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                      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, 2001

                       Commission File Number: 333-87985

                                  eBenX, Inc.

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

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                             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, 2002 was $57,778,944.

   Number of shares outstanding on March 1, 2002 was 20,004,621 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of Registrant's Proxy Statement for its May 23, 2002 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..................................  14

                                         PART II
Market for Registrant'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  16
Quantitative and Qualitative Disclosures about Market Risk...........................  29
Financial Statements and Supplementary Data..........................................  30
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  49

                                         PART III
Directors and Executive Officers of the Registrant...................................  49
Executive Compensation...............................................................  49
Security Ownership of Certain Beneficial Owners and Management.......................  49
Certain Relationships and Related Transactions.......................................  49

                                         PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-K......................  49
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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" and "Critical Accounting Policies and
Practices". 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 to manage the business
transactions between the employer-buyer and the carrier-supplier 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 necessary to administer and pay for health and welfare benefits.
Utilizing our 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 2000, it is estimated that
the United States spent approximately $1.3 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
annually 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.

   Health and welfare benefits represent the single largest benefit expense for
employers. In 2002, the average annual cost of providing coverage for active
and retired workers is estimated to be approximately $5,420 per employee. We
expect this average cost to increase 9% to 19% annually over the next five
years. In 2002, on average, each active employee is expected to contribute 19%
of this amount through payroll deductions and co-payments.

   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.

   We provide services today primarily to large and mid-sized employers.

   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;

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    .  Point of service plans;

    .  Self-directed health plans;

    .  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, each with a
limited geographic services range. Among HMOs alone, there are over 550
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 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, consultants usually support
large employers 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.

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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.

   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
marriage, divorce, childbirth 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
this 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, union status and those 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 and updated
through 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 17,000 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 550 independent HMOs in the United States
today, which may operate in a single or limited geographic service 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

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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 premium contribution
schemes, demands for more employee choice, inclusion of employee self-directed
health plans, and new creative pricing structures between employers and health
plans. These changes will increase the complexity of benefit administration.

   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 or result in an inaccurate payment to physicians, hospitals or other
health care providers.

   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 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 or adopted.
Further, the standards that do exist deal mostly with syntax (the form) and not
with the semantics (the meaning) of the data.

   Most employers to whom we market our services 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 to manage customer premium billing and collections as
well as provider claim adjudication and payment processing. 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 + dependent, 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 from 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

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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.

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 tangible goods or services such
as 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 and services that enable large employers to present requests for
       bids to carriers, and for carriers to respond with proposals; and

    .  Annual and ongoing enrollment systems or supporting services 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; and

    .  Systems that eventually enable carriers to present standardized
       offerings and processes to the employer buyer.

   We provide technology and services for both front-end and back-end
administration, though we do not provide all services to all market segments.
For example, we do not provide carrier selection services directly to employers
in the mid-market segment because that service is provided by the same brokers
who act as our distribution system to that market.

   Regardless of whether a customer uses our front-end enrollment system and
services, we believe we can produce efficiencies 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 other non-proprietary
solutions provides a fully integrated end-to-end solution for group health and
welfare benefits administration.

Opportunity to Create a Business Service 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.

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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, Target Corporation, GE Capital Services,
Hilton Hotels Corporation and RR Donnelley & Sons Company, and the United
States' largest regional and local health plans and other carriers, such as
Aetna, CIGNA, Humana, and United Health Group, to name a few. We now also offer
a fully integrated, real time enrollment and eligibility database platform,
ChoiceOne Link, which integrates with payroll providers and expands our suite
of services.

   In 2001, we integrated our proprietary back-end technology with front-end
enrollment applications, including ChoiceOne Link and those offered by
PeopleSoft, Inc. and CitiStreet LLC. We intend to increase volume through these
arrangements, and add additional such arrangements.

Value Proposition

   We believe our solution provides value to all participants 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 resource information systems
       and services companies such as PeopleSoft, Inc. and CitiStreet LLC;

    .  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;

    .  reduces employee benefits expense by reducing or eliminating premium
       payments for terminated employees that are no longer eligible to be
       covered under the employer's benefit plan;

    .  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 eventually offering
       preferred carrier relationships to the employer purchasers; 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 as well as the costs and distraction related to the
       follow up and collection of late and unpaid premiums;

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    .  provides improved customer service and provider satisfaction by
       improving the accuracy and timeliness of 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 expenditures;

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

    .  allows brokers 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 access to interactive voice response (IVR)/Web-based enrollment
       and plan information; and

    .  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 and dollar transactions between the
buyers of health and welfare benefits, employees and employers, and their
carrier suppliers. 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 and pay 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 in our system. This allows the
       employer to obtain a consolidated bill for all of their carriers and
       allows the carriers to discontinue direct billing to employers by using
       our services. 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 data 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 and individual billing
services for inactive employee populations, and enhanced

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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
$31,057,000, $23,172,000 and $13,823,000, for the years ended December 31,
2001, 2000 and 1999, 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, rate negotiations, actuarial
services and the preparation of benefit plan communication materials for
employees. Approximately 42 of our employees engage in delivering these
services. Our principal customers for these services are General Electric
Company, Nabisco, Inc., and Federated Department Stores 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 $5,806,000, $5,829,000 and $3,703,000, for
the years ended December 31, 2001, 2000 and 1999, respectively. We expect these
revenues to increase due to our November 2001 acquisition of the health and
welfare assets of Howard Johnson, and through direct sales to large employers.

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 approximately 1,800 employers in the United States with
5,000 employees or more. With the acquisition of the health and welfare assets
of Howard Johnson, we now provide services to more than 60 of these employers,
including Eastman Kodak Company, General Electric Company, Georgia-Pacific,
Intel Corporation, Kellogg Company, KPMG LLP, Northwest Airlines Corporation,
PepsiCo, Inc., Safeway, Inc., TRW, 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 sell through select
relationships with aggregators such as human resource information systems and
service companies. Human resource information systems and service companies
include those involved with payroll, record keeping, and enterprise-wide
systems. These key strategic relationships with human resource information
systems and service companies 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 approximately
16,000 mid-sized employers in the United States who buy group health insurance
primarily through brokers. 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.

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   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. In February 2002, we
entered into an agreement with Emerge HealthCare, Inc. (Emerge) to develop and
deliver new risk-adjusted pricing health and welfare benefit products that we
believe will improve employee choice of carriers, benefit plan design, price
and provider networks. As a part of this relationship, Emerge will provide
services such as health plan relations, risk management, and broker
distribution and sales. We will provide the technology and services to this new
developing product and license our proprietary platform to Emerge. As the
product and market develops, we believe that additional companies such as
Emerge will develop and we will be in a strong strategic position to provide
additional technology and services to these developing companies.

   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 benefits administration services similar
to eBenX or additional strategic services such as payroll, voluntary benefits,
carrier support or other strategic services. We believe that making strategic
acquisitions and developing strategic relationships will enable us to enhance
our service offerings and expand our client base.

Customers

   As of December 31, 2001, we had approximately 63 large employer customers
and 185 mid-market customers. In 2001, approximately 55% of our consolidated
revenues came from 16 customers.

   In 2001, Verizon Communications Inc. and PepsiCo, Inc., accounted for 12.5%
and 9.8%, respectively, of our consolidated revenue. In 2000, Verizon
Communications Inc. and PepsiCo, Inc. accounted for 19.2% and 13.2%,
respectively, of our consolidated revenue. We discontinued providing the
majority of services to Verizon Communications Inc. as of December 31, 2001,
and anticipate the discontinuance of remaining services as of March 31, 2002.

Sales and Marketing

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

   Large Employers.  We sell directly to large employers, and partner with
human resource information 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 a dedicated large market sales force. Additional employees
are dedicated to supporting our partnership efforts. We will consider adding
personnel to this area as other strategic relationships are developed in the
future. In addition, we augment the sales effort with dedicated strategic
procurement consultants who spend a portion of their time cross selling
administrative services to the large employer market. In addition, our Client
Relationship Management staff is responsible for selling additional services to
existing customers.

