which $137.0 million were government backed, $97.5 million were rated AAA,
$25.5 million were rated AA, $23.4 million were rated A, $4.6 million were rated
BBB, and $4.8 million were rated below investment grade by external rating
agencies.

Investments are reviewed quarterly (or more frequently if certain
indicators arise) to determine if they have suffered an impairment of value that
is considered other than temporary. Management's review considers the following
indicators of impairment: fair value is significantly below cost; the decline in
fair value is attributable to specific adverse conditions affecting a particular
investment; the decline in fair value is attributable to specific conditions,
such as conditions in an industry or in a geographic area; the decline in fair
value has existed for an extended period of time; downgrades by rating agencies
from investment grade to non-investment grade; the financial condition of the
issuer has deteriorated and dividends have been reduced or eliminated or
scheduled interest payments have not been made. Management monitors investments
where two or more of the above indicators exist and investments are identified
by the Company in economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of determination.

The Company regularly monitors its investment portfolio to attempt to
minimize its concentration of credit risk in any single issuer. Set forth in the
table below is a schedule of all investments representing greater than 1% of the
Company's aggregate investment portfolio at December 31, 2002 and 2001:

The Company's short-term investments are held in a diversified
institutional money market fund that invests solely in the highest quality
United States dollar denominated money market securities of domestic and foreign
issuers.

Under the terms of various reinsurance agreements (see Note I), the Company
is required to maintain assets in escrow with a fair value equal to the
statutory reserves assumed under the reinsurance agreements. Under these
agreements, the Company had on deposit, securities with a fair value of
approximately $82.7 million and $84.5 million as of December 31, 2002 and 2001,
respectively. In addition, domestic insurance subsidiaries had securities with a
fair value of $18.2 million and $17.7 million on deposit with insurance
departments in various states at December 31, 2002 and 2001, respectively.

F-28

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE E -- INVESTMENT IN HEALTHAXIS, INC.

At December 31, 2002, the Company held 24,224,904 shares of common stock of
Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"), which at such date represented
approximately 45% of the issued and outstanding shares of HAI. HAI is an
emerging technology service firm that provides web-based connectivity and
applications solutions for health benefit distribution and administration. These
solutions, which consist primarily of software products and related services,
are designed to assist health insurance payers, third party administrators,
intermediaries and employers in providing enhanced services to members,
employees and providers through the application of HAI's flexible technology to
legacy systems, either on a fully integrated or on an application service
provider (ASP) basis.

At December 31, 2002, the Company also held (a) a warrant to purchase
12,291 shares of HAI common stock at an exercise price of $3.01 per HAI share;
(b) a warrant to purchase 200,100 shares of HAI common stock at an exercise
price of $4.40 per HAI share; (c) a warrant to purchase 10,005 shares of HAI
common stock at an exercise price of $12.00 per share; and (d) 1,424 shares of
HAI 2% convertible preferred stock, which preferred stock has a stated
liquidation value of $1,000 per share and is convertible into 542,476 shares of
HAI common stock at a conversion price per HAI share of $2.625. On July 31,
2002, UICI acquired the shares of HAI 2% convertible preferred stock and cash in
the amount of $243,000 in exchange for $1.67 million principal amount of HAI 2%
convertible debentures (which were convertible into an aggregate of 185,185
shares of HAI common stock). The Company had previously acquired on September
29, 2000 from a third party the $1.67 million principal amount of HAI 2%
convertible debentures (together with a warrant to purchase 12,291 shares of HAI
common stock at an exercise price of $3.01 per share) for a total purchase price
of $1.2 million.

Through November 7, 2001, 8,581,714 shares of HAI common stock held by the
Company were subject to the terms of a Voting Trust Agreement, pursuant to which
trustees unaffiliated with the Company had the right to vote such shares.
Effective November 7, 2001, UICI appointed as its proxies the board of directors
of HAI, who may vote 33 1/3% of the number of HAI shares held of record from
time to time by UICI in favor of the nominees for director that a majority of
the directors of HAI shall have recommended stand for election. The authority
granted to such proxies will terminate at the earlier to occur of (i) November
7, 2011, (ii) such date as UICI beneficially holds less than 25% of the
outstanding shares of common stock of HAI on a fully diluted basis, (iii) such
date as any person or persons acting as a "group" beneficially holds a greater
percentage of the outstanding shares of HAI common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAI
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAI.

Until their resignations effective November 7, 2001, Gregory T. Mutz (the
President and a director of the Company) and Patrick J. McLaughlin (a director
of the Company) served as directors of HAI.

The Company's interest in HAI was derived from the January 7, 2000 merger
(the "Insurdata Merger") of Insurdata Incorporated (formerly a wholly-owned
subsidiary of UICI) with and into HealthAxis.com, the sole operating subsidiary
of HAI. HealthAxis.com formerly was a web-based retailer of health insurance
products and related consumer services. During 1999 and in advance of the
Insurdata Merger, Insurdata transferred to UICI the net assets of Insurdata
Administrators (a division of Insurdata engaged in the business of providing
third party benefits administration, including eligibility and billing
reconciliation) and its member interest in Insurdata Marketing Services, LLC (a
subsidiary of Insurdata engaged in the business of marketing third party
benefits administration services) for cash in the amount of $858,000,
representing the aggregate book value of the net assets and member interest so
transferred. The Company recognized no gain on the non-monetary exchange of
stock in the Insurdata Merger due to uncertainty of realization of the gain.

Following the Insurdata Merger, the Company held approximately 43.6%, and
HAI held approximately 28.1%, of the issued and outstanding capital stock of
HealthAxis.com, the surviving corporation in the

F-29

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Insurdata Merger. On March 14, 2000, the Company sold in a private sale to an
institutional purchaser 2,000,000 shares of HealthAxis.com common stock and,
giving effect to such sale, the Company held 39.2% of the issued and outstanding
shares of common stock of HealthAxis.com.

On January 26, 2001, HAI acquired all of the outstanding shares of
HealthAxis.com that HAI did not then own in a stock-for-stock merger of
HealthAxis.com with a wholly-owned subsidiary of HAI (the "HAI Merger"). In the
HAI Merger, HealthAxis.com shareholders (including the Company) received 1.334
shares of HAI common stock for each share of HealthAxis.com common stock
outstanding.

The Company has accounted for its investment in HAI utilizing the equity
method and has recognized its ratable share of HAI income and loss (computed
prior to amortization of goodwill recorded in connection with the Insurdata
Merger). The Company's carrying value of its investment in HAI was $4.9 million
and $8.3 million at December 31, 2002 and 2001, respectively.

Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), HAI
formerly provided information systems and software development services
(including administration of the Company's computer data center) to the Company
and its insurance company affiliates at HAI's cost of such services (including
direct costs of HAI personnel dedicated to providing services to the Company
plus a portion of HAI's overhead costs) plus a 10% mark-up. The Services
Agreement had an initial five-year term scheduled to end on January 3, 2005,
which was subject to extension by the Company. The Services Agreement was
terminable by the Company or HAI at any time upon not less than 180 days' notice
to the other party. The Services Agreement did not constitute a requirements
contract, did not prevent UICI from obtaining from other third parties (or
providing to itself) any or all of the services currently provided by HAI, and
did not limit UICI's right or ability to decrease the demand for services from
HAI.

Effective June 15, 2002, UICI and HAI terminated the Services Agreement. As
part of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Because UICI constitutes a significant shareholder of HAI, the aggregate amount
of consideration paid to HAI by UICI for the early termination of the Services
Agreement was reflected for financial reporting purposes as a contribution by
UICI to the capital of HAI, the effect of which was to increase the Company's
carrying value of its investment in HAI. Effective June 30, 2002, UICI
determined the carrying value in its investment in HAI was impaired in the
amount of $6.5 million and therefore the investment was written down to an
estimated realizable value.

Pursuant to the terms of the Services Agreement, UICI paid to HAI $8.1
million, $20.4 million and $21.0 million in 2002, 2001 and 2000, respectively.
In addition, HAI has provided to the Company and its affiliates certain other
information technology services, including claims imaging and software-related
services, for which UICI paid to HAI $2.7 million, $10.1 million and $6.4
million in 2002, 2001 and 2000, respectively. The aggregate amounts paid by UICI
to HAI in 2002, 2001 and 2000, respectively, represented 38%, 70% and 63% of
HAI's total gross revenues of $28.1 million, $43.8 million and $43.7 million in
such years, respectively.

F-30

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a summary condensed balance sheet (unaudited) for HAI as
of December 31, 2002.

Set forth below is condensed income statement data for HAI (unaudited) as
reported by HAI for the years ended December 31, 2002, as adjusted to exclude
(a) the effects of push-down accounting for the January 7, 2000 merger of
Insurdata Incorporated with and into HealthAxis.com and (b) the extraordinary
gain of $16.4 million resulting from the exchange of HAI's $27.5 million of
long-term convertible debt for $4.0 million of cash and the issuance of
permanent equity in July 2002. The Company's reported share of losses in HAI
include the ratable share of HAI losses as adjusted and the Company's write down
of its investment in HAI in the quarter ended June 30, 2002 in the amount of
$6.5 million:

NOTE F -- STUDENT LOANS

Primarily through its AMS subsidiary and its College Fund Life Division,
the Company holds federally guaranteed and alternative (i.e. non-federally
guaranteed) student loans extended to students at selected colleges and
universities.

F-31

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is a summary of the student loans held by the Company at the
dates indicated:

Of the aggregate $1,431.0 million and $1,278.4 million carrying amount of
student loans held by the Company at December 31, 2002 and 2001, respectively,
$1,430.8 million and $1,276.1 million, respectively, were pledged to secure
payment of secured student loan indebtedness. See Note K.

The Company estimates the fair value of student loans based on values of
recent sales of student loans.

The loans under the Federal Family Education Loan Program are guaranteed as
to 98% of principal and accrued interest by the federal government or other
private insurers. Certain alternative loans are guaranteed (in an amount ranging
from 95% to 100%) as to principal and accrued interest by private insurers. The
Company has established a reserve for potential losses on the portion of
principal and accrued interest not guaranteed by the federal government or other
private insurers and for potential losses on uninsured student loans. The
reserve is maintained at a level that the Company believes is adequate to absorb
estimated credit losses.

The Company's provision for losses on student loans is summarized as
follows:

The Company recognized interest income from the student loans of $74.2
million, $94.4 million and $115.3 million in 2002, 2001 and 2000, respectively,
of which $7.9 million, $6.0 million and $3.9 million, respectively, is included
in the Investment income category on the Company's consolidated statements of
operations. The remaining $66.3 million, $88.4 million and $111.4 million of
interest income in such years is reflected in the Other interest income category
on the Company's consolidated statements of operations.

Included in other income for the years ended December 31, 2002, 2001 and
2000 was approximately $5.9 million, $11.3 million and $7.8 million,
respectively, in gain from the sale of loans. The sold loans had a carrying
value of $271.2 million, $447.0 and $765.0 million principal amount at the
respective dates of sale in 2002, 2001 and 2000, respectively.

NOTE G -- GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets on January 1, 2002. In accordance with
Statement 142, the Company tested for goodwill impairment as of January 1, 2002.
As a result of the transitional impairment testing, completed during the quarter
ended June 30, 2002, the Company determined that goodwill recorded in connection
with

F-32

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the acquisitions of AMS and Barron was impaired in the aggregate amount of $6.9
million ($5.1 million net of tax). The Company has reflected this impairment
charge in its financial statements as a cumulative effect of a change in
accounting principle as of January 1, 2002 in accordance with Statement 142.
Statement 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Statement 142 requires that these assets be reviewed
for impairment at least annually, or more frequently if certain indicators
arise. The Company has determined that it will review goodwill and intangible
assets for impairment as of November 1 of each year or more frequently if
certain indicators arise. An impairment loss would be recorded in the period
such determination was made.

Set forth in the table below is a summary of the goodwill and other
intangible assets by operating segment at the dates indicated:

F-33

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is the impact to the Company's net income for the year ended
December 31, 2002, 2001 and 2000 as a result of the non-amortization provisions
of Statement 142:

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

(1) Includes $3.9 million and $1.8 million of goodwill amortization recorded in
continuing operations and discontinued operations, respectively.

(2) Includes $5.5 million and $163,000 of goodwill amortization recorded in
continuing operations and discontinued operations, respectively.

Other intangible assets consist of present value of future commissions,
customer lists, trademark and non-compete agreements related to the acquisitions
of SeniorsFirst and STAR HRG completed in the three months ended March 31, 2002.
(See Note C).

Set forth in the table below is a summary of the estimated amortization
expense for the next five years and thereafter for other intangible assets:

F-34

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE H -- POLICY LIABILITIES

Liability for future policy and contract benefits consists of the
following:

With respect to traditional life insurance, future policy benefits are
computed on a net level premium method using assumptions with respect to current
investment yield, mortality and withdrawal rates determined to be appropriate as
of the date the business was acquired by the Company. Substantially all reserve
interest assumptions range from 7% to 8%. Such liabilities are graded to equal
statutory values or cash values prior to maturity.

Interest rates credited to future contract benefits related to universal
life-type contracts approximated 5.0%, 5.0% and 5.3% during 2002, 2001 and 2000,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 4.0% to 5.5% during
2002, 4.0% to 5.5% during 2001 and 3.0% to 7.3% during 2000.

As described in Note I, the Company has assumed certain life and annuity
business from subsidiaries of AEGON USA, INC. ("AEGON"), utilizing the same
actuarial assumptions as the ceding company. The liability for future policy
benefits related to life business has been calculated using an interest rate of
9% graded to 5% over twenty years for life policies. Mortality and withdrawal
rates are based on published industry tables or experience of the ceding company
and include margins for adverse deviation. Interest rates credited to the
liability for future contract benefits related to these annuity contracts
generally ranged from 3.8% to 5.5% during 2002, 4.3% to 5.5% during 2001, and
4.8% to 5.5% during 2000.

The carrying amounts and fair values of the Company's liabilities for
investment-type contracts (included in future policy and contract benefits and
other policy liabilities in the consolidated balance sheets) are as follows:

Fair values under investment-type contracts consisting of direct annuities
and supplemental contracts without life contingencies are estimated using the
assumption-reinsurance pricing method, based on estimating the amount of profits
or losses an assuming company would realize, and then discounting those amounts
at a current market interest rate. Fair values for the Company's liabilities
under assumed annuity investment-type contracts are estimated using the cash
surrender value of the annuity.

F-35

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Activity in the claims liability is summarized as follows:

The above reconciliation shows incurred losses developed in amounts less
than originally anticipated due to better than expected experience on the health
business in the Self Employed Agency Division in 2002, 2001 and 2000. The better
than expected experience in 2001 was partially offset by adverse experience on
the workers' compensation business. Accrual for additional or return of premium
is reflected in Future policy and contract benefits caption on the consolidated
balance sheet.

NOTE I -- REINSURANCE

In 2002, 2001 and 2000, approximately 1%, 5% and 11%, respectively, of the
Company's premiums from continuing operations were assumed from AEGON. Prior to
1997, the health business assumed was marketed by UGA Inc. and issued through
AEGON's insurance subsidiaries. Under the terms of its coinsurance agreement,
AEGON's insurance subsidiaries have agreed to cede and the Company has agreed to
assume through coinsurance 60% of the health business previously sold by UGA
Inc. agents for business written on AEGON's insurance subsidiaries. Commencing
in May 2001, and in accordance with Assumption Reinsurance Agreements with
AEGON, the Company began to assume all of the remaining policies from AEGON as
approvals were received from state regulatory authorities. As of December 31,
2002, the Company has assumed from AEGON approximately 78% of the remaining
policies, and the Company currently anticipates that the balance of the
remaining policies will be assumed during 2003. On the policies that have been
assumed, the Company has ceded 40% of the health insurance business back to
AEGON. The Company has agreed to acquire in 2003 the remaining 40% of the
coinsured business from AEGON at a purchase price to be based on the estimated
present value of future profits from the business.

The Company's insurance subsidiaries, in the ordinary course of business,
reinsure certain risks with other insurance companies. These arrangements
provide greater diversification of risk and limit the maximum net loss potential
to the Company arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the reinsurance agreements,
the Company remains liable.

F-36

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The reinsurance receivable included in the consolidated financial
statements at December 31, 2002 and 2001 is as follows:

The effect of reinsurance transactions reflected in the consolidated
financial statements are as follows:

In August 1994, the Company entered into an agreement, pursuant to which
the Company acquired a block of life insurance and annuity policies. In
conjunction with this acquisition, the Company ceded through a coinsurance
agreement 100% of the policy liabilities to an unrelated reinsurer. The
acquisition required no financial investment by the Company. In July 2001, the
reinsurer recovered its investment in the amount of $22.0 million in this block,
and the coinsurance agreement was terminated and the company at no cost
recaptured all remaining policies.

F-37

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE J -- NON-STUDENT LOAN DEBT

Set forth below is a summary of the Company's short and long-term
indebtedness outstanding at December 31, 2002 and 2001 (excluding outstanding
indebtedness that was incurred to originate and/or is secured by student loans)
(see Note K):

On January 25, 2002, the Company entered into a three-year bank credit
facility with Bank of America, NA and LaSalle Bank National Association. Under
the facility, the Company may borrow from time to time up to $30.0 million on a
revolving, unsecured basis. Loans outstanding under the facility will bear
interest at the option of the Company at prime plus 1% or LIBOR plus 1%. The
Company intends to utilize the proceeds of the facility for general working
capital purposes. The Company has not to date borrowed any funds under the
facility.

On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
due June 2004 in the aggregate amount of $27.7 million. In accordance with the
agreement governing the terms of the notes (the "Note Agreement"), commencing on
June 1, 1998 and on each June 1 thereafter to and including June 1, 2003, the
Company is required to repay approximately $4.0 million aggregate principal
together with accrued interest thereon to the date of such repayment. The
principal amount of the notes outstanding was $7.9 million and $11.9 million at
December 31, 2002 and 2001, respectively. The Company incurred $835,000, $1.2
million and $1.5 million of interest expense on the notes in the years ended
December 31, 2002, 2001 and 2000, respectively. The Note Agreement contains
restrictive covenants that include certain financial ratios, limitations on
additional indebtedness as a percentage of certain defined equity amounts and
the disposal of certain subsidiaries, including primarily the Company's
regulated insurance subsidiaries.

AMS has a note payable to Fleet National Bank in the outstanding principal
amount of $1.6 million and $1.8 million at December 31, 2002 and 2001,
respectively, maturing June 30, 2004. The note bears interest at 3.6% at
December 31, 2002, requires principal and interest payments quarterly and is
secured by a first mortgage on real estate held by AMS.

Effective June 29, 2000, UICI executed and delivered an unsecured
promissory note payable to a systems vendor in the amount of $10.0 million,
which note bore interest at LIBOR plus 150 basis points (1.5%) (3.38% at March
31, 2002), and was payable as to principal in equal quarterly installments in
the amount of $500,000, commencing October 1, 2000, with a final maturity
scheduled for June 30, 2005. The note was delivered to discharge an account
payable by United CreditServ ("UCS") in the amount of $10.0 million owing to the
systems vendor, which payable was reflected in the consolidated balance sheet of
the Company. The Company made its scheduled quarterly $500,000 principal payment
on April 1, 2002, and on April 29, 2002, the Company paid in full all remaining
outstanding principal in the amount of $6.5 million and accrued interest on the
note. At December 31, 2001, the outstanding balance on the note was $7.5
million.

F-38

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Specialized Card Services, Inc. (a wholly-owned subsidiary of the Company)
("SCS") has various loans with the South Dakota Board of Economic Development
bearing interest at a rate of 3.00% per annum. The proceeds were used to
purchase equipment and leasehold improvements. The loans were scheduled to
mature in 2003 and 2004. On July 19, 2002, the Company paid in full all
remaining outstanding principal on the loans. At December 31, 2001, the
outstanding balance on the indebtedness was $4.1 million.

Effective October 1, 2000, the Company's AMS subsidiary amended the terms
of its unsecured term loan facility (under which, at December 31, 2000, $21.3
million of indebtedness was outstanding) to eliminate all financial covenants.
In connection with the amendment of the facility, UICI (the parent company)
agreed to unconditionally guarantee the payment when due of such indebtedness.
In June 2001, AMS paid off the remaining outstanding indebtedness under this
facility.

On July 19, 2000, the Company's offshore-domiciled insurance companies
incurred indebtedness with an institutional lender in the amount of $24.0
million. The indebtedness bore interest at the per annum rate of 11.0%, was
scheduled to mature on August 1, 2001, was secured by a pledge of all of the
assets of the Company's offshore insurance subsidiaries, and was guaranteed by
the Company. The proceeds of the borrowing were advanced to the parent company
to fulfill liquidity needs at the parent company. At December 31, 2000, the
outstanding balance on the loan was $18.0 million. During 2001, all outstanding
principal in the amount of $18.0 million and accrued interest was paid in full.

