SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________

COMMISSION FILE NUMBER 0-31014

HEALTHEXTRAS, INC.
(Exact name of registrant as specified in its charter)

Delaware 52-2181356
--------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

2273 Research Boulevard, 2nd Floor, Rockville, Maryland 20850
(Address of principal executive offices, zip code)

(301) 548-2900
(Registrant's phone number, including area code)

Not Applicable
-----------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act: Common Stock,
$0.01 par value

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 the 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: ( __ )

The number of shares of Common Stock, par value $.01 per share, outstanding
on March 26, 2001 was 29,186,157. As of March 26, 2001, assuming as fair value
the last sale price of $5.09 per share on The Nasdaq Stock Market, the aggregate
fair value of shares held by non-affiliates was approximately $43.0 million.

DOCUMENTS INCORPORATED BY REFERENCE:
The Company's Proxy Statement for its annual meeting of stockholders to be
held in June, 2001, a definitive copy of which will be filed within 120 days of
December 31, 2000, is incorporated by reference in Part III of this Report on
Form 10-K.

TABLE OF CONTENTS

Page
----

PART I

Item 1. Business...............................................3
Item 2. Properties.............................................8
Item 3. Legal Proceedings......................................8
Item 4. Submission of Matters for a Vote of
Security Holders.......................................8

PART II

Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................9
Item 6. Selected Financial Data...............................10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........11
Item 7A Quantitative and Qualitative Disclosures
About Market Risk.....................................22
Item 8. Financial Statements and Supplementary Data...........22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................22

PART III

Item 10. Directors and Executive Officers of the
Registrant............................................23
Item 11. Executive Compensation................................23
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................23
Item 13. Certain Relationships and Related Transactions........23

PART IV

Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K...............................24

SIGNATURES

THIS FORM 10-K, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE, CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, STATEMENTS
CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE AND FINANCIAL
CONDITION. THESE FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE" AND OTHER SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THEIR
DATES. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON THE COMPANY'S
CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES,
INCLUDING, WITHOUT LIMITATION, THOSE IDENTIFIED UNDER "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN
THIS FORM 10-K, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM RESULTS REFERRED TO IN THE FORWARD-LOOKING
STATEMENTS. IN ADDITION, IMPORTANT FACTORS TO CONSIDER IN EVALUATING SUCH
FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN EXTERNAL MARKET FACTORS, CHANGES
IN THE COMPANY'S BUSINESS OR GROWTH STRATEGY OR AN INABILITY TO EXECUTE ITS
STRATEGY DUE TO CHANGES IN ITS INDUSTRY OR THE ECONOMY GENERALLY. IN LIGHT OF
THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCES THAT THE RESULTS
REFERRED TO IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K WILL
IN FACT OCCUR. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.

PART 1

ITEM 1. BUSINESS
- -----------------

OVERVIEW

HealthExtras, Inc. (the "Company" or "HealthExtras") is a leading
provider of health and disability programs, that utilizes a variety of
direct marketing channels to offer individuals, small businesses and employer
groups customizable and affordable health and disability insurance programs. The
Company has strategic relationships with nationally recognized insurance
underwriters, and its marketing partners include many of the nation's largest
financial institutions, along with leading affinity groups, associations, and
Internet companies. Additionally, HealthExtras has a relationship with actor and
advocate Christopher Reeve to promote its programs.

We have contracted with insurance companies to underwrite the
insurance components of our programs. As a result, we do not assume any
insurance underwriting risk. The financial responsibility for the payment of
claims resulting from a qualifying disability, or other event covered by the
insurance features of our programs, is borne by third-party insurers. All of the
insurance and service features included in our membership programs are supplied
by outside vendors. As of December 31, 2000, we have enrolled over 450,000
program members.

ACQUISITION OF INTERNATIONAL PHARMACY MANAGEMENT, INC.

Effective November 1, 2000 the Company acquired control of
International Pharmacy Management, Inc. ("IPM"). The acquisition is intended
to accelerate our introduction of pharmacy benefits to individual and small
business customers. Prescription drug costs continue to grow rapidly, reflecting
both increased drug utilization and price inflation. These factors should
contribute to an increasing opportunity to market cost effective programs to
underserved market segments. IPM has developed and begun to market insurance
products, underwritten like the Company's other products by third parties, to
small employer groups. These prescription drug programs are reasonably priced
compared to full service drug benefits and generally provide significant
coverage for generic drugs, a contribution to the cost of brand drugs and a
point of sale discount feature for the non-covered portion of the prescription.

We believe that there will be a growing market for pharmacy
benefits including potentially significant opportunities with Medicare
eligibles. Pharmacy programs are attractive because the discount pricing and
benefit administration are highly automated and reliable at the point of sale.
The refinement and distribution of pharmacy benefits and services will be a
major focus of our revenue growth strategy in the future. We believe this growth
will be driven by traditional pharmacy benefit administration services marketed
to employer groups as well as more direct consumer and small business offerings.

The significant majority of IPM's current revenues are derived from
pharmacy benefit management services marketed to health plan sponsors,
including self-insured employers. These services allow customers to manage costs
and to better understand the effect of pharmaceutical utilization on their
membership. IPM's pharmacy benefit management products and services include plan
design, administration of a network of over 50,000 retail pharmacies, electronic
point-of-sale claims processing, mail order pharmacy services, formulary
administration/management and other services.

BUSINESS STRATEGY

We are a multi-channel direct seller of health and disability
benefit programs. In addition to traditional distribution channels, the
Internet represents a more cost-effective marketing and operating platform for
our business which can eliminate a significant percentage of the costs
associated with commission-driven distribution systems. Accordingly, the
Internet enhances our ability to provide access to affordable health and
disability benefit programs. Elements of our strategy include:

Become a Recognized Leader In The Online Sale of Health and Disability
Benefit Programs.

We are moving aggressively to capture a significant share of the
Internet segment of the health and disability market. We are positioned to
promote membership features of HealthExtras, including health and disability
benefits that historically have been relatively uneconomic to offer to consumers
through traditional, commission-driven distribution channels. By leveraging our
membership base to obtain group rates, we are able to offer benefits to members
at a cost which we believe is less than they would have to pay individually for
comparable benefits.

Promote HealthExtras as the National Brand for Health and Disability
Benefits.

Through our exclusive association with Christopher Reeve, we
have the opportunity to achieve recognizable brand identity for our
membership programs. We intend to continue to expand our brand marketing through
the selective use of the Internet, television, radio, and print activities.

Develop Strategic Marketing Relationships.

We have established strategic marketing relationships with many of
the nation's largest credit card issuing banks for access to their
customers. We have entered into marketing programs with selected Internet
portals, insurance-related websites, and other websites with attractive
demographic profiles. We have also entered into agreements with national
insurance companies and direct insurance marketers to expand the distribution of
our products.

Continue to Develop and Arrange for the Sale of Additional Innovative Health
and Disability Programs to Members.

We are continuing to develop an expanded list of insurance and
service options for inclusion in our membership programs. These additional
products would provide flexibility in coverage amounts to our program members
and address additional insurance needs. Specifically, our recent acquisition of
Internal Pharmacy Management, Inc. should accelerate our introduction of
consumer prescription drug benefits.

STRATEGIC MARKETING RELATIONSHIPS

We have established strategic marketing relationships with many
of the nation's largest credit card issuing banks as well as leading direct
marketers of insurance products for access to their customers. These partners
are assisting us in establishing brand name recognition and driving traffic to
our website with their installed bases of customers, which we estimate
represent more than 70 million households. In addition, we have established
marketing relationships with selected Internet content sites. These
relationships drive traffic to our website and increase our brand name
recognition.

These arrangements provide for various marketing initiatives,
including, telemarketing, statement inserts, statement messages,
direct-response television, banner placements and e-mail. These communications
feature Christopher Reeve, provide information about HealthExtras benefit
programs and promote our website. In addition, our marketing partners may
establish links from their websites to the HealthExtras website. HealthExtras
compensates these partners based principally on a commission basis for the
benefit programs purchased in response to these communications.

Under the contracts that govern our relationships with our partners,
they have the right to review and approve all marketing materials and to
determine whether to market to customers. In general, HealthExtras pays for the
marketing material used and generally compensates our marketing partners based
on the purchases of HealthExtras benefit programs by their customers.

The contracts are typically for a term of 12 months, with automatic
annual renewal unless cancelled upon written notice 30 or 90 days prior to
an anniversary date. Some contracts also provide for termination by either party
without cause upon 30 or 90 days prior written notice.

Christopher Reeve has entered into an exclusive agreement to
assist HealthExtras in developing products, making consumers aware of
various catastrophic events that could threaten their families' security and
promoting the HealthExtras brand. Mr. Reeve appears in a number of television,
radio and print advertisements to promote HealthExtras programs and our website.
We have an agreement with Cambria Productions, Inc. f/s/o Christopher Reeve,
which had an initial three-year term from July 8, 1997. This agreement has been
extended through June of 2005 with renewal provisions through 2010.

PRODUCTS OFFERED

Through membership in a HealthExtras program, participants have
access to various combinations of health and disability benefits. Further,
we seek to provide flexibility for members to customize the package of benefits
included in their HealthExtras program to meet their individual needs.
HealthExtras does not assume any underwriting risks for the benefits included in
its programs. The principal benefits, which can be obtained through membership
in HealthExtras, include:

* Catastrophic accidental disability
* Short-term income replacement
* Pharmacy benefits
* Accidental death and disability

The significant majority of HealthExtras' revenue and membership to
date is based on purchases of the catastrophic disability product.

OTHER STRATEGIC RELATIONSHIPS

Reliance National Insurance Company

During 2000, HealthExtras was required to discontinue its relationship
with Reliance National Insurance Company ("Reliance"). Reliance had been
HealthExtras' primary underwriting partner and had issued insurance coverage for
our catastrophic disability, organ transplant and excess medical programs. In
general, our marketing partners require that our insurance underwriters maintain
an A.M. Best claims paying rating of A-minus or better as a condition for
marketing to their customers. When Reliance's rating was reduced and remained
below this minimum standard we began the process of transitioning our members to
other carriers; and in the case of the excess medical and organ transplant
programs to termination of coverage. Effective September 1, 2000, we had
successfully implemented these changes with a minimum of disruption or loss of
business.

United Payors & United Providers, Inc. (Now BCE Emergis Corporation)

NETWORK ACCESS

We continue to maintain a royalty agreement with BCE Emergis
Corporation ("BCE"), formerly United Payors & United Providers, Inc., which
provides us the ability to market access to their national network of hospitals,
physicians, and other medical providers in conjunction with our health care
products. Because Reliance was the sole underwriter of the insurance components
of these programs, the termination of that relationship resulted in a complete
loss of membership in programs to which the royalty was applicable. We are
currently investigating alternative underwriting relationships and plan to
reintroduce comparable programs as quickly as possible.

ADMINISTRATIVE SERVICES

During 2000, the Company significantly reduced its reliance on
BCE for personnel, information systems, and facilities support. Currently,
HealthExtras subleases our office space and, through a utilization-based
contract, accesses certain shared technology systems, including the
communications grid.

COMPETITION

Since HealthExtras programs incorporate insurance benefits, we consider
that our programs compete with those of online and traditional providers of
insurance products. The market for selling insurance products over the Internet
is new, rapidly evolving and intensely competitive. Current and new competitors
may be able to launch new websites at a relatively low cost.

