<PAGE>   1



================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1999

                        Commission File Number 333-90165

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


                DELAWARE                            85-0373486
     (State or other jurisdiction of             (I.R.S. Employer
     incorporation or organization)              Identification No.)


      6400 S. Fiddler's Green Circle, Suite 1400, Englewood, Colorado 80111
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (303) 488-2019

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

          Title of each class                 Name of each exchange on
                                                  which registered

                None                                    None

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

                                      None
                                (Title of Class)

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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filings for
the past 90 days. Yes ___. No X.

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




<PAGE>   2

The aggregate market value of the voting common stock held by non-affiliates of
the registrant was $121,030,121 based on the last reported sale price of the
common stock of the registrant on the Nasdaq National Market on March 17, 2000.
For purposes of this disclosure, shares of common stock held by persons who hold
more than 5% of the outstanding common stock and common stock held by executive
officers and directors of the registrant have been excluded in that such persons
may be deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination is
not necessarily conclusive for other purposes.

As of March 17, 2000, there were 16,138,709 shares of Common Stock of the
registrant outstanding.

================================================================================

                                 XCARE.NET, INC.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
    Item
   Number                                                                                      Page
   ------                                                                                      ----
                                                      PART I
<S>            <C>                                                                             <C>
      1        Business...................................................................       3
      2        Properties.................................................................      16
      3        Legal Proceedings..........................................................      16
      4        Submission of Matters to a Vote of Security Holders........................      16

                                                     PART II
      5        Market for Registrant's Common Equity and Related Stockholder Matters......      19
      6        Selected Financial Data....................................................      20
      7        Management's Discussion and Analysis of Financial Condition and
                   Results of Operations..................................................      21
     7A        Quantitative and Qualitative Disclosures About Market Risk.................      39
      8        Financial Statements and Supplementary Data................................      39
      9        Changes in and Disagreements with Accountants on Accounting and
                   Financial Disclosure...................................................      39

                                                     PART III
     10        Directors and Executive Officers of the Registrant.........................      40
     11        Executive Compensation.....................................................      42
     12        Security Ownership of Certain Beneficial Owners and Management.............      43
     13        Certain Relationships and Related Transactions.............................      45

                                                     PART IV
     14        Exhibits, Financial Statement Schedules and Reports on Form 8-K............      48
               Signatures.................................................................      51
</TABLE>



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FORWARD-LOOKING STATEMENTS

    All statements, trend analysis and other information contained in this
Annual Report on Form 10-K ("Annual Report") of XCare.net, Inc. ("XCare," or the
"Company") and the information incorporated by reference which are not
historical in nature are forward-looking statements within the meaning of the
Private-Securities Litigation Reform Act of 1995. These forward-looking
statements include, without limitation, discussion relative to markets for our
products and trends in revenue, gross margins and anticipated expense levels, as
well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect" and "intend" and other similar expressions. All
statements regarding the Company's expected financial position and operating
results, business strategy, financing plans, forecast trends relating to our
industry are forward-looking statements. These forward-looking statements are
subject to business and economic risks and uncertainties, and our actual results
of operations may differ materially from those contained in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" as well as other risks
and uncertainties referenced in this Annual Report.

                                     PART I

ITEM 1. BUSINESS

    XCare.net is an electronic commerce service provider for health care
businesses. We have developed an Internet-based technology platform using
extensible mark-up language, or XML, to process health care transactions and
provide related services for payers, providers and other health care industry
participants. We process transactions such as eligibility checking, claims
submission, referral processing, physician credentialling and appointment
scheduling. We also provide consulting services to define, develop and implement
Internet health care strategies as well as Web-site hosting, transaction support
and maintenance services for our customers.

    Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into a community to create an Internet exchange. We use the
XCare.net platform to deliver a broad range of applications, services and
electronic product offerings that streamline and automate high-volume,
data-intensive transactions and processes. The XCare.net platform is based on
extensible mark-up language, or XML, in conjunction with the Topic Navigation
Mapping standard. The enhanced integration and filtering capabilities of this
platform are designed to meet the demands of health care industry participants.
We expect extensible mark-up language to be a predominant protocol for
exchanging data for electronic commerce in the future. Topic Navigation Mapping
provides a standard format for indexing and structuring the extensible mark-up
language formatted content. We take advantage of the benefits of both extensible
mark-up language and Topic Navigation Mapping technologies to process data
trapped in usually incompatible existing computer systems, allow for automation
of health care processes and integrate a wide variety of health care data
including audio, video and text.

    Health care providers, payers and suppliers, have adopted the XCare.net
platform. Some of our customers include American Medical Pathways, Inc. and
Asthma Management Services, Inc. in the provider field, Advica Health Resources,
Employers Mutual, Inc. and Brokerage Services, Inc. in the health care payer
field and ADIS International Ltd, Nursefinders, Inc., Digital Medical Registrar,
Delta Health Services, Quest Diagnostic Incorporated and Methodist Care, Inc. in
the health care supplier field.

OUR HISTORY

    We were incorporated in Delaware in March 1989 under the name Reilly Dike
Dosher Corporation, Inc. In December 1996, we changed our name to MPower
Solutions, Inc. In April 1999, we changed our name to XCare.net, Inc. We have
historically derived a significant portion of our revenue from sales of
mainframe and client-server software for managed health care systems and from
providing services to health care organizations seeking to outsource
administrative functions. In early 1998 we identified an emerging opportunity to
utilize the Internet to connect health care participants together into a
community structure. We saw this as an opportunity to provide a more efficient
service to health care and to offer our existing services, as well as additional
applications, services and products, through a more efficient delivery medium.
Beginning in mid-1998, we began to focus on Internet-based health care
solutions. We intend to derive an increasing portion of our future revenue from
our Internet-based applications, services and product offerings.



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Health Care Market Overview

    The U.S. Health Care Finance Administration estimates that health care
expenditures currently represent $1.2 trillion, or 14% of the U.S. economy, and
that these expenditures will increase to $2.0 trillion by 2007 due both to
rising health care costs and an aging population. Health care claims, which
totalled approximately 4.4 billion in 1998, generally are processed through
antiquated computer systems via paper, fax or phone. These systems can be
inefficient due to their inability to communicate with the systems of other
health care participants and lead to unnecessary and duplicative costs. We
believe that the provision of new, Internet-based, business-to-business
information exchange and electronic commerce services that effectively address
processing inefficiencies is one of the significant market opportunities in
health care today.

    The health care industry is currently one of the most complex markets due to
the numerous interrelationships among health care participants.

    The payment for and delivery of health care requires that consistent,
accurate information be shared confidentially among health care participants
across a large and fragmented industry. Employers select health plans, determine
benefit levels, enroll employees and maintain employee eligibility data.
Individuals compare medical plans, choose physicians and submit claims for
reimbursement. Physicians, hospitals and other providers verify patient
eligibility, collect patient histories, order diagnostic tests and x-rays,
receive and interpret test results, render diagnoses, issue referrals and submit
claims to payers. Payers manage referrals, establish medical care protocols and
reimbursement policies and process claims. Laboratories analyze and process
patient samples or tests, provide results and submit claims for reimbursement.
Pharmacies fill prescriptions and submit claims for reimbursement. Medical
supply companies distribute medical devices and pharmaceutical supplies. These
health care transactions all are highly dependent on the collection and
communication of information, and each participant is dependent on the others
for portions of that information.

Market Characteristics

    Market fragmentation. The health care market is highly fragmented with wide
geographic dispersion, a large number of participants and significant
differences in technology infrastructure.

    o   Geographic fragmentation. Because health care is delivered locally,
        there are hundreds of thousands of market participants in different
        locations. For example, there are approximately 750 HMOs in the United
        States, 644,000 active physicians and 6,200 hospitals. Additionally,
        there are over 16,500 nursing homes, 8,000 home health agencies and
        4,500 independent laboratories.

    o   Technological fragmentation. Information technology investment has not
        been coordinated among health care participants. Current technology
        infrastructure in health care is characterized by numerous, incompatible
        and, in many cases, antiquated computer systems. Consequently,
        communication of information generally takes place via paper, fax and
        telephone.

    Complex processes. Health care is delivered in a marketplace which has
become increasingly complex given the transition to managed care, the
data-intensive nature of health care transactions, the lack of standard data
formats, the complicated procurement process and the pervasiveness of government
regulation.

    o   Transition to managed care. One of the most important changes in the
        U.S. health care system since the 1980s has been the shift away from
        fee-for-service indemnity plans to managed care organizations.
        Currently, 67.1% of the U.S. population is covered through some form of
        managed care. As managed care has become more prevalent and the number
        of payers has increased, provider reimbursement and general
        administration has become increasingly burdensome.

    o   Intensive data management. Upkeep of health care data is largely a
        labor-intensive, paper-based and error-prone process in which data are
        manually collected, authenticated, edited, categorized and updated. For
        example, eligibility and plan information, which is basic information
        about an individual and his or her dependents, is cumbersome to manage,
        given that the data must be constantly updated to reflect any changes
        affecting coverage status, such as marriage, child births and address
        changes. However, this information is required at all points of health
        care delivery.




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<PAGE>   5

    o   No standard data format or business rules. Data formats vary
        considerably throughout the health care industry and typically are
        unique to each particular health plan or provider. The data are stored
        in different formats and health care participants often rely on
        proprietary business rules for information such as plan coverage,
        eligibility and physician co-payments.

    o   Complexity of procurement, purchasing and payment processes. There are
        numerous types of health care transactions due to the large number of
        both suppliers and buyers of care. In addition, there are multiple
        payment mechanisms depending on who has assumed the health care coverage
        risk. Payment mechanisms can range from fee-for-service to a fully
        insured health care maintenance organization, known as an HMO, and may
        be paid for by the individual, the individual's employer, the
        government, or a combination of all three.

    o   Increasing government regulation. Numerous federal, state and local laws
        and regulations govern the health care industry, which change frequently
        depending on political and economic influences. For example, the Health
        Insurance Portability and Accountability Act of 1996 has recently placed
        substantial new administrative requirements on many health care
        participants, including rules regarding compliance with industry
        standards, data formats, portability of insurance and data security.

Current Health Care Market Issues

    As a result of the fragmentation and complexity of the health care market,
participants are unable to cost-effectively manage, communicate and exchange
information in real-time. This fragmentation and complexity has resulted in
increasing dissatisfaction among health care participants.

    o   Inability to manage and exchange data. In order to achieve efficient
        delivery of health care, information must flow within and between health
        care participants. The enrollment and eligibility process requires
        shared employee information among employers, health plans and provider
        groups. The referral and authorization process involves physicians
        seeking approval from health plans and patients scheduling appointments
        with other physicians. To diagnose and treat patients, physicians need
        access to clinical information, such as medical history data or lab
        results, from various hospitals, laboratories or other providers.
        Prescription services require communication of medication histories and
        payer rules among patients, physicians, pharmacy benefit managers,
        pharmacies and payers. Finally, for the health care supply chain to
        generate and fulfill transactions, medical supply vendors and
        laboratories require information about the availability and pricing of
        supplies. The inability to transfer information between participants is
        exacerbated by the fact that several different data formats can exist
        even within one health plan.

    o   Lack of real-time and secure communication. The current, paper-based
        processes do not allow for automated, daily workflow or the secure
        exchange of time-sensitive and critical information. This often results
        in administrative inefficiencies related to the manual retrieval of
        information, delivery of unnecessary care and the performance of
        redundant tests and procedures.

    o   Rising costs. Despite payers' use of a number of techniques designed to
        control the cost of care and administration -- such as lowering
        reimbursement rates, shifting costs to providers and restricting
        coverage for services -- health care costs are continuing to escalate.
        To compensate for operating margin pressures, payers are raising
        premiums. This, in turn, is increasing the costs of health care for
        individuals and their employers.

Growth of the Internet and Applicability to Health Care

    The Internet has emerged as the fastest growing communication medium in
history. International Data Corporation, an independent research firm, estimates
that the total number of Internet users worldwide will grow from 142 million at
the end of 1998 to 502 million by the end of 2003. The ubiquitous nature, low
cost and ability to scale of the Internet have created new opportunities for
conducting secure commerce. Recently, the widespread adoption of intranets and
the acceptance of the Internet as a business communications platform have
created a foundation for business-to-business electronic commerce that should
enable organizations to streamline complex processes, lower costs and improve
productivity.




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     Forrester Research, Inc., an independent research firm, estimates that
business-to-business electronic commerce will grow from $43.1 billion in the
United States in 1998 to $1.3 trillion in 2003 while business-to-consumer
electronic commerce will grow from $7.8 billion in 1998 to $108.0 billion in
2003. We believe that the lower cost nature of the Internet can serve as a
catalyst to lower the cost of business-to-business commerce and bring market
participants across industry lines together in more efficient and productive
relationships.

    The Internet is currently being used to speed and streamline a variety of
business transactions. Nonetheless, additional improvements in the ability to
search, structure, integrate and filter vast amounts of disparate data and to
dynamically customize and display information in contexts relevant to particular
users would increase the usefulness of Internet-based applications. These
improvements would be particularly useful in health care transaction processing
and information retrieval systems, where streamlining data exchanges among
industry participants can reduce process inefficiencies and costs. In order for
an Internet-based health care solution to be successful, the following key
technology and business components are important:

    o   a common, secure and scaleable platform for structuring information
        exchange and commerce among multiple market participants;

    o   an effective and cost-efficient interface with existing computer
        systems;

    o   automation of health care transaction processes to reduce paper, improve
        work flow and streamline administration;

    o   integration of disparate data from a variety of multimedia sources such
        as audio, video and written documents;

    o   ability to dynamically retrieve and update data in a view customizable
        for each particular health care participant; and

    o   quick returns on investment to facilitate adoption by health care
        participants.

OUR SOLUTION

    We are an electronic commerce services provider for health care businesses.
Using the XCare.net platform, we can customize Web-site portals to meet our
customers' needs in a flexible and cost-effective manner. Through these
customized portals, we deliver applications, services and electronic commerce
product offerings that are designed to improve workflow efficiencies, reduce
administrative costs and create new revenue opportunities for our customers. Our
applications consist of software modules facilitating health care transactions
such as eligibility checks, referrals and health plan enrollment. Our services
include formulating and implementing Internet strategies for our customers,
administering back office operations and operating and hosting their technology
environments in our electronic commerce operations center. Our electronic
commerce product offerings include drug store products, medical supplies and
credit cards with smart card technology for claims payment. Our technology
platform, applications, services and product offerings are designed to enhance
the efficiency of the health care delivery and payment system. Our approach to
the market is based on the following:

    Use of new standard for information exchange. The XCare.net platform and
associated applications and services are based on extensible mark-up language,
or XML. We expect extensible mark-up language to be a predominant protocol for
exchanging multimedia data for information exchange and electronic commerce on
the Internet in the future. Extensible mark-up language provides a document
structure that allows complex data from multiple sources to be dynamically
processed and displayed to users in personalized ways. We believe that these
capabilities are particularly applicable to the health care industry because
extensible mark-up language can process data trapped in pre-existing computer
systems, allow for automation of health care processes and integrate a wide
array of health care data including audio, video and text.

    Ability to develop comprehensive customer strategies. We have developed a
step by step approach to assist our customers in designing a health care
Internet strategy, creating a customized portal and hosting their Internet
offerings and transactions in a secure and reliable data operations
infrastructure. The XCare.net platform is designed to provide a comprehensive
set of applications, services and product offerings while preserving previous
technology investments




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by integrating diverse multimedia content, including data and information from
large, existing and usually incompatible computer systems.

    Solution Channels that provide value to other healthcare industry
participants. We use our XCare.net platform as the central element for a network
of business relationships among healthcare industry participants who use our
technology, thus creating collaborative electronic communities for the exchange
of healthcare data, products and services. We call these communities our
Solution Channels, and use them to distribute our applications, services and
product offerings through our Solution Channels, in addition to our normal sales
activities. In addition, our Solution Channels are designed to provide a means
for our customers, vendors, distributors, co-marketers and others to offer their
own related products and services to each other, as well as to their own
customers. Solution Channels allow us to:

    o   Create new revenue opportunities for others. Customers and vendors can
        utilize our Solution Channels as distribution channels for existing as
        well as new products and services that allow them to generate new
        sources of incremental revenue. For example, we package our eXtensible
        CARE applications system with medical management and third party
        administration services provided by Employers Mutual, Inc. for
        distribution to members of the XCare.net community such as American
        Medical Pathways, Inc., a subsidiary of American Medical Response, Inc.

    o   Identify new revenue opportunities for us. Our customers can produce
        complementary applications or services that operate on the XCare.net
        platform and enhance the value of the specific applications, services
        and product offerings we have developed. We can deliver these new
        applications and services to the XCare.net community through our
        Solution Channels, generating additional revenue for us. For example, we
        can license credentialing applications from one existing customer, and
        then resell these applications through our Solution Channels to other
        community members.

    o   Establish growing communities connected through the XCare.net platform.
        Our customers can extend the scope and reach of the XCare.net platform
        by distributing our applications, services and product offerings to
        their customers. By leveraging our customer base as channels for wider
        deployment of our solutions, we encourage increased usage of the
        XCare.net platform as well as extend the community to new users.

STRATEGY

    Our objective is to become the leading electronic commerce service provider
for health care businesses. Our strategy focuses on the following:

    Cross-sell applications, services and electronic commerce product offerings
in our Solution Channels. We will sell additional applications, services and
product offerings to existing customers through our Solution Channels. Our
Solution Channels distribution model is designed to promote new applications,
services and electronic commerce product offerings that are either internally
developed or obtained through our growing number of customer and vendor
relationships. This cross-selling approach is designed to simplify the sales
process, and may shorten our sales cycle and reduce our cost of sales.

    Penetrate target market segments. We will continue to target the more than
12,000 entities in the payer/third-party administrator, at-risk provider and
health care supplier market segments. These potential customers have the
influence to drive change in health care processes, and have the incentive to
lower their operating costs by adopting new process improvement technologies
such as the Internet.

    Develop new applications, services and product offerings. We will continue
to develop a variety of applications, services and product offerings to address
operational inefficiencies in the health care industry. As Internet strategies
in the health care and other industries evolve and new relationships between
organizations are formed, we intend to continue to identify new development
opportunities.

    Leverage existing applications, services and product offerings. We seek to
identify key functions that are critical to particular industry participants and
develop solutions supporting these functions. We intend to regularly review
existing applications, services and product offerings to extend their
functionality, transaction capabilities and features, as customer needs dictate.
In addition, we may modify existing solutions to pursue new market
opportunities. We plan to accomplish this by building extensible mark-up
language-based applications encompassing the identified




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functionality, by acquiring businesses or technologies, by enabling
industry-leading, third-party applications to operate on our platform, and by
increasing our product offerings. We have initially targeted applications,
service and product offerings that streamline mission critical processes and
transactions such as managed care administration and personnel management. These
applications, services and product offerings offer the highest value to health
care participants and are readily adaptable to our XCare.net platform.

    Form customer, vendor, distributor, and co-marketing relationships with
leading health care participants. We are aggressively pursuing relationships
with leaders in key health care industry segments to increase our portfolio of
applications, services and product offerings, to increase the scope of our
XCare.net community of users and to provide specialized industry expertise for
new solutions. These relationships are intended to accelerate market awareness
and demand for our applications, services and product offerings, through the
influence of these partners both directly, through their use of our solutions
and sales efforts, and indirectly, through their relationships with other
potential customers.

TECHNOLOGY

    Our XCare.net platform is based on an extensible mark-up language, or
XML-based infrastructure in conjunction with the Topic Navigation Mapping
standard. The enhanced capabilities of this platform are designed to meet the
demands of health care industry participants. Unlike the current Internet
standard, hypertext mark-up language, or HTML, extensible mark-up language in
combination with the Topic Navigation Mapping standard allows a higher degree of
flexibility for customized data exchange between health care participants. We
expect extensible mark-up language to be a predominant protocol for exchanging
multimedia data for information exchange and electronic commerce in the future.
Topic Navigation Mapping provides a standard format for indexing and structuring
the extensible mark-up language formatted content. We call the resulting indices
and structures Topic Maps. We take advantage of the benefits of both extensible
mark-up language and Topic Navigation Mapping technologies to process data
previously trapped in usually incompatible existing computer systems, allow for
automation of health care processes and integrate a wide variety of health care
data including data in audio, video and text form.

    Extensible mark-up language is a method of writing programming instructions
which attaches invisible labels describing the objects contained in the web
page. As a result, for example, a number isn't just a number. A number on a Web
page can also be in a format specifying whether the number represents a price,
an invoice, a date or a zip code. This makes it easier to extract information
from a page to suit a particular use, and/or increase the speed and accuracy of
Internet searches. It also enables users to select information from different
Web sites without having to re-enter the same information repeatedly. Topic Maps
are Web-based software tools used to organize information in a way that is
optimized for navigation. They address the problem of excess information and
provide a tool to filter and extract efficiently the kind of information, which
is most relevant to the user.

    We use a set of software applications, known as brokering components, to
find, integrate and present relevant, customized information to individual
users.

    Context Broker. The Context Broker acts as a user's personal information
manager and transaction assistant. It stores information about the user and
learns personal preferences. With each use, the Context Broker further refines a
user's personal preferences, and, as a result, the user's experience with the
Web site is continually tailored to his or her particular needs based on current
and past sessions. As the user moves from one transaction to another, the
Context Broker also ensures that information is carried through and remains
consistent across multiple transactions.

    DataFabric. The DataFabric is a map formed by linking data and weighting
relationships. This fabric filters out irrelevant information and allows for
more intelligent searching.

    LogicFabric. The LogicFabric is a map assembled by the rules and workflow
associated with the data relationships. This fabric provides the order and
assembly instructions for the information.

    Semantic Broker. The Semantic Broker is responsible for interpreting a
user's request and finding the relevant information. It does this by reading the
DataFabric and LogicFabric for interpretation, location and assembly
instructions. It then dispatches the Service Broker to obtain the information
from any location throughout the Web. The final integration of data may involve
multi-media content, transactions and associated rules and workflow.




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    Service Broker. The Service Broker is the gateway out to the Internet,
locating and collecting the information as specified by the Semantic Broker. The
Service Broker then returns the information to the Context Broker, which
presents the relevant information in a manner customized to individual users.

    The technology components which comprise our platform are developed using
the Oracle 8i relational database management system, Enterprise JavaBeans
programming language and Object Store, a global object-oriented database
management system. To support the ability of our technology platform to enable
and facilitate electronic commerce, we have built and maintain an electronic
commerce operations center designed for high performance, scalability and
stability utilizing Sun Microsystems, Inc.'s Solaris operating system.

    Our platform architecture was designed for use in highly confidential,
health care computing environments where security is a high priority. A Web
server authenticates the identity of the end-users to ensure only authorized
end-users have access to our Web applications. Users are authenticated by valid
user identification and password, a security token or a digital certificate, or
a certificate authority. We address data security using digital certificate
technology signed with private keys and verified with public keys.

    Our facilities and operations utilize redundancy and back-up to minimize
exposure to systems failure. Telecommunications and server infrastructures
support redundant processing and data back-up capabilities. Our routine back-up
procedures are performed incrementally on a daily basis with a full system
back-up performed monthly. In addition, we use RAID5 systems that provide
real-time back-up of data. All back-ups are maintained in fire proof storage
with critical support information. Technical and operations support staff are
available on a 24-hours-a-day, seven-days-a-week basis to assist with any
critical processing incidents or failures.

    The XCare.net platform provides our customers with the capability to scale
their applications, services, and product offerings as their business grows.
This ability to scale can extend these solutions across multiple organizations
in diverse geographic settings supporting high volumes of users. Our flexible
technology architecture can also accommodate high volumes of transactions and
dynamic customization for the multiple participants within the health care
marketplace.

APPLICATIONS, SERVICES AND PRODUCT OFFERINGS

    We provide a range of applications, services and product offerings that
support the management of health care data and facilitate health care business
connectivity, information exchange and electronic commerce among health care
industry participants. Our applications, services and product offerings, which
may incorporate licensed components, are designed to enable our customers to
preserve investments in existing computer systems while integrating new
Internet-based products and services.