In May 1999, the Company entered into a $100.0 million unsecured credit
facility (the "Bank Credit Facility") with a group of commercial banks. Amounts
outstanding under the Bank Credit Facility initially bore interest at an annual
rate of LIBOR plus 75 basis points (0.75%). At December 31, 1999, the Company
had fully drawn on the Bank Credit Facility, of which $50.0 million was used to
repay $50.0 million of debt outstanding under the Company's prior bank facility
and $50.0 million was used to fund the UMMG and Academic Management Services
acquisitions (completed in May 1999 and July 1999, respectively) and current
operations. Effective December 31, 1999, the interest rate on amounts
outstanding under the Bank Credit Facility was increased to LIBOR plus 100 basis
points (1.00%).

On March 14, 2000, a limited liability company controlled by the Company's
Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the
Company (the "Lender LLC Loan"). The proceeds of the Lender LLC Loan, together
with $5.0 million of cash on hand, were used to reduce indebtedness outstanding
under the Bank Credit Facility from $100.0 million to $25.0 million. The Lender
LLC Loan bore interest at the prevailing prime rate, was guaranteed by UICI, was
due and payable in July 2001 and was secured by a pledge of investment
securities and shares of the Company's National Motor Club unit.

As part of the March 2000 paydown of indebtedness under the Bank Credit
Facility, the Bank Credit Facility was amended to provide, among other things,
that the $25.0 million balance outstanding would be due and payable on July 10,
2000, amounts outstanding under the facility would be secured by a pledge of
investment securities and shares of Mid-West National Life Insurance Company of
Tennessee ("Mid-West"), and the restrictive covenants formerly applicable to
UICI and its restricted subsidiaries (primarily the Company's insurance
companies) were made applicable solely to Mid-West. Amounts outstanding under
the Bank Credit Facility continued to bear interest at LIBOR plus 100 basis
points per annum. On April 11, 2000 and June 28, 2000, the Company made
principal payments of $11.0 million and $8.0 million, respectively, under the
Bank Credit Facility, and on June 30, 2000, Lender LLC, against payment to the
banks of $6.0 million, assumed 100% of the banks' remaining $6.0 million
position in the Bank Credit Facility.

Effective July 27, 2000, the Company and the Lender LLC completed a further
restructuring of the terms of the Lender LLC Loan. As part of the restructuring,
the Company paid to Lender LLC principal owing on the Lender LLC Loan in the
amount of $6.0 million and amended the terms of the Lender LLC Loan to provide
that the aggregate principal amount of $70.0 million then owing by the Company
(the

F-39

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

"Amended Lender LLC Loan") would consist of a $32.0 million unsecured tranche
and a $38.0 million tranche secured by a pledge of 100% of the capital stock of
Mid-West. The Amended Lender LLC Loan (a) matured on January 1, 2002, (b)
continued to bear interest at the prevailing prime rate from time to time, with
interest accruing but not payable until the earlier to occur of full prepayment
of the Lender LLC Loan or January 1, 2002, and (c) was mandatorily prepayable
monthly to the extent of 1% of the original outstanding principal balance of the
Amended Lender LLC Loan. The security interest in all remaining collateral
previously pledged to secure payment of the Lender LLC Loan and indebtedness
outstanding under the Bank Credit Facility (including all investment securities
and shares of the Company's National Motor Club unit) was released in full, and
the Bank Credit Facility was terminated.

In addition to scheduled principal payments totaling $3.5 million made
during the course of 2000, on October 20, 2000, the Company prepaid the
unsecured tranche of the Amended Lender LLC Loan in the amount of $12.5 million,
and on November 2, 2000, the Company prepaid an additional $17.4 million of the
unsecured tranche and $17.6 million of the secured tranche. Accordingly, at
December 31, 2000, the Company had no indebtedness outstanding under the
unsecured tranche and $19.0 million outstanding under the secured tranche of the
Amended Lender LLC Loan.

On January 30, 2001, the Company prepaid in full all principal in the
amount of $19.0 million, plus accrued interest of $2.1 million, on the secured
tranche of the Amended Lender LLC Loan, utilizing a portion of the proceeds
received in liquidation of UCNB, and the lender's security interest in 100% of
the capital stock of Mid-West was released in full.

Principal payments required in each of the next five years and thereafter
are as follows:

The fair value of the Company's short-term and long-term debt was $10.1
million and $26.2 million at December 31, 2002 and 2001, respectively. The fair
value of the Company's long-term debt is estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amounts of the Company's
short-term debt approximate fair values. Total interest paid was $3.5 million,
$6.4 million and $8.8 million in the years ended December 31, 2002, 2001 and
2000, respectively. For 2002, interest paid reflects $1.8 million interest
related to the Onward & Upward put. See Note N.

The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2001 was 10.1%. The Company had no short-term borrowings
outstanding at December 31, 2002.

NOTE K -- STUDENT LOAN CREDIT FACILITIES

At December 31, 2002 and 2001, the Company, through its Academic Management
Services Corp. ("AMS") subsidiary and the College Fund Life Insurance Division,
had outstanding an aggregate of $1,752.6 million and $1,506.2 million of
indebtedness, respectively, under secured student loan credit facilities, of
which $1,726.1 million and $1,242.8 million, respectively, were issued by
bankruptcy-remote special purpose entities (a "Special Purpose Entity"), the
accounts of which are included in the Company's Consolidated Financial
Statements. At December 31, 2002 and 2001, indebtedness outstanding under
secured student loan credit facilities (including indebtedness issued by Special
Purpose Entities) was secured by federally guaranteed and alternative (i.e.,
non-federally guaranteed) student loans in the carrying amount of $1,430.8
million and $1,276.1 million, respectively, and by a pledge of cash, cash
equivalents and other

F-40

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

qualified investments in the amount of $222.5 million and $129.4 million,
respectively. All such indebtedness issued under secured student loan credit
facilities is reflected as student loan indebtedness on the Company's
consolidated balance sheet; all such student loans pledged to secure such
facilities are reflected as student loan assets on the Company's consolidated
balance sheet; and all such cash, cash equivalents and qualified investments
specifically pledged under the student loan credit facilities are reflected as
restricted cash on the Company's consolidated balance sheet.

A summary of student loan credit facilities is set forth below:

ACADEMIC MANAGEMENT SERVICES CORP.

Following is a summary of debt outstanding under student loan credit
facilities at AMS:

In March 1998, AMS entered into a master repurchase agreement and credit
facility with a financial institution, the obligations under which are partially
(approximately $13.0 million at December 31, 2002) guaranteed by the Company.
The proceeds of the facility are used from time to time to initially fund AMS'
student loan originations. The repurchase agreement provides for the purchase of
student loans by the financial institution, and the financial institution may
put the student loans back to AMS on the last day of each month. AMS, in turn,
has the right to require the financial institution to repurchase the student
loans on such date, with the interest rate on the credit facility reset on such
date. The credit facility is committed to provide up to $150.0 million of
financing and may be increased up to $300.0 million subject to approval by the
financial institution. The credit facility had an outstanding balance of $26.5
million and $263.4 million at December 31, 2002 and 2001, respectively, and
amounts outstanding under the facility bear interest at a variable annual rate
of LIBOR plus 75 basis points (2.1675% at December 31, 2002). The credit
facility, which had an initial term of one year, has been extended until March
31, 2003 and is secured by student loans made under the Federal Family Education
Loan Program ("FFELP") or alternative loans guaranteed by private guarantors.
The financial institution may value the loans at any time and require AMS to
repay any amount by which the market value of the loans is less than the amount
required by the credit facility.

F-41

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

After initial funding, AMS typically refinances groups of loans on a more
structured basis by transferring loans to Special Purpose Entities, which in
turn issue debt securities secured by the student loans. AMS has entered into
five structured financing facilities:

- In August 2002, the Company completed a $300.0 million financing by
issuing through a Special Purpose Entity Class A and Class B floating
rate student loan-backed notes. The interest rate on the $288 million
Class A notes (2.1225% at December 31, 2002) is determined by reference
to three-month LIBOR plus 0.30%. The interest rate on the $12 million
Class B notes (2.6725% at December 31, 2002) is determined by reference
to three-month LIBOR plus 0.85%. Interest on the Class A and Class B
notes reset approximately every 90 days. The maturity date for the Class
A notes is January 2033 and the maturity date for the Class B notes is
April 2037. The outstanding notes of $300.0 million at December 31, 2002
may be redeemed at the option of the issuer, in whole or in part, on each
Class' respective payment date (approximately every 90 days) at an
aggregate price equal to the outstanding principal amount of the notes
plus accrued interest thereon.

- In January 2002, the Company completed a $335.0 million financing by
issuing through a Special Purpose Entity four classes of auction rate
student loan-backed notes. The notes are secured by a pledge of federally
guaranteed student loans and are insured by MBIA Insurance Corporation
("MBIA"). As part of the transaction, the Special Purpose Entity acquired
a $269.1 million portfolio of student loans from AMS and a loan
acquisition fund in the amount of $50.0 million (consisting of cash and
cash equivalents) was established to acquire in the future additional
student loans originated by AMS. The interest rates on the notes (1.57%,
1.62%, 1.65%, and 1.65% at December 31, 2002) are reset every 35 days
pursuant to auctions conducted by The Bank of New York. The notes
notionally mature on March 1, 2038. The outstanding balance of the notes
was $335.0 million at December 31, 2002. The outstanding notes may be
redeemed at the option of the Special Purpose Entity, in whole or in
part, on each Class' payment date (every 35 days) at an aggregate price
equal to the outstanding principal amount of the notes plus accrued
interest thereon.

- On October 7, 1999, AMS completed a $344.0 million financing of three
classes of notes issued by a Special Purpose Entity. The $229.0 million
Class A-1 notes were structured as three-month LIBOR floating rate notes
and were priced with a spread of 42 basis points with the interest rate
reset quarterly (2.243% at December 31, 2002). The Class A-1 notes have
an expected average life of 2.5 years with legal final maturity in April
2009. The Class A-1 notes had an outstanding balance of $69.7 million and
$153.7 million at December 31, 2002 and 2001, respectively. The $57.5
million Class A-2 and $57.5 million Class A-3 notes were structured as
auction rate notes with an initial interest rate of 6.38%. The interest
rate on these notes is reset quarterly. Legal final maturity of the A-2
and A-3 notes is July 2027. At December 31, 2002, the interest rate on
the notes was 2.0%. At December 31, 2002 and 2001, the outstanding
balance on the notes was $115.0 million. All three classes of notes are
insured by MBIA.

- Effective August 6, 1999, AMS completed a closing and funding of $515.0
million of its $650.0 million single seller asset-backed commercial paper
conduit, pursuant to which commercial paper may be issued by a Special
Purpose Entity from time to time with maturities from one to 270 days.
Commercial paper bearing interest rates of 1.45% to 1.70% was issued and
outstanding under the facility at December 31, 2002. The commercial paper
had an outstanding balance of $593.6 million and $619.6 million at
December 31, 2002 and 2001, respectively. Liquidity support is provided
by a separate banking facility. Under the terms of the program, in the
event the support facility is activated, borrowings under the bank
facility would be repaid using collections of underlying student loans,
would bear interest at LIBOR plus seventy-five (75) basis points and
would mature in August 2034. The commercial paper is insured by MBIA.

F-42

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- On June 11, 1999, AMS sold, in a private placement transaction, $319.5
million principal amount of Auction Rate Student Loan-Backed Notes issued
by a Special Purpose Entity at an initial interest rate of 5.038%. The
notes were sold in two tranches (Class A-1 and Class A-2) and mature in
November 2022. The interest rate (1.40% for Class A-1 and 1.47% for Class
A-2 at December 31, 2002) on the notes is generally reset monthly by an
auction process. The outstanding balance at December 31, 2002 and 2001
was $162.8 million and $254.6 million, respectively. The notes are
insured by MBIA.

In each case the notes represent obligations solely of the Special Purpose
Entity that issued the obligations and not of the Company, AMS or any other
subsidiary of the Company. However, for financial reporting and accounting
purposes the AMS structured finance facilities have been classified as
financings. Accordingly, in connection with the financings neither the Company
nor AMS recorded gain on sale of the student loan assets transferred to the
Special Purpose Entity and, on a consolidated basis, the Company continues to
carry on its consolidated balance sheet the student loans ($1,307.9 million and
$975.3 million principal amount at December 31, 2002 and 2001, respectively) and
cash and cash equivalents held by the Special Purpose Entities ($172.1 million
and $113.4 million at December 31, 2002 and 2001, respectively, classified as
restricted cash) and the associated indebtedness ($1,602.6 million and $1,142.8
million in the aggregate at December 31, 2002 and 2001, respectively, which is
included on the Company's consolidated balance sheet as student loan credit
facilities) arising from the transactions.

During the year ended December 31, 2002, 2001 and 2000, AMS' total interest
paid on borrowings incurred to finance the funding of student loans totaled
$34.2 million, $68.4 million and $98.5 million, respectively.

COLLEGE FUND LIFE INSURANCE DIVISION

On April 10, 2002, the Company completed a $50.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by the
Company's College Fund Life Insurance Division through its College First
Alternative Loan Program. The securitization consisted of a $50.0 million series
of Student Loan Asset Backed Notes issued by a Special Purpose Entity. The
outstanding balance of the notes was $50.0 million at December 31, 2002.
Interest rates on the series of notes reset monthly (1.57% at December 31, 2002)
in a Dutch auction process, with the initial rate set at 2.10%. The notes are
secured by a pledge of alternative student loans and cash and cash equivalents
and are insured by MBIA. As part of the transaction, the Special Purpose Entity
established a loan acquisition fund in the amount of $49.8 million (consisting
of cash and cash equivalents) to acquire in the future additional student loans
originated by the College Fund Life Division. At December 31, 2002, the loan
acquisition fund balance was $40.1 million. The notes represent obligations
solely of the Special Purpose Entity and not of the Company or any other
subsidiary of the Company.

On April 27, 2001, the Company completed a $100.0 million securitization of
alternative (i.e., non-federally guaranteed) student loans originated by College
Fund Life Division through its College First Alternative Loan Program. The
securitization consisted of two $50.0 million series of Student Loan Asset
Backed Notes issued by a bankruptcy-remote special purpose entity (a "Special
Purpose Entity"). The outstanding balance of the notes was $100.0 million at
December 31, 2002 and 2001. Interest rates on the notes reset monthly in a Dutch
auction process, with the initial rate set at 4.75% for each of the Series A-1
and Series A-2 notes. At December 31, 2002, the interest rates on the Series A-1
and Series A-2 notes were 1.50% and 1.55%, respectively. The notes are secured
by a pledge of alternative student loans and are insured by MBIA. As part of the
transaction, the Special Purpose Entity acquired a $70.1 million portfolio of
alternative student loans from various affiliates of the Company and established
a loan acquisition fund in the amount of $19.1 million (consisting of cash and
cash equivalents) to acquire in the future additional student loans originated
by College Fund Life Division. At December 31, 2002, the loan acquisition fund
had been used to fund additional student loans.

F-43

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The notes represent obligations solely of the Special Purpose Entity and
not of the Company or any other subsidiary of the Company. For financial
reporting and accounting purposes the College Fund Life Division structured
finance facility has been classified as a financing. Accordingly, in connection
with the financing the Company recorded no gain on sale of the assets
transferred to the Special Purpose Entity and, on a consolidated basis, the
Company continues to carry on its consolidated balance sheet the alternative
student loans ($95.2 million and $78.5 million principal amount at December 31,
2002 and 2001, respectively) and cash and cash equivalents held by the Special
Purpose Entity ($48.2 million and $13.9 million at December 31, 2002 and 2001,
respectively, classified as restricted cash) and the associated indebtedness
($150.0 million and $100.0 million at December 31, 2002 and 2001, respectively,
which is included on the Company's consolidated balance sheet as student loan
credit facilities) arising from the transaction.

During the year ended December 31, 2002 and 2001 College Fund Life Division
paid total interest on borrowings associated with the securitization in the
amount of $2.7 million and $2.3 million.

The weighted-average interest rate on short-term borrowings incurred by AMS
and College Fund Life Division and outstanding at December 31, 2002 and 2001 was
2.6% and 4.6%, respectively.

Principal payments required by AMS and College Fund Life Division with
respect to their outstanding student loan indebtedness in each of the next five
years and thereafter are as follows:

NOTE L -- FEDERAL INCOME TAXES

Deferred income taxes for 2002 and 2001 reflect the impact of temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities. Deferred tax liabilities and assets consist of the
following:

F-44

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company establishes a valuation allowance when management believes,
based on the weight of the available evidence, that it is more likely than not
that some portion of the deferred tax asset will not be realized. Realization of
the net deferred tax asset is dependent on generating sufficient future taxable
income. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. During 2002 the Company determined that it
was more likely than not that it would be able to realize its deferred tax
assets. Accordingly, the Company eliminated or released the remaining valuation
allowance of $4.0 million. The net change in the total valuation allowance for
2001 was a decrease of $12.5 million. AMS recognized taxable income for 2001 and
realized a tax benefit from its operating loss carryforward resulting in a
decrease in the valuation allowance. Because AMS was not part of the Company's
consolidated group during 2000, the Company increased the valuation allowance
during 2000 and did not realize the tax benefit associated with the significant
operating losses of AMS for 2000.

The provision for income tax expense (benefit) consisted of the following:

F-45

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company's effective income tax rates applicable to continuing
operations varied from the maximum statutory federal income tax rate as follows:

The deferred tax liability related to the undistributed earnings in
subsidiaries decreased $4.2 million in 2001. The decrease related to taxes on
undistributed earnings from subsidiaries that were previously less than 80%
owned and are now wholly owned subsidiaries.

Under pre-1984 federal income tax laws, a portion of a life insurance
company's "gain from operations" was not subject to current income taxation but
was accumulated for tax purposes in a memorandum account designated as
"policyholders' surplus account." These amounts are not taxable unless (a) the
life insurance company fails to qualify as a life insurance company for federal
income tax purposes for two consecutive years, (b) these amounts are distributed
to the Company or (c) these amounts exceed certain statutory limitations. The
aggregate accumulation in this account for the Company's life insurance
subsidiaries was approximately $3.1 million at December 31, 2002.

At December 31, 2002, MEGA had an aggregate federal tax loss carryforward
from certain acquired subsidiaries of $3.0 million for use to offset future
taxable income, under certain circumstances, with expiration dates ranging
between 2003 and 2007. The maximum amounts of federal tax loss carryforwards
available are $657,000 per year from 2003 through 2006, and $388,000 in 2007.

At December 31, 2002 AMS had $24.9 million of federal tax loss
carryforwards that will begin to expire in 2019. AMS entered the Company's
consolidated group on August 3, 2001 following the Company's acquisition of the
minority interest of AMS. The utilization of operating loss carryovers of AMS
generated before August 3, 2001 is limited to future taxable income of AMS and
is not available to offset the future taxable income of the other members of the
Company's consolidated group.

At December 31, 2002, the Company's insurance company subsidiaries incurred
tax basis capital losses of $2.3 million resulting in a deferred tax asset of
$700,000. Capital losses not used to offset capital gains will expire in 2007.

Total federal income taxes paid in prior years and recovered were $8.5
million and $18.6 million during 2002 and 2001, respectively. Total federal
income taxes paid were $20.6 million, $26.9 million and $11.8 million for 2002,
2001 and 2000, respectively.

UICI, MEGA, Mid-West, two other non-life insurance subsidiaries and all of
the Company's non-insurance subsidiaries file a consolidated federal income tax
return. The Company's other domestic life insurance subsidiary Chesapeake and
two offshore life reinsurance subsidiaries file separate federal income tax
returns.

F-46

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has interests in several limited liability corporations that
file separate tax returns. The Company's consolidated results of operations
reflect 100% of the income from these companies.

NOTE M -- STOCKHOLDERS' EQUITY

On August 11, 2000, the Company issued to the UICI Employee Stock Ownership
and Savings Plan ("the Employee Plan") 1,610,000 shares of UICI common stock at
a purchase price of $5.25 per share, or $8.5 million in the aggregate. The
purchase price for the shares was paid by delivery to UICI of the Employee
Plan's $8.5 million promissory note, which was scheduled to mature July 31, 2003
and was secured by a pledge of the purchased shares. As of December 31, 2002,
the Employee Plan had repaid the $8.5 million promissory note to the Company.
See Note P.

In November 1998, the Company's Board of Directors authorized the
repurchase of up to 4,500,000 shares of the Company's Common Stock. The shares
were authorized to be purchased from time to time on the open market or in
private transactions. As of December 31, 2000, the Company had repurchased
198,000 shares pursuant to such authorization, all of which were purchased in
1999. At its regular meeting held on February 28, 2001, the Board of Directors
of the Company reconfirmed the Company's 1998 share repurchase program.
Following reconfirmation of the program, through December 31, 2002, the Company
had purchased an additional 2,000,000 shares pursuant to the program (with the
most recent purchase made on December 31, 2002) at an aggregate cost of $29.3
million, or $14.64 per share. Through March 11, 2003, the Company had purchased
an additional 324,200 shares at an aggregate cost of $4.9 million, or $15.02 per
share. The timing and extent of additional repurchases, if any, will depend on
market conditions and the Company's evaluation of its financial resources at the
time of purchase.