We also face competition from the traditional distributors of
insurance, such as captive agents, independent brokers and agents, and
direct distributors of insurance. Insurance companies and distributors of
insurance products are increasingly competing with banks, securities firms and
mutual fund companies that sell insurance or alternative products to similar
consumers. Traditionally, regulation separated much of the activity in the
financial services industry. However, recent regulatory changes have begun to
permit other financial institutions to sell insurance also.

We potentially face competition from unanticipated alternatives
to our benefit programs from a number of large Internet companies and
services that have expertise in developing online commerce and in facilitating
Internet traffic, including America Online, Microsoft and Yahoo. These potential
competitors could choose to compete with us directly or indirectly through
affiliations with insurers, insurance agents and brokers and other electronic
commerce companies. Other large companies with strong brand recognition,
technical expertise and experience in Internet commerce could also seek to
compete with us. Competition from these and other sources could harm our
business, results of operations and financial condition.

We believe that the principal competitive factors in our markets are
price, brand recognition, marketing expertise, website accessibility,
ability to fulfill customer purchase requests, customer service, reliability of
delivery, ease of use, and technical expertise and capabilities. Many of our
current and potential competitors, including Internet directories and search
engines and traditional insurance agents and brokers, have longer operating
histories, larger consumer bases, greater brand recognition and significantly
greater financial, marketing, technical and other resources than we. Certain of
these competitors may be able to secure products and services on more favorable
terms than we can obtain. In addition, many of these competitors may be able to
devote significantly greater resources than we for developing websites and
systems, marketing and promotional campaigns, attracting traffic to their
websites and attracting and retaining key employees.

Any of the firms described above could seek to compete against us
through traditional channels or by copying our products or business model.
Increased competition may result in reduced operating margins, loss of market
share and damage to our brand. We cannot assure you that we will be able to
compete successfully against current and future competitors or that competition
will not harm our business, results of operations and financial condition.

As we expand pharmacy offerings, we will face additional industry
specific competition. Competitors in this industry include other pharmacy
benefit management companies, drug retailers, physician practice management
companies, and insurance companies/health maintenance organizations. We may also
experience competition from other sources in the future. Pharmacy benefit
management companies compete primarily on the basis of price, service, reporting
capabilities and clinical services. In most cases, the competitors listed above
are large, profitable and well-established companies with substantially greater
financial and marketing resources than our own.

REGULATION

Since the HealthExtras programs include insurance benefits,
distribution of our programs must satisfy applicable legal requirements
relating, among other things, to policy form and rate approvals, the licensing
laws for insurance agents and insurance brokers, and the satisfaction by a
HealthExtras member who receives the insurance benefit of requisite criteria,
for example being a resident of a state which has approved the insurance policy.
We believe we satisfy applicable requirements. The underwriter of the insurance
benefits included in HealthExtras programs is responsible for obtaining
regulatory approvals for those benefits. Independent licensed insurance agencies
are responsible for the solicitation of insurance benefits involved in
HealthExtras programs.

Complex laws, rules and regulations of each of the 50 states and
the District of Columbia pertaining to insurance impose strict and
substantial requirements on insurance coverage sold to consumers and businesses.
These factors are also relevant to insured pharmacy programs marketed by
HealthExtrasRx and underwritten by third-party insurers. Compliance with these
laws, rules and regulations can be arduous and imposes significant costs. Each
jurisdiction's insurance regulator typically has the power, among other things,
to:

* administer and enforce the laws and promulgate rules and
regulations applicable to insurance, including the quotation of
insurance premiums;

* approve policy forms and regulate premium rates;

* regulate how, by which personnel and under what circumstances an
insurance premium can be quoted and published; and

* regulate the solicitation of insurance and license insurance
companies, agents and brokers who solicit insurance.

State insurance laws and regulations are complex and broad in scope
and are subject to periodic modification as well as differing
interpretations. There can be no assurance that insurance regulatory authorities
in one or more states will not determine that the nature of our business
requires us to be licensed under applicable insurance laws. A determination to
that effect or that we or our business partners are otherwise not in compliance
with applicable regulations could result in fines, additional licensing
requirements or inability to market our products in particular jurisdictions.
Such penalties could significantly increase our general operating expenses and
harm our business. In addition, even if the allegations in any regulatory or
legal action against us turn out to be false, negative publicity relating to any
such allegation could result in a loss of consumer confidence and significant
damage to our brand.

The distribution of our programs including an insurance component
over the Internet subjects us to additional risk as most insurance laws and
regulations have not been modified to clarify or amend their application to
Internet transactions. Currently, many state insurance regulators and
legislators are exploring the need for specific regulation of insurance sales
over the Internet. Such regulation could dampen the growth of the Internet as a
means of providing insurance services. Moreover, the application of laws
governing general commerce on the Internet remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing insurance,
intellectual property, privacy and taxation apply to the Internet. In addition,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws and regulations that may
impose additional burdens on companies conducting business over the Internet.
Any new laws or regulations or new interpretations of existing laws or
regulations relating to the Internet could harm our business.

We believe that we are currently in compliance with applicable
legal requirements. However, the future regulation of insurance sales via
the Internet as a part of the new and rapidly growing electronic commerce
business sector is unclear. If additional state or federal laws or regulations
are adopted, they may have an adverse impact on us.

One of the means by which the Company markets its programs is
telemarketing, which it generally outsourced to third parties. Telemarketing
has become subject to an increasing amount of Federal and state regulation as
well as general public scrutiny in the past several years. For example such
regulation limits the hours during which telemarketers may call consumers and
prohibits the use of automated telephone dialing equipment to call certain
telephone numbers. The Federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994 and Federal Trade Commission ("FTC") regulations prohibit
deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and
state attorneys general have authority to prevent certain telemarketing
activities deemed by them to violate consumer protection. Some states have
enacted laws and others are considering enacting laws targeted directly at
regulating telemarketing practices, and there can be no assurance that any such
laws, if enacted, will not adversely affect or limit the Company's current or
future operations. Compliance with these regulations is generally the shared
responsibility of the Company, its sub-contractors and its marketing partners.

EMPLOYEES

As of December 31, 2000, we had 78 personnel whose services are devoted
full time to HealthExtras or IPM. We have never had a work stoppage. A
collective bargaining unit does not represent our personnel. We consider our
relations with our personnel to be good. Our future success will depend, in
part, on our ability to continue to attract, integrate, retain and motivate
highly qualified technical and managerial personnel, for whom competition is
intense.

ITEM 2. PROPERTIES
- -------------------

Our primary executive, administrative and operating offices are
located in approximately 19,700 square feet of office space in Rockville,
Maryland under a sublease that expires on March 31, 2004. Additionally, IPM's
executive, administrative, and operating offices consist of approximately 6,800
square feet of office space in Birmingham, Alabama under a lease that expires on
March 31, 2003. We believe that our office space is adequate for our existing
needs and that suitable additional space on commercially reasonable terms will
be available as required.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------

From time to time we become subject to legal proceedings and claims
in the ordinary course of business. Such legal proceedings and claims could
include claims of alleged infringement of third party intellectual property
rights, notices from state regulators that we may have violated state
regulations, and employment related disputes. Such claims, even if without
merit, could result in the significant expenditure of our financial and
managerial resources. We are not aware of any legal proceedings or claims that
we believe will, individually or in the aggregate, significantly harm our
business, financial condition or results of operations in any material respect.

ITEM 4. SUBMISSION OF MATTERS FOR A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------

There were no matters submitted to a vote of security holders during
the quarter ended December 31, 2000.

PART II

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

The common stock has been quoted on the Nasdaq National Market under
the symbol "HLEX" since the Company's initial public offering on December
14, 1999. The following table sets forth for the period indicated the high and
low sales prices for the common stock:

High Low
1999
- ----

December 14 - December 31................... $ 12.38 $ 7.38

2000
- ----
First quarter............................... $ 11.97 $ 3.88
Second quarter.............................. $ 6.13 $ 3.31
Third quarter............................... $ 6.06 $ 2.50
Fourth quarter.............................. $ 6.00 $ 2.38

2001
- ----
First quarter (through March 26, 2001)...... $ 6.44 $ 3.25

On March 26, 2001 the last closing sale price of the common stock,
as reported by the Nasdaq National Market was $5.09 per share. As of March 26,
2001, the Company had approximately 2,211 stockholders of record. The Company
did not pay any cash dividends in 2000 and has no plans to do so in the
foreseeable future.

In connection with the establishment of the strategic relationship with
UnumProvident Corporation, discussed under "Management's Discussion and Analysis
of Financial Condition and Results of Operation", on October 10, 2000 the
Company sold 1,302,600 shares of its common stock for net proceeds of $5,862,000
to an affiliate of UnumProvident. This sale was made in a private transaction in
reliance upon the exemption from the registration requirements of the Securities
Act of 1933 afforded by Section 4(2) of that Act. In connection with this sale,
the Company entered into agreements related to registration rights and certain
restrictions on transfers of the shares for two years.

In connection with the establishment of a marketing relationship with
J.C. Penney Life Insurance Company, the Company entered into a Warrant
Agreement which could require the Company to issue to J.C. Penney warrants to
purchase up to a maximum aggregate of 4.2 million shares of common stock at
exercise prices ranging from $5.21 to $15.63 per share. Issuances of warrants is
dependent upon specific annualized thresholds of revenue attributable to the
marketing relationship, to be measured for the tweleve-month periods ending
June 30, 2001, 2002 and 2003 and such revenue as a percentage of Company
revenue for 2001 and 2002.

The net proceeds to the Company from the December 17, 19999 initial
public offering of the 5,500,000 shares of common stock were approximately
$54.9 million after deducting underwriting discounts and offering expenses
of approximately $4.2 million and $1.4 million, respectively. As of December 31,
2000, we had used approximately $26.0 million of the net proceeds. Of this
amount, approximately $2.9 million was used to repay borrowings under a line of
credit and approximately $2.3 million was used to repay a non-interest bearing
loan from the Chairman of the Board of the Company. Approximately $7.5 million
was used for the acquisition of International Pharmacy Management, Inc. The
remainder was used to fund operating activities, in particular those relating to
the Company's sales and marketing efforts. The amount of the net proceeds not
used as of December 31, 2000 has been invested in short-term, investment grade,
and interest bearing securities.
9

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
(In thousands except per share data)

The following selected financial data has been derived from the
audited financial statements of the Company and its predecessor companies.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited consolidated financial statements, including notes thereto.