   Due to the technical nature of our products and services, our typical sales
cycle in the large employer market is six to nine months and usually involves a
competitive bidding process, which starts with a request for proposal (RFP)
from the employer. The employer often indicates that this RFP 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 seasonal in nature 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 May through August. The mutual intent is that our services will become
operational prior to the next annual enrollment period.

   Mid-sized Employers.  We utilize existing brokerage distribution systems to
penetrate the mid-sized employer market. We employ a dedicated mid-market sales
force that is specifically focused on developing our sales and marketing
efforts to mid-sized employers through brokers.

                                      9

<PAGE>

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, employees and their dependents,
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 plan
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 call center staff operating during normal business hours.
We use a proprietary automated tracking system to ensure resolution of all
inquiries. As of December 31, 2001, we had more than 140 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. 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, price, and the breadth of services
offered in addition to health and welfare benefits administration. We believe
our products and services are competitive with respect to these factors.

   In the large employer market we compete with total benefits outsourcers who
offer retirement administration services such as 401(k) or pension
administration in addition to benefits administration, and benefits consultants
with administration services capabilities. We believe our major competititors
are Hewitt Associates LLC, Automatic Data Processing, Inc., and Towers Perrin
Forster & Crosby. 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 start up and independent companies that provide
technology solutions that serve the automation and benefits administration
needs of employers, brokers and other benefit advisors. However, as the economy
experienced a downturn in 2001, many of these start up and independent
companies merged, sold their businesses or went out of business due to a
shortage of capital. Currently, none of these start up and independent
companies have a significant market share. 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 technology 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(R) 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 2000, as a result of our acquisition of Arbor, we also acquired its
processing technology referred to as ChoiceOne Link. The ChoiceOne Link system
is the platform 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,

                                      10

<PAGE>

human resource information service systems and insurance carriers. In 2001,
work was completed on the first phase of the integration between ChoiceOne Link
and BEN-NET. This integration will be completed in 2002.

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 redundant
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,
resulting in reduced support costs and improved timeliness and 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 databases, MS Internet Information
Servers, 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, 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.

   In addition to real-time replication of data between the sites, 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

                                      11

<PAGE>

operation. Our primary Minnesota data processing 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
$8,704,000, $7,883,000 and $4,012,000 in 2001, 2000 and 1999, respectively. We
typically enter into nondisclosure and confidentiality agreements with our
employees and consultants with access to sensitive information. However, 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 has patented its health and welfare benefit systems. The patent will
expire in March 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/or 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.

Employees

   As of December 31, 2001, we had 495 full-time employees, including 170 in
information technology, 142 in operations, 67 in account relations, 34 in sales
and marketing, 42 in consulting, and 40 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.

Item 2.  Properties

   Our corporate headquarters are located at 605 North Highway 169, Suite LL,
Minneapolis, Minnesota, 55441-6465, where we lease approximately 109,000 square
feet of office space. This operating lease expires in 2005. Our telephone
number is 763-614-2000 and our Web site address is www.ebenx.com.

   Our subsidiary, Arbor Associates, Inc., has its main office at 325 Chestnut
Street, Suite 1010, Philadelphia, Pennsylvania, 19106, for our mid-market
division. It leases approximately 14,000 square feet of office space under a
lease that expires in 2006.

   We license office space in three locations in Seattle, Washington, totaling
approximately 25,000 square feet, and we sublease office space of approximately
7,500 square feet in Chicago, Illinois, for operations supporting the
administration of clients acquired from Howard Johnson. The license expires in
2002 and the sublease expires in 2003. We are currently negotiating a sublease
agreement to be effective through 2003 that will consolidate the Seattle
locations.

   We also maintain approximately 5,600 square feet of office space for our
primary data processing production facility in Minneapolis, Minnesota. The term
of this operating lease is ten years, through 2009, with the right to renew for
two additional five-year terms. In addition, we provide office space of
approximately 6,800 square feet in Atlanta, Georgia, under an operating lease
that expires in 2005, for 8 professionals focused on providing procurement
services.

Item 3.  Legal Proceedings

   A class action lawsuit was filed on October 25, 2001 on behalf of purchasers
of our securities between December 9, 1999 and December 6, 2000, inclusive. The
lawsuit was filed in United States District Court,

                                      13

<PAGE>

Southern District of New York, against eBenX, BancBoston Robertson Stephens,
Inc., Warburg Dillon Read LLC, Thomas Weisel Partners LLC, and our Chairman,
Mark W. Tierney, Chief Executive Officer, John J. Davis, and Executive Vice
President & General Manager-Corporate Solutions, Scott P. Halstead. The
complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. The complaint alleges that our prospectus, filed
in connection with our initial public offering, was materially false and
misleading because it failed to disclose certain commissions and agreements
between the aforementioned parties and certain investors and customers. The
complaint seeks unspecified damages plus attorneys' fees and rescission. We
intend to vigorously defend against this lawsuit.

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 2001.

                                    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 periods indicated as reported by
the Nasdaq National Market.

<TABLE>
<CAPTION>
                                            2001
                              --------------------------------
                                  Q1        Q2     Q3     Q4
                                ------    ------ ------ ------
                 <S>          <C>         <C>    <C>    <C>
                 Bid quotation per share:
                    Low...... $ 4.38      $ 3.06 $ 3.05 $ 2.97
                    High..... $ 7.38      $ 5.09 $ 4.67 $ 4.60
                                            2000
                              --------------------------------
                                  Q1        Q2     Q3     Q4
                                ------    ------ ------ ------
                 Bid quotation per share:
                    Low...... $29.50      $12.75 $11.31 $ 6.75
                    High..... $76.50      $36.88 $29.00 $14.00
</TABLE>

National Market

   The closing sales price of our common stock on March 1, 2002 was $4.08. As
of March 1, 2002, we had 20,004,621 shares of common stock held by 354
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

                                      14

<PAGE>

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.

   Through December 31, 2001, 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.............. $ 42.1
                  Acquisition of Arbor................   20.4
                  Acquisition of Howard Johnson assets   11.5
                  Purchase of furniture and equipment.   11.0
                  Working capital.....................   20.5
                                                       ------
                     Total............................ $105.5
                                                       ======
</TABLE>

   In connection with our acquisition of Arbor, the President of Mid-Market,
formerly President of Arbor, received approximately $11.4 million in his
capacity as the majority shareholder of Arbor. He was not affiliated with eBenX
prior to the acquisition. 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.

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, 2001, 2000 and 1999 and the balance sheet data as of
December 31, 2001 and 2000 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, 1998 and 1997 and the balance
sheet data as of December 31, 1999, 1998 and 1997 are derived from our audited
financial statements not included elsewhere in this document.

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                      ----------------------------------------------
                                                        2001     2000       1999     1998     1997
                                                      --------  --------  --------  -------  -------
                                                           (In thousands, except per share data)
<S>                                                   <C>       <C>       <C>       <C>      <C>
Statement of Operations Data:
   Net revenue....................................... $ 36,863  $ 29,001  $ 17,526  $10,122  $ 7,093
   Net loss.......................................... $(68,813) $(15,490) $ (5,027) $(1,042) $  (500)
   Net loss per share:
       Basic and diluted............................. $  (3.51) $  (0.90) $  (1.18) $ (0.30) $ (0.15)
   Shares used in calculation of net loss per share:
       Basic and diluted.............................   19,626    17,211     4,253    3,463    3,376

                                                                       December 31,
                                                      ----------------------------------------------
                                                        2001     20001      1999     1998     1997
                                                      --------  --------  --------  -------  -------
                                                                      (In thousands)
Balance Sheet Data:
   Cash, cash equivalents and short-term investments. $ 49,535  $ 77,508  $ 98,611  $ 1,681  $ 1,009
   Working capital................................... $ 54,648  $ 82,436  $ 98,608  $ 1,782  $ 3,102
   Total assets...................................... $ 94,800  $157,226  $105,599  $ 5,596  $ 5,084
   Redeemable convertible preferred stock............ $     --  $     --  $     --  $ 5,468  $ 5,468
   Total shareholders' equity (deficit).............. $ 87,836  $153,470  $101,126  $(2,077) $(1,045)
</TABLE>

                                      15

<PAGE>

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,
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 health and
welfare benefits data and dollars.

