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

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

                                   FORM 10-K

                 Annual report pursuant to section 13 OR 15(d)
                     of the Securities Exchange Act of 1934

                    For fiscal year ended December 31, 2000

                       Commission File Number: 333-87985

                                  eBenX, Inc.

                                                       41-1758843
               Minnesota                    IRS Employer Identification No.
         State of Incorporation

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

                             605 North Highway 169
                                    Suite LL
                       Minneapolis, Minnesota 55441-6465
                     Address of Principal Executive Offices

                        Telephone Number: (763) 614-2000

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

        Securities Registered pursuant to Section 12(b) of the Act: None

          Securities Registered Pursuant to Section 12(g) of the Act:

                          Common Stock, $.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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes [X]No [_]

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

   The aggregate market value of common stock held by non-affiliates based upon
the closing Nasdaq sale price on March 1, 2001 was $113,018,567.

   Number of shares outstanding on March 1, 2001 was 19,655,403 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of Registrant's Proxy Statement for its May 24, 2001 Annual Meeting
of Shareholders are incorporated by reference in Part III.

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                               TABLE OF CONTENTS

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                                 PART I
Business.................................................................    1
Properties...............................................................   13
Legal Proceedings........................................................   13
Submission of Matters to a Vote of Security Holders......................   13
                                 PART II
Market for Registant's Common Equity and Related Stockholder Matters.....   14
Selected Consolidated Financial Data.....................................   15
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................   15
Quantitative and Qualitative Disclosures about Market Risk...............   27
Financial Statements and Supplementary Data..............................   28
Changes in and Disagreements with Accountants on Accounting and Financial
 Disclosure..............................................................   45
                                PART III
Directors and Executive Officers of the Registrant.......................   45
Executive Compensation...................................................   45
Security Ownership of Certain Beneficial Owners and Management...........   45
Certain Relationships and Related Transactions...........................   45
                                 PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K..........   45
</TABLE>

Forward-Looking Statements

   Except for historical information, this document contains various "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our revenue mix,
anticipated costs and expenses, service development, relationships with
strategic partners, pending acquisitions and other factors discussed under
"Risks Related To Our Business". These forward-looking statements may include
declarations regarding our belief or current expectations of management, such
as statements indicating that "we expect," "we anticipate," "we intend," "we
believe," and similar language. We caution that any forward-looking statement
made by us in this Form 10-K or in other announcements made by us are further
qualified by important factors that could cause actual results to differ
materially from those projected in the forward-looking statements, including
without limitation the risk factors set forth in this Form 10-K.
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                                     PART I

Item 1. Business

Overview

   We provide specialized technology-based solutions for the administration of
health and welfare benefit programs. We use the Internet, proprietary
technology and strategic support resources to simplify and automate the sharing
of data and the completion of complex, multiple and ongoing financial and
administrative transactions that are necessary to administer and pay for health
and welfare benefits. Utilizing eBenX services results in more choice and
reduced costs for employers; improved efficiencies and strengthened client
relationships for brokers and other benefit advisors; reduced costs and the
ability to offer new products for health plans and other benefit suppliers; and
more choice, convenience and improved service for employees and their
dependents.

Group Health & Welfare Benefits

General Industry Background

   With new capabilities, changing demographics and our society's ongoing
commitment to health and well-being, costs associated with health care continue
to grow at a rate above other economic sectors. In 1999, it is estimated that
the United States spent approximately $1.23 trillion on health care services
and benefits. Aside from the federal government, which accounts for roughly
half of all health care expenses, employers are the most significant purchasers
of health and welfare benefits for employees, retirees and their dependents.
Currently, more than half of the U.S. population receives group health
insurance benefits through their employers, representing more than $600 billion
in services and payments between employers and carriers, the two primary
participants in the health and welfare benefits supply chain. Approximately
three percent of that $600 billion, or $18 billion, is estimated to have been
spent on the selection and administration of employee health and welfare
benefits in 1999.

   Health and welfare benefits represent the single largest benefit expense for
employers. In 2001, the average cost of providing coverage for active and
retired workers is estimated to be approximately $4,752 per employee. We expect
this average cost to increase 9% to 19% annually over the next five years. In
2001, on average, each active employee is expected to contribute 19% of this
amount through payroll deductions and co-payments. We believe that this
percentage will increase.

   Health and welfare benefits generally include health care, life, dental,
short-term disability, long-term disability, and vision.

   Employers, the primary benefit purchasers, can be segmented into three
categories:

  .  Large employers: Those with more than 5,000 employees with complex
     benefit structures such as the Fortune 1000 companies and federal, state
     and local governments;

  .  Mid-sized employers: Generally defined as those with 250 to 5,000
     employees; and

  .  Small employers: Under 250 employees.

   Broadly characterized, carriers consist of any organization that reimburses
physicians, hospitals, pharmacies and other direct providers of health care.
These organizations include:

  .  Health maintenance organizations;

  .  Preferred provider organizations;

  .  Point of service plans;

  .  Self-directed health plans;

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  .  Indemnity carriers;

  .  Third party administrators; and

  .  Pharmacy benefit managers.

   Prior to the 1980s, employers typically purchased health benefits through a
single third-party administrator or national indemnity insurance carrier.
However, with the growth of managed care in the 1980s and 1990s, employers
began to purchase coverage through an increasing number of health plans because
the managed care system is comprised of numerous provider networks with limited
geographic locations. Among HMOs alone, there are over 700 licensed local
health plans in the United States. Reflecting this proliferation of new types
of plans and payers, we estimate that each Fortune 500 employer today contracts
with an average of 30 different plans.

Administration of Health & Welfare Benefits

   The administrative and financial processes that connect employers and
carriers are complex, expensive and highly inefficient. Large and mid-sized
employers generally purchase from multiple carriers. Carriers generally charge
employers based on the number of enrolled employees and their projected
actuarial risk or, alternatively, pay providers on behalf of the employer and
then are reimbursed by the employer. Therefore, an individual employer is
subject to multiple administrative and financing arrangements.

   The administrative and financial processes consist of two basic components
commonly referred to as the "front-end" and "back-end."

Front-end

   The front-end process refers to the selection of various carriers by an
employer, the provision of information to employees so they can make individual
benefits selections, and the collection and ongoing maintenance of enrollment
and eligibility data.

   Carrier selection. Employers annually solicit rate quotes from health plans
and other carriers in order to select which plans will be made available to
their employees. Employers may choose as few as one or as many as 150 or more
health plans depending on the employers' geographic locations and the desire to
offer health plan choices. Large and mid-sized employers usually offer multiple
health plans to provide greater choice, geographic coverage and access to
specialized services for their employees. Employers choose various financing
mechanisms depending on the level of risk they wish to retain, including self
funded, fully insured, partially insured, or a combination of all three
financing mechanisms. To make these decisions, large employers usually are
supported by consultants while mid-sized employers generally use brokers.

   Communication of benefits information to employees. Employers annually
provide information to employees regarding the availability and material
features of each benefit plan offered for that year. This process entails
distribution of printed materials, mailings and other manual, paper-based
communications. Increasingly, employers and carriers are using electronic means
to present, distribute and allow access to this information. Due to continuous
changes in benefit information, materials must be regularly updated.

   Collection of enrollment and eligibility information. Employees enroll in
one or more of the available benefit plans during an annual open enrollment
period. Employers collect enrollment and eligibility data using a wide variety
of methods, including paper forms, telephone-based systems and Web-based self-
service enrollment systems. Enrollment data includes information on the
employee's benefit plan choices and primary care provider. Eligibility
information is basic information about the employee and his or her
dependent(s), such as name, address, date of birth, Social Security number,
employment code, benefit status, coverage level and eligibility period.


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   Life & work event management. In addition to collecting annual enrollment
and eligibility information, employers need to obtain and communicate daily
life event changes that affect coverage status. These changes include employee
marriages, divorces, child births and address changes, as well as career events
such as new hires, terminations and movements from hourly to salaried status.
Health and welfare benefits are the only benefits that must maintain and store
precise family history; no other benefits offered by employers require as high
a level of information collection and continuous monitoring and modification.

Back-end

   While the front-end process focuses on communication and collection of
information between employers and employees, the back-end process focuses on
managing and sharing eligibility and financial data with carriers and using
these data to reconcile payments.

   Post enrollment data management. Once enrollment and eligibility data is
collected, employers undertake a cumbersome process to authenticate, edit,
categorize and organize the data. This process also requires the ongoing
classification of employees by employment status, such as active, retired,
surviving spouse, student, and eligible to receive benefits under the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), in order to
accommodate diverse collection and payment processes for each category. This
data management is critical to accurate billing, internal accounting and
reconciling of payments between an employer and its carriers.

   Eligibility data distribution. At a minimum, eligibility data should be
transferred on a weekly basis from employers to carriers and in a manner that
assures it will be correctly recorded. In many cases, however, this data is
transferred far less frequently and with little assurance that it will be
correctly interpreted by the carrier. At best, the data is communicated
electronically between legacy systems and, at worst, via hard copy data entry.
Ultimately, this eligibility data is required when employees and dependents
present themselves to physicians and other providers for health care services.
Providers obtain patient eligibility information via telephone or computer from
patients' health plans prior to rendering services.

   Billing, reconciliation and settlement. Carriers bill employers on a weekly
or monthly basis based on either enrollment numbers and quoted rates, or on
claims paid. It is our belief, based on our experience, that employers
initially pay these multiple paper bills without completely auditing them.
Employers then manually reconcile the number of enrolled employees and their
eligibility status using their own internal data. Because of data discrepancies
and delays in transfer and billing cycles, the carriers' data and the
employers' data are rarely the same, and thus ongoing payment disputes are
common.

Factors Influencing the Marketplace and Related Issues

   The benefits procurement, administration and payment process is encumbered
by inefficient procedures for rate setting, gathering and transferring data and
executing payment transactions. These inefficiencies, together with other
factors unique to health care delivery, result in the following significant
challenges:

   Fragmented employers and health plans. There are more than 30,000 large and
mid-sized employers in the United States, many of which have a broadly
dispersed employee base often located in multiple sites across the United
States. In contrast, there are over 700 independent HMOs in the United States
today, which generally operate in a single or limited geographic area. As a
result, employers contract with multiple health plans to provide complete
geographic coverage and choice for all of their employees.

   Increasing group health insurance benefit costs. The average cost of
employee and retiree health care is expected to increase 9% to 19% annually
over the next five years. As these costs rise, we believe employers will seek
more cost-effective health insurance benefits solutions, will be more critical
in their selection of carriers and will demand a more competitive bidding
process. In addition, we believe employers will be looking for different
solutions which could include changing employee contribution schemes, employee
self-directed health plan choices and changing the pricing structure between
employers and health plans.

                                       3
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   Complex data management. Carriers collect complex, detailed and dynamic data
in varying formats from multiple employers. Conversely, employers must
distribute this data in varying formats to multiple carriers. A failure to
accurately update eligibility and financial data in a timely fashion may result
in additional administrative costs and financial reconciliation problems and
can lead to employees and their dependents being wrongfully denied health care
services.

   Eligibility and financial data formats vary considerably throughout the
health and welfare benefits supply chain and typically are unique to each
particular employer and carrier. The collection, storage and transmission of
this data remains a labor-intensive, paper-based and error-prone process. As a
result, most carriers are unable to frequently update this data. Some efforts
have been made to develop a common standard. However, these standards do not
meet the complex needs of multiple purchasers and have not been widely
accepted.

   Most employers use their own unique human resource information systems and
other benefit and payroll related systems to communicate with multiple
carriers. These carriers, in turn, rely on their own unique legacy systems.
Often, within a single employer or carrier, there are several systems in place
for collecting and storing this data that are unable to easily communicate with
one another.

   Archaic pricing and financing processes. Employers must obtain rate quotes
from carriers based on the estimated risk of the employers' employee population
for that geographic market. Rates between plans are difficult to compare
because of differing plan designs and underwriting methodologies. Today, a
three-tier premium pricing standard (employee, employee + spouse, and family)
is common. This pricing standard, which dates back to the 1960s, is based on
the general risk of an employer group for a specific geographic area, not the
risk of an individual employee or family. Health plans agree to cover all
employees regardless of their health risk profiles or pre-existing conditions
and, consequently, are paid a fixed fee per month that is the same for all
employees within a tier. In many cases this results in plans bidding only on
the entire employer group for that specific geographic market, therefore
limiting employee choice.

   Inefficient and inaccurate billing, reconciliation and settlement
processes. Employers receive bills from each of their carriers in different
formats and, in some cases, for different coverage periods. These bills are
calculated using the data of the carriers. If a carrier is late in recognizing
an employee's termination, for example, the bill will be wrong and only an
employer audit will catch the error. Regularly auditing carrier bills can be an
arduous task depending on the number of carriers and the diversity of the
payment arrangements. Inaccurate payments require significant manual
intervention by employers and carriers to reconcile accounts.

   Brokers have limited transaction processing capability. In the mid-sized
employer market, employers and carriers conduct business through brokers. Many
brokers want to focus on strategic advisory services, and act as a trusted
business partner with their employer clients rather than a paper processor.
Brokers generally do not have access to the capital needed to develop Web-based
benefits administration systems. Consequently, this mid-market process is
largely labor-intensive, paper-based and highly inefficient.

   Added complexity caused by government regulation. Numerous federal, state
and local laws and regulations govern the health care and insurance industries.
These laws and regulations change frequently. In recent years, the
responsibilities of employers that provide their employees with access to
health care have increased significantly. In particular, COBRA and the Health
Insurance Portability and Accountability Act of 1996 (HIPAA) have added
substantial burdens to employers in the administration of employee health
insurance benefits. The proposed legislation covering a patients' bill of
rights includes a provision that may put carriers and employers at more risk of
litigation. We believe this may have the effect of pushing employers toward a
new pricing and financing system that may include such things as a defined
contribution or self-directed approach to employee health insurance benefits.

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Opportunity for Technology-Based Services

   Health and welfare benefit transactions are well suited for technology-based
service solutions. Most of these transactions are information-based and do not
require delivery of durable goods at the point of payment. However, unlike
other e-commerce services, such as purchasing books or individual insurance
online, health and welfare benefits transactions involve complex group
insurance pricing, complex product presentation, and ongoing data management
between multiple organizations.

   We believe that technology-based solutions for the health and welfare
benefits supply chain can simplify the sharing of data and completion of
financial and administrative transactions. The solutions require the following
components:

   Front-end benefits administration:

  .  Systems that enable employers or their brokers to present requests for
     bids to carriers, and for carriers to respond with proposals and sales;
     and

  .  Annual and ongoing enrollment update tools that accommodate enrollment
     in numerous plans, and content engines that provide plan descriptions,
     provider networks and rate information.

   Back-end benefits administration:

  .  Systems that transfer eligibility and financial data files between
     participants in the supply chain and execute payment transactions with
     all applicable parties.

   Currently, there are numerous front-end solutions that support enrollment.
However, we believe efficient supply chain management will exist with a more
seamless integration of the front- and back-end processes. We believe that
linking our proprietary back-end technology and financial data management
services with front-end solutions such as our ChoiceOne Link system and non-
proprietary solutions provides a fully integrated end-to-end solution for group
health and welfare benefits administration.

Opportunity to Create a Category

   Just like many employers turn to specialists for assistance in administering
their payroll and 401(k) programs, we believe employers will turn increasingly
to a specialist for help in administering their health and welfare benefits
programs. A health and welfare benefits specialist is able to provide the
technology and strategic support resources to help an employer simplify and
automate the complex, ongoing and multiple transactions associated with the
administration and exchange of data and dollars between participants in the
health and welfare benefits supply chain.