For the Period
October 23, 1996
(date of
inception) to For the Years Ended December 31,
--------------------------------
December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----

Statement of Operations Data:
Revenue............................... $ -- $ -- $ -- $ 5,327 $ 44,178

Direct expenses....................... -- -- -- 3,096 24,303
Product development and
marketing........................ 810 3,380 4,936 10,331 31,211
General and administrative............ 146 1,306 1,598 2,996 8,458
-------- ----- ----- -------- ----------

Operating loss........................ (956) (4,686) (6,534) (11,096) (19,794)
Interest income (expense), net........ -- (556) (110) (351) 2,069
Other income (expense), net........... (5) 589 -- (73) 499
--------- -------- ---------- ------------- ----------

Net loss.............................. $ (961) $ (4,653) $ (6,644) $ (11,520) $ (17,226)
============ =========== =========== ============= ===========

Basic and diluted net loss per share. $ -- $ -- $ -- $ (0.56) (0.62)
Weighted average shares of
common stock outstanding......... -- -- -- 20,588 28,010

Pro forma basic and diluted net loss . $ (0.05) $ (0.26) $ (0.38) $ -- $ --
per share (1)....................
Pro forma weighted average shares of
common stock outstanding (1)..... 17,680 17,680 17,680 -- --

December 31,
----------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----

Balance Sheet Data:
Cash and cash equivalents........... $ 3,526 $ 9,651 $ 219 $ 46,971 $ 28,921
Total assets........................ 4,226 12,710 4,608 53,662 52,044
Total liabilities................... 188 7,770 5,531 6,298 15,806
Total stockholders' (members') equity
(deficit)........................... 4,038 4,940 (923) 47,364 36,239

--------------
(1) Reflects the formation of HealthExtras, Inc. and the Reorganization
as if those events had taken place at the beginning of the period, except
that no effect is given to the investment by Capital Z Healthcare Holding Corp.
in HealthExtras prior to May 27, 1999.

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

This Form 10-K may contain forward-looking statements (see "Certain
Factors That May Affect Future Operating Results or Stock Prices") within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve a number of risks and uncertainties. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
in this report and in our other filings with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect our business.

OVERVIEW

We expect to generate a significant portion of our revenue from the
sale of membership programs which provide disability benefits. While
product development has been ongoing for the past several years, we began
revenue-generating activities in January 1999. Prior to that time, we were a
development stage enterprise, which designed and test marketed various benefit
combinations. To date, we have primarily focused on the distribution of our
membership programs to our business partners' customers and building recognition
of our program brand. Christopher Reeve is featured prominently in our online,
television and print marketing campaigns to build brand awareness. Our objective
is to affect a growing portion of our program distributions over the Internet.

We believe our consumer research and marketing efforts have
given us valuable insight into the consumer perceptions and preferences
regarding the value and limitations of prevailing insurance products.
Accordingly, we believe that our programs are well positioned to address the
needs of our targeted market segments. As of December 31, 2000, more than
450,000 members had enrolled in our programs.

Revenue is generated by payments for program benefits. The
primary determinant of HealthExtras' revenue recognition is monthly program
enrollment. In general, revenue is recognized based on the number of members
enrolled in each reporting period multiplied by the applicable monthly fee for
their specific membership program. The revenue recognized by HealthExtras
includes the cost of the membership benefits, which are supplied by others,
including the insurance components. Revenue from program payments received, and
related direct expenses, are deferred to the extent that they are applicable to
future periods or to any refund guarantee we offer. As of December 31, 2000,
initial revenue was deferred for approximately 75,000 program members.

Direct expenses consist principally of marketing and processing fees
and the cost of benefits provided to program members. Direct expenses are a
function of the level of membership during the period and the specific set of
program features selected by members. The coverage obligations of our benefit
suppliers and the related expense are determined monthly, as are the remaining
direct expenses. HealthExtras frequently maintains a prepaid expense balance
with respect to the features of its programs supplied by others. Where amounts
are prepaid, direct expense is recognized based on the actual membership levels
in each program. These prepaid amounts were $731,800 and $682,300 at December
31, 1999 and December 31, 2000, respectively. The carrying value of the
prepayment is adjusted at the end of each quarter based on factors including
enrollment levels in each product, enrollment trends, and the remaining portion
of the unexpired prepayment period. In the event that a period of coverage was
purchased in advance, and there were insufficient members to utilize the
coverage, the value would expire and be expensed by HealthExtras without any
related revenue. HealthExtras believes that current enrollment trends will allow
the balance at December 31, 2000 to be fully utilized prior to expiration.

Our limited history makes it difficult to evaluate our business
and prospects. We have incurred substantial operating losses since our
inception, and we intend to incur ongoing marketing and brand development
expenses over the next several years. We anticipate that our operating losses
will continue in the near term. There can be no assurance that we will generate
significant revenues or profitability in the future.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

HealthExtras incurred an operating loss of $19.8 million for the year
ended December 31 2000, consisting of a $19.7 million loss from the
Company's core operations, and a $100,000 loss associated with IPM operations.
Revenue of $44.2 million consisted of program member payments earned during the
period of $39.3 million and sales revenue for 2000 generated by IPM's pharmacy
benefit management services of $4.9 million from the acquisition date of
November 1, 2000. Cash collections for program enrollments for the year ended
December 31, 2000 totaled $38.8 million. HealthExtras incurred an operating loss
of $11.1 million for the year ended December 31, 1999. Revenue of $5.3 million
consisted of annual program member payments earned during the period. Cash
collections for program enrollments through December 31, 1999 totaled $10.5
million. The increase in revenue and program receipts was primarily attributable
to the net growth in our membership during the year ended December 31, 2000.

Operating expenses for the year ended December 31, 2000 totaled
$64.0 million. Direct expenses of $24.3 million, consisted of $19.8 million
in costs for benefits included in our programs and fees payable to our
distribution partners and $4.5 million in direct costs associated with IPM
operations. These direct expenses represented 38% of operating expenses for the
period. For the year ended December 31, 2000, HealthExtras incurred $31.2
million in product development and marketing expenses, or 49% of total operating
expenses, $1.2 million of which was for the continuing creative development of
promotional sales materials, $4.9 million for media production, including
television, radio, Internet and print advertisements, $21.2 million for media
distribution, $1.1 million in product endorsement costs, and $2.8 million in
market research, product development, and other marketing-related expenses.
General and administrative expenses for the year totaled $8.5 million or 13% of
total operating expenses, $8.0 million of which was attributable to the
Company's core operations and approximately $448,000 was associated with IPM
operations. These expenses included $4.2 million in compensation and benefits,
$653,000 in professional fees, $467,000 in facility costs, $308,000 in telephone
and software costs, $380,000 in other personnel costs, $274,000 in travel
expenses, and $702,000 in depreciation and amortization. Interest income for the
period was approximately $2.1 million.

Total operating expenses for the year ended December 31, 1999 totaled
$16.4 million. Direct expenses of $3.1 million consisted of the cost of
obtaining the benefits included in our programs, and marketing and other fees
payable to our distribution partners. These direct expenses represented 19% of
operating expenses for the year. For the year ended December 31, 1999,
HealthExtras incurred $10.3 million in product development and marketing
expenses, or 63% of total operating expense, $4.3 million of which was incurred
for the continuing creative development of promotional and sales materials,
including television and print advertisements, and $1.1 million of which was
product endorsement costs. Media production expenses totaled $5.1 million for
print and Internet advertisement production and distribution. General and
administrative expenses for the year totaled $3.0 million or 18% of total
operating expenses. These expenses included $1.7 million in compensation and
benefits and $205,000 in professional services. Interest expense totaled
$350,000. The increase in operating expenses was attributable to the net growth
in our membership as well as expanded product development and marketing for the
year ended December 31, 200.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

HealthExtras incurred an operating loss of $11.1 million for the year
ended December 31, 1999. Revenue of $5.3 million in 1999 consisted of annual
program member payments earned during the period. Cash collections for
program enrollments through December 31, 1999 totaled $10.5 million. There was
no revenue in 1998.

Operating expenses for the year ended December 31, 1999 totaled
$16.4 million. Direct expenses of $3.1 million consisted of the cost of
obtaining the benefits included in our programs, and marketing and other fees
payable to our distribution partners. These direct expenses represented 19% of
operating expenses for that period. For the year ended December 31, 1999,
HealthExtras incurred $10.3 million in product development and marketing
expenses, or 63% of total operating expenses, $4.3 million of which was incurred
for the continuing creative development of promotional and sales materials,
including television and print advertisements, and $1.1 million of which was
product endorsement costs. Media production expenses totaled $5.1 million for
print and Internet advertisement production and distribution. General and
administrative expenses for that period totaled $3.0 million or 18% of total
operating expenses. These expenses included $1.7 million in compensation and
benefits and $205,000 in professional services.

Total operating expenses for the twelve months ended December 31, 1998
were $6.5 million. In 1998, total product development and marketing expenses
were $4.9 million, representing 75% of total operating expenses. These expenses
included $2.4 million for media development, consisting of $1.0 million in
product endorsement costs, $631,000 in business partner marketing materials,
$133,000 in test-marketing costs and approximately $650,000 in pre-production
creative costs. Production-related expenses in 1998 total $1.1 million, of which
$765,000 was in print advertisements and fulfillment materials and $330,000 was
for the production of television and radio promotions. Also in 1998, $626,000
was devoted to market research and product development consulting. Additional
costs of $237,000 of compensation expense, $324,000 in travel expense, and
$220,000 of other costs were incurred as product development and marketing
expenses. General and administrative expenses for the same period totaled $1.6
million, approximately 25% of total operating costs, and included approximately
$630,000 in compensation and $224,000 in professional and consulting fees.

LIQUIDITY AND CAPITAL RESOURCES

In October 2000 we issued 1,302,600 shares of our common stock
to an affiliate of UnumProvident in exchange for net proceeds of $5,862,000.
This sale was completed in connection with a strategic relationship intended to
accelerate and assist our development and introduction of UnumProvident's broad
and attractive array of insurance products into our programs. This relationship
will also allow us to collaborate on the use of the Internet to facilitate
product distribution in the workplace market and establish a distribution
platform with product offerings for individual consumers and small businesses
not well served by traditional insurance distribution channels. Pursuant to this
and related agreements, UnumProvident will be the preferred underwriter for
various HealthExtras products.

HealthExtras is using the proceeds from this private placement to
implement jointly developed marketing initiatives with respect to current
and planned disability, life, accidental death and disability, and long-term
care products. The implementation plans will include the establishment of
channel specific teams to address consumer and small business initiatives with
financial institutions, associations, affinity groups and other membership
organizations through direct mail, Internet, inserts, telemarketing, e-mails and
other direct consumer marketing.

In December 1999, we completed the sale to the public of 5,500,000
shares of the Company's common stock and received proceeds (net of
underwriting commissions and expenses of $5.6 million) of approximately $54.9
million. As of December 31, 2000, we had $28.9 million in cash and cash
equivalents, $21.4 million in working capital and no debt.

The primary commitment of our capital resources is to fund
expenditures relating to marketing and brand development we intend to incur
over the next several years and to fund the operating losses we anticipate in
the near term. We also will continue to selectively evaluate acquisition
opportunities.

We currently anticipate our available cash resources will be
sufficient to meet our planned working capital, capital expenditures and
business expansion requirements for approximately the next 24 months. There can
be no assurance that we will not require additional capital prior to the
expiration of that 24-month period. Even if such funds are not required, we may
seek additional equity or debt financing. We cannot assure you that such
financing will be available on acceptable terms, if at all, or that such
financing will not be dilutive to our stockholders.

RECENT ACCOUNTING PRONOUNCEMENTS

The U. S. Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" during the year ended December 31, 2000. SAB No. 101, as amended,
became effective during the year ended December 31, 2000 and did not have a
significant impact on the Company's financial position or results of operation.

In June 1998, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." We will be required to adopt
SFAS No. 133 for the quarter ending March 31, 2001. Because we do not currently
hold any derivative financial instruments and do not expect to engage in hedging
activities, adoption of SFAS No. 133 is expected to have no material impact on
our financial condition or results of operations.