   On November 5, 2001, we acquired the health and welfare assets of Howard
Johnson & Company, a wholly owned subsidiary of Merrill Lynch & Company, Inc.,
for a purchase price of $12.6 million, consisting of approximately $11.5
million in cash and the assumption of $1.1 million of liabilities. The
acquisition was accounted for under the purchase method of accounting. Under
this method, the purchase price is allocated to the assets acquired and
liabilities assumed based on their determined fair market values. The assets
acquired primarily consist of customer contracts and arrangements for the
provision of health and welfare benefits administration services. This
acquisition resulted in significant increases in accounts receivable, accrued
compensation, and accrued expenses.

   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. We
typically enter into multi-year contracts with our large employer customers and
often provide fixed and variable fee structures to permit volume-adjusted
pricing.

   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.

   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 portion of cost of services consists of new customer
implementation expenses. Therefore, as a short-term effect of growth,
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.

   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. The Company follows AICPA Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use", in
accounting for internally developed software. To date, we have not capitalized
any of our software development costs as a majority of our in-house development
efforts related to determining specific software requirements and evaluating
alternatives related to specific performance criteria for our products. As a
result, all research and development costs have been expensed as incurred.

                                      16

<PAGE>

   Since our inception, we have incurred losses. As of December 31, 2001, we
had an accumulated deficit of $91.6 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,
amortization of stock-based compensation and goodwill and other intangibles and
a $30.4 million impairment charge to the carrying value of goodwill associated
with the September 2000 acquisition of Arbor. 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.

Critical Accounting Policies and Estimates

General

   Management's discussion and analysis of its financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, management
evaluates its estimates, including those related to customer receivables,
short-term investments, intangible assets, income taxes, and contingencies and
litigation. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

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

Revenue Recognition

   We recognize revenue for administrative, enrollment, and procurement
consulting services as the services are performed. Implementation fees
associated with our administrative services are recognized as revenue over the
life of the contract.

Short-term Investments

   We classify our short-term investments as available-for-sale securities.
Pursuant to SFAS No. 115 such securities are measured at fair market value in
the financial statements with unrealized gains or losses recorded in other
comprehensive income until the securities are sold or otherwise disposed of.
However, in accordance with SFAS No. 115, a decline in fair market value below
cost that is other than temporary is accounted for as a realized loss.

Bad Debts

   We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

Note Receivable

   In conjunction with the formation of a strategic alliance, we provided a
line of credit of $1.5 million (see Note 5 to the Audited Financial
Statements). We will evaluate recoverability of the carrying amount of this
line of credit on a periodic basis. If we determine that the carrying value is
not fully recoverable, we will have to record an impairment charge not
previously recognized.

                                      17

<PAGE>

Goodwill and Intangible Impairment

   In assessing the recoverability of our goodwill and other intangibles, we
must make assumptions regarding estimated future cash flows and other factors
to determine the fair value of the respective assets. If these estimates or
their related assumptions change in the future, then we may be required to
record impairment charges for these assets not previously recorded. Effective
January 1, 2002, we adopted Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," and are required to analyze our goodwill and
other intangible assets for impairment issues during the first six months of
2002, and then on a periodic basis thereafter.

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,
                                                     ----------------------
                                                      2001    2000    1999
                                                     ------   -----   -----
  <S>                                                <C>      <C>     <C>
  Net revenue.......................................  100.0%  100.0%  100.0%
  Cost of services..................................   77.3    73.0    76.3
                                                     ------   -----   -----
         Gross profit...............................   22.7    27.0    23.7

  Operating expenses:
     Selling, general and administrative............   45.2    41.4    29.2
     Research and development.......................   23.6    27.2    22.9
     Amortization of stock-based compensation.......    6.7     9.4     4.4
     Amortization of goodwill and other intangibles.  143.8    24.7      --
                                                     ------   -----   -----
         Total operating expenses...................  219.3   102.7    56.5
                                                     ------   -----   -----
  Loss from operations.............................. (196.6)  (75.7)  (32.8)
  Interest income, net..............................   10.0    22.3     4.1
                                                     ------   -----   -----
  Net loss.......................................... (186.6%) (53.4%) (28.7%)
                                                     ======   =====   =====
</TABLE>

   In addition to our operating results, we also track and provide enrollment
statistics. Enrollment is defined as the number of employees or retirees to
whom we currently provide administration services. Enrollment commitments
include the number of employees currently in enrollment, plus the number of new
customer employees that will be implemented in the foreseeable future, and
reduced by further known and anticipated customer dis-enrollments (if any). The
following table sets forth our enrollment statistics for the periods indicated:

<TABLE>
<CAPTION>
                                       Years Ended December 31,
                                       -------------------------
                                         2001     2000    1999
                                       --------- ------- -------
                <S>                    <C>       <C>     <C>
                Enrollment............ 1,023,000 780,000 535,000
                Enrollment commitments 1,060,000 852,000 600,000
</TABLE>

Years ended December 31, 2001 and 2000


   Enrollment and enrollment commitments.  Enrollment increased 31% to 1.023
million as of December 31, 2001 from 780,000 as of December 31, 2000.
Enrollment commitments increased 24% to 1.06 million as of December 31, 2001
from 852,000 as of December 31, 2000. These increases were the result of the
best new sales year in our history and the acquisition of the health and
welfare assets of Howard Johnson. We sold employers representing over 285,000
covered employees during 2001. Approximately two-thirds of these new sales came
through strategic partnerships. The acquisition of the health and welfare
assets of Howard Johnson contributed 270,000 enrolled employees and 210,000
employee commitments as of December 31, 2001. The difference of 60,000
employees is due to three employers who notified Howard Johnson prior to the
close of the transaction of their intent to discontinue service before January
1, 2003. We contemplated this in the agreement and adjusted the purchase price
accordingly.

                                      18

<PAGE>

   Net revenue.  Net revenue increased to $36.9 million in 2001 from $29.0
million in 2000, representing an increase of $7.9 million, or 27.2%. This
increase was the result of additional revenue earned from our subsidiary, Arbor
Associates Inc., which was acquired in September 2000, additional revenue
derived from the acquisition of the health and welfare clients of Howard
Johnson in November 2001, and internal revenue growth from the sale of new
business in 2000 and 2001. These increases were partially offset by the loss of
several unprofitable clients during 2001 and decreased revenue from consulting
services provided to Verizon Communications, Inc.

   Cost of services.  Cost of services increased to $28.5 million in 2001, from
$21.2 million in 2000, representing an increase of $7.3 million, or 34.4%. Cost
of services, as a percentage of net revenues, increased to 77.3% in 2001 from
73.0% in 2000. This increase is primarily due to costs related to integrating
Arbor operations and systems; higher rent, equipment lease costs, maintenance
costs and depreciation related to our new Minnesota production site; higher
rent costs related to new company headquarters; and reserves established for
terminated clients. We anticipate that cost of service as a percentage of
revenue will decrease as a result of actions taken during first quarter 2002 to
eliminate excess space at our corporate headquarters, and to reduce the
workforce.