   We see a new category of employee benefits administrators--the health and
welfare benefits specialist--emerging in the marketplace. We believe that we
are well positioned to define and lead this new category.

Our Solution

   We provide technology-based services that simplify and automate the
management of group health and welfare benefits. Our services address the
requirements of both the front- and back-end processes. During the first eight
years of our operations, we focused on data and financial management systems
and on building electronic connections between customers, such as PepsiCo,
Inc., Northwest Airlines Corporation, GE Capital, Hilton Hotels Corporation and
RR Donnelley & Sons Company and the United States' largest regional and local
health plans and other carriers. This effort has resulted in connectivity to
health plans that collectively serve approximately 85% of the managed care
enrollment in the United States. Our acquisition of Arbor Administrative
Services, Inc. (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information on our
acquisition) provides us with a fully integrated real time enrollment and
eligibility database platform which integrates with payroll providers and
expands our suite of services.

   In 2000, we began integrating our proprietary back-end technology with
multiple front-end enrollment applications, including ChoiceOne Link and those
offered by PeopleSoft, Inc. and CitiStreet LLC.

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Value Proposition

   Our solution provides value to all participants in the health and welfare
benefits supply chain through the collection, management and storage of
employee enrollment, eligibility and financial data and the ongoing
transmission of this data to carriers. Additionally, we manage and execute the
reconciling of payments between the purchasers and suppliers of health and
welfare benefits.

   For employers, our technology-based solution:

  .  streamlines the enrollment process;

  .  leverages existing relationships with human resources systems and
     services companies such as PeopleSoft, Inc., CitiStreet LLC and TALX
     Corporation;

  .  reduces administrative costs associated with the distribution of benefit
     plan information to employees, the enrollment transaction, and the
     management and transfer of data among parties;

  .  shifts the employer's responsibility to us for transmitting accurate
     enrollment and eligibility information to a variety of carriers and
     gives purchasers and suppliers access to real time eligibility via Web-
     enabled tools;

  .  eliminates the traditional paper-based and labor-intensive payment
     reconciling process used by purchasers and suppliers, and delivers a
     single, consolidated bill to employers and automates accurate and
     retroactively adjusted payments to carriers;

  .  allows more choice of plans and reduces the cost of switching between
     competing health plans;

  .  reduces the cost of procuring health and welfare benefits by increasing
     carrier competition in the bidding process; and

  .  increases the ability to attract and retain employees through more
     diverse benefit offerings.

   For carriers, our technology-based solution:

  .  improves timeliness and accuracy and lowers the cost of receiving
     eligibility and financial data;

  .  reduces the administrative burden associated with receiving eligibility
     and financial data;

  .  provides improved customer service and provider claims adjudication
     through Web-enabled access to employers' eligibility and financial data;
     and

  .  opens channels for them to create and distribute new products and
     services.

   For brokers and other benefit advisors, our technology-based solution:

  .  allows access to technology without significant capital expense;

  .  moves services from a paper process to a more efficient Web-based
     solution;

  .  allows them to more easily offer multiple health plans to their employer
     clients; and

  .  provides significant differentiation from competing brokers.

   For employees, our technology-based solution:

  .  provides more opportunity for choice of plans and, through more
     competitive pricing, lower costs;

  .  provides interactive voice response (IVR)/Web-based enrollment and plan
     information; and


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  .  improves quality of services by reducing eligibility data errors through
     the more timely and accurate transmission of eligibility data to
     carriers.

Health and Welfare Benefits Administration Services

   We manage complex and dynamic data from employees and employers, process
this data and transmit it to the carriers that support the employer. Our core
technology incorporates the business rules of each of the relevant participants
in the supply chain, as well as the format translations needed to automatically
reconcile and pay carriers. Our solution creates a standard for connectivity
without causing employers or carriers to make major changes to their systems.
Employers can use our services to manage their enrollment process, or they can
manage it independently. We enable the employer to send data in the format and
media of their choice. After enrollment, our system edits and translates the
data into a standard format. To facilitate connectivity to carriers, our system
then translates that data into the format that is compatible with the computer
systems of the individual carriers utilized by our employer customers. This
translated information is then transmitted in the medium acceptable to the
carrier. The eligibility data stored in our system is more current than the
data held by the carriers, allowing us to accurately bill the parties
concerned.

   Our primary services are:

  .  Enrollment: streamlined, self-service health and welfare benefits
     enrollment for human resource managers and employee populations via the
     Web or IVR. We have proprietary enrollment tools or can leverage the
     self-service enrollment tools of human resource system and service
     companies such as PeopleSoft, Inc. and CitiStreet LLC.

  .  Administration: the input, processing and output of enrollment data,
     customer service support, financial services and carrier management.

  .  Billing, payment and collection: creation of the invoice from the data,
     eligibility rules, and rates housed on our system. This allows the
     employer to obtain a consolidated bill for all of their carrriers and
     allows the carriers to turn off their billing mechanisms. After billing,
     the employer pays us and we pay the carriers on their behalf. The
     carriers accept our payment as payment in full because we have tied the
     dollars to the eligibility rules. Our bill automatically incorporates
     the retroactive adjustments caused by late adds, deletes and other
     eligibility changes.

   Our suite of services also includes flexible spending account
administration, COBRA and HIPAA compliance services, medicare + choice services
for retired employee populations and individual billing services for inactive
employee populations, and enhanced administration services, such as primary
care physician selection, over-age dependent verification, enhanced carrier
audits, and employee/customer service support.

   Revenues generated from our administration or exchange services were
$23,172,000, $13,823,000 and $7,742,000, for the years ended December 31, 2000,
1999 and 1998, respectively.

Health & Welfare Benefits Procurement Consulting Services

   We provide health and welfare benefits procurement consulting services to
large employers, primarily our Fortune 1000 customers. We undertake these
services on a project basis. We assist and advise our customers on their
selection of potential carriers and other benefit suppliers, preparation of
requests for proposals, evaluation of proposals, and rate negotiations.
Approximately 27 of our employees engage in delivering these services. Our
principal customers for these services are Federated Department Stores Inc.,
General Electric Company and Nabisco, Inc. We view these activities as a
complement to our health and welfare benefits administration services. In
addition, we gain valuable knowledge regarding market conditions and processes
from providing these services. Revenues generated from our procurement
consulting services were $5,829,000, $3,703,000 and $2,380,000, for the years
ended December 31, 2000, 1999 and 1998, respectively.

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Our Strategy

   Our objective is to be the leading provider of technology-based services
that manage the health and welfare benefits supply chain. Key elements to our
strategy include the following:

   Create a new category. Much like large employers turn to specialists to
administer payroll and their 401(k) programs, we believe employers will turn to
a specialist for the administration of their health and welfare benefits, as a
significant amount of an employer's money is involved, and the associated
transactions are multiple, ongoing and extremely complex. "Health and welfare
benefits supply chain management" is a new and emerging category that we are
striving to define and lead. We will develop marketing programs to build
awareness of this new category and the value of working with a specialist.

   Increase penetration of the large employer market. We will continue to focus
on marketing our services to large employers with geographically dispersed
employee populations and complex benefit plans where we can best demonstrate
administrative efficiencies, cost savings and participant satisfaction. There
are 1,500 employers in America with 5,000 employees or more. We now provide
services to more than 20 of these employers, including Eastman Kodak Company,
General Electric Company, Georgia-Pacific, KPMG LLP, Northwest Airlines
Corporation, PepsiCo, Inc., The Reader's Digest Association, Inc., and Target
Corporation. The remaining companies in the large employer market provide us
with substantial growth opportunities.

   Expand large employer customer base through relationships with aggregators
of employees. We intend to continue to aggressively expand through select
relationships with aggregators such as human resource systems and service
companies. Human resource systems and service companies include those involved
with payroll, record keeping, and enterprise-wide systems. These key strategic
relationships, with organizations such as PeopleSoft, Inc. and CitiStreet LLC,
enhance our service offering and provide an opportunity to expand our customer
base.

   Expand presence in the mid-size employer market. There are 30,000 mid-sized
employers in America who buy group health insurance primarily through brokers.
Through our acquisition of Arbor Administrative Services, Inc., a Web-based
benefits administrator, we accelerated our presence in the mid-sized employer
market. Our mid-market activities remain focused on selling our services to and
through brokers who act as distribution partners to mid-sized employers. Our
solution for the mid-market utilizes a more standardized approach to the
administration of health and welfare benefits.

   Offer solutions to health plans and carriers. Carriers need a way to sell
and service employers using new technology. Because employers buy from multiple
health plans, we are well positioned to address the needs of health plans and
carriers by leveraging our current applications. We believe we can offer
carriers an efficient new distribution channel that will help them lower their
administrative costs, especially in the areas of enrollment, billing and
collection.

   Develop new products and services. We intend to use our market knowledge and
experience to develop new products and services to fully leverage our
technology-based services and consulting expertise. These may include a
structure for offering a new risk-adjusted pricing model that would replace the
current three or four tiered structures. This new pricing model will allow
employers to offer a variety of standard products and benefit designs to
employees at competitive prices. This platform of choice will enable the many
carriers to compete for the employees' business as opposed to the employer's
business.

   Pursue key strategic relationships to further enhance our service offering
and client base. We intend to pursue key strategic relationships, including
partnerships and acquisitions. These partnership and acquisition candidates
could include companies that provide payroll, front-end enrollment, voluntary
benefits and similar services. We believe that making strategic acquisitions
and developing strategic relationships will enable us to enhance our service
offerings and expand our client base.


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Customers

   The following is a list of some of our major customers.

  Bass Hotel & Resorts Inc.               Northwest Airlines Corporation
  Eastman Kodak Company                   PepsiCo, Inc.
  Federated Department Stores,            RR Donnelley & Sons Company
  Inc.                                    Target Corporation
  General Electric Company                W.W. Grainger, Inc.
  Georgia-Pacific Corporation             Verizon Communications Inc.
  Hilton Hotels Corporation
  KPMG LLP

   In 2000, Verizon Communications Inc. and PepsiCo, Inc. accounted for 19.2%
and 13.2%, respectively, of our consolidated revenue, while in 1999, Verizon
Communications Inc. and PepsiCo, Inc. accounted for 28.0% and 20.3%,
respectively, of our consolidated revenue. In 1998, PepsiCo, Inc., Verizon
Communications Inc. and Northwest Airlines Corporation accounted for 19.1%,
17.1% and 14.0%, respectively, of our consolidated revenue. Verizon
Communications Inc. will end its relationship with us at the end of the 2001
calendar year. We will continue to receive revenue from and provide services to
Verizon through the end of 2001.

Connected Carriers

   The following is a list of some of the carriers with which we have
interfaces.

  Aetna, Inc. Plans                       Kaiser Foundation Health Plan
  Blue Cross Blue Shield Plans            Merck-Medco
  CIGNA Health Plans, Inc.                PacifiCare Health Systems
  Delta Dental                            UnitedHealth Group Corporation Plans
  Harvard Pilgrim Health Care

Sales and Marketing

   Our sales, marketing and business development staff is organized according
to our three key targeted customer segments: large employers, mid-sized
employers and carriers. Executive management plays an active role in our sales,
marketing and business development efforts.

   Large Employers. We sell directly to large employers, and we partner with
human resource systems and service companies, such as PeopleSoft, Inc. and
CitiStreet LLC. We employ a senior vice president in charge of sales who is
supported by four regional sales directors and two technical sales support
specialists. We expect to hire additional sales personnel in the next year. Our
partnership efforts are supported by two employees. We will consider adding
personnel to this area as other strategic relationships are developed. In
addition, we augment the sales effort with four strategic procurement
consultants who spend a portion of their time cross selling administrative
services to the large employer market. Our sales efforts are supported by three
marketing specialists.

   Due to the technical nature of our products and services, our typical sales
cycle in the large employer market is four to six months and usually involves a
competitive bidding process, which starts with a request for proposal from the
employer. The employer often indicates that this request for proposal has been
sent to other benefits administration service companies, which may or may not
submit a proposal to the employer. Our sales process also is somewhat seasonal
because most large employers undergo the open enrollment process in the fall of
each year. We obtain approximately 75% of our customer commitments during the
months of March through August. The mutual intent is that our services will
become operational prior to the next open enrollment period.


                                       9
<PAGE>

   Mid-sized Employers. We utilize existing brokerage distribution systems to
penetrate the mid-sized employer market. We employ seven staff members who are
specifically focused on developing our sales and marketing efforts to mid-sized
employers.

   Carriers. We sell directly to health plans and other carriers. Three
employees, including the Chairman of our Company, are focused on developing
this new market segment.

Customer Support

   We believe a high level of customer support is necessary to support and
enhance the services we provide. We provide a wide range of customer support
services through our call service center, account managers, customer service
staff and an e-mail help desk. By providing consolidated customer service
through our service center, we allow employers, brokers, carriers and other
participants in the supply chain to resolve enrollment, eligibility and billing
issues. We also assist individual participants with enrollment choices,
grievances and benefit clarification. Our service center is available 24 hours
a day, seven days a week through a combination of an Internet-based support
service, voice mail, electronic mail, and a call center operating during normal
business hours. We use a proprietary automated tracking system to ensure
resolution of all inquiries. As of December 31, 2000, we had more than 130
employees in customer support functions.

Competition

   The market for health and welfare benefits administration services is
intensely competitive, rapidly evolving and subject to continual change. Many
of our actual and potential competitors have announced or introduced solutions
that compete, at least in part, with our products and services. We believe that
the principal competitive factors in this market are expertise in benefits
administration, managed care and relevant government regulations, data
integration and transfer technology, health and welfare benefits processing
technology, customer service and support and price. We believe our products and
services are competitive with respect to these factors and no other competitor
can match our technology capabilities and domain expertise.

   We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the internal information
systems departments of employers and carriers that may choose to perform their
own health and welfare benefits administration services. In the mid-sized
employer market, we compete with other technology solutions that serve the
automation and administration needs of brokers and other benefit advisors. In
addition, many human resource service and systems companies have the health
care expertise and financial strength to develop the technology necessary to
compete with us. As the market evolves, we expect increasing competition from
Internet-based service providers in both the health care connectivity market
and the online insurance market. We believe that our established and proven
technology, which predates the prevalence of the Internet, and our knowledge of
the health care market provide us with the necessary capabilities to adapt to
the evolving market and to increasing competition.

Systems and Technology

Primary Systems Information

   Historically, our services have been delivered using our proprietary BEN-NET
technology as the core eligibility and financial exchange platform. BEN-NET was
originally designed and implemented in 1994 to serve two distinct customer
bases: Fortune 1000 employers and health insurance purchasing coalitions.
Though the latter market never fully developed, the business requirements and
attendant system capabilities, such as our ability to update, transmit and
permanently store eligibility data at both the employee and dependent level,
have provided additional benefit to our large employer clients. We have
incorporated a number of enhancements to BEN-NET in three subsequent major
releases.

   In calendar year 2000, as a result of our acquisition of Arbor
Administrative Services, Inc., we also acquired its processing technology
referred to as ChoiceOne Link. The ChoiceOne Link system is the platform

                                       10
<PAGE>

for our mid-market activities, and provides front-end enrollment and
eligibility capabilities via Web, IVR, and paper as well as back-end
integration with payroll, human resourse information service systems and
insurance carriers. Work is currently underway to provide a robust integration
between ChoiceOne Link and BEN-NET.