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<TABLE>
<CAPTION>
  APPLICATION                             DESCRIPTION
  -----------                             -----------

<S>                         <C>
eXtensible CARE             Provides back-office processing for managed
System                      care transactions by health plan payers and
                            at-risk provider organizations.

eXtensible CARE             Facilitates submission, adjudication,
Transactions                remittance and Verification transactions for a
                            variety of managed care Functions such as claims,
                            capitation, authorizations, referrals, eligibility,
                            enrollment, and benefits.

MatchNet Staffing &         Facilitates staffing, scheduling, management
Scheduling*                 and reporting transactions.


Physician                   Stores physician credentialing data with the ability
Credentialing*              to automatically populate fields of associated
                            managed care applications.

Electronic Medical          Facilitates the data collection and review of
Record*                     patient-level medical conditions based on access
                            to disease, allergy, medication and other
                            related historical data and clinical observations.

Medication                  Provides comprehensive patient-level information
and Medical                 on prescription and over-the-counter medications,
Assessment Inquiry          as well as common medical conditions.
Systems*


Physician Practice          Automates physician practice management functions
Management                  including patient scheduling, third-party
                            Contract maintenance, receivables billing,
                            management, accounting and reporting.

Provider and Payer          Provides access to a national provider database of
Profiling and Report        demographic, clinical and National Committee
Cards*                      for Quality Assurance-specific information, as well
                            as a national payer database containing Health Plan
                            Employer Data and Information Set ratings and
                            National Committee for Quality Assurance
                            accreditation status.

Document                    Automates various paper-based processes through
Management*                 a Web-based workflow combining document imaging,
                            storage and retrieval by authorized users.

Decision Support            Web-enabled ad-hoc reporting system for mining and
System*                     analysis of data from managed care information
                            system sources.

Remote Patient              Combines an external monitoring device with a
Monitoring*                 Web-based workflow engine to facilitate
                            communication of test results from
                            patient to physician for chronic disease management.
</TABLE>


*We are currently marketing these applications but have not yet recognized
revenue from sales.

<TABLE>
<CAPTION>
                  SERVICES                         DESCRIPTION
                  --------                         -----------

<S>                                     <C>
eHealth Development Discipline          Provides a framework for development and
                                        design of Internet strategies.

Custom Portal Integration & Hosting     Provides professional services and
                                        operations management for customers
                                        through the analysis of business,
                                        operational and technology needs,
                                        including next generation information
                                        and transaction portal customizations
                                        for virtual health care organizations.

Third-Party Administration/ Management  Provides outsourcing services for health
Service Organization Outsourcing        care systems, including back- office
Services                                administration, timesharing services and
                                        additional service bureau functions.

eHealth Operations Management           Provides a secure, 24 hours a day, seven
                                        days a week environment for Internet
                                        hosting of transactions and multi-media
                                        content, application maintenance and
                                        customer service.
</TABLE>


                                       10
<PAGE>   11


<TABLE>
<CAPTION>
             PRODUCT OFFERINGS                     DESCRIPTION
             -----------------                     -----------
<S>                                           <C>

 MDPay Accelerator*                           Links eligibility verification,
                                              claims submission, co-pay
                                              collection and receivables
                                              management within the physician's
                                              or hospital's point-of-service
                                              environment.

 Online Drug Store*                           Facilitates the purchase of
                                              brand-name pharmaceutical and
                                              personal health care products, as
                                              well as access to decision-making
                                              resources.

 Medical Supply Product*                      Provides Internet-based medical
                                              supply ordering service for use by
                                              health care buyers and suppliers.
</TABLE>

* We are currently marketing these product offerings but have not yet recognized
revenue from sales.

    We are actively developing new applications, services and product offerings,
and from time to time, we license technology necessary for such development.
Nonetheless, new applications, services and product offerings may not be
introduced as scheduled, and we may not be able to enter into needed licensing
arrangements in a timely manner or at all.

CUSTOMERS

    The following is a representative list of our customers that have purchased
applications or services:

<TABLE>
<CAPTION>
    MARKET SEGMENT                   CUSTOMERS
    --------------                   ---------

<S>                           <C>
Health Care Providers         American Medical Pathways, Inc., a subsidiary of
                                American Medical Response, Inc.
                              Breathnet LLC
                              Delta Health Systems
                              Methodist Care, Inc.
                              Quest Diagnostics Incorporated
                              University of Southern California -- Doheny Eye
                                Institute

Health Care Payers            Advica Health Resources
                              Community Health Electronic Clearing House
                              Employers Mutual, Inc., a wholly owned subsidiary
                                of Florida Physicians Insurance Company, and
                                Brokerage Services, Inc., a division of
                                Employers Mutual, Inc.
                              Provider Services, Incorporated

Health Care Suppliers         ADIS International Ltd
                              Clinical Solutions LLC
                              Expert Practice Inc.
                              NotifyMD, Inc.
                              Nursefinders, Inc.
</TABLE>


    In 1999, sales to Methodist Care, Inc. accounted for 20% of revenue, sales
to Expert Practice, Inc. and American Medical Pathways, Inc. each accounted for
12% of revenue, sales to Brokerage Services, Inc. accounted for 11% of revenue
and sales to Quest Diagnostics Incorporated accounted for 10% of revenue.

SALES AND MARKETING

    Sales. We sell our applications, services and product offerings through our
direct sales and business development groups, targeting the payer/third-party
administrator, risk-bearing provider and health care supplier market segments.
Our sales office is located at our principal offices in Englewood, Colorado. The
direct sales process involves the generation of sales leads through direct
marketing, tele-prospecting, public relations, Web advertising and promotion,
attendance and presentations at major health care and technology-oriented trade
shows and industry conferences. The




                                       11
<PAGE>   12

time between initial customer contact and an actual sales order may span three
months or more. If our operating results vary significantly due to the lengthy
sales and implementation cycles for our products and services, our revenues may
be delayed and our results of operations and share price may fluctuate.

    In addition, our direct sales and business development groups use our
Solution Channels to cultivate strategic relationships with our customers and
vendors to encourage them to provide value-added applications, services and
products for redistribution through the network of users of the XCare.net
platform.

    Marketing. Our primary marketing initiatives include public relations,
direct mail and outreach programs to customers and vendors. We use our Web site,
www.xcare.net, to establish our market presence, generate leads and extend our
program offerings to health care industry participants.

    At December 31, 1999, we had 13 employees in sales and marketing functions.

CUSTOMER SUPPORT

    We provide a range of customer support services through our staff of
customer service personnel, multiple call centers and an e-mail help desk all of
which are available 24 hours a day, seven days a week and are frequently updated
to improve existing information and to support new services. We also employ
technical support personnel who work directly with our direct sales force and
customers of our applications and services. We provide our customers with the
ability to purchase maintenance for our applications and services, which
includes technical support and upgrades. We also provide training programs for
our customers. At December 31, 1999, we had 37 employees in addition to one
independent contractor in customer support functions.

RESEARCH AND DEVELOPMENT

    At December 31, 1999, our development and engineering group consisted of 5
employees divided into extensible mark-up language, Topic Navigation Mapping and
infrastructure groups. For the years ended December 31, 1997, 1998 and 1999, we
incurred $4.2 million, $670,000 and $575,000 in research and development
expenses respectively. We believe that timely development of new and enhanced
applications and technology is necessary to remain competitive in the
marketplace. Accordingly, we intend to continue recruiting and hiring
experienced development personnel and to make investments in development and
engineering.

COMPETITION

    The emerging Internet-based health care market is undergoing rapid
technological change. The ubiquitous reach of the Internet, coupled with the
availability and acceptability of new Internet-based technologies, has created
significant opportunities in health care for both traditional and new Internet-
based system vendors. Potential competitors fall primarily into three
categories: health care Internet companies focused on providing connectivity and
transactions within business-to-business and business-to-consumer frameworks;
traditional health care information system vendors who seek to extend the
services of their core products using Internet-based technology; and traditional
managed care information system and outsourcing vendors who are focusing on
extending the services of their core products to the Internet. In addition, from
time to time our customers may develop products and services competitive with
those offered by us.

    We believe that our main competitors currently are CareInsite, Inc., Exodus
Communications Inc., Healtheon Corporation, IDX Systems Corporation, iXL
Enterprises, Inc., McKesson HBOC Inc., and Razorfish, Inc. and that the
principal competitive factors in the Internet-based health care market are the:

    o   ability of technology to integrate data from existing computer systems
        and other multimedia content;

    o   timeliness and price of new applications, services and electronic
        commerce product offerings;

    o   degree of customer service offered to purchasers of Internet health care
        solutions;

    o   scope of industry knowledge and familiarity with needs of health care
        market participants; and

    o   size and scope of a solution's user base.




                                       12
<PAGE>   13

INTELLECTUAL PROPERTY

    We seek to protect our software, documentation and other written materials
primarily through a combination of trade secret, trademark and copyright laws,
confidentiality procedures and contractual provisions. For example, we license
rather than sell our software applications and require licensees to enter into
license agreements that impose certain restrictions on the licensees' ability to
utilize the software code. In addition, we seek to avoid disclosure of our trade
secrets, by, among other things, requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code.

    We have filed a patent application in the United States with respect to
certain aspects of our content brokering technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. While we are unable to
determine the extent to which piracy of our products exists, software piracy can
be expected to be a persistent problem, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the United
States.

    From time to time, we may be involved in intellectual property disputes. We
have not been notified that any of our products infringe the proprietary rights
of third parties. However, in the future, third parties may claim infringement
against us with respect to current or future products. We expect that providers
of Internet health care solutions will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and
traditional suppliers of health care data and transaction solutions begin to
offer Internet-based products. If our proprietary technology is subjected to
infringement claims, we may have to pay damages or seek a license from third
parties, which could delay sales of our products, and if our proprietary
technology is infringed upon, we may experience losses.

    We rely upon software we have licensed from Sinclair Montrose Healthcare PLC
to perform key functions of our MatchNet Staffing & Scheduling product. We
currently have an exclusive license to the software, although exclusivity may
terminate if we are unable to meet milestones. This license may not continue to
be available to us on commercially reasonable terms. The loss of this license
could result in delays or reductions of shipments of the MatchNet Staffing &
Scheduling application until equivalent software could be identified, developed,
licensed and integrated. If we lose key licenses we may be required to develop
or license alternative technologies which may cause delays, at considerable
expense or reduce sales.

GOVERNMENT REGULATION

Standards

    The Health Insurance Portability and Accountability Act of 1996 mandates the
use of standard transactions, standard identifiers, security and other
provisions by the year 2000. We are designing our XCare.net platform and
applications, services and product offerings to enable compliance with the
proposed regulations. However, until such regulations become final, they could
change, which could require us to expend additional resources to comply with the
revised standards. In addition, the success of our compliance efforts may be
dependent on the success of health care participants in dealing with the
standards.

Confidentiality

    The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by us. Changes to state or
federal laws may materially restrict the ability of health care providers to
submit information from patient records using our applications.

    We utilize an architecture that incorporates a secured socket layer
encryption which surpasses required security protection. Additionally the use of
firewalls and other security schemes assure customers of a compliant and secure
computing environment. Additionally, we utilize a formal, authority-based use of
digital certificates to assure the




                                       13
<PAGE>   14

identity of electronic trading partners. For support of identification
requirements we utilize an exchange of passwords and identities by U.S.
certified mail or telephonic identification. If unauthorized persons were to
gain access to patient records notwithstanding our efforts to maintain their
security, this could result in our liability for these security breaches and
damage to our reputation.

Third Party Administration and Utilization Review Licensure and Registration

    Certain of the administrative services we provide health plans, payers and
providers, including our third-party administration and utilization review
operations, are regulated by the statutes and regulations of various states and
require that we obtain appropriate licensure or registration.

False Claims Act

    Under the federal False Claims Act, liability may be imposed on any
individual or entity who knowingly submits or participates in submitting claims
for payment to the federal government which are false or fraudulent, or which
contain false or misleading information. Liability may also be imposed on any
individual or entity who knowingly makes or uses a false record or statement to
avoid an obligation to pay the federal government. Various state laws impose
liability for similar acts. Claims under the federal False Claims Act may be
brought by the federal government or private whistleblowers. If we are found
liable for a violation of the federal False Claims Act, or any similar state
law, it may result in substantial civil and criminal penalties. In addition, we
could be prohibited from processing Medicaid or Medicare claims for payment.

Prompt Payment Laws

    Various states have passed laws regarding the prompt payment of medical
claims by health plans. If a claim is brought against us and we are found to
have violated a law regarding the prompt processing of claims for payment, we
may incur civil or other penalties.

Government Investigations

    There is increasing scrutiny by law enforcement authorities, the U.S.
Department of Health and Human Services Office of Inspector General, the courts
and Congress of agreements between health care providers and suppliers or other
contractors which have a potential to increase utilization of government health
care resources. In particular, scrutiny has been placed on the coding of claims
for payment and contracted billing arrangements. Investigators have demonstrated
a willingness to look beyond the formalities of business arrangements to
determine the underlying purposes of payments between health care participants.
Although, to our knowledge, neither we nor any of our customers is the subject
of any investigation, we cannot tell whether we or our customers will be the
target of governmental investigations in the future.

Regulation of the Practice of Medicine and Other Health Care Professions

    The practices of medicine, nursing and pharmacology are generally defined by
state law and vary from state to state. These practices require a license under
state law and, depending on state law, practicing without a license can be a
civil or criminal violation. We have endeavored to structure our existing
operations to be in substantial compliance with state health care professional
licensing requirements. However, the application of this area of the law to
Internet services such as ours is new. Also, we have not conducted a state by
state survey of licensing requirements and policies. Accordingly, a state
regulatory authority and/or one or more licensed professionals or advocacy
groups or consumers may allege that one or more elements of our business
requires a license to practice under existing or future laws or statutes. Any
application of professional practice regulations to our business could
negatively impact our business. Further, liability based on a determination that
we engaged in a professional practice without a license may cause us to be
excluded from coverage under the terms of our current general liability
insurance policy and may also subject us to a higher standard of care than would
be applicable to activities which do not require a professional license.




                                       14
<PAGE>   15

Regulation of Pharmacy Prescription Drug Activities

    The business of providing prescription drugs and other medical products is
subject to federal, state and local regulations, many of which are specific to
pharmacies. In addition, the Federal Trade Commission and many state agencies
regulate advertising and product performance claims for prescription drugs.
Pharmacy operations are subject to federal, state and local licensing and
registration regulations with respect to the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and local
laws and regulations relating to pharmacy operations, including registration,
security, recordkeeping, and reporting requirements related to the purchase,
storage and dispensing of controlled substances, prescription drugs and certain
over-the-counter drugs.

    The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focusing on those who prescribe drugs online and
pharmacies that fill invalid prescriptions, including those that are written
online. The committee on commerce requested that the General Accounting Office
undertake a formal review of a number of issues pertaining to online pharmacies,
including an assessment of mechanisms to ensure that online pharmacies are
obeying the various state and federal regulations for the industry. In addition,
various state legislatures are considering new legislation related to the
regulation of nonresident pharmacies. The inclusion of prescription drugs as a
Medicare benefit has been the subject of numerous bills in the U.S. Congress.

    Should we commence providing prescription drugs to consumers, we will be
required to comply with many of the laws, regulations and initiatives described
above. These efforts may require the commitment of additional resources by us.

Federal and State Anti-Kickback Laws

    Provisions of the Social Security Act, which are commonly known as the
Federal Anti-Kickback Law, prohibit knowingly or willfully, directly or
indirectly, paying or offering to pay, or soliciting or receiving, any
remuneration in exchange for the referral of patients to a person participating
in, or for the order, purchase or recommendation of items or services that are
subject to reimbursement by, Medicare, Medicaid and similar other federal or
state healthcare programs. Violations may result in civil and criminal sanctions
and penalties. Applications, services or product offerings. If any of our health
care communications or electronic commerce activities were deemed to be
inconsistent with the Federal Anti-Kickback Law or with state anti-kickback or
illegal remuneration laws, we could face civil and criminal penalties or be
barred from such activities. Further, we could be required to restructure our
existing or planned sponsorship compensation arrangements and electronic
commerce activities in a manner which could harm our business.

Regulation of the Sale of Over-the-Counter Drugs, Nutritional Supplements,
Cosmetics and Medical Devices

    The U.S. Food and Drug Administration and Federal Trade Commission and
similar state agencies regulate drug and cosmetic advertising and promotion,
including direct-to-consumer advertising, done by or on behalf of drug and
cosmetic manufacturers and marketers. In addition, the Federal Trade Commission
regulates product safety for nutritional supplements as well as over-the-counter
drugs, medical devices and prescription drugs. In the event that we provide such
products or services, we will be subject to U.S. Food and Drug Administration
and Federal Trade Commission regulation and enforcement for false advertising
and misleading advertising, including overstatements regarding product
performance, especially regarding nutritional supplements. While we have rights
against the manufacturer as to adulteration issues and product claims to the
extent we have received the claims from the manufacturer, we may have liability
if the manufacturer cannot or will not indemnify us in a specific situation.

FDA Regulation of Medical Devices

    The FDA is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Computer applications and
software are considered medical devices and subject to regulation by the FDA
when they are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current applications, services or product
offerings are subject to FDA jurisdiction or regulation; however, we may expand
our applications, services and offerings into areas that may subject it to FDA
regulation. We have no experience in complying with FDA regulations and
compliance with FDA regulations could




                                       15
<PAGE>   16

prove to be time consuming, burdensome and expensive, which could impede our
ability to introduce new applications, services or product offerings in a timely
manner. If compliance with government regulation of health care becomes costly
and difficult for our customers, and us we may not be able to grow our business.

EMPLOYEES

    As of December 31, 1999, we had a total of 64 employees, of whom 30 are
engaged in professional services and customer support functions, seven in the
electronic commerce operations center, 13 in sales and marketing, nine in
management, finance and administration and five in product development. None of
our employees is represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.

Our future performance depends in significant part upon the continued service of
our key personnel, none of whom is bound by an employment agreement requiring
service for any defined period of time. Our future success also depends on our
continued ability to attract, integrate, retain and motivate highly qualified
sales, technical and managerial personnel. Competition for such qualified
personnel is intense. If our executive officers and key personnel do not remain
with us in the future, we may experience difficulty in attracting and retaining
qualified personnel.


ITEM 2. PROPERTIES.

    Our principal executive and corporate offices are located in Englewood,
Colorado, in approximately 21,978 square feet of subleased office space under a
sublease that expires on December 30, 2001. We also sublease 4,145 square feet
of office space in the same building, which expires on December 30, 2002. We
also maintain an electronic commerce operations center in Albuquerque, New
Mexico, in 6,800 square feet of subleased office space under a lease that
expired in January 2000. We have recently entered into a lease for a new 5,240
square foot facility for our Albuquerque electronic commerce operations center.
This lease commenced in January 2000 and expires in January 2005. We believe our
space is adequate for our current operations and that additional leased space
can be obtained on commercially reasonable terms if needed.


ITEM 3. LEGAL PROCEEDINGS.

    There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.


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

    No matters were submitted to a vote of the Company's stockholders, through
solicitation of proxies or otherwise, during 1999.


EXECUTIVE OFFICERS OF THE COMPANY

    The following persons were serving as executive officers of the Company as
of March 17, 2000.

<TABLE>
<CAPTION>
NAME                                         AGE   POSITION
----                                         ---   --------
<S>                                          <C>   <C>

Lorine R. Sweeney........................... 42    President and Chief Executive Officer
Peter H. Cheesbrough........................ 48    Senior Vice President, Finance and Chief Financial Officer
Lawrence S. Dike............................ 53    Senior Vice President and Chief Scientist
Mark Rangell................................ 36    Senior Vice President, Marketing and Product Management
Thomas M. Pianko............................ 39    Senior Vice President, Sales and Business Development
Suriya Narayanan............................ 39    Senior Vice President and Chief Technology Officer
Tammy McLaren............................... 34    Vice President, Professional Services
Randy McMahon............................... 44    Vice President, eCommerce Production and Operations
Sinan S. Nayman............................. 32    Vice President, eCommerce Marketing and Creative Services
Gary Scherping.............................. 42    Vice President, Acquisitions
</TABLE>



                                       16
<PAGE>   17

    Lorine R. Sweeney. Ms. Sweeney has been President, Chief Executive Officer
and a director of XCare.net since October 1997. From November 1994 until
September 1997, Ms. Sweeney was Vice President of Software Development and
Technology and Vice President of the UltiMedex Business Unit of Micromedex,
Inc., an international supplier of clinical reference information to the health
care and environmental industries. From August 1993 until November 1994, Ms.
Sweeney was a Managing Consultant for Microsoft Consulting Services, the
management consulting division of Microsoft Corporation. Ms. Sweeney has over 19
years of executive leadership experience in the commercial software, CD-ROM,
online information services, consulting and systems integration industries. Ms.
Sweeney received her B.S. degree in Engineering from the University of Arizona
and her M.B.A. from the University of Phoenix.

    Peter H. Cheesbrough. Mr. Cheesbrough has been Senior Vice President,
Finance and Chief Financial Officer of XCare.net since September 1999. From
April 1993 until August 1999, Mr. Cheesbrough was Senior Vice President of
Finance and Chief Financial Officer of Echo Bay Mines, Ltd., a gold mining and
exploration company. Mr. Cheesbrough is a director of HealthGrades.com, Inc., an
Internet company that provides online health care ratings and information. Mr.
Cheesbrough was educated in England and qualified as a Chartered Accountant
(equivalent to the CPA designation) in the United Kingdom in 1974 and in Canada
in 1977.

    Lawrence S. Dike. Mr. Dike was one of three founders of Reilly Dike Dosher
Corporation, XCare.net's predecessor company. From April 1989 until April 1999,
Mr. Dike was Senior Vice President of Technology Platforms and a director of
Reilly Dike Dosher Corporation. Mr. Dike received his B.S. degree in Mathematics
and his M.S. degree in Computing Science from the University of New Mexico.

    Mark Rangell. Mr. Rangell has been Senior Vice President, Marketing and
Product Management since December 1999 and was previously Senior Vice President
of Sales and Marketing of XCare.net since January 1998. From May 1997 until
December 1997, Mr. Rangell was Vice President of Marketing at GreenPages Data
Services, LLC, a development stage organization focused on building an
electronic commerce network for pharmaceutical contracting and negotiation. From
January 1996 until May 1997, Mr. Rangell was Director of Marketing for the
Ultimedex Business Unit of Micromedex, Inc. From November 1992 until December
1995, Mr. Rangell was Product Manager at Medical Economics Co., a
publisher/database supplier to pharmaceutical, medical device and health care
delivery sectors. Mr. Rangell received his B.S. degree in Computer Information
Systems and Economics at New York University and his M.S. degree in Marketing
and Corporate Strategy at the MIT Sloan School of Management.

    Thomas M. Pianko. Mr. Pianko has been Senior Vice President, Sales and
Business Development of XCare.net since December 1999. From December 1998 to
December 1999 Mr. Pianko was Vice President of Sales, Information Technology
Business, Enterprise Sales-- Intermountain Region and from February 1996 to
December 1998 he was Regional Director and Sales Executive with McKesson HBOC
Inc., a health information technology and supply services corporation. Mr.
Pianko was the Regional Accounts Manager for Eli Lilly & Co., a company engaged
in the business of ethical pharmaceutical development and sales. Mr. Pianko
received his M.B.A. in finance and marketing from the Simon School of Business
at the University of Rochester and his B.S. degree in physiology and immunology
from Cornell University.

    Suriya Narayanan. Mr. Narayanan has been Senior Vice President and Chief
Technology Officer of XCare.net since January 2000. From October 1998 to January
2000, Mr. Narayanan was Engineering Manager for Healtheon Corporation, an
internet healthcare software and transactions company. From May 1998 to October
1998, Mr. Narayanan was a Systems Architect at Sapient Corporation, a systems
integration and consulting company. From March 1997 to May 1998, Mr. Narayanan
was Chief Architect and a Principal of The Redmond Consulting Group, a
consulting company for distributed computing solutions using Microsoft
technologies. From September 1991 to March 1997, Mr. Narayanan was a Principal
Consultant for Microsoft Consulting Services, the management consulting division
of Microsoft Corporation. Mr. Narayanan has over 17 years of information
technology, consulting and managerial experience. Mr. Narayanan received his
B.S. degree in Applied Sciences from Madurai University and his M.S. degree in
Applied Physics and Electronics from Delhi University.