In August 1998, Ronald L. Jensen (the Company's Chairman) and his wife
established an incentive program (the "BOB Program"), pursuant to which they
agreed to distribute to "eligible participants" on August 15, 2002, in cash an
aggregate of the dollar equivalent value of 100,000 UICI shares. Eligible
participants in the BOB Program consisted of full-time employees of UICI and its
subsidiaries and independent agents associated with UICI's insurance
subsidiaries who were employed by or contracted with UICI, as the case may be,
at the close of business on August 14, 1998, and who remain employed by or
contracted with UICI at the close of business on August 14, 2002. In accordance
with the BOB Program, each eligible participant was entitled to receive his or
her portion of the aggregate cash payment determined by reference to a formula
based on, among other things, such eligible participant's tenure with UICI and
level of compensation.

For financial reporting purposes, UICI incurred non-cash variable
compensation expense associated with the BOB Program over the four-year vesting
period, which expense included adjustments due to periodic changes in the value
of UICI common stock. The Company established a corresponding liability
associated with the future benefits payable under the BOB Program. At December
31, 2001 and August 15, 2002 (the date of vesting of benefits under the BOB
Program), UICI had recorded a liability for the benefits associated with the BOB
Program in the amount of $1.1 million and $1.8 million, respectively.

In a series of celebrations occurring in August 2002, Mr. and Mrs. Jensen
distributed cash in the aggregate amount of $1.8 million to the eligible
participants in the BOB Program. In connection with the funding of the BOB
Program, UICI extinguished the liability in the amount of $1.8 million at August
15, 2002 and credited an equivalent amount ($1.2 million net of tax) to the
Company's additional paid-in capital account.

Effective September 15, 1999, the Company entered into an Assumption
Agreement with an affiliate of Mr. Jensen, pursuant to which UICI agreed to
assume and discharge an unfunded obligation to fund certain agent stock
accumulation plans established for the benefit of independent sales agents and
representatives. In consideration of a cash payment made by the related party to
the Company in the amount of $10.1 million

F-47

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(representing the dollar value of 369,174 shares of UICI Common Stock at
$27.4375 per share (the closing price of UICI common stock at September 15,
1999)), UICI agreed to assume the liability and fund the agent plans to the
extent of 369,174 shares of UICI common stock. On October 29, 1999, the Company
received the cash payment. See Note N.

On July 1, 2002, pursuant to the terms of a Put/Call Agreement, the Company
exercised its option to purchase from a related party 369,174 shares of Common
Stock at the then-effective call price of $32.25 per share, or $11.9 million in
the aggregate. For financial reporting purposes, the Company treated the
transaction as a repurchase of Company common stock in the amount of $10.1
million (which represented the fair market value of 369,174 shares of Common
Stock of the Company at September 15, 1999) and a discharge of a liability in
the amount of $1.8 million (which represented accrued interest expense
previously recorded over the term of the put/call arrangement is included in the
Other expenses category on the Company's consolidated statement of operations),
resulting in an overall decrease in consolidated stockholders' equity in the
amount of $11.9 million.

Pursuant to the Company's Executive Stock Purchase Program, during 1998 and
1999 the Company extended loans to officers, directors and employees in the
amount of $3.3 million and $2.9 million, respectively, the proceeds of which
were used to purchase Company Common Stock. The six-year term loans bear
interest at 5.22%-5.37% per annum, and interest is payable quarterly. Loans are
full recourse to borrowers and are payable in full upon the occurrence of
certain events. The terms of the loans were significantly modified during the
year ended December 31, 2000. At December 31, 2002 and 2001, the aggregate
outstanding balance of the loans was $1.7 million and $1.9 million,
respectively. See Note P.

Generally, total stockholders' equity of domestic insurance subsidiaries,
as determined in accordance with statutory accounting practices, in excess of
minimum statutory capital requirements is available for transfer to the parent
company subject to the tax effects of distribution from the "policyholders'
surplus account" described in Note L on Federal Income Taxes. The minimum
statutory capital and surplus requirements of the Company's domestic insurance
subsidiaries was $26.6 million and $28.2 million at December 31, 2002 and 2001,
respectively.

Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company that exceed certain
limitations based on statutory surplus and net income. During the fourth quarter
of 2002, the Company's two principal domestic insurance subsidiaries paid $20.0
million in the aggregate to the holding company. During 2001 and 2000, the
domestic insurance companies paid dividends in the amount of $40.0 million and
$19.0 million, respectively. During 2003, the Company's domestic insurance
companies could pay aggregate dividends to the parent company of approximately
$39.1 million without prior approval by statutory authorities.

Combined net income and stockholders' equity for the Company's domestic
insurance subsidiaries determined in accordance with statutory accounting
practices and as reported in regulatory filings are as follows:

The National Association of Insurance Commissioners ("NAIC") revised the
Accounting Practices and Procedures Manual ("Manual") in a process referred to
as Codification. The revised Manual became effective January 1, 2001. The
primary domiciled states of the Company's domestic insurance subsidiaries
(Oklahoma and Tennessee) adopted the provisions of the Manual. The Manual
changed, to some extent, prescribed

F-48

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

statutory accounting practices and resulted in changes to the accounting
practices that the Company's domestic insurance subsidiaries use to prepare its
statutory-basis financial statements.

Statutory accounting changes adopted to conform to the provisions of the
Manual are reported as changes in accounting principles in the Company's
statutory-based financial statements. The cumulative effect of changes in
accounting principles is reported as an adjustment to unassigned funds (surplus)
in the period of the change in accounting principle. The cumulative effect is
the difference between the amount of statutory capital and surplus at the
beginning of the year and the amount of statutory capital and surplus that would
have been reported at that date if the new accounting principles had been
applied retroactively for all prior periods. As a result of these changes, the
Company's insurance subsidiaries reported a change in accounting principle, as
an adjustment that increased statutory capital and surplus by $18.6 million as
of January 1, 2001. Included in this total adjustment is an increase in
statutory capital and surplus of $23.4 million related to deferred tax assets.

NOTE N -- RELATED PARTY TRANSACTIONS

INTRODUCTION

Historically, the Company and its subsidiaries have engaged from time to
time in transactions and joint investments with executive officers and entities
controlled by executive officers, particularly Ronald L. Jensen (the Company's
Chairman) and entities in which Mr. Jensen and his adult children have an
interest ("Jensen Affiliates").

Under the Company's by-laws, any contract or other transaction between the
Company and any director (or company in which a director is interested) is valid
for all purposes if the interest of such director is disclosed or known and such
transaction is authorized by a majority of directors not interested in the
transaction. The Board of Directors has adopted a policy requiring the
prospective review and approval by a majority of the "Disinterested Outside
Directors" of any contract or transaction with a related party involving
payments of $250,000 or more in any twelve-month period or $1.0 million over the
life of the contract. For purposes of the policy, a "related-party" is a person
or entity that is an "affiliate" of the Company or any entity in which any
officer or director of the Company has a 5% or greater equity interest, and a
"Disinterested Outside Director" is any director of UICI who is an employee of
neither the Company nor any affiliate of the Company and otherwise holds no
interest in any person or entity with which the Company proposes to enter into a
transaction in question.

The Company believes that the terms of all such transactions with all
related parties, including all Jensen Affiliates, are and have been on terms no
less favorable to the Company than could have been obtained in arms' length
transactions with unrelated third parties. Mr. Jensen has never voted with
respect to any matter in which he or his children have or have had an interest.

TRANSACTIONS WITH MR. JENSEN AND JENSEN AFFILIATES

Special Investment Risks, Ltd.

From the Company's inception through 1996, Special Investment Risks, Ltd.
("SIR") (formerly United Group Association, Inc. ("UGA")) sold health insurance
policies that were issued by AEGON USA and coinsured by the Company or policies
issued directly by the Company. SIR is owned by Mr. Jensen. Effective January 1,
1997, the Company acquired the agency force of SIR and certain tangible assets
of SIR for a price equal to the net book value of the tangible assets acquired
and assumed certain agent commitments of $3.9 million. The tangible assets
acquired consisted primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of $13.1 million.

In accordance with the terms of the asset sale to the Company, SIR retained
the right to receive all commissions on policies written prior to January 1,
1997, including the policies previously issued by AEGON
F-49

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and coinsured by the Company and the policies previously issued directly by the
Company. The commissions paid to SIR on the coinsured policies issued by AEGON
are based on commission rates negotiated and agreed to by AEGON and SIR at the
time the policies were issued prior to 1997, and the commission rates paid on
policies issued directly by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share of commissions
payable to SIR on co-insured policies issued by AEGON. During 2002, 2001 and
2000, SIR received insurance commissions of $3.1 million, $3.8 million and $7.7
million, respectively, on the policies previously issued by AEGON prior to
January 1, 1997 and coinsured by the Company. During 2002, 2001 and 2000, SIR
received commissions of $2.5 million, $3.1 million and $1.8 million,
respectively, on policies issued prior to January 1, 1997 and issued directly by
the Company.

In accordance with the terms of an amendment, dated July 22, 1998, to the
terms of the sale of the UGA assets to the Company, SIR was granted the right to
retain 10% of net renewal commissions (computed at the UGA -- Association Field
Services agency level) on any new business written by the UGA agency force after
January 1, 1997. During the years ended December 31, 2002, 2001 and 2000, the
Company paid to SIR the amount of $1.9 million, $1.2 million and $1.1 million,
respectively, pursuant to this arrangement.

In 1986 and 1996, respectively, SIR established, for the benefit of its
independent insurance agents, independent sales representatives and independent
organizations associated with SIR, the Agency Matching Total Ownership Plan I
and the Agency Matching Total Ownership Plan II (collectively, the "Plans"),
entitling participants to purchase and receive Company Common Stock. In
connection with SIR's transfer to the Company of SIR's agency operations
effective January 1, 1997, SIR agreed to retain the liability to fund the Plans
to the extent of 922,587 shares of UICI Common Stock, representing the
corresponding number of unvested AMTOP Credits (as defined in the Plans) at
January 1, 1997. As of August 30, 1999, the liability of SIR to fund the Plans
remained undischarged to the extent of 369,174 shares of UICI Common Stock (the
"Unfunded Obligation").

Effective September 15, 1999, SIR and the Company entered into an
Assumption Agreement, pursuant to which UICI agreed to assume and discharge the
Unfunded Obligation, in consideration of a cash payment made by SIR to the
Company in the amount of $10.1 million representing the dollar value of 369,174
shares of UICI Common Stock at $27.4375 per share (the closing price of UICI
common stock at September 15, 1999). On October 29, 1999, SIR funded the cash
payment.

Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), which is the holder of approximately
6.5% of the Company's outstanding Common Stock. To ensure that the dollar value
of the Unfunded Obligation would not exceed the dollar proceeds received from
SIR plus a reasonable allowance for the cost of funds, effective September 15,
1999, the Company and OUI entered into a Put/Call Agreement. Pursuant to the
Put/Call Agreement, for a thirty day period commencing on July 1 of each year,
the Company had an option to purchase from OUI, and OUI had a corresponding
right to require the Company to purchase, up to 369,174 shares of Common Stock
at a purchase price per share equal to $28.50 in 2000, $30.25 in 2001, $32.25 in
2002, $34.25 in 2003, $36.25 in 2004, $38.25 in 2005 and $40.25 in 2006. The
call/put price escalated over time in annual dollar increments designed to
recognize an increase in value of the underlying UICI stock based upon
historical past performance (an approximate 6.0% annual rate of appreciation).
In July 2000, the Company extended until October 31, 2000 the period during
which OUI could exercise its initial put right under the Put/Call Agreement. In
November 2000, the Company extended until March 31, 2001 the period during which
OUI could have exercised its initial put right under the Put/Call Agreement, and
in May 2001, the Company extended until June 30, 2001 the period during which
OUI could have exercised its initial put right under the Put/Call Agreement. On
July 1, 2002, pursuant to the terms of the Put/Call Agreement, the Company
exercised is option to purchase from OUI 369,174 shares of Common Stock at the
then-effective call price of $32.25 per share, or $11.9 million in the
aggregate.

F-50

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2002, 2001 and 2000, the Company received $2,000, $-0- and $2,000,
respectively, from SIR as reimbursement of office supply and occupancy expenses.

Richland State Bank

Richland State Bank ("RSB") is a state-chartered bank in which Mr. Jensen
holds a 100% equity interest. Prior to the chartering of United Credit National
Bank in February 1997, the Company's United CreditServ subsidiary (formerly the
Company's Credit Services division) utilized RSB to issue credit cards bearing
the name of RSB for the Company's ACE and AFCA credit card programs. The
agreement governing the terms of the issuance of such credit cards provided that
UICI paid to RSB a fee in the amount of $0.50 per card issued for each month a
credit card bearing the RSB name remained outstanding. In 2000, the Company paid
fees in the amount of $33,000, pursuant to this agreement. The agreement
terminated on June 30, 2000.

Until September 30, 2000, the Company's United CreditServ unit processed
and serviced credit cards issued by RSB, at a monthly rate of $5.25 per account.
The Company received $856,000 from RSB for services performed in connection with
processing and marketing of credit cards in 2000.

RSB has also originated student loans for AMS and resold originated loans
to AMS at par less an origination fee of 31 basis points (0.31%). During 2000,
RSB originated $80.9 million aggregate principal amount of student loans for
AMS, for which it received $245,000 in origination fees. During 2001, RSB
originated $88.2 million aggregate principal amount of student loans for AMS,
for which it received $275,000 in origination fees. The agreement governing the
terms of RSB's origination services for AMS formally expired on January 20, 2002
and has been extended for an indefinite term pending negotiation of the terms of
a new arrangement. During 2002, RSB originated $77.6 million aggregate principal
amount of student loans for AMS, for which it received $241,000 in origination
fees.

Pursuant to the terms of an underwriting and processing agreement between
RSB and Specialized Card Services, Inc. (an indirect wholly owned subsidiary of
the Company) ("SCS"), SCS formerly provided to RSB certain underwriting and loan
processing services utilizing 17 SCS employees resident in Sioux Falls, South
Dakota, which enabled RSB to perform its obligations under the AMS origination
agreement. The fees and expenses paid to SCS by RSB pursuant to the processing
agreement were passed through to AMS in accordance with the terms of the
origination agreement. The student loan underwriting and loan processing
services constituted the sole remaining operation of SCS in Sioux Falls
following the sale of UICI's credit card portfolio in September 2000 and final
liquidation of United Credit National bank in January 2001.

The Company entered into an agreement, dated as of June 4, 2001, with AMS,
SCS and RSB, pursuant to which, among other things, SCS and the Company agreed
to permit RSB to make offers of employment to, and to hire, 17 SCS employees. In
connection with such offers, RSB agreed to assume all liabilities (including
accrued vacation and benefits) accruing on and after June 30, 2001 associated
with the employees actually hired by RSB. The Company agreed to retain all
liability for severance and/or termination costs associated with employees who
elected not to accept RSB's offer of employment. On June 30, 2001, SCS confirmed
that all employees had either elected to accept offers of employment from RSB or
had been terminated by SCS, and SCS closed its remaining operations in Sioux
Falls.

RSB also provides student loan origination services for the Company's
College Fund Life Insurance Division of MEGA and Mid-West. Pursuant to a Loan
Origination and Purchase Agreement, dated June 12, 1999, RSB originated student
loans and resold such loans to UICI Funding Corp. 2 ("Funding") (a wholly owned
subsidiary of UICI) at par (plus accrued interest) less an origination fee of 31
basis points (0.31%). Effective June 12, 2000, RSB and Funding amended the
agreement to provide that student loans originated by RSB would be resold to
Funding at par (plus accrued interest). During 2002, 2001 and 2000, RSB
originated $17.7 million, $20.7 million and $19.5 million aggregate principal
amount plus accrued interest, respectively,

F-51

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of student loans for College Fund Life Division, for which it received
origination fees in the amounts of $-0-, $-0- and $12,000, respectively.

During 2002, 2001 and 2000, RSB collected on behalf of, and paid to,
Funding $1.6 million, $1.9 million and $1.7 million, respectively, in guarantee
fees paid by student borrowers in connection with the origination of student
loans.

In June 1999, RSB entered into a service agreement with College Fund Life
Division, pursuant to which College Fund Life Division provides underwriting
services to permit RSB to approve prospective student loans. During 2002, 2001
and 2000, RSB collected on behalf of and collectively paid to College Fund Life
Division fees of $442,000, $512,000 and $477,000, respectively, in origination
fees paid by student borrowers in connection with the origination of student
loans.

During 2002, 2001 and 2000, Funding received from RSB interest income in
the amount of $4,000, $20,000 and $37,000, respectively, on money market reserve
accounts maintained at RSB by the Company.

Specialized Association Services, Inc.

Pursuant to an agreement entered into in July 1998 and terminated effective
December 31, 2002, Specialized Association Services, Inc. ("SAS") (which is
controlled by Mr. Jensen's adult children) paid UICI Marketing for certain
benefits provided to association members. UICI Marketing, in turn, purchased
such benefits from third parties (including NMC, which was sold July 27, 2000 to
an investor group consisting of Jensen family members). During 2002, 2001 and
2000, SAS paid to UICI Marketing $14.6 million, $15.0 million and $9.7 million,
respectively, pursuant to this arrangement. During 2002 and 2001, UICI Marketing
paid NMC $161,000 and $1.4 million, respectively, pursuant to this arrangement.
Effective January 1, 2003, UICI Marketing sells new membership sales leads to
the enrollers and video and print services to the associations and to SAS.

During 2002, SAS began purchasing directly from MEGA certain ancillary
benefit products (including accidental death, hospital confinement and emergency
room benefits) for the benefit of the membership associations that endorse the
Company's health insurance products. The aggregate amount paid by SAS to MEGA
for these benefit products was $6.4 million in 2002.

During 2002, 2001 and 2000, the Company paid to SAS $441,000, $347,000 and
$176,000, respectively, for various services and reimbursement of expenses. The
Company received from SAS $357,000, $178,000 and $7,000 during 2002, 2001 and
2000, respectively, for reimbursement of expenses. During 2002, 2001 and 2000,
SAS paid to MEGA $347,000, $342,000 and $325,000, respectively, for leased
office facilities.

Healthcare Management Administrators, Inc.

During 1999 and a portion of 2000, the Company provided to Healthcare
Management Administrators, Inc. ("HMA") (which was owned by Mr. Jensen until
February 3, 2000) certain leased facilities and data processing, accounting,
management and administrative services. For such services, the Company received
fees of $34,000 in 2000.

During 2000, Insurdata Marketing Services received commissions from HMA in
the amount of $38,000.

In accordance with the terms of a Management and Option Agreement, dated as
of April 1, 1999, HMA and Mr. Jensen granted to the Company an option to
purchase certain assets, subject to certain corresponding liabilities,
associated with the third party administration business of HMA. The option was
exercisable on or before January 30, 2000 at an option price equal to the book
value of the net tangible assets of HMA to be purchased plus assumption of an
obligation to pay WinterBrook VSO, LLC (a company controlled by Mr. Jensen)
certain commissions payable over a five year term in an amount not to exceed
$4.2 million. The Company delivered notice of exercise of the option on January
25, 2000, and the Company completed the
F-52

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase of the assets associated with HMA's third party administration business
on February 3, 2000, at a renegotiated purchase price equal to approximately
$4.0 million (representing the recorded net book value of the assets purchased)
plus $500,000, representing repayment to Mr. Jensen of cash advances made to HMA
subsequent to December 31, 1999. The assets of HMA comprised a part of the
assets of UICI Administrators, Inc., which was sold by the Company in January
2002.

NetLojix Communications, Inc. (formerly AvTel Communications, Inc.)

Until November 2002, NetLojix Communications, Inc. ("NetLojix") provided
long distance voice telecommunications services to the Company and its
subsidiaries, pursuant to a series of agreements originally executed in 1998 and
most recently extended for a two-year period in November 2000. At December 31,
2002, Mr. Jensen and his adult children beneficially hold in the aggregate
approximately 59% of the issued capital stock of NetLojix.

The Company's most recent agreement with NetLojix expired on October 31,
2002 and was not extended upon expiration. The agreement required UICI to
purchase a minimum of $86,000 in service per month at a rate of $0.0299 per
minute for interstate calls and $0.070 per minute, or $0.075 per minute,
depending on the state, for intrastate calls. The Company's prior agreement
(which was effective August 1, 1999 and terminated on October 31, 2000) required
UICI to purchase a minimum of $200,000 in service per month at a rate of $0.035
per minute for interstate calls and $0.075 per minute for intrastate calls.
Effective August 1, 1998, UICI and NetLojix entered into a one year long
distance service agreement, which required UICI to purchase a minimum of
$120,000 in service per month at a rate of $0.052 per minute for interstate
calls and $0.088 per minute for intrastate calls.

The Company paid NetLojix in the aggregate $2.5 million, $2.3 million and
$4.0 million in 2002, 2001 and 2000, respectively, for long distance
telecommunications services.

On August 23, 2002, UICI and NetLojix entered into a one-year master
services agreement, pursuant to which NetLojix will provide to UICI and its
subsidiaries certain technical support services. During the year ended December
31, 2002, the Company paid to NetLojix $39,590 pursuant to this agreement.

At December 31, 2002, 2001 and 2000, the Company had accounts payable owing
to NetLojix under the services agreement in the amount of approximately $29,000,
$37,000 and $270,000, respectively.

Excell Global Services, Inc.