   Selling, general and administrative.  Selling, general and administrative
expenses increased to $16.7 million in 2001, from $12.0 million in 2000. The
$4.7 million increase, or 39.2%, primarily was due to additions in the sales
and marketing staff, an increase in rent and depreciation of leasehold
improvements related to our corporate headquarters move in mid-2000, adding an
additional corporate headquarters floor in mid-2001, additions to bad debt
reserves, and a full year of expenses for Arbor. Selling, general and
administrative expenses, as a percentage of net revenues, increased to 45.2% in
2001, from 41.4% in 2000, primarily due to the above factors. We anticipate
that selling, general, and administrative expenses will decrease as a
percentage of revenue in the future as a result of leveraging existing
resources across a larger revenue base and due to actions taken during the
first quarter of 2002 to eliminate excess headquarters office space and to
reduce the general and administrative workforce.

   Research and development.  Research and development expenses increased to
$8.7 million in 2001, from $7.9 million in 2000, representing an increase of
$0.8 million, or 10.1%. This increase is primarily due to research and
development expenses incurred during 2001 by Arbor. Research and development
expenses, as a percentage of net revenues, decreased to 23.6% in 2001, from
27.2% in 2000. We anticipate that research and development expenses will
decrease as a percentage of net revenue in the future because we are leveraging
existing resources across a larger revenue base, and from technologies gained
through the Arbor acquisition.

   Amortization of stock-based compensation.  In connection with the granting
of stock options to employees prior to our initial public offering, we recorded
deferred stock-based compensation in 1999 with an additional amount recorded in
2000 related to our acquisition of Arbor. We recorded $2.5 million in
amortization expense related to the deferred stock-based compensation in 2001,
a decrease of 7.4% from the $2.7 million recorded in 2000. The amortization of
deferred stock-based compensation will result in an additional $3.1 million of
total charges to operations through 2004.

   Goodwill and other intangibles charges.  Goodwill and other intangibles
charges increased to $53.0 million in 2001, from $7.2 million in 2000. In the
fourth quarter of 2001, we recorded a $30.4 million impairment charge to the
carrying value of goodwill associated with the September 2000 acquisition of
Arbor. In the fourth quarter of 2001, management believed that the carrying
value of the Arbor goodwill exceeded its fair market value. As a result, we
performed an impairment test by using a current market valuation approach to
calculate the amount of the impairment charge. Prior to this one-time charge,
goodwill and other intangibles of $67.8 million related to this acquisition
were being amortized over a 36-month period. Under SFAS No. 142, Goodwill and
Other Intangible Assets, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will be amortized over their useful
lives. During the first six months of 2002, the Company will perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets as of January 1, 2002. Management has not yet determined what the effect
of these tests will be on our earnings and financial position.

                                      19

<PAGE>

   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 decreased to $3.7 million in 2001, from $6.5 million in
2000, representing a decrease of $2.8 million, or 43.1%. This decrease is
primarily a result of the decrease in our short-term investment portfolio as a
result of the acquisition of the health and welfare business assets of Howard
Johnson, operating losses, and a decrease in the return on investment of the
securities that are held in our short-term investment portfolio due to a
general decline in market interest rates.

   Income taxes.  As of December 31, 2001, 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, 2001, of approximately $23.1 million which
begin to expire in 2009. These net operating loss carryforwards are not
recognized as an asset on the Company's balance sheet because the utilization
of these carryforwards is dependent upon our ability to generate sufficient
taxable income during future periods.

Years Ended December 31, 2000 and 1999

   Enrollment and enrollment commitments.  Enrollment increased 46% to 780,000
as of December 31, 2000 from 535,000 as of December 31, 1999. Enrollment
commitments increased 42% to 852,000 as of December 31, 2000 from 600,000 as of
December 31, 1999. These increases were the result of internal sales and the
acquisition of Arbor.

   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 September 2000 acquisition of Arbor.

   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 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.

   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.

   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.

                                      20

<PAGE>

   Goodwill and other intangibles charges.  Related to our acquisition of
Arbor, goodwill and other intangibles of $67.8 million were recorded. Prior to
December 31, 2001, goodwill and other intangibles were being 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.

Liquidity and Capital Resources

   Our initial public offering on December 10, 1999, and the January 2000
exercise of the underwriter's over allotment, generated gross proceeds of $115
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 and approximately $11.5 million were used in connection with
our November 2001 acquisition of the health and welfare assets of Howard
Johnson. 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.

   At December 31, 2001, we had $49.5 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 $12.3 million in 2001, $8.5 million in
2000 and $3.8 million in 1999. The use of cash from operations in 2001 was due
primarily to our net loss and an increase in accounts receivable, principally
offset by non-cash charges for depreciation and amortization. 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 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 provided cash of $14.3 million in 2001, and used
cash of $104.1 million in 2000 and $1.6 million in 1999. In 2001, sales of
investments, net of purchases, provided cash of $30.7 million. Other 2001
investing activities included the acquisition of the health and welfare assets
of Howard Johnson of $11.5 million, and additions to property and equipment of
$4.1 million. In 2000, our investing activities used cash of $20.4 million for
the acquisition of Arbor and $6.9 million for additions to property and
equipment. In

                                      21

<PAGE>

2000, purchases of investments, net of sales, used cash of $76.8 million. In
1999, our investing activities used cash of $1.6 million for additions to
equipment.

   Our financing activities provided cash of $503,000 in 2001, $14.7 million in
2000, and $102.4 million in 1999. In 2001, financing activities provided
$161,000 in cash through sales of common stock and $342,000 from the exercise
of stock options and warrants. 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 $879,000
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.

   Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment, and leasehold improvements. We fund equipment
additions either through the use of working capital or with operating leases.
We expect to fund future equipment additions in the same manner.

   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 while our goal is to
achieve operating profitability in the fourth quarter of 2002, 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 $68.8 million, $15.5 million and $5.0
million for the years ended December 31, 2001, 2000 and 1999, respectively. At
December 31, 2001, we had an accumulated deficit of $91.6 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.

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 2001, sixteen customers accounted
for approximately 55% 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.

                                      22

<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,
price, and the breadth of services offered in addition to health and welfare
benefits administration. We expect competition to increase in the future.

   We compete with administrative service providers, total benefits outsourcers
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 administrative
service providers including health benefit brokerages with administrative arms.
In addition, total benefits outsourcers and 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 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 both as a
result of organic growth and acquisitions. We will continue to add personnel to
maintain our ability to grow in the future. We must integrate our new employees
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 limit expansion of 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 six to nine 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.

                                      23

<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 May 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 health care industry.
Our future growth and our ability to achieve our financial and operational
objectives will depend in large part upon our ability to attract and

                                      24

<PAGE>

retain highly skilled technical, engineering, sales and marketing and customer
support 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 that
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 us. 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 the health and welfare assets of
Howard Johnson & Company may not be realized.

   Achieving the expected benefits of our acquisition of the health and welfare
assets of Howard Johnson will depend in part on the timely and efficient
integration of the operations and personnel of the two companies and conversion
of customers to our core systems. 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 that 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 expense
significant amounts of goodwill and other intangible assets in connection with
future acquisitions that 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.

                                      25

<PAGE>

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 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. In addition, the health care landscape could change such
that an employer would no longer find it beneficial to contract with multiple
carriers, limiting the need for our services.

   Although there is not currently any single payer or government sponsored
health care legislation being proposed, such legislation has been introduced in
the past. Should such legislation be made into law, it could dramatically
change the health care industry and may adversely affect our business.

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 that we develop. We rely on a combination of contractual,
statutory and common law rights including non-disclosure agreements,

                                      26

<PAGE>

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 other 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.

