OBJECTIVE - The objective of this study was to characterize health care costs associated with diabetic lower-extremity ulcers. RESEARCH DESIGN AND METHODS - Adult patients with diabetes who had a lower-extremity ulcer episode during 2000 and 2001 were identified using claims data. Ulcer-related direct health care costs were computed for each episode. Episodes were stratified according to severity level based on the Wagner classification. RESULTS - A total of 2,253 patients were identified. The mean age was 68.9 years, and 59% of the patients were male. The average episode duration was 87.3 +/- 82.8 days. Total ulcer-related costs averaged $13,179 per episode and increased with severity level, ranging from $1,892 (level 1) to $27,721 (level 4/5). Inpatient hospital charges accounted for 77% ($10,188) of the overall cost, indicating that hospitalization was a major cost driver. Total ulcer-related costs were significantly higher for patients <65 years of age compared with those of older patients ($16,390 vs. $11,925, P = 0.02) and for patients with inadequate vascular status compared with patients with adequate vascular status ($23,372 vs. $5,218, P < 0.0001). Patients who progressed to a higher severity level also had significantly higher ulcer-related costs compared with patients who did not progress ($20,136 vs. $3,063, P < 0.0001). CONCLUSIONS - The high costs of treating diabetic lower-extremity ulcers emphasize the value of intensive outpatient interventions designed to prevent ulcer progression.