INTEREST RATE AND EQUITY PRICE SENSITIVITY

We are subject to interest rate risk on our short-term investments
and equity price risk in our marketable securities. We have determined that
a 10% move in the current weighted average interest rate of our short-term
investments and/or a 10% move in the weighted average market price of our
marketable securities would not have a material effect in our financial
position, results of operations and cash flows in the next year.

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

FACTORS RELATED TO OUR BUSINESS

Because we have a limited operating history, our business prospects are
subject to a great deal of uncertainty

While our product development efforts have been ongoing for the
past two years, we only began revenue-generating activities in January 1999.
This limited history of operating our business means that our business prospects
are subject to a great deal of uncertainty and risks.

We have not been profitable and may not become profitable in the future

We have incurred operating losses since our inception. Because we
plan to continue to significantly increase our operating expenses in an
attempt to increase our member base, we will need to generate significantly
higher revenues to achieve profitability. Even if we achieve profitability, we
may not be able to maintain profitability in the future. In addition, as our
business model evolves, we expect to introduce a number of new products and
services that may or may not be profitable for us.

Our future profitability is dependent, to a significant extent, upon
increased consumer demand for additional products, which we are in the process
of developing or may develop in the future

Most of our revenue currently is derived from members purchasing
membership programs, which include disability benefits. We believe our
future profitability is dependent upon achieving substantial increases in sales
of our programs, including those providing excess health insurance coverage and
other benefits we are developing or may develop in the future. To the extent
these products include insurance features, they generally will require
regulatory approvals. If we do not achieve these increased sales, we may never
achieve profitability.

If the sale of our membership programs over the Internet does not achieve
widespread consumer acceptance, we may never achieve profitability

To date, we primarily have promoted our membership programs through
mailings to credit card or other customers of banks and other entities.
However, we intend to significantly increase the distribution of our programs
over the Internet. Thus, our future profitability is dependent in large part on
our ability to achieve widespread consumer acceptance of purchasing our programs
over the Internet. The development of an online market for programs, such as
those we offer, has only recently begun, is rapidly evolving and likely will be
characterized by an increasing number of market entrants. Therefore, there is
significant uncertainty with respect to the viability and growth potential of
this market

There can be no assurance that an online market for our programs
will develop or that consumers will significantly increase their use of the
Internet for obtaining the types of products and services included in the
programs that we sell. If an online market for these products fails to develop,
or develops more slowly than we expect, or if our programs do not achieve
widespread market acceptance, the prospects for our achieving profitable
operations will be significantly reduced.

If we lose one or more of our marketing relationships, our access to
potential customers would decline and sales and revenues would suffer

A significant majority of all of our program sales is attributable
to two marketing partner relationships. If we lose one or more of these
marketing relationships and are unable to replace them with other marketing
outlets, our access to potential customers would decline and sales and revenue
would suffer.

Our membership growth is increasingly dependent on telemarketing

A significant percentage of our membership growth during 2000
was attributable to telemarketing sales. These sales involve a much higher
percentage of monthly rather than annual sales than was our previous experience.
The combination of these factors is likely to result in higher initial
cancellation rates and reduced enrollment persistency.

Our pharmacy benefit management operations face significant competition

The pharmacy benefit management industry is relatively consolidated
and dominated by large companies with significant resources. Many of the
large pharmacy benefit management companies are owned by large companies,
including pharmaceutical manufacturers, which can provide them with significant
purchasing power and other advantages, which we do not have. Competitors in this
industry include other pharmacy benefit management companies, drug retailers,
physician practice management companies, and insurance companies/health
maintenance organizations. We may also experience competition from other sources
in the future. Pharmacy benefit management companies compete primarily on the
basis of price, service, reporting capabilities and clinical services. In most
cases, the competitors referenced above are large, profitable and
well-established companies with substantially greater financial and marketing
resources than our resources.

Our pharmacy benefit management business relies on real-time management
information systems

IPM operates an electronic network connecting approximately 50,000
retail pharmacies to process third-party claims. The systems that IPM
utilizes are provided by a third-party. Because claims are adjudicated in real
time, systems availability and reliability are key to meeting IPM customers'
service expectations. Any interruption in real time service, either through
systems availability or telecommunications disruptions can significantly damage
the quality of service we provide. IPM depends on third-party proprietary
software to perform all of its automated transaction processing. While IPM has
not experienced significant or detrimental service interruptions, and has
significant back-up database capability, there can be no assurance that the
business will not be harmed by these service interruptions.

If we are not able to achieve a high level of brand recognition and consumer
demand for our programs, we will not achieve the level of revenues we need to be
profitable

There are a growing number of resources that offer consumers
access to information regarding insurance coverage alternatives and product
pricing. Our programs may be considered to compete with these and other
distribution channels for insurance products. We believe that broader
recognition of the HealthExtras brand and increased consumer demand for our
programs are essential to our future success. To attempt to achieve that
recognition and demand, we intend to continue to pursue an aggressive
brand-enhancement strategy consisting of our traditional print advertising, as
well as national radio and television advertising, online marketing and
promotional efforts. This effort will require significantly greater expenditures
than we have been able to make to date. If these expenditures do not result in a
sufficient increase in revenues, we will not achieve profitability.

The loss of our relationship with Christopher Reeve to promote our programs
could significantly impair our brand recognition and, thus, our ability to sell
our programs

Our agreement for Christopher Reeve to promote our programs
currently expires in July 2002. The loss of the Christopher Reeve
identification with our programs, upon termination of our contract or otherwise,
could significantly reduce our ability to sell our programs.

If we lose our relationships with our benefit providers, we could have
difficulty meeting demand for the products and services included in the programs
we sell

We are dependent on the providers of benefits included in our
programs. These benefits are provided pursuant to arrangements with Unum
Life Insurance Company of America, The Chubb Group of Insurance Companies,
Zurich American Insurance Company and others that may be terminated on
relatively short notice. If we lose these relationships and are unable to
replace them quickly and cost effectively, we would not be able to satisfy
consumer demand for our programs.

We may experience significant fluctuations in our quarterly results of
operations, which will make it difficult for investors to make reliable
period-to-period comparisons and may contribute to volatility in our stock price

Our quarterly expenses have fluctuated significantly in the past,
and we expect our quarterly revenues and expenses to continue to fluctuate
significantly in the future. The causes for fluctuations could include, among
other factors:

* changes in acceptance levels for our benefit program by consumers;

* our levels of marketing expenditures;

* renewal rate experience for our benefit programs;

* the initiation of new or increased distribution methods, services
and products by our competitors;

* price competition by insurance companies in their sale of insurance
products; and

* the level of Internet use to purchase insurance or similar type
products.

We believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful and not good indicators of our future
performance. Due to the above-mentioned and other factors, it is possible that
in one or more future quarters our operating results will fall below the
expectations of securities analysts and investors. If this happens, the trading
price of our common stock would likely decrease.

If we do not manage our growth effectively, we will not be able to operate
profitably

We only began offering our programs this year, and we have been
expanding our operations rapidly. Our growth strategy, if successful, will
result in further expansion. We can achieve profitable operation, however,
only if we are able to manage our growth effectively. Our growth in operations
has placed significant demands on our management and other resources, which is
likely to continue. Under these conditions, it is important for us to retain our
existing management and to attract, hire and retain additional highly skilled
and motivated officers, managers and employees and improve existing systems
and/or implement new systems.

We may not be successful in managing or expanding our
operations or maintaining adequate management, financial and operating systems
and controls.

If the providers of the benefits included in our programs fail to provide
those benefits, we could become subject to liability claims by our program
members

We arrange for the provision by others of the benefits included
in our member programs. If the firms with which we have contracted to
provide those benefits fail to provide them as required, or are negligent or
otherwise culpable in providing them, we could become involved in any resulting
claim or litigation.

FACTORS RELATED TO REGULATION

If we fail to comply with all of the various and complex laws and
regulations governing our products and marketing techniques, we could be subject
to fines, additional licensing requirements or the inability to market in
particular jurisdictions

Complex laws, rules and regulations of each of the 50 states
and the District of Columbia pertaining to insurance impose strict and
substantial requirements on insurance coverage sold to consumers and businesses.
Compliance with these laws, rules and regulations can be arduous and imposes
significant costs. The underwriter of the insurance benefits included in
HealthExtras programs is responsible for obtaining and maintaining regulatory
approvals for those benefits. If the appropriate regulatory approvals for the
insurance benefits included in our programs are not maintained, we would have to
stop including those benefits. An independent licensed insurance agency is
responsible for the solicitation of insurance benefits involved in HealthExtras
programs. Each jurisdiction's insurance regulator typically has the power, among
other things, to:

* administer and enforce the laws and promulgate rules and
regulations applicable to insurance, including the quotation of
insurance premiums;

* approve policy forms and regulate premium rates;

* regulate how, by which personnel and under what circumstances, an
insurance premium can be quoted and published; and

* regulate the solicitation of insurance and license insurance
companies, agents and brokers who solicit insurance.

State insurance laws and regulations are complex and broad in scope
and are subject to periodic modification as well as differing
interpretations. There can be no assurance that insurance regulatory authorities
in one or more states will not determine that the nature of our business
requires us to be licensed under applicable insurance laws. A determination to
that effect or that we or our business partners are not in compliance with
applicable regulations could result in fines, additional licensing requirements
or inability to market our programs in particular jurisdictions. Such penalties
could significantly increase our general operating expenses and harm our
business. In addition, even if the allegations in any regulatory or legal action
against us turn out to be false, negative publicity relating to any such
allegation could result in a loss of consumer confidence and significant damage
to our brand. We believe that because many consumers and insurance companies are
not yet comfortable with the concept of purchasing insurance online, the
publicity relating to any such regulatory or legal issues could significantly
reduce sales of our programs.

Regulation of the sale of insurance over the Internet and of electronic
commerce generally is unsettled, and future laws, regulations and
interpretations could hinder our ability to offer programs over the Internet

We could be subject to legal liability based upon the information on our
website

Our members may rely upon the information published on our website
regarding insurance coverage, exclusions, limitations and ratings, and the
other benefits included in our programs. To the extent that the information we
provide is not accurate, we could be liable for damages. These types of claims
could be time-consuming and expensive to defend, divert management's attention,
and could cause consumers to lose confidence in our service. As a result, these
types of claims, whether or not successful, could harm our business.

Our pharmacy benefit management business must comply with a range of State
and Federal regulatory requirements

Various forms of legislation and government regulations affect or
could affect providers of pharmacy benefit management services. Among the
most prominent forms of such regulation are the following:

Open Network Legislation. Numerous states have adopted "any
willing provider" legislation, which requires pharmacy network sponsors to
admit for network participation any retail pharmacy willing to meet a healthcare
plan's price and other terms.

Anti-Remuneration Legislation. "Anti-kickback" statutes at the federal
and state level prohibit an entity from paying or receiving any compensation to
induce the referral of healthcare plan beneficiaries or the purchase of items or
services for which payment may be made under such healthcare plans.
Additionally, state and federal regulations have been the basis for
investigations and multi-state settlements relating to financial incentives
provided by pharmaceutical manufacturers to retail pharmacies in connection with
pharmaceutical switching programs. To our knowledge, these laws have not been
applied to prohibit pharmacy benefit management companies from receiving amounts
from pharmaceutical manufacturers in connection with pharmaceutical purchasing
and formulary management programs, to prohibit therapeutic substitution programs
conducted by independent pharmacy benefit management companies, or to prohibit
contractual relationships such a we have regarding these types of programs.