   We have received a U.S. trademark registration for BEN-NET and a U.S.
service mark registration for WebElect(R). In addition, we have applied for
trademark and service mark protection for benX, eBenX, and The Benefit Exchange
Network under the classification of computer hardware and software, employee
benefits consulting services and computer consulting services. Our subsidiary,
Arbor Associates, Inc., has not applied for any trademark or service mark
protections. 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 or our subsidiary's 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

                                      27

<PAGE>

providers and carriers, these regulations may be extended to cover our business
and the eligibility data and 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. We have designed our products and services to
comply with HIPAA, but any change in federal standards would require us to
expend additional resources to comply with the new standards. 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 which might increase our cost of providing services and/or make it
more difficult to market and provide services in those jurisdictions.

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 240,499 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

                                      28

<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 that 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 principal
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, 2001 (in thousands):

<TABLE>
<CAPTION>
                                         2002     2003    Total
                                        -------  ------  -------
              <S>                       <C>      <C>     <C>
              Cash equivalents......... $ 3,324  $   --  $ 3,324
                 Average interest rate.     1.5%     --      1.5%

              Short-term investments... $38,353  $7,858  $46,211
                 Average interest rate.     2.9%    3.5%     3.0%
</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.

                                      29

<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 the years ended December 31, 2001 and 2000. 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 annual report. 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>
                                                 2001
                                          Three Months Ended
                             -------------------------------------------
                             March 31  June 30   September 30 December 31
                             --------  --------  ------------ -----------
                             (In thousands, except per share information)
       <S>                   <C>       <C>       <C>          <C>
       Net revenue.......... $  7,316  $  7,828    $ 9,095     $ 12,624
       Gross profit......... $    665  $  1,174    $ 2,463     $  4,074
       Net loss............. $(10,522) $(10,007)   $(9,310)    $(38,974)
       Net loss per share:
          Basic and diluted. $  (0.54) $  (0.51)   $ (0.47)    $  (1.97)
</TABLE>
<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>

                                      30

<PAGE>

                                  EBENX, INC.

                             FINANCIAL STATEMENTS

                 Years Ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                                                    Page
                                                                    ----
       <S>                                                          <C>
       Report of Independent Auditors..............................  32
       Audited Financial Statements
          Consolidated Balance Sheets..............................  33
          Consolidated Statements of Operations....................  34
          Consolidated Statement of Shareholders' Equity (Deficit).  35
          Consolidated Statements of Cash Flows....................  36
          Notes to Consolidated Financial Statements...............  37
</TABLE>

                                      31

<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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.

                                          /s/ Ernst & Young LLP

Minneapolis, Minnesota
February 8, 2002

                                      32

<PAGE>

                                  EBENX, INC.

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

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                ------------------
                                                                  2001      2000
                                                                --------  --------
<S>                                                             <C>       <C>
                                ASSETS

Current assets:
   Cash and cash equivalents................................... $  3,324  $    764
   Short-term investments......................................   46,211    76,744
   Accounts receivable, net of allowance of $957 and $178......    7,868     3,973
   Unbilled revenue............................................    2,272     3,477
   Prepaid expenses and other..................................    1,937     1,234
                                                                --------  --------
       Total current assets....................................   61,612    86,192

Property and equipment, net....................................   11,401     9,800
Loans receivable from employees................................      540       492
Note receivable................................................      800        --
Deposits.......................................................      113       103
Goodwill and other intangibles, net............................   20,334    60,639
                                                                --------  --------
       Total assets............................................ $ 94,800  $157,226
                                                                ========  ========

                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable............................................ $    204  $    150
   Accrued compensation........................................    2,297       585
   Accrued expenses............................................    3,684     2,848
   Client liability reserve....................................      670        80
   Deferred revenue............................................      109        93
                                                                --------  --------
       Total current liabilities...............................    6,964     3,756

Shareholders' equity:
   Common stock, $.01 par value: 100,000,000 shares authorized;
     19,908,159 and 19,575,265 shares issued and outstanding...      199       196
   Additional paid-in capital..................................  182,130   182,246
   Deferred stock-based compensation...........................   (3,145)   (6,241)
   Accumulated other comprehensive income......................      204         8
   Retained deficit............................................  (91,552)  (22,739)
                                                                --------  --------
       Total shareholders' equity..............................   87,836   153,470
                                                                --------  --------
       Total liabilities and shareholders' equity.............. $ 94,800  $157,226
                                                                ========  ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      33

<PAGE>

                                  EBENX, INC.

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

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                          ----------------------------
                                                                            2001      2000      1999
                                                                          --------  --------  --------
<S>                                                                       <C>       <C>       <C>
Net Revenue.............................................................. $ 36,863  $ 29,001  $ 17,526
Cost of services (exclusive of stock-based compensation expense of
  $833, $961 and $245 for the years ended December 31, 2001, 2000
  and 1999, respectively)................................................   28,487    21,182    13,372
                                                                          --------  --------  --------
       Gross profit......................................................    8,376     7,819     4,154

Operating expenses:
   Selling, general and administrative (exclusive of stock-based
     compensation expense of $1,220, $1,095 and $321 for the years ended
     December 31, 2001, 2000 and 1999, respectively).....................   16,680    12,004     5,118
   Research and development (exclusive of stock-based compensation
     expense of $427, $663 and $201 for the years ended December 31,
     2001, 2000 and 1999, respectively)..................................    8,704     7,883     4,012
   Amortization of stock-based compensation..............................    2,480     2,719       767
   Goodwill and other intangibles charges................................   53,025     7,164        --
                                                                          --------  --------  --------
       Total operating expenses..........................................   80,889    29,770     9,897
                                                                          --------  --------  --------
Loss from operations.....................................................  (72,513)  (21,951)   (5,743)
Interest income and other, net...........................................    3,700     6,461       716
                                                                          --------  --------  --------
Net loss................................................................. $(68,813) $(15,490) $ (5,027)
                                                                          ========  ========  ========

Net loss per share:
   Basic and diluted..................................................... $  (3.51) $  (0.90) $  (1.18)
                                                                          ========  ========  ========

Shares used in calculation of net loss per share:
   Basic and diluted.....................................................   19,626    17,211     4,253
                                                                          ========  ========  ========
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      34

<PAGE>

                                  EBENX, INC.

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

<TABLE>
<CAPTION>
                                      Common stock
                                      -------------
                                                                             Accumulated
                                                    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, 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
   Exercise of stock options and
    warrants.........................    277     2        159          --           --          --       161
   Issuance of common stock..........     56     1        341          --           --          --       342
   Deferred stock-based
    compensation.....................     --    --       (616)        616           --          --        --
   Amortization of stock-based
    compensation.....................     --    --         --       2,480           --          --     2,480
   Unrealized gain on
    investments......................                                              196                   196
   Net loss..........................     --    --         --          --           --     (68,813)  (68,813)
                                      ------  ----   --------    --------     --------    --------  --------

Balance at December 31, 2001......... 19,908  $199   $182,130    $ (3,145)    $    204    $(91,552) $ 87,836
                                      ======  ====   ========    ========     ========    ========  ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      35

<PAGE>

                                  EBENX, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                              -------------------------------
                                                                                2001       2000       1999
                                                                              ---------  ---------  ---------
<S>                                                                           <C>        <C>        <C>
Operating activities:
   Net loss.................................................................. $ (68,813) $ (15,490) $  (5,027)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
       Depreciation of property and equipment................................     2,477      1,479        721
       Stock-based compensation, goodwill and other intangibles
         charges.............................................................    55,505      9,885        767
       Loss on sale of property and equipment................................        --        210         --
       Changes in operating assets and liabilities:
          Accounts receivable................................................    (3,895)       515     (1,451)
          Other current assets...............................................       502     (3,093)      (713)
          Accounts payable...................................................        54     (1,717)       516
          Accrued expenses...................................................     1,910       (168)     1,216
          Deferred revenue...................................................        16        (90)       173
          Deposits...........................................................       (10)         5        (21)
                                                                              ---------  ---------  ---------
              Net cash used in operating activities..........................   (12,254)    (8,464)    (3,819)