BEN-NET

   BEN-NET and its fully integrated attendant applications are delivered using
a multi-tier information system comprised of multiple midrange servers, PCs and
workstations. The midrange servers, Sun Enterprise servers running Sun's
Solaris UNIX operating system, are used to provide middle-tier application
component logic and as a platform for our relational database management
system. Batch and end-user local and Internet applications employ a number of
different languages, primarily PowerBuilder, C/C++, and Java.

   Our BEN-NET production processing environment, maintained at two sites in
the Minneapolis area, is composed of multiple servers, permitting maximum
flexibility in organizing and protecting client data. The environment in which
our database runs, UNIX, is a highly scalable platform. Given this platform, we
are able to add capacity relatively easily; we can also physically organize our
databases on different servers to optimize the processing performed on each
server. For example, an entire production server can be dedicated to a single
large client if this client has extensive processing requirements. Within this
processing environment, we establish separate physical production databases for
each of our large employer customers to ensure that customer data remains
confidential and secure while maintaining its integrity. This enables us to
provide secure, real time Internet-based employer, broker and carrier access to
consistent, specified user group data data, resulting in reduced support costs
and improved quality.

   We believe our proprietary data import and export management application is
a key differentiator for our services. Electronic Vendor Interface Management
(EVIM) delivers the ability and flexibility to receive and transmit data
between participants in the benefit supply chain. This application incorporates
a library of health plan data maps as well as a deep knowledge of the business
rules required for the complex managed care market.

   Electronic imports and exports (an average of 1,000 files per week with each
file ranging from 500-130,000 records) are managed via EVIM, ensuring
automated, timely distribution of data, payments, and reports to employers,
brokers and carriers. The precise management of this flow of data also supports
a key function of BEN-NET, the dynamic application of customer-related business
rules to customer-delivered eligibility data, streamlining health plan delivery
of both service and payment.

ChoiceOne Link

   ChoiceOne Link is delivered using a multi-tier information system comprising
multiple NT servers and workstations. The NT servers host proprietary
application logic, Microsoft SQL Server 7.0 databases, MS Internet Information
Server, as well as firewall and intrusion detection applications. The
workstations control ChoiceOne Link setup, maintenance, and batch processes.
ChoiceOne Link was developed in Visual Basic 6.0, Java and C++.

Redundancy, System Backup, Security and Disaster Recovery

   We believe our facilities and operations include sufficient redundancy,
back-up and security to ensure minimal exposure to systems failure or
unauthorized access. The preparations in this area include the use of two data
processing sites in Minnesota and two data processing sites in Pennsylvania in
order to help provide redundancy for data and processes should one site be
completely disabled. As part of our ongoing efforts, we simulate the loss of
one of our data sites and enact our disaster recovery plan on a periodic basis.

   Incremental backups of both software and databases are performed on a daily
basis and a full system backup is performed weekly. Backup tapes are stored at
an offsite location along with copies of schedules and production control
procedures, procedures for recovery using an off-site data center,
documentation and other critical information necessary for recovery and
continued operation. Our primary Minnesota data processing

                                       11
<PAGE>

facility has two separate power feeds, uninterruptible power supply (UPS) and
back-up generators that provide a level of redundancy should a power outage or
interruption occur.

   We employ rigorous physical and electronic security to protect customer
data. Our data centers have restricted card key access and appropriate
additional physical security measures. Electronic protections include
encryption, firewalls, multi-level access controls and separate customer
databases.

Proprietary Rights

   We rely upon a combination of contractual rights, trade secrets, copyrights,
technical measures, nondisclosure agreements, patents and trademarks to
establish and protect proprietary rights in our products and technologies.
However, we believe that intellectual property protection is less important
than our ability to continue to develop new applications and services that meet
the requirements of our industry. As a result, we have invested heavily in the
research and development of our products and services, spending approximately
$7,883,000, $4,012,000 and $1,519,000 in 2000, 1999 and 1998, respectively. We
typically enter into nondisclosure and confidentiality agreements with our
employees and consultants with access to sensitive information. These
agreements may be breached and we may not have adequate remedies for any
breach. Others may acquire substantially equivalent proprietary technologies or
otherwise gain access to our proprietary technologies. In addition, any
particular technology may not be regarded as a trade secret under applicable
law. As a result of the reliance that we place on our trade secrets, loss of
our trade secret protection could harm our business and results of operations.
Arbor Associates, Inc. has patented its health and welfare benefit systems,
which will expire in March of 2016.

   Although we have taken steps to protect our technology, the steps taken by
us to protect our proprietary rights may not be adequate to prevent
misappropriation of our technology or independent development or sale by others
of software products with features based upon, or otherwise similar to, our
products. While we believe our technology has been independently developed and
that none of our technology or intellectual property infringes on the rights of
others, third parties may assert infringement claims against us in the future.
If infringement were established, we might be required to modify our products
or technologies or obtain a license to permit our continued use of those
rights. We may not be able to do either in a timely manner or upon acceptable
terms and conditions, and any failure to do so could harm our business and
results of operations. In addition, any future litigation necessary to protect
our trade secrets, know-how or other proprietary rights, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others could result in substantial
cost to us and diversion of our resources. Adverse determinations in any
litigation or proceedings also could subject us to significant liabilities to
third parties and could prevent us from producing, selling or using our
products or technologies. We may not have the resources to defend or prosecute
a proprietary rights infringement claim or other action.

Government Regulation

   The health care industry is highly regulated by state, federal and local
laws and regulations, which are subject to change. Currently, few of these laws
and regulations apply directly to our business but rather apply primarily to
employers, health plans and health providers. For example, the confidentiality
of individual health information and the circumstances under which such data
may be released for inclusion in our databases may be subject to regulation
under state and federal laws, including HIPAA, which governs the disclosure and
the use of personal health information. Although compliance with these laws and
regulations currently is principally the responsibility of health plans and
providers, and we typically do not include confidential patient medical
information in our databases, newly finalized regulations may extend to our
business and some data that we include in our databases. In addition, we
anticipate the issuance of federal standards that will require the
implementation of security measures that apply to the maintenance and
transmission of health information. Changes to these and other federal and
state laws, as well as enactment of new legislation at the federal or state
level, may materially restrict employers' and health plans' ability to store
and transmit personal health information and may affect the use of our products
and services.


                                       12
<PAGE>

   Laws and regulations may be adopted with respect to the Internet or other
online services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other online services. This could decrease the demand
for our products and services and increase our cost of doing business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing property ownership, sales taxes and other forms of
taxation, libel and personal privacy is uncertain and may remain uncertain for
a considerable length of time.

   Finally, our function as a conduit for payment by employers to health plans
may subject us to the provisions of the Employee Retirement Income Security Act
(ERISA). ERISA imposes fiduciary duties on employers and health plans with
respect to payments made on behalf of participants. Although we believe our
role in the payment process is purely ministerial, it is possible that these
fiduciary duties could be deemed to apply to us. In that event, we may become
subject to greater liability with respect to these payments and may experience
higher operating costs in order to comply with these regulations.

Properties

   Our headquarters are located at 605 North Highway 169, Suite LL,
Minneapolis, Minnesota 55441-6465 and our telephone number is (763) 614-2000.
The main office of our subsidiary, Arbor Associates, Inc., is located at 325
Chestnut Street, Suite 1010, Philadelphia, Pennsylvania 19106. Our Web site
address is www.ebenx.com.

Employees

   As of December 31, 2000, we had 428 full-time employees, including 129 in
information technology, 166 in operations, 44 in account relations, 33 in sales
and marketing, 23 in consulting and 33 in administration and executive
management. We have never had a work stoppage and none of our employees
currently are represented under collective bargaining agreements. We consider
our relations with our employees to be good. We believe that our future success
will depend in part on the continued service of our senior management and key
technical personnel and our ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel. Competition for qualified
personnel in our industry and geographic locations is intense. We may not
continue to be successful in attracting and retaining a sufficient number of
qualified personnel to conduct our business in the future.

Item 2. Properties

   Our corporate headquarters are currently located in Plymouth, Minnesota
where we lease approximately 91,100 square feet of office space. An additional
18,100 square feet will be added before May 1, 2001. This lease expires in
2005.

   Our subsidiary, Arbor Associates, Inc., maintains offices in Philadelphia,
Pennsylvania for our mid-market division. It leases approximately 14,000 square
feet of office space in an operating lease that terminates in 2006.

   We also lease approximately 5,600 square feet of office space for our
primary data processing production facility in Minneapolis, Minnesota. The term
of this lease is ten years, with the right to renew this lease for two
additional five-year terms.

   In addition, we lease office space of approximately 6,800 square feet in
Atlanta, Georgia for 18 professionals focused on providing procurement
services.

Item 3. Legal Proceedings

   The Company is not involved in any material legal proceedings.

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

   No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.

                                       13
<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

   Our common stock, $.01 par value, is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol "EBNX". Prior to December 10,
1999, there was no public market for our common stock. The following table sets
forth the high and low bid quotations for the period indicated as reported by
the Nasdaq National Market.

<TABLE>
<CAPTION>
                                           2000                  Period from
                                ---------------------------   December 10, 1999
                                  Q1     Q2     Q3     Q4    to December 31, 1999
                                ------ ------ ------ ------  --------------------
      <S>                       <C>    <C>    <C>    <C>    <C>     <C>  <C>  <C>
      Bid quotation per share:
        Low...................  $29.50 $12.75 $11.31 $ 6.75  $34.00
        High..................  $76.50 $36.88 $29.00 $14.00  $53.84
</TABLE>

   As of March 1, 2001, we had 19,655,403 shares of Common Stock held by 370
shareholders of record. This does not reflect persons or entities that hold
their stock in a nominee or a "street" name through various brokerage firms.

Dividend Policy

   We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.

Use of Proceeds from Initial Public Offering

   On December 15, 1999, we closed our initial public offering of 5,000,000
shares of common stock. In January 2000, the underwriters exercised their over-
allotment option to purchase 750,000 shares at the initial offering price of
$20.00 per share. The shares of the common stock sold in the offering were
registered under the Securities Act of 1933 on a registration statement on Form
S-1 (No. 333-87985), the effective date of which was December 9, 1999. With the
over-allotment option, the aggregate initial public offering proceeds totaled
$115 million. After deducting underwriting discounts and commissions and other
offering expenses of $9.5 million, we received net proceeds of approximately
$105.5 million from the offering.

   We have used the net offering proceeds for the following purposes in the
approximate amounts set forth below (in millions):

<TABLE>
      <S>                                                                <C>
      Short-term investments............................................ $ 69.7
      Acquisition of Arbor..............................................   20.4
      Purchase of furniture and equipment...............................    6.9
      Working capital...................................................    8.5
                                                                         ------
        Total........................................................... $105.5
</TABLE>

   In connection with our acquisition of Arbor, the eBenX President of Mid-
Market, formerly President of Arbor, received approximately $11.4 million in
his capacity as the majority shareholder of Arbor. Otherwise, none of the net
proceeds were paid, directly or indirectly to (i) officers or directors of
eBenX or its affiliates, (ii) persons owning 10% or more of our equity
securities or (iii) affiliates.

Recent Sales of Unregistered Securities

   Not applicable.


                                       14
<PAGE>

Item 6. Selected Consolidated Financial Data

   The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," appearing elsewhere
in this document. The selected statement of operations data shown below for the
years ended December 31, 2000, 1999 and 1998 and the balance sheet data as of
December 31, 2000 and 1999 are derived from our audited financial statements
included elsewhere in this document. The selected statement of operations data
shown below for the years ended December 31, 1997 and 1996 and the balance
sheet data as of December 31, 1998, 1997 and 1996 are derived from our audited
financial statements not included elsewhere in this document.

<TABLE>
<CAPTION>
                                           Years Ended December 31,
                                    ------------------------------------------
                                      2000     1999     1998     1997    1996
                                    --------  -------  -------  ------  ------
                                    (In thousands, except per share data)
<S>                                 <C>       <C>      <C>      <C>     <C>
Statement of Operations Data:
  Net revenue...................... $ 29,001  $17,526  $10,122  $7,093  $4,360
  Net loss......................... $(15,490) $(5,027) $(1,042) $ (500) $ (581)
  Net loss per share:
    Basic and diluted.............. $  (0.90) $ (1.18) $ (0.30) $(0.15) $(0.18)
  Shares used in calculatrion of
   net loss per share:
    Basic and diluted..............   17,211    4,253    3,463   3,376   3,313
</TABLE>

<TABLE>
<CAPTION>
                                                  December 31,
                                    ------------------------------------------
                                      2000     1999    1998     1997     1996
                                    -------- -------- -------  -------  ------
                                                 (In thousands)
<S>                                 <C>      <C>      <C>      <C>      <C>
Balance Sheet Data:
  Cash and cash equivalents........ $    764 $ 98,611 $ 1,681  $ 1,009  $1,614
  Working capital.................. $ 82,436 $ 98,608 $ 1,782  $ 3,102  $3,981
  Total assets..................... $157,226 $105,599 $ 5,596  $ 5,084  $5,179
  Redeemable convertible preferred
   stock........................... $    --  $    --  $ 5,468  $ 5,468  $5,468
  Total shareholders' equity
   (deficit)....................... $153,470 $101,126 $(2,077) $(1,045) $ (564)
</TABLE>

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

   The following discussion and analysis of the financial condition and results
of operations of eBenX should be read in conjunction with "Selected
Consolidated Financial Data" and our consolidated financial statements and
related notes appearing elsewhere in this report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties, and
assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including but
not limited to the risks discussed in this report.

Overview

   We provide specialized technology-based solutions to employers, brokers and
other employee benefit advisors, and health plans and other carriers for the
purchase, administration, and payment of group health and welfare benefits. We
apply the Internet and other technology to simplify and automate the complex,
ongoing and multiple transactions associated with the exchange of data and
dollars between parties in the health and welfare benefits supply chain.

   In September 2000, we acquired Arbor Administrative Services, Inc., which
merged into our wholly owned subsidiary, Arbor Associates, Inc. (Arbor). Arbor
is a Web-based benefits administrator that offers a Web/IVR benefits platforms,
and provides full service benefit administration for mid-sized employers. Arbor
distributes its services primarily through brokers and other employee benefits
advisors.

                                       15
<PAGE>

   Revenue is derived primarily from providing ongoing annual enrollment and
health and welfare eligibility administration and premium billing and payment
exchange services. Administrative or exchange services revenue typically is
priced on a per employee per month basis with adjustments made to accommodate
the number of health plans and other carriers required by the customer. In many
cases, we allow fixed and variable fee structures to permit volume-adjusted
pricing. We recognize revenue for administrative services as the services are
performed. Revenue also is recorded for implementation fees associated with our
administrative services. These fees are recognized as revenue over the period
of time the implementation services are being provided. We also receive fees
for providing enrollment services. These fees are recognized over the
enrollment period as services are provided. In addition, we earn revenue from
health and welfare benefits procurement consulting fees as services are
performed. We typically enter into multi-year contracts with our large employer
customers. Customers may purchase some or all of our services, and the customer
relationship may evolve from utilizing procurement services to utilizing
implementation and enrollment services and per employee-based administrative
services.

   The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The large employer sales process
typically takes four to six months, and the implementation process takes an
additional two to four months. The establishment of new mid-market customer
relationships is coordinated through the broker or employee benefit advisor
that typically has an existing relationship with the employer. The
implementation process for mid-market customers typically takes one to four
months. The sales process is accounted for under the selling, general and
administrative expense category. The implementation process affects cost of
services but may also impact research and development expense to the extent new
customer relationships require new or enhanced service offerings.