Patient Choice. Some states have enacted legislation that prohibits the
plan sponsor from implementing certain restrictive design features, and many
states have introduced legislation to regulate various aspects of managed care
plans, including provisions relating to the pharmacy benefit. Legislation has
been introduced in some states to prohibit or restrict therapeutic substitution,
or to require coverage of all FDA approved drugs. Other states mandate coverage
of certain benefits or conditions. Such legislation does not generally apply to
us, but it may apply to certain of our customers, such as HMOs and health
insurers. If such legislation were to become widespread and broad in scope, it
could have the effect of limiting the economic benefits achievable through
pharmacy benefit management and consequently make our services less attractive.

Consumer Protection Legislation. Most states have consumer protection
laws that have been the basis for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with drug switching programs. We believe that our
contractual relationships with drug manufacturers and retail pharmacies do not
include the features that were viewed by adversely by enforcement authorities.
However, no assurance can be given that we will not be subject to scrutiny or
challenge under one or more of these laws.

Licensure. Many states have licensure or registration laws governing
certain types of ancillary healthcare organizations, including preferred
provider organizations, third party administrators and utilization review
organizations. These laws differ significantly from state to state, and the
application of such laws to the activities of pharmacy benefit managers is often
unclear. We have registered under such laws in those states in which we have
concluded such registration is required.

Confidential Information. Most of our activities involve the receipt
or use by us of confidential, medical information concerning individual
members, including the transfer of the confidential information to the member's
health benefit plan. In addition, we use aggregated population data for research
and analysis purposes. Legislation has been proposed at the federal level and in
several states to restrict the use and disclosure of confidential medical
information the enactment of such legislation could require significant changes
to a our business operations.

Licensure. Our mail service pharmacy is duly licensed and in good
standing, in accordance with the laws and regulations of the State of
Alabama.

Other Regulation. Many of the states into which we deliver
pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with the board of pharmacy or similar regulatory
body in the state. These states generally permit the mail service pharmacy to
follow the laws of the state within which the mail service pharmacy is located.
We have registered in every state in which, to our knowledge, such registration
is required. Other statutes and regulations impact our mail service operations.
Federal statutes and regulations govern the labeling, packaging, transportation,
delivery, advertising and adulteration of prescription drugs and the dispensing
of controlled substances.

FACTORS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE

If we experience failures of, or capacity constraints in, our systems or the
systems of third parties on which we rely, sales of our programs likely would be
reduced and our reputation could be damaged

We use both internally developed and third party systems to operate
the Internet aspects of our business. If the number of users of our service
increases substantially, we will need to significantly expand and upgrade our
technology, transaction processing systems and network infrastructure. We do not
know whether we will be able to accurately project the rate or timing of any
increases, or expand and upgrade our systems and infrastructure to accommodate
any increases in a timely manner. Our ability to facilitate transactions
successfully and provide high quality customer service also depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. Our service has experienced periodic system interruptions, and
it is likely that these interruptions will continue to occur from time to time.
Additionally, our systems and operations are vulnerable to damage or
interruption from human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, acts of vandalism and similar
events. We may not carry sufficient business interruption insurance to
compensate for losses that could occur. Any system failure that causes an
interruption in service or decreases the responsiveness of our service would
impair our revenue-generating capabilities, and could damage our reputation and
our brand name.

If we are unable to safeguard the security and privacy of our program
members' information, our reputation would be damaged and we could be subject to
litigation and liability

A significant barrier to electronic commerce and online communications
has been the need for secure transmission of confidential information over
the Internet. Our ability to secure the transmission of confidential information
over the Internet is essential in maintaining consumer confidence in our
service. In addition, because we handle confidential and sensitive information
about our program members, any security breaches would damage our reputation and
could expose us to litigation and liability. We cannot guarantee that our
systems will prevent security breaches.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------------
(Included in Management's Discussion and Analysis of Financial
Condition and Results of Operations)

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

Our audited Financial Statements are contained in a separate section of
this Annual Report on Form 10-K on pages F-1 through F-17, attached hereto.

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------

Information required under this item is contained in the section
entitled "Executive Officers and Directors" in our 2000 Proxy Statement and
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------

Information required under this item is contained in the sections
entitled "Directors Compensation" and "Executive Compensation" in our 2000
Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------

Information required under this item is contained in the section
entitled "Stock Ownership" in our 2000 Proxy Statement and is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------

Information required under this item is contained in the section
entitled "Certain Transactions" in our 1999 Proxy Statement and is incorporated
herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------

(a) Documents filed as part of this report

(1) Financial Statements
Report of Independent Accountants
Balance Sheets as of December 31, 1999 and 2000
Statements of Operations and Comprehensive Loss for the
years ended December 31, 1998, 1999 and 2000
Statements of Stockholders' (Members') Equity (Deficit) for
the years ended December 31, 1998 1999 and 2000
Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000 Notes to Financial Statements

(2) All schedules have been omitted because they are not
applicable, not required or the information is included
elsewhere in the Company's financial statements or notes
thereto.

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated November 12,
2000 reporting items in connection with the Securities Purchase Agreement
entered into by the Company.

The following exhibits are filed as part of this report unless noted
otherwise:

Exhibit No. Description
- --------------- -----------------------------------------------------------

2.1 Form of Reorganization Agreement by and among HealthExtras,
Inc., HealthExtras, LLC and Capital Z Healthcare Holding
Corp (1)
3.1(a) Certificate of Incorporation of HealthExtras, Inc (1)
3.1(b) Form of Amended and Restated Certificate of Incorporation
(1)
3.2 Bylaws of HealthExtras, Inc. (1)
4.1 Specimen Stock Certificate of HealthExtras, Inc.
4.2 Form of Stockholders' Agreement (1)
10.1 Form of Employment Agreement between HealthExtras, Inc. and
David T. Blair (1)
10.2 Form of Employment Agreement between HealthExtras, Inc. and
certain Executive Officers (1)
10.3 Program Administrator's Agreement by and between
HealthExtras LLC and Reliance National Insurance Company (1)
10.4 Agreement between United Payors & United Providers, Inc. and
HealthExtras, Inc.
10.5 Agreement by and between United Payors & United Providers,
Inc. and HealthExtras, LLC. re: network access(1)
10.6 Agreement by and between Cambria Productions, Inc. f/s/o
Christopher Reeve and HealthExtras, Inc. (1) (2)
10.7 Indemnification Agreement (1)
10.8 Sublease Agreement by and between United Payors & United
Providers, Inc. and HealthExtras, Inc.
10.9 Form of HealthExtras, Inc. 1999 Stock Option Plan (1)
10.10 Form of Registration Rights Agreement (1)
10.11 Securities Purchase Agreement by and among HealthExtras,
Inc., as the Purchaser, and TD Javelin Capital Fund, L.P.,
Meriken Nominees, LTD, et. al, as the Sellers (3)
10.12 Form of HealthExtras, Inc. 2000 Stock Option Plan (filed
herewith)
10.13 Form of HealthExtras, Inc. 2000 Directors' Stock Option Plan
(filed herewith)
10.14 Warrant Agreement by and among HealthExtras, Inc. and J.C.
Penney Life Insurance Company (filed herewith)
10.15 Amended Agreement by and between Cambria Productions, Inc.
f/s/o Christopher Reeve and HealthExtras, Inc. (filed
herewith)
27.1 Financial Data Schedule

- --------------
(1) Incorporated herein by reference into this document from the Exhibits to
the Form S-1 Registration Statement, as amended, Registration No.
333-83761, initially filed on July 26, 1999.
(2) Confidential treatment requested for portion of agreement pursuant to
Section 406 of Regulation C. promulgated under the Securities Act of
1933, as amended.
(3) Incorporated herein by reference into this document from the Exhibits to
the Form 8-K initially filed on November 21, 2000.

SIGNATURES

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

HEALTHEXTRAS, INC.

Date April 2, 2001 By: /s/ David T. Blair
-------------------------------
David T. Blair
Chief Executive Officer and Director

Pursuant to the requirements of the 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:

Date April 2, 2001 By: /s/ Thomas L. Blair
-------------------------------
Thomas L. Blair
Chairman of The Board

Date April 2, 2001 By: /s/ David T. Blair
-------------------------------
David T. Blair
Chief Executive Officer and Director

Date April 2, 2001 By: /s/ Michael P. Donovan
-------------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer

Date April 2, 2001 By: /s/ Edward S. Civera
-------------------------------
Edward S. Civera
Director

Date April 2, 2001 By: /s/ Bette B. Anderson
-------------------------------
Bette B. Anderson
Director

Date April 2, 2001 By: /s/ William E. Brock
-------------------------------
William E. Brock
Director

Date April 2, 2001 By: /s/ Thomas J. Graf
-------------------------------
Thomas J. Graf
Director

Date April 2, 2001 By: /s/ Julia M. Lawler
-------------------------------
Julia M. Lawler
Director

Date April 2, 2001 By: /s/ Karen E. Shaff
-------------------------------
Karen E. Shaff
Director

Date April 2, 2001 By: /s/ Frederick H. Graefe
-------------------------------
Frederick H. Graefe
Director

Report of Independent Accountants

To the Board of Directors and Stockholders of HealthExtras, Inc.:

In our opinion, the accompanying consolidated balance sheets, and the
related consolidated statements of operations and comprehensive loss, of changes
in stockholders' (members') equity (deficit) and of cash flows, present fairly,
in all material respects, the financial position of HealthExtras, Inc. and its
subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

McLean, Virginia
February 21, 2001

F-1

HealthExtras, Inc.
Consolidated Balance Sheets

December 31, December 31,
1999 2000
----------- ------------

ASSETS
Current assets:
Cash and cash equivalents ................... $ 46,971,106 $ 28,921,312
Marketable securities of a related party .... 664,984 --
Accounts receivable, net of allowance for ... 62,795 3,799,270
doubtful accounts of $453,954 in 2000
Deferred charges:
Direct .................................... 1,203,854 3,050,603
Marketing and promotion ................... 2,316,491 508,447
Other current assets ........................ 240,153 731,061
------------ ------------
Total current assets .................... 51,459,383 37,010,693
Fixed assets, net ............................. 1,904,847 4,588,153
Goodwill, net of accumulated amortization
of $102,473 in 2000 ..................... -- 9,120,104
Other assets .................................. 297,853 1,325,156
------------ ------------
Total assets ............................ $ 53,662,083 $ 52,044,106
============ ============

LIABILITIES & Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ....... $ 1,060,777 $ 7,555,031
Purchase consideration due for IPM........... -- 956,075
Other current liabilities ................... -- 22,876
Deferred revenue ............................ 5,237,210 7,121,349
------------ ------------
Total current liabilities ............... 6,297,987 15,655,331
Long-term liabilities ......................... -- 150,211
------------ ------------
Total liabilities ....................... 6,297,987 15,805,542
------------ ------------

Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized, none issued .......... -- --
Common stock, $0.01 par value, 100,000,000
shares authorized, 27,600,000 and
28,902,600 shares issued and outstanding
at December 31, 1999 and 2000, respectively 276,000 289,026
Additional paid-in capital .................. 48,045,635 54,149,068
Accumulated deficit ......................... (719,976) (17,946,192)
Deferred compensation ....................... (370,232) (253,338)
Accumulated other comprehensive income ...... 132,669 --
------------ ------------
Total stockholders' equity .............. 47,364,096 36,238,564
------------ ------------
Total liabilities and stockholders'
equity................................ $ 53,662,083 $ 52,044,106
============ ============