    Tammy McLaren. Ms. McLaren has been Vice President, Professional Services of
XCare.net since July 1998. From January 1998 until June 1998, Ms. McLaren was a
Manager in the management consulting branch of Ernst & Young, L.L.P. From May
1996 until January 1998, Ms. McLaren was a Program Manager for Commercial
Software at Micromedex, Inc. From January 1989 until May 1996, Ms. McLaren was a
Manager of Business Systems at AtlanticRichfield Corporation, a natural resource
company. Ms. McLaren received her B.A. in Computer Information Systems from the
University of Texas.

    Randy McMahon. Mr. McMahon has been Vice President of eCommerce Productions
and Operations of XCare.net since January 2000. From January 1997 to January
2000, Mr. McMahon was Assistant Vice President, Investment Systems, and from
February 1990 to January 1997, he was Manager of Investment Systems, both for
Great-West Life Assurance Company. Mr. McMahon has over 23 years experience in
technical and systems management.


                                       17
<PAGE>   18
    Sinan S. Nayman. Mr. Naman has been Vice President of eCommerce Marketing
and Creative Services since February 2000. From September 1999 to February 2000,
Mr. Nayman was the Executive Director of Creative Services at XCare.net. From
March 1999 to September 1999, Mr. Nayman was a consultant for XOR, an eCommerce
services provider. From October 1995 to March 1999, Mr. Nayman was a Creative
Director for Raymond James Consulting. From April 1994 to October 1995, Mr.
Nayman was a free lance consultant. Mr. Nayman received his Bachelor of Fine
Arts degree from Colorado State University.

    Gary Scherping. Mr. Scherping has been Vice President of Acquisitions for
XCare.net since February 2000. From February 1999 to February 2000, Mr.
Scherping was Treasurer of Echo Bay Mines Ltd. Mr. Scherping was Director of
Marketing and Banking from July 1997 to February 1999, and was Director of
Financial Reporting from September 1994 to July 1997, at Echo Bay Mines Ltd. Mr.
Scherping received his B.S. degree in Accounting and Computer Science from
Northern Illinois University.



                                       18
<PAGE>   19

                                     PART II

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

    The Company's common stock is quoted on the Nasdaq National Market under the
symbol "XCAR." The following table sets forth, for the period indicated, the
range of high and low closing sales prices per share of Common Stock, as
reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
   2000
                                                                 High       Low
                                                                 ----       ---
<S>                                                             <C>       <C>
   First Quarter (February 10, 2000 through March 17, 2000)     $31.25    $18.00
</TABLE>


    At March 17, 2000 the last reported sale price of the common stock was
$19.968 per share, and the number of holders of record of the common stock was
approximately 43. Because many of the Company's shares of common stock are held
by brokers and other institutions on behalf of stockholders, the Company is
unable to estimate the total number of stockholders represented by these record
holders.

    The Company's registration statement on Form S-1 (SEC File No. 333-90165)
covering the Company's initial public offering (the "Offering") of 5,750,000
shares of common stock (including the underwriter's over-allotment option of
750,000 shares of common stock) at $18.00 per share was declared effective on
February 9, 2000. FleetBoston Robertson Stephens, Inc., SG Cowen Securities
Corporation, E*OFFERING Corp and Advest, Inc. acted as representatives for the
underwriters.

    The net proceeds to us from the sale of shares of our common stock in the
offering at the initial public offering price of $18.00 per share, after
deducting estimated expenses of $1.6 million and underwriting discounts and
commissions, were approximately $94.7 million.

    We expect to use the net proceeds from this offering for general corporate
purposes, working capital and capital expenditures to fund our operations,
including to continue expanding and enhancing our sales and marketing operations
and our product offerings. The amounts and timing of our actual expenditures
will depend upon numerous factors, including the status of our product
development efforts, marketing and sales activities, and the amount of cash
generated by our operations and competition. We may find it necessary or
advisable to use portions of the proceeds for other purposes.

    A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies, although there are no current plans, negotiations or discussions
for any such transactions. Pending use of the net proceeds for the above
purposes, we intend to invest such funds in short-term, interest-bearing,
investment grade obligations.

    Except for dividends declared in connection with our status as an S
corporation prior to January 1996, we have never declared or paid any cash
dividends on our common stock or other securities. We currently anticipate that
we will retain all of our future earnings for use in the expansion and operation
of our business and do not anticipate paying any cash dividends in the
foreseeable future.




                                       19
<PAGE>   20

ITEM 6. SELECTED FINANCIAL DATA

    The following selected financial data are qualified by reference to, and
should be read in conjunction with, our financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report. The selected balance sheet
data as of December 31, 1998 and 1999 and selected statement of operations data
for the years ended December 31, 1997, 1998 and 1999 have been derived from our
audited financial statements and notes thereto included elsewhere in this Annual
Report. The balance sheet data as of December 31, 1995, 1996 and 1997 and the
statement of operations data for the years ended December 31, 1995 and 1996 are
derived from our historical financial statements not included in this Annual
Report. Historical results are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                            -----------------------------------------------------
                                              1995       1996        1997        1998       1999
                                            -------    --------    --------    -------    -------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>         <C>         <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenue .................................   $ 7,708    $  9,726    $  5,984    $ 2,270    $ 4,400
Revenue from affiliate...................        --          --          --         --        453
                                            -------    --------    --------    -------    -------
         Total revenue...................     7,708       9,726       5,984      2,270      4,853
                                            -------    --------    --------    -------    -------
Costs and expenses:
  Cost of revenue .......................     2,593       3,744       4,575      2,086      3,923
  Sales and marketing ...................       236       1,369       2,531        965      1,105
  General and administrative ............     1,465       2,220       2,436      2,194      1,867
  Research and development ..............     1,789       3,190       4,212        670        575
  Impairment of long-lived assets and
    abandonment of operating lease ......        --          --         887         --         --
  Stock compensation expense ............        --          --          --         --        504
                                            -------    --------    --------    -------    -------
         Total costs and expenses .......     6,083      10,523      14,641      5,915      7,974
Income (loss) from operations ...........     1,625        (797)     (8,657)    (3,645)    (3,121)
Settlements received from contract
  Terminations ..........................        --       2,250         250         --         --
Interest income (expense), net ..........       (42)         --           5       (437)       (67)
                                            -------    --------    --------    -------    -------
Income (loss) before income taxes .......     1,583       1,453      (8,402)    (4,082)    (3,188)
Income tax (benefit) expense ............        --       1,200      (1,078)        --         --
                                            -------    --------    --------    -------    -------
Net income (loss) .......................   $ 1,583    $    253    $ (7,324)   $(4,082)   $(3,188)
                                            =======    ========    ========    =======    =======
Net income (loss) per common share--basic
  and diluted ...........................   $  2.64    $   0.53    $ (18.92)   $(10.64)   $ (6.91)
                                            =======    ========    ========    =======    =======
Weighted average common shares
  Outstanding-- basic and diluted .......       599         476         390        390        472
                                            =======    ========    ========    =======    =======
Pro forma:
  Income before income taxes ............   $ 1,583
  Net income ............................   $   980
Pro forma net income (loss) per common
  share-- basic and diluted .............   $  1.64                                       $  (.42)
                                            =======                                       =======
Pro forma weighted average common shares
  Outstanding-- basic and diluted .......       599                                         7,642
                                            =======                                       =======
</TABLE>



                                       20
<PAGE>   21


<TABLE>
<CAPTION>
                                                                       DECEMBER  31,
                                                      -----------------------------------------------
                                                       1995     1996     1997      1998       1999
                                                      ------   ------  --------- --------- ----------
                                                                    (IN THOUSANDS)
<S>                                                   <C>      <C>     <C>       <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................      $  172   $1,394  $    697  $    198  $   7,455
Working capital.................................         840      243      (952)   (5,335)     8,138
Total assets....................................       4,190    4,492     4,026     2,805     13,183
Long-term debt..................................       1,012    1,317       939       284         --
Mandatorily redeemable convertible
  preferred stock...............................          --       --     6,728     6,827     23,842
Stockholders' equity (deficit)..................       1,770      842    (6,537)  (10,620)   (13,172)
</TABLE>


    In reviewing the above data, you should consider the following:

    o   During 1996, a major customer terminated its contract with us and paid
        $2.3 million to settle all claims arising from the termination. During
        1997, another major customer terminated its contract with us and paid
        $250,000 to settle all claims associated with the termination.

    o   As a result of the contract terminations referred to above, during 1997
        we abandoned an operating lease and incurred impairment charges for
        related fixed assets aggregating $887,000.

    o   Prior to January 1, 1996, XCare.net was an S corporation for federal and
        state income tax purposes, and, accordingly, our income was taxed
        directly to our stockholders. Pro forma income before income taxes and
        pro forma net income and pro forma net income (loss) per common share
        for the year ended December 31, 1995, give effect to pro forma
        adjustments that reflect the federal and state income taxes that would
        have been recorded if XCare.net had been a C corporation prior to
        January 1, 1996.

    o   See note 1 of notes to the financial statements for a description of the
        method used to compute net income (loss) per share and pro forma net
        loss per common share for all periods presented.

    o   In 1999, we completed a sale of Series B convertible preferred stock
        with net proceeds totaling $13.7 million.


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

OVERVIEW

    XCare.net is an electronic commerce service provider for health care
businesses. We have developed an Internet-based technology platform using
extensible mark-up language, or XML, to process health care transactions and
provide related services for payers, providers and other health care industry
participants. We provide transaction processing services such as eligibility
checking, claims submission, referral processing, physician credentialling, and
appointment scheduling. We also provide consulting services to define, develop
and implement Internet healthcare strategies as well as Web-site hosting,
operational support and maintenance services for our customers.

    Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into a community to form an Internet exchange. We use the XCare.net
platform to deliver a broad range of applications, services and electronic
product offerings that streamline and automate high-volume, data-intensive
transactions and processes.

    We commenced operations in March 1989, but we did not begin to focus on
Internet-based health care solutions until mid-1998. We have historically
derived a significant portion of our revenue from sales of mainframe and
client-server software for managed health care systems and from providing
services to health care organizations seeking to outsource administrative
functions. We intend to derive an increasing portion of our future revenue from
our Internet-based applications, services and product offerings. Due to our
limited operating history in the Internet-based health care market, it is
difficult for us to predict with any accuracy our future results of operations.
Accordingly, we believe that our historical financial results are not
necessarily indicative of our future financial performance.




                                       21
<PAGE>   22

    In the first quarter of 1997, we obtained financing from new investors
through the issuance of Series A convertible preferred stock. This financing
enabled us to develop and pursue a new strategic plan to supplement our
mainframe-based business with client-server applications and services. In
pursuing this strategy, we increased our expenditures in marketing, research and
development, and general administration.

    At the beginning of the third quarter of 1997, our largest customer at the
time, who accounted for approximately 74% of 1997 revenue, decided to pursue an
alternative software approach and terminated its contract with us. In August
1997, the customer paid $250,000 to settle all claims arising under the
termination. In response, we reduced total personnel by 40% and 26%, as well as
other expenditures, during the fourth quarter of 1997 and the first quarter of
1998, respectively.

    Also at the end of 1997 and during the first quarter of 1998, we obtained
additional financing through the issuance of convertible promissory notes. This
financing allowed us to continue to license and implement our client-server
based product to new customers and begin development of our Internet-based
applications and services. Notwithstanding this financing, we had limited
available working capital during the latter part of 1998 through the first part
of 1999, causing us to reduce our sales and marketing, research and development,
and general and administration expenditures from 1997 levels.

    At the end of 1998, we obtained additional financing from our existing
investors through the issuance of convertible promissory notes, and in June and
July 1999, we obtained financing through the issuance of Series B convertible
preferred stock. These financings have enabled us to add personnel and other
resources to facilitate the development and marketing of the new Internet-based
applications, services and product offerings.

    For contracts entered into subsequent to January 1, 1998, we recognize
revenue in accordance with the provisions of Statement of Position 97-2,
"Software Revenue Recognition." We derive revenue from license fees and related
services under the terms of fixed price contracts. Maintenance revenue is
derived from agreements for supporting and providing periodic updates to
licensed software. Consulting revenue consists of revenue from consulting
services provided pursuant to time and materials contracts. Transaction
processing revenue is derived from transaction processing services and is
recognized on a per-transaction basis as services are performed. Operational
support revenue is derived from agreements for supporting and maintaining
customers' processing environments and is recognized ratably over the service
period.

    License fees and related services revenue is generally recognized from fixed
price contracts using the percentage-of-completion method of accounting where
collectibility of fees is probable. Where collectibility of fees is not
probable, we defer revenue and related costs as deferred contract costs and
recognize revenue and cost of revenue as cash is collected.

    We may encounter budget and schedule overruns on fixed price contracts
caused by increased material, labor or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs indicate a loss.
We do not require collateral for our receivables and an allowance is maintained
for potential credit losses.

    Maintenance revenue is recorded as unearned revenue and is recognized
ratably over the service period, which is generally 12 months. When maintenance
is bundled with the original license fee arrangement, its fair value is deferred
and recognized during the period such services are provided.

    Revenue from consulting services provided pursuant to time-and-materials
contracts is recognized as the services are performed.

    For contracts entered into prior to January 1, 1998, we recognized revenue
in accordance with Statement of Position 91-1, "Software Revenue Recognition."
Our revenue recognition for such pre-1998 contracts was substantially the same
as that discussed above.

    In 1999, sales to Methodist Care, Inc. accounted for 20% of revenue, sales
to Expert Practice, Inc. and American Medical Pathways, Inc. each accounted for
12% of revenue, sales to Brokerage Services, Inc. accounted for 11% of revenue
and sales to Quest Diagnostics Incorporated accounted for 10% of revenue. If we
do not generate as much




                                       22
<PAGE>   23

revenue from these major customers as we expect to, or if we lose any of them as
customers, our revenue will be significantly reduced.

    We incurred net losses and losses from operations the years ended December
31, 1999 and 1998. As of December 31, 1999, we had an accumulated deficit of
approximately $14.3 million. Since we began developing and marketing our
Internet-based health care applications, services, and product offerings in
early 1999, we have funded our business primarily by borrowing funds and from
the sale of convertible preferred stock, not from cash generated by our
business. We expect to continue to incur significant sales and marketing,
research and development and general and administrative expenses. As a result,
we will experience losses and negative cash flows for the foreseeable future.
Factors which may prevent us from achieving or maintaining profitability and
cause our stock price to decline include the demand for and acceptance of our
solutions and our ability to attract new customers.

    During 1999 and through February 10, 2000, the effective date of the
Company's initial public offering, in connection with stock options granted to
certain employees and a consultant under the stock plan, we have recorded
unearned stock compensation representing the difference between the exercise
price of the options and the deemed fair value of our common stock at the date
of grant. This unearned stock compensation will be amortized to expense over the
period during which the options or common stock subject to repurchase vest,
generally four years, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28. Amortization of unearned stock
compensation amounted to approximately $504,000 during the year ended December
31, 1999. We expect to recognize amortization expense related to unearned
compensation for the aforementioned grants of approximately $1,510,000 in 2000,
$570,000 in 2001, $260,000 in 2002 and $52,000 in 2003.

    We expect to record a charge during the first quarter of 2000, of $132,000,
relating to the settlement of a dispute with a holder of a warrant to purchase
common stock.

    In 1999, Laidlaw Inc., the Canadian parent company of American Medical
Response, Inc. announced its intention to divest its interest in that company in
order to focus on its transportation business. American Medical Response, Inc.
is the parent company of one of our customers, American Medical Pathways, Inc
("AMP"). If such a sale is consummated, and the new owner decided to terminate
our agreement, there would likely be a material adverse impact on our future
earnings and cash flow. As of December 31, 1999, there has been no change in our
relationship with AMP and we have continued to provide services under our
agreement.

RESULTS OF OPERATIONS

    The following table sets forth financial data for the periods indicated as a
percentage of revenue.

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                            -------------------------
                                            1997      1998      1999
                                            -----     -----     -----
<S>                                         <C>       <C>       <C>

Revenue .................................   100.0%     100.0%    100.0%
Costs and expenses:
  Cost of revenue .......................    76.5       91.9      80.8
  Sales and marketing ...................    42.3       42.5      22.8
  General and administrative ............    40.7       96.7      38.5
  Research and development ..............    70.4       29.5      11.8
  Impairment of long-lived assets and
     abandonment of operating lease .....    14.8         --        --
  Stock compensation expense ............      --         --      10.4
                                            ------    ------    ------
          Total costs and expenses ......    244.7     260.6     164.3
                                            ------    ------    ------
Loss from operations ....................   (144.7)   (160.6)    (64.3)
Settlements received from contract
  Terminations ..........................      4.2        --        --
Interest income (expense), net ..........      0.1     (19.2)     (1.4)
                                            ------    ------    ------
Income (loss) before income taxes .......   (140.4)   (179.8)    (65.7)
                                            ------    ------    ------
Income tax (benefit) expense ............    (18.0)       --        --
                                            ------    ------    ------
Net income (loss) .......................   (122.4)%  (179.8)%   (65.7)%
                                            ======    ======    ======
</TABLE>




                                       23
<PAGE>   24

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

     Revenue. Revenue increased $ 2.6 million, or 114%, to $4.9 million for the
year ended December 31, 1999 from $2.3 million for the year ended December 31,
1998. This increase reflects revenue recognized from new customers coupled with
an increase in average total arrangement fees during 1999 as compared to 1998,
partially offset by decreased transaction processing revenue, as two customers
did not continue their transaction processing arrangements after they completed
implementation of our software.

     Cost of revenue. Cost of revenue includes personnel and related overhead
costs, payments to third-party consultants who assist with implementation and
support services, facilities costs and equipment depreciation. Cost of revenue
increased $1.8 million, or 88%, to $3.9 million for the year ended December 31,
1999 from $2.1 million for the year earlier period. This increase reflects the
cost of additional third-party consultants utilized to support the current
license implementation and custom development projects, amortization of software
purchased in the fourth quarter of 1998 and recognition of contract expenses
deferred in the prior year.

Sales and marketing. Sales and marketing expenses consist of personnel and
related overhead costs, including commissions, travel expenses, field sales
office expenses and advertising and promotion costs. Sales and marketing
expenses increased $140,000, or 15%, to $1,105,000 during the year ended
December 31, 1999 from $965,000 for the year ended December 31, 1998. This
increase represents increases in personnel, travel, advertising and marketing as
we began to expand our sales and marketing force during the last half of 1999.
This was accomplished using the proceeds from the issuance of Series B
convertible preferred stock which was received in June and July, 1999.

     General and administrative. General and administrative expenses include
personnel and related overhead costs for our executive, administrative, finance
and human resources functions, as well as legal and accounting fees. General and
administrative expenses decreased $327,000, or 15%, to $1.9 million for the year
ended December 31, 1999 from $2.2 million from the year earlier period. This
decrease is due primarily to a reduction in the amount of losses on the disposal
of assets which were recorded in 1998 and the phase out of our mainframe
computer as we discontinued its use. These decreases were partially offset by
increases in recruitment and personnel costs as we built our staff with the
proceeds from the Series B preferred stock received in June and July, 1999, to
develop the XCare.net platform and market our products.

     Research and development. Research and development expenses include
personnel and related overhead costs for product development, enhancements to
existing applications and services and quality assurance activities. Research
and development expenses decreased $95,000, or 14%, to $575,000 for the year
ended December 31, 1999 from $670,000 for the year ended December 31, 1998. This
decrease reflects a) a reduction in the use of outside consultants due to the
completion of a project in 1998 related to the conversion of forms in the claims
processing application, and b) the write-off of certain software and equipment
during 1998 after two of our customers did not continue their transaction
processing arrangements once they completed implementation of our software.
These decreases were partially offset by an increase in salaries as we increased
personnel after obtaining the funding described above.

     Stock compensation expense. During 1999, we recorded aggregate unearned
compensation of $2.8 million in connection with the grant of certain stock
options. Amortization of this compensation amounted to $504,000 for the year
ended December 31, 1999. See Note 10 of Notes to Financial Statements.

     Interest income (expense), net. Interest income (expense), net includes
interest expense on our convertible promissory notes and capital lease
obligations partially offset by interest income on cash and cash equivalent
balances. Interest expense, net of interest income, decreased $370,000, or 85%,
to $67,000 for the year ended December 31, 1999 from $437,000 for the prior
year. This decrease is due to the conversion of the convertible promissory notes
to Series B convertible preferred stock in June 1999, and the substantial
reduction of debt and capital lease obligations during 1999 with the proceeds of
the Series B preferred stock as noted above.

     Income tax (benefit) expense. No provision for federal and state income
taxes has been recorded for the year ended December 31, 1999 or 1998 as we have
incurred net operating losses for each of these periods. We believe that, based
on the history of losses and other factors, the weight of available evidence
indicates that it is more likely than not that we will not be able to realize
our deferred tax assets, and thus a full valuation allowance has been recorded
against such assets as of December 31, 1999 and 1998.




                                       24
<PAGE>   25

     Net income (loss). Net loss decreased $894,000, or 22%, to $3.2 million for
the year ended December 31, 1999 from $4.1 million for the year ended December
31, 1998. This decrease is due to an increase in revenue of $2.6 million, or
114%, partially offset by an increase in total costs and expenses of $1.7
million, as discussed above.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

    Revenue. Revenue decreased 62% to $2.3 million for the year ended December
31, 1998 from $6.0 million for the year ended December 31, 1997. This decrease
reflects a significant reduction in consulting revenue due to the loss of a
major customer during July 1997 that accounted for approximately $4.4 million,
or 74%, of total 1997 revenue.

    Cost of revenue. Cost of revenue decreased 54% to $2.1 million for the year
ended December 31, 1998 from $4.6 million for the year ended December 31, 1997.
As a percentage of revenue, cost of revenue increased to 92% in 1998 from 77% in
1997. The decrease in absolute dollars reflects a 55% reduction in the number of
employees who perform implementation services due to limited availability of
working capital in 1998. The increase in cost of revenue as a percentage of
revenue reflects decreased revenue associated with a major contract termination
in 1997 which was not completely offset by a decline in cost of revenue due to
certain fixed infrastructure costs which are included in cost of revenue.

    Sales and marketing. Sales and marketing expenses decreased 62% to $965,000
for the year ended December 31, 1998 from $2.5 million for the year ended
December 31, 1997, representing 43% and 42% of revenue, respectively. The
decrease in absolute dollars reflects a 29% reduction in sales and marketing
personnel, and decreased travel and entertainment costs due to the loss of the
significant customer described above. In addition, we incurred higher costs for
marketing, consulting, advertising and promotion and attendance at trade shows
in 1997 as compared to 1998 in connection with our new strategic focus on
client-server applications and services, including various marketing studies and
analyst research projects on the client-server market.

    General and administrative. General and administrative expenses decreased
10% to $2.2 million for the year ended December 31, 1998, from $2.4 million for
the year ended December 31, 1997, representing 97% and 41% of revenue,
respectively. The increase as a percentage of revenue is due to significantly
reduced revenue and losses on the disposal of fixed assets. The decrease in
absolute dollars reflects a 68% reduction in general and administrative
management personnel due to the loss of the significant customer described
above, which was partially offset by charges relating to the loss on disposal of
property and equipment referred to above.

    Research and development. Research and development expenses decreased 84% to
$670,000 for the year ended December 31, 1998 from $4.2 million for the year
ended December 31, 1997, representing 30% and 70% of revenue, respectively. The
decrease in absolute dollars reflects management's decision to reduce research
and development staff by 96%, and support costs, as a result of the significant
decrease in revenue. In addition, during 1997, we had focused on developing and
maintaining two separate software applications, one for the mainframe market and
one for the client-server market, while in 1998 we were developing only the
client-server product.

    Interest income (expense), net. Interest expense, net, significantly
increased to $437,000 for the year ended December 31, 1998 from $5,000 of
interest income for the year ended December 31, 1997, as a result of interest
expense incurred on the December 1997 and April 1998, convertible promissory
notes.