   Cost of services consists primarily of personnel costs for account
management, operations, production and procurement and information technology
costs for both ongoing procurement and administrative services and for customer
implementation expense. The information technology costs relate to personnel
costs for implementing and maintaining customer and health plan computer
interfaces and computer hardware and software expenses related to computer
processing. A significant portion of cost of services consists of new customer
implementation expenses. Therefore, increasing numbers of new customers will
cause the cost of services as a percentage of net revenue to increase.

   Selling, general and administrative expenses consist primarily of payroll
and payroll-related expenses associated with sales and marketing, executive
management and corporate administrative personnel, as well as professional fees
and expenditures for advertising, public relations and promotional efforts. We
intend to increase our sales and marketing expenses over the next several
years, including expanding efforts to sell directly to health plans and other
carriers. At the same time, we intend to devote additional resources to develop
partnerships and relationships with human resource service and systems
organizations. We expect that, in support of the continued growth and operation
of our business, selling, general and administrative expenses will continue to
increase for the foreseeable future.

   Research and development expenses consist primarily of development personnel
and external contractor costs related to the development of new products and
services, enhancement of existing products and services, quality assurance and
testing. To date, we have not capitalized any of our software development costs
because the timing of the commercial release of our services has substantially
coincided with technological feasibility. As a result, all research and
development costs have been expensed as incurred. We intend to continue to
expand our offerings by adding additional services. We expect these activities
will require additional personnel. Accordingly, we expect our research and
development expenses will continue to increase for the foreseeable future.

   Since our inception, we have incurred losses. As of December 31, 2000, we
had an accumulated deficit of $22.7 million. These losses and this accumulated
deficit have resulted from the significant costs incurred in the development of
our technology platform, the establishment of relationships with our customers,
the development and maintenance of our customer and carrier interfaces, and the
amortization of stock-based compensation, goodwill and other intangibles. We
believe that we will incur operating losses for the next

                                       16
<PAGE>

several years. Although we have experienced significant revenue growth in
recent periods, our operating results for future periods are subject to
numerous uncertainties. In view of the rapidly evolving nature of our business
and our limited operating history, we believe that period-to-period comparisons
of our operating results are not necessarily meaningful and should not be
relied upon as an indication of future performance.

Results of Operations

   The following table sets forth for the periods indicated selected statement
of operations data expressed as a percentage of net revenues.

<TABLE>
<CAPTION>
                                                          Years Ended
                                                         December 31,
                                                       ---------------------
                                                       2000    1999    1998
                                                       -----   -----   -----
      <S>                                              <C>     <C>     <C>
      Net revenue..................................... 100.0 % 100.0 % 100.0 %
      Cost of services................................  73.0    76.3    68.7
                                                       -----   -----   -----
          Gross profit................................  27.0    23.7    31.3
      Operating expenses:
        Selling, general and administrative...........  41.4    29.2    28.0
        Research and development......................  27.2    22.9    15.0
        Amortization of stock-based compensation......   9.4     4.4     --
        Amortization of goodwill and other
         intangibles..................................  24.7     --      --
                                                       -----   -----   -----
          Total operating expenses.................... 102.7    56.5    43.0
                                                       -----   -----   -----
      Loss from operations............................ (75.7)  (32.8)  (11.7)
      Interest income, net............................  22.3     4.1     1.4
                                                       -----   -----   -----
      Net loss........................................ (53.4)% (28.7)% (10.3)%
                                                       =====   =====   =====
</TABLE>

   In addition to our operating results, we also track and provide enrollment
statistics. Enrollment is defined as the number of employees to which we
currently provide administration services. Enrollment commitments include the
number of employees currently in enrollment, as well as new customer employee
commitments that will be implemented in the foreseeable future. The following
table sets forth our enrollment statistics for the periods indicated.

<TABLE>
<CAPTION>
                                                         Years Ended December
                                                                  31,
                                                        -----------------------
                                                         2000    1999    1998
                                                        ------- ------- -------
      <S>                                               <C>     <C>     <C>
      Enrollment....................................... 780,000 535,000 320,000
      Enrollment commitments........................... 852,000 600,000 335,000
</TABLE>

Years ended December 31, 2000 and 1999

   Net revenue. Net revenue increased to $29.0 million in 2000 from $17.5
million in 1999, representing an increase of $11.5 million, or 65.5%. This
increase was due primarily to our success in direct sales of both our
administrative and procurement services to new customers, as well as through
the expansion of administrative services to our existing customers. In
addition, revenue in 2000 includes approximately four months of revenue
resulting from our acquisition of Arbor in September 2000.

   Cost of services. Cost of services increased to $21.2 million in 2000, from
$13.4 million in 1999, representing an increase of $7.8 million, or 58.4%. The
increase can be attributed to additional personnel and computer-related costs
required to service our new clients. Cost of services, as a percentage of net
revenues, decreased to 73.0% in 2000 from 76.3% in 1999, primarily due to
efficiencies gained from our efforts to standardize and streamline our rules-
based interfaces with customers and health plans and other carriers.

   Selling, general and administrative. Selling, general and administrative
expenses increased to $12.0 million in 2000, from $5.1 million in 1999. The
$6.9 million increase, or 134.5%, primarily was due to additions to management
infrastructure and sales and marketing staff and a one-time write-off of
property and

                                       17
<PAGE>

equipment of $210,000 relating to the relocation of our corporate headquarters.
Selling, general and administrative expenses, as a percentage of net revenues,
increased to 41.4% in 2000, from 29.2% in 1999. We anticipate that sales and
marketing expenses will increase in future periods as we continue to expand our
sales and marketing efforts.

   Research and development. Research and development expenses increased to
$7.9 million in 2000, from $4.0 million in 1999, representing an increase of
$3.9 million, or 96.5%. This increase primarily was due to additions to our
research and development staff and external contractors to enhance product
offerings and expand services to the mid-sized employer market. Research and
development expenses, as a percentage of net revenues, increased to 27.2% in
2000, from 22.9% in 1999. We anticipate that research and development expenses,
as a percentage of net revenue, will decrease in the future due to technologies
gained through the Arbor acquisition and subsequent integration efforts.

   Amortization of stock-based compensation. In connection with the granting of
stock options to employees, we recorded deferred stock-based compensation in
1999, with an additional amount recorded in 2000 related to our acquisition of
Arbor. We recorded $2.7 million in amortization expense related to the deferred
stock-based compensation in 2000, an increase of 254.5% from the $767,000
recorded in 1999. The amortization of deferred stock-based compensation will
result in an additional $6.2 million of charges to operations through 2004.

   Amortization of goodwill and other intangibles. Related to our acquisition
of Arbor, goodwill and other intangibles of $67.8 million was recorded.
Goodwill and other intangibles will be amortized over 36 months. We recorded
$7.2 million in amortization expense related to these assets in 2000.

   Interest income and other, net. Net interest income includes income earned
from our invested cash and short-term investments and income earned from
facilitating our customers' payments to their health plans and other carriers.
Net interest income increased to $6.5 million in 2000, from $716,000 in 1999.
The increase in interest income is a result of the income earned on the
proceeds received from the completion of our initial public offering on
December 10, 1999, and increased income earned from customer payments to health
plans and other carriers. Net interest income in 1999 also included interest
expenses related to outstanding debt obligations under our bank credit
facility, which was repaid during 1999.

   Income taxes. As of December 31, 2000, we had unused federal and state
research and development tax credit carryforwards of approximately $250,000
which begin to expire in 2009. In addition, we had unused federal net operating
loss carryforwards at December 31, 2000 of approximately $11.4 million which
begin to expire in 2009. The utilization of these carryforwards is dependent
upon our ability to generate sufficient taxable income during carryforward
periods.

Years Ended December 31, 1999 and 1998

   Net revenues. Net revenues increased to $17.5 million in 1999, from $10.1
million in 1998, representing an increase of $7.4 million, or 73.3%. This
increase primarily was due to a new contract with Verizon Communications Inc.
entered into in late 1998, the expansion of our relationship with PepsiCo, Inc.
and new client implementations in 1999.

   Cost of services. Cost of services increased to $13.4 million in 1999, from
$7.0 million in 1998, representing an increase of $6.4 million, or 91.4%. Cost
of services, as a percentage of net revenues, increased from 68.7% in 1998 to
76.3% in 1999, primarily due to new customer implementations, as personnel and
computer-related infrastructure costs were incurred to meet the increased
demand for our services. Increasing numbers of new customers will cause the
cost of services as a percentage of net revenue to increase.

   Selling, general and administrative. Selling, general and administrative
expenses increased to $5.1 million in 1999, from $2.8 million in 1998,
representing an increase of $2.3 million, or 82.1%. This increase primarily was
due to the establishment of a sales team in late 1998 and additions to
management. Selling, general and administrative expenses, as a percentage of
net revenues, increased from 28.0% in 1998 to 29.2% in 1999.

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   Research and development. Research and development expenses increased to
$4.0 million in 1999, from $1.5 million in 1998, representing an increase of
$2.5 million, or 166.7%. This increase primarily was due to additions to our
research and development staff.

   Interest income, net. Net interest income includes income earned from our
invested cash, income earned from facilitating our customers' payments to their
health plans and expenses related to outstanding debt obligations under our
bank credit facility. Net interest income increased to $716,000 in 1999, from
$144,000 in 1998, or 397.2%, primarily as a result of the completion of our
initial public offering on December 10, 1999 and increased income earned from
customer payments to health plans. Interest expense was incurred for bank
borrowings which were repaid during 1999.

   Amortization of stock-based compensation. In connection with the granting of
stock options to employees, we recorded stock-based compensation totaling
approximately $767,000 in 1999. This amount represents the difference between
the exercise price and the deemed fair value of our common stock for accounting
purposes on the date these stock options were granted.

   Income taxes. As of December 31, 1999, we had unused federal and state
research and development tax credit carryforwards of approximately $100,000
which begin to expire in 2009. In addition, we had unused federal net operating
loss carryforwards at December 31, 1999 of approximately $5.6 million which
begin to expire in 2009. The utilization of these carryforwards is dependent
upon our ability to generate sufficient taxable income during carryforward
periods.

Liquidity and Capital Resources

   Our initial public offering on December 10, 1999 generated gross proceeds of
$100 million in cash. The January 2000 exercise of the underwriter's over-
allotment option to purchase 750,000 shares at $20.00 per share generated
additional gross proceeds of $15 million in cash. After underwriting discounts
and commissions and other costs, the net proceeds from the offering totaled
$105.5 million. Approximately $20.4 million of these proceeds were used in
connection with our acquisition of Arbor in September 2000. We intend to use
the remaining proceeds from the offering for general corporate purposes,
including working capital, sales and marketing expenditures, development of new
products and services, and investment in technology infrastructure. In
addition, a portion of the net proceeds may be used for other acquisitions of
businesses, products and technologies that are complementary to ours. Pending
use of the net proceeds for the above purposes, we intend to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities.

   Prior to our public offering we funded operations primarily through private
sales of preferred stock and limited bank borrowings. Computer and
communications equipment was funded primarily through operating leases.

   As of December 31, 2000, we had $77.5 million in short-term investments and
cash and cash equivalents. Short-term investments consisted primarily of
commercial paper and corporate and government bonds. Cash equivalents consisted
primarily of money market funds.

   Our operating activities used cash of $8.5 million in 2000, $3.8 million in
1999 and $1.3 million in 1998. The use of cash from operations in 2000 was due
primarily to our net loss, an increase in other current assets and a decrease
in accounts payable, partially offset by non cash charges for depreciation and
amortization. The use of cash from operations in 1999 and 1998 was due
primarily to our net loss and an increase in accounts receivable, partially
offset by an increase in depreciation and accrued expenses.

   Our investing activities used cash of $104.1 million in 2000 and $1.6
million in 1999, and provided cash of $1.2 million in 1998. In 2000 our
investing activities used $786.6 million in cash for purchases of investments
and $20.4 million for the acquisition of Arbor. Additions to property and
equipment used $6.9 million, while sales of investments provided cash of $709.8
million. In 1999, our investing activities used cash of $1.6 million for
additions to equipment. In 1998, we received proceeds of $2.0 million from the
sale of U.S. Treasury Notes, and used cash of $0.8 million for additions to
equipment.

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<PAGE>

   Our financing activities provided cash of $14.7 million in 2000, $102.4
million in 1999 and $0.8 million in 1998. In 2000, financing activities
provided $13.8 million in cash through the sale of common stock, primarily from
the exercise of the underwriter's over-allotment option to purchase shares and
our Employee Stock Purchase Plan. The exercise of stock options and warrants
added $0.9 million in cash. In 1999, financing activities provided cash from
the sale of $10.4 million in preferred stock and $92.6 million in common stock,
partially offset by the repayment of bank borrowings. In 1998, financing
activities provided cash principally from bank borrowings in December 1998 of
$0.8 million.

   Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment and leasehold improvements. In connection with
the relocation of the corporate headquarters in 2000, we added office furniture
and equipment and made significant leasehold improvements. Since inception, we
have generally funded equipment additions either through the use of working
capital or with operating leases. We expect to continue to add computer
hardware and software and to fund these additions through working capital or
operating leases.

   We believe that the net proceeds from the sale of the common stock in our
public offering and cash from operations will be sufficient to meet our working
capital and operating resource expenditure requirements for the foreseeable
future. However, to the extent that cash is used to fund acquisitions or
investments in complementary businesses, technologies or service lines, we may
find it necessary to obtain additional equity or debt financing.

Risks Related to Our Business

We have had net losses over the past several years and we may not be able to
achieve or maintain profitability in the future.

   Our business strategy may be unsuccessful and we may never achieve or
maintain significant revenues or profitability. With the exception of fiscal
1995, we have incurred net losses each year since we began operations in 1993.
We had net losses of approximately $15.5 million, $5.0 million and $1.0 million
for the years ended December 31, 2000, 1999 and 1998, respectively. As of
December 31, 2000 we had an accumulated deficit of $22.7 million. We expect to
continue to incur development, sales and marketing and other operational
expenses in connection with our business. We may also incur expenses in
connection with acquisitions or other strategic relationships. As a result of
these expenses, we will need to generate significant quarterly revenue
increases to achieve and maintain profitability. We expect that we will incur
losses for the forseeable future.

We rely significantly on a limited number of customers and the loss of any
material customer could harm our business and operating results.

   The loss of a material customer would significantly reduce our revenue and
harm our business and operating results. In 2000, eight customers accounted for
approximately 60% of our total revenue. Further, because increased employee
participation from existing customers has contributed to our revenue growth,
the loss of any material customer would harm our prospects for future growth.
We may continue to depend upon a small number of customers for a substantial
percentage of our revenue in the future.

The failure of the industry to accept our services could limit our revenue
growth.

   The failure of industry participants to accept our services as a replacement
for traditional methods of operation could limit our revenue growth. Our
success depends on our ability to provide services to a large number of
employers with a substantial base of participating employees and to efficiently
and accurately collect and process eligibility data and execute payment
transactions with numerous health plans. The acceptance by employers of our
services will require that all participants in the group health insurance
market adopt new methods of administering benefits, exchanging eligibility
information and executing payment transactions.

   Further, our services facilitate competition among health plans at the
employer level by creating an infrastructure that allows multiple health plans
to service a single employer. Health plans have in the past resisted servicing
smaller companies on a non-exclusive basis. This resistance may inhibit our
growth, especially in the mid-sized employer market.

                                       20
<PAGE>

We face intense competition in our industry and, if we are unable to compete
successfully, our business and operating results will be seriously harmed.