Excell Global Services, Inc. ("Excell Global") is a holding company, the
principal subsidiary of which is Excell Agent Services, LLC ("Excell"). Excell
Global and members of management of Excell Global hold, in the aggregate, 99% of
the equity interest in Excell, and Mr. Jensen holds the remaining 1% equity
interest. Excell provides telephone directory assistance services. Mr. Jensen
serves as a director of Excell Global and at December 31, 2002 was the
beneficial holder of 100% of the outstanding equity of Excell Global. Until
February 2001, Mr. Mutz served on the board of directors of Excell Global, and
Mr. Mutz held 13.2% of the outstanding equity of Excell Global until August
2002, at which date he disposed of all of his holdings.

Excell paid to the Company $-0-, $2,000 and $53,000 in 2002, 2001 and 2000,
respectively, for medical administration fees under an arrangement entered into
in 2000.

Onward and Upward, Inc. and Other Entities Owned by the Jensen Adult Children

Mr. Jensen's five adult children hold in the aggregate 100% of the equity
interest in Onward & Upward, Inc. ("OUI"), the holder of approximately 6.5% of
the Company's outstanding Common Stock.

Effective September 15, 1999, the Company entered into an Assumption
Agreement with an affiliate of Mr. Jensen, pursuant to which UICI agreed to
assume and discharge an unfunded obligation to fund certain
F-53

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agent stock accumulation plans established for the benefit of independent sales
agents and representatives. In consideration of a cash payment made by the
related party to the Company in the amount of $10.1 million (representing the
dollar value of 369,174 shares of UICI Common Stock at $27.4375 per share (the
closing price of UICI common stock at September 15, 1999)), UICI agreed to
assume the liability and fund the agent plans to the extent of 369,174 shares of
UICI common stock. On October 29, 1999, the Company received the cash payment

Effective September 15, 1999, the Company and Onward & Upward, Inc. ("OUI")
entered into a Put/Call Agreement, pursuant to which, for a thirty day period
commencing on July 1 of each year, the Company was granted an option to purchase
from OUI, and OUI was granted a corresponding right to require the Company to
purchase, up to 369,174 shares of Common Stock at a purchase price per share
equal to $28.50 in 2000, $30.25 in 2001, $32.25 in 2002, $34.25 in 2003, $36.25
in 2004, $38.25 in 2005 and $40.25 in 2006. Mr. Jensen's five adult children
hold in the aggregate 100% of the equity interest in OUI, which is the holder of
approximately 6.5% of the Company's outstanding Common Stock. On July 1, 2002,
pursuant to the terms of the Put/Call Agreement, the Company exercised its
option to purchase from OUI 369,174 shares of Common Stock at the then-effective
call price of $32.25 per share, or $11.9 million in the aggregate. For financial
reporting purposes, the Company treated the transaction as a repurchase of
Company common stock in the amount of $10.1 million (which represented the fair
market value of 369,174 shares of Common Stock of the Company at September 15,
1999) and a discharge of a liability in the amount of $1.8 million (which
represented accrued interest expense previously recorded over the term of the
put/call arrangement), resulting in an overall decrease in consolidated
stockholders' equity in the amount of $11.9 million.

OUI holds a 21% equity interest in U.S. Managers Life Insurance Company,
Ltd., a subsidiary of the Company. The Company has a right-of-first-offer to
purchase from OUI, and OUI has a corresponding put right to sell to the Company,
OUI's 21% equity interest in U.S. Managers Life Insurance Company, Ltd. at a
price equal to 21% of the book value of U.S. Managers Life Insurance Company,
Ltd. (determined in accordance with generally accepted accounting principles) at
the date of purchase.

In 2002, 2001 and 2000, the Company paid $257,000, $174,000 and $144,000,
respectively, to Small Business Ink (a division of Specialized Association
Services, in which the adult children of Mr. Jensen own 99%) for printing
services.

Impact Productions, Inc.

In 1998, the Company acquired a 90% interest in Impact Productions, Inc.
("Impact") from one of Mr. Jensen's adult children for a total price of
$236,000, which approximated the net book value of the assets as of the purchase
date. In May 2001, the Company acquired the remaining 10% interest from Mr.
Jensen's adult child for a total price of $26,275. During 2001 and 2000, the
Company paid to Impact $256,000 and $-0-, respectively, for promotional
services.

During 2001 and 2000, Impact paid the Company $74,000 and $79,000,
respectively, for reimbursement of expenses.

Small Business Showcase, Inc. ("SBS")

Cornerstone America (a division of Mid-West) paid to Small Business
Showcase, Inc. ("SBS") (which was owned by one of Mr. Jensen's adult children
until March 2000) $333 in 2000 for lead generation services.

In 2000, SBS paid to subsidiaries of the Company $13,000 for generating
Internet leads.

F-54

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Purchase of Series B Certificates

On December 31, 1999, the Company sold to Mr. Jensen for an aggregate of
$10.0 million in cash (representing 100% of the principal amount thereof) (a) a
Class B 8.25% Asset Backed Certificate, Series 1998-1, in the outstanding
principal amount of $4.1 million; (b) a Class B 10.00% Asset Backed Certificate,
Series 1997-1, in the outstanding principal amount of $3.0 million; and (c) a
Class B 10.00% Asset Backed Certificate, Series 1996-1, in the outstanding
principal amount of $2.9 million (collectively the "Series B Certificates"). The
Series B Certificates were created as part of the Company's securitizations of
credit card receivables issued in 1996, 1997 and 1998 generated by the Company's
credit card operations. The Class B Certificates were liquidated and paid off at
par from a portion of the proceeds of the September 2000 sale of the non-cash
assets associated with the Company's credit card unit.

Sun Communications, Inc. Litigation

As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with Sun
Communications, Inc. ("Sun") concerning the distribution of the cash proceeds
from the sale and liquidation of SunTech Processing Systems, LLC ("STP") assets
in February 1998.

Assignment and Release Agreement. Effective April 2, 2002, the Company and
Mr. Jensen entered into an Assignment and Release Agreement (the "Assignment and
Release Agreement"), which is intended to effectively transfer the Company's 80%
interest in STP to Mr. Jensen and to terminate the Company's active
participation in, and limit the Company's financial exposure associated with,
the Sun Litigation. In accordance with the terms of the Assignment and Release
Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of $15.6
million and granted to UICI various indemnities against possible losses which
UICI might incur resulting from the Sun Litigation, including (i) any losses
arising from the breach of fiduciary duty claim asserted by Sun against the
Company and Sun's related claim for attorneys' fees, (ii) Sun's claim for
attorneys' fees arising out of the distribution issue in the Sun Litigation, and
(iii) all other claims of any nature asserted by Sun against the Company in the
Sun Litigation arising out of or relating directly to the March 1997 agreement
governing the distribution of cash proceeds from the sale and liquidation of
STP. In exchange therefor, (i) UICI assigned to Mr. Jensen all of UICI's right,
title and interest to the funds held in the registry of the Court in the Sun
Litigation and released Mr. Jensen from any and all obligations arising under
the Jensen 1996 Guaranty and the Assurance Agreement; (ii) UICI granted to Mr.
Jensen an option, exercisable at a nominal exercise price, to transfer to Mr.
Jensen UICI's 80% interest in STP; (iii) UICI agreed to cooperate with Mr.
Jensen in all reasonable respects in connection with the Sun Litigation; and
(iv) UICI granted to Mr. Jensen an irrevocable proxy to vote UICI's membership
interest in STP all matters coming before the members of STP for a vote

For financial reporting purposes, the Company recorded no gain or loss in
connection with this transaction and will continue to include the accounts of
STP in its consolidated financial statements until final distribution of cash
proceeds from the sale and liquidation of STP or such time as Mr. Jensen shall
exercise the option to acquire UICI's 80% membership interest in STP. Because
the Company has assigned all of its rights to any cash proceeds from the sale
and liquidation of STP, the Company has established and will continue to record
a liability equal to the total cash and cash equivalents on deposit in the
registry of the Court in the Sun Litigation (which amount was $21.9 million at
December 31, 2002 and is reflected as restricted cash on the Company's
consolidated balance sheet).

Exercise of STP Texas Draw. In accordance with an agreement entered into
as of December 31, 1996, by and between Sun and the Company (the "STP Texas Draw
Agreement"), either of Sun or the Company may, at any time after July 1, 1999,
offer to purchase all, but not less than all, of the membership interest in STP
owned by the other party by delivering notice of the offer setting forth, among
other things, a cash purchase price and all other essential terms of the offer.
Pursuant to the terms of the STP Texas Draw
F-55

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement, the party receiving the initial offer must in turn deliver to the
offering party notice of its unambiguous election to either (a) sell all of its
membership interest in STP to the offering party or (b) counteroffer to purchase
all of the offering party's membership interest in STP, in both cases pursuant
to terms and conditions identical to those contained in the initial offer. On
December 12, 2002, Mr. Jensen and the Company entered into an agreement,
pursuant to which (a) in accordance with UICI's undertaking to cooperate with
Mr. Jensen in the Sun Litigation as provided in the Assignment and Release
Agreement, UICI at the request of Mr. Jensen made an offer to purchase all, but
not less than all, of Sun's membership interest in STP in accordance with the
STP Texas Draw Agreement, (b) Mr. Jensen acknowledged that UICI's undertaking to
make such offer would be without monetary or other obligation on the part of
UICI and (c) Mr. Jensen agreed to indemnify and hold UICI harmless from and
against any and all liability that UICI might incur as a result of making such
offer.

Sun subsequently filed a motion for a temporary injunction to enjoin
closing of the transactions contemplated by the STP Texas Draw Agreement. Mr.
Jensen has agreed to postpone the closing of the transactions contemplated by
the STP Texas Draw Agreement pending the court's ruling on a summary judgment
motion that he intends to file with respect to Sun's objections to those
transactions.

Release of Ronald L. Jensen

As previously disclosed, on June 1, 1999, the Company was named as a
nominal defendant in a shareholder derivative action captioned Richard Schappel
v. UICI, Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary
Friedman, John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach,
which was filed in the District Court of Dallas County, Texas (the "Shareholder
Derivative Litigation").

On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001. The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.

In accordance with the terms of a Release Agreement, dated as of April 2,
2002, the Company agreed to release Mr. Jensen from any and all claims that the
derivative plaintiff in the Shareholder Derivative Litigation brought or could
have brought against Mr. Jensen on behalf of UICI in the Shareholder Derivative
Litigation, and Mr. Jensen agreed to waive and release UICI from any obligation
to indemnify Mr. Jensen for any future costs and/or out-of-pocket expenses
associated with any claims that the derivative plaintiff brought or could have
brought against Mr. Jensen in the Shareholder Derivative Litigation.

March 2000 Loan

On March 14, 2000, a limited liability company controlled by Mr. Jensen
("Lender LLC") loaned $70.0 million (the "Lender LLC Loan") to a newly formed
subsidiary of the Company. The proceeds of the Lender LLC Loan, together with
$5.0 million of cash on hand, were used to reduce indebtedness outstanding under
the Company's Bank Credit Facility from $100.0 million to $25.0 million. The
Lender LLC Loan bore

F-56

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest at the prevailing prime rate, was guaranteed by UICI, was due and
payable in July 2001 and was secured by a pledge of investment securities and
shares of the Company's National Motor Club unit.

In connection with the March 2000 pay down of indebtedness outstanding
under the Company's then outstanding $100 million bank credit facility, the bank
credit facility was amended to provide, among other things, that the $25.0
million balance outstanding would be due and payable on July 10, 2000, amounts
outstanding under the facility would be secured by a pledge of investment
securities and shares of Mid-West National Life Insurance Company of Tennessee
("Mid-West"), and the restrictive covenants formerly applicable to UICI and its
restricted subsidiaries (primarily the Company's insurance companies) were made
applicable solely to Mid-West. Amounts outstanding under the bank credit
facility continued to bear interest at LIBOR plus 100 basis points per annum. On
April 11, 2000 and June 28, 2000, the Company made principal payments of $11.0
million and $8.0 million, respectively, under the bank credit facility, and on
June 30, 2000, Lender LLC, against payment to the banks of $6.0 million, assumed
100% of the banks' remaining $6.0 million position in the bank credit facility.

June-July 2000 Transactions

In June and July 2000, the Company entered into a series of transactions
(the "July 2000 Transactions") with Mr. Jensen and affiliates of Mr. Jensen, the
proceeds of which were utilized, in part, to fund the Company's cash and other
obligations under the Consent Order, dated June 29, 2000, issued by the Office
of the Comptroller of the Currency to memorialize the terms of the UCNB Capital
Plan approved by the Office of the Comptroller of the Currency. See Note B.

In accordance with the policies and procedures of the Board of Directors,
each of the July 2000 Transactions was approved by the disinterested outside
directors of the Company at a meeting of the Board of Directors held on July 21,
2000, as being fair to UICI and its shareholders. The Board's determination was
made, in part, in reliance upon the opinion of an independent financial advisor
that the July 2000 Transactions, in their totality, were fair to the public
shareholders of UICI (consisting of non-Jensen affiliated shareholders) from a
financial point of view.

Restructuring of Lender LLC Loan. Effective July 27, 2000, the Company and
the Lender LLC completed a restructuring of the terms of the Lender LLC Loan. As
part of the restructuring, the Company paid to Lender LLC principal owing on the
Lender LLC Loan in the amount of $6.0 million and amended the terms of the
Lender LLC Loan to provide that the aggregate principal amount of $70.0 million
then owing by the Company would consist of a $32.0 million unsecured tranche and
a $38.0 million tranche secured by a pledge of 100% of the capital stock of
Mid-West (the "Amended Lender LLC Loan"). The Amended Lender LLC Loan (a)
matured on January 1, 2002, (b) continued to bear interest at the prevailing
prime rate from time to time, with interest accruing but not payable until the
earlier to occur of full prepayment of the Lender LLC Loan or January 1, 2002,
and (c) was mandatorily prepayable monthly to the extent of 1% of the
outstanding principal balance of the Amended Lender LLC Loan. The security
interest in all remaining collateral previously pledged to secure payment of the
Lender LLC Loan and indebtedness outstanding under the bank credit facility
(including all investment securities and shares of the Company's National Motor
Club unit) was released in full.

In addition to scheduled payments of principal made during the course of
2000, on October 20, 2000, the Company prepaid the unsecured tranche of the
Amended Lender LLC Loan in the amount of $12.5 million, and on November 2, 2000,
the Company prepaid an additional $17.4 million of the unsecured tranche and
$17.6 million of the secured tranche. Accordingly, at December 31, 2000, the
Company had no indebtedness outstanding under the unsecured tranche and $19.0
million outstanding under the secured tranche of the Amended Lender LLC Loan.

F-57

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 30, 2001, the Company prepaid in full principal and accrued
interest on the secured tranche of the Amended Lender LLC Loan in the amount of
$21.1 million, utilizing a portion of the proceeds received in liquidation of
UCNB, and Lender LLC's security interest in 100% of the capital stock of
Mid-West was released in full.

Sale of NMC Holdings, Inc. On July 27, 2000, the Company sold to an
investor group consisting of Jensen family members (including Mr. Jensen) (the
"NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"), the parent company
of its National Motor Club of America unit, for a purchase price of $56.8
million, representing 97% of the value of NMC as determined by independent
appraisal. The purchase price was paid at closing in cash in the amount of $21.8
million and by delivery of a promissory note (the "NMC Note") issued by the NMC
Buyer in the principal amount of $35.0 million. For financial reporting
purposes, the $12.6 million, net of tax, received by the Company in excess of
the net book value of NMC was reflected in additional paid in capital.

The NMC Note was an unsecured, full recourse obligation of the NMC Buyer
and was unconditionally guaranteed by Mr. Jensen. The NMC Note bore interest at
the per annum rate of prime fluctuating from time to time, and was initially
payable in three equal installments of principal in the amount of $11.7 million
due on each of October 1, November 1 and December 1, 2000, respectively.
Effective October 1, 2000, the NMC Note was amended to provide for three equal
installments of principal in the amount of $11.7 million due on each of November
1 and December 1, 2000 and January 1, 2001, respectively. In accordance with the
terms of the June Consent Orders, the Company pledged the NMC Note to UCNB to
secure, in part, the Company's obligations under the Capital Plan. On October
31, 2000, the Office of the Comptroller of the Currency consented to the release
by UCNB of its security interest in the NMC Note. On November 2, 2000, the NMC
Buyer prepaid the NMC Note in its entirety. Under the terms of the NMC Note, the
Company received $875,000 in interest in 2000.

On July 27, 2000, UICI, NMC Buyer and NMC entered into a Management
Agreement, the terms of which governed the provision by UICI to NMC of
management and administrative services, information technology services,
telephone services and other services formerly provided to NMC by UICI. The
Management Agreement was terminable (a) by UICI at any time upon not less than
60 days' notice to NMC and the NMC Buyer, and (b) by NMC at any time following
the payment in full of the NMC Note upon not less than 30 days' notice to UICI.
Pursuant to the Management Agreement, UICI agreed to allow William Gedwed
(formerly an Executive Vice President of the Company and currently a Director of
the Company and the holder of approximately 3% of the equity interest in NMC) to
serve as a consultant to NMC for the term of the Management Agreement. As of
December 31, 2000, the Company was owed by NMC $50,000 pursuant to the terms of
the Management Agreement, which was paid in full in the first quarter of 2001.

Mr. Gedwed resigned as an executive officer of UICI effective December 31,
2000, and NMC terminated the Management Agreement effective January 31, 2001.

Jensen Indemnity Agreement. To secure in part the Company's obligations
under the Capital Plan, effective June 29, 2000 Mr. Jensen pledged to UCNB $7.1
million face amount of Series B Certificates created as part of the Company's
securitizations of credit card receivables issued in 1997 and 1998 generated by
UICI's credit card operations. As a condition to Mr. Jensen's pledge of the
Series B Certificates, on June 29, 2000 the Company executed and delivered an
Indemnity Agreement, pursuant to which the Company agreed, among other things,
to indemnify and hold Mr. Jensen harmless from and against (A) loss, cost,
expense, or liability incurred by Mr. Jensen arising from, in respect of or in
connection with, a default by the Company of its obligations under the June
Office of the Comptroller of the Currency Consent Orders, the UCNB Capital Plan
or the Liquidity and Capital Assurances Agreement, and (B) any and all losses,
costs and expenses (including reasonable attorneys' fees and expenses) incurred
by Mr. Jensen in enforcing any rights under the Indemnity Agreement.

F-58

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Sale of UICI Shares to NMC. Pursuant to the terms of an agreement, dated
July 13, 2000, between the Company and NMC, on July 24, 2000, the Company issued
to NMC 175,000 treasury shares of common stock at a purchase price of $5.25 per
share. It is anticipated that the 175,000 shares will be used to fund incentive
stock programs for the benefit of NMC employees.

National Motor Club

As discussed above, on July 27, 2000, the Company sold its 97% interest in
NMC Holdings, Inc. ("NMC"), the parent company of its National Motor Club of
America ("NMCA") unit, to an investor group consisting of Jensen family members
(including Mr. Jensen) for a purchase price of $56.8 million, representing 97%
of the value of NMC as determined by independent appraisal. William J. Gedwed (a
director of the Company) holds 3% of the issued and outstanding common stock of
NMC. The Chesapeake Life Insurance Company ("CLICO") (formerly a direct wholly
owned subsidiary of the Company) and NMCA were previously parties to an
administrative service agreement, pursuant to which CLICO agreed to issue life,
accident and health insurance polices to NMCA for the benefit of NMCA members in
selected states. NMCA, in turn, agreed to provide to CLICO certain
administrative and record keeping services in connection with the NMCA members
for whose benefit the policies have been issued. Following the acquisition of
CLICO by The MEGA Life and Health Insurance Company ("MEGA") (a wholly-owned
insurance subsidiary of the Company) in July 2000, MEGA and NMCA entered into a
similar administrative service agreement for a two-year term ending in December
31, 2002. During the year ended December 31, 2002, 2001 and 2000, NMCA paid to
MEGA and CLICO insurance premiums in the amount of $1.7 million, $2.4 million
and $2.6 million, respectively, pursuant to such arrangements. Effective January
1, 2003, MEGA and NMCA entered into a new administrative services agreement for
a term ending on December 31, 2004.

In connection with the sale of NMC in July 2000, NMC entered into a
sublease agreement with MEGA, pursuant to which NMC subleased from MEGA
approximately 17,000 square feet of office space. During 2001 and 2000, NMC paid
to MEGA $287,000 and $144,000 pursuant to the sublease. NMC terminated the
sublease arrangement effective November 2001.

During 2002 and 2001, NMC paid the Company $231,000 and $334,000,
respectively, for printing and various other services.

Funding of BOB Program

In August 1998, Ronald L. Jensen (the Company's Chairman) and his wife
established an incentive program (the "BOB Program"), pursuant to which they
agreed to distribute to "eligible participants" on August 15, 2002, in cash an
aggregate of the dollar equivalent value of 100,000 UICI shares. Eligible
participants in the BOB Program consisted of full-time employees of UICI and its
subsidiaries and independent agents associated with UICI's insurance
subsidiaries who were employed by or contracted with UICI, as the case may be,
at the close of business on August 14, 1998, and who remain employed by or
contracted with UICI at the close of business on August 14, 2002. In accordance
with the BOB Program, each eligible participant was entitled to receive his or
her portion of the aggregate cash payment determined by reference to a formula
based on, among other things, such eligible participant's tenure with UICI and
level of compensation.