    Provision for (benefit from) income taxes. No provision for federal and
state income taxes has been recorded for the year ended December 31, 1998, as we
incurred a net operating loss. We believe that based on the history of losses
and other factors, the weight of available evidence indicates that it is more
likely than not that we will not be able to realize our deferred tax assets, and
thus a full valuation allowance has been recorded as of December 31, 1998.

    Net income (loss). Net loss decreased 44% to $4.1 million for the year ended
December 31, 1998 from $7.3 million for the year ended December 31, 1997,
primarily due to a 60% decrease in total costs and expenses as discussed above,
partially offset by a decrease in total revenue.




                                       25
<PAGE>   26

LIQUIDITY AND CAPITAL RESOURCES

    We have historically financed our operations through a combination of cash
flow from operations, private sales of common and convertible preferred stock,
and issuances of convertible promissory notes.

    During March 1997, we completed a sale of Series A convertible preferred
stock for net proceeds of $6.6 million. From the period December 1997 through
December 1998, we issued $2.7 million of convertible promissory notes. During
June and July 1999, we completed a sale of Series B convertible preferred stock
with net proceeds totaling $13.7 million of which $7.3 million was received in
June 1999 and $6.4 million was received in July 1999. A portion of these
proceeds amounting to $438,000 was used to pay the majority of our capital lease
obligations during the third quarter of 1999 and $302,000 was used to repay debt
during that quarter.

    At December 31, 1999, our principal sources of liquidity included $8.1
million in working capital with $92,000 in outstanding debt. Outstanding debt at
December 31, 1999, includes a capital lease that is secured by the underlying
equipment and matures in December 2000.

    Net cash used in operating activities was $4.4 million in 1999, $2.2 million
in 1998 and $6.6 million in 1997. Net cash used in operating activities is
primarily attributable to net losses.

    Net cash used in investing activities was $1.2 million in 1999 and net cash
provided by investing activities was $167,000 in 1998. Net cash used in
investing activities was $318,000 in 1997. Investing activities consist
primarily of purchases of computer hardware and software, office furniture and
equipment, offset by proceeds from the sale of property and equipment.

    Net cash provided by financing activities was $12.9 million in 1999, $1.5
million in 1998, and $6.2 million in 1997 and consists primarily of net proceeds
from the issuance of convertible preferred stock and convertible promissory
notes.

    In February 2000, we completed our initial public offering and issued
5,750,000 shares of common stock (including the underwriter's over-allotment of
750,000 shares of common stock) at an initial public offering price of $18.00
per share. We received approximately $94.7 million in cash proceeds, net of
underwriting discounts, commissions and other offering costs.

    We expect to use our cash and cash equivalents, as well as the net proceeds
from this offering, for general corporate purposes, working capital and capital
expenditures to fund our operations, including to continue expanding and
enhancing our sales and marketing operations and to continue expanding our
product offerings. The amounts and timing of our actual expenditures will depend
upon numerous factors, including the status of our product development efforts,
marketing and sales activities, and the amount of cash generated by our
operations and competition. We may find it necessary or advisable to use
portions of the proceeds for other purposes.

    A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies, although there are no current plans, negotiations or discussions
for any such transactions. Pending use of the net proceeds for the above
purposes, we intend to invest such funds in short-term, interest-bearing,
investment grade obligations.

    We anticipate that the above funds will be sufficient to meet our needs as
described above for the next eighteen months. Thereafter, we may require
additional funds to support our working capital requirements or for other
purposes, and we may seek, even before such time, to raise additional funds
through public or private equity financing or from other sources. Such
additional financing may not be available at all or, if available, on terms
acceptable to us and that are not dilutive to our stockholders.

FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

    We have experienced quarterly fluctuations in our operating and financial
results due to the timing and relative size of new custom software development
projects, cancellations of contracts, and fluctuations in costs, including
personnel, equipment and facilities costs. We expect quarterly results to
fluctuate in the future due to the timing and introduction of new applications
and services and other market factors. See "Risk Factors."




                                       26
<PAGE>   27

    The following tables set forth unaudited statement of operations data for
each of the eight quarters ended December 31, 1999, as well as the percentage of
our revenue represented by each line item. This information has been derived
from our unaudited financial statements. The unaudited financial statements have
been prepared on the same basis as the audited financial statements contained in
this prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of this
information. These unaudited quarterly results should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Annual Report. Our operating results are expected to vary significantly from
quarter to quarter and are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                        ---------------------------------------------------
                                        MARCH 31,    JUNE 30,   SEPTEMBER 30,  DECEMBER 31,
                                          1998         1998         1998           1998
                                        ---------    --------   -------------  ------------
                                        (In thousands, except as a percentage of revenue)
<S>                                     <C>          <C>        <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenue .............................   $    521     $    521     $    522       $    706
Revenue from affiliate...............         --           --           --             --
                                        --------     --------     --------       --------
        Total revenue................        521          521          522            706
Costs and expenses:
  Cost of revenue ...................        547          445          448            646
  Sales and marketing ...............        334          232          226            173
  General and administrative ........        612          431          346            805
  Research and  development .........        396          150           48             76
  Stock compensation expense ........         --           --           --             --
                                        --------     --------     --------       --------
         Total costs and Expenses ...      1,889        1,258        1,068          1,700
                                        --------     --------     --------       --------
Income (loss) from operations .......     (1,368)        (737)        (546)          (994)
Interest income (expense), net ......        (74)        (106)        (126)          (131)
                                        --------     --------     --------       --------
Loss before income taxes ............     (1,442)        (843)        (672)        (1,125)
Income tax (benefit) expense ........         --           --           --             --
                                        --------     --------     --------       --------
Net loss ............................   $ (1,442)    $   (843)    $   (672)      $ (1,125)
                                        ========     ========     ========       ========
AS A PERCENT OF REVENUE:
Revenue .............................      100.0%       100.0%       100.0%         100.0%
Revenue from affiliate...............         --           --           --             --
                                        --------     --------     --------       --------
        Total revenue................      100.0%       100.0%       100.0%         100.0%
Costs and expenses:
  Cost of revenue ...................      105.0         85.4         85.8           91.5
  Sales and marketing ...............       64.1         44.5         43.3           24.5
  General and administrative ........      117.5         82.7         66.3          114.0
  Research and development ..........       76.0         28.8          9.2           10.8
  Stock compensation expense ........         --           --           --             --
                                        --------     --------     --------       --------
         Total costs and expenses ...      362.6        241.4        204.6          240.8
                                        --------     --------     --------       --------
Income (loss) from operations .......     (262.6)      (141.4)      (104.6)        (140.8)
                                        --------     --------     --------       --------
Interest income (expense), net ......      (14.2)       (20.4)       (24.1)         (18.5)
                                        --------     --------     --------       --------
Loss before income taxes ............     (276.8)      (161.8)      (128.7)      (159.3)
Income tax (benefit) expense ........         --           --           --           --
                                        --------     --------     --------     --------
Net loss ............................     (276.8)%     (161.8)%     (128.7)%     (159.3)%
                                        ========     ========     ========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                        ---------------------------------------------------
                                        MARCH 31,    JUNE 30,   SEPTEMBER 30,  DECEMBER 31,
                                          1999         1999         1999          1999
                                        ---------    --------   -------------  ------------
                                        (In thousands, except as a percentage of revenue)
<S>                                     <C>          <C>        <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenue .............................   $  1,311     $    530     $    813       $  1,746
Revenue from affiliate...............         --           --           --            453
                                        --------     --------     --------       --------
        Total revenue................      1,311          530          813          2,199
Costs and expenses:
  Cost of revenue ...................        923          714          784          1,502
  Sales and marketing ...............        155          138          252            560
  General and administrative ........        144          282          759            682
  Research and  development .........        104           57          256            158
  Stock compensation expense ........         --           --          112            392
                                        --------     --------     --------       --------
         Total costs and expenses ...      1,326        1,191        2,163          3,294
                                        --------     --------     --------       --------
Income (loss) from operations .......        (15)        (661)      (1,350)        (1,095)
Interest income (expense), net ......       (136)        (122)         108             83
                                        --------     --------     --------       --------
Loss before income taxes ............       (151)        (783)      (1,242)        (1,012)
Income tax (benefit) expense ........         --           --           --             --
                                        --------     --------     --------       --------
Net loss ............................   $   (151)    $   (783)    $ (1,242)      $ (1,012)
                                        ========     ========     ========       ========
AS A PERCENT OF REVENUE:
Revenue .............................      100.0%       100.0%       100.0%          79.4%
Revenue from affiliate...............         --           --           --           20.6
                                        --------     --------     --------       --------
        Total revenue................      100.0%       100.0%       100.0%         100.0%
Costs and expenses:
  Cost of revenue ...................       70.4        134.7         96.4           68.3
  Sales and marketing ...............       11.8         26.0         31.0           25.5
  General and administrative ........       11.0         53.2         93.4           31.0
  Research and development ..........        7.9         10.8         31.5            7.2
  Stock compensation expense ........         --           --         13.8           17.8
                                        --------     --------     --------       --------
         Total costs and expenses ...      101.1        224.7        266.1          149.8
                                        --------     --------     --------       --------
Income (loss) from operations .......       (1.1)      (124.7)      (166.1)         (49.8)
                                        --------     --------     --------       --------
Interest income (expense), net ......      (10.4)       (23.0)        13.3            3.8
                                        --------     --------     --------       --------
Loss before income taxes ............      (11.5)      (147.7)      (152.8)         (46.0)
Income tax (benefit) expense ........         --           --           --             --
                                        --------     --------     --------       --------
Net loss ............................      (11.5)%     (147.7)%     (152.8)%        (46.0)%
                                        ========     ========     ========       ========
</TABLE>



                                       27
<PAGE>   28

    Revenue increased significantly during the quarter ended March 31, 1999 due
to the progress made in completing several custom software development projects.
Revenue for the quarter ended June 30, 1999 decreased relative to the prior
quarter as limited working capital available during the six months ended June
30, 1999 resulted in a reduction in our sales force personnel and other
promotional marketing activities, which impeded our ability to generate new
sales leads. Revenue for the quarter ended September 30, 1999 included $240,000
for the settlement of outstanding amounts owed by a customer relating to work
that had been performed in a prior quarter and for which the revenue had not
previously been recognized because collectibility of fees was not probable.
Revenue increased significantly during the quarter ended December 31, 1999 due
to revenue recognized from new customers coupled with an increase in total
arrangement fees.

    Cost of revenue as a percentage of revenue has varied from quarter to
quarter due to fluctuations in quarterly revenue and changes in associated
personnel costs. During the quarter ended March 31, 1999, cost of revenue
decreased as a percentage of revenue due to increased revenue from the
completion of several custom software development projects during the quarter.
During the quarter ended June 30, 1999, the increase in cost of revenue as a
percentage of revenue reflects the decreased revenue recognized during the
quarter, the utilization of third-party consultants for license implementation
contracts and custom development projects and the amortization of purchased
software. Cost of revenue increased during the quarter ended December 31, 1999,
as a result of additional personnel hired to execute new custom development
projects and expand our existing technology and infrastructure to support future
growth. Cost of revenue decreased as a percentage of revenue during the same
period due to the increase in revenue without a proportional increase in costs.
This was primarily due to the Company having a larger revenue base to absorb its
fixed costs.

    Sales and marketing expenses declined in both dollars and as a percentage of
revenue during the quarter ended March 31, 1999, due to a substantial reduction
in personnel costs. During the quarter ended December 31, 1999, sales and
marketing expenses increased as we added additional personnel and incurred
expenses to implement our Internet-based sales and marketing initiatives.

    General and administrative expenses increased in absolute dollars and as a
percentage of revenue during the quarter ended December 31, 1998 due to an
approximate $360,000 loss on disposal of fixed assets. During the quarter ended
March 31, 1999, general and administrative expenses declined in both dollars and
as a percentage of revenue due to a substantial reduction in personnel costs.
During the quarter ended September 30, 1999, general and administrative
personnel increased by 68% and recruiting and relocation costs increased by
$192,000 reflecting costs associated with recruiting new employees.

    Research and development expenses sharply declined following the quarter
ended March 31, 1998, due to reduction of research and development personnel
caused by limited working capital. During the quarter ended September 30, 1999,
we increased research and development employees by 266% reflecting our
commitment to enhance the XCare.net platform.




                                       28
<PAGE>   29

    Stock compensation expense increased sharply due to the grant of certain
stock options. Unearned compensation totaling $2.8 million was recorded during
1999 in connection with these stock options. Amortization of this compensation
was recorded beginning in the third quarter of 1999.

INFLATION

    We do not believe that inflation has had a material impact on our results of
operations.

IMPACT OF THE YEAR 2000

    To date, the Company has experienced no significant adverse effects related
to the Year 2000 computer issue. All important internal information technology
systems made a seamless transition into the Year 2000 and there were no notable
problems with equipment or systems which may have been effected by faulty
embedded chips or other Year 2000 problems. The Company is not aware of any
significant Year 2000 problems at any of its customers nor has the Company noted
any disruption in its supply chain related to Year 2000 issues.

    The Company implemented a comprehensive project plan to identify internal
and external information technology and non-information technology systems which
required modification or upgrade to be made Year 2000 compliant. An inventory
and assessment of these systems was completed by the end of the second quarter
of 1999. Remediation and testing of non-Year 2000 compliant systems was
completed during the fourth quarter of 1999. As part of this project, the
Company developed and tested contingency plans which identified workarounds in
the event of a malfunction of a system designated as a priority system. In
addition, the Company identified suppliers of key goods and services and
requested information about their Year 2000 readiness.

    To date, we have not incurred any material costs directly associated with
Year 2000 readiness efforts, except for compensation expense associated with
salaried employees who have devoted some of their time to year 2000 assessment
and remediation efforts. We do not expect the total cost of Year 2000 problems
to be material to our business, financial condition and operating results.
However, there can be no assurance that currently unidentified Year 2000 issues,
if any, will not arise, especially in areas outside the Company; that these
issues will not have a material adverse effect on the Company; or, that
additional resources needed to address these issues will not be material.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    We recognize revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," which provides guidance on recognizing revenue
from software transactions, as amended by SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition." We applied the
provisions of SOP 97-2 on a prospective basis for new software transactions
entered into as of January 1, 1998. The adoption of this guidance did not have a
material impact on our financial condition or results of operations.

    Further guidance was published during 1998 in SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions."
Additionally, the AICPA issued technical questions and answers on financial and
reporting issues related to SOP 97-2 in January 1999. The adoption of this
guidance is not expected to have a material impact on our financial condition or
results of operations.

RISK FACTORS

OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE ARE IN A
TRANSITIONAL STAGE OF DEVELOPMENT

    It is difficult to evaluate our business and our prospects because our
business model is new and unproven. We commenced operations in March 1989, but
we did not begin focusing on Internet-based health care solutions until early
1999. We have historically derived a significant portion of our revenue from
sales of maintenance and client/server software for managed health care systems
and from providing services to health care organizations seeking to outsource
administrative functions. We intend to derive an increasing portion of our
future revenue from our Internet-based applications, services and product
offerings. As a result, even though we have been in existence for over ten
years, we are prone to the risks and difficulties frequently encountered by
early stage companies, particularly companies in new and rapidly evolving
technology-related markets.




                                       29
<PAGE>   30

WE WILL HAVE DIFFICULTY PREDICTING OUR FUTURE RESULTS OF OPERATIONS

    Due to our limited operating history in the Internet-based health care
market, it is difficult for us to predict with any accuracy our future results
of operations. For example, we cannot accurately forecast expenses based on our
historical results because our experience in our current market is limited, and
we are required to forecast expenses in part on future revenue projections. The
provision of services using Internet technology in the health care industry is a
developing business that is inherently riskier than business in industries where
companies have established operating histories. Accordingly, our historical
financial results are not necessarily indicative of our future financial
performance.

WE HAVE INCURRED LOSSES SINCE CHANGING OUR FOCUS TO INTERNET-BASED SOLUTIONS AND
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY

    We incurred net losses and losses from operations for the years ended
December 31, 1999 and 1998. As of December 31, 1999, we had an accumulated
deficit of approximately $14.3 million. Since we began developing and marketing
our Internet-based health care products and services in early 1999, we have
funded our business primarily by borrowing funds and from the sale of our stock,
not from cash generated by our business. We expect to continue to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we will experience losses and negative
cash flows for the foreseeable future. Factors which may prevent us from
achieving or maintaining profitability and cause our stock price to decline
include the demand for and acceptance of our products, product enhancements and
services, and our ability to attract new customers, as well as a number of other
factors described elsewhere in this "Risk Factors" section.

OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, CAUSING OUR
SHARE PRICE TO DECLINE

    Our quarterly operating results have fluctuated significantly in the past
and are likely to fluctuate in the future depending on a number of factors
described below and elsewhere in this "Risk Factors" section of the prospectus,
including:

    o   any delay in the introduction of new applications, services and product
        offerings and enhancements of existing solutions;

    o   the loss of a major customer;

    o   reductions in the average selling prices of our applications, services
        and product offerings;

    o   cost pressures from shortages of skilled technical employees, increased
        product development and engineering expenditures; and

    o   changes in industry market conditions.

    Due to the factors described above and other factors, our results of
operations could fluctuate substantially in the future, and quarterly
comparisons may not indicate reliable trends of future performance. If our
operating results do not meet the expectations of securities analysts and
investors, our share price is likely to decline.

IF WE FAIL TO DEVELOP RELATIONSHIPS WITH ESTABLISHED HEALTH CARE INDUSTRY
PARTICIPANTS, WE MAY EXPERIENCE DELAYS IN THE GROWTH OF OUR BUSINESS

    Relationships with established health care industry participants are
critical to our success. These relationships include customer, vendor,
distribution and co-marketing relationships. To date, we have established only a
limited number of these relationships, and these relationships are in the early
stages of development. Entering into relationships is complicated because it
involves identifying opportunities and collaborating with a number of our
customers, vendors and competitors. In addition, we may not be able to establish
relationships with particular key participants in the health care industry if we
have established relationships with competitors, and therefore it is important
that we are perceived as independent of any particular customer or partner.
Moreover, many potential




                                       30
<PAGE>   31

customers and vendors may resist working with us until our applications,
services and product offerings have been successfully introduced and have
achieved market acceptance. If we cannot successfully establish relationships
with key health care industry participants, our business will grow slowly.

IF WE CANNOT MAINTAIN OUR RELATIONSHIPS WITH ESTABLISHED HEALTH CARE INDUSTRY
PARTICIPANTS, OUR APPLICATIONS, SERVICES AND PRODUCTS MAY NOT ACHIEVE MARKET
ACCEPTANCE

    Once we have established a relationship with an established health care
industry participant, we rely on that participant's ability to assist us in
generating increased acceptance and use of our applications, services and
product offerings. We have limited experience in maintaining relationships with
health care industry participants. Additionally, the other parties to these
relationships may not view these relationships with us as significant to their
own business, and they may reassess their commitment to us or decide to compete
directly with us in the future. We generally do not have agreements that
prohibit them from competing against us directly or from contracting with our
competitors. We cannot guarantee that any such party will perform its
obligations as agreed or contemplated or that we would be able to specifically
enforce any agreement with it. Our arrangements generally do not establish
minimum performance requirements, but instead rely on the voluntary efforts of
the other party. Therefore, we cannot guarantee that these relationships will be
successful. If we were to lose any of these relationships, or if the other
parties were to fail to collaborate with us to pursue additional business
relationships, we would not be able to execute our business plans and our
business would suffer significantly. Moreover, we may not experience increased
use of our applications, services and product offerings even if we establish and
maintain these relationships.

    For additional information regarding these relationships, see "Business --
Strategy."

IF THE HEALTH CARE INDUSTRY DOES NOT ACCEPT THE NEED FOR A COMMON TECHNOLOGY
PLATFORM, OUR BUSINESS WOULD NOT GROW

    To be successful and to grow, we must attract a significant number of
customers throughout the health care industry. To date, the health care industry
has been resistant to adopting new information technology applications, services
and product offerings. Electronic information exchange and transaction
processing by the health care industry is still developing. Complexities in the
nature of health care transactions and lack of a common technology platform are
significant issues in the development and acceptance of information technology
applications, services and product offerings by the industry. There are
currently hundreds of different incompatible hardware, software and database
components. If health care industry participants do not accept the need to
integrate pre-existing information technology components, the market for our
applications and services would not develop and our business would not grow.

IF PHYSICIANS AND OTHER HEALTH CARE PROVIDERS DO NOT ACCEPT INTERNET-BASED
WORKFLOW MODIFICATIONS, THE MARKET FOR OUR PRODUCTS MAY NOT GROW

    Acceptance of Internet technology by physicians and other providers into
daily administrative and clinical workflow is a key factor in our ability to
meet our anticipated deployment levels for transaction services and process
automation components. However, without the acceptance by physicians and
providers of workflow modifications, new installation projects, such as our
applications, services and product offerings, may be stalled.

IF THE EXTENSIBLE MARK-UP LANGUAGE FAILS TO BECOME A STANDARD DATA EXCHANGE
PROTOCOL FOR THE INTERNET, THE MARKETABILITY OF OUR PRODUCTS MAY BE LIMITED

    Our XCare.net platform operates with the extensible mark-up language, or
XML. The failure of extensible mark-up language to become well-accepted would
seriously impede the marketability of our products and force us to adapt our
products to other data exchange protocols. Any such adaptation may entail
substantial costs, may require substantial time and effort, and may not lead to
marketable and competitive products. In addition, if incompatible versions of
the extensible mark-up language standard arise in the market, the market for
extensible mark-up language-based applications may grow slowly or not at all. If
the version of extensive mark-up language for which we have developed
applications, services and product offerings does not gain widespread
acceptance, we will have to adapt our products to another version of extensible
mark-up language, which will cause delays in shipments of our application and
product offerings and impede our ability to provide services.




                                       31
<PAGE>   32

OUR REVENUE IS CONCENTRATED IN A FEW CUSTOMERS, WHICH PUTS OUR REVENUE AT RISK

    We receive a substantial majority of our revenue from a limited number of
customers. In 1999, sales to Methodist Care, Inc. accounted for 20% of revenue,
sales to Expert Practice, Inc. accounted for 12% of revenue, sales to American
Medical Pathways, Inc. a subsidiary of American Medical Response, Inc.,
accounted for 12% of revenue, and sales to Brokerage Services Incorporated
accounted for 11% of revenue, and sales to Quest Diagnostics Incorporated
accounted for 10% of revenue. We expect that a significant portion of our
revenue will continue to depend on sales to a small number of customers. If we
do not generate as much revenue from these major customers as we expect to, or
if we lose any of them as customers, our total revenue will be significantly
reduced.

    We have a contract with American Medical Pathways, Inc., a wholly owned
subsidiary of American Medical Response, Inc., to provide third-party
administrative services in connection with its contracts to provide medical
transportation services. Our revenue under this contract accounted for 12% of
our revenue in 1999. American Medical Pathways, Inc. may terminate our contract
on 120 days notice. In addition, Laidlaw, Inc., the owner of American Medical
Response, Inc., recently announced its decision to seek a buyer for American
Medical Response, Inc. A new owner of American Medical Response, Inc. may not
continue to provide the same level of medical transportation services or may
seek to terminate our contract. Any termination of the contract or reduction in
license fees earned under the contract would reduce our revenue and could slow
our growth. American Medical Response, Inc. is the largest provider of private
ambulance service in the United States. Therefore, if we lose revenue due to
termination of the contract or reduction in license fees, it will be difficult
to replace such revenue through contracts with other providers of medical
transportation services.

IF WE LOSE KEY LICENSES WE MAY BE REQUIRED TO DEVELOP OR LICENSE ALTERNATIVE
TECHNOLOGY, WHICH MAY CAUSE DELAYS, ADD CONSIDERABLE EXPENSE OR REDUCE SALES

    We currently rely on software that we have licensed from Sinclair Montrose
Healthcare plc of London, England for our Match.Net Staffing and Scheduling
product. We will integrate this software with our software applications,
services and product offerings to centralize the scheduling and staffing
functions for health care providers in a secure Internet environment. We
currently have an exclusive license to the software, although exclusivity may
terminate if we are unable to meet milestones. This license may not continue to
be available to us on commercially reasonable terms in the future. The loss of
this license could result in delays or reductions of shipments of our MatchNet
Staffing & Scheduling product until equivalent software could be identified,
developed, licensed and integrated. In addition, other products and services we
may offer in the future may rely on licensed software. The loss of any current
or future license could result in delays in the introduction of our products and
services, add additional expense, and reduce sales of our products and services
until equivalent software could be developed, identified, licensed and
integrated.