   Increased competition in our industry could result in price reductions,
reduced gross margins or loss of market share which could seriously harm our
business and operating results. The health and welfare benefits administration
industry is intensely competitive, rapidly evolving and subject to sudden
technological change. We believe that the principal competitive factors in this
market are health and managed care expertise, data integration and transfer
technology, benefits processing technology, customer service and support and
service fees. We expect competition to increase in the future.

   We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the human resource and
information systems departments of carriers and employers that perform their
own health and welfare benefit administration services. In the mid-sized
employer market we compete with health benefit brokers and regional brokers. In
addition, many human resource service and systems companies have the health
care expertise and financial strength to develop the technology necessary to
compete with us. As the market evolves we expect increased competition from
Internet-based service providers in both the health care connectivity market
between suppliers and providers (e.g., physicians, hospitals and pharmacies)
and the online insurance market.

   Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish strategic relationships among themselves or with
third parties to increase the ability of their products and services to address
employer needs. They may develop similar services to ours and we may not be
able to successfully market our services or develop and introduce new services
that are less costly than or superior to those of our competitors. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.

Failure to manage our growth effectively could harm our business and operating
results.

   Failure to manage our growth effectively could harm our business and
operating results. Continued rapid growth will place significant strain upon
our management and operational systems and resources. We will need to expand
our existing information systems or acquire new systems to meet the
requirements of our future operations. Any expansion or replacement of our
information systems may not be sufficient to meet our needs. In addition, we
may experience interruptions of service as we expand these systems.

   We recently have added a significant number of new employees, including key
executives. We will continue to add personnel to maintain our ability to grow
in the future. We must integrate our new employees and key executives into a
cohesive team. At the same time, we must increase the total number of employees
and train and manage our employee work force in a timely and effective manner
to expand our business. We may not be able to do so successfully, which would
inhibit our ability to expand our business and harm our operating results.

Unsuccessful efforts or incurrence of unanticipated expenses in selling our
services could harm our business and operating results.

   The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. The decision to
implement our services requires a substantial and technical analysis of an
employer's health and welfare benefits offerings and requirements, and time-
intensive education of the advantages of our services. Due to the length of our
sales cycle, which ranges from three to twelve months, we often devote
significant resources and incur costs without any assurance that a prospective
employer will purchase our services. In the event that a prospective employer
does not purchase our services, we may have incurred substantial costs that
cannot be recovered and which will not result in future revenues.

                                       21
<PAGE>

Our failure to establish and maintain successful relationships with strategic
partners could limit our revenue growth.

   We believe that our future revenue growth depends in part upon the
successful creation and maintenance of relationships with strategic partners
such as front-end health care information collection companies, human resource
information services firms, benefits consultants and brokers and other industry
participants. To date, we have established a limited number of strategic
relationships. Strategic partners may offer products or services of several
different companies, including products and services that compete with our
services. Strategic partners and potential strategic partners may be influenced
by our competitors to scale back or end their relationships with us. We may not
establish additional strategic relationships and these relationships may not be
ultimately successful. Our strategic partners may not devote adequate resources
to selling our services.

   If we are unable to establish and maintain successful strategic
relationships, we may have to devote substantially more resources to the sales
and marketing of our services, which will increase our costs and harm our
operating results.

Our quarterly results likely will fluctuate which could cause the value of our
common stock to rapidly decline.

   Any quarterly fluctuations in our operating results could subject the market
price of our common stock to rapid and unpredictable change. Historically, we
obtain a significant portion of each year's new customer commitments during the
months of March through August because most employers have open enrollment
periods for the selection of health plans by their employees in the fall. We
expect this seasonality in our business to continue. Our expenses are
relatively fixed in the short term and are based in part on our expectations of
future revenues, which may vary significantly. If we do not achieve expected
revenue targets, we may be unable to adjust our spending quickly enough to
offset any revenue shortfall which could harm our business and operating
results.

   Factors that may cause these quarterly fluctuations include:

  .  the number and size of new customers starting services;

  .  the decision of one or more employers to delay implementation or cancel
     ongoing services;

  .  our ability to design, develop and introduce new services and features
     for existing services on a timely basis;

  .  costs associated with strategic acquisitions and alliances or
     investments in technology;

  .  expenses incurred for geographic and service expansion;

  .  a reduction in the number of employees of our customers; and

  .  mergers or acquisitions of our customers by other companies.

   Further, our agreements with customers generally do not have penalties for
cancellation. As a result, any decision by a customer to cancel our services
may cause significant variations in operating results in a particular quarter
and could result in losses for that quarter. As we secure larger customers, any
cancellation of services by a larger customer likely would result in greater
fluctuations in operating results than historically experienced.

Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.

   The loss of one or more of our executive officers could inhibit the
development of our business and, accordingly, harm our business and operating
results. While we generally enter into employment agreements with our key
executive officers, we may not be able to retain them.

   Qualified personnel are in great demand throughout the Internet and health
care industries. Our future growth and our ability to achieve our financial and
operational objectives will depend in large part upon our ability to attract
and retain highly skilled technical, engineering, sales and marketing and
customer support

                                       22
<PAGE>

personnel. Our failure to attract and retain personnel may limit the rate at
which we can expand our business, including the development of new products and
services and the retention of additional customers, which could harm our
business and operating results.

We could be subject to potential liability claims related to our services which
could harm our financial condition and results of operations.

   Any liability claim brought against us, even if not successful, would likely
be time consuming and costly and could seriously harm our business and
operating results. Errors in the performance of our services on behalf of an
employer could result in the delay of processing of health care eligibility
information or execution of payment transactions or could otherwise result in
financial or other damages to our customers. These errors also may result in
the improper denial of health care benefits to employees. A liability claim
brought against us by an employer or an employee could seriously harm our
business and reputation.

   Our customer agreements generally require that we indemnify our customers
for various losses and liabilities incurred by them that are caused by us. Any
indemnification payments required under these agreements may harm our business
and operating results.

   We also may become party to litigation brought by a participating employee
against an employer or health plan. We may not successfully avoid liability for
problems related to the provision of health care benefits even though we do not
make medical determinations or coverage decisions. Any claims or litigation
also could require expenditures in terms of management time and other resources
to defend ourselves. This could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue service offerings or to take other
precautions. Liability of this type could harm our business and operating
results.

Expected benefits of our recent acquisition of Arbor Administrative Services,
Inc. may not be realized.

   Achieving the expected benefits of our acquisition of Arbor Administrative
Services, Inc. will depend in part on the timely and efficient integration of
the operations and personnel of the two companies. Among the challenges
involved in this integration are demonstrating to customers that the
acquisition will not result in adverse changes to service or customer service
standards, persuading personnel and customers that our business cultures are
compatible and addressing any perceived adverse changes in business focus. An
unsuccessful integration may result in the loss of customers and key employees,
and divert the attention of management which may adversely affect our business,
financial condition and operating results.

The failure to successfully integrate any future acquisitions could harm our
business and operating results.

   If we acquire businesses in the future and are unable to successfully
integrate these businesses into our own, it could harm our business and
operating results. In order to remain competitive or to expand our business, we
may find it necessary or desirable to acquire other businesses, products or
technologies. If we identify an appropriate acquisition candidate, we may not
be able to negotiate the terms of the acquisition successfully, to finance the
acquisition or to integrate the acquired businesses, products or technologies
into our existing business and operations. Further, completing a potential
acquisition and integrating an acquired business may strain our resources and
require significant management time. In addition, we may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions which would harm our operating results.

Changes in the health care industry could harm our future operating results and
opportunities for growth.

   Our services are, in large part, beneficial to employers because we are able
to coordinate the exchange of eligibility and financial data and execute
payment transactions between an employer and its numerous carriers. Changes in
the health care industry may require us to reconfigure our services and systems
to accommodate a change in data formats and codes utilized by recently acquired
or consolidated health plans. Further, the consolidation of health plans
operating in the same geographic market may substantially reduce the number of

                                       23
<PAGE>

competitive health plans in that market. Existing and potential customers,
especially mid-sized employers operating in only one geographic market, may not
find our services beneficial if there is limited competition among health
plans.

Our revenues could decrease if our systems or processes are inadequate.

   Any failure of our systems or processes could harm our business and
operating results. We process vast amounts of enrollment, eligibility and
financial data and execute many payment transactions. Any delay or failure in
our system, in our ability to communicate electronically with employers and
health plans, or in our ability to collect, store, analyze or process accurate
enrollment, eligibility and financial data may result in the denial of health
care benefits, or in the delay or failure to execute payment transactions
accurately. This type of denial or failure would harm our business and
operating results.

   The occurrence of a catastrophic event or other system failure at our
facilities could interrupt our operations or result in the loss or corruption
of stored data. In addition, we depend on the efficient operation of Internet
and network connections among our system, employers and carriers. These
connections depend on the efficient operation of data exchange tools, Web
browsers, Internet service providers and Internet and network backbone service
providers. In the past, Internet users have occasionally experienced
difficulties with Internet and online services due to system failures. Any
disruption in Internet or network access provided by third parties could harm
our business and operating results. Further, we are dependent on hardware
suppliers for prompt delivery, installation and service of equipment used to
deliver our services. The failure of these suppliers to promptly deliver,
install or service equipment could harm our business and operating results.

   Furthermore, our business depends upon products, services and technology
provided by third parties, such as health care providers and insurers,
insurance and health care brokers, information technology consultants, network
support providers, telecommunication companies, Internet service and access
providers, third-party service providers, vendors, business partners and others
outside our control. A prolonged Internet or communications failure also could
prevent us from performing services on behalf of customers. Also, a systemic
failure could require potential customers to dedicate substantial resources
towards fixing or resolving problems and may make the sales and marketing of
our services more difficult.

Our business and reputation may be harmed if we are unable to protect the
privacy of our information.

   Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers or similar disruptive problems. A user who is able to
access our computer or communication systems could gain access to confidential
employer, employee or carrier information or our own confidential information.
A material security breach could harm our business and our reputation or could
result in liability to us. Therefore, it is critical that our facilities and
infrastructure remain secure. The occurrence of any of these events could
result in the interruption, delay or cessation of our services, which could
harm our business or operating results. Further, our reputation may suffer if
third parties were to obtain this information and we may be liable for this
disclosure. Any effect on our reputation or any liability for any disclosure
could harm our business and operating results.

If we are unable to adequately protect our intellectual property rights or if
we infringe upon the intellectual property rights of third parties, our results
may be harmed.

   Our success depends in part upon our intellectual property rights to
products and services which we develop. We rely on a combination of
contractual, statutory and common law rights including non-disclosure
agreements, trade secrets, copyrights, patents and trademarks to establish and
protect our intellectual property rights in our names, products, services and
related technology. While our subsidiary, Arbor Associates, Inc., has patented
its health and welfare benefit systems, we currently have no registered patents
or pending patent applications covering any of our technology. Loss of
intellectual property protection or inability to secure intellectual property
protection on any of our names, confidential information or technology could
harm our business and operating results.

                                       24
<PAGE>

   We have received a U.S. trademark registration for BEN-NET and a U.S.
service mark registration for WebElect. In addition, we have applied for
trademark and service mark protection for benX, eBenX, and The Benefit Exchange
Network under the classifications of computer hardware and software, employee
benefits consulting services and computer consulting services. Arbor
Associates, Inc., has not applied for any trademark or service mark
protections. The benX and eBenX applications filed under the computer hardware
and software classification have been approved for publication, although third
parties may still raise objections to their registration. We have received
office actions from the U.S. Patent and Trademark Office for the benX and eBenX
applications filed under the employee benefits consulting services and computer
consulting services classifications and for The Benefit Exchange Network for
all three applications. These applications may not be granted. Our current
trademark and service mark registrations and any future granted registrations
may not be enforceable or effective in protecting the marks, and the lack of
registered trademark or service mark protection for our subsidiary's marks and
name could require it to stop using the marks or to change its name. Any
failure to protect our marks could result in the loss of any goodwill created
in providing our services.

   We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may not be adequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our services may be independently developed.

   Although we believe that our core technology has been independently
developed and that none of our technology or intellectual property infringes on
the rights of others, third parties may assert infringement claims against us
in the future. We may be required to modify our products, services, internal
systems or technologies or to obtain a license to permit our continued use of
those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating results. In addition, future litigation relating to these matters
could result in substantial cost diversion of resources by us. Adverse
determinations in any litigation or proceedings of this type also could subject
us to significant liabilities to third parties and could prevent us from using
some of our products, services, internal systems or technologies.

Rapidly changing technology may impair our financial performance.

   We may encounter difficulties responding to technological changes that could
delay our introduction of products and services and we may not be able to
respond to these changes in a timely and cost-effective manner. Our business
depends upon the use of software, hardware, networking and Internet technology
and systems. These technologies and systems are rapidly evolving and are
subject to rapid change and obsolescence. As these technologies mature, we must
be able to quickly and successfully modify our products and services to adapt
to this change. We may encounter difficulties that could delay or harm the
performance of our products or services. We may not be able to respond to
technological changes in a timely and cost-effective manner. In addition, our
competitors may develop technologically superior products and services.
Further, data formatting and eligibility rules within a particular employer or
health plan, or within the group health benefits industry as a whole, may
change and may require substantial and expensive re-engineering of eligibility
data and adjustment of the tools we use to process this eligibility data.

Federal, state and local laws could harm our business and operating results.

   Federal, state or local laws could harm our business and operating results
by requiring us to change the way we provide services and increase our cost of
performing services. Further, these laws could restrict our ability to continue
to develop our business as currently planned. The health care industry is
highly regulated by federal, state and local laws. The application of existing
laws, or the implementation of new laws applicable to our business could harm
our business and operating results. For example, the confidentiality of patient
records and the circumstances under which records may be released for inclusion
in our databases may be subject to substantial regulation. Although compliance
with current laws is principally the responsibility of health care providers
and carriers, these regulations may be extended to cover our business and the
eligibility data and

                                       25
<PAGE>

other information included in our databases. If these laws are extended to
cover our business, we may be required to expend additional resources in order
to comply with these laws, including changes to our security practices, and may
be exposed to greater liability in the event we fail to comply with these laws.

   HIPAA mandates that health plans use standard transactions, identifiers,
security and other provisions during 2000. We have designed our products and
services to comply with HIPAA, but any change in federal standards would
require us to expend additional resources. In addition, under HIPAA, the U.S.
Department of Health and Human Services has issued proposed rules that, if
adopted, would impose significant restrictions on the disclosure of electronic
personal health information.

   Further, our ministerial role in facilitating payments by employers to
health plans may subject us to ERISA. This act imposes fiduciary duties on
employers and health plans with respect to payments made on behalf of
participating employees and it is possible that these fiduciary duties could be
deemed to apply to us. In that event, we may become subject to greater
liability and constraints with respect to these payments and may experience
higher operating costs in order to comply with this regulation. These increases
in operating costs may harm our business and operating results.

Laws and regulations concerning the sale, marketing or distribution of
insurance over the Internet could harm our business and operating results.

   The impact of current or future insurance laws and regulations on our
business is difficult to anticipate because the application of e-commerce to
the insurance market is relatively new. The insurance industry is subject to
extensive regulation under state laws. Insurance laws and regulations cover all
aspects of the insurance process, including sales techniques, underwriting for
eligibility, rates, claim payments, and record keeping by licensed insurance
companies and insurance agents. A company that does business as an insurance
agent is generally required to be licensed in each state in which it conducts
that business. In the future, aspects of our business or other activities may
be considered by insurance regulatory authorities to fall under their licensing
jurisdiction.