For financial reporting purposes, UICI incurred non-cash variable
compensation expense associated with the BOB Program over the four-year vesting
period, which expense included adjustments due to periodic changes in the value
of UICI common stock. The Company established a corresponding liability
associated with the future benefits payable under the BOB Program. At December
31, 2001 and August 15, 2002 (the date of vesting of benefits under the BOB
Program), UICI had recorded a liability for the benefits associated with the BOB
Program in the amount of $1.1 million and $1.8 million, respectively.

F-59

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In a series of celebrations occurring in August 2002, Mr. and Mrs. Jensen
distributed cash in the aggregate amount of $1.8 million to the eligible
participants in the BOB Program. In connection with the funding of the BOB
Program, UICI extinguished the liability in the amount of $1.8 million at August
15, 2002 and credited an equivalent amount ($1.2 million net of tax) to the
Company's additional paid-in capital account.

Other Jensen Transactions

In 2002, 2001 and 2000, the Company received $1,000, $335 and $9,000,
respectively, from United Group Service Center, Inc., a company owned by one of
the adult children of Mr. Jensen, which amounts represent premiums on a stop
loss policy issued by MEGA and reimbursement of office expenses.

ACADEMIC MANAGEMENT SERVICES CORP.

A former president of Academic Management Services Corp. and the former
holder of 25% of the equity interest in AMS is a partner in a partnership from
which the Company's AMS subsidiary formerly leased office space. During 2000,
AMS paid $15,000 under the terms of the lease. AMS terminated the lease on
January 13, 2000.

On August 3, 2001, the Company completed the acquisition from the former
AMS officer of the remaining 25% common stock interest in AMS it did not already
own for a purchase price of $750,000. For additional consideration, the former
AMS officer and certain former employees of AMS agreed, for a three-year period
ending in August 2004, not to engage in any business competitive with AMS'
tuition installment or student loan servicing businesses. These former
executives and their affiliates further agreed to pay to AMS fees in prescribed
amounts in connection with the origination and consolidation of certain student
loans over a three-year period ending in August 2004.

TRANSACTIONS WITH PHILLIP A. GRAY

Prior to April 23, 1999, Phillip A. Gray served as head of the Company's
Credit Services division and held a minority interest in United Membership
Marketing Group, Ltd. (a former majority owned subsidiary of the Company)
("UMMG"). During a portion of 2000, the Company engaged in transactions with Mr.
Gray and business entities controlled by Mr. Gray.

American Fair Credit Association, Inc.

Mr. Gray is the controlling member of American Fair Credit Association,
Inc. ("AFCA"), an independent membership association that provides credit
education programs and other benefits and through which United CreditServ
formerly marketed its credit support services and "AFCA" credit cards prior to
termination by the Company of the credit program in January 2000.

In 2000, AFCA paid to UMMG cash in the amount of approximately $4.7 million
for fulfillment services and marketing materials.

Financial Services Reinsurance, Ltd.

At December 31, 2000 and 2001, the Company, Mr. Gray and another former
officer of UMMG held a 79%, 16.8% and 1.68% equity interest, respectively, in
Financial Services Reinsurance Ltd., an offshore re-insurer ("FSR"). At each of
December 31, 2001 and 2000, Mr. Gray had total indebtedness owing to the Company
in the amount of $1.0 million, and the other former officer of UMMG had total
indebtedness outstanding owing to the Company in the amount of $267,000, which
indebtedness in each case bore interest at 5%-6% per annum, with principal and
all accrued interest due and payable on January 1, 2002. Effective January 1,
2002, the Company purchased Mr. Gray's and the other former UMMG officer's
respective 16.8%
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UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and 1.68% equity interests in FSR for a purchase price equal to the outstanding
balance plus accrued interest on the indebtedness owing by Mr. Gray and the
other former UMMG officer, respectively.

TRANSACTION WITH AMLI RESIDENTIAL PROPERTIES TRUST

At December 31, 2002, 2001 and 2000, the Company held a 10.5%, 10.2% and
10.4% fully diluted interest, respectively, in AMLI Residential Properties
Trust, a publicly-traded real estate investment trust ("AMLI"). Mr. Mutz (a
director and the President and Chief Executive Officer of the Company) also
serves as Chairman of the Board of AMLI. Pursuant to the terms of a Purchase
Agreement, dated as of December 16, 2002, in exchange for aggregate
consideration of $700,000 in cash payable to the Company, (a) an affiliate of
AMLI purchased the Company's minority economic interests in each of four service
affiliates of AMLI Residential Properties Trust and (b) the transfer to AMLI of
the Company's rights to the service mark "AMLI" and the right to use the name
"AMLI", which rights a subsidiary of the Company formerly held and licensed to
AMLI and certain AMLI affiliates. In connection with this transaction, the Board
of Directors of UICI received an independent opinion, utilizing the methodology
and subject to the limitations and assumptions set forth in the opinion, that
the transaction contemplated by the Purchase Agreement was fair from a financial
point of view.

TRANSACTIONS WITH HEALTHAXIS, INC.

At December 31, 2002, the Company held 24,224,904 shares of common stock of
Healthaxis, Inc. (HAXS: Nasdaq) ("HAI"), which at such date represented
approximately 45% of the issued and outstanding shares of HAI. HAI is an
emerging technology service firm that provides web-based connectivity and
applications solutions for health benefit distribution and administration. These
solutions, which consist primarily of software products and related services,
are designed to assist health insurance payers, third party administrators,
intermediaries and employers in providing enhanced services to members,
employees and providers through the application of HAI's flexible technology to
legacy systems, either on a fully integrated or on an application service
provider (ASP) basis.

At December 31, 2002, the Company also held (a) a warrant to purchase
12,291 shares of HAI common stock at an exercise price of $3.01 per HAI share;
(b) a warrant to purchase 200,100 shares of HAI common stock at an exercise
price of $4.40 per HAI share; (c) a warrant to purchase 10,005 shares of HAI
common stock at an exercise price of $12.00 per share; and (d) 1,424 shares of
HAI 2% convertible preferred stock, which preferred stock has a stated
liquidation value of $1,000 per share and is convertible into 542,476 shares of
HAI common stock at a conversion price per HAI share of $2.625. On July 31,
2002, UICI acquired the shares of HAI 2% convertible preferred stock and cash in
the amount of $243,000 in exchange for $1.67 million principal amount of HAI 2%
convertible debentures (which were convertible into an aggregate of 185,185
shares of HAI common stock).

Through November 7, 2001, 8,581,714 shares of HAI common stock held by the
Company were subject to the terms of a Voting Trust Agreement, pursuant to which
trustees unaffiliated with the Company had the right to vote such shares.
Effective November 7, 2001, UICI appointed as its proxies the board of directors
of HAI, who may vote 33 1/3% of the number of HAI shares held of record from
time to time by UICI in favor of the nominees for director that a majority of
the directors of HAI shall have recommended stand for election. The authority
granted to such proxies will terminate at the earlier to occur of (i) November
7, 2011, (ii) such date as UICI beneficially holds less than 25% of the
outstanding shares of common stock of HAI on a fully diluted basis, (iii) such
date as any person or persons acting as a "group" beneficially holds a greater
percentage of the outstanding shares of HAI common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAI
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAI.

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Until their resignations effective November 7, 2001, Gregory T. Mutz (the
President and a director of the Company) and Patrick J. McLaughlin (a director
of the Company) served as directors of HAI.

Pursuant to the terms of an information technology services agreement,
amended and restated as of January 3, 2000 (the "Services Agreement"), HAI
formerly provided information systems and software development services
(including administration of the Company's computer data center) to the Company
and its insurance company affiliates at HAI's cost of such services (including
direct costs of HAI personnel dedicated to providing services to the Company
plus a portion of HAI's overhead costs) plus a 10% mark-up. The Services
Agreement had an initial five-year term scheduled to end on January 3, 2005,
which was subject to extension by the Company. The Services Agreement was
terminable by the Company or HAI at any time upon not less than 180 days' notice
to the other party. The Services Agreement did not constitute a requirements
contract, did not prevent UICI from obtaining from other third parties (or
providing to itself) any or all of the services currently provided by HAI, and
did not limit UICI's right or ability to decrease the demand for services from
HAI.

Effective June 15, 2002, UICI and HAI terminated the Services Agreement. As
part of the termination arrangement, UICI made a one-time payment to HAI in the
amount of $6.5 million and tendered 500,000 shares of HAI common stock to HAI.
Because UICI constitutes a significant shareholder of HAI, the aggregate amount
of consideration paid to HAI by UICI for the early termination of the Services
Agreement was reflected for financial reporting purposes as a contribution by
UICI to the capital of HAI, the effect of which was to increase the Company's
carrying value of its investment in HAI. Effective June 30, 2002, UICI
determined the carrying value in its investment in HAI was impaired in the
amount of $6.5 million and therefore the investment was written down to an
estimated realizable value.

Pursuant to the terms of the Services Agreement, UICI paid to HAI $8.1
million, $20.4 million and $21.0 million in 2002, 2001 and 2000, respectively.
In addition, HAI has provided to the Company and its affiliates certain other
information technology services, including claims imaging and software-related
services, for which UICI paid to HAI $2.7 million, $10.1 million and $6.4
million in 2002, 2001 and 2000, respectively. The aggregate amounts paid by UICI
to HAI in 2002, 2001 and 2000, respectively, represented 38%, 70% and 63% of
HAI's total gross revenues of $28.1 million, $43.8 million and $43.7 million in
such years.

At December 31, 2002, 2001 and 2000, UICI had accounts payable to HAI
relating to services provided under the Services Agreement and other services in
the amount of $108,000, $3.0 million and $3.0 million, respectively.

HAI formerly leased certain facilities from the Company, for which it paid
$287,000 in 2000. In 2002 and 2001, rents of approximately $153,000 and $437,000
were offset against HAI invoices for services HAI provided to the Company. In
addition, in 2002, 2001 and 2000 HAI paid $-0-, $-0- and $12,000, respectively,
to the Company for medical administration fees and $2,000, $24,000 and $19,000,
respectively, for other shared expenses.

During the quarter ended December 31, 2000, the Company transferred to HAI
certain claims administration software and related proprietary rights for a sale
price of $1.6 million, which was the Company's book value of such software as of
the date of sale. Effective January 25, 2001, the Company also entered into a
license agreement with HAI, pursuant to which it has licensed from HAI the right
to use HAI's proprietary Insur-Web(TM) and Insur Enroll(TM) software for a
perpetual term for a one-time license fee of $1.8 million plus an annual
maintenance fee in the amount of $276,000, payable commencing on the date of the
first successful implementation of the system at UICI. UICI has the right for
two years to cease the use of the software and put the software back to HAI for
a refund of a prorated portion of the license fee. Effective November 1, 2002,
the Company terminated the Insur-Web agreement.

F-62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER TRANSACTIONS WITH CERTAIN MEMBERS OF MANAGEMENT

Transactions with Mr. Mutz

AMLI Residential Properties Trust. During 2000, 2001 and 2002, Mr. Mutz (a
director and the President and Chief Executive Officer of the Company) also
served as Chairman of the Board of AMLI Residential Properties Trust, a
publicly-traded real estate investment trust ("AMLI"). At December 31, 2002,
2001 and 2000, the Company held a 10.5%, 10.2% and 10.4% fully diluted interest,
respectively, in AMLI. As Chairman of the Board of AMLI, Mr. Mutz received
certain compensation and participated in various option and deferred
compensation programs, all of which are described in the AMLI proxy statement.
In addition, as of December 31, 2002, 2001 and 2000, AMLI had outstanding
secured and unsecured loans owing from Mr. Mutz in the aggregate amount of
$763,000, $1.0 million and $2.1 million, respectively, the proceeds of which had
been used to purchase 108,891 shares of AMLI beneficial interest.

AMLI Commercial Properties Trust. Mr. Mutz also served as chairman of the
board of AMLI Commercial Properties Trust ("ACPT"), a private real estate
investment trust in which the Company formerly held a 20% equity interest. Mr.
Mutz was the beneficial holder of less than one percent of the issued and
outstanding shares of beneficial interest of ACPT. At December 31, 2000, ACPT
had an outstanding loan owing from Mr. Mutz (or companies affiliated with Mr.
Mutz) in the amount of $508,000, the proceeds of which were used to purchase
stock in ACPT. During the year ended December 31, 2001, ACPT sold substantially
all of its assets for an aggregate sale price of approximately $226.3 million,
distributed the proceeds and was liquidated in October 2001. In connection with
such sale, the Company recognized a gain in the amount of $5.3 million and Mr.
Mutz repaid his loan in full.

UICI Executive Stock Purchase Program. In accordance with the Company's
Executive Stock Purchase Program (the "ESPP") (see Note P), in December 1998 the
Company extended a loan to Mr. Mutz in the amount of $3.3 million, the proceeds
of which were used to purchase 200,000 shares of Common Stock of the Company at
a purchase price of $19.50 per share. The loan bears interest at the rate of 5%
per annum, payable quarterly, had a six-year term, and is full recourse to Mr.
Mutz. In June 1999, the Company extended an additional loan to Mr. Mutz pursuant
to the ESPP in the amount of $429,000, the proceeds of which were used to
purchase 20,000 shares of Company Common Stock at a purchase price of $24.45 per
share. The loan bears interest at 5.37%, payable quarterly, had a six-year term,
and was full recourse to Mr. Mutz.

As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company granted to Mr. Mutz 107,104 shares of
UICI common stock, discharged $1.5 million principal amount of the ESPP loan,
and paid to Mr. Mutz a one-time cash bonus in the amount of $1.1 million (which
was calculated to reimburse Mr. Mutz for income and other taxes payable upon
receipt of the UICI stock and discharge of the portion of the ESPP loan). The
terms of the ESPP loans were modified to extend the maturity date to January 1,
2007. See Note P.

The amount outstanding under Mr. Mutz' ESPP loans at December 31, 2002,
2001 and 2000, was $1.3 million, $1.3 million and $2.8 million, respectively.

Termination of Split Dollar Life Insurance Arrangement. As a long-term
incentive for continued employment, in 1985 AMLI Realty Co. (a wholly owned
subsidiary of the Company acquired by the Company in 1996) entered into a split
dollar life insurance arrangement with Mr. Mutz, who then served as Chairman of
AMLI Realty Co. ("ARC"). Under the arrangement, Mr. Mutz and/or trusts
affiliated with Mr. Mutz purchased and held a life insurance policy on his life.
ARC agreed to pay a substantial portion of the annual premium on such policies
in exchange for Mr. Mutz's assigning an interest in the policy death benefit and
cash value equal to the cumulative premiums paid by ARC. ARC was to be paid its
interest at Mr. Mutz's death, or earlier if (a) Mr. Mutz prematurely terminated
his employment, or (b) the policy cash values were sufficient to withdraw the
amount due ARC. The amount of the annual premium paid by Mr. Mutz was

F-63

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

calculated according to a formula based on his age, the net amount of death
benefit, and the basic term insurance rates of the carrier.

In each of the years ended December 31, 2002, 2001 and 2000, the total
annual premiums on the policies were $20,432, of which UICI (through ARC) paid
premiums pursuant to the arrangement in the amount of $19,901, $19,898 and
$19,937, respectively. At December 31, 2001, and September 30, 2002, the Company
had reflected on its books a receivable in an amount of $182,559 and $202,500,
respectively, which receivable corresponded to the cumulative premium paid by
ARC pursuant to the arrangement.

In accordance with the terms of an agreement, dated December 19, 2002, Mr.
Mutz and the Company terminated the split dollar arrangement. In exchange for a
cash payment by Mr. Mutz made to the Company in the amount of $11,173 (which
amount was calculated actuarially as the present value of ARC's future right to
collect on the policies), Mr. Mutz discharged ARC from all future obligation to
pay premiums and ARC released its interest in the policies. Following the
transaction, Mr. Mutz owns the three policies outright and is fully responsible
for all future required premium payments, and ARC no longer has any interest in
or any obligations with respect to the policies. In connection with the
transaction, UICI recognized for financial accounting purposes a charge against
pre-tax earnings in the amount of $191,327.

Purchase of Real Estate Interest. Prior to its acquisition by UICI in
1996, AMLI Realty Co. ("ARC") from time to time sponsored limited partnerships
to raise capital and to acquire, develop and sell real estate. The limited
partners in these partnerships included ARC officers and affiliates of ARC
officers, including Mr. Mutz and entities affiliated with Mr. Mutz. To eliminate
the nuisance and cost to the investors and to ARC of partnership administration
for substantially completed investment programs, ARC has from time to time
purchased its' investors limited partnership interests.

On October 22, 2002, ARC purchased the interest held by Mr. Mutz and all
other 41 limited partners in AMLI Augusta Properties L.P., which was originally
formed on July 8, 1985 to acquire, develop and sell 162 acres of vacant land in
Augusta, Georgia. Mr. Mutz received $13,125 in exchange for 1/80 of the economic
interests of all the limited partners in the partnership.

Other Loans to Management

In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note P), during 1999 the Company extended loans to Glenn W. Reed
(the Company's Executive Vice President and General Counsel), and William J.
Gedwed (until December 31, 2000 an executive officer of UICI and currently a
Director of the Company) in the amounts of $417,000 and $203,000, respectively,
the proceeds of which were used to purchase Company Common Stock. The loan to
Mr. Reed bore interest at 5.37% per annum and the loan to Mr. Gedwed bears
interest at 5.37% per annum. The six-year term loans required quarterly interest
payments, had a six-year term, are full recourse to the borrower and are payable
in full upon the occurrence of certain events, including the termination of
employment.

At December 31, 2000, Mr. Reed and Mr. Gedwed had outstanding loans payable
to the Company under the ESPP in the amounts of $417,000 and $203,000,
respectively.

As part of modifications to the ESPP adopted by the Company's Board of
Directors on January 2, 2001, the Company discharged $297,000 principal amount
of indebtedness under the ESPP owing by Mr. Reed and paid to Mr. Reed a one-time
cash bonus in the amount of $160,000 (which was calculated to reimburse Mr. Reed
for income and other taxes payable upon discharge of the portion of the ESPP
loan). The terms of Mr. Reed's ESPP loan were modified to extend the maturity
date to January 1, 2007.

At December 31, 2001, the amount outstanding under Mr. Reed's ESPP loan was
$120,000 and the amount outstanding under Mr. Gedwed's ESPP loan was $139,000.
Mr. Reed repaid his ESPP loan in full on June 5, 2002. At December 31, 2002, the
amount outstanding under Mr. Gedwed's ESPP loan was $139,000.

F-64

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other Transactions

The Company receives investment management services from investment
advisory firms affiliated with two of its directors. During 2002, 2001 and 2000,
the Company paid advisory fees in the amount of $186,000, $307,000 and $231,000,
respectively, to Emerald Capital Group, Ltd., for which Patrick J. McLaughlin (a
director of the Company) serves as a managing director and owner. During 2002,
2001 and 2000, the Company paid investment advisory fees in the amount of
$405,000, $206,000 and $145,000, respectively, to The Chicago Trust Company, for
which Stuart Bilton (a director of the Company) serves as President and Chief
Executive Officer.

From time to time the Company has also retained Emerald Capital Group, Ltd.
to perform investment banking and insurance advisory services. In accordance
with the terms of a Consulting Agreement dated September 14, 1999, as amended,
the Company formally retained the services of Emerald Capital Group, Ltd. for an
annual fee of $400,000, payable in monthly installments. During 2002, 2001 and
2000, the Company paid an aggregate of $557,000, $436,000 and $237,000,
respectively, in fees and expenses to Emerald Capital Group, Ltd. for investment
banking and insurance advisory services. Effective March 10, 2000, Mr.
McLaughlin elected to forego $100,000 of cash payments otherwise due and owing
under the Consulting Agreement in exchange for options to purchase 50,000 shares
of Company Common Stock at $6.625 per share.

The Company and a former officer and director of the Company entered into
an agreement, dated as of November 2, 1999, pursuant to which the former officer
agreed (a) to resign as a director and as Executive Vice President of the
Company, effective November 2, 1999, and (b) to serve as a consultant to the
Company for the period ending May 2, 2002, for which the former officer is
entitled to a monthly consulting fee in the amount of $12,000 for the term of
the agreement. In accordance with the agreement, the former officer received a
one-time severance payment in the amount of $120,000 and the Company released
the former officer from liability under a promissory note in the principal
amount of $230,000, the proceeds of which were used to purchase shares of Common
Stock. The Company terminated the consulting arrangement with the former officer
effective March 1, 2001, at which time the Company made to the former officer a
one-time payment in the amount of $180,000 in accordance with the terms of the
agreement.

In accordance with the Company's Executive Stock Purchase Program (the
"ESPP") (see Note P), during 1999 the Company extended a loan to Mr. McLaughlin
in the amount of $44,000, the proceeds of which were used to purchase 2,094
shares of Company Common Stock. The loan bears interest at 5.22% per annum. The
loan has a six-year term, requires quarterly interest payments, is full recourse
to the borrower, and is payable in full upon the occurrence of certain events.
The outstanding balance under the loan, including accrued interest, at December
31, 2000 was $44,000. The loan was paid in full on December 28, 2001.