Investing activities
   Additions to property and equipment.......................................    (4,079)    (6,918)    (1,609)
   Purchases of investments..................................................  (359,864)  (786,581)        --
   Sales of investments......................................................   390,593    709,845         --
   Advances to employees.....................................................       (48)        --         --
   Advances on notes.........................................................      (800)        --         --
   Cost of acquisition, net of cash acquired.................................   (11,491)   (20,424)        --
                                                                              ---------  ---------  ---------
              Net cash provided by (used in) investing activities............    14,311   (104,078)    (1,609)

Financing activities:
   Payment of note payable...................................................        --         --       (750)
   Stock options and warrants exercised......................................       161        879         93
   Proceeds from issuance of preferred stock, net of costs...................        --         --     10,446
   Proceeds from issuance of common stock, net of costs......................       342     13,816     92,569
                                                                              ---------  ---------  ---------
              Net cash provided by financing activities......................       503     14,695    102,358

Net increase (decrease) in cash and cash equivalents.........................     2,560    (97,847)    96,930
Cash and cash equivalents at beginning of year...............................       764     98,611      1,681
                                                                              ---------  ---------  ---------
Cash and cash equivalents at end of year..................................... $   3,324  $     764  $  98,611
                                                                              =========  =========  =========

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.

                                      36

<PAGE>

                                  EBENX, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2001, 2000, and 1999

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 on a straight-line basis over the estimated useful
life of the assets or the related lease term, whichever is less.

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,

                                      37

<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 life of the contract. 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, rate negotiations, actuarial
services and preparation of benefit plan communication materials for employees.
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 recognizes revenue under the contracts and agreements as services
are performed. Revenues generated from administrative or exchange services for
the years ended December 31, 2001, 2000 and 1999 were $31,057,000, $23,172,000,
and $13,823,000, respectively. Revenues generated from procurement consulting
services for the years ended December 31, 2001, 2000, and 1999 were $5,806,000,
$5,829,000, and $3,703,000, respectively.

Research and Development and Software Development

   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. The Company follows AICPA Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use", in
accounting for internally developed software. To date, the Company has not
capitalized any software development costs as a majority of in-house
development efforts are related to determining specific software requirements
and evaluating alternatives related to specific performance criteria for its
products. As a result, all research and development costs have been expensed as
incurred.

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 2001, 2000 and 1999 was approximately $418,000,
$357,000, and $71,000, 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,

                                      38

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

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, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components.
Adjustments to comprehensive loss for the years ended December 31, 2001 and
2000 consisted solely of unrealized gains on available-for-sale securities of
$196,000 and $8,000, respectively, resulting in total comprehensive losses of
$68,617,000 and $15,482,000, respectively.

Reclassification

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

Recent Accounting Pronouncements

   In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in
accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives.

   The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of SFAS No. 142 is expected to result in an increase
in net income of $8.8 million, $7.3 million and $3.5 million for 2002, 2003 and
2004, respectively. During the first six months of 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002. The Company has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company. The provisions of SFAS No. 142 do not allow for
amortization of goodwill associated with acquisitions that closed after July 1,
2001. As a result, the 2001 net loss was $702,000 lower than it would have been
had the goodwill associated with the acquisition of the health and welfare
assets of Howard Johnson been amortized through December 31, 2001.

   In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the
accounting and reporting provision of APB Opinion No. 30, "Reporting the
Results of Operations" for a disposal of a segment of a business. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt SFAS No. 144 as of January
1, 2002, and it has not determined the effect, if any, the adoption will have
on the Company's financial position and results of operations.

2. Acquisitions

   On November 5, 2001, the Company completed the acquisition of the health and
welfare assets of Howard Johnson & Company, ("Howard Johnson"), a wholly owned
subsidiary of Merrill Lynch & Company, Inc., for a

                                      39

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

final purchase price of approximately $12.6 million, including approximately
$11.5 million paid in cash at closing and approximately $1.1 million in assumed
obligations to employees, pursuant to the terms of an Asset Purchase Agreement
between Howard Johnson and the Company dated as of October 19, 2001 (the "Asset
Purchase Agreement"). The purchase price was funded from the Company's existing
cash.

   In connection with the consummation of this acquisition, the Company entered
into a Shared Services Agreement with Howard Johnson pursuant to which Howard
Johnson will provide agreed upon services to the Company in connection with the
Company's health and welfare business for up to 24 months. The Company is
obligated to pay Howard Johnson a monthly fee of $187,500, subject to reduction
as responsibility for providing these services to each client is transferred to
the Company. The Company also entered into a Marketing Agreement with Howard
Johnson pursuant to which Howard Johnson may refer potential and existing
clients seeking health and welfare benefits services to the Company in exchange
for a percentage of revenues from such referrals.

   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 mid-sized 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,
two years for expected life, 6.35% for the risk-free interest rate, and a
market value of $17.19. The restricted stock was 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.

   Each of the above acquisitions was accounted for using the purchase method
of accounting. The excess of the consideration provided over the relative fair
value of the assets acquired was allocated to goodwill. The allocation of
purchase price related to the acquisition of the health and welfare assets of
Howard Johnson is subject to change pending a final analysis of the value of
the assets acquired and the liabilities assumed.

   The total purchase price paid for the Arbor and Howard Johnson acquisitions
was allocated as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Howard
                                           Arbor  Johnson
                                          ------- -------
                      <S>                 <C>     <C>
                      Net assets acquired $    24 $    --
                      Intangible assets..   5,600      --
                      Goodwill...........  62,203  12,649
</TABLE>

   In the fourth quarter of 2001, the Company recorded a $30.4 million
impairment charge to the carrying value of goodwill associated with the 2000
acquisition of Arbor. In the fourth quarter of 2001, management believed that
the carrying value of the Arbor goodwill exceeded its fair market value. As a
result, the Company performed an impairment test by using a current market
valuation approach to calculate the amount of the impairment charge.

   Prior to the impairment charge of $30.4 million in fourth quarter 2001,
goodwill and other intangible assets related to the Arbor acquisition were
being amortized over a three year period, however, in accordance with SFAS No.
142, no amortization was recorded for goodwill associated with the acquisition
of the health and welfare assets of Howard Johnson in 2001. At December 31,
2001, accumulated goodwill charges and amortization related to goodwill and
other intangible assets acquired in the Arbor acquisition totaled $60.2 million.

                                      40

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following summary, prepared on an unaudited pro forma basis, reflects
the condensed consolidated results of operations for the years ended December
31, 2001, 2000 and 1999, assuming Arbor had been acquired at the beginning of
2000 and 1999, and assuming the health and welfare assets of Howard Johnson had
been acquired at the beginning of 2001and 2000 (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                               Year ended December 31,
                                            ----------------------------
                                              2001      2000      1999
                                            --------  --------  --------
       <S>                                  <C>       <C>       <C>
       Revenue............................. $ 53,628  $ 52,591  $ 21,802
       Net loss............................ $(66,509) $(30,737) $(27,554)
       Basic and diluted net loss per share $  (3.39) $  (1.62) $  (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, 2001
(in thousands):

<TABLE>
<CAPTION>
                                                   Gross      Gross
                                       Amortized Unrealized Unrealized  Fair
                                         Cost      Gains      Losses    Value
                                       --------- ---------- ---------- -------
  <S>                                  <C>       <C>        <C>        <C>
  Commerical paper & certificates of
    deposit...........................  $ 5,203   $    20    $     --  $ 5,223
  U.S government and agency securities   16,593        92          --   16,684
  Corporate notes and bonds...........   24,211        93         (1)   24,304
                                        -------   -------    --------  -------
                                        $46,007   $   205    $    (1)  $46,211
                                        =======   =======    ========  =======
</TABLE>

   The contractual maturities of the Company's available-for-sale securities at
December 31, 2001 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Amortized  Fair
                                                    Cost     Value
                                                  --------- -------
            <S>                                   <C>       <C>
            Due within one year..................  $38,225  $38,353
            Due after one year through five years    7,782    7,858
                                                   -------  -------
                                                   $46,007  $46,211
                                                   =======  =======
</TABLE>

   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 2001.