IF OUR TRANSACTION AND DATA PROCESSING FACILITY FAILS, CUSTOMER SATISFACTION
COULD DECLINE

    We currently process substantially all of our customer transactions and data
at our facility in Albuquerque, New Mexico. Although we have safeguards for
emergencies, we do not have back-up facilities to process information if this
facility is not functioning. The occurrence of a major catastrophic event or
other system failure at our Albuquerque, New Mexico facility could interrupt
data processing or result in the loss of stored data. In addition, we depend on
the efficient operation of Internet connections from customers to our systems.
These connections, in turn, depend on the efficient operation of Web browsers,
Internet service providers and Internet backbone service providers, all of which
have had periodic operational problems or experienced outages. Any system
delays, failures or loss of data, whatever the cause, could reduce customer
satisfaction with our applications, services and product offerings.

IF SECURITY OF OUR CUSTOMER AND PATIENT INFORMATION IS COMPROMISED, PATIENT CARE
COULD SUFFER, WE COULD BE LIABLE FOR DAMAGES AND OUR REPUTATION COULD DECLINE

    We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure remain
secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive problems. If
we fail to meet our clients' expectations, we could be liable for damages and
our reputation could suffer. In addition, patient care could suffer and we could
be liable if our systems fail to deliver correct information in a timely manner.
Our insurance may not protect us from this risk.




                                       32
<PAGE>   33

IF OUR TRANSACTION HOSTING SERVICES SUFFER INTERRUPTIONS, OUR BUSINESS AND
REPUTATION COULD BE HARMED

    Our customers have in the past experienced some interruptions with our
transaction hosting services. Similar interruptions may continue to occur from
time to time. These interruptions could be due to hardware and operating system
failures. We expect a large portion of our revenue to be derived from customers
who use our transaction hosting services. As a result, our business will suffer
if we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosting. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation in levels of customer service. If this were to
continue to happen, our business and reputation could be seriously harmed.

OUR MARKETS ARE HIGHLY COMPETITIVE AND COMPETITION COULD HARM OUR ABILITY TO
SELL APPLICATIONS, SERVICES AND PRODUCT OFFERINGS

    Competition could seriously harm our ability to sell additional products and
services. Potential competitors fall primarily into three categories: health
care Internet companies focused on providing connectivity and transactions
within business-to-business and business-to-consumer frameworks; traditional
health care information system vendors who seek to extend the services of their
core products using Internet-based technology; and traditional managed care
information system and outsourcing vendors who are focusing on extending the
services of their core products to the Internet. In addition, from time to time
our customers may develop applications, services and product offerings
competitive with those offered by us.

    Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. Our
competitors may develop and successfully market Internet-based health care
products and services in a manner that could have an adverse effect on our
business model. See "Business -- Competition."

IF WE CANNOT EXPAND OUR MANAGEMENT SYSTEMS AND NETWORK INFRASTRUCTURE, WE MAY
EXPERIENCE DELAYS IN THE GROWTH OF OUR BUSINESS

    In order to grow, we intend to rapidly expand our management, product
development, testing, network operations, marketing, sales and customer service
personnel over the next year. This growth has and will continue to place a
significant strain on our managerial, operational, financial and information
systems resources. We may not be able to effectively manage expansion of our
operations, and our facilities, systems, procedures or controls may not be
adequate to support our operations. Moreover, our systems may not accommodate
increased use while maintaining acceptable overall performance.

    As we grow, we will also need to expand and adapt our network infrastructure
to accommodate additional users, increased transaction volumes and changing
customer requirements. So far, we have processed a limited number and variety of
transactions over our network infrastructure and only a limited number of health
care participants use our infrastructure. Many of our service agreements contain
performance standards. If we fail to meet these standards, our customers could
terminate their agreements with us. The loss of any of our service agreements
would cause a decline in our revenues. We may be unable to expand or adapt our
network infrastructure to meet additional demand or our customers' changing
needs on a timely basis and at a commercially reasonable cost, or at all.

IF OUR OPERATING RESULTS VARY SIGNIFICANTLY DUE TO THE LENGTHY SALES AND
IMPLEMENTATION CYCLES FOR OUR PRODUCTS AND SERVICES, OUR REVENUES MAY BE DELAYED
AND OUR RESULTS OF OPERATIONS AND SHARE PRICE MAY FLUCTUATE

    Because our applications, services and product offerings have lengthy sales
and implementation cycles, it is difficult for us to forecast the timing and
recognition of revenues from sales of our applications, services and product
offerings. Since we are unable to control many of the factors that will
influence our customers' buying decisions, the lengthy sales cycle could cause
our operating results to be below the expectations of analysts and investors.

    A key element of our strategy is to market our applications, services and
product offerings to large organizations with significant data management and
access needs. The sales process normally involves a significant evaluation



                                       33
<PAGE>   34

process, and commitment of budgets may be subject to delays due to a customer's
internal procedures for approving new expenditures and deploying new
technologies. The period of time between initial customer contact and a purchase
order can span up to three months or more.

    In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our applications,
services and product offerings, which may cause additional delays during the
evaluation and acceptance process. General concerns regarding year 2000
compliance may further delay purchasing decisions by prospective customers. Our
long and unpredictable sales cycle can result in delayed revenues, difficulty in
matching revenues with expenses and increased expenditures, which together may
contribute to fluctuations in our results of operations and share price.

WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO
NOT DEVELOP NEW APPLICATIONS, SERVICES AND PRODUCTS OR IF THESE SOLUTIONS DO NOT
KEEP PACE WITH TECHNOLOGICAL CHANGES

    Internet technologies are evolving rapidly and the technology used by any
electronic commerce business is subject to rapid change and obsolescence. If we
are not able to maintain and improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and evolving customer requirements and achieve market
acceptance, we may lose existing customers or be unable to attract new
customers. For example, we currently are developing Physician Credentialing,
Electronic Medical Record, Case Management, Medication and Medical Assessment
Inquiry Systems, Physician Practice Management, MD Pay Accelerator, Online Drug
Store, Medical Supply Product, Health and Medical Bookstore products. We may not
be successful in developing and marketing these or other product enhancements or
new products that respond to technological advances by others on a timely or
cost-effective basis. In addition, such applications, services and product
offerings may contain licensed components which may be difficult to integrate or
may cause the solutions to be ineffective. These products, if developed, may not
achieve market acceptance. Any delay or problems in the installation or
implementation of new products or services may cause customers to forego
purchases from us and could cause them to purchase from our competitors.

IF WE ARE REQUIRED TO COMMIT UNANTICIPATED RESOURCES TO COMPLETE FIXED-PRICE
CONTRACTS, OUR OPERATING RESULTS MAY DECLINE

    We had historically derived a majority of our revenue from contracts that
were billed on a time-and-materials basis. Beginning in 1998, a significant
portion of our revenue has been derived from contracts that were billed on a
fixed-price basis. These contracts specify certain obligations and deliverables
to be met by us regardless of our actual costs incurred. We cannot assure you
that we can successfully complete these contracts on budget, and our inability
to do so could seriously harm our business, financial condition and results of
operations.

    Our failure to accurately estimate the resources required for a fixed-price
contract could cause our operating results to decline. In the past, we have been
required to commit unanticipated additional resources to complete certain
project plans during the project to ensure that the project was completed on
schedule. We may experience similar situations in the future.

IF COMPLIANCE WITH GOVERNMENT REGULATION OF HEALTH CARE BECOMES COSTLY AND
DIFFICULT FOR OUR CUSTOMERS, AND US WE MAY NOT BE ABLE TO GROW OUR BUSINESS

    Participants in the health care industry are subject to extensive and
frequently changing regulation under numerous laws administered by governmental
entities at the federal, state and local levels, some of which are, and others
of which may be, applicable to our business. Furthermore, our health care
service provider, payer and plan customers are also subject to a wide variety of
laws and regulations that could affect the nature and scope of their
relationships with us.

    Laws regulating health care providers, health insurance, health maintenance
organizations and similar organizations, employee benefit plans and governmental
health benefit programs cover a broad array of subjects, including but not
limited to licensing, billing, collection and reimbursement, advertising,
confidentiality, financial relationships with, and referral of services and
goods among and to, suppliers and providers, mandated benefits and grievance and
appeal procedures. Furthermore, the federal Health Insurance Portability and
Accountability Act of 1996 mandates the use of standard transactions, standard
identifiers, security and other provisions by the year 2000.




                                       34
<PAGE>   35

    These laws are often not uniform between states, and could require us to
undertake the expense and difficulty of tailoring our business procedures,
information systems, or financial relationships in order for our customers to be
in compliance with applicable laws and regulations. Compliance with such laws
could also interfere with the scope of our applications, services and product
offerings, or make them less cost effective for our customers. Furthermore, the
impact of regulatory developments in the health care industry is complex and
difficult to predict, and we cannot guarantee that we will not be adversely
affected by new regulatory requirements or interpretations.

    Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
FDA. We do not believe that our current applications, services or product
offerings are subject to FDA regulation. If we expand our applications, services
and product offerings into areas subject to FDA regulation, complying with these
regulations could be time consuming, burdensome and expensive and could delay
our introduction of new products. For more information on government regulation
affecting our business, see "Business -- Government Regulation."

BECAUSE WE PROVIDE UTILIZATION REVIEW SERVICES, WE MAY INCUR LIABILITY

    One of the functions of our applications is automatic adjudication of
whether or not a claim for payment or service should be denied or whether
existing coverage should be continued based upon particular plans or contracts
and industry-standard, clinical-support criteria. Our payer customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of payment of medical claims or medical service. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability.

IF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL DO NOT REMAIN WITH US IN THE FUTURE,
WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED PERSONNEL

    Our future success depends upon the continued service of our executive
officers and other key employees as well as our ability to hire a significant
number of new employees. In particular, it would be difficult for us to replace
the services of our President and Chief Executive Officer, Lorine Sweeney. In
addition, we are particularly dependent on the continued services of software
developers with programming skills in extensible mark-up language, Java and
Oracle. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. None of our executive officers or key personnel have employment
agreements with us, except for standard agreements we have with all of our
employees providing for confidentiality and invention assignment obligations.

WE MAY FACE PRODUCT-RELATED LIABILITIES THAT COULD FORCE US TO PAY DAMAGES WHICH
WOULD HURT OUR REPUTATION

    While our customers and we test our applications, services and product
offerings, they may contain defects or result in system failures. These defects
or problems could result in the loss of or delay in generating revenue, loss of
market share, failure to achieve market acceptance, diversion of development
resources, injury to our reputation or increased insurance costs.

    Our contracts limit our liability arising from our errors; however, these
provisions may not be enforceable and may not protect us from liability. While
we have general liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to maintain this insurance
on reasonable terms in the future. In addition, our insurance may not be
sufficient to cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our financial condition could be materially
harmed.



                                       35
<PAGE>   36

IF WE DO NOT ESTABLISH AND MAINTAIN THE XCARE.NET BRAND, OUR REPUTATION COULD BE
ADVERSELY AFFECTED

    In order to increase our customer base and expand our online traffic, we
must establish, maintain and strengthen the XCare.net brand. For us to be
successful in establishing our brand, health care professionals must perceive us
as offering quality, cost-effective, communications, information and
administrative services. Our reputation and brand name could be adversely
affected if we experience difficulties in introducing new applications, services
and product offerings, if these applications, services and product offerings are
not accepted by customers, if we are required to discontinue existing
applications, services and product offerings or if our products and services do
not function properly.

OUR GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE WERE UNABLE TO MEET OUR
FUTURE CAPITAL REQUIREMENTS

    We expect that the money generated from this offering, combined with our
current cash resources, will be sufficient to meet our requirements for
approximately 18 months. However, we expect that we will continue to experience
negative cash flow in the near term. Accordingly, we may need to raise
additional capital to support expansion, develop new or enhanced applications,
services and product offerings, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. We may need to raise additional funds by selling debt or equity
securities, by entering into strategic relationships or through other
arrangements. We cannot assure you that we will be able to raise any additional
amounts on reasonable terms, or at all, when they are needed.

ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND DILUTE
STOCKHOLDER VALUE

    We expect to acquire technologies and other health care technology companies
to increase the number and variety of applications, services and product
offerings we offer and to increase our customer base. To be successful, we will
need to identify applications, technologies and businesses that are
complementary to ours, integrate disparate technologies and corporate cultures
and manage a geographically dispersed company. Acquisitions could divert our
attention from other business concerns and expose us to unforeseen liabilities
or risks associated with entering new markets. Finally, we may lose key
employees while integrating these new companies. Integrating newly acquired
organizations and technologies into XCare.net could be expensive, time consuming
and may strain our resources. In addition, we may lose our current customers if
any acquired companies have relationships with competitors of our customers.
Consequently, we may not be successful in integrating any acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. The
health care industry is consolidating and we expect that we will face
intensified competition for acquisitions, especially from larger, better-funded
organizations. If we fail to execute our acquisition strategy successfully for
any reason, our business will suffer significantly.

    We intend to pay for some of our acquisitions by issuing additional common
stock and this could dilute our stockholders. We may also use cash to buy
companies or technologies in the future. If we do use cash, we may need to incur
debt to pay for these acquisitions. Acquisition financing may not be available
on favorable terms or at all. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which would seriously harm our results of operations.

IF OUR PROPRIETARY TECHNOLOGY IS SUBJECTED TO INFRINGEMENT CLAIMS, WE MAY HAVE
TO PAY DAMAGES OR SEEK A LICENSE FROM THIRD PARTIES, WHICH COULD DELAY SALES OF
OUR PRODUCTS, AND IF OUR PROPRIETARY TECHNOLOGY IS INFRINGED UPON, WE MAY
EXPERIENCE LOSSES

    Our intellectual property is important to our business. We expect that we
could be subject to intellectual property infringement claims as the number of
our competitors grows and the functionality of our applications overlap with
competitive offerings. These claims, whether or not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
would be required to pay a substantial damage award and to develop
non-infringing technology, obtain a license or cease selling the applications
that contain the infringing intellectual property. We may be unable to develop
noninfringing technology or obtain a license on commercially reasonable terms,
or at all. In addition, we may not be able to protect against misappropriation
of our intellectual property. Third parties may infringe upon our intellectual
property rights, we may not detect this unauthorized use and we may be unable to
enforce our rights.




                                       36
<PAGE>   37

IF WE ARE NOT ABLE TO PROTECT AND ENFORCE OUR TRADE NAMES, INTERNET ADDRESS AND
INTELLECTUAL PROPERTY RIGHTS, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MAY SUFFER

    We seek to protect our brand and our other intellectual property through a
combination of copyright, trade secret and trademark laws. Our XCare.net brand
is an important component of our business strategy. We have recently filed
federal trademark applications for "XCare.net," "XCare," "Solution Channels" and
"the Business to Business Platform for eHealth." We cannot guarantee that any of
these trademark applications will be granted. If we are unable to secure
registration of these marks or otherwise obtain the right to use these marks
under contract or common law, we may be required to stop using these marks. This
could cause confusion to our customers and in the marketplace and harm our
business, financial condition and results of operations.

    In addition, our future success and ability to compete in our markets may be
dependent in part on our proprietary rights to products and services which we
develop. We rely on copyright, trademark and trade secret laws and contractual
restrictions. We also expect to rely on patents to protect our proprietary
technology and to rely on similar proprietary rights of any of our technology
providers. We have filed a patent application to protect certain of our
proprietary technology. We cannot assure you that such application will be
approved or, if approved, will be effective in protecting our proprietary
technology. We enter into confidentiality agreements with all of our employees,
as well as with our customers and potential customers seeking proprietary
information, and limit access to and distribution of our software, documentation
and other proprietary information. We cannot assure you that the steps we take
or the steps such providers take would be adequate to prevent misappropriation
of our respective proprietary rights.

POTENTIAL YEAR 2000 PROBLEMS WITH OUR PRODUCTS OR INTERNAL SYSTEMS MAY INVOLVE
SIGNIFICANT TIME AND EXPENSE AND MAY REDUCE OUR FUTURE SALES

    Many currently installed computer systems and software products store dates
using only the last two digits of the calendar year. As a result, such systems
may not be able to distinguish whether "00" means 1900 or 2000, which may cause
system failures or erroneous results. Although no material year 2000 problems
with our application, services and product offerings have been brought to our
attention to date, year 2000 problems emerging in the future could subject us to
liability claims and disrupt our customers' purchasing patterns, either of which
could harm our business.

    Our applications, services and product offerings operate in complex network
environments and directly or indirectly interact with a number of other hardware
and software systems that we cannot adequately evaluate for year 2000
compliance. We may face claims based on year 2000 problems in other companies'
products, or issues arising from the integration of multiple products within an
overall system. Although we have not been a party to any litigation or
arbitration proceeding involving our solutions related to year 2000 compliance
issues, we may in the future be required to defend our applications, services
and product offerings in such proceedings, or to negotiate resolutions of claims
based on year 2000 issues. Defending and resolving year 2000-related disputes,
regardless of the merits of such disputes, and any liability we have for year
2000-related damages, including consequential damages, could be expensive to us.
In addition, customers and potential customers may limit purchases of new
applications, services and product offerings due to year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for year 2000 compliance. These expenditures may result in
reduced funds available to purchase our applications, services and product
offerings.

GOVERNMENT REGULATION OF INTERNET COMMUNICATIONS MAY IMPACT OUR BUSINESS BY
DIRECTLY OR INDIRECTLY INCREASING OUR COSTS

    We provide Internet services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wireline communications. We currently are not
subject to direct regulation by the Federal Communications Commission or any
other governmental agency, other than regulations applicable to businesses
generally.

    However, in the future we could become subject to regulation by the Federal
Communications Commission or another regulatory agency as a provider of basic
telecommunications services. Changes in the regulatory environment relating to
the application of access charges and Universal Service Fund support payments to
Internet and Internet telephony providers, regulation of Internet services,
including Internet telephony, and other regulatory changes that directly or
indirectly affect costs imposed on Internet or Internet telephony providers,
telecommunications costs or increase in the likelihood or scope of competition,
could harm our business and financial results.




                                       37
<PAGE>   38

OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL
OVER US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO OUR STOCKHOLDERS' VOTE

    Our executive officers and directors, together with their affiliates, will
beneficially own an aggregate of approximately 58.8% of our outstanding common
stock following the completion of the offering (including 750,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option). These
stockholders, if acting together, will be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or similar transactions even if other
stockholders disagree.

WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY

    Provisions of our certificate of incorporation, bylaws, other agreements and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND OUR INVESTMENT OF
THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN

    We intend to use the proceeds from the offering for general corporate
purposes, including working capital, capital expenditures and may use a portion
of proceeds to acquire other businesses, products or technologies. Our
management will have considerable discretion in the application of the net
proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds of this offering may be used for corporate
purposes that do not increase our results of operations or our market value.
Pending any such uses, we plan to invest the net proceeds of the offering in
investment-grade, interest-bearing securities. We cannot predict that such
investments will yield a favorable return.

OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING

    Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained after completion of
the offering. The initial public offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the market
price of the common stock could fall below the initial public offering price. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology companies and which have often been unrelated to the operating
performance of such companies.

WE MAY BE SUBJECT TO LITIGATION IF OUR COMMON STOCK PRICE IS VOLATILE

    In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company. The institution of class action litigation
against us could result in substantial costs to us and a diversion of our
management's attention and resources which would harm our business, financial
condition and results of operations. Any adverse determination in this
litigation could also subject us to significant liabilities.

SHARES ELIGIBLE FOR FUTURE SALE AFTER THE OFFERING COULD CAUSE OUR STOCK PRICE
TO FALL

    If our stockholders sell substantial amounts of our common stock in the
public market following the offering, the market price of our common stock could
fall. Such sales also might make it more difficult for XCare.net to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Based upon the number of our shares outstanding as of December 31,
1999, upon completion of the offering, we will have outstanding 16,138,709
shares of common stock, which includes the exercise of the underwriters' option
to purchase additional shares and no exercise of outstanding options after
December 31, 1999. Of these shares, the 5,750,000 shares sold in the offering
will be freely tradable. The remaining 10,388,709 shares of common stock will be
available for sale in the public market 180 days after the date of the offering.

    Based on the number of our shares outstanding as of December 31, 1999, after
the offering, the holders of approximately 9,809,876 shares of common stock,
which represents 61% of our outstanding stock after completion of




                                       38
<PAGE>   39

the offering, will be entitled to certain rights to have the resale of their
shares registered under the Securities Act of 1933. If these holders, by
exercising their registration rights, cause a large number of securities to be
registered and sold in the public market, such sales could materially and
adversely affect the market price for our common stock. In addition, if we were
to include in a registration statement shares held by these holders pursuant to
the exercise of their registration rights, such sales may impede our ability to
raise needed capital.


ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

    We currently develop and market our products in the United States. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make our product less competitive in foreign markets. Our interest income is
sensitive to changes in the general level of U.S. interest rates. Due to the
short-term nature of our investments, we believe that there is no material risk
exposure. Based on the foregoing, no quantitative disclosures have been
provided.


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements required pursuant to this item are included in Item
14 of this Annual Report on Form 10-K and are presented beginning on page F-1.
The supplementary financial information required by this item is included in
"Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the subsection entitled "Quarterly Results of Operations /
Supplementary Financial Information."


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

    Effective September 1, 1999, PricewaterhouseCoopers LLP was engaged as our
independent accountants and replaced KPMG LLP, who were dismissed as our
independent accountants on August 25, 1999. The decision to change accountants
was approved by our Board of Directors. The audit report of KPMG LLP for the
year ended December 31, 1997 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle, except that the audit report issued by KPMG LLP for the
year ended December 31, 1997 included an explanatory paragraph citing factors
that raised substantial doubt surrounding our ability to continue as a going
concern. In connection with its audit through December 31, 1997 and through
August 25, 1999, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statements disclosure or auditing
scope or procedures, which disagreements, if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. KPMG LLP has not audited or reported on any
of the financial statements or information included in this Annual Report. The
financial statements for the years ended December 31, 1997, 1998, and 1999 have
been audited by PricewaterhouseCoopers LLP. Prior to September 1, 1999, we had
not consulted with PricewaterhouseCoopers LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our financial
statements.



                                       39
<PAGE>   40

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The information required by this item concerning the executive officers of
the company is incorporated by reference to the information set forth in the
section entitled "Executive Officers of the Company" at the end of Part I of
this Annual Report.

    Our directors as of March 17, 2000, are as follows:

<TABLE>
<CAPTION>
NAME                                             AGE      POSITION
----                                             ---      --------
<S>                                              <C>      <C>

Jeffrey M. Krauss(1).........................    43       Chairman of the Board of Directors
Lorine R. Sweeney............................    42       President and Chief Executive Officer, Director
Fred L. Brown................................    59       Director
J. Andrew Cowherd(2).........................    47       Director
James B. Hoover(2)...........................    45       Director
L. Ben Lytle.................................    53       Director
Daniel J. Mitchell(1)........................    43       Director
William F. Reilly(1).........................    57       Director
Robert Tsao(2)...............................    27       Director
</TABLE>

----------

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

    Jeffrey M. Krauss. Mr. Krauss has been Chairman of the Board of Directors of
XCare.net since March 1997. Since May 1990, Mr. Krauss has been a General
Partner of Nazem & Company, a venture capital firm. From January 1983 until
April 1990, Mr. Krauss was an attorney with the law firm of Simpson Thatcher &
Bartlett. Mr. Krauss is a director of Tegal Corporation, a publicly traded
company engaged in the manufacture of semi-conductor capital equipment. Mr.
Krauss received his B.S. in Accounting from the State University of New York and
his J.D. from Harvard Law School.