Effective December 31, 2000, the Company entered into an agreement with
William J. Gedwed (a director of the Company), pursuant to which Mr. Gedwed
resigned as an executive officer of the Company effective December 31, 2000 and
as an officer of various UICI affiliates effective February 1, 2001. In
accordance with the agreement, Mr. Gedwed agreed to provide consulting services
to MEGA for a two-year term that expired December 31, 2002 for an annual fee of
$120,000.

In October 2000, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned as an executive
officer of the Company and various UICI affiliates effective October 27, 2000.
In accordance with the agreement, the former officer received a one-time
severance payment of $50,000, and the former officer agreed to provide
consulting services to UICI for a term that expired January 15, 2003 for an
aggregate fee of $120,000.

On March 14, 2001, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned as an executive
officer of the Company and as an officer of various UICI affiliates effective
February 1, 2001. In accordance with the agreement, the Company agreed to
forgive
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UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indebtedness owing by the former officer in the amount of $45,000, and the
former officer agreed to provide consulting services to MEGA for a one-year term
that expired March 31, 2002 for an annual fee of $135,000.

On May 16, 2001, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned as an officer
of the Company and various UICI affiliates effective June 1, 2002. In accordance
with the agreement, the former officer received a one-time severance payment of
$15,000, and the former officer agreed to provide consulting services to UICI
for a term that expires on May 31, 2003 for an aggregate fee of $151,250.

In accordance with the terms of the Company's ESPP, in May 1999 Messrs.
Bilton (director of the Company) and Lane (then director of the Company)
purchased 2,408 shares and 2,408 shares, respectively, of the Company's Common
Stock, at a purchase price equal to 85% of the then market value of such shares.
In accordance with the terms of the Company's ESPP, in June 2000 Mr. Mockler (a
director of the Company), purchased 2,000 shares of UICI common stock in
exchange for cash in the amount of $6,000 and a promissory note in the amount of
$8,000. At each of December 31, 2002 and 2001, the amount outstanding on Mr.
Mockler's note was $8,000.

In accordance with the terms of the Company's compensation arrangement with
directors, in May 2002 Dr. Cooper (a director of the Company) purchased 3,809
shares, of the Company's Common Stock, at a purchase price equal to 85% of the
then market value of such shares.

In May 2000, Resolution Reinsurance Intermediaries, LLC ("Resolution Re"),
a 50%-owned subsidiary of the Company, loaned to the other 50% shareholder of
Resolution Re (who was also an employee of the Company) the amount of $69,300.
The loan bore interest at 8.5% and was repaid in full in October 2000.
Commencing in April 2000, Resolution Re leased space in a building owned by the
shareholder/employee at a rental rate of $4,000 per month. During 2000,
Resolution Re paid to the shareholder/employee the aggregate amount of $36,000
pursuant to this arrangement. The lease was terminated in February 2001. On
April 25, 2002, the Company sold its 50% ownership interest in Resolution Re to
the remaining 50% equity holder in Res Re and the unit's chief executive
officer. The sale was structured as a liquidation by Res Re of UICI's 50%
ownership interest for a total liquidation price of $650,000, payable at closing
in cash in the amount of $150,000 and by delivery of a promissory note issued by
Res Re in the amount of $500,000. The note bears interest, payable quarterly, at
5.00% per annum, is payable in annual principal installments in the amount of
$75,000 on each of March 31, 2003; March 31, 2004; and March 31, 2005, with a
final balloon payment of principal due on March 31, 2006, and is secured by a
pledge of 100% of the membership interest in Res Re. In October 2002, the
Company received in advance the $75,000 annual principal installment due March
31, 2003.

Effective May 31, 2001, WinterBrook Holdings, Inc. (a wholly-owned
subsidiary of the Company) sold its 44% minority interest in Cassidy Employee
Benefit Services, LLC ("Cassidy") to Cassidy for $140,000 in cash. The remaining
equity holders of Cassidy constituted members of Cassidy management.

NOTE O -- COMMITMENTS AND CONTINGENCIES

The Company is a party to the following material legal proceedings:

SECURITIES CLASS ACTION LITIGATION

As previously disclosed, in December 1999 and February 2000, the Company
and certain of its executive officers were named as defendants in three
securities class action lawsuits alleging, among other things, that the
Company's periodic filings with the SEC contained untrue statements of material
facts and/or failed to disclose all material facts relating to the condition of
the Company's credit card business, in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The three cases were
subsequently consolidated as Herbert R. Silver, et al. v. UICI et al, which is
pending in U.S. District Court for
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UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Northern District of Texas. Plaintiffs purport to represent a class of
persons who purchased UICI common stock from February 10, 1999 through December
9, 1999.

Following a mediation held on May 23, 2002, the parties entered into
definitive settlement agreement on July 3, 2002 pursuant to which the parties
have agreed, without admitting or denying liability and provided that certain
conditions are satisfied, to fully and finally resolve the litigation. The
Company believes that the terms of the settlement as contemplated by the
settlement agreement will not have a material adverse effect upon the financial
condition or results of operations of the Company. Funding of the settlement
amount was completed on July 15, 2002.

On December 12, 2002, the Court issued an order preliminarily approving the
settlement and providing for notice to prospective class members. At a fairness
hearing held on March 3, 2003, the U. S. District Court confirmed terms of the
settlement.

SUN COMMUNICATIONS LITIGATION

As previously disclosed, UICI and Ronald L. Jensen (the Company's Chairman)
are parties to litigation (Sun Communications, Inc. v. SunTech Processing
Systems, LLC, UICI, Ronald L. Jensen, et al) (the "Sun Litigation") with a third
party concerning the distribution of the cash proceeds from the sale and
liquidation of SunTech Processing Systems, LLC ("STP") assets in February 1998.

Effective April 2, 2002, the Company and Mr. Jensen entered into an
Assignment and Release Agreement, which is intended to effectively transfer the
Company's 80% interest in STP to Mr. Jensen and to terminate the Company's
active participation in, and limit the Company's financial exposure associated
with, the Sun Litigation. In accordance with the terms of the Assignment and
Release Agreement, on April 2, 2002 Mr. Jensen made a total payment to UICI of
$15.6 million and granted to UICI various indemnities against possible losses
which UICI might incur resulting from the Sun Litigation, including (i) any
losses arising from the breach of fiduciary duty claim asserted by Sun
Communications, Inc. ("Sun") against the Company and Sun's related claim for
attorneys' fees, (ii) Sun's claim for attorneys' fees arising out of the
distribution issue in the Sun Litigation, and (iii) all other claims of any
nature asserted by Sun against the Company in the Sun Litigation arising out of
or relating directly to the March 1997 agreement governing the distribution of
cash proceeds from the sale and liquidation of STP. In exchange therefor, (i)
UICI assigned to Mr. Jensen all of UICI's right, title and interest to the funds
held in the registry of the Court in the Sun Litigation and released Mr. Jensen
from any and all obligations arising under the Jensen 1996 Guaranty and the
Assurance Agreement; (ii) UICI granted to Mr. Jensen an option, exercisable at a
nominal exercise price, to transfer to Mr. Jensen UICI's 80% interest in STP;
(iii) UICI agreed to cooperate with Mr. Jensen in connection with the Sun
Litigation; and (iv) UICI granted to Mr. Jensen an irrevocable proxy to vote
UICI's membership interest in STP all matters coming before the members of STP
for a vote.

At the request of Mr. Jensen and pursuant to the Company's obligations to
cooperate with Mr. Jensen in the Sun Litigation, on December 12, 2002 UICI made
an offer to purchase all, but not less than all, of Sun's membership interest in
STP in accordance with a Texas Draw Agreement. See Note N of Notes to
Consolidated Financial Statements.

SHAREHOLDER DERIVATIVE LITIGATION

As previously disclosed, on June 1, 1999, the Company was named as a
nominal defendant in a shareholder derivative action captioned Richard Schappel
v. UICI, Ronald Jensen, Richard Estell, Vernon Woelke, J. Michael Jaynes, Gary
Friedman, John Allen, Charles T. Prater, Richard Mockler and Robert B. Vlach,
which was filed in the District Court of Dallas County, Texas (the "Shareholder
Derivative Litigation").

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On December 21, 2001, the District Court of Dallas County, Texas, approved
the terms of a Settlement Agreement and Mutual Release between UICI and each of
Richard J. Estell, Vernon Woelke, J. Michael Jaynes, Gary L. Friedman, John E.
Allen, Charles T. Prater, Richard T. Mockler, and Robert B. Vlach (collectively,
the "Individual Defendants"), on the one hand, and Richard Schappel and Mr.
Schappel's counsel, on the other hand. Pursuant to the Settlement Agreement, the
parties reached agreement with respect to the payment of attorneys' fees and
expenses on termination of the Shareholder Derivative Action, and the Court also
entered a Modified Final Judgment in the case, vacating certain findings of fact
that formed a part of an earlier ruling by the Court rendered on October 14,
2001.

The Settlement Agreement and the Modified Final Judgment had the effect of
fully and finally resolving the matters in dispute in the Shareholder Derivative
Litigation between UICI and the Individual Defendants, on the one hand, and Mr.
Schappel, on the other hand. The terms of the settlement did not have a material
effect on the results of operations or financial condition of UICI.

Ronald L. Jensen (the Chairman of the Company and a defendant in the
Shareholder Derivative Litigation) is not a party to the Settlement Agreement.
In its earlier judgment rendered on October 14, 2001, the Court found that
certain statements made by plaintiff in the pleadings in the case were
"groundless, false and brought for the purpose of harassment and with the intent
to cause harm to or injure" Mr. Jensen and UICI, for which the plaintiff was
ordered to pay to Mr. Jensen $5,000 as a judicial sanction in accordance with
Texas law. The plaintiff retains the right to appeal, and Mr. Jensen retains the
right to defend, that ruling in the Shareholder Derivative Litigation.

ACE/AFCA AND PHILIP A. GRAY LITIGATION

As previously disclosed, the Company is a party to a lawsuit (the
"ACE/AFCA" Litigation) (American Credit Educators, LLC and American Fair Credit
Association, Inc. v. UICI and United Credit National Bank, pending in the United
States District Court for the District of Colorado), which was initially filed
as two separate lawsuits in February 2000 by American Credit Educators, LLC
("ACE") and American Fair Credit Association, Inc. ("AFCA"), organizations
through which United CreditServ formerly marketed its credit card programs. In
the ACE/AFCA Litigation, plaintiffs initially alleged, among other things, that
UCNB breached its agreements with ACE and AFCA, sought injunctive relief and a
declaratory judgment and claimed money damages in an indeterminate amount. ACE
and AFCA are each controlled by Phillip A. Gray, the former head of UICI's
credit card operations.

On July 26, 2001, the Court issued an order granting UICI's motion to
substitute UICI for UCNB as a party defendant and dismissing a significant
number of plaintiffs' claims. UICI's motion to dismiss was denied by the Court
as to AFCA's claims for breach of contract, declaratory judgment and
interference with contractual relations and ACE's claims for breach of contract
and for an accounting.

In its answer filed on August 15, 2001, the Company asserted numerous
defenses to the plaintiffs' remaining claims. UICI and United CreditServ also
asserted numerous counterclaims against ACE and AFCA, including, among other
things, breach of contract, breach of fiduciary duty, fraud and civil
conspiracy, and UICI and UCS have claimed damages in an indeterminate amount.
ACE and AFCA filed a partial motion to dismiss the counterclaims. While such
motion was pending, UICI and UCS sought leave to amend their counterclaims and
asserted additional claims against ACE and AFCA. On September 12, 2002, the
Court granted UICI's and UCS' motion for leave and denied ACE's and AFCA's
partial motion to dismiss the counterclaims previously filed.

In a separate suit filed on March 26, 2001 in the District Court of Dallas
County, Texas (the "Gray Litigation") (UICI, United Membership Marketing Group,
Inc., and UMMG-Colorado, LLC f/k/a United Membership Marketing Group Ltd.
Liability Co. v. Philip A. Gray and PAG Family Partners, LLC), the Company sued
Philip A. Gray individually ("Gray") and a related limited liability company
(the "LLC"),

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alleging, among other things, fraud, negligent misrepresentation, and breach of
fiduciary duty in connection with the Company's sub prime credit card business.
Gray removed the case to the United States District Court for the Northern
District of Texas, and UICI substituted PAG Family Partners Ltd. ("PAG") and the
PAG Family Trust for the LLC as defendants. By order dated May 6, 2002, the
Texas Federal Court denied PAG's motion to dismiss the fraud, negligent
misrepresentation and certain other claims, but dismissed certain of the named
defendants from the Gray Litigation. In addition, the Court ordered the transfer
of the Gray Litigation to the United States District Court for the District of
Colorado.

On May 31, 2002, in an answer and third-party complaint Gray denied all
allegations and asserted counterclaims against UICI and third-party claims
against certain individuals, including Ronald L. Jensen (the Company's Chairman)
and Gregory T. Mutz (the Company's President and Chief Executive Officer), in
which Gray has alleged, among other things, violations of Colorado securities
laws, fraudulent misrepresentations, breach of fiduciary duty, unjust enrichment
and negligent misrepresentations and has sought a declaratory judgment and an
accounting. Certain third-party defendants have not yet been served.

On December 11, 2002, UICI entered into a settlement agreement with ACE,
AFCA and all other Gray-related parties. The settlement is contingent upon court
approval of the settlement reached in the credit card marketing consumer actions
(Dadra Mitchell, et al. v. American Fair Credit Association, Inc., et al.,
Mitchell v. Bank First, N.A., and Timothy M. Roe v. Phillip A. Gray, American
Fair Credit Association, Inc., UICI, UCNB, et al) that are pending against UICI
and various of the Gray-related parties. In the event that the settlement
agreement becomes effective, it provides for the dismissal of the ACE/AFCA
litigation and the Gray Litigation upon terms that would not have a material
adverse effect upon the results of operations or financial condition of the
Company.

In the event that the settlement does not become effective, the Company
intends to continue to vigorously defend and pursue its counterclaims in the
ACE/AFCA Litigation and defend the counterclaims and pursue its claims in the
Gray Litigation.

CREDIT CARD MARKETING CONSUMER LITIGATION

As previously disclosed, the Company is involved in three disputes (Dadra
Mitchell v. American Fair Credit Association, United Membership Marketing Group,
LLC and UICI; Dadra Mitchell v. BankFirst, N.A; and Timothy M. Roe v. Phillip A.
Gray, American Fair Credit Association, Inc., UICI, UCNB, et al), all of which
arise out of the marketing of the American Fair Credit Association credit card
program prior to the termination of the Company's participation in the program
in January 2000.

Following a mediation held on December 7, 2002, the parties entered into a
Settlement and Release Agreement, dated as of December 11, 2002, pursuant to
which the defendants (including the Company), without acknowledging any fault,
liability or wrongdoing of any kind and subject to satisfaction of certain
conditions, agreed to settle all three cases. Funding of the settlement was
completed on December 20, 2002 in accordance with the terms of the Settlement
Agreement. The Company believes that the terms of the settlement as contemplated
by the Settlement and Release Agreement will not have a material adverse effect
upon the financial condition or results of operations of the Company.

The settlement is subject to preliminary approval of the terms of the
settlement, and certification of a plaintiff class for purposes of the
settlement, by the U.S. District Court for the Northern District of California
(with respect to the BankFirst case) and the California Superior Court for
Alameda County (with respect to the Mitchell case); notice of settlement to the
plaintiff class; and final approval of, and granting of a final judgment by, the
U.S. District Court for the Northern District of California (with respect to the
BankFirst case) and the California Superior Court for Alameda County (with
respect to the Mitchell case). There can be no assurance that these conditions
to effectiveness of the settlement will in fact be satisfied.

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On December 13, 2002, the California state court granted preliminary
approval of the settlement terms, and on December 27, 2002, the U.S. District
Court granted preliminary approval of the settlement terms. The notices to the
class members were sent out in the California state case and in the California
Federal case on January 3, 2003.

The California state court in the Mitchell case granted its final approval
of the settlement terms on February 5, 2003. On February 28, 2003, the U.S.
District Court granted final approval of the settlement terms of the BankFirst
case.

Set forth below is additional information concerning the Mitchell case, the
BankFirst case and the Roe litigation:

Mitchell Case

The Company is one of three named defendants in a class action suit filed
in 1997 pending in California state court (Dadra Mitchell v. American Fair
Credit Association, United Membership Marketing Group, LLC and UICI) (the
"Mitchell case"). In the Mitchell case, plaintiffs have alleged that defendants
violated California law regarding unfair and deceptive trade practices by making
misleading representations about, and falsely advertising the nature and quality
of, the benefits of membership in American Fair Credit Association ("AFCA").

In October 2000, the state court in the Mitchell case granted, in part, and
denied, in part, the joint motions of UICI, AFCA and United Membership Marketing
Group ("UMMG") to compel arbitration and to narrow the scope of the plaintiff
class. The court severed from the class action the claims for recovery of money
by way of damages or restitution of class members who joined AFCA after January
1, 1998 and who executed signed arbitration agreements. However, the state court
denied UICI's motion to compel arbitration with respect to these class members'
claims for injunctive relief and, as a result, their claims for injunctive
relief remain part of the class action. With respect to class members who were
existing members of AFCA in January of 1998 and who received through the mail an
amendment adding arbitration of disputes to their AFCA membership agreement, the
state court denied UICI's motion to compel arbitration unless the member also
signed a separate arbitration agreement. In addition, the state court clarified
that its prior April 12, 1999 order certified a class with respect to all claims
pleaded in the complaint, not solely claims under the California Credit Services
Act of 1984.

On October 12, 2000, UICI, jointly with defendants AFCA and UMMG, filed a
Notice of Appeal from the state court's October 2000 orders and from its
original class certification order dated April 12, 1999. By letter dated October
12, 2000, defendants notified plaintiffs of the filing of their Notice of Appeal
and, consequently, all trial court proceedings in the Mitchell case were stayed.

On July 10, 2002, the Court of Appeal issued a decision affirming the order
entered by the trial court in October 2000 regarding defendants' motion to
compel arbitration. The Court of Appeal dismissed for want of appellate
jurisdiction the appeal respecting the orders certifying the class and defining
the scope of the class entered by the trial court in April 1999 and October
2000, respectively. On August 19, 2002, UICI, along with AFCA, timely filed a
petition for review of the Court of Appeal's decision with the California
Supreme Court. On October 23, 2002, the California Supreme Court denied UICI's
and AFCA's petition for review.

On August 6, 2002, Plaintiffs filed a motion in the trial court for limited
relief from the stay (to pursue injunctive relief against AFCA) pending appeal,
which stay has been in effect since October 12, 2000. On or about September 19,
2002, the trial court denied the motion for limited relief from the stay pending
the California Supreme Court's order denying UICI's petition for review (which
was issued on October 23, 2002).

In the event that the conditions to effectiveness of the Settlement
Agreement are not in fact satisfied, the Company intends to continue to
vigorously defend the Mitchell case.

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BankFirst Case

Plaintiffs in the Mitchell case also filed a companion case in federal
district court in San Francisco (Dadra Mitchell v. BankFirst, N.A.) (the
"BankFirst case"), which alleges violations of the federal Truth in Lending Act
and Regulation Z. on the theory that the 90-day notice period required for
termination of AFCA membership was not properly disclosed. The sole defendant in
BankFirst case is BankFirst, N.A., a bank that issued a VISA credit card made
available through the AFCA program. The Company and AFCA agreed to indemnify
BankFirst against any liability BankFirst may incur in connection with the
credit card program.

On May 4, 2000, the court in the BankFirst case granted BankFirst's motion
for summary judgment and entered a judgment terminating the case in favor of
BankFirst and against plaintiff Mitchell. Plaintiff Mitchell subsequently filed
a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
Oral argument on the appeal was held on November 6, 2001.

By Memorandum dated November 21, 2001, the Ninth Circuit affirmed, in part,
and vacated, in part, the judgment entered by the district court, and remanded
the Bankfirst case to the district court for further proceedings. Among other
things, the Ninth Circuit held that the district court erred in failing to grant
Mitchell's motion for additional discovery pursuant to Rule 56(f) of the Federal
Rules of Civil Procedure.

On December 28, 2001, plaintiff Mitchell moved for class certification. By
order entered February 20, 2002, the district court deferred ruling on
Mitchell's motion for class certification pending completion of discovery and
the filing of cross motions for summary judgment.

In the event that the conditions to effectiveness of the Settlement
Agreement are not in fact satisfied, the Company intends to continue to
vigorously defend the Bankfirst case.

Roe Litigation

On March 8, 2001, UICI and UCNB were named as defendants in a case (Timothy
M. Roe v. Phillip A. Gray, American Fair Credit Association, Inc., UICI, UCNB,
et al) initially filed in the United States District Court for the District of
Colorado. Plaintiff, on his own behalf and on behalf of a purported class of
similarly situated individuals, in connection with the AFCA credit card program,
alleged breach of contract and violations of the federal Credit Repair
Organizations Act and the Truth-In-Lending Act and seeks certain declaratory
relief.