The accompanying notes are an integral part of these financial statements
F-2

HealthExtras, Inc.
Consolidated Statements of Operations and Comprehensive Loss

For the years ended December 31,
1998 1999 2000
----------- ------------ -------------

Revenue ................................ $ -- $ 5,326,527 $ 44,178,040
----------- ------------ -------------

Direct expenses ........................ -- 3,095,397 24,302,775
Product development and marketing ...... 4,935,831 10,331,163 31,210,649
General and administrative ............. 1,597,660 2,996,345 8,458,533
----------- ------------ -------------
Total operating expenses ......... 6,533,491 16,422,905 63,971,957
----------- ------------ -------------

Operating loss ................... (6,533,491) (11,096,378) (19,793,917)

Interest income (expense), net (includes
imputed interest applicable
to related-party transactions
of $238,479 and $268,064 for
the years ended December 31, 1998
and 1999, respectively) .............. (110,273) (350,487) 2,068,421
Other income (expense), net ............ (100) (73,234) 499,280
----------- ------------ -------------

Net loss ......................... (6,643,864) (11,520,099) (17,226,216)

Unrealized holding gains (losses) on
marketable securities arising
during the period .................... 542,189 (479,270) --
Reclassification adjustment for
realized gains included in net loss .. -- -- (132,669)
------------ ------------ -------------
Comprehensive loss ............... $ (6,101,675) $(11,999,369) $ (17,358,885)
============ ============ =============

Basic and diluted net loss per share ... $ -- $ (0.56) $ (0.62)
Weighted average shares of common stock
outstanding (in thousands) .......... -- 20,588 28,010

Pro forma basic and diluted net loss
per share ........................... $ (0.38) $ -- $ --
Pro forma weighted average shares of
common stock outstanding
(in thousands) ...................... 17,680 -- --

The accompanying notes are an integral part of these financial statements
F-3

HealthExtras, Inc.
Statement of Changes in Stockholders' (Members') Equity (Deficit)
For the Years Ended December 31, 1998, 1999 and 2000

HealthExtras LLC HealthExtras, Inc.
------------------------ -----------------------------------------------------------------------

Accumulated Common Stock Accumulated
Other ------------ Other
Members Comprehensive Additional Comprehensive
Capital Income Paid In Income Accumulated Deferred
(deficit) Loss Shares Amount Capital (Loss) Deficit Compensation Total
------- -------- ---------- -------- ----------- ----------- ------------ ------------ -----------

Balance at
December
31, 1997 4,870,153 69,750 -- -- -- -- -- -- 4,939,903
Unrealized gain
on marketable
securities -- 542,189 -- -- -- -- -- -- 542,189
Noncash interest
expense 238,479 -- -- -- -- -- -- -- 238,479
Net loss (6,643,864) -- -- -- -- -- -- -- (6,643,864)
----------- -------- ------ ------- ------- ----- ------- --------- ----------
Balance at
December
31, 1998 (1,532,232) 611,939 -- -- -- -- -- -- (923,293)
Grant of
effective
member
interests to
management,
net of deferred
compensation of
$370,232 97,341 -- -- -- -- -- -- -- 97,341
Capital
contribution
by new member 5,000,000 -- -- -- -- -- -- -- 5,000,000
Unrealized gain
(loss) on
marketable
securities -- (491,817) -- -- -- 12,547 -- -- (479,270)
Noncash interest
expense and
loan guarantee
fees 268,063 -- -- -- -- -- -- -- 268,063
Net loss for the
period from
January 1, 1999
to December 16,
1999 (see Note 1) (10,800,123) -- -- -- -- -- -- -- (10,800,123)
Reorganization,
December 17,
1999 (see
Note 1) 6,969,951 (120,122) 22,100,000 221,000 (6,820,719) 120,122 -- (370,232) --
Net proceeds
from initial
public offering
(see Note 1) -- -- 5,500,000 55,000 54,866,354 -- -- -- 54,921,354
Net loss for the
period from
December 17, 1999
to December 31,
1999 -- -- -- -- -- -- (719,976) -- (719,976)
-------- ----- ---------- ------- --------- ------- --------- -------- ---------
Balance at
December 31,
1999 -- -- 27,600,000 276,000 48,045,635 132,669 (719,976) (370,232) 47,364,096
------- --------- ---------- ------- ---------- ------- --------- ---------- ------------
Amortization of
deferred
compensation -- -- -- -- -- -- -- 116,894 116,894
Warrants expected
to be issued
in connection
with the
marketing
agreement -- -- -- -- 254,129 -- -- -- 254,129
Net proceeds from
private
placement -- -- 1,302,600 13,026 5,849,304 -- -- -- 5,862,330
Reclassification
adjustment for
realized gains
included in
net loss -- -- -- -- -- (132,669) -- -- (132,669)
Net loss for the
period -- -- -- -- -- -- (17,226,216) -- (17,226,216)
-------- ------ ---------- ------- ----------- -------- ------------ -------- -----------
Balance at
December 31,
2000 $ -- $ -- 28,902,600 $289,026 $54,149,068 $ -- $(17,946,192) $(253,338) $36,238,564
========== ========== ========== ======== =========== ======== ============== ========= ============

The accompanying notes are an integral part of these financial statements
F-4

HealthExtras, Inc.
Consolidated Statements of Cash Flows

For the years ended December 31
1998 1999 2000
------------ ------------ ------------

Cash flows from operating activities:
Net loss ....................................... $ (6,643,864) $(11,520,099) $(17,226,216)
Depreciation expense ........................... -- 89,889 599,337
Noncash compensation expense and fees .......... -- 97,341 371,023
Noncash interest expense ....................... 238,479 268,064 --
Amortization of goodwill ....................... -- -- 102,473
Gain on sale of marketable securities .......... -- -- (551,735)
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS FROM PURCHASE OF IPM IN 2000:
Accounts receivable .......................... -- (62,795) (780,522)
Other assets ................................. 20,000 (538,006) (89,823)
Deferred charges ............................. 230,700 (976,045) (38,705)
Accounts payable and accrued expenses ........ 73,901 630,381 2,189,998
Accrued benefit expense ...................... 546,562 (546,562) --
Marketing expenses payable ................... (1,015,713) (1,012,000) --
Contribution payable ......................... 9,091 (200,000) --
Deferred revenue ............................. 257,746 4,979,464 1,884,138
------------ ------------ ------------
Net cash used in operating activities ...... (6,283,098) (8,790,368) (13,540,032)
------------ ------------ ------------

Cash flows from investing activities:
Capital expenditures ............................ -- (1,994,736) (3,061,247)
Payment for purchase of IPM, net of
cash acquired................................... -- -- (7,406,398)
Maturity (purchase) of certificate of deposit ... (700,000) 700,000 --
Purchases of available for sale securities ...... (338,341) -- --
Sales of available for sale securities .......... -- -- 1,084,050
Other assets acquired ........................... -- -- (988,500)
------------ ------------ ------------
Net cash used in investing activities ....... (1,038,341) (1,294,736) (10,372,095)
------------ ------------ ------------

Cash flows from financing activities:
Proceeds from (repayment of) line of credit .... 1,750,000 (1,750,000) --
Capital contribution ............................ -- 5,000,000 --
Borrowings from (repayment to) member, net ...... (3,860,282) (1,334,429) --
Net proceeds from sale of common stock .......... -- 54,921,354 5,862,333
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................... (2,110,282) 56,836,925 5,862,333
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ....................................... (9,431,721) 46,751,821 (18,049,794)
Cash and cash equivalents at the beginning
of period ........................................ 9,651,006 219,285 46,971,106
------------ ------------ -------------
Cash and cash equivalents at the end of period ..... $ 219,285 $ 46,971,106 $ 28,921,312
============ ============ ============
Supplemental disclosure:
Cash paid for interest ........................... $ 3,248 $ 181,729 $ --

The accompanying notes are an integral part of these financial statements
F-5

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

HealthExtras, Inc. (the "Company" or "HealthExtras") is a Delaware
corporation organized on July 9, 1999 and the successor to certain predecessor
companies (the "Predecessor Companies") The Predecessor Companies include:
Sequel Newco, Inc., Sequel Newco Joint Venture (the Joint Venture), Health
Extras Partnership (HEP), Sequel Newco, LLP (SN LLP) and HealthExtras LLC.
Through December 31, 1998, the Company was considered to be a development stage
enterprise. The Company commenced business operations with its health benefits
program on November 1, 1998; however, all operating revenues were deferred and
were recognized in 1999 in order to coincide with the program member benefits.

On December 17, 1999, in connection with the closing of the initial public
offering of 5,500,000 shares of the Company's common stock at an initial public
offering price of $11.00 per share, HealthExtras LLC was merged into the Company
with the Company being the surviving entity (the "Reorganization") and the
members of HealthExtras LLC received an aggregate 22,100,000 shares of the
Company's common stock in exchange for their member interests. The net proceeds
received by the Company from the initial public offering (net of underwriting
commissions and expenses of $5.6 million) were approximately $54.9 million.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
HealthExtras, Inc. and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated.

Cash and cash equivalents

Cash and cash equivalents consist of cash and investments in highly liquid
instruments with maturities of three months or less when purchased. At December
31, 2000, the Company held $164,878 in restricted cash as a prepayment from a
client for pharmacy benefit management services.

Marketable securities

Prior to 1999, the Company purchased certain marketable securities of a
related entity. Management considered all of the common stock purchased to be
available for sale as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available for sale securities are
reported at fair value, with net unrealized gains and losses reported as a
component of other comprehensive loss. In 2000, the Company sold its shares in
the related entity.

The historical cost, gross unrealized holding gain, realized holding gain,
and proceeds from sale of marketable securities available for sale are as
follows:

1999 2000
---- ----

Historical cost, as of December 31....... $ 532,315 -
Realized gain on sale of securities...... - 551,735
Proceeds from sale of securities......... - 1,084,050
Gross unrealized holding gain............ 132,669 -

F-6

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fixed assets

Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated lives of the assets or
the lease term. The Company capitalizes costs incurred for software for internal
use that is still in the application development stage in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use".

Other assets

At December 31, 2000 other assets is largely comprised of the Company's
interest in a joint venture relating to the fractional ownership interest in two
aircraft used for corporate business purposes with a carrying value of $976,144,
net of amortization of $12,356. Maintenance and service costs associated with
the aircraft are expensed as incurred.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company maintains its cash and cash equivalents in
bank accounts, which, at times, may exceed federally insured amounts. The
Company has not experienced any losses related to its cash or cash equivalents
and believes it is not exposed to any significant credit risk on its cash or
cash equivalents. Accounts receivable consists principally of amounts due from
companies whose payment history is monitored regularly. The Company monitors
the balances of individual accounts to establish appropriate reserves. The
Company has not experienced significant losses related to receivables in the
past

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Contributions

Contributions made, including unconditional promises to give, are recognized
as expenses in the period made or promised.

Goodwill

Goodwill represents the excess of acquisition costs over the fair value of
net assets acquired and is amortized on a straight-line basis over its estimated
useful life of 15 years.

Income taxes

Prior to the Reorganization, no provision for federal or state income taxes
was made in the accompanying financial statements since the Company was treated
as a partnership for federal and state income tax purposes. Upon the
Reorganization, the Company became subject to federal and state income taxes.