    Lorine R. Sweeney. Ms. Sweeney has been President, Chief Executive Officer
and a director of XCare.net since October 1997. From November 1994 until
September 1997, Ms. Sweeney was Vice President of Software Development and
Technology and Vice President of the UltiMedex Business Unit of Micromedex,
Inc., an international supplier of clinical reference information to the health
care and environmental industries. From August 1993 until November 1994, Ms.
Sweeney was a Managing Consultant for Microsoft Consulting Services, the
management consulting division of Microsoft Corporation. Ms. Sweeney has over 19
years of executive leadership experience in the commercial software, CD-ROM,
online information services, consulting and systems integration industries. Ms.
Sweeney received her B.S. degree in Engineering from the University of Arizona
and her M.B.A. from the University of Phoenix.

    Fred L. Brown. Mr. Brown has been a director of XCare.net since December 30,
1999. Since January 1999, Mr. Brown has been Chairman of the American Hospital
Association, a public policy advocate and educational think tank for the
American hospital industry. From June 1993 until December 1998, Mr. Brown was
the founding President and Chief Executive Officer of BJC Health System, a
healthcare organization comprised of a comprehensive health network featuring
200 care sites, 30,000 care givers and physicians, and health plans covering
more than 200,000 patients. From January 1986 until February 1993, Mr. Brown was
President of Christian Hospital Northeast-Northwest. Mr. Brown is also currently
a director of Citation Computers, Inc., a publicly traded company that designs,
develops, markets and supports patient-centered clinical information systems for
health care providers; Superior Consultant Company, a publicly traded company
that consults for a broad cross-section of the health care industry; the
Advisory Board of American's Doctor.com, a privately held company; the
Healthcare Research and Development Institute, a research institute comprised of
35 chief executives who direct hospitals and major health care systems that
undertake research studies; and Morrison Management Specialists, Inc., a
publicly traded company that provides food, nutrition and dining services to the
health care senior living industries. He is also a Visiting Professor at George
Washington University in Washington, D.C., and has been a member of President
Clinton's Council of Year 2000




                                       40
<PAGE>   41

Conversion since January 1999. Mr. Brown received his B.A. in 1962 from
Northwestern University, his M.A. in 1966 from George Washington University, and
a doctorate of humane letters from the University of Missouri-St. Louis.

    J. Andrew Cowherd. Mr. Cowherd has been a director of XCare.net since March
1997. Since July 1996, Mr. Cowherd has been a Managing Member of the general
partner of Atlantic Medical Capital, L.P., a venture capital firm that is
managed by Atlantic Medical Management, L.L.C. From April 1991 until January
1993, Mr. Cowherd was a Managing Director in the Global Merchant Banking Group
at BT Securities, a division of Bankers Trust Company. From September 1977 until
March 1991, Mr. Cowherd was an investment banker at Salomon Brothers, where he
served as Managing Director in Corporate Finance from January 1989 until March
1991. Mr. Cowherd is a director of Nursefinders, Inc., a privately-held company
providing health care staffing and home health care services and NotifyMD, a
privately-held company providing unified messaging and other communications
services to physicians. Mr. Cowherd received his A.B. in History from Princeton
University and his M.B.A. from the Graduate School of Business at Stanford
University.

    James B. Hoover. Mr. Hoover has been a director of XCare.net since June
1999. Mr. Hoover is the Managing Member of Dauphin Capital Partners I, L.P., a
venture capital firm that he founded in June 1998. From November 1992 until June
1998, Mr. Hoover was a General Partner of Welsh, Carson, Anderson & Stowe, a
private equity firm specializing in the acquisition of healthcare and
information services businesses. Prior to joining Welsh, Carson, Anderson &
Stowe, Mr. Hoover was a General Partner of Robertson, Stephens & Company from
February 1984 until October 1992. From June 1977 until February 1984, Mr. Hoover
was a Vice President of Citibank N.A. Mr. Hoover is a director of Centennial
Healthcare, New American Healthcare and U.S. Physical Therapy, three publicly
traded health care companies. Mr. Hoover received his B.S. in Business
Administration from Elizabethtown College and his M.B.A. from the Graduate
School of Business at Indiana University.

    L. Ben Lytle. Mr. Lytle has been a director of XCare.net since January 11,
2000. Since 1992, Mr. Lytle has been the Chairman of the Board of Anthem, Inc.,
a mutual insurance company that provides a wide range of managed care products
including health maintenance organizations, preferred provider organizations and
point of service organizations and integrated health networks. From 1982 to
1989, Mr. Lytle also served as Anthem, Inc.'s Chief Operating Officer. He served
as President and CEO of Anthem, Inc. from 1989 to October 1999. Mr. Lytle serves
on the boards of directors of IPALCO Enterprises, a publicly traded energy
company; Central Newspapers, Inc., a publicly traded media company; CID Equity
Partners, a venture capital firm; Duke REIT, a publicly traded real estate
investment firm; and AllScripts, Inc., a publicly traded electronic
pharmaceutical dispensing firm. Mr. Lytle is a Fellow with the American
Enterprise Institute of Washington, D.C., and a guest lecturer at the University
of Arizona School of Business. He also served on President Clinton's Commission
on Consumer Protection and Quality in the Health Care Industry. Mr. Lytle
received his B.A. in 1970 from East Texas University, and his J.D. in 1980 from
Indiana University.

    Daniel J. Mitchell. Mr. Mitchell has been a director of XCare.net since
August 1999. Since January 1997, Mr. Mitchell has been a Manager of Sequel
Venture Partners, LLC, a venture capital firm. Since June 1992, Mr. Mitchell has
been a General Partner of Capital Health Venture Partners, a venture capital
firm. From July 1981 until August 1985, Mr. Mitchell was an investment officer
at Institutional Venture Capital Fund at the First National Bank of Chicago. Mr.
Mitchell received his B.S. degree in Finance from the University of Illinois at
Urbana-Champaign and his M.B.A. in Finance from the Haas School of Business at
the University of California-- Berkeley.

    William F. Reilly. Mr. Reilly has been a director of XCare.net since May
1989. Mr. Reilly was one of the three founders of Reilly Dike Dosher
Corporation, XCare.net's predecessor company. From May 1989 until October 1997,
Mr. Reilly was President and Chief Executive Officer of XCare.net. Since June
1998, Mr. Reilly has been an independent consultant. Mr. Reilly received his
A.B. degree in Philosophy from Stonehill College and his M.B.A. from Harvard
University.

    Robert Tsao. Mr. Tsao has been a director of XCare.net since June 1999.
Since August 1997, Mr. Tsao has been an Investment Manager at Vertex Management,
Inc., a venture capital firm. From July 1995 until July 1997, Mr. Tsao was a
Corporate Finance Analyst at SoundView Technology Group, Inc., an investment
banking firm. Mr. Tsao received his B.A. degree in Physics and Economics from
the University of California-- Berkeley.



                                       41
<PAGE>   42

ITEM 11. EXECUTIVE COMPENSATION

    The following table sets forth information concerning the compensation that
we paid during the year ended December 31, 1999, for services rendered during
1999, to our Chief Executive Officer and the only other executive officers whose
salary and bonus exceeded $100,000 during such fiscal year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                         ANNUAL COMPENSATION          ALL OTHER
NAME AND PRINCIPAL POSITION                             SALARY          BONUS      COMPENSATION(1)
---------------------------                             ------      ----------    ----------------
<S>                                                    <C>          <C>           <C>

Lorine R. Sweeney.................................     $ 175,000                       $2,815
  President and Chief Executive Officer
Lawrence S. Dike..................................       135,000            --          3,909
  Senior Vice President and Chief Scientist
Mark Rangell......................................       135,000                        2,814
  Senior Vice President, Sales and Marketing
Tammy McLaren.....................................       113,462       $ 1,500          2,665
  Vice President, Professional Services
Jon Wisda (2).....................................       106,154            --          2,123
  Vice President, Product Development
</TABLE>

----------

(1) Consists of premiums we paid for life insurance, dental insurance, health
    insurance and long-term disability insurance for each executive officer.

(2) Mr. Wisda resigned effective February 18, 2000.

OPTION GRANTS IN LAST FISCAL YEAR

    The following table sets forth certain information with respect to stock
options granted in 1999 to each of the officers named in the above table,
including the potential realizable value over the ten-year term of the options,
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent our estimate of our future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.

<TABLE>
<CAPTION>
                                                  INDIVIDUAL GRANTS

                                   --------------------------------------------------      POTENTIAL REALIZABLE
                                    NUMBER OF                                                VALUE AT ASSUMED
                                   SECURITIES    % OF TOTAL                                ANNUAL RATES OF STOCK
                                   UNDERLYING      OPTIONS      EXERCISE                  PRICE APPRECIATION FOR
                                     OPTIONS     GRANTED TO     PRICE PER  EXPIRATION           OPTION TERM
NAME                                 GRANTED      EMPLOYEES       SHARE       DATE            5%          10%
----                               -----------   -----------   ----------- -----------    ---------   ----------
<S>                                <C>           <C>           <C>         <C>             <C>         <C>
Lorine R. Sweeney..............      151,100         12.9%        $ 0.25     03/16/09      $ 23,756   $   60,204
                                     285,726         24.3           2.70     09/01/09       485,167    1,229,509
Lawrence S. Dike...............           --           --             --           --            --           --
Mark Rangell...................       60,300          5.1           0.25     03/16/09         9,481       24,026
                                      66,800          5.7           2.70     09/01/09       113,427      287,447
Tammy McLaren..................       50,000          4.3           0.25     02/08/09         7,861       19,922
                                      44,000          3.7           2.70     09/01/09        74,713      189,337
Jon Wisda(1)...................       50,000          4.3           0.25     02/08/09         7,861       19,922
                                      30,000          2.6           2.70     09/01/09        50,940      129,093
</TABLE>
--------------
(1) Mr. Wisda resigned effective February 18, 2000.

    In 1999, we granted options to purchase an aggregate of 1,175,276 shares to
employees, directors and consultants. All options were granted under our stock
option plan at exercise prices equal to the fair market value of our common
stock on the date of grant, as determined in good faith by our board of
directors, based on our financial results and prospects and at the share prices
paid in arms-length transactions. All options typically vest over four years and
are exercisable for up to ten years. In July 1999, we amended our option
agreements so that all options are immediately exercisable upon grant; however,
any unvested shares are subject to repurchase by us at their cost in the event
of the optionee's termination of employment.




                                       42
<PAGE>   43

OPTION EXERCISES AND HOLDINGS

    The following table sets forth for each of the named officers information
concerning exercisable and unexercisable options held as of December 31, 1999.
The value of in-the-money options is based on a value of $10.00 per share, the
fair market value of our common stock at December 31, 1999, as determined by our
board, and net of the option exercise price.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                            NUMBER OF UNEXERCISED           VALUE OF UNEXERCISED
                                                                 OPTIONS AT                 IN-THE-MONEY OPTIONS
                               SHARES        VALUE            DECEMBER 31, 1999             AT DECEMBER 31, 1999
                             ACQUIRED ON    REALIZED   ------------------------------  -----------------------------
NAME                          EXERCISE        ($)       EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
----                        -------------  ----------  ------------- ----------------  --------------  -------------
<S>                         <C>            <C>         <C>           <C>               <C>             <C>

Lorine R. Sweeney                80,000      216,000        788,726        --          $    6,990,050        --
Lawrence S. Dike                     --           --             --        --                      --        --
Mark Rangell                     22,800       61,560        277,200        --          $    2,539,040        --
Tammy McLaren                    20,000       54,000         80,000        --          $      672,200        --
John Wisda(1)                        --           --         80,000                    $      706,500        --
</TABLE>
--------------
(1) Mr. Wisda resigned effective February 18, 2000.

    The number of unexercised options at December 31, 1999 which are exercisable
reflects that all options are immediately exercisable upon grant, although the
shares issued upon exercise are subject to our right to repurchase them upon
termination of employment, which right lapses progressively over time.


EMPLOYMENT AGREEMENTS

    We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon termination
the employee will not work for a competitor and may not solicit our customers
and employees. At the time of commencement of employment, our employees also
generally sign offer letters specifying basic terms and conditions of
employment. Lorine R. Sweeney, Mark Rangell and Tammy McLaren have each signed
offer letters of this type.

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

    The following table sets forth information with respect to beneficial
ownership of our common stock as of March 17, 2000, as adjusted to reflect the
sale of common stock in this offering, the conversion of our outstanding
convertible preferred stock, including convertible preferred stock issuable upon
the assumed cashless exercise of all outstanding convertible preferred stock
warrants, and the cashless exercise of all outstanding common stock warrants.
Information is given for:

    o   each person who is known by us to beneficially own more than five
        percent of our common stock;

    o   each of our directors;

    o   each of our officers; and

    o   all of our directors and officers as a group.

    Percentages of the outstanding shares of common stock are based on
16,138,709 shares outstanding as of March 17, 2000, plus all shares of common
stock issuable on exercise of options within 60 days of March 17, 2000 held by
the particular beneficial owner.

    All percentages assume no exercise of the underwriter's over-allotment
option. The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial




                                       43
<PAGE>   44
ownership includes any shares as to which the individual or entity has voting
power or investment power and any shares which the individual has the right to
acquire within 60 days of March 17, 2000, through the exercise of any stock
option or other right. Except pursuant to applicable community property laws or
as indicated in the footnotes to this table, to our knowledge, each stockholder
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by such stockholder.

    Unless otherwise indicated, the principal address of each of the
stockholders below is c/o XCare.net, Inc., 6400 South Fiddler's Green Circle,
Suite 1400, Englewood, Colorado 80111.

<TABLE>
<CAPTION>
                                                     SHARES                  PERCENTAGE
NAME OF BENEFICIAL OWNER                        BENEFICIALLY OWNED       BENEFICIALLY OWNED
------------------------                        ------------------       ------------------
<S>                                                   <C>                    <C>
Entities affiliated with Nazem &
  Company IV, L.P.(1) .....................           2,914,542                18.0%
Jeffrey M. Krauss
  645 Madison Avenue, 12th Floor
  New York, New York 10022-1010
Atlantic Medical Capital, L.P. (2) ........           2,398,501                14.9
J. Andrew Cowherd
  156 West 56th Street, Suite 1605
  New York, New York 10019-3800
Entities affiliated with Sequel Venture
  Partners II, LLC(3) .....................           1,129,012                 7.0
Daniel J. Mitchell
  4430 Arapahoe Avenue, Suite 220
  Boulder, Colorado 80303
Vertex Technology Fund (II) Ltd.(4) .......           1,156,112                 7.2
Robert Tsao
  3 Lagoon Drive, Suite 220
  Redwood City, California 94065
CB Healthcare Fund, L.P. ..................           1,111,112                 6.9
  One Boston Place, Suite 4010
  Boston, MA 02108
Dauphin Capital Partners I, L.P.(5) .......             955,926                 5.9
James B. Hoover
  108 Forest Avenue
  Locust Valley, New York 11560
Lorine R. Sweeney(6) ......................             868,726                 5.1
Peter H. Cheesbrough(7) ...................             104,000                   *
Fred L. Brown(8)...........................              25,000                   *
Ben Lytle(9)...............................              25,000                   *
Lawrence S. Dike ..........................             120,000                   *
Tammy McLaren(10)..........................             100,000                   *
Randy McMahon(11)..........................              40,000                   *
Suriya Narayanan(12).......................              60,000                   *
Sinan S. Nayman(13)........................              25,000                   *
Thomas M. Pianko(14).......................              80,000                   *
Mark Rangell(15)...........................             300,000                 1.8
William F. Reilly(16)......................             205,000                 1.3
Gary Scherping(17).........................              25,500                   *
All directors and officers as a group
  (18 persons)(18) ........................          11,643,431                65.8
</TABLE>

----------

 *    Represents less than one percent of the total.

(1)   Represents 2,334,486 shares held by Nazem & Company IV, L.P., 555,556
      shares held by Transatlantic Venture Fund C.V., 14,500 shares owned by
      Jeffrey M. Krauss, and 10,000 shares subject to stock options exercisable
      within 60 days of March 17, 2000 held by



                                       44
<PAGE>   45

      Jeffrey M. Krauss. Mr. Krauss, one of our directors, is a general partner
      of Nazem & Company IV, L.P. Nazem & Company IV, L.P. has four general
      partners, each of whom shares voting and investment power over the shares
      held by Nazem & Company IV, L.P. Mr. Krauss is also an investment manager
      of Transatlantic Venture Fund C.V. Transatlantic Venture Fund C.V.'s
      investment managers each shares voting and investment power over the
      shares held by Transatlantic Venture Fund C.V. Mr. Krauss disclaims
      beneficial ownership of the shares held by these entities except to the
      extent of his proportionate pecuniary interest.

(2)   Represents 2,388,001 shares held by Atlantic Medical Capital, L.P., 500
      shares owned by J. Andrew Cowherd, and 10,000 shares subject to stock
      options exercisable within 60 days of March 17, 2000 held by Atlantic
      Medical Management, LLC. J. Andrew Cowherd, one of our directors, is a
      member of Atlantic Medical Management LLC. Atlantic Medical Management LLC
      is the management services company of Atlantic Medical Capital L.P.
      Atlantic Medical Management LLC has three members, each of whom shares
      voting and investment power over the shares held by Atlantic Medical
      Capital, L.P. Mr. Cowherd disclaims beneficial ownership of the shares
      held by that entity except to the extent of his proportionate pecuniary
      interest.

(3)   Represents 1,074,075 shares held by Sequel Limited Partnership II, 37,037
      shares held by Sequel Entrepreneurs Fund II, L.P., 7,900 shares held by
      Daniel J. Mitchell, and 10,000 shares subject to stock options exercisable
      within 60 days of March 17, 2000 held by Sequel Venture Partners II,
      L.L.C. Sequel Venture Partners II, L.L.C., the general partner of Sequel
      Limited Partnership II and Sequel Entrepreneurs Fund II, L.P., has five
      managers, including Daniel J. Mitchell, one of our directors. Each of
      these managers' shares voting and investment power over the shares held by
      Sequel Limited Partnership II and Sequel Entrepreneurs Fund II, L.P. Mr.
      Mitchell disclaims beneficial ownership of the shares held by these
      entities except to the extent of his proportionate pecuniary interest.

(4)   Represents 1,136,112 shares held by Vertex Technology Fund (II) Ltd.,
      10,000 shares owned by Robert Tsao, and 10,000 shares subject to stock
      options exercisable within 60 days of March 17, 2000 held by Robert Tsao.
      Mr. Tsao, one of our directors, is an Investment Manager with Vertex
      Technology Fund. Mr. Tsao disclaims beneficial ownership of the shares
      held by that entity except to the extent of his proportionate pecuniary
      interest.

(5)   Represents 925,926 shares held by Dauphin Capital Partners I, L.P., 20,000
      shares owned by James B. Hoover, and 10,000 shares subject to stock
      options exercisable within 60 days of March 17, 2000 held by Dauphin
      Management, L.L.C. James B. Hoover, one of our directors, is a Managing
      Member of Dauphin Capital Partners I, L.P. Mr. Hoover disclaims beneficial
      ownership of the shares held by that entity except to the extent of his
      proportionate pecuniary interest.

(6)   Includes 788,726 shares subject to stock options exercisable within 60
      days of March 17, 2000.

(7)   Includes 80,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(8)   Includes 25,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(9)   Includes 25,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(10)  Includes 80,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(11)  Includes 40,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(12)  Includes 60,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(13)  Includes 25,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(14)  Includes 80,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(15)  Includes 277,200 shares subject to stock options exercisable within 60
      days of March 17, 2000.

(16)  Includes 10,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(17)  Includes 25,000 shares subject to stock options exercisable within 60 days
      of March 17, 2000.

(18)  Includes 1,565,926 shares subject to stock options exercisable within 60
      days of March 17, 2000, as described in the above footnotes.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    Since January 1996, there has not been nor is there currently proposed any
transaction or series of similar transactions to which we were or are to be a
party in which the amount involved exceeds $60,000 and in which any of our
directors, executive officers, holders of more than five percent of our stock or
any member of their immediate


                                       45
<PAGE>   46

families had or will have a direct or indirect material interest other than
compensation agreements and other arrangements, which are described where
required in "Management," and the transactions described below.



    EQUITY INVESTMENT TRANSACTIONS

    On March 12, 1997, we sold an aggregate of 2,450,000 shares of our Series A
convertible preferred stock at a price per share of $2.86. In June and July
1999, we sold an aggregate of 63,053,144 shares of our Series B convertible
preferred stock at a price per share of $0.27, including 11,867,959 shares of
Series B convertible preferred stock issued upon conversion of convertible
promissory notes. Upon the closing of this offering, all shares of preferred
stock will be converted into shares of common stock. The holders of Series A
convertible preferred stock are entitled to convert their shares into an
aggregate of 2,802,800 shares of common stock, based on a conversion price of
$2.50 per common share. The holders of Series B convertible preferred stock are
entitled to convert their shares into an aggregate of 6,305,322 shares of common
stock, based on a conversion price of $2.70 per common share. Listed below are
those directors, executive officers and stockholders who beneficially own five
percent or more of our securities who participated in the preferred stock
financings. We believe that the shares issued in these transactions were sold at
the then fair market value and that the terms of these transactions were no less
favorable than we could have obtained from unaffiliated third parties.

<TABLE>
<CAPTION>
                                                            SERIES A             SERIES B
                                                           CONVERTIBLE          CONVERTIBLE        AGGREGATE
STOCKHOLDER                                                 PREFERRED            PREFERRED       CONSIDERATION
-----------                                                -----------          -----------      -------------
<S>                                                        <C>                  <C>              <C>

Atlantic Medical Capital, L.P........................       1,225,000            6,401,921         $5,232,019
C.B. Healthcare Fund, L.P............................              --           11,111,111          3,000,000
Dauphin Capital Partners I, L.P......................              --            9,259,259          2,500,000
Entities Affiliated with Nazem & Company IV, L.P.....       1,225,000           11,422,335          6,587,530
Entities affiliated with Sequel Venture
  Partners II, LLC...................................              --           11,111,111          3,000,000
Vertex Technology Fund (II) Ltd......................              --           11,111,111          3,000,000
</TABLE>


    J. Andrew Cowherd, one of our directors, is a member of Atlantic Medical
Management LLC. Atlantic Medical Management LLC is the Management Services
Company for Atlantic Medical Capital L.P. James B. Hoover, one of our directors,
is a Managing Member of Dauphin Capital Partners I, L.P. The shares purchased by
entities affiliated with Nazem & Company IV, L.P. include 5,555,556 shares of
Series B convertible preferred stock purchased by Transatlantic Venture Fund
C.V. Jeffrey M. Krauss, one of our directors, is a general partner of Nazem &
Company IV, L.P. Mr. Krauss is also an investment manager of Transatlantic
Venture Fund C.V. The Series B convertible preferred stock purchased by entities
affiliated with Sequel Venture Partners II, LLC includes 10,740,741 shares
purchased by Sequel Limited Partnership II and 370,370 shares purchased by
Sequel Entrepreneurs Fund II, L.P. Daniel J. Mitchell, one of our directors, is
a manager of Sequel Venture Partners II, LLC. Robert Tsao, one of our directors,
is an investment manager with Vertex Technology Fund.

    Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of these shares. See
"Description of Capital Stock -- Registration Rights."

LOAN AND WARRANT AGREEMENTS

    On December 29, 1997, we entered into a loan agreement pursuant to which,
during 1997 and 1998, we borrowed $750,000 from Atlantic Medical Capital, L.P.
at an interest rate of 12% per year. In connection with the loan, Atlantic
Medical Capital, L.P. received warrants to purchase 131,119 shares of Series A
convertible preferred stock at an exercise price of $0.50 per share. On April
10, 1998, we entered into a loan agreement pursuant to which we borrowed
$500,000 from Atlantic Medical Capital, L.P. at an interest rate of 12% per
year. In connection with the loan, Atlantic Medical Capital, L.P. received
warrants to purchase 87,412 shares of Series A convertible preferred stock at an
exercise price of $0.25 per share. Also in connection with the April 10, 1998
loan, the exercise price of the warrants issued on December 29, 1997 was
decreased from $0.50 to $0.25 per share. On November 20, 1998, we entered into a
loan agreement pursuant to which we borrowed $150,000 from Atlantic Medical
Capital, L.P. at an interest rate of




                                       46
<PAGE>   47

12% per year. In connection with the loan, Atlantic Medical Capital, L.P.
received warrants to purchase 100,000 shares of common stock at an exercise
price of $0.10 per share. On June 4, 1999, Atlantic Medical Capital, L.P.
converted all principal and accrued interest into 6,001,180 shares of Series B
convertible preferred stock. J. Andrew Cowherd, one of our directors, is a
member of Atlantic Medical Management LLC, the management services company of
Atlantic Medical Capital, L.P.