On October 10, 2001, the Court granted the motion of UICI, UCNB and each of
the other named defendants to stay the litigation (the "Colorado action")
pending arbitration pursuant to the Federal Arbitration Act. Accordingly, the
court in the Colorado action entered an order administratively retiring the
Colorado action from its docket subject to reactivation for good cause shown.
The defendants had previously filed a petition to compel arbitration against the
individual named plaintiff in the United States District Court for the Eastern
District of North Carolina, the judicial district wherein the named plaintiff
resides. The petitions to compel arbitration are pending.

Two defendants unaffiliated with UICI timely appealed from the Colorado
District Court's order, arguing that the Colorado court should have decided the
merits of the arbitration controversy rather than defer to the Eastern District
of North Carolina. On April 22, 2002, UICI and the remaining defendants timely
filed their opposition briefs to the unaffiliated defendants' appeal. The Tenth
Circuit has not yet rendered a decision on the unaffiliated defendants' appeal.

On April 8, 2002, a hearing was held in the Eastern District of North
Carolina regarding plaintiff's request for discovery in connection with
plaintiff's contention that the arbitration agreements are unenforceable because
they impose prohibitive costs on plaintiff. By order entered April 9, 2002, the
Eastern District of North Carolina held that cost is not a viable issue to
oppose arbitration in light of UICI's offer to bear the forum-imposed costs
arising from any arbitration between UICI and plaintiff. Further, the Eastern
District of
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North Carolina ordered the parties to file cross-motions for summary judgment on
or before May 10, 2002, and the Court held in reserve plaintiff's request for
discovery on other issues pending its decision on the contemplated summary
judgment motions.

On September 4, 2002, a hearing was held on the cross-motions for summary
judgment. At the conclusion of the hearing, the Court solicited additional
briefing. The parties filed their Supplemental Memoranda on summary judgment on
September 25, 2002. On November 15, 2002, the District Court entered an order
granting the Company's motion for summary judgment to enforce arbitration,
denying Roe's cross motion for summary judgment and dismissing the matter.

In the event that the conditions to effectiveness of the Settlement
Agreement are not in fact satisfied, the Company intends to continue to pursue
arbitration in North Carolina of the individual plaintiff's claims (as set forth
in the complaint in the Colorado action). The Company intends to vigorously
contest these allegations in the proper forum.

REINSURANCE LITIGATION

As previously disclosed, on November 3, 2000, The MEGA Life and Health
Insurance Company (a wholly-owned subsidiary of the Company) ("MEGA") was named
as a party defendant in a suit filed by General & Cologne Life Re of America
("Cologne Re") (General & Cologne Life Re of America vs. The MEGA Life and
Health Insurance Company), in the High Court of Justice, Queen's Bench Division,
Commercial Court, Royal Courts of Justice, in London, England. Plaintiff alleged
that it had incurred substantial losses in a health insurance program in the
United Kingdom in which Cologne Re was a cedent of reinsurance and MEGA was
Cologne Re's retrocessionaire.

On January 29, 2002, following mediation in London, MEGA and Cologne Re
agreed to a full settlement of the dispute. The terms of the settlement did not
have a material adverse effect on the results of operations or financial
condition of the Company.

COMPTROLLER OF THE CURRENCY CONSENT ORDER

As previously disclosed, the Company is subject to a Consent Order,
initially issued by the United States Office of the Comptroller of the Currency
on June 29, 2000 and as modified on January 29, 2001, confirming the obligations
of the Company to assume all obligations of UCNB. Until January 29, 2001, UCNB
was a special purpose national bank headquartered in Sioux Falls, South Dakota,
and an indirect wholly owned (except for directors' qualifying shares)
subsidiary of the Company. On January 29, 2001, the Company completed the
voluntary liquidation of UCNB, in accordance with the terms of a plan of
voluntary liquidation approved by the Office of the Comptroller of the Currency.

NEW MEXICO CLASS ACTION LITIGATION

As previously disclosed, on June 1, 2001, UICI and MEGA were served as
parties defendant in a purported class action (Frances C. Chandler, Individually
and as a Representative of a Class of Similarly Situated Persons, vs. PFL Life
Insurance Company, UICI, The MEGA Life and Health Insurance Company, et al.)
initially filed on January 12, 2001 in First Judicial District Court (Santa Fe,
New Mexico). On her own behalf and on behalf of an alleged class of similarly
situated individuals, plaintiff alleged that sales materials associated with a
group hospital benefit health insurance plan sponsored, marketed, underwritten,
reinsured and/or administered by defendants contained incomplete, inaccurate,
misleading and/or false statements, and that benefits and treatment were denied
plaintiffs with attendant credit damage, pain and suffering and loss of
enjoyment. Plaintiffs alleged, among other things, breach of contract,
misrepresentation, breach of fiduciary duties, unjust enrichment, and the
violation of the duty of good faith and fair dealing.

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On August 13, 2002, the parties agreed to fully and finally resolve the
litigation upon terms that will not have a material adverse effect upon the
financial condition or results of operations of the Company. The suit was
formally dismissed on August 23, 2002 by joint motion of the parties, who are
currently in the process of drafting final settlement documentation.

UNITED CREDIT NATIONAL BANK SHAREHOLDER DERIVATIVE LITIGATION

As previously disclosed, various former directors and officers of United
Credit National Bank were named as defendants in a shareholder derivative action
(William K. Lester, on behalf of United Credit National Bank, v. Ronald L.
Jensen, Gregory T. Mutz, et al), which was filed on June 29, 2001 and was
pending in the District Court of Harris County, Texas. The plaintiff asserted on
behalf of UCNB various derivative claims brought against the individual
defendants, alleging, among other things, negligence in connection with the
operations of UCNB. In December 2000, plaintiff made a demand on the Board of
Directors of United Credit National Bank to investigate and assess certain
alleged derivative claims. The Board of Directors constituted a special
committee to investigate and assess the asserted derivative claims, and the
special committee determined that the claims were wholly without merit.

On July 15, 2002, plaintiff and the defendants entered into a Settlement
Agreement, pursuant to which the parties agreed to fully and finally settle,
without admitting or denying liability, the matters that were the subject of the
suit. The terms of the settlement did not have a material adverse effect upon
the financial condition or results of operations of the Company.

UICI agreed to advance the expenses of the individual defendants incurred
in connection with the defense of the case, subject to the defendants'
undertaking to repay such advances unless it is ultimately determined that they
are or would have been entitled to indemnification by UICI under the terms of
the Company's bylaws.

ACADEMIC MANAGEMENT SERVICES CORP. CLASS ACTION LITIGATION

As previously disclosed, Academic Management Services Corp. (formerly
Education Finance Group, Inc.) has been named as a party defendant in a
purported class action suit (Timothy A. McCulloch, et al. v. Educational Finance
Group Inc. et al) filed on June 20, 2001 in the United States District Court for
the Southern District of Florida (Miami). On his own behalf and on behalf of an
alleged class of similarly situated individuals, plaintiff has alleged, among
other things, that, in connection with the marketing and origination of
federally-insured Parent Plus student loans, AMS and other defendants violated
certain provisions of the federal Higher Education Act, were negligent,
committed mail and wire fraud, breached a fiduciary duty owed to plaintiffs and
made negligent misrepresentations.

On October 19, 2001, the Court granted defendants' motion to dismiss the
case in its entirety, dismissing with prejudice plaintiffs' claims under the
Higher Education Act and federal mail and wire fraud claims and dismissing
without prejudice plaintiffs' state law claims. The District Court subsequently
denied plaintiffs' motion for reconsideration/rehearing. On December 27, 2001,
plaintiffs appealed the District Court's ruling and filed an appeal with the
United States Court of Appeals for the Eleventh Circuit in Atlanta, Georgia. On
July 17, 2002, the United States Court of Appeals for the Eleventh Circuit
affirmed the District Court's dismissal of the case in its entirety.

Plaintiffs also filed a parallel state class action complaint in the
Eleventh Judicial Circuit, Dade County, Florida. The state class action
complaint asserted essentially the same tort causes of action previously
dismissed by the federal District Court and added a claim alleging violations of
the Florida state deceptive trade practices statute. On March 1, 2002,
defendants (including AMS) filed a motion to dismiss the state class action
complaint. On April 9, 2002, the court in the Florida state action granted AMS'
petition for a stay in the state court proceedings pending resolution of the
federal action. In light of the United States Court of

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Appeals' affirmation of the District Court's dismissal of the federal case, the
state court has lifted the stay with respect to AMS' motion to dismiss, but has
maintained a stay of all discovery pending resolution of that motion. In
response to AMS' motion to dismiss, plaintiffs have filed an amended complaint,
which asserts the same causes of action as were contained in the previous
complaint and adds one count asserting violation of Florida's Telemarketing Act.
On February 3, 2003, the Company filed its motion to dismiss the amended
complaint in its entirety.

The Company believes that plaintiffs' claims are wholly without merit, and
AMS intends to vigorously contest plaintiffs' amended state class action
complaint.

ASSOCIATION GROUP LITIGATION

The health insurance products issued by the Company in the self employed
market are primarily issued to members of various independent membership
associations that endorse the products and act as the master policyholder for
such products. The associations provide their membership with a number of
endorsed benefits and products, including health insurance underwritten by the
Company.

The MEGA Life and Health Insurance Company (a wholly owned subsidiary of
the Company) has recently been named a defendant in three separate lawsuits
(Richard and Patty McBrayer vs. Brad Fair, MEGA Life and Health Insurance
Company, et al., filed on December 26, 2002 in the Circuit Court of Clay County,
Mississippi; Joe Shelton and Sharon Shelton vs. Chad Mills, MEGA Life and Health
Insurance Company, et al., filed on December 20, 2002 in the Circuit Court of
Pontotoc County, Mississippi; and Herman Tomlin and Gary Harrison vs. MEGA Life
and Health Insurance Company, et al., filed on January 28, 2003 in the Circuit
Court of Monroe County, Mississippi), each of which contain certain allegations
regarding the relationships between MEGA and the National Association for the
Self-Employed (NASE), the membership association that has endorsed MEGA's health
insurance products. Plaintiffs specifically alleged, among other things, that
MEGA pursued a scheme of deceptive sales practices designed to create the
impression that NASE is an independent entity; that in fact NASE and MEGA are
"under common ownership and control;" that the benefits of NASE membership are
negligible and membership is intended to permit MEGA to control the
insurer/insured relationship; and that the scheme was intended to allow MEGA to
eliminate insureds with health problems from its block of business by raising
premiums. Plaintiffs demand punitive and economic damages in an indeterminate
amount, including excess premiums, association dues and charges, administrative
fees, and accrued interest.

The McBrayer case, the Tomlin case and the Shelton case were removed to
United States District Court for the Northern District of Mississippi. The
Shelton case was subsequently dismissed voluntarily by the plaintiffs with
prejudice. The Company has not answered or otherwise responded in the McBrayer
or Tomlin case, and no discovery has been undertaken. The Company believes that
these cases are without merit and intends to vigorously defend against the
plaintiffs' allegations.

INSURANCE REGULATORY MATTERS

The Company's insurance subsidiaries are subject to extensive regulation in
their states of domicile and the other states in which they do business under
statutes that typically delegate broad regulatory, supervisory and
administrative powers to state insurance departments and agencies. The method of
regulation varies, but the subject matter of such regulation covers, among other
things, the amount of dividends and other distributions that can be paid by the
Company's insurance subsidiaries without prior approval or notification; the
granting and revoking of licenses to transact business; trade practices,
including with respect to the protection of consumers; disclosure requirements;
privacy standards; minimum loss ratios; premium rate regulation; underwriting
standards; approval of policy forms; methods and timing of claims payment;
licensing of insurance agents and the regulation of their conduct; the amount
and type of investments that the Company's subsidiaries may hold; minimum
reserve and surplus requirements; risk-based capital require-
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ments; and compelled participation in, and assessments in connection with, risk
sharing pools and guaranty funds. Such regulation is intended to protect
policyholders rather than investors.

The Company's insurance subsidiaries are required to file detailed annual
statements with the state insurance regulatory departments, and state insurance
departments have also periodically conducted and continue to conduct periodic
financial and market conduct examinations of UICI's insurance subsidiaries. As
of December 31, 2002, either or both of The MEGA Life and Health Insurance
Company and Mid-West National Life Insurance Company of Tennessee were subject
to ongoing market conduct examinations in ten states. State insurance regulatory
agencies have broad authority to levy monetary fines and penalties resulting
from findings made during the course of such financial and market conduct
examinations. Historically, the Company's insurance subsidiaries have from time
to time been assessed such fines and penalties, none of which individually or in
the aggregate have had a material adverse effect on the results of operations or
financial condition of the Company.

The Company provides health insurance products to consumers in the
self-employed market in 44 states. A substantial portion of such products is
issued to members of various independent membership associations that endorse
the products and act as the master policyholder for such products. The two
principal membership associations in the self-employed market for which the
Company underwrites insurance are the National Association for the Self-Employed
("NASE") and the Alliance for Affordable Services ("AAS"). The associations
provide their membership with a number of endorsed benefits and products,
including health insurance underwritten by the Company. Subject to applicable
state law, individuals generally may not obtain insurance under an association's
master policy unless they are also members of the associations. UGA agents and
Cornerstone agents also act as enrollers of new members for the associations,
for which the agents receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of the Chairman of the Company)
provides administrative and benefit procurement services to the associations,
and a subsidiary of the Company sells new membership sales leads to the
enrollers and video and print services to the associations and to Specialized
Association Services, Inc. See Note N of Notes to Consolidated Financial
Statements. In addition to health insurance premiums derived from the sale of
health insurance, the Company receives fee income from the associations,
including fees associated with the enrollment of new members, fees for
association membership marketing and administrative services and fees for
certain association member benefits. The agreements with these associations
requiring the associations to continue as the master policyholder and to endorse
the Company's insurance products to their respective members are terminable by
the Company and the associations upon not less than one year's advance notice to
the other party.

Recent articles in the popular press have been critical of association
group coverage. In December 2002, the NAIC convened a special task force to
review association group coverage, and the Company is aware that selected states
are reviewing the laws and regulations under which association group policies
are issued. The Company has also recently been named a party to three lawsuits
challenging the nature of the relationship between MEGA and the National
Association for the Self-Employed (NASE), the membership association that has
endorsed MEGA's health insurance products. While the Company believes it is
providing association group coverage in full compliance with applicable law,
changes in the relationship between the Company and the membership associations
and/or changes in the laws and regulations governing so-called "association
group" insurance (particularly changes that would subject the issuance of
policies to prior premium rate approval and/or require the issuance of policies
on a "guaranteed issue" basis) could have a material adverse impact on the
financial condition, results of operations and/or business of the Company.

OTHER LITIGATION MATTERS

The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate

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disposition of such lawsuits and claims, management believes that the liability,
if any, resulting from the disposition of such proceedings will not be material
to the Company's financial condition or results of operations.

OTHER COMMITMENTS AND CONTINGENCIES

The Company and its subsidiaries lease office space and data processing
equipment under various lease agreements with initial lease periods of three to
ten and one-half years. Minimum lease commitments, at December 31, 2002 were
$9.8 million in 2003, $7.4 million in 2004, $5.5 million in 2005, $2.7 million
in 2006, and $1.9 million in 2007 and $6.8 million thereafter. Rent expense was
$8.5 million, $6.3 million and $7.5 million for the years ended December 31,
2002, 2001 and 2000, respectively.

In conjunction with its College Fund Life Division life insurance
operations, the Company commits to assist in funding the higher education of its
insureds with student loans. As of December 31, 2002, the Company through its
College Fund Life Insurance Division had outstanding commitments to fund student
loans for the years 2003 through 2024. The interest rates on these commitments
vary as described below. Loans are limited to the cost of school or prescribed
maximums. These loans are generally guaranteed as to principal and interest by
an appropriate guarantee agency and are also collateralized by either the
related insurance policy or the co-signature of a parent or guardian. The total
commitment for the next five school years and thereafter as well as the amount
the Company expects to fund considering utilization rates and lapses are as
follows:

Interest rates on the above commitments are principally variable (national
prime plus 2%).

At each of December 31, 2002 and 2001, the Company had $7.2 million and
$6.0 million, respectively of letters of credit relating to its insurance
operations.

NOTE P -- EMPLOYEE AND AGENT STOCK PLANS

UICI EMPLOYEE STOCK OWNERSHIP AND SAVINGS PLAN

The Company maintains for the benefit of its and its subsidiaries'
employees the UICI Employee Stock Ownership and Savings Plan (the "Employee
Plan"). The Employee Plan through its 401(k) feature enables eligible employees
to make pre-tax contributions to the Employee Plan in an amount not in excess of
15% of compensation (subject to overall limitations) and to direct the
investment of such contributions among several investment options, including
UICI common stock. A second feature of the Employee Plan constitutes an employee
stock ownership plan (the "ESOP"), contributions to which are invested primarily
in shares of UICI common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching contributions and to share
in certain supplemental contributions made by UICI and its subsidiaries.
Contributions by UICI and its subsidiaries to the Employee Plan under the ESOP
feature currently vest in prescribed increments over a six-year period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On August 11, 2000, the Company issued to the Employee Plan 1,610,000
shares of UICI common stock at a purchase price of $5.25 per share, or $8.5
million in the aggregate. The purchase price for the shares was paid by delivery
to UICI of the Employee Plan's $8.5 million promissory note (the "Plan Note"),
which was scheduled to mature in three years and was secured by a pledge of the
purchased shares. The shares of UICI common stock purchased with the Plan Note
(the "$5.25 ESOP Shares") were held in a suspense account for allocation among
participants as and when the Company's matching and supplemental contributions
to the ESOP were made. The Plan Note was extinguished over a period of
approximately two years ended in November 2002 by crediting the Company's
matching and supplemental contribution obligations under the ESOP feature of the
Employee Plan against principal and interest due on the Plan Note. As of
December 31, 2002, the note was extinguished.

The Company recorded compensation expense associated with contributions to
the Employee Plan in the amount of $11.7 million, $7.0 million and $5.0 million
for the years ended December 31, 2002, 2001 and 2000, respectively, of which
$7.3 million, $3.0 million and $254,000, respectively, were recorded as non-cash
variable stock-based compensation expense. The amount classified as variable
stock-based compensation expense with respect to the Employee Plan in 2002
represented the incremental compensation expense associated with the allocation
during the year ended December 31, 2002 of 630,000 $5.25 ESOP Shares to fund the
Company's matching and supplemental contributions to participants' accounts in
the ESOP. As and when the Company made matching and supplemental contributions
to the ESOP by allocating to participants' accounts these $5.25 ESOP Shares, the
Company recorded additional non-cash compensation expense equal to the excess,
if any, between the fair value of the shares allocated and $5.25 per share. As
of December 31, 2002, all $5.25 ESOP Shares had been allocated to participants'
accounts and the related Plan Note had been extinguished. Accordingly, in future
periods the Company will recognize no additional variable stock-based
compensation associated with the ESOP feature of the Employee Plan.

The allocated $5.25 ESOP Shares are considered outstanding for purposes of
the computation of earnings per share.

AGENT STOCK ACCUMULATION PLANS

The Company sponsors a series of stock accumulation plans (the "Agent
Plans") established for the benefit of the independent insurance agents and
independent sales representatives associated with UGA -- Association Field
Services, New United Agency, Cornerstone America, Guaranty Senior Assurance,
SeniorsFirst and CFLD Association Field Services.

The Agent Plans generally combine an agent-contribution feature and a
Company-match feature. The agent-contribution feature generally provides that
eligible participants are permitted to allocate a portion (subject to prescribed
limits) of their commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of such shares at
the time of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective Agent Plan accounts
book credits in the form of equivalent shares based on the number of shares of
UICI common stock purchased by the participant under the agent-contribution
feature of the Agent Plans. The "matching credits" vest over time (generally in
prescribed increments over a ten-year period, commencing the plan year following
the plan year during which contributions are first made under the
agent-contribution feature), and vested matching credits in a participant's plan
account in January of each year are converted from book credits to an equivalent
number of shares of UICI common stock. Matching credits forfeited by
participants no longer eligible to participate in the Agent Plans are
reallocated each year among eligible participants and credited to eligible
participants' Agent Plan accounts.

The Agent Plans do not constitute qualified plans under Section 401(a) of
the Internal Revenue Code of 1986 or employee benefit plans under the Employee
Retirement Income Security Act of 1974, and the Agent

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Plans are not subject to the vesting, funding, nondiscrimination and other
requirements imposed on such plans by the Internal Revenue Code and ERISA.

Prior to July 1, 2000, the Company granted matching credits in an amount
equal to the number of shares of UICI common stock purchased by the participant
under the agent-contribution feature of the Agent Plans. Effective July 1, 2000,
the Company modified the formula for calculating the number of matching credits
to be posted to participants' accounts. During the period beginning July 1, 2000
and ending on the earlier of June 30, 2002 or the date that an aggregate of
2,175,000 share equivalents have been granted under this revised formula, the
number of matching credits issued to an individual participant will be the
greater of (a) the number of matching credits determined each month by dividing
the dollar amount of the participant's contribution for that month by $5.25, or
(b) the actual number of shares acquired, at then-current fair market value, by
the participant's contribution amount.