The Company records deferred tax assets and liabilities based on temporary
differences between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse. The Company has recorded a full valuation
allowance against the Company's deferred tax assets due to the uncertainty as to
their ultimate realization.

F-7

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net loss per share

Basic net loss per share is based on the weighted average number of shares
outstanding during the year. Diluted net loss per share is based on the weighted
average number of shares and dilutive common stock equivalent shares outstanding
during the year. All outstanding stock options at December 31, 2000 were
excluded from the computation of diluted net loss per share because the exercise
price of the stock options exceeded the average market price of the common
shares, and therefore, were antidilutive.

Pro forma basic and diluted net loss per share and weighted average shares
outstanding reflect the formation of HealthExtras, Inc. and merger with
HealthExtras, LLC in exchange for Company common stock as if the merger was
effective January 1, 1998.

Pro forma weighted average basic net loss per share is computed based on the
number of outstanding shares of common stock. Pro forma diluted net loss per
share adjusts the pro forma basic shares weighted average for the potential
dilution that could occur if stock options or warrants, if any, were exercised.
Pro forma diluted net loss per share is the same as pro forma basic net loss per
share because there were no dilutive securities outstanding at December 31,
1998.

Revenue and direct expense recognition

The primary determinant of revenue recognition is monthly program
enrollment. In general, revenue is recognized based on the number of members
enrolled in each reporting period multiplied by the applicable monthly fee for
their specific membership program. The revenue recognized by HealthExtras
includes the cost of membership features supplied by others, including the
insurance components. Direct expenses consist of the costs that are a direct
function of a period of membership and a specific set of program features. The
coverage obligations of our benefit suppliers and the related expense are
determined monthly, as are the remaining direct expenses.

Revenue from program benefits and related direct expenses (principally
marketing and processing fees and the cost of the benefits provided to program
members) are initially deferred during the period which a program member is
generally entitled to obtain a refund. If a member requests a refund,
HealthExtras retains any interest earned on funds held during the refunded
membership period. Revenue and direct expenses attributable to the initial
deferral are recognized in the subsequent month. After the initial deferral
period, revenue is recognized as earned and direct expenses as incurred.

IPM's revenues from sales of prescription drugs by pharmacies in the
Company's nationwide network and related claims processing fees are recognized
when the claims are adjudicated. Pharmacy claims are adjudicated at the
point-of-sale using the Company's on-line claims processing system. When IPM has
an independent obligation to pay its network pharmacy providers, the Company
includes payments from plan sponsors for these benefits as revenues and payments
to its pharmacy providers as direct expense. Rebate revenues earned under
arrangements with manufacturers are recognized as they are earned in accordance
with contractual agreements. Certain of these revenues are based on estimates,
which are subject to final settlement with the contracted party. Revenues from
the dispensing of pharmaceuticals from the Company's mail service pharmacy are
recognized when each prescription is shipped.

HealthExtras has historically maintained a prepaid balance for the benefits
included in its programs. The carrying value of the prepayment is adjusted at
the end of each quarter based on factors including enrollment levels in each
product, enrollment trends, and the remaining portion of the unexpired
prepayment period. In the event that a period of coverage was purchased in
advance, and there were insufficient members to utilize the coverage, the value
would expire and be expensed by HealthExtras without any related revenue.
HealthExtras believes that current enrollment levels will allow the balance at
December 31, 2000 to be fully utilized prior to expiration.

F-8

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HealthExtras' members always enroll for an annual period but may chose to
pay either annually or in monthly installments. There is no interest charged
under the monthly option but members who pay annually receive a reduced rate
that reflects lower administrative, transaction and maintenance costs.

Marketing agreements

The Company defers the amount of payments under marketing and similar
agreements. Expense is recognized straight-line over the term of the agreements.

Segment reporting

The Company operates in two market segments as a provider of supplemental
health and disability benefit programs to individuals and, commencing with
the acquisition of IPM in November 2000, as a provider of pharmacy benefit
management services. HealthExtras' membership is highly concentrated in groups
represented by two of its marketing partners, which accounted for 26% and
21% of our revenue for 2000. We anticipate that these relationships
will produce an increasing percentage of revenue in 2001. The following
table presents financial data by segment for the year ended December 31, 2000.
Pharmacy benefit management ("PBM") services operating results are from the
acquisition date of November 1, 2000.

Supplemental
Health and
Disability PBM Total
------------- ----------- ------------

Revenue $ 39,300,891 $ 4,877,149 $ 44,178,040
Operating Expenses 58,983,554 4,988,403 63,971,957
Net loss 17,122,208 104,008 17,226,216
Total assets 47,795,234 4,248,872 52,044,106

Common stock warrants

The Company records direct expense for the fair market value of common stock
warrants expected to be issued to a marketing partner through 2003. The Company
estimates the value of the warrants at each balance sheet date using an
appropriate equity pricing model with assumptions consistent with those used in
preparing the Company's fair value stock option compensation disclosures. During
2000, the Company recorded $254,129 in direct expense related to common stock
warrants expected to be issued subsequent to June 30, 2001.

3. BUSINESS COMBINATION

On November 1, 2000, the Company acquired a controlling interest in
International Pharmacy Management, Inc. through a purchase of all of the issued
and outstanding voting preferred stock and the majority of outstanding common
stock warrants of IPM. The preferred stock and warrants represented
approximately 70% of the voting control of IPM. The preferred stock and related
warrants were purchased for an aggregate cash consideration of $6.5 million.
Following the purchase of the voting preferred shares, the Company tendered for
all the issued and outstanding common stock and options of IPM. Substantially
all of the common stock and options were tendered or were committed to be
tendered by December 31, 2000. The total consideration payable for securities
tendered totaled $1.6 million in cash and 77,300 shares of the Company's common
stock with a fair market value of $347,850. As of December 31, 2000, $956,075 of
such consideration (including all of the common stock valued at $347,850) was
included as a liability in the accompanying balance sheet. The acquisition
was accounted for as a purchase, with the purchase prices allocated to the
assets acquired and liabilities assumed based upon their respective estimated
fair values at the dates of acquisition. IPM will conduct its business under the
name of "HealthExtrasRx" going forward.

F-9

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The acquisition resulted in goodwill of approximately $9.2 million
determined as follows. The assets acquired were net of an allowance for
doubtful accounts of $454,000.

Total consideration............ $ 8,638,123
------------
Total assets acquired.......... 3,891,238
Total liabilities assumed...... 4,475,692
------------
Net liabilities assumed........ 584,454
------------
Goodwill....................... $ 9,222,577
============

The following unaudited pro forma consolidated results of operations
for the years ended December 31, 1999 and 2000 are presented as though IPM had
been acquired at the beginning of 1999, after giving effect to purchase
accounting adjustments relating to the amortization of goodwill. Results are in
thousands, except for per share data.

1999 2000
---- ----

Revenue....................................... $ 23,634 $ 65,239
Net loss available to
common shareholders........................ $ (13,316) $(18,580)
Net loss per share - basic and diluted........ $ (0.65) $ (0.66)
Weighted average shares - basic and diluted... 20,588 28,010

The pro forma results of operations are not necessarily indicative of the
results that would have occurred had IPM's acquisition been consummated as of
January 1, 1999, nor are they necessarily indicative of future operating
results.

4. FIXED ASSETS

Fixed assets consist of the following:

1999 2000
---------- ----------

Computer equipment ........................ $ 451,118 $2,039,328
Software development costs ................ -- 886,367
Furniture, fixtures and office equipment .. 88,217 770,271
Medical equipment ........................ -- 85,362
Leasehold improvements .................... 1,455,401 1,778,526
---------- ----------
Total fixed assets ...................... 1,994,736 5,559,854
Accumulated depreciation and amortization (89,889) (971,701)
---------- ----------
Fixed assets, net ......................... $1,904,847 $4,588,153
========== ==========

Depreciation expense for the year ended December 31, 1999 and 2000 was
$89,889 and $599,337, respectively.

F-10

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. INCOME TAXES

A summary of the components of deferred income taxes at December 31, 1999
and 2000 computed at an effective tax rate of 38.6% as follows:

1999 2000
----------- -----------

Deferred tax assets (liabilities):
Accrued expenses.................................. $ -- $ 96,550
Allowance for doubtful accounts................... -- 175, 317
Deferred charges.................................. (464,928) (1,178,143)
Deferred revenue.................................. 2,022,610 2,750,227
Net operating loss carryforwards.................. 5,473 7,332,863
Capital loss carryforward......................... -- 38,620
Valuation allowance............................... (1,563,155) (9,215,434)
----------- ------------
Net deferred tax asset........................ $ -- $ --
============= ==========

The Company has net operating loss carryforwards of approximately
$18,987,218 at December 31, 2000, available for carryforward to future periods.
The carryforwards expire at various times beginning in 2010 through 2020.

The effective tax rate varies from the U.S. Federal Statutory tax rate
principally due to the following:

1999 2000
------- ------

U.S. Federal Statutory tax rate............ (34.0%) (34.0%)
State tax, net of federal benefit........... (4.6) (4.6)
Non-deductible expenses..................... -- 1.5
Valuation allowance......................... 38.5 37.0
Other....................................... .1 .1
---- ----
Effective tax rate.......................... --% --%
==== ====

6. STOCKHOLDERS' EQUITY

Stock (member interests) grants

In February 1999, certain management employees were granted effective member
interests aggregating 1.87% (equivalent to 413,333 common shares, post
Reorganization) of the Company, after giving effect to an existing commitment to
sell a 20% interest in the Company to a third party for $5,000,000 cash. Such
grants vest over a four-year period commencing March 1, 1999. The Company
recorded the estimated fair value of such interests of $467,573 ($1.13 per post
Reorganization common share) as stockholders' equity and deferred compensation
expense. During 1999 and 2000, amortization of deferred compensation expense
amounted to $97,341 and $116,894, respectively. The remainder of the deferred
compensation expense will be amortized over the vesting period for the
interests.

Stock option plans

During 2000, the Board of Directors adopted the HealthExtras, Inc. 2000
Stock Option Plan ("2000 SOP") and the HealthExtras, Inc. Directors' Stock
Option Plan (Directors' SOP), subject to shareholder approval. The maximum
number of the Company's common shares reserved for issuance pursuant to the
grant of options under the 2000 SOP and the Directors' SOP are 1,000,000 and
200,000 shares respectively. Under the 2000 SOP, options granted vest ratably
over a period of four years from the date of grant. The Directors' SOP provides
for options granted to be exercisable on the first anniversary date of the date
of grant. The maximum contractual life of all stock options granted under the
2000 SOP and the Directors' SOP is ten years.

F-11

HEALTEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Under the 2000 SOP, options to purchase 320,000 shares of Company's common
stock were issued at a price of $4.63 in 2000. Under the Directors' SOP, options
to purchase 30,000 shares of the Company's common stock were issued at a price
of $4.63. None of these stock options are exercisable and all remain outstanding
as of December 31, 2000.

During 1999, in connection with the Reorganization and initial public
offering, the Company established the HealthExtras, Inc. 1999 Stock Option Plan
("1999 SOP"). The maximum number of shares of the Company's common stock
reserved for issuance pursuant to the grant of options under the 1999 SOP is
4,000,000 shares. All officers, employees and independent contractors of the
Company are eligible to receive option awards. A Committee of the Board of
Directors determines award amounts, option prices and vesting periods, subject
to the provisions of the 1999 SOP. Stock options granted under the 1999 SOP vest
ratably over a period of four years and the contractual life of all of the stock
options is ten years.