    On December 29, 1997, we entered into a loan agreement pursuant to which,
during 1997 and 1998, we borrowed $750,000 from Nazem & Company IV, L.P. at an
interest rate of 12% per year. In connection with the loan, Nazem & Company IV,
L.P. received warrants to purchase 131,119 shares of Series A convertible
preferred stock at an exercise price of $0.50 per share. On April 10, 1998, we
entered into a loan agreement pursuant to which we borrowed $500,000 from Nazem
& Company IV, L.P. at an interest rate of 12% per year. In connection with the
loan, Nazem & Company IV, L.P. received a warrant to purchase 87,412 shares of
Series A convertible preferred stock at an exercise price of $0.25 per share.
Also in connection with the April 10, 1998 loan, the exercise price of the
warrants issued on December 29, 1997 was decreased from $0.50 to $0.25 per
share. On November 20, 1998, we entered into a loan agreement pursuant to which
during 1998 and 1999 we borrowed $115,000 from Nazem & Company IV, L.P. at an
interest rate of 12% per year. In connection with the loan, Nazem & Company IV,
L.P. received a warrant to purchase 100,000 shares of common stock at an
exercise price of $0.10 per share. On June 4, 1999, Nazem & Company IV, L.P.
converted all principal and accrued interest into 5,866,779 shares of Series B
convertible preferred stock. Jeffrey M. Krauss, one of our directors, is a
general partner of Nazem & Company IV, L.P.


OPTION GRANTS TO DIRECTORS

    On September 1, 1999, we granted an option to purchase 10,000 shares of
common stock to each of Jeffrey M. Krauss, Robert Tsao, and William F. Reilly,
each of whom is one of our directors. In addition, on September 1, 1999, we
granted an option to purchase 10,000 shares of common stock to each of Atlantic
Medical Management LLC, with which J. Andrew Cowherd, one of our directors, is
affiliated; to Sequel Venture Partners II, LLC, with which Daniel J. Mitchell,
one of our directors, is affiliated; and to Dauphin Management L.L.C., with
which James B. Hoover, one of our directors, is affiliated. The options each
have an exercise price of $2.70 per share. Twenty-five percent of the shares
subject to each option vests on September 7, 2000, and 1/48th of the shares
subject to each option vests at the end of each month after September 7, 2000,
subject to the continued services of the particular individual as a director. On
December 30, 1999, we granted an option to purchase 25,000 shares of common
stock to Fred L. Brown, a director appointed to our board on that date. The
option has an exercise price of $10.00 per share. Twenty-five percent of the
shares subject to the option vest on December 30, 2000, and 1/48th of the shares
vest at the end of each month after December 30, 2000, subject to the continued
service of Mr. Brown as a director. On January 11, 2000, we granted an option to
purchase 25,000 shares of common stock to L. Ben Lytle, a director appointed to
our board on that date. The option has an exercise price of $10.00 per share.
Twenty-five percent of the shares subject to the option vest on February 10,
2002, and 1/48th of the shares vest at the end of each month after January 10,
2000, subject to the continued service of Mr. Lytle as a director.


OFFERS OF EMPLOYMENT

    Ms. Lorine R. Sweeney, our President and Chief Executive Officer, is a party
to an offer letter dated September 27, 1997. Pursuant to the offer letter, Ms.
Sweeney received an annual salary of $175,000, a bonus of $30,000 payable on the
first anniversary of her employment with XCare.net, and an option to purchase 3%
of our then outstanding shares.

    Mr. Mark Rangell, our Senior Vice President of Sales and Marketing, is a
party to an offer letter dated December 12, 1997. Pursuant to the offer letter,
Mr. Rangell received an annual salary of $135,000, sales commissions based on
achieving planned sales objectives and an option to purchase 2.5% of our then
outstanding shares.

    Ms. Tammy McLaren, our Vice President of Professional Services, is a party
to an offer letter dated June 12, 1998. Pursuant to the offer letter, Ms.
McLaren received an annual salary of $95,000, which has since been increased to
$115,000.




                                       47
<PAGE>   48

OTHER TRANSACTIONS

    We have entered into an indemnification agreement with each of our executive
officers and directors.

    XCare.net believes that all related-party transactions described above were
on terms no less favorable than could have been otherwise obtained from
unrelated third parties. All future transactions between XCare.net and its
principal officers, directors and affiliates will be approved by a majority of
the independent and disinterested members of the Board and will be on terms no
less favorable that could be obtained from unrelated third parties.


                                     PART IV

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

    (a) The following documents are filed as part of this Annual Report on Form
        10-K:

        1.  Financial Statements

        The following financial statements of XCare.net, Inc. are filed as part
        of this report:

<TABLE>
<CAPTION>
                                                                    Page Number
                                                                    -----------
<S>                                                                 <C>

           Index to Financial Statements                                F-1
           Report of Independent Accountants                            F-2
           Balance Sheet                                                F-3
           Statement of Operations                                      F-4
           Statement of Changes in Stockholders' Equity (Deficit)       F-5
           Statement of Cash Flows                                      F-6
           Notes to the Financial Statements                            F-7
</TABLE>

        2.  Financial Statement Schedules. All schedules have been omitted since
            they are either not required, not applicable or the required
            information can be derived from the financial statements or notes
            thereto.

        3.  Exhibits. The exhibits listed on the accompanying index to exhibits
            are filed as part of, or incorporated by reference into, this Form
            10-K.

    (b) Reports of Form 8-K: The Company filed no Current Reports on Form 8-K in
        the fourth quarter ended December 31, 1999.

    (c) Index to Exhibits

           Exhibit
           Number    Description of Document

            1.1      Form of Underwriting Agreement. (1)

            3.1      Amended and Restated Certificate of Incorporation of
                     Registrant. (1)

            3.2      Form of Amended and Restated Certificate of Incorporation
                     of Registrant to be filed upon the closing of the offering
                     made under the Registration Statement. (1)

            3.3      Bylaws of Registrant. (1)

            3.4      Amendment to the Amended and Restated Certificate of
                     Incorporation of Registrant effecting a reverse stock
                     split. (1)

            4.1      Form of Registrant's Common Stock Certificate. (1)

            4.2      Second Amended and Restated Registration Rights Agreement,
                     dated as of July 27, 1999, between the Registrant and the
                     parties named therein. (1)

            5.1      Opinion of Wilson Sonsini Goodrich & Rosati, Professional
                     Corporation. (1)

            10.1     Form of Indemnification Agreement entered into by
                     Registrant with each of its directors and executive
                     officers. (1)

            10.2     Amended and Restated 1997 Stock Option Plan. (1)

            10.3     1999 Employee Stock Purchase Plan and related agreements.
                     (1)

            10.4     1999 Director Option Plan and related agreements. (1)



                                       48
<PAGE>   49

            10.5     Licensing Agreement, dated as of December 30, 1998, between
                     the Registrant and Match Health Care Services, Ltd. (1) (2)

            10.6     Master Licensing Agreement, dated February 4, 1999, between
                     the Registrant and Methodist Care, Inc. (1) (2)

            10.7     Services Agreement Subcontract, dated December 17, 1998,
                     between the Registrant and PRC, Inc. (1)

            10.8     Master Licensing, Processing and Services Agreement, dated
                     February 16, 1997, between the Registrant and
                     Healthscope/United, Inc. (1) (2)

            10.9     System Management Contract, dated April 1, 1999, between
                     the Registrant and Advica Health Resources. (1) (2)

            10.10    Administration Services Agreement, dated March 29, 1999,
                     between the Registrant and American Medical Pathways, Inc.
                     (1) (2)

            10.11    Processing and Services Agreement, dated January 1, 1997,
                     between the Registrant and Brokerage Services Incorporated.
                     (1) (2)

            10.12    Addendum to Processing and Services Agreement, dated July
                     25, 1997, between the Registrant and Brokerage Services
                     Incorporated. (1) (2)

            10.13    Supplemental Agreement, dated December 24, 1997, between
                     the Registrant and Brokerage Services Incorporated. (1) (2)

            10.14    Employers Mutual, Inc. Assignment Letter, dated August 5,
                     1999, between the Registrant and Employers Mutual, Inc. (1)
                     (2)

            10.15    Master License and Services Agreement, dated June 24, 1998,
                     between Registrant and Employers Mutual, Inc. (1) (2)

            10.16    Contractor Agreement, dated February 19, 1999, between the
                     Registrant and Employers Mutual, Inc. (1) (2)

            10.17    Master Licensing and Services Agreement, dated February 20,
                     1998, between the Registrant and Provider Services,
                     Incorporated. (1) (2)

            10.18    Contractor Agreement, dated April 27, 1999, between the
                     Registrant and Provider Services, Incorporated. (1) (2)

            10.19    Master Licensing and Services Agreement, dated August 24,
                     1998, between the Registrant and Quest Diagnostics
                     Incorporated. (1) (2)

            10.20    Offer letter, dated September 22, 1997, with Lorine
                     Sweeney. (1)

            10.21    Offer letter, dated December 12, 1997, with Mark Rangell.
                     (1)

            10.22    Offer letter, dated June 12, 1998, with Tammy McLaren. (1)

            10.23    Sublease, dated as of May 11, 1998, by and between the
                     Registrant and Echo Bay Management Corp. (1)

            10.24    Sub-sublease Agreement, dated as of December 18, 1998, by
                     and between Registrant and Project Discovery, Inc. (1)

            10.25    Office lease, dated May 2, 1997, between Registrant and MBL
                     Life Assurance Corporation. (1)

            10.26    Office lease, dated September 29, 1995 between Registrant
                     and MBL Life Assurance Corporation. (1)

            10.27    Consulting Agreement, dated June 10, 1998, by and between
                     Registrant and ADIS International Ltd. (1) (2)

            10.28    Consulting Agreement, dated September 16, 1998, by and
                     between Registrant and ADIS International Ltd. (1) (2)

            10.29    Development Services Agreement, dated November 8, 1999, by
                     and between Registrant and Doheny Eye Medical Group, Inc.
                     (1) (2)

            10.30    Development Services Agreement, dated November 10, 1999 by
                     and between Registrant and Delta Health Services. (1) (2)



                                       49
<PAGE>   50

            10.31    Hosting Services Agreement, dated November 10, 1999, by and
                     between Registrant and Delta Health Services. (1) (2)

            10.32    Office Lease Agreement, dated November 1, 1999, by and
                     between Registrant and Mountain States Mutual Casualty
                     Company. (1)

            10.33    Software License and Services Agreement, dated October 25,
                     1999, by and between Registrant and Oracle Corporation. (1)
                     (2)

            10.34    Professional Services Agreement, dated September 9, 1999,
                     by and between Registrant and Asthma Management Company.
                     (1) (2)

            10.35    Consulting Services Agreement, dated November 29, 1999, by
                     and between Registrant and Decision Consultants, Inc. (1)

            10.36    Sublease dated December 17, 1999 by and between Registrant
                     and The Pittsburgh & Midway Coal Mining Co. (1)

            16.1     Letter regarding change in certifying accountant. (1)

            23.1     Consent of Wilson Sonsini Goodrich & Rosati, Professional
                     Corporation (included in Exhibit 5.1). (1)

            23.2     Consent of PricewaterhouseCoopers LLP. (1)

            24.1     Power of Attorney (See page II-7).

            27.1     Financial Data Schedule.*



  *  Filed herewith.

(1) Previously filed with the Securities and Exchange Commission (the
    "Commission") as an Exhibit to the Registrant's Form S-1 on November 2, 1999
    (File No. 333-90165).

(2) Confidential treatment has been requested with respect to certain portions
    of this exhibit. Omitted portions have been filed separately with the
    Securities and Exchange Commission.




                                       50
<PAGE>   51

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be singed on its behalf by the
undersigned thereunto duly authorized , in the City of Englewood, State of
Colorado, on this 29th day of March, 2000.

                                       XCARE.NET, INC.

                                       By: /s/ Lorine R. Sweeney
                                          -------------------------------------
                                          Lorine R. Sweeney
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, Lorine R. Sweeney and
Peter Cheesbrough and each one of them, his true and lawful attorney-in-fact and
agents, each with full power of substitution, for his and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this report
on Form 10-K, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as she might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or by virtue
hereof.

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

<TABLE>
<CAPTION>
                 Signatures                                Title                               Date
                 ----------                                -----                               ----
<S>                                           <C>                                         <C>

/s/ Lorine R. Sweeney                         President and Chief Executive Officer       March 14, 2000
--------------------------------              (Principal Executive Officer)
Lorine R. Sweeney

/s/ Peter H. Cheesbrough                      Senior Vice President of Finance and
--------------------------------              Chief Financial Officer (Principal          March 14, 2000
Peter H. Cheesbrough                          Financial and Accounting Officer)

/s/ Jeffrey M. Krauss                         Chairman of the Board                       March 14, 2000
--------------------------------
Jeffrey M. Krauss

/s/ Fred L. Brown                             Director                                    March 14, 2000
--------------------------------
Fred L. Brown

/s/ J. Andrew Cowherd                         Director                                    March 14, 2000
--------------------------------
J. Andrew Cowherd

/s/ James B. Hoover                           Director                                    March 14, 2000
-------------------------------
James B. Hoover

/s/ L. Ben Lytle                              Director                                    March 20, 2000
-------------------------------
L. Ben Lytle

/s/ Daniel Mitchell                           Director                                    March 14, 2000
--------------------------------
Daniel Mitchell

/s/ William F. Reilly                         Director                                    March 14, 2000
---------------------------------
William F. Reilly

/s/ Robert Tsao                               Director                                    March 14, 2000
--------------------------------
Robert Tsao
</TABLE>



                                       51
<PAGE>   52

                                 XCARE.NET, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                 Page
                                                                 ----
<S>                                                              <C>

Report of Independent Accountants................................ F-2
Balance Sheet ................................................... F-3
Statement of Operations ......................................... F-4
Statement of Changes in Stockholders' Equity (Deficit)........... F-5
Statement of Cash Flows.......................................... F-6
Notes to the Financial Statements................................ F-7
</TABLE>




<PAGE>   53

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of XCare.net, Inc.

    In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 48 present fairly, in all material respects, the financial
position of XCare.net, Inc. at December 31, 1998 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP
Broomfield, Colorado
February 11, 2000




                                      F-2
<PAGE>   54

                                 XCARE.NET, INC.

                                  BALANCE SHEET
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                       PRO FORMA
                                                                                                     STOCKHOLDERS'
                                                                                                       EQUITY AT
                                                                               DECEMBER 31,          DECEMBER 31,
                                                                           --------------------      -------------
                                                                             1998        1999            1999
                                                                           --------    --------      -------------
                                                                                                      (unaudited)
                                                                                                        (Note 1)
<S>                                                                        <C>         <C>           <C>
Cash and cash equivalents                                                  $    198    $  7,455
Accounts receivable, net of allowance of $50 and
 $141 at December 31, 1998 and 1999, respectively                               703         890
Receivable from affiliate                                                        --         453
Other current assets                                                             78       1,853
                                                                           --------    --------
  Total current assets                                                          979      10,651
Property and equipment, net                                                     691       1,368
Purchased software, net                                                         850         566
Other assets                                                                    285         598
                                                                           --------    --------
  Total assets                                                             $  2,805    $ 13,183
                                                                           ========    ========

         LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
                       AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable                                                         $    727    $    819
  Accrued liabilities                                                         1,590       1,449
  Unearned revenue                                                              500         153
  Current portion of long-term debt and capital lease obligations             3,497          92
                                                                           --------    --------
  Total current liabilities                                                   6,314       2,513
Long-term debt                                                                  284          --
                                                                           --------    --------
  Total liabilities                                                           6,598       2,513
                                                                           --------    --------
Commitments and contingencies (Note 8)
 Series A mandatorily redeemable convertible preferred stock, $.01
  par value; 6,000,000 shares authorized as of December 31, 1998
  and 1999, respectively; 2,450,000 shares issued and outstanding;
  no shares issued and outstanding, pro forma (unaudited)                     6,743       6,810        $     --
 Series B mandatorily redeemable convertible preferred stock, $.01
  par value; 0 and 75,000,000 shares authorized as of December 31,
  1998, and 1999,  respectively; 63,053,144 issued and outstanding at
  December 31, 1999;  no shares issued and outstanding, pro forma                --      16,948              --
  (unaudited)
Value ascribed to mandatorily redeemable convertible preferred
  stock warrants                                                                 84          84              --
                                                                           --------    --------        --------
                                                                              6,827      23,842              --
                                                                           --------    --------        --------
 Stockholders' equity (deficit):
   Common stock, $.01 par value; 5,000,000 and 12,500,000 shares
      authorized as of December 31, 1998 and 1999, respectively;
      390,000 and 577,663 shares issued and outstanding as of
      December 31, 1998 and 1999, respectively; 10,388,709 shares
      issued and outstanding, pro forma (unaudited)                               4           6             104
 Additional paid-in capital                                                     529       3,432          27,176
 Unearned compensation, net                                                      --      (2,269)         (2,269)
 Accumulated deficit                                                        (11,153)    (14,341)        (14,341)
                                                                           --------    --------        --------
   Total stockholders' equity (deficit)                                     (10,620)    (13,172)       $ 10,670
                                                                           --------    --------        --------
   Total liabilities and stockholders' equity (deficit)                    $  2,805    $ 13,183
                                                                           ========    ========
</TABLE>


   The accompanying notes are an integral part of these financial statements.




                                      F-3
<PAGE>   55


                                 XCARE.NET, INC.

                             STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1997        1998      1999
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>

Revenue                                                       $  5,984    $ 2,270    $ 4,400
Revenue from affiliate                                              --         --        453
                                                              --------    -------    -------
      Total revenue                                              5,984      2,270      4,853
                                                              --------    -------    -------

Costs and expenses:
  Cost of revenue                                                4,575      2,086      3,923
  Sales and marketing                                            2,531        965      1,105
  General and administrative                                     2,436      2,194      1,867
  Research and development                                       4,212        670        575
  Impairment of long-lived assets and
     abandonment of operating lease                                887         --         --
  Stock compensation expense                                        --         --        504
                                                              --------    -------    -------
      Total costs and expenses                                  14,641      5,915      7,974
                                                              --------    -------    -------
Loss from operations                                            (8,657)    (3,645)    (3,121)
 Settlements received from contract terminations                   250         --         --
 Interest income (expense), net                                      5       (437)       (67)
                                                              --------    -------    -------
Loss before income taxes                                        (8,402)    (4,082)    (3,188)
 Income tax benefit                                              1,078         --         --
                                                              --------    -------    -------
Net loss                                                      $ (7,324)   $(4,082)   $(3,188)
                                                              ========    =======    =======
Net loss per common
  share-- basic and diluted                                   $ (18.92)   $(10.64)   $ (6.91)
                                                              ========    =======    =======
Weighted average common shares
  outstanding-- basic and diluted                                  390        390        472
                                                              ========    =======    =======
Pro forma net loss per common share
  basic and diluted (unaudited) (Note 1)                                             $  (.42)
                                                                                     =======
Pro forma weighted average common
  shares outstanding basic and diluted (unaudited) (Note 1)                            7,642
                                                                                     =======
</TABLE>



   The accompanying notes are an integral part of these financial statements.




                                      F-4
<PAGE>   56

                                 XCARE.NET, INC.

             STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                  COMMON STOCK     ADDITIONAL                     ACCUMULATED
                                 --------------     PAID-IN        UNEARNED        EARNINGS
                                 SHARES  AMOUNT     CAPITAL    COMPENSATION, NET   (DEFICIT)       TOTAL
                                 ------  ------    ----------  -----------------  -----------    --------
<S>                              <C>     <C>       <C>         <C>                <C>            <C>

Balance at December 31, 1996        1     $--      $   589         $    --         $    253      $    842
Stock split                       389       4           (4)             --               --            --
Accretion of mandatorily
  redeemable convertible
  preferred stock                  --      --          (55)             --               --           (55)
Net loss                           --      --           --              --           (7,324)       (7,324)
                                  ---     ---      -------         -------         --------      --------
Balance at December 31, 1997      390       4          530              --           (7,071)       (6,537)
Accretion of mandatorily
  redeemable convertible
  preferred stock                  --      --          (66)             --               --           (66)
Other                              --      --           65              --               --            65
Net loss                           --      --           --              --           (4,082)       (4,082)
                                  ---     ---      -------         -------         --------      --------
Balance at December 31, 1998      390       4          529              --          (11,153)      (10,620)
Common stock issued upon
  exercise of options             188       2           95              --               --            97
Accretion of mandatorily
  redeemable convertible
  preferred stock                  --      --          (75)             --               --           (75)
Unearned compensation, net         --      --        2,773          (2,269)              --           504
Other                                                  110              --               --           110
Net loss                           --      --           --              --           (3,188)       (3,188)
                                  ---     ---      -------         -------         --------      --------
Balance at December 31, 1999      578      $6      $ 3,432         $(2,269)        $(14,341)     $(13,172)
                                  ===     ===      =======         =======         ========      ========
</TABLE>



   The accompanying notes are an integral part of these financial statements.




                                      F-5
<PAGE>   57

                                 XCARE.NET, INC.

                             STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                  ------------------------------------
                                                                   1997          1998           1999
                                                                  -------       -------       --------
<S>                                                               <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                          $(7,324)      $(4,082)      $ (3,188)
Adjustments to reconcile net income (loss) to net cash
  used in operating activities:
  Depreciation and amortization                                       918           815            797
  Deferred income tax benefit                                        (451)           --             --
  Provision for losses on receivables                                  --            50             91
  Loss on impairment and disposal of assets                           914           408              9
  Amortization of unearned compensation                                --            --            504
  Other                                                                --            99            198
  Change in assets and liabilities:
    Accounts receivable                                               756          (300)          (278)
    Receivable from affiliate                                          --            --           (453)
    Other current assets                                              (17)           99         (1,775)
    Income taxes receivable                                          (617)          617             --
    Purchased software                                                 --          (850)            --
    Other assets                                                       --          (285)          (313)
    Accounts payable                                                 (367)          488             92
    Accrued liabilities                                              (565)          473            298
    Unearned revenue                                                  188           312           (347)
                                                                  -------       -------       --------
         Net cash used in operating activities                     (6,565)       (2,156)        (4,365)
                                                                  -------       -------       --------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                   (348)          (19)        (1,245)
Proceeds from sale of property and equipment                           30           186              4
                                                                  -------       -------       --------
         Net cash provided by (used in) investing activities         (318)          167         (1,241)
                                                                  -------       -------       --------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt                                        533         2,230            205
Principal payments on debt                                           (618)         (166)          (430)
Principal payments under capital leases                              (351)         (574)          (749)
Proceeds from issuance of mandatorily redeemable
  convertible preferred stock, net                                  6,622            --         13,740
Proceeds from issuance of common stock                                 --            --             97
                                                                  -------       -------       --------
         Net cash provided by financing activities                  6,186         1,490         12,863
                                                                  -------       -------       --------

Net increase (decrease) in cash and cash equivalents                 (697)         (499)         7,257
Cash and cash equivalents at beginning of period                    1,394           697            198
                                                                  -------       -------       --------
Cash and cash equivalents at end of period                        $   697       $   198       $  7,455
                                                                  =======       =======       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                     $   148       $   127       $     74
Income taxes refunded                                                  --          (615)            --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
  FINANCING TRANSACTIONS
Capital lease obligations for purchase of equipment                 1,217            --             --
Conversion of convertible promissory notes and accrued
  interest to Series B mandatorily redeemable
  convertible preferred stock                                          --            --          3,204
</TABLE>



   The accompanying notes are an integral part of these financial statements.



                                      F-6
<PAGE>   58

                                 XCARE.NET, INC.

                        NOTES TO THE FINANCIAL STATEMENTS


1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

    XCare.net, Inc. (the "Company") develops, deploys and supports
business-to-business software solutions for the health care industry. The
Company's proprietary XML-based platform and professional services allow it to
create customizable transaction-based application solutions that are designed to
address the complex administrative processing requirements of health care
companies. In addition, the Company provides outsourcing and transaction hosting
services that improve workflow processes and reduce administrative costs for
customers.