                                      41

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. Property and Equipment, net

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

<TABLE>
<CAPTION>
                                               2001     2000
                                              -------  -------
                <S>                           <C>      <C>
                Computer hardware............ $ 5,343  $ 3,433
                Purchased software...........   3,569    1,984
                Furniture and fixtures.......   3,586    3,334
                Leasehold improvements.......   3,484    3,261
                Office equipment.............     789      681
                                              -------  -------
                                               16,771   12,693
                Less accumulated depreciation  (5,370)  (2,893)
                                              -------  -------
                                              $11,401  $ 9,800
                                              =======  =======
</TABLE>

5. Note Receivable

   In conjunction with the formation of a strategic alliance to develop,
promote, distribute and support an integrated Web-based benefits administration
and communications product for mid-sized employers, the Company entered into a
joint development agreement and a related loan agreement on August 31, 2001,
granting a line of credit of $1.5 million to Online Benefits, Inc, a privately
held Delaware corporation. The outstanding principal balance under the line of
credit bears interest at a rate of 8% per annum. Interest is due annually on
the anniversary date of the loan agreement. On August 31, 2004, the third
anniversary date of the loan agreement, payment of the lesser of the
outstanding principal balance under the line of credit or the total gross
revenues received by the strategic alliance through such date is due. If less
than the entire principal balance under the line of credit is paid on August
31, 2004, then the lesser of the remaining principal balance or the total gross
revenues of the strategic alliance for the preceding year is due on the next
and each succeeding anniversary date of the loan agreement. Any remaining
outstanding principal balance under the line of credit is due on August 31,
2006. At December 31, 2001, $800,000 has been advanced and remains outstanding
under the line of credit.

   As a condition of the loan agreement, the Company received warrants to
purchase common stock of Online Benefits at an exercise price of $1.644 per
share. The warrants entitle the Company to purchase shares equal to 15% of the
total advances on the line of credit, divided by the per share exercise price.
The warrants expire August 31, 2006. Warrants for the purchase of 72,992 shares
of common stock were outstanding at December 31, 2001.

6. 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.

7. 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

                                      42

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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. Shares purchased under this plan
were 56,244 and 79,500 in 2001 and 2000, respectively.

8. Income Taxes

   At December 31, 2001 and 2000, the Company's deferred taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                          2001     2000
                                                         -------  -------
      <S>                                                <C>      <C>
      Deferred tax assets:..............................
         Net operating loss carryforwards............... $ 8,786  $ 4,332
         Research and development credits...............     250      250
         Bonus and vacation.............................     538      225
         Accounts receivable allowance..................     364       68
                                                         -------  -------
                                                           9,938    4,875
      Deferred tax liabilities:
         Depreciation...................................     (85)     (50)
                                                         -------  -------
      Net deferred tax assets before valuation allowance   9,853    4,825
      Less valuation allowance..........................  (9,853)  (4,825)
                                                         -------  -------
      Net deferred tax assets........................... $    --  $    --
                                                         =======  =======
</TABLE>

   The Company has established a valuation allowance to fully reserve for the
net deferred tax assets at December 31, 2001 and 2000. 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, 2001, 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, 2001 of approximately $23.1 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 is subject to limitations imposed under Section 382
of the Internal Revenue Code.

                                      43

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. 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. Future lease payments for all operating leases, excluding
executor costs, such as management and maintenance fees are as follows (in
thousands):

<TABLE>
                        <S>                      <C>
                        Year ending December 31:
                        2002.................... $ 4,979
                        2003....................   3,168
                        2004....................   2,616
                        2005....................   1,600
                        2006....................     386
                        Thereafter..............     340
                                                 -------
                                                 $13,089
                                                 =======
</TABLE>

   Rent expense, including the Company's pro rata share of certain operating
costs, was $6,993,000, $5,457,000, and $2,096,000 in 2001, 2000 and 1999
respectively.

   On August 29, 2001, the Company secured an irrevocable letter of credit for
approximately $1.8 million. The letter was required under the operating lease
of the Company's corporate headquarters, and as such, the lessor is assigned as
the beneficiary of the funds in the event of default on the lease. The letter
of credit expires July 31, 2005, and is collateralized by securities restricted
for that purpose.

10. Significant Customers

   Significant customer activity as a percent of the Company's net revenue in
2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                     2001  2000  1999
                                     ----  ----  ----
                          <S>        <C>   <C>   <C>
                          Customer A 12.5% 19.2% 28.0%
                          Customer B  9.8% 13.2% 20.3%
                          Customer C  3.0%  3.7%  8.9%
</TABLE>

11. 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
there under 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, 2001, 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
nonqualified 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, 2001,
583,850 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", collectively, with the 1993 Plan and the 1999

                                      44

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Plan, the "Plans") effective September 6, 2000. The 2000 Plan provides for the
granting of incentive stock options, nonqualified 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,
2001, 183,733 shares of restricted stock were vested, and there were 66,208
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 board of directors
determines the exercise price of nonqualified options granted under the Plans.

   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 there under may become
available for additional option awards under the Plans.

   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 $2.5 million and $2.7 million was recognized in 2001 and 2000,
respectively. The amortization of the remaining deferred stock-based
compensation will result in additional charges to operations through 2004.

                                      45

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                      average
                                                              2000    exercise
                                       1993 Plan  1999 Plan   Plan     price
                                       ---------  ---------  -------  --------
 <S>                                   <C>        <C>        <C>      <C>
 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
    Granted at market value...........        --  1,868,925       --   $ 4.76
    Granted at less than market value.        --         --       --   $ 0.00
    Exercised.........................  (265,962)        --       --   $ 0.67
    Canceled..........................  (289,875)  (641,350) (63,030)  $20.35
                                       ---------  ---------  -------
 Outstanding at December 31, 2001..... 1,859,647  2,388,825  282,991   $ 5.03
                                       =========  =========  =======

 Exercisable at:
    December 31, 2001................. 1,089,457    269,127  154,821   $ 4.24
    December 31, 2000.................   943,756     25,567   73,637   $ 1.56
    December 31, 1999.................   845,744     27,375       --   $ 1.16
</TABLE>

   Summary information about the Company's stock options outstanding at
December 31, 2001 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>
    $  .23 - $  .60....    177,175       2.33       $ 0.59     175,975   $ 0.59
    $ 0.75.............  1,292,587       6.46       $ 0.75     772,702   $ 0.75
    $ 1.33 - $ 2.98....    424,913       7.75       $ 1.58     172,308   $ 1.68
    $ 3.15 - $ 5.04....    989,125       9.47       $ 3.85          --   $   --
    $ 5.55 - $ 9.75....  1,002,883       8.85       $ 6.11     129,588   $ 6.40
    $10.06 - $13.94....    418,693       8.44       $13.42     164,431   $13.47
    $14.00 - $20.00....    136,087       8.28       $17.58      63,638   $18.34
    $21.00 - $39.94....     78,500       8.35       $31.35      29,653   $31.52
    $44.00 - $67.50....     11,500       8.14       $58.05       5,110   $58.49
                         ---------                           ---------
                         4,531,463                           1,513,405
                         =========                           =========
</TABLE>

                                      46

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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 Black-Scholes multiple
option-pricing model for options granted in 2001 and 2000, and the minimum
value option-pricing model for options granted in 1999. The fair value
calculation for 1999 does not include a volatility factor, because the options
were granted prior to the Company's initial public offering.