The following table summarized stock option activity under all plans for
the two years ended December 31. 2000:

Number of Shares of
Common Stock
-------------------
Price per Weighted Average
Options Share Exercise Price
---------- ------------ -----------------

Initial grant of stock options, and
Balance, December 31, 1999 2,956,000 $ 13.20 $ 13.20
Granted 1,463,000 $ 4.06 - 5.63 $ 4.58
Exercised -- -- --
Forfeited (163,500) 13.20 13.20
---------- -------------- ---------
Balance, December 31, 2000 4,255,500 4.06 to $13.20 10.31

Exercisable, December 31, 2000 698,125 13.20 13.20

The following table summarized information about the outstanding and
exercisable options and warrants at December 31, 2000:

Outstanding Exercisable
---------------------------------------- -------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Prices Number Life (Years) Exercise Price Number Exercise Price
--------------- ------ ------------ -------------- --------------

$4.06 - $5.63 1,463,000 9.6 $4.58 -- --
$13.20 2,792,500 9.0 $13.20 698,125 $13.20
------ --------- --- ------ ------- ------
$4.06 to $13.20 4,255,500 9.2 $10.31 698,125 $13.20

During 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation. This pronouncement requires that the Company calculate the fair
value of stock options and shares issued under employee stock purchase plans at
the date of grant using an option-pricing model. The Company has elected the
"pro forma, disclosure only" option permitted under FAS 123, instead of
recording a charge to operations. The following table reflects pro forma net
loss and net loss per share for the year ended December 31, 2000 and 1999 had
the Company elected to adopt the fair value approach of FAS 123:

F-12

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1999 2000
---------- -----------

Net loss
As reported........................ $11,520,099 $17,226,216
Pro forma.......................... 11,693,258 21,894,402

Net loss per share
As reported - basic and diluted.... $ 0.56 $ 0.62
Pro forma - basic and diluted...... 0.57 0.78

The exercise price of each option granted in 1999 and 2000 was no less than
the market price of the Company's common stock at the date of grant. The grant
date fair value of each option granted was $5.70 and $3.47 per share, in 1999
and 2000, respectively.

The estimated fair value of each option was calculated using the modified
American Black-Scholes economic option-pricing model. The following table
summarizes the weighted-average of the assumptions used for stock options
granted during 2000

1999 2000
--------- ----------

Risk-free interest rate............ 4.7% 6.2%
Expected years until exercise...... 5 years 5 years
Expected volatility................ 61.3% 95.9%
Dividend yield..................... -- --

Warrant Agreement

During 2000, the Company entered into an agreement whereby warrants to
acquire up to 4.2 million shares of common stock may be issued to a marketing
partner at exercise prices ranging from $5.21 to $15.63 per share. The issuance
of these warrants is contingent on the marketing partner exceeding specific
annualized revenue thresholds to be measured for the twelve-month periods ending
June 30, 2001, 2002, and 2003 as well as relative revenue contributions for the
years ending December 31, 2001 and 2002. The maximum contractual life of the
warrants from the date of grant is five years.

Private Placement

In October of 2000 the Company issued 1,302,600 shares of our common
stock to an affiliate of UnumProvident Corporation in exchange for net
proceeds of $5,862,000. Pursuant to this and related agreements, UnumProvident
will be the preferred underwriter for various HealthExtras products. The
purchase price was based on the average closing price of the Company's stock for
the 20 days prior to the closing of the agreement.

7. BANK LINE OF CREDIT

In 1998, the Company entered into a credit facility with a bank totaling
$2,000,000 and bearing interest at the prime rate which was guaranteed by United
Payors & United Providers, Inc. (now BCE). As of December 31, 1999, all
amounts due under the credit facility had been paid and the Company terminated
the credit facility in January 2000.

Loan guarantee fees were imputed based on the monthly amounts outstanding
under the credit line at an annual rate of 2%. The imputed loan guarantee fees
have been recorded as interest expense in the statement of operations and as
members' capital. Such fees amounted to $45,453 for the year ended December 31,
1999.

F-13

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. LEASE COMMITMENTS

The Company entered into an agreement dated December 22, 1999, to lease
office space under a non-cancelable sublease agreement with United Payors &
United Providers, Inc. The sublease agreement provides for annual escalations
and for the payment by the Company of its proportionate share of the increase in
the costs of operating the building. In connection with the acquisition of IPM,
the Company has committed to make payments for the lease of office space used
for IPM's executive, administrative, and operating use. For financial reporting
purposes, the Company recognizes rent expense on a straight-line basis over the
term of the lease. The future minimum payments due under this lease are as
follows:

2001.................. $ 717,053
2002.................. 746,205
2003.................. 687,193
2004.................. 280,000
----------
Total............. $2,430,451
==========

Facility lease expense for the years ended December 31, 1999 and
2000, was $60,000 and $363,000, respectively.

9. COMMITMENTS

In 2000, the Company extended one of two marketing agreements entered into
during 1997, whereby the Company has committed to total non-refundable payment
of $5 million due in equal installments over a five-year term in exchange for an
individual's participation in various marketing campaigns. Under the agreement,
the Company has the option to extend the agreement for another five-year period,
which would result in an additional commitment of $7.7 million.

Under the marketing agreement, the Company must pay annual fees of $1.00
per program member that subscribes to the benefits promoted by the individuals
when program members exceed one million. Such payments are for the current
five-year term of the marketing agreement and shall continue for a 10-year
period thereafter.

The Company is party to a royalty agreement, which runs through December
31, 2003 related to access to a national network of hospitals and physicians for
members enrolled in health care programs. The rates payable for health care
members increases from $1.00 per month in the first year to a maximum of $1.50
per month in the fourth year of enrollment. There are currently no enrollees in
programs which provide health care benefits featuring network access.
Accordingly no royalty payments are currently being expensed. Should the Company
reintroduce health care products with network access features, it would
recognize expense under the terms of the agreement. In 1999 the Company made
payments of approximately of $529,000 under this agreement.

During 1998, the Company entered into various agreements with participating
companies requiring aggregate payments by the Company of $1,260,900, whereby the
Company guaranteed minimum enrollment in its programs. The Company has
historically maintained a prepaid expense balance with respect to benefit
features of its programs. Direct expense is recognized based on the actual
membership levels in each program. The deferred amount at the end of each
quarter is adjusted to reflect advances, if any, made during the period,
expenses recognized and remaining coverage periods and membership levels to
which such advances can be applied. The Company deferred expense recognition of
$731,786 in minimum and advance payments at December 31, 1999, with respect to
these commitments in order to match related future revenue recognition.

The Company has entered into three-year employment agreements with certain
executive officers. The annual base salaries under these agreements range from
$165,000 to $210,000, and one executive will be entitled to a bonus equal to one
percent of the Company's annual after-tax profits. The Company's minimum
aggregate payments under these employment agreements are expected to be $680,000
annually.

F-14

HEALTHEXTRAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In the ordinary course of business, the Company may become subject to legal
proceedings and claims. The Company is not aware of any legal proceedings or
claims, which, in the opinion of management, will have a material adverse effect
on the financial condition or results of operations of the Company.

10. 401(K) SAVINGS PLAN

In April 2000, the Company authorized the establishment of an employee
401(k) Savings Plan (the "401(k)"). The 401(k) benefit is available to all of
the Company employees subject to certain service requirements. For 2000, the
Company matched the first $1,000 of the employee's contribution and 50%
thereafter subject to statutory limits. The Company's contribution vests ratably
over 5 years for each employee. For 2000, the Company expensed $85,989.

11. RELATED PARTY TRANSACTIONS

During 2000, the Company entered into a joint venture with Southern Aircraft
Leasing Corporation, owned by the Chairman of the Board of the Company, whereby
the Company invested $988,500 for a fractional interest of approximately 45% in
two aircraft used for corporate business purposes. For corporate business
purposes, the Company also utilizes the services of an aircraft owned by
Southern Aircraft Leasing Corporation. For the years ended December 31, 1998,
1999 and 2000, the Company paid $97,638, $156,185, and $109,575 respectively,
for utilizing the services of this aircraft.

The Company held available for sale securities in a corporation for which
the Chairman of the Board of the Company was the Chairman of the Board and
Co-Chief Executive Officer. Investments held were $664,984 as of December 31,
1999. All of these securities were sold in March 2000 for aggregate proceeds of
$1,084,050, resulting in a gain of $551,735.

The Chairman of the Board of the Company, from time to time, loaned the
Company funds, in excess of his pro-rata share of capital contributions, in
order to fund operating expenses. Interest was imputed on the monthly
outstanding balance of the loan at an annual rate of 10%. The imputed interest
was recorded as interest expense in the statement of operations and as
stockholders' equity. Imputed interest expense amounted to $173,868, and
$150,109 for the years ended December 31, 1998, and 1999, respectively. All
funds advanced were repaid as of December 31, 1999.

Effective January 1, 1999, the Company entered into an agreement with United
Payors & United Providers, Inc. ("UP&UP"), a corporation for which the Chairman
of the Board of the Company was the Chairman of the Board and Co-Chief Executive
Officer, whereby UP&UP provided administrative services for the Company and was
reimbursed for the costs incurred. Prior to January 1, 1999, the Company had an
unwritten arrangement with UP&UP to provide similar services. The amount paid by
the Company for such services were $866,000, $3.3 million and $1.2 million, for
the years ended December 31, 1998, 1999 and 2000, respectively. Under a revised
agreement dated December 22, 1999, services to be provided by UP&UP subsequent
to March 31, 2000, are limited primarily to services relating to information
technology and communications and are paid on a cost plus fee basis. The amount
paid for these services under the revised agreement was $829,000 for the year
ended December 31, 2000.

From time to time the Company owed UP&UP for the costs of administrative
services. Such amounts payable did not bear interest. Interest on amounts due
UP&UP was imputed at an annual rate of 10% and was recorded as interest expense
in the statement of operations and as stockholders' equity. Such expense
amounted to $64,611 and $72,501 for the years ended December 31, 1998 and 1999,
respectively.

F-15

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SUPPLEMENTAL DISCLOSURE OF QUARTERLY RESULTS OF OPERATION

Quarterly results of operations for the years ended December 31, 2000 and
1999 (in thousands, except per share amounts):

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000 QUARTERLY OPERATING RESULTS (unaudited)

Revenue ................................... $ 5,253 $ 8,098 $10,784 $20,043
------- ------ ------ ------
Operating loss............................. (7,877) (5,240) (3,905) (2,771)
Net loss ............................. (6,645) (4,740) (3,427) (2,414)

Basic & diluted net loss per common share.. $ (0.24) $ (0.17) $ (0.12) $ (0.08)

1999 QUARTERLY OPERATING RESULTS (unaudited)

Revenue ................................... $ 256 $ 765 $ 1,572 $ 2,733
------- ------ ------ ------
Operating loss............................. (2,143) (1,517) (2,879) (4,557)
Net loss ............................. (2,181) (1,669) (2,960) (4,719)

Basic & diluted net loss per common share.. $ -- $ -- $ -- $ (0.20)

Pro forma basic and diluted net loss
per common share........................ $( 0.12) $( 0.09) $ (0.13) $ --