Prior to July 1, 2000, the Company purchased UICI shares in the open market
from time to time to satisfy its commitment to issue its shares upon vesting of
matching credits under the Agent Plans. During the period beginning July 1, 2000
and ending July 31, 2002, the Company agreed to utilize up to 2,175,000 newly
issued shares to satisfy its commitment to deliver shares that will vest under
the Company-match feature of the agent plans. Under the arrangement effective
July 1, 2000, the Company's subsidiaries transferred to the holding company
$5.25 per share for any newly issued shares utilized to fund vested matching
credits under the plans. In accordance with such arrangement, during the period
commencing July 1, 2000 and ending on July 31, 2002, the Company issued to the
subsidiaries an aggregate of 1,765,251 shares, for which the Company's
subsidiaries transferred to the Company at the holding company level cash in the
aggregate amount of $9.3 million. Subsequent to July 31, 2002, the Company
resumed purchasing UICI shares in the open market from time to time to satisfy
its commitment to issue its shares upon vesting of matching credits under the
Agent Plans.

For financial reporting purposes, the Company accounts for the
Company-match feature of its Agent Plans under EITF 96-18 "Accounting for Equity
Instruments that are issued to Other Than Employees for Acquiring or in
Connection with Selling Goods and Services," by recognizing compensation expense
over the vesting period in an amount equal to the fair market value of vested
shares at the date of their vesting and distribution to the participants. The
Company estimates its current liability for unvested matching credits by
reference to the number of unvested credits, the current market price of the
Company's common stock, and the Company's estimate of the percentage of the
vesting period that has elapsed up to the current quarter end. Changes in the
liability from one quarter to the next are accounted for as an increase in, or
decrease to, compensation expense, as the case may be. Upon vesting, the Company
reduces the accrued liability (equal to the market value of the vested shares at
date of vesting) with a corresponding increase to equity. Unvested matching
credits are considered share equivalents outstanding for purposes of the
computation of earnings per share. For the years ended December 31, 2002, 2001
and 2000, the Company recorded total compensation expense associated with these
agent plans in the amount of $16.3 million, $6.6 million and $3.0 million,
respectively, of which $9.2 million, $2.8 million and $175,000, respectively,
represented the non-cash stock based compensation expense associated with the
adjustment to the liability for future unvested benefits.

At December 31, 2002, the Company had recorded approximately 1.9 million
unvested matching credits associated with the Agent Plans, of which 697,000
vested in January 2003.

The accounting treatment of the Company's Agent Plans will result in
unpredictable stock-based compensation charges, dependent upon fluctuations in
the quoted price of UICI common stock. These unpredictable fluctuations in stock
based compensation charges may result in material non-cash fluctuations in the
Company's results of operations. In periods of general decline in the quoted
price of UICI common stock, if any, the Company will recognize less stock based
compensation expense than in periods of general appreciation in the quoted price
of UICI common stock. In addition, in circumstances where increases in the
quoted price of UICI common stock are followed by declines in the quoted price
of UICI common stock,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

negative compensation expense may result as the Company adjusts the cumulative
liability for unvested stock-based compensation expense. Stock-based
compensation expense is non-cash and will accordingly have no impact on the
Company's cash flows or liquidity.

STOCK OPTION PLANS

In accordance with the terms of the Company's 1998 Employee Stock Option
Plan and the Company's 1998 Agent Stock Option Plan, each effective August 15,
1998, the Company granted agents and employees of the Company options to
purchase an aggregate of 8,100,000 shares of Company common stock at an exercise
price of $15 per share. The options vested in 20% increments in each year,
commencing on August 15, 1999 and ending August 15, 2001, and the remaining 40%
vested on August 15, 2002. At December 31, 2002 and 2001, options to purchase
736,975 shares and 2,156,766 shares, respectively, were outstanding under the
1998 Plans, all of which options remained exercisable during the period ending
on January 13, 2003. Subsequent to December 31, 2002 and prior to termination on
January 13, 2003, 590,463 options were exercised. On January 14, 2003, 104,942
unexercised options granted under the 1998 Plans lapsed.

For years ended December 31, 2002, 2001 and 2000, the Company recognized no
compensation expense in connection with the 1998 Plans.

In accordance with the terms of the Company's 1987 Stock Option Plan, as
amended (the "1987 Plan"), 4,000,000 shares of common stock of the Company have
been reserved for issuance upon exercise of options that may be granted to
officers, key employees, and certain eligible non-employees at an exercise price
equal to the fair market value at the date of grant. The options generally vest
in 20% annual increments every twelve months, subject to continuing employment,
provided that an option will vest 100% upon death, permanent disability, or
change of control of the Company. All options under the 1987 Plan are
exercisable over a five-year period. At December 31, 2002 and 2001, options to
purchase 1,269,215 shares and 1,057,585 shares, respectively, were outstanding
under the 1987 Plan. During the year ended December 31, 2002 and 2001, the
Company granted to officers, directors and employees under the 1987 Plan options
to purchase an aggregate of 319,914 shares and 340,609 shares, respectively, at
an average exercise price of $14.05 and $10.54 per share, respectively, which
was equal to the market price at the date of grant.

In connection with the Company's acquisition of AMLI Realty Co. ("ARC") in
1996, options previously outstanding under the ARC employee stock option plan
were converted into the right to receive shares of the Company's common stock.
At each of December 31, 2002 and 2001, 58,526 options (at a weighted exercise
price per share of $12.43) and 60,591 options (at a weighted exercise price per
share of $12.72), respectively, were outstanding under the ARC plan. Options
issued under the ARC plan are fully vested.

F-79

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a summary of stock option transactions:

The Company has historically accounted for the stock-based compensation
plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. Under APB 25, because the exercise price of the
Company's employee stock options has been equal to the market price of
underlying stock on the date of grant, no compensation expense has to date been
recognized. On January 1, 2003, the Company adopted Statement No. 123 for all
employee awards granted or modified on or after January 1, 2003, and will begin
measuring the compensation cost of stock-based awards under the fair value
method. The Company adopted Statement No. 148 on January 1, 2003 and has adopted
the transition provisions that require expensing options prospectively in the
year of adoption. Existing awards will continue to follow the intrinsic value
method prescribed by APB 25.

Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 2002, 2001 and 2000: risk-free interest rate of 3.53%, 4.43% and
6.58%, respectively; dividend yield of -0-% for each of the three years,
volatility factor of the expected market price of the Company's common stock of
0.65, 0.56 and 0.49, respectively; and a weighted-average expected life of the
option of 4.26 years, 5 years and 5 years for 2002, 2001, and 2000,
respectively. The weighted average grant date fair value per share of stock
options issued in 2002, 2001 and 2000 was $4.46, $5.70 and $3.45, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect on
net income (loss) of the stock compensation amortization for the

F-80

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

years presented above is not likely to be representative of the effects on
reported net income for future years. The Company's pro forma information
follows (in thousands except for earnings per share information):

RESTRICTED STOCK GRANTS

In 2002, 2001 and 2000, the Company issued an aggregate of 3,500, 109,250
and 56,459 shares of restricted stock, respectively, to selected officers and
key employees with a weighted average price per share on the date of issuance of
$13.79, $6.63 and $7.58, respectively. Until the lapse of certain restrictions
generally extending over a two-year period, all of such shares are subject to
forfeiture if a grantee ceases to provide material services to the Company as an
employee for any reason other than death. Upon death or a Change in Control (as
defined) of the Company, the shares of restricted stock are no longer subject to
forfeiture.

UICI EXECUTIVE STOCK PURCHASE PROGRAM

To encourage the ownership of UICI Common Stock among directors and key
executives, in December 1998 the Company adopted the UICI Executive Stock
Purchase Program (the "ESPP"). Pursuant to the ESPP, the directors and selected
executives of UICI were offered the opportunity, in the alternative, to either
purchase shares of UICI common stock at a purchase price equal to 85% of the
then-prevailing market price per share (the "Discount Option"), or purchase
shares of common stock at 100% of the then fair market value, such purchase to
be financed by the executive to the extent of $3.00 per share and by UICI to the
extent of the balance (the "Loan Option").

In the case of the Loan Option, UICI agreed to finance the balance of the
purchase price by accepting delivery of a full recourse, five-year promissory
note bearing interest at the rate of the greater of the then-prevailing Fed
funds rate or 5% per annum to be paid quarterly in arrears. In addition to the
foregoing, with respect to each of Discount Option and the Loan Option, UICI
offered to issue to the executives on a one-for-one basis stock options to
purchase UICI common stock exercisable at the then-prevailing market price per
share. Options so issued were to be governed by the terms of UICI's Amended and
Restated 1987 Stock Option Plan.

F-81

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A total of 24 current executives and outside directors elected pursuant to
the ESPP to purchase an aggregate of 308,422 shares of UICI common stock, of
which an aggregate of 9,878 shares were purchased pursuant to the Discount
Option at a weighted average purchase price of $22.67 per share and 298,544
shares were purchased pursuant to the Loan Option at a weighted average purchase
price of $21.26 per share. As part of the ESPP, the Company issued an aggregate
of 308,422 options to purchase UICI common stock at a weighted average exercise
price of $21.40 per share. Current executives and directors had indebtedness
outstanding owing to the Company under the Loan Option at December 31, 2000 in
the aggregate amount of $4.4 million (including $2.8 million payable by Gregory
T. Mutz, the Company's President and Chief Executive Officer).

Following the significant decline in the price of UICI common stock
following UICI's announcement of losses at its United CreditServ credit card
unit in December 1999, the Board of Directors sought means to revise the ESPP in
a manner that would better serve its intended objectives. The Board became
increasingly concerned that the ESPP had in fact contributed to negative morale
among a group of key UICI executives, none of whom had direct involvement with
the difficulties at United CreditServ.

Following a recommendation of the Board's Compensation Committee, the Board
of Directors of the Company (including all of the outside disinterested members
of the Board), at a meeting held on January 2, 2001, approved modifications to
the ESPP that were generally designed to restore executives economically to
where they would have been if the ESPP were implemented in January 2001
according to its original design and the stock price in January 2001 had been
$9.00 per share. The modifications were designed to assure that the ESPP serves
as reasonable incentive on a going-forward basis to those executives who
continue to serve the Company and who will, as a result, be relied upon to
assure the Company's future success. As originally applied to the Company's
outside directors and to executives no longer with the Company, the terms of the
ESPP remain unmodified.

In particular, in January 2001 UICI issued an aggregate of 11,054 shares of
UICI common stock to the five executives who purchased shares pursuant to the
Discount Option. Giving effect to such issuance, the executives have an average
cost in shares purchased pursuant to the Discount Option of $9.00 per share. In
addition, UICI discharged an aggregate of $997,000 of indebtedness owed by 13
current executives (other than Mr. Mutz) who elected to purchase shares pursuant
to the Loan Option, representing 73% of the indebtedness previously owing by
such persons. Giving effect to this debt discharge, these individuals will have
acquired pursuant to the ESPP an aggregate of 62,934 shares at a cost of
$566,000 ($378,000 of indebtedness plus $188,000 of cash invested), or $9.00 per
share.

Mr. Mutz initially purchased pursuant to the ESPP a total of 220,000 shares
of UICI stock at an aggregate purchase price of $4.4 million, or $19.95 per
share, which purchase was initially financed with $660,000 ($3.00 per share) in
cash and by indebtedness owing to UICI in the amount of $3.7 million. Mr. Mutz
subsequently paid down principal on his loan in the amount of $960,000.
Accordingly, through December 31, 2000, Mr. Mutz had paid a total of $1.6
million in cash and had outstanding against his 220,000 shares a total of $2.8
million in indebtedness.

In January 2001 UICI discharged indebtedness owing by Mr. Mutz in the
amount of $1.5 million. Giving effect to such forgiveness, Mr. Mutz, at December
31, 2002, owes UICI $1.3 million, or $6.00 per share initially purchased. In
addition, UICI issued to Mr. Mutz 107,104 shares of UICI common stock. Giving
effect to the debt forgiveness and the issuance of the shares, Mr. Mutz pursuant
to the ESPP holds an aggregate of 327,104 shares of UICI common stock at a cost
to Mr. Mutz of $2.9 million ($1.3 million of indebtedness plus $1.6 million of
cash invested), or $9.00 per share.

In January 2001, UICI cancelled the 290,404 options that were issued to
executives pursuant to the ESPP at a weighted average option price of $21.17 per
share. In addition, the maturity of the promissory notes

F-82

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

delivered in connection with the Loan Option was extended to January 1, 2007.
All other terms and conditions of the original notes remain in effect.

Upon the issuance of the UICI shares and the discharge of indebtedness in
January 2001, executives recognized immediate income for federal tax purposes
and UICI became entitled to an immediate deduction and tax benefit in a
corresponding amount. In order to afford participants a means to pay their tax,
UICI transferred to participants the benefit of UICI's tax savings by paying a
cash tax "gross-up" payment to affected participants in the aggregate amount of
$1.7 million.

Reflecting the modifications to the ESPP made in January 2001, current
executives and directors had indebtedness outstanding owing to the Company at
December 31, 2002 and 2001 in the aggregate amount of $1.7 million and $1.9
million, respectively, (including $1.3 million at December 31, 2002 and 2001,
payable by Gregory T. Mutz, the Company's President and Chief Executive
Officer).

In connection with the January 2001 modifications to the ESPP, for
financial reporting purposes UICI recorded in the quarter ended December 31,
2000 compensation expense in the amount of $4.8 million pre-tax, or $4.1 million
net of tax. The 118,158 shares of UICI common stock issued to participants were
issued from treasury shares.

OTHER COMPENSATION PLANS

In August 1998, Ronald L. Jensen (the Company's Chairman) and his wife
established an incentive program (the "BOB Program"), pursuant to which they
agreed to distribute to "eligible participants" on August 15, 2002, in cash an
aggregate of the dollar equivalent value of 100,000 UICI shares. Eligible
participants in the BOB Program consisted of full-time employees of UICI and its
subsidiaries and independent agents associated with UICI's insurance
subsidiaries who were employed by or contracted with UICI, as the case may be,
at the close of business on August 14, 1998 and who remain employed by or
contracted with UICI at the close of business on August 14, 2002. In accordance
with the BOB Program, each eligible participant was entitled to receive his or
her portion of the aggregate cash payment determined by reference to a formula
based on, among other things, such eligible participant's tenure with UICI and
level of compensation.

For financial reporting purposes, UICI incurred non-cash variable
compensation expense associated with the BOB Program over the four-year vesting
period, which expense included adjustments due to periodic changes in the value
of UICI common stock. The Company established a corresponding liability
associated with the future benefits payable under the BOB Program. For the years
ended December 31, 2002, 2001 and 2000 the Company recorded non-cash
compensation expense associated with the BOB Program in the amount of $751,000,
$693,000 and $(15,000), respectively. At December 31, 2001 and August 15, 2002
(the date of vesting of benefits under the BOB Program), UICI had recorded a
liability for the benefits associated with the BOB Program in the amount of $1.1
million and $1.8 million, respectively.

In August 2002, Mr. and Mrs. Jensen distributed cash in the aggregate
amount of $1.8 million to the eligible participants in the BOB Program. In
connection with the funding of the BOB Program, UICI extinguished the liability
in the amount of $1.8 million at August 15, 2002 and credited an equivalent
amount ($1.2 million net of tax) to the Company's additional paid-in capital
account.

In August 2002, the Company established an incentive program (the "BOB II
Program"), pursuant to which the Company agreed to distribute to "eligible
participants" on August 15, 2006, in cash an aggregate of the dollar equivalent
value of 200,000 UICI shares. Eligible participants in the BOB II Program
consisted of full-time employees of UICI and its subsidiaries and independent
agents associated with UICI's insurance subsidiaries who were employed by or
contracted with UICI, as the case may be, at the close of business on August 15,
2002 and who remain employed by or contracted with UICI at the close of business
on August 15, 2006. In accordance with the BOB II Program, each eligible
participant is entitled to receive his or her portion
F-83

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the aggregate cash payment determined by reference to a formula based on,
among other things, such eligible participant's tenure with UICI and level of
compensation.

For financial reporting purposes, UICI will incur compensation expense
associated with the BOB II Program over the four-year vesting period, which
expense included adjustments due to periodic changes in the value of UICI common
stock. The Company has established a corresponding liability associated with the
future benefits payable under the BOB II Program. For the year ended December
31, 2002, the Company recorded compensation expense associated with the BOB II
Program in the amount of $291,000.

In January 2000, the Company established a plan, pursuant to which 25% of
the cash equivalent value of 100,000 shares of UICI common stock will be
distributed to eligible employees in each of January 2001, 2002, 2003 and 2004.
At December 31, 2002 and 2001, the Company's liability for future benefits
payable under this plan was $680,000 and $731,000, respectively. For the years
ended December 31, 2002, 2001 and 2000 the Company recorded compensation expense
associated with this plan in the amount of $261,000, $407,000 and $309,000,
respectively.

NOTE Q -- INVESTMENT ANNUITY SEGREGATED ACCOUNTS

The Company had deferred investment annuity policies which have segregated
account assets and liabilities amounting to $218.9 million and $234.5 million at
December 31, 2002 and 2001, respectively, which are funded by specific assets
held in segregated custodian accounts for the purposes of providing policy
benefits and paying applicable premiums, taxes and other charges as due. Because
investment decisions with respect to these segregated accounts are made by the
policyholders, these assets and liabilities are not presented in these financial
statements. The assets are held in individual custodian accounts, from which the
Company has received hold harmless agreements and indemnification.

NOTE R -- SEGMENT INFORMATION

The Company's operating segments include the following: (i) Insurance
segment, which includes the businesses of the Self Employed Agency Division, the
Group Insurance Division (formerly the Company's Student Insurance Division),
the Life Insurance Division (formerly the Company's OKC Division) and the Senior
Market Division; (ii) Financial Services Segment, which includes the businesses
of Academic Management Services Corp., the Company's investment in Healthaxis,
Inc., and (iii) Other Key Factors.

The Company's Other Key Factors segment includes (a) investment income not
allocated to other business segments, (b) interest expense on non-student loan
indebtedness, (c) general expenses relating to corporate operations, (d)
realized gains or losses on sale of investments, (e) the operations of the
Company's AMLI Realty Co. subsidiary, (f) minority interest, (g) variable
stock-based compensation, (h) operations that do not constitute reportable
operating segments (consisting primarily of Barron Risk Management Services,
Inc., the remaining portion of the Company's former TPA Division, until sold by
the Company in September 2002) and (i) amortization of goodwill (with respect to
periods ended prior to January 1, 2002).

Allocations of investment income and certain general expenses are based on
a number of assumptions and estimates, and the business segments reported
operating results would change if different methods were applied. Certain assets
are not individually identifiable by segment and, accordingly, have been
allocated by formulas. Segment revenues include premiums and other policy
charges and considerations, net investment income, and fees and other income.
Operations that do not constitute reportable operating segments have been
combined with Other Key Factors. Depreciation expense and capital expenditures
are not considered material. Management does not allocate income taxes to
segments. Transactions between reportable operating segments are accounted for
under respective agreements, which provide for such transactions generally at
cost.

F-84

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Revenues from continuing operations, income from continuing operations
before federal income taxes, and assets by operating segment are set forth in
the tables below:

F-85

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-86

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE S -- EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted
earnings (loss) per share:

F-87

UICI AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE T -- SUPPLEMENTAL FINANCIAL STATEMENT DATA

Set forth below is certain supplemental information concerning
underwriting, policy acquisition costs and insurance expenses for the years
ended December 31, 2002, 2001 and 2000:

NOTE U -- SUBSEQUENT EVENTS

Through its College First Alternative Loan Program, the Company's College
Fund Life Division (based in Norcross, Georgia) has historically offered an
interest-sensitive whole life insurance product that has generally been issued
with an annuity rider and a child term rider. The child term rider includes a
special provision under which the Company commits to provide private student
loans to help fund the named child's higher education if certain restrictions
and qualifications are satisfied.

The Company has determined that, effective May 31, 2003, it will no longer
issue new life insurance policies under the College Fund Life Division program
and that, effective June 30, 2003, it will cease all operations at the Company's
Norcross, Georgia facility. In connection with such closedown, the Company
currently estimates that it will incur exit costs (consisting primarily of
employee severance, relocation expenses and lease termination and other costs)
in the amount of approximately $900,000, which costs will be expensed as
incurred over the period ending June 30, 2003 in accordance with FASB Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

The Company through its College Fund Life Division has outstanding
commitments to fund student loans for the years 2003 through 2024. See Notes K
and O of Notes to Consolidated Financial Statements.

F-88

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)

BALANCE SHEETS

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

* Eliminated in consolidation.

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.

F-89

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)

CONDENSED STATEMENTS OF OPERATIONS

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

* Eliminated in consolidation.

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.

F-90

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.

F-91

SCHEDULE III

UICI
AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION

F-92

SCHEDULE III

UICI
AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION

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

* Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.

(1) Other operating expenses includes underwriting, policy acquisition costs,
and insurance expenses and other income and expenses allocable to the
respective segment.

F-93

SCHEDULE IV

UICI
AND SUBSIDIARIES

REINSURANCE

F-94

SCHEDULE V

UICI
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

F-95

EXHIBIT INDEX