Future sales of our common stock in the public market could cause the price of
our common stock to decline.

   We cannot predict the timing or amount of future sales of shares of our
stock or the effect, if any, that market sales of shares, or the availability
of shares for sale, will have on the prevailing market price of our common
stock. Our shareholders could sell substantial amounts of our common stock in
the public market. Currently approximately 2.4 million shares are subject to
certain lock-up agreements. Upon the expiration of these agreements, these
shares will be available for public trading. Consequently, the price of our
common stock could fall.

Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.

   Some shareholders, including officers and directors of the company,
beneficially own a substantial portion of our outstanding common stock. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of discouraging third party offers to acquire our
company or of delaying or preventing a change in control of our company.

Our charter documents and Minnesota law may discourage unsolicited takeover
offers which could deprive our shareholders of opportunities to sell their
shares of common stock at prices higher than prevailing market prices.

   Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws

                                       26
<PAGE>

provide for a classified board of directors with each class of directors
subject to re-election every three years. This will make it more difficult for
third parties to insert their representatives on our board of directors and
gain control of our company. These provisions also could discourage proxy
contests and make it more difficult for shareholders to elect directors and
take other corporate actions. Further, the Minnesota Control Share Acquisition
Act and the Minnesota Business Combination Act may make it more difficult for
third parties to secure control of us or to complete an acquisition. These acts
may discourage unsolicited takeover offers which could deprive our shareholders
of opportunities to sell their shares of common stock at prices higher than
prevailing market prices.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

   Our exposure to market risk for changes in interest rates relate primarily
to our short-term investments. We do not use derivative financial instruments.
The primary objective of our investment activities is to preserve principle
while maximizing yields without significantly increasing risk. Due to the
nature of our investments, we believe that there is no material risk exposure.
All investments are held at market value, with unrealized gains and losses
included in other comprehensive income.

   The table below represents principal (or notional) amounts and related
weighted average interest rates by year of maturity for our investments at
December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                              2001  2002  Total
                                                             ------ ----- ------
      <S>                                                    <C>    <C>   <C>
      Cash equivalents......................................    764   --     764
       Average interest rate................................   5.7%   --    5.7%
      Short-term investments................................ 75,431 1,313 76,744
       Average interest rate................................   6.7%  6.2%   6.7%
</TABLE>

Exchange Rate and Commodity Price Sensitivity

   We do not conduct business outside of the United States and do not invest in
foreign instruments or commodities and, therefore, have no direct exposure
related to either foreign currency exchange rate fluctuation or commodity price
fluctuation.

                                       27
<PAGE>

Item 8. Financial Statements and Supplementary Data

Selected Quarterly Operating Results

   The following table shows unaudited statement of operations data for each
quarter in our last two fiscal years ended December 31, 2000 and 1999. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited financial statements and related notes and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the quarters
presented, when read in conjunction with the audited financial statements and
related notes included elsewhere in this prospectus. We believe that quarter-
to-quarter comparisons of our financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.

<TABLE>
<CAPTION>
                                                        2000
                                                 Three Months Ended
                                      -------------------------------------------
                                      March 31  June 30  September 30 December 31
                                      --------  -------  ------------ -----------
                                           (In thousands, except per share
                                                    information)
<S>                                   <C>       <C>      <C>          <C>
Net revenue.......................... $ 5,575   $ 6,394    $ 7,644      $ 9,388
Gross profit......................... $ 1,304   $ 1,570    $ 2,054      $ 2,891
Net loss............................. $(1,785)  $(1,892)   $(3,650)     $(8,163)
Net loss per share:
  Basic and diluted.................. $ (0.11)  $ (0.12)   $ (0.21)     $ (0.42)
</TABLE>

<TABLE>
<CAPTION>
                                                         1999
                                                  Three Months Ended
                                       ------------------------------------------
                                       March 31 June 30  September 30 December 31
                                       -------- -------  ------------ -----------
                                            (In thousands, except per share
                                                     information)
<S>                                    <C>      <C>      <C>          <C>
Net revenue...........................  $3,342  $3,766     $ 4,638      $ 5,780
Gross profit..........................  $  987  $  888     $   802      $ 1,477
Net loss..............................  $ (372) $ (740)    $(1,590)     $(2,325)
Net loss per share:
  Basic and diluted...................  $(0.11) $(0.21)    $ (0.45)     $ (0.36)
</TABLE>



                                       28
<PAGE>

                                  EBENX, INC.

                              FINANCIAL STATEMENTS

                  Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors.............................................  30
Audited Financial Statements
  Consolidated Balance Sheets..............................................  31
  Consolidated Statements of Operations....................................  32
  Consolidated Statements of Shareholders' Equity (Deficit)................  33
  Consolidated Statements of Cash Flows....................................  34
  Notes to Consolidated Financial Statements...............................  35
</TABLE>


                                       29
<PAGE>

                         Report of Independent Auditors

Board of Directors and Shareholders
eBenX, Inc.

   We have audited the accompanying consolidated balance sheets of eBenX, Inc.
as of December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in shareholders' equity (deficit), and cash flows for each
of the three years in the period ended December 31, 2000. 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 in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eBenX, Inc. at
December 31, 2000 and 1999, and the consolidated results of its operations and
its 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.

                                          /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 9, 2001

                                       30
<PAGE>

                                  EBENX, INC.

                          CONSOLIDATED BALANCE SHEETS
            (Amounts in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $    764  $ 98,611
  Accounts receivable, net of allowance of $178 and $45....    3,973     3,415
  Unbilled revenue.........................................    3,477       446
  Prepaid expenses and other...............................    1,234       609
  Short-term investments...................................   76,744       --
                                                            --------  --------
    Total current assets...................................   86,192   103,081
Property and equipment, net................................    9,800     2,456
Loans receivable from employees............................      492       --
Deposits...................................................      103        62
Goodwill and other intangibles, net........................   60,639       --
                                                            --------  --------
    Total assets........................................... $157,226  $105,599
                                                            ========  ========
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................... $    150  $  1,353
  Accrued compensation.....................................      585       960
  Accrued expenses.........................................    2,743       864
  Accrued offering costs...................................      185     1,113
  Deferred revenue.........................................       93       183
                                                            --------  --------
    Total current liabilities..............................    3,756     4,473
Shareholders' equity:
  Common stock, $.01 par value: 100,000,000 shares
   authorized; 19,575,265 and 15,183,518 shares issued and
   outstanding.............................................      196       152
  Additional paid-in capital...............................  182,246   112,937
  Deferred stock-based compensation........................   (6,241)   (4,714)
  Accumulated other comprehensive income...................        8       --
  Retained deficit.........................................  (22,739)   (7,249)
                                                            --------  --------
    Total shareholders' equity.............................  153,470   101,126
                                                            --------  --------
    Total liabilities and shareholders' equity............. $157,226  $105,599
                                                            ========  ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       31
<PAGE>

                                  EBENX, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                                     --------------------------
                                                       2000     1999     1998
                                                     --------  -------  -------
<S>                                                  <C>       <C>      <C>
Net revenue......................................... $ 29,001  $17,526  $10,122
Cost of services....................................   21,182   13,372    6,958
                                                     --------  -------  -------
    Gross profit....................................    7,819    4,154    3,164
Operating expenses:
  Selling, general and administrative...............   12,004    5,118    2,831
  Research and development..........................    7,883    4,012    1,519
  Amortization of stock-based compensation..........    2,719      767      --
  Amortization of goodwill and other intangibles....    7,164      --       --
                                                     --------  -------  -------
    Total operating expenses........................   29,770    9,897    4,350
                                                     --------  -------  -------
Loss from operations................................  (21,951)  (5,743)  (1,186)
Interest income and other, net......................    6,461      716      144
                                                     --------  -------  -------
Net loss............................................ $(15,490) $(5,027) $(1,042)
                                                     ========  =======  =======
Net loss per share:
  Basic and diluted................................. $  (0.90) $ (1.18) $ (0.30)
                                                     ========  =======  =======
Shares used in calculation of net loss per share:
  Basic and diluted.................................   17,211    4,253    3,463
                                                     ========  =======  =======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       32
<PAGE>

                                  EBENX, INC.

      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                Accumulated
                         Common stock  Additional   Deferred       Other
                         -------------  Paid-In   Stock-Based  Comprehensive Retained
                         Shares Amount  Capital   Compensation    Income     Deficit    Total
                         ------ ------ ---------- ------------ ------------- --------  --------
<S>                      <C>    <C>    <C>        <C>          <C>           <C>       <C>
Balance at December 31,
 1997...................  3,445  $ 34   $    101    $   --         $ --      $ (1,180) $ (1,045)
  Exercise of stock
   options and
   warrants.............     35     1          9        --           --           --         10
  Net loss..............    --    --         --         --           --        (1,042)   (1,042)
                         ------  ----   --------    -------        -----     --------  --------
Balance at December 31,
 1998...................  3,480    35        110        --           --        (2,222)   (2,077)
  Exercise of stock
   options and
   warrants.............    455     5         88        --           --           --         93
  Deferred stock-based
   compensation.........    --    --       5,481     (5,481)         --           --        --
  Amortization of stock-
   based compensation...    --    --         --         767          --           --        767
  Initial Public
   Offering.............  5,000    50     91,406        --           --           --     91,456
  Conversion of
   preferred stock to
   common stock.........  6,249    62     15,852        --           --           --     15,914
  Net loss..............    --    --         --         --           --        (5,027)   (5,027)
                         ------  ----   --------    -------        -----     --------  --------
Balance at December 31,
 1999................... 15,184   152    112,937     (4,714)         --        (7,249)  101,126
  Exercise of stock
   options and
   warrants.............    663     7        872        --           --           --        879
  Issuance of common
   stock................    829     8     14,757        --           --           --     14,765
  Issuance of equity in
   connection with
   acquisition..........  2,899    29     49,434        --           --           --     49,463
  Deferred stock-based
   compensation.........    --    --       4,246     (4,246)         --           --        --
  Amortization of stock-
   based compensation...    --    --         --       2,719          --           --      2,719
  Unrealized gain on
   investments..........                                               8                      8
  Net loss..............    --    --         --         --           --       (15,490)  (15,490)
                         ------  ----   --------    -------        -----     --------  --------
Balance at December 31,
 2000................... 19,575  $196   $182,246    $(6,241)       $   8     $(22,739) $153,470
                         ======  ====   ========    =======        =====     ========  ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       33
<PAGE>

                                  EBENX, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                   ----------------------------
                                                     2000       1999     1998
                                                   ---------  --------  -------
<S>                                                <C>        <C>       <C>
Operating activities:
 Net loss........................................  $ (15,490) $ (5,027) $(1,042)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation of property and equipment........      1,479       721      481
   Amortization of stock-based compensation,
    goodwill and other intangibles...............      9,885       767      --
   Loss on sale of property and equipment........        210       --       --
   Changes in operating assets and liabilities:
    Accounts receivable..........................        515    (1,451)  (1,391)
    Other current assets.........................     (3,093)     (713)    (166)
    Accounts payable.............................     (1,717)      516      656
    Accrued expenses.............................       (168)    1,216      192
    Deferred revenue.............................        (90)      173      (55)
    Deposits.....................................          5       (21)      (6)
                                                   ---------  --------  -------
     Net cash used in operating activities.......     (8,464)   (3,819)  (1,331)
Investing activities
 Additions to property and equipment.............     (6,918)   (1,609)    (761)
 Purchases of investments........................   (786,581)      --       --
 Sales of investments............................    709,845       --     2,005
 Cost of acquisition, net of cash acquired.......    (20,424)      --       --
                                                   ---------  --------  -------
     Net cash provided by (used in) investing
      activities.................................   (104,078)   (1,609)   1,244
Financing activities:
 Proceeds from note payable......................        --        --       750
 Payment of note payable.........................        --       (750)     --
 Stock options and warrants exercised............        879        93        9
 Proceeds from issuance of preferred stock, net
  of costs.......................................        --     10,446      --
 Proceeds from issuance of common stock, net of
  costs..........................................     13,816    92,569      --
                                                   ---------  --------  -------
     Net cash provided by financing activities...     14,695   102,358      759
Net increase (decrease) in cash and cash
 equivalents.....................................    (97,847)   96,930      672
Cash and cash equivalents at beginning of year...     98,611     1,681    1,009
                                                   ---------  --------  -------
Cash and cash equivalents at end of year.........  $     764  $ 98,611  $ 1,681
                                                   =========  ========  =======
Supplemental disclosures of cash flow information
 Cash paid for interest..........................  $     --   $     27  $   --
Noncash investing and financing activities:
 Issuance of equity for acquisition..............  $  49,463  $    --   $   --
 Deferred compensation related to options
  granted........................................  $   4,246  $  5,481  $   --
 Conversion of preferred stock to common stock...  $     --   $ 15,914  $   --
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       34
<PAGE>

                                  EBENX, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2000, 1999, and 1998

1. Business Description and Summary of Significant Accounting Policies

Business Description

   eBenX, Inc., a Minnesota corporation incorporated in September 1993 (the
"Company"), provides technology-based solutions for the purchase,
administration and payment of group health and welfare benefits. The Company
currently operates in a single business segment providing services to
employers, brokers and other employee benefit advisors, and health plans and
other carriers. The Company's customers are located throughout the United
States.

Principles of Consolidation

   The consolidated financial statements include the Company and its wholly
owned subsidiaries, Arbor Associates, Inc. and Managed Care Buyer's Group, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation.

Cash and Cash Equivalents

   The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.

Short-term investments

   Short-term investments consist of commercial paper, U.S. government and
agency securities and corporate notes and bonds. All short-term investments are
classified as available-for-sale securities under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity.

   The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and
accretion as well as interest and realized gains and losses are included in
interest income and other.

Property and Equipment

   Property and equipment, including purchased software, is stated at cost for
items purchased and at estimated fair value for items contributed by the
founding shareholders. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets of five to seven years. Leasehold
improvements are amortized over the estimated life of the assets or the related
lease term, whichever is less, on a straight-line basis.

Income Taxes

   Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and
tax bases of assets and liabilities.

Revenue Recognition

   The Company generates revenue from providing exchange and procurement
services. Administrative or exchange services represent technology-based
solutions to employers and health plans for the purchase,

                                       35
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

administration, and payment of group health and welfare benefits. Fees related
to these services are generally billed on a per employee per month basis.
Revenue is recognized as services are performed. The Company also records
revenue related to implementation fees associated with its exchange services.
These fees are recognized as revenue over the period of time the implementation
services are being provided. In addition, the Company receives fees for
providing enrollment services. These fees are recognized over the enrollment
period as services are provided. Procurement consulting services consist of the
Company assisting and advising customers on the selection of potential health
care suppliers, preparation of requests for proposals, evaluation of proposals,
and rate negotiations. The Company's ongoing exchange contracts range in
duration from one to five years. Procurement services agreements do not exceed
five years in duration. The Company earns revenue under the contracts and
agreements as services are performed. Revenues generated from administrative or
exchange services for the years ended December 31, 2000, 1999 and 1998 were
$23,172,000, $13,823,000 and $7,742,000 respectively. Revenues generated from
procurement consulting services for the years ended December 31, 2000, 1999 and
1998 were $5,829,000, $3,703,000 and $2,380,000 respectively.

Research and Development and Software Development

   Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven
marketability of the product are established.

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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Advertising Costs

   The Company expenses advertising costs as incurred. The amount of
advertising expensed during 2000, 1999 and 1998 was approximately $357,000,
$71,000 and $73,000 respectively.