<TABLE>
<CAPTION>
                                               2001        2000         1999
                                            ---------- ------------ ------------
<S>                                         <C>        <C>          <C>
Weighted average fair value:
   Options granted at estimated fair value. $     4.09 $      22.60 $       0.55
   Options granted at less than estimated
     fair value............................ $       -- $      25.72 $       7.26
Weighted average assumptions:
   Risk-free interest rate.................       4.6%  6.1% - 6.3%  5.2% - 6.1%
   Expected life...........................          5            5            5
   Volatility factor.......................       0.90  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>
                                               2001      2000     1999
                                             --------  --------  -------
       <S>                                   <C>       <C>       <C>
       Net Loss:
          As reported....................... $(68,813) $(15,490) $(5,027)
          Pro forma......................... $(71,674) $(24,853) $(5,114)
       Basic and diluted net loss per share:
          As reported....................... $  (3.51) $  (0.90) $ (1.18)
          Pro forma......................... $  (3.65) $  (1.44) $ (1.20)
</TABLE>

   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 and expires
June 2010.

                                      47

<PAGE>

                                  EBENX, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. 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 2001, 2000 or 1999.

13. Contingencies

   A class action lawsuit was filed on October 25, 2001 on behalf of purchasers
of our securities between December 9, 1999 and December 6, 2000, inclusive. The
lawsuit was filed in United States District Court, Southern District of New
York, against eBenX, BancBoston Robertson Stephens, Inc., Warburg Dillon Read
LLC, Thomas Weisel Partners LLC, and our Chairman, Mark W. Tierney, Chief
Executive Officer, John J. Davis, and Executive Vice President & General
Manager-Corporate Solutions, Scott P. Halstead. The complaint alleges
violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaint alleges that our prospectus, filed in connection with
our initial public offering, was materially false and misleading because it
failed to disclose certain commissions and agreements between the
aforementioned parties and certain investors and customers. The complaint seeks
unspecified damages plus attorneys' fees and rescission. We intend to
vigorously defend against this lawsuit.

                                      48

<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,
2001.

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,
2001.

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,
2001

   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,
2001.

                                    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, 2001 and 2000.

       (ii) Consolidated Statements of Operations for the years ended December
            31, 2001, 2000 and 1999.

      (iii) Consolidated Statement of Shareholders' Equity (Deficit) for the
            years ended December 31, 2001, 2000 and 1999.

       (iv) Consolidated Statements of Cash Flows for the years ended December
            31, 2001, 2000 and 1999.

        (v) Notes to consolidated financial statements at December 31, 2001.

                                      49

<PAGE>

  (a)(2) Financial Statement Schedule.

        (i) Schedule II--Valuation and Qualifying Accounts. Such schedules
            should be read in conjunction with the consolidated financial
            statements. All other supporting schedules are omitted because of
            absence of conditions under which they are required.

  (a)(3) Exhibits

        The following exhibits are filed or incorporated by reference:

            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 (incorporated by reference to Exhibit 10.4
                 of Registrant's Annual Report on Form 10-K, filed on March 23,
                 2001).

            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).

                                      50

<PAGE>

           10.11 Employment Agreement by and between the Company and Jeff
                 Rosenblum, dated as of September 6, 2000 (incorporated by
                 reference to Exhibit 10.11 of Registrant's Annual Report on
                 Form 10-K, filed on March 23, 2001).

           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 Registration Rights Agreement, dated September 6, 2000
                 (relating to the registration rights of the previous
                 shareholders of Arbor Administrative Services, Inc.)
                 (incorporated by reference to Exhibit 10.15 of Registrant's
                 Annual Report on Form 10-K, filed on March 23, 2001).

           10.14 Employment Agreement by and between the Company and Thomas E.
                 Kelly, dated as of February 23, 2001 (incorporated by
                 reference to Exhibit 10.8 of Registrant's Quarterly Report on
                 Form 10-Q, filed on May 14, 2001).

           10.15 Separation Agreement and Release by and between the Company
                 and Michael C. Bingham, dated as of March 5, 2001
                 (incorporated by reference to Exhibit 10.9 of Registrant's
                 Quarterly Report on Form 10-Q, filed on May 14, 2001).

           10.16 Asset Purchase Agreement between Howard Johnson & Company and
                 eBenX, Inc. dated as of October 19, 2001 (incorporated by
                 reference to Exhibit 10.1 of Registrant's Current Report on
                 Form 8-K, filed on November 20, 2001).

           10.17 Shared Services Agreement by and between Howard Johnson &
                 Company and eBenX, Inc. dated as of November 1, 2001
                 (incorporated by reference to Exhibit 10.2 of Registrant's
                 Current Report on Form 8-K, filed on November 20, 2001).

           10.18 Transaction Services Agreement by and between Howard Johnson &
                 Company and eBenX, Inc. dated as of November 1, 2001
                 (incorporated by reference to Exhibit 10.3 of Registrant's
                 Current Report on Form 8-K, filed on November 20, 2001).

           10.19 Marketing Agreement by and between Howard Johnson & Company
                 and eBenX, Inc. dated as of November 5, 2001 (incorporated by
                 reference to Exhibit 10.4 of Registrant's Current Report on
                 Form 8-K, filed on November 20, 2001).

            21.1 Subsidiaries of the Company(1)

            23.1 Consent of Ernst & Young LLP(1)

            24.1 Power of Attorney(1)
--------
(1) Filed herewith.

(b)  The registrant filed reports on Form 8-K during its fourth fiscal quarter
         ended December 31, 2001. The reports filed on November 6 and 20, 2001,
         pertained to the acquisition of the assets of the health and welfare
         business unit of Howard Johnson & Company, a wholly owned subsidiary
         of Merrill Lynch & Company, Inc.

                                      51

<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 27, 2002
                                          By
                                                   /S/  JOHN J. DAVIS
                                            ------------------------------------
                                                      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.

      Signature                    Title                  Date
      ---------                    -----                  ----

 /S/ MARK W. TIERNEY   Chairman and Director         March 27, 2002
----------------------
   Mark W. Tierney

  /S/ JOHN J. DAVIS    President, Chief Executive    March 27, 2002
---------------------- Officer and Director
    John J. Davis        (principal executive
                         officer)

/S/ RANDALL J. SCHMIDT acting Chief Financial        March 27, 2002
---------------------- Officer and Secretary
  Randall J. Schmidt   (principal financial officer
                         and principal accounting
                         officer)

  /S/ PAUL V. BARBER   Director                      March 27, 2002
----------------------
    Paul V. Barber

 /S/ JAMES P. BRADLEY  Director                      March 27, 2002
----------------------
   James P. Bradley

  /S/ DANIEL M. CAIN   Director                      March 27, 2002
----------------------
    Daniel M. Cain

/S/ ALAIN C. ENTHOVEN  Director                      March 27, 2002
----------------------
  Alain C. Enthoven

 /S/ FRANK C. WITTHUN  Director                      March 27, 2002
----------------------
   Frank C. Witthun

                                      52

<PAGE>

                                  EBENX, INC.

                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                             Additions
                                                       ---------------------
                                                                  Charged to
                                            Balance at Charges to   Other                Balance at
                                            Beginning  Costs and  Accounts-  Deductions-   End of
Description                                 of Period   Expenses   Describe  Describe(1)   Period
-----------                                 ---------- ---------- ---------- ----------- ----------
<S>                                         <C>        <C>        <C>        <C>         <C>
Year Ended December 31, 2001
Reserves and allowances deducted from asset
  accounts:
   Allowance for doubtful accounts.........    $178       $995       $--        $(216)      $957

Year Ended December 31, 2000
Reserves and allowances deducted from asset
  accounts:
   Allowance for doubtful accounts.........      45        329        --         (196)       178

Year Ended December 31, 1999
Reserves and allowances deducted from asset
  accounts:
   Allowance for doubtful accounts.........      51         --        --           (6)        45
</TABLE>
--------
(1) Amounts written off against the reserve.

                                      53