Impairment of Long-Lived Assets

   The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

Stock-Based Compensation

   The Company follows Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its employee stock options. Under APB No. 25, expense is
recognized for the excess of the market price of the underlying stock on the
date of grant over the exercise price of the Company's employee stock options.

Net Loss Per Share

   Basic net loss per share is based on the weighted-average shares outstanding
during the period. Diluted net loss per share increases the shares used in the
per share calculation by the dilutive effects of options, warrants, and
convertible securities. The Company's common stock equivalent shares
outstanding from stock options and warrants are excluded from the diluted net
loss per share computation for all periods because their effect would be
antidilutive.

                                       36
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Fair Value of Financial Instruments

   SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial instruments.
Cash and cash equivalents, accounts receivable, accounts payable, and accrued
liabilities are reflected in the consolidated financial statements at fair
value due to the short-term maturity of these instruments.

Comprehensive Loss

   SFAS No. 130 establishes standards for reporting comprehensive income and
its components in financial statements. Adjustments to comprehensive loss for
the year ended December 31, 2000 consisted solely of an unrealized gain on
available-for-sale securities of $8,000 resulting in a total comprehensive loss
of $15,482,000. The tax effects of the other comprehensive gain were not
considered to be material.

Reclassification

   Certain prior year items have been reclassified to conform to the current
year presentation.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivatives which focused on
freestanding contracts, including, for example, options and forwards, futures
and swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000, in accordance with
SFAS No. 137, which delays the required implementation of SFAS No. 133 for one
year. The adoption of SFAS No. 133 is not expected to have an impact on the
Company's financial position or results of operations. The Company currently
does not hold derivative instruments or engage in hedging activities.

   In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB No. 101B, which amended SAB No. 101 and superseded SAB No.
101A, further delaying the implementation date of SAB No. 101 for registrants
with fiscal years that end after December 15, 1999. The Company was required to
be in conformity with the provisions of SAB No. 101, as amended by SAB
No. 101B, by December 31, 2000. The adoption of SAB No. 101 did not have a
material effect on the financial position or results of operations of the
Company.

2. Acquisition

   On September 6, 2000, the Company completed its acquisition of Arbor
Administrative Services, Inc. ("Arbor"). Arbor provides benefits administration
and related Web-based services to employers. Arbor distributes its services
primarily through brokers and employee benefit advisors. The Company paid $17
million in cash and exchanged approximately 2,596,000 shares of eBenX stock
with a fair value of $44.6 million for all of the outstanding common stock of
Arbor. The common stock was valued using eBenX's average closing stock price on
the date prior to and the date of the announcement. The Company also assumed
all of the outstanding restricted stock, stock options and warrants of Arbor at
a fair value of $4.8 million. The options and warrants were valued using the
Black-Scholes option pricing model with inputs of .90 for volatility, 2 years
for expected life, 6.35% for the risk-free interest rate, and a market value of
$17.19. The restricted stock was

                                       37
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

valued at a market value of $17.19 per share. In connection with the
acquisition, the Company incurred transaction costs consisting primarily of
professional fees of $1.4 million, bringing the total purchase price for the
acquisition to $67.8 million.

   The acquisition was accounted for under the purchase method of accounting in
accordance with APB Opinion No. 16. Under the purchase method of accounting,
the purchase price is allocated to the assets acquired and liabilities assumed
based on their estimated fair values.

   The total purchase price paid for the Arbor acquisition was allocated as
follows:

<TABLE>
<CAPTION>
      <S>                                                                <C>
      Net assets acquired............................................... $    24
      Intangible assets.................................................   5,600
      Goodwill..........................................................  62,203
</TABLE>

   Goodwill and other intangible assets are being amortized over a three-year
period. At December 31, 2000, accumulated amortization related to goodwill and
other intangible assets acquired in the Arbor acquisition totaled $7.2 million.

   The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the year ended December
31, 2000 and 1999, assuming Arbor had been acquired at the beginning of the
year (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                               Year ended
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
      <S>                                                   <C>       <C>
      Revenue.............................................. $ 32,044  $ 21,802
      Net loss............................................. $(33,123) $(27,554)
      Basic and diluted net loss per share................. $  (1.74) $  (4.02)
</TABLE>

   The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. They
are not intended to be a projection of future results and do not reflect any
synergies that might be affected from combined operations.

3. Short-term Investments

   The following is a summary of short-term investments at December 31, 2000
(in thousands):

<TABLE>
<CAPTION>
                                                   Gross      Gross
                                       Amortized Unrealized Unrealized  Fair
                                         Cost      Gains      Losses    Value
                                       --------- ---------- ---------- -------
      <S>                              <C>       <C>        <C>        <C>
      Commerical paper................  $43,840     $--        $(6)    $43,834
      U.S government and agency
       securities.....................   19,817       16        (1)     19,832
      Corporate notes and bonds.......   13,079      --         (1)     13,078
                                        -------     ----       ----    -------
                                        $76,736     $ 16       $(8)    $76,744
                                        =======     ====       ====    =======
</TABLE>

   The contractual maturities of the Company's available-for-sale securities at
December 31, 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                              Amortized  Fair
                                                                Cost     Value
                                                              --------- -------
      <S>                                                     <C>       <C>
      Due within one year....................................  $75,432  $75,431
      Due after one year through five years..................    1,304    1,313
                                                               -------  -------
                                                               $76,736  $76,744
                                                               =======  =======
</TABLE>


                                       38
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Actual maturities may differ from contractual maturities because some
borrowers have the right to call or prepay obligations. Realized gains or
losses from the sales of marketable securities are based on the specific
identification method. Gross realized gains and losses on sales of available
for sale securities were immaterial in 2000.

4. Property and Equipment, Net

   Property and equipment as of December 31 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                2000     1999
                                                               -------  -------
      <S>                                                      <C>      <C>
      Computer hardware....................................... $ 3,433  $ 1,734
      Purchased software......................................   1,984    1,174
      Furniture and fixtures..................................   3,334      718
      Leasehold improvements..................................   3,261      420
      Office equipment........................................     681      282
                                                               -------  -------
                                                                12,693    4,328
      Less accumulated depreciation...........................  (2,893)  (1,872)
                                                               -------  -------
                                                               $ 9,800  $ 2,456
                                                               =======  =======
</TABLE>

5. Redeemable Preferred Stock

   In May and June 1999, the Company sold a total of 1,075,820 shares of Series
C preferred stock resulting in net proceeds to the Company of $10.4 million.
Prior to the closing of the Company's initial public offering in December 1999,
all of the Company's preferred stock converted into 6,248,922 shares of common
stock.

6. Shareholders' Equity

Common Stock

   On December 8, 1999, the Company effected a three-for-one stock split
whereby each shareholder received two additional shares for each share owned.
Accordingly, all share, per share, and weighted average share information have
been restated to reflect the split.

   On December 15, 1999, the Company closed its initial public offering of
5,000,000 shares of common stock sold at $20.00 per share. The Company received
$91.5 million in proceeds from the offering, net of underwriting discounts,
commissions, and other costs. An additional 750,000 shares were sold under the
exercise of the underwriter's over-allotment option in January 2000, resulting
in additional net proceeds to the Company of $14 million.

Employee Stock Purchase Plan

   The Company's board of directors approved the 1999 Employee Stock Purchase
Plan, effective December 10, 1999, under which 900,000 shares of common stock
have been reserved for issuance. The Plan permits an eligible employee to
purchase common stock at a price equal to 85% of the lesser of the fair market
value of the common stock at the beginning of the purchase period and the fair
market value of the common stock at the end of the purchase period. Under the
Plan, employees may purchase stock at a maximum amount of 15% of their
compensation per annum, not to exceed $21,250. In 2000, 79,500 shares were
purchased under this Plan.


                                       39
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. Income Taxes

   At December 31, 2000 and 1999, the Company's deferred taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                2000     1999
                                                               -------  -------
      <S>                                                      <C>      <C>
      Deferred tax assets:
        Net operating loss carryforwards...................... $ 4,332  $ 2,126
        Research and development credits......................     250      250
        Bonus and vacation....................................     225      364
        Accounts receivable allowance.........................      68       17
                                                               -------  -------
                                                                 4,875    2,757
      Deferred tax liabilities:
        Depreciation..........................................     (50)    (122)
                                                               -------  -------
      Net deferred tax assets before valuation allowance......   4,825    2,635
      Less valuation allowance................................  (4,825)  (2,635)
                                                               -------  -------
      Net deferred tax assets................................. $   --   $   --
                                                               =======  =======
</TABLE>

   The Company has established a valuation allowance to fully reserve for the
net deferred tax assets at December 31, 2000 and 1999, respectively. The
valuation allowance was established due to the available evidence indicating
that it is not more than likely that the deferred tax assets will be realized.

   As of December 31, 2000, the Company has unused federal and state research
and development tax credit carryforwards of approximately $250,000 which begin
to expire in 2009. In addition, the Company has unused federal net operating
loss carryforwards at December 31, 2000 of approximately $11.4 million, which
begin to expire in 2009. The utilization of these carryforwards is dependent
upon the Company's ability to generate sufficient taxable income during the
carryforward periods, and are subject to limitations imposed under Section 382
of the Internal Revenue Code.

8. Operating Leases

   The Company leases or subleases its office space and certain equipment under
terms of noncancelable operating lease agreements which expire through November
2009. The Company's current lease for its corporate offices includes additional
office space which the Company will occupy commencing May 1, 2001. This space
will result in additional lease expense of approximately $250,000 annually.
Future lease payments for all operating leases, excluding executory costs, such
as management and maintenance fees are as follows (in thousands):

<TABLE>
<CAPTION>
      Year ending December 31:
      <S>                                                              <C>
      2001............................................................ $ 4,835
      2002............................................................   4,033
      2003............................................................   2,394
      2004............................................................   2,016
      2005............................................................   1,123
      Thereafter......................................................     488
                                                                       -------
                                                                       $14,889
                                                                       =======
</TABLE>


                                       40
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Rent expense, including the Company's pro rata share of certain operating
costs, was $5,457,000, $2,096,000 and $976,000 in 2000, 1999 and 1998
respectively.

9. Significant Customers

   Significant customer activity as a percent of the Company's net revenue in
2000, 1999, and 1998 is as follows:

<TABLE>
<CAPTION>
                                                               2000  1999  1998
                                                               ----  ----  ----
      <S>                                                      <C>   <C>   <C>
      Customer A.............................................. 19.2% 28.0% 17.1%
      Customer B.............................................. 13.2% 20.3% 19.1%
      Customer C..............................................  3.7%  8.9% 14.0%
</TABLE>

10. Stock Options, Restricted Stock and Warrants

   In 1993, the Company adopted the 1993 Stock Option Plan (the 1993 Plan) to
encourage stock ownership by employees, directors and other individuals as
determined by the Board of Directors. The Plan provides that options granted
thereunder may be either incentive stock options (ISOs), as defined by the
Internal Revenue Code, or nonqualified stock options. A maximum of 3,900,000
shares may be granted under the 1993 Plan. At December 31, 2000, there were no
shares available for grant under the 1993 Plan. The 1993 Plan expires in 2003.

   In 1999, the Company adopted the 1999 Stock Incentive Plan (the 1999 Plan).
The 1999 Plan provides for the granting of incentive stock options and non-
qualified stock options, stock appreciation rights, restricted stock,
performance awards, and other stock-based awards. The Company has reserved
3,000,000 shares for issuance under the 1999 Plan. At December 31, 2000,
1,811,425 shares were available for grant under the 1999 Plan. The 1999 Plan
expires in 2009.

   In connection with the acquisition of Arbor, the Company adopted the eBenX,
Inc./Arbor Administrative Services, Inc. 2000 Equity Compensation Plan (the
2000 Plan) effective September 6, 2000. The 2000 Plan provides for the granting
of incentive stock options, non-qualified stock options and restricted stock to
employees and directors of the Company. The Company has reserved 667,944 shares
for issuance under the 2000 Plan. At the time of the Arbor acquisition, the
Company issued 318,745 shares of restricted stock, including 22,053 vested
shares, and options to purchase 349,199 shares. At December 31, 2000, 110,288
shares of restricted stock were vested, and there were 3,178 shares available
for grant under the 2000 Plan. The 2000 Plan expires in 2010.

   The compensation committee of the board of directors determines who will
receive options under the Plans and sets the terms, including vesting dates.
Options may have a maximum term of no more than ten years except in the case of
a shareholder possessing more than 10% of the total voting power of all classes
of stock (a 10% shareholder) in which case the maximum term is five years. The
exercise price of ISOs granted under the Plans must be at least equal to the
fair market value (or in the case of a 10% shareholder, 110% of the fair market
value) of the common stock on the date of grant. The exercise price of
nonqualified options is determined by the board of directors.

   The exercise price may be paid in cash, shares of previously owned common
stock, or by issuance of a promissory note. In addition, the Plans also contain
a provision allowing the Company to permit option holders to pay their
withholding obligation through share redirection. If an option expires,
terminates or is canceled, the shares not purchased thereunder may become
available for additional option awards under the Plans.


                                       41
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In connection with the granting of stock options to employees prior to the
Company's initial public offering, the Company recorded deferred stock-based
compensation of approximately $5.5 million in the year ended December 31, 1999.
This amount represents the difference between the exercise price and the deemed
fair value of the Company's common stock for accounting purposes on the date
these stock options were granted. In connection with the acquisition of Arbor
in September 2000, the Company recorded deferred stock-based compensation of
$5.2 million. This amount represents the difference between the exercise price
and the deemed fair value of the Company's common stock for accounting purposes
on the date all outstanding unvested options and restricted stock of Arbor were
converted to Company options and restricted stock. The deferred stock-based
compensation is included as a component of stockholders' equity and is being
amortized over the vesting period of the options. Amortization expense of
approximately $2.7 million and $767,000 was recognized in 2000 and 1999
respectively. The amortization of the remaining deferred stock-based
compensation will result in additional charges to operations through 2004.

   Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                       2000    Weighted average
                                1993 Plan  1999 Plan   Plan     exercise price
                                ---------  ---------  -------  ----------------
   <S>                          <C>        <C>        <C>      <C>
   Outstanding at December 31,
    1997......................  1,449,840        --       --        $ 0.34
     Granted..................    638,250        --       --        $ 0.71
     Exercised................    (34,800)       --       --        $ 0.27
     Canceled.................   (346,800)       --       --        $ 0.17
                                ---------  ---------  -------
   Outstanding at December 31,
    1998......................  1,706,490        --       --        $ 0.45
     Granted at market value..  1,412,358    125,375      --        $ 2.24
     Granted at less than
      market value............    805,350        --       --        $ 1.42
     Exercised................   (442,395)       --       --        $ 0.22
     Canceled.................   (225,240)       --       --        $ 0.62
                                ---------  ---------  -------
   Outstanding at December 31,
    1999......................  3,256,563    125,375      --        $ 1.51
     Granted at market value..             1,134,200      --        $25.53
     Granted at less than
      market value............        --         --   349,199       $ 6.98
     Exercised................   (588,029)   (27,325)     --        $ 1.43
     Canceled.................   (253,050)   (71,000)  (3,178)      $ 4.35
                                ---------  ---------  -------
   Outstanding at December 31,
    2000......................  2,415,484  1,161,250  346,021       $ 8.75
                                =========  =========  =======
   Exercisable at:
     December 31, 2000........    943,756     25,567   73,637       $ 1.56
     December 31, 1999........    845,744     27,375      --        $ 1.16
     December 31, 1998........    477,078        --       --        $ 0.23
</TABLE>

                                       42
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   Summary information about the Company's stock options outstanding at
December 31, 2000 is as follows:

<TABLE>
<CAPTION>
                                     Options Outstanding         Options Exercisable
                             ----------------------------------- --------------------
                                            Weighted    Weighted             Weighted
                                            average     average              average
                               Number     contractual   exercise   Number    exercise
   Range of exercise price   outstanding life remaining  price   exercisable  price
   -----------------------   ----------- -------------- -------- ----------- --------
   <S>                       <C>         <C>            <C>      <C>         <C>
   $  .10 - $  .60...           336,952       2.49       $ 0.49     258,958   $ 0.46
   $ 0.75............         1,547,507       7.39       $ 0.75     586,553   $ 0.75
   $ 1.33 - $ 2.67...           562,553       8.73       $ 1.53     114,009   $ 1.56
   $ 5.55 - $ 9.75...           297,463       9.06       $ 6.71      56,099   $ 6.22
   $10.06 - $13.94...           563,603       9.46       $13.34         --    $  --
   $14.00 - $20.00...           193,927       8.75       $17.62      27,341   $19.68
   $20.13 - $39.94...            90,750       9.37       $30.47         --    $  --
   $43.00 - $67.50...           330,000       8.95       $49.83         --    $  --
                              ---------                           ---------
                              3,922,755                           1,042,960
                              =========                           =========
</TABLE>

   Exercise prices for grants are equal to the market price of common stock on
the date of grant. Prior to the Company's public offering, the board of
directors established exercise prices for grants based on the board's
estimation of the fair value of the common stock on the date of grant. Options
vest over periods of one to ten years, and expire five to ten years after the
date of grant.

   Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation", and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value for these options
was calculated as of the date of grant using the the Black-Scholes multiple
option pricing model for options granted in 2000, and the minimum value option
pricing model for options granted in 1999 and 1998. The fair value
calculations for 1999 and 1998 do not include a volatility factor, because the
options were granted prior to the Company's initial public offering.

<TABLE>
<CAPTION>
                                                   2000         1999     1998
                                                -----------  ----------  -----
   <S>                                          <C>          <C>         <C>
   Weighted average fair value:
     Options granted at estimated fair value..       $22.60       $0.55  $0.15
     Options granted at less than estimated
      fair value..............................       $25.72       $7.26  $ --
   Weighted-average assumptions:
     Risk-free interest rate..................   6.1% - 6.3% 5.2% - 6.1%   5.5%
     Expected life............................            5           5      5
     Volatility factor........................  0.95 - 1.18         --     --
</TABLE>

   Had the Company recorded compensation cost in accordance with SFAS No. 123,
the net loss and net loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                      2000     1999     1998
                                                    --------  -------  -------
      <S>                                           <C>       <C>      <C>
      Net Loss:
        As reported................................ $(15,490) $(5,027) $(1,042)
        Pro forma.................................. $(24,853) $(5,114) $(1,079)
      Basic and diluted net loss per share:
        As reported................................ $  (0.90) $ (1.18) $ (0.30)
        Pro forma.................................. $  (1.44) $ (1.20) $ (0.31)
</TABLE>


                                      43
<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   During 1995, the Company entered into a line of credit agreement to borrow
up to $550,000, which expired in 1996. In connection with the agreement, the
Company issued a warrant to purchase 6,000 shares of the Company's Series A
Convertible Preferred Stock at $2.701 per share. These warrants are convertible
into 18,000 shares of common stock, and are exercisable over ten years.

   During 1995, the Company granted three employees warrants to purchase 65,415
shares of common stock at $.0333 per share. The warrants, which were
immediately exercisable and expired at various times between June 30, 2000 and
August 31, 2000, were granted in lieu of cash compensation. All remaining
warrants were exercised during 2000.

   In connection with the acquisition of Arbor and the conversion of all
outstanding equity securities to those of the Company, the Company issued a
warrant to purchase 53,520 shares of common stock at $10.15 per share to a
former investor of Arbor. The warrant is exercisable over ten years.

11. Employee Benefit Plans

   The Company has a 401(k) plan covering substantially all employees. Under
the terms of the plan, participants may contribute 2% to 20% of their salary to
the plan. Employees are eligible after one day of service and upon attainment
of age 21. The Company may make matching contributions based on a discretionary
formula or may contribute a discretionary amount. The Company did not make any
contributions in 2000, 1999 or 1998.

                                       44
<PAGE>

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

   None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

   Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
2000.

Item 11. Executive Compensation

   Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
2000.

   For purposes of computing the market value of eBenX Common Stock held by
non-affiliates of eBenX on the cover page of this report, all executive
officers, directors, and shareholders affiliated with directors of eBenX are
considered to be affiliates of eBenX. This does not represent an admission by
eBenX or any such person as to the affiliate status of such person.

Item 13. Certain Relationships and Related Transactions

   Incorporated herein by reference to portions of the Proxy Statement for
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days of the close of the fiscal year ended December 31,
2000.

                                    PART IV

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

  (a)(1)  The following financial statements are filed herewith in Item 8:

     (i)  Consolidated Balance Sheets as of December 31, 2000 and 1999.

     (ii)  Consolidated Statements of Operations for the years ended
           December 31, 2000, 1999 and 1998.

     (iii)  Consolidated Statement of Shareholders' Equity (Deficit) for
            the years ended December 31, 2000, 1999 and 1998.

     (iv)  Consolidated Statements of Cash Flows for the years ended
           December 31, 2000, 1999 and 1998.

     (v)  Notes to consolidated financial statements at December 31, 2000.

  (a)(2)  Financial Statement Schedule. None

  (a)(3)  Exhibits

     The following exhibits are submitted herewith:

       3.1  Fifth Amended and Restated Articles of Incorporation of the
            Company (incorporated by reference to Exhibit 3.1 of
            Registrant's Registration Statement on Form S-1, Registration
            Number 333-87985).

                                       45
<PAGE>

       3.2  Amended and Restated Bylaws of the Company (incorporated by
            reference to Exhibit 3.2 of Registrant's Registration
            Statement on Form S-1, Registration Number 333-87985).

       4.1  Specimen of Common Stock Certificate (incorporated by
            reference to Exhibit 4.1 of Registrant's Registration
            Statement on Form S-1, Registration Number 333-87985).

      10.1  1993 Stock Option Plan (incorporated by reference to Exhibit
            4.4 of Registrant's Registration Statement on Form S-8,
            Registration Number 333-94081).**

      10.2  1999 Stock Incentive Plan (incorporated by reference to
            Exhibit 4.5 of Registrant's Registration Statement on Form S-
            8, Registration Number 333-94081).**

      10.3  1999 Employee Stock Purchase Plan (incorporated by reference
            to Exhibit 4.6 of Registrant's Registration Statement on Form
            S-8, Registration Number 333-94081).**

      10.4  eBenX, Inc./Arbor Administrative Services, Inc. 2000 Equity
            Compensation Plan.*/**

      10.5  Agreement and Plan of Merger by and among Arbor Administrative
            Services, Inc., a Delaware corporation, the principal
            stockholder of Arbor, eBenX, Inc., a Minnesota corporation,
            and Arbor Acquisition Corp., a Minnesota corporation, dated
            August 28, 2000 (incorporated by reference to Exhibit 2.1 of
            Registrant's Form 8-K, filed on September 14, 2000).

      10.6  Services Agreement by and between the Company and PepsiCo,
            Inc. dated June 1, 1997 (incorporated by reference to Exhibit
            10.4 of Registrant's Registration Statement on Form S-1,
            Registration Number 333-87985).

      10.7  Services Agreement by and between the Company and Bell
            Atlantic Corporation, dated July 1, 1998 (incorporated by
            reference to Exhibit 10.5 of Registrant's Registration
            Statement on Form S-1, Registration Number 333-87985)

      10.8  Employment Agreement by and between the Company and Mark
            Tierney, dated as of April 22, 1999, and amended and restated
            on September 28, 1999 (incorporated by reference to Exhibit
            10.9 of Registrant's Registration Statement on Form S-1,
            Registration Number 333-87985).**

      10.9  Employment Agreement by and between the Company and John
            Davis, dated as of April 12, 1999 (incorporated by reference
            to Exhibit 10.10 of Registrant's Registration Statement on
            Form S-1, Registration Number 333-87985).**

      10.10  Employment Agreement by and between the Company and Scott
             Halstead, dated as of April 22, 1999 (incorporated by
             reference to Exhibit 10.11 of Registrant's Registration
             Statement on Form S-1, Registration Number 333-87985).**

      10.11  Employment Agreement by and between the Company and Jeff
             Rosenblum, dated as of September 6, 2000.*/**

      10.12  Multi-Tenant Office Lease Agreement by and between the
             Company and Utah State Retirement Investment Fund, dated
             January 21, 2000 (incorporated by reference to Exhibit 10.5
             of Registrant's Form 10-Q, filed on August 11, 2000).

      10.13  Healtheon Service Employer Group Distribution Agreement by
             and between the Company and Healtheon Corporation, dated
             September 30, 1999 (incorporated by reference to Exhibit
             10.20 of Registrant's Registration Statement on Form S-1,
             Registration Number 333-87985).

                                       46
<PAGE>

      10.14  Second Amended and Restated Investors' Rights Agreement,
             dated June 9, 1999 (relating to the registration rights
             relating to Series A, Series B, and Series C Preferred Stock)
             (incorporated by reference to Exhibit 10.21 of Registrant's
             Registration Statement on Form S-1, Registration Number 333-
             87985).

      10.15  Registration Rights Agreement, dated September 6, 2000
             (relating to the registration rights of the previous
             shareholders of Arbor Administrative Services, Inc.).*

      21.1  Subsidiaries of the Company*

      23.1  Consent of Ernst & Young LLP*

      24.1  Power of Attorney*
--------
*  Filed herewith.
**  Management contract or compensatory plan or arrangement required to be
    filed as an exhibit to Form 10-K pursuant to Item 14(c) of this Report.

  (b)  The Registrant filed no Reports on Form 8-K during its fourth fiscal
       quarter.

                                       47
<PAGE>

                                   SIGNATURES

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

                                          EBENX, INC.

Dated: March 23, 2001
                                                     /s/ John J. Davis
                                          By __________________________________
                                                       John J. Davis
                                                Chief Executive Officer and
                                                          President

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

<TABLE>
<CAPTION>
             Signature                            Title                      Date
             ---------                            -----                      ----
 <C>                                <S>                                <C>
        /s/ Mark W. Tierney         Chairman and Director (principal    March 23, 2001
 _________________________________
          Mark W. Tierney           executive officer)

         /s/ John J. Davis          President, Chief Executive
                                    Officer and                         March 23, 2001
 _________________________________
           John J. Davis            Director (principal executive
                                    officer)

        /s/ Thomas E. Kelly         Chief Financial Officer and
                                    Secretary                           March 23, 2001
 _________________________________
          Thomas E. Kelly           (principal financial officer and
                                    principal accounting officer)

         /s/ Paul V. Barber         Director                            March 23, 2001
 _________________________________
           Paul V. Barber

        /s/ James P. Bradley        Director                            March 23, 2001
 _________________________________
          James P. Bradley

         /s/ Daniel M. Cain         Director                            March 23, 2001
 _________________________________
           Daniel M. Cain

           /s/ John Nehra           Director                            March 23, 2001
 _________________________________
             John Nehra

        /s/ Frank C. Witthun        Director                            March 23, 2001
 _________________________________
          Frank C. Witthun
</TABLE>


                                       48
<PAGE>

                                INDEX TO EXHIBITS

Exhibit
-------

3.1      Fifth Amended and Restated Articles of Incorporation of the Company,
         (incorporated by reference to Exhibit 3.1 of Registrant's Registration
         Statement on Form S-1, Registration Number 333-87985).

3.2      Amended and Restated Bylaws of the Company, (incorporated by reference
         to Exhibit 3.2 of Registrant's Registration Statement on Form S-1,
         Registration Number 333-87985).

4.1      Specimen of Common Stock Certificate. (incorporated by reference to
         Exhibit 4.1 of Registrant's Registration Statement on Form S-1,
         Registration Number 333-87985).

10.1     1993 Stock Option Plan (incorporated by reference to Exhibit 4.4 of
         Registrant's Registration Statement on Form S-8, Registration Number
         333-94081).

10.2     1999 Stock Incentive Plan (incorporated by reference to Exhibit 4.5 of
         Registrant's Registration Statement on Form S-8, Registration Number
         333-94081).

10.3     1999 Employee Stock Purchase Plan (incorporated by reference to Exhibit
         4.6 of Registrant's Registration Statement on Form S-8, Registration
         Number 333-94081).

10.4     eBenX, Inc./Arbor Administrative Services, Inc. 2000 Equity
         Compensation Plan.

10.5     Agreement and Plan of Merger by and among Arbor Administrative
         Services, Inc., a Delaware corporation, the principal stockholder of
         Arbor, eBenX, Inc., a Minnesota corporation, and Arbor Acquisition
         Corp., a Minnesota corporation, dated August 28, 2000 (incorporated by
         reference to Exhibit 2.1 of Registrant's Form 8-K, filed on September
         14, 2000).

10.6     Services Agreement by and between the Company and PepsiCo, Inc. dated
         June 1, 1997 (incorporated by reference to Exhibit 10.4 of Registrant's
         Registration Statement on Form S-1, Registration Number 333-87985).

10.7     Services Agreement by and between the Company and Bell Atlantic
         Corporation, dated July 1, 1998 (incorporated by reference to Exhibit
         10.5 of Registrant's Registration Statement on Form S-1, Registration
         Number 333-87985).

10.8     Employment Agreement by and between the Company and Mark Tierney, dated
         as of April 22, 1999, and amended and restated on September 28, 1999
         (incorporated by reference to Exhibit 10.9 of Registrant's Registration
         Statement on Form S-1, Registration Number 333-87985).

10.9     Employment Agreement by and between the Company and John Davis, dated
         as of April 12, 1999 (incorporated by reference to Exhibit 10.10 of
         Registrant's Registration Statement on Form S-1, Registration Number
         333-87985).

10.10    Employment Agreement by and between the Company and Scott Halstead,
         dated as of April 22, 1999 (incorporated by reference to Exhibit 10.11
         of Registrant's Registration Statement on Form S-1, Registration Number
         333-87985).

10.11    Employment Agreement by and between the Company and Jeff Rosenblum,
         dated as of September 6, 2000.
<PAGE>

10.12    Multi-Tenant Office Lease Agreement by and between the Company and Utah
         State Retirement Investment Fund, dated January 21, 2000 (incorporated
         by reference to Exhibit 10.5 of Registrant's Form 10-Q, filed on August
         11, 2000).

10.13    Healtheon Service Employer Group Distribution Agreement by and between
         the Company and Healtheon Corporation, dated September 30, 1999
         (incorporated by reference to Exhibit 10.20 of Registrant's
         Registration Statement on Form S-1, Registration Number 333-87985).

10.14    Second Amended and Restated Investors' Rights Agreement, dated June 9,
         1999 (relating to the registration rights relating to Series A, Series
         B, and Series C Preferred Stock) (incorporated by reference to Exhibit
         10.21 of Registrant's Registration Statement on Form S-1, Registration
         Number 333-87985).

10.15    Registration Rights Agreement, dated September 6, 2000 (relating to the
         registration rights of the previous shareholders of Arbor
         Administrative Services, Inc.).

21.1     Subsidiaries of the Company

23.1     Consent of Ernst & Young LLP

24.1     Power of Attorney