Use of Estimates

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

Revenue Recognition

    For contracts entered into subsequent to January 1, 1998, the Company
recognizes revenue in accordance with the provisions of Statement of Position
97-2, "Software Revenue Recognition". The Company derives revenue from license
fees and related services under the terms of fixed price contracts. Maintenance
revenue is derived from agreements for supporting and providing periodic updates
to licensed software. Consulting revenue consists of revenue from consulting
services provided pursuant to time and materials contracts. Transaction
processing revenue is derived from transaction processing services and is
recognized on a per-transaction basis as services are performed. Operational
support revenue is derived from agreements for supporting and maintaining
customers' processing environments and is recognized ratably over the service
period.

    License fees and related services revenue is generally recognized from fixed
price contracts using the percentage-of-completion method of accounting where
collectibility of fees is probable. Where collectibility of fees is not
probable, the Company defers revenue and related costs as deferred contract
costs and recognizes revenue and cost of revenue as cash is collected.

    The Company may encounter budget and schedule overruns on fixed price
contracts caused by increased material, labor or overhead costs. Adjustments to
cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period in
which current estimates of total contract revenue and contract costs indicate a
loss. The Company does not require collateral for its receivables and an
allowance is maintained for potential credit losses.

    Maintenance revenue and operational support revenue are recorded as unearned
revenue and are recognized ratably over the service periods, which are generally
12 months. When maintenance is bundled with the original license fee
arrangement, its fair value is deferred and recognized during the period such
services are provided.

    Revenue from consulting services provided pursuant to time-and-materials
contracts is recognized as the services are performed.

    For contracts entered into prior to January 1, 1998, the Company recognized
revenue in accordance with Statement of Position 91-1, "Software Revenue
Recognition." The Company's revenue recognition for such pre-1998 contracts was
substantially the same as that discussed above.




                                      F-7
<PAGE>   59

Reclassifications

    Certain prior year information has been reclassified to conform with the
current year presentation.

Cash and Cash Equivalents

    All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. All cash equivalents are
carried at cost, which approximates fair value.


Fair Value of Financial Instruments

    The Company's financial instruments include cash, accounts receivable,
prepaids, accounts payable and accrued liabilities. The carrying amounts of
financial instruments approximate fair value due to their short maturities.
Additionally, based upon the borrowing rates currently available to the Company
for debt agreements with similar terms and average maturities, management
believes the carrying amount of its debt approximates fair value.

Major Customers

    The Company performs ongoing evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. All such
customers operate in the health care industry.

    The Company had the following customers which accounted for greater than 10%
of each respective period's revenue:

<TABLE>
<CAPTION>
                                     YEAR ENDED DECEMBER 31,
                                    -------------------------
             CUSTOMER               1997       1998      1999
             --------               ----       ----      ----
<S>                                 <C>        <C>       <C>
                A                    --         --        20%
                B                    74%        --        --
                C                    --         29%       --
                D                    --         20%       11%
                E                    --         12%       10%
                F                    --         11%       --
                G                    --         --        12%
                H                    --         --        12%
</TABLE>


    At December 31, 1999, customer A accounted for 31% of accounts receivable
and receivable from affiliate, and two other customers accounted for 31% and 13%
of accounts receivable and receivable from affiliate. At December 31, 1998,
customers D, E, F and H accounted for 20%, 23%, 10% and 27% of accounts
receivable, respectively, and one other customer accounted for 13% of accounts
receivable. Included in other assets is $598,000 related to an arrangement with
a customer whereby the Company has the option to receive either cash or stock
with a fair value equal to this amount.

Property and Equipment

    Property and equipment are recorded at cost and depreciated using
straight-line methods over the estimated useful lives of the related assets,
ranging from two to five years. Equipment under capital lease arrangements as
well as leasehold improvements are amortized over the shorter of their useful
lives or the terms of the related leases.

Long-Lived Assets and Impairments

    The Company periodically evaluates the carrying value of long-lived assets,
including, but not limited to, purchased software, property and equipment, and
other assets, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately indentifiable and is less
than its carrying value. In that event, a loss is




                                      F-8
<PAGE>   60

recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Loss on long-lived assets to be disposed of is determined in a similar manner,
except that fair values are reduced for the cost to dispose.

Unaudited Pro Forma Stockholders' Equity

    In accordance with the requirements of the Securities and Exchange
Commission ("SEC"), which provide that the total redemption value of Series A
and B mandatorily redeemable convertible preferred stock (the "Convertible
Preferred Stock") be excluded from stockholders' equity (deficit), the
redemption value of the Convertible Preferred Stock has been reflected in the
accompanying balance sheet as mandatorily redeemable convertible preferred
stock.

    The board of directors had authorized management of the Company to file a
registration statement with the SEC permitting the Company to sell shares of its
common stock to the public. The Company's initial public offering (the "IPO")
was consummated and, accordingly all outstanding shares of Convertible Preferred
Stock will convert into 9,108,122 shares of common stock of the Company in the
first quarter of 2000. Unaudited Pro Forma Stockholders' Equity as of December
31, 1999, as set forth in the accompanying balance sheet, is adjusted to reflect
such conversion, the assumed "cashless exercise" of all outstanding common stock
warrants and Series A mandatorily redeemable convertible preferred stock
warrants, and the conversion of the Series A mandatorily redeemable convertible
preferred stock issued upon the assumed exercise of the latter warrants into
common stock, resulting in the issuance of 9,811,046 additional shares of common
stock. See Note 10.

Research and Development

    Research and development expense includes costs incurred by the Company to
develop and enhance the Company's software. Research and development costs are
charged to expense as incurred.

Advertising

    The Company expenses advertising costs as incurred. Advertising expenses for
the years ended December 31, 1997, 1998 and 1999 were approximately $433,000,
$66,000 and $271,000, respectively.

Software Development Costs

    Software development costs are required to be expensed until the point that
technological feasibility of the product is established, after which time such
costs are capitalized until general availability of the product. The period
between achieving technological feasibility and the general availability of such
software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility have historically been immaterial
and therefore expensed as incurred.

Purchased Software

    Purchased software is held for resale under an exclusive license and is
capitalized and amortized ratably over a three-year estimated life. Accumulated
amortization was $0 and $284,000 as of December 31, 1998 and 1999, respectively.
See Note 8.

Income Taxes

    Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.




                                      F-9
<PAGE>   61

Stock Option Compensation

    Stock option compensation expense is recognized in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.

Net Loss Per Common Share

    Net loss per common share is calculated in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per common share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. Diluted net loss per common
share is computed by dividing the net loss for the period by the weighted
average number of common and potential shares outstanding during the period if
their effect is dilutive. Potential common shares consist of incremental common
shares issuable upon the exercise of stock options and warrants and upon
conversion of the Convertible Preferred Stock and convertible promissory notes.

Unaudited Pro Forma Net Loss Per Common Share

    The Company has computed unaudited pro forma basic net loss per common share
in accordance with the methodology in SFAS No. 128. The Company's historical
capital structure is not indicative of its prospective structure due to the
automatic conversion of all shares of Convertible Preferred Stock into common
stock concurrent upon the closing of the Company's IPO. Accordingly, historical
basic net loss per common share should not be used as an indicator of future
earnings per common share.

    Unaudited pro forma basic net loss per common share is computed using the
weighted average number of common shares outstanding during the period. The
Company has assumed the conversion of all outstanding Convertible Preferred
Stock issued into common stock for all periods presented on a weighted average
share basis and the assumed "cashless exercise" of all outstanding common stock
warrants and Series A mandatorily redeemable convertible preferred warrants, and
the conversion of the Series A mandatorily redeemable convertible preferred
stock issued upon the assumed exercise of the latter warrants into common shares
as if such transactions occurred at the beginning of the respective period or at
the date of original issuance, if later.

    The following table sets forth the computation of the numerators and
denominators in the basic, diluted and pro forma net loss per common share
calculations for the periods indicated:

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                          -----------------------------------
                                                                            1997         1998          1999
                                                                          -------       -------       -------
<S>                                                                       <C>           <C>           <C>
Numerator:
  Net loss                                                                $(7,324)      $(4,082)      $(3,188)
  Accretion of mandatorily redeemable convertible preferred stock             (55)          (66)          (75)
                                                                          -------       -------       -------

  Net loss available to common stockholders                               $(7,379)      $(4,148)       (3,263)
                                                                          =======       =======
  Effect of pro forma conversion of securities:
     Accretion of mandatorily redeemable convertible preferred stock                                       75
                                                                                                      -------
     Pro forma net loss available to common stockholders (unaudited)                                  $(3,188)
                                                                                                      =======
Denominator:
  Weighted average common shares outstanding-- basic and diluted              390           390           472
                                                                          =======       =======       -------
  Weighted average effect of pro forma securities:
     Series A mandatorily redeemable convertible preferred stock                                        3,297
     Series B mandatorily redeemable convertible preferred stock                                        3,664
     Common stock warrants                                                                                209
                                                                                                      -------
Pro forma weighted average common shares outstanding-- basic
and diluted  (unaudited)                                                                                7,642
                                                                                                      =======
</TABLE>

    Potentially dilutive securities totaling 5,737,092 and 11,432,265 for the
years ended December 31, 1998 and 1999, respectively, were excluded from
historical basic and diluted loss per common share because of their
anti-dilutive effect.



                                      F-10
<PAGE>   62

Comprehensive Income

    Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity during a period from
non-owner sources. During each of the three years ended December 31, 1999, the
Company has not had any significant transactions that are required to be
reported as adjustments to determine comprehensive income.

2. BALANCE SHEET COMPONENTS

    Certain balance sheet components are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           ---------------------
                                                             1998         1999
                                                           -------       -------
<S>                                                        <C>           <C>
OTHER CURRENT ASSETS
  Deferred IPO costs                                       $    --       $ 1,093
  Work performed in advance of billings                         --           557
  Other                                                         78           203
                                                           -------       -------
                                                           $    78       $ 1,853
                                                           =======       =======

                                                                DECEMBER 31,
                                                           ---------------------
                                                            1998          1999
                                                           -------       -------
PROPERTY AND EQUIPMENT
  Furniture, fixtures and equipment                        $   301       $   412
  Computer hardware                                          1,435         1,927
  Computer software                                            257           618
                                                           -------       -------
                                                             1,993         2,957
Less accumulated depreciation and amortization              (1,302)       (1,589)
                                                           -------       -------
                                                           $   691       $ 1,368
                                                           =======       =======

                                                                DECEMBER 31,
                                                           ---------------------
                                                              1998          1999
                                                           -------       -------
ACCRUED LIABILITIES
  Accrued payroll                                          $   171       $   173
  Operating lease obligation payable                           203            18
  Accrued interest                                             269            48
  Accrued license fee payable                                  850           600
  Accrued professional fees                                     33           446
  Other                                                         64           164
                                                           -------       -------
                                                           $ 1,590       $ 1,449
                                                           =======       =======
</TABLE>


    Assets underlying capital leases included above were approximately
$1,192,000 and $0 as of December 31, 1998 and 1999, respectively. Accumulated
amortization of assets under capital leases was approximately $614,000 and $0 as
of December 31, 1998 and 1999, respectively.




                                      F-11
<PAGE>   63

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

   Debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                                   ---------------
                                                                                    1998      1999
                                                                                   -------    ----
<S>                                                                                <C>        <C>
Unsecured convertible promissory notes payable to preferred stockholders, net
  of debt discount of $50 and $0 at December 31, 1998 and 1999, respectively;
  interest rate at 12%                                                             $ 2,680    $ --
Unsecured notes payable to former employees; interest rates ranging from
  5.73% to 6.84%                                                                       246      --
Unsecured notes payable to software vendors for software
  licenses; interest rate at 10.5%; principal and interest
  were payable on January 1, 1998                                                       44      44
Unsecured notes payable to landlord for leasehold
  improvements; interest rate at 9.5%; principal and
  interest payable in monthly installments of $1,207 until February 1, 2000             16       2
Capitalized lease obligations                                                          795      46
                                                                                   -------    ----
     Total long-term debt                                                            3,781      92
Less current portion                                                                (3,497)    (92)
                                                                                   -------    ----
     Long-term debt, excluding current portion                                     $   284    $ --
                                                                                   =======    ====
</TABLE>


    Certain equipment financing agreements recorded as capital lease obligations
are subject to restrictive covenants contained in the credit agreement that
require XCare.net to maintain certain financial ratios. The capital lease
obligations under the financing agreements that included the restrictive
covenants were paid off during September 1999.

    On December 29, 1997 and April 10, 1998, the Company entered into bridge
loan agreements with related parties who were the holders of all the Company's
then outstanding preferred stock. There were two related party lenders, each of
which is represented by one of its general partners on the board of directors.
One of those directors is the chairman of the board. The loan agreements
provided for commitments for $2,500,000 of financing (the "1997 Convertible
Promissory Notes"), of which $500,000 was received in 1997. The remaining
$2,000,000 was received throughout 1998. In June 1999, the 1997 Convertible
Promissory Notes plus accrued interest aggregating approximately $2,924,000
converted at $0.27 per share into 10,831,800 shares of Series B mandatorily
redeemable convertible preferred stock in conjunction with the sale of Series B
mandatorily redeemable convertible preferred stock. In connection with the 1997
Convertible Promissory Notes, the Company issued warrants to purchase 437,062
shares of the Company's Series A mandatorily redeemable convertible preferred
stock at $0.25 per share. The warrants expire in 2002 through 2003 or upon an
IPO, if earlier. The value assigned to the warrants of $84,000, determined using
a Black-Scholes option pricing model, resulted in additional debt discount which
is being amortized to interest expense over the period that the Convertible
Promissory Notes are outstanding.

    In November 1998, the Company entered into a second bridge loan agreement
with related parties who were the holders of all the Company's then outstanding
preferred stock. There were two related party lenders, each of which is
represented by one of its general partners on the board of directors. One of
those directors is the chairman of the board. These were the same related
parties that invested in the December 29, 1997 and April 10, 1998 bridge loans
described above. The loan agreement provided for $265,000 financing of which
$230,000 was received in 1998 and $35,000 was received in 1999 (the "1998
Convertible Promissory Notes"). In June 1999, the 1998 Convertible Promissory
Notes plus accrued interest aggregating approximately $280,000 converted at
$0.27 per share into 1,036,159 shares of Series B mandatorily redeemable
convertible preferred stock in conjunction with the sale of Series B mandatorily
redeemable convertible preferred stock. In connection with the 1998 Convertible
Promissory Notes, the Company issued warrants to purchase 200,000 shares of the
Company's common stock at $0.10 per share. The warrants expire in 2003 or upon
an IPO, if earlier. The value assigned to the warrants of $43,000 resulted in
additional debt discount which is being amortized to interest expense over the
period that the Convertible Promissory Notes are outstanding.




                                      F-12
<PAGE>   64

4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS

Mandatorily Redeemable Convertible Preferred Stock

    In March 1997, the Company issued 2,450,000 shares of $.01 par value Series
A mandatorily redeemable convertible preferred stock and received proceeds net
of issuance costs totaling approximately $6,622,000.

    In June 1999, the Company issued 27,111,111 shares of $.01 par value Series
B mandatorily redeemable convertible preferred stock and received proceeds
totaling $7,320,000. Concurrently, outstanding Convertible Promissory Notes plus
accrued interest of approximately $3,204,000 in the aggregate were converted
into an additional 11,867,959 shares of Series B mandatorily redeemable
convertible preferred stock.

    In July 1999, the Company issued 24,074,074 shares of $.01 par value Series
B mandatorily redeemable convertible preferred stock and received proceeds net
of issuance costs totaling $6,420,000.

    The holders of the Convertible Preferred Stock have the following rights and
preferences:

Voting Rights

    The holders of the Convertible Preferred Stock and the common stock, voting
together as a single class, are entitled to vote upon any matter submitted to
the stockholders. The holders of the Convertible Preferred Stock are entitled to
one vote for each share of common stock that such holder would be entitled to
receive if the Convertible Preferred Stock were converted into common stock. The
holders of common stock have one vote per share of common stock.

Dividends

    The holders of the Series A mandatorily redeemable convertible preferred
stock are entitled to receive, out of funds legally available, dividends payable
at amounts equal to the equivalent per share dividend declared on the common
stock. Holders of Series B mandatorily redeemable convertible preferred stock
are entitled to receive noncumulative dividends at the per annum rate of
$0.00216 per share, when and if declared by the board of directors. No dividends
have been declared to date.


Liquidation

    In the event of any sale, liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B mandatorily redeemable convertible
preferred stock are entitled to receive up to five times their original cost.
The holders of Series A mandatorily redeemable convertible preferred stock are
entitled to receive an amount of $2.86 per share plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
common stock. The holders of the Series B mandatorily redeemable convertible
preferred stock are entitled to receive an amount of $0.27 per share plus any
declared but unpaid dividends prior to and in preference to any distribution to
the holders of common stock. The remaining assets, if any, shall be distributed
ratably among the holders of common stock and the holders of Convertible
Preferred Stock on an as-converted basis. The holders of the Convertible
Preferred Stock stop participating in the remaining assets once they have
recovered five times their original cost.

Conversion

    The 2,450,000 outstanding shares of Series A mandatorily redeemable
convertible preferred stock are convertible at the option of the holder into
2,802,800 shares of common stock. The original conversion ratio of the Series A
mandatorily redeemable convertible preferred stock into common stock was
one-for-one. This conversion ratio was adjusted during 1997 and 1998 to 1.144
shares of common stock for each share of Series A mandatorily redeemable
convertible preferred stock. The 63,053,144 shares of Series B mandatorily
redeemable convertible preferred stock are convertible at the option of the
holders into 6,305,322 shares of common stock, reflecting the rounding upwards
of all resulting fractional shares. Each share of Convertible Preferred Stock



                                      F-13
<PAGE>   65

automatically converts into common stock upon the closing of a public offering
at a per share price of at least $9.50 with gross proceeds of greater than
$15,000,000. See Note 10.

Redemption Rights

    As of January 1, 2002, 2003 and 2004, each holder of the Convertible
Preferred Stock has the individual right to require the Company to redeem the
holder's shares by paying in cash $2.86 per share of Series A mandatorily
redeemable Convertible Preferred Stock and $0.27 per share of Series B
mandatorily redeemable convertible preferred stock, for up to a maximum on each
such date of one-third of the total shares of Convertible Preferred Stock
outstanding. The difference between the recorded value and the redemption value
of the Convertible Preferred Stock is being accreted ratably over the period
from issuance to redemption dates which approximates the effective interest
method.

Stock Warrants

    In conjunction with the Series A mandatorily redeemable convertible
preferred stock offering, the Company issued warrants to purchase a total of
12,250 shares of common stock for $31.46 per share. The value assigned to these
warrants using a Black-Scholes option pricing model was immaterial. The warrants
are exercisable immediately and expire in 2005 or upon an IPO, if earlier.

    In connection with the issuance of the 1997 Convertible Promissory Notes,
warrants to purchase 437,062 shares of the Company's Series A mandatorily
redeemable convertible preferred stock at $0.25 per share were issued to the
promissory noteholders. The exercise price of 262,238 of these warrants was
repriced from $0.50 to $0.25 in April 1998. The warrants expire December 2002
through April 2003 or upon an IPO, if earlier.

    In connection with the issuance of the 1998 Convertible Promissory Notes,
warrants to purchase 200,000 shares of the Company's common stock at $0.10 per
share were issued to the promissory noteholders. The warrants expire November
and December of 2003 or upon IPO, if earlier.

    As of December 31, 1999, all warrants remain outstanding.  See Note 10.

5. CONTRACT TERMINATIONS AND RELATED CHARGES

    During 1997, a major customer terminated its contract with the Company and
paid $250,000 to settle all claims associated with the termination.

    As a result of this contract termination, during 1997, the Company abandoned
an operating lease and incurred impairment charges for related fixed assets
aggregating $887,000.

6. EMPLOYEE AND DIRECTOR BENEFIT PLANS

Stock Options

    During 1997, the Company adopted a stock option plan (the "Plan") which
provides for the grant of stock options to directors, key employees, and
consultants. As of December 31, 1999, a total of 2,200,000 shares of common
stock were reserved for issuance under the Plan. The Plan provides for the
granting of incentive stock options to employees and nonqualified options to
employees, directors and consultants.

    Stock options are granted with an exercise price not less than fair market
value of the common stock on the date of the grant, as determined by the board
of directors. The vesting period is determined by the board of directors and is
generally four years. The options generally expire ten years after the date of
grant. During February 1998, the board of directors reduced the exercise price
of 14,026 options from $2.80 to $0.50 and in July 1998, they reduced the
exercise price for 1,850 options from $0.50 to $0.25.

    In July 1999, the board of directors amended all existing stock option
agreements under the Plan. The amendment provided that all options are
immediately exercisable. However, any shares acquired upon exercise




                                      F-14
<PAGE>   66

are subject to repurchase by XCare.net over a reverse vesting period that
entitles the optionee to exactly the same vesting schedule as the original
grant. The repurchase price is equal to the exercise price of the options.

    During 1999, the Company issued stock options to certain employees under the
Plan with exercise prices below the deemed fair value of the Company's common
stock at the date of grant. The Company has recorded unearned stock compensation
for the difference between the exercise price of the stock options and the
deemed fair value of the Company's common stock at the date of grant. This
unearned stock compensation will be amortized to expense over the period during
which the options or common stock subject to repurchase vest, generally four
years, using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28. During 1999, the Company recorded
unearned compensation related to these options in the amount of $2,773,000, of
which $504,000 has been amortized to expense.

    If stock compensation expense for the year ended December 31, 1999 had been
allocated across all relevant functional expense categories within operating
expenses, it would be allocated as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED
                                               DECEMBER 31, 1999
                                              -------------------
<S>                                           <C>

          Cost of revenue                           $  80
          Sales and marketing                          52
          General and administrative                  343
          Research and development                     29
                                                    -----
                                                    $ 504
                                                    =====
</TABLE>


    Included in general and administrative expense in the above table is $26,000
for an option the Company granted to a non-employee for 20,000 common shares
with a strike price of $2.70 which vests over twelve months or upon occurrence
of an IPO, if earlier. As of December 31, 1999, the Company had recorded
unearned compensation of $113,000 related to this option grant. Such amount was
charged to stock compensation expense during the first quarter of 2000
concurrent with the closing of the Company's IPO. See Note 10.

    The Company records compensation expense related to stock options granted to
employees using the intrinsic value based method and includes a pro forma
disclosure in the footnotes for compensation value measured using the fair value
accounting treatment. Options granted to consultants are accounted for based on
the fair value of the consideration received or the fair value of the options
issued, whichever is more reliably measurable. For the fair value disclosure
below, compensation value is estimated for each option grant under the Plan on
the date of grant using a Black-Scholes-type option pricing model. The following
assumptions were used for grants in 1998 and 1999: risk-free rates corresponding
to government securities with original maturities similar to the expected option
lives of 4.5% to 5.6% in 1998 and 4.9% to 6.3% for 1999; expected dividend yield
of 0% for both periods; volatility factor of zero; and expected lives of
approximately one year beyond vesting dates for all periods.

    Based on calculations using a Black-Scholes-type minimum value option
pricing model, the weighted-average fair value of options at grant date was
$0.06 and $0.64 in 1998 and 1999, respectively. The pro forma impact on the
Company's net loss and net loss per share had compensation cost been recorded as
determined in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation" is shown below (in thousands, except per share data).

<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                         DECEMBER 31,
                                                    -----------------------
                                                       1998         1999
                                                    ----------   ----------
<S>                                                 <C>          <C>
          Net loss:
            As reported                             $  (4,082)   $  (3,188)
            Pro forma                                  (4,155)      (3,319)
          Net loss per common share:
            As reported                             $  (10.64)   $   (6.91)
            Pro forma                                  (10.65)       (7.03)
</TABLE>




                                      F-15
<PAGE>   67

    Total stock options outstanding and exercisable under the Plan as of
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                               STOCK OPTIONS OUTSTANDING                             STOCK OPTIONS EXERCISABLE
        ------------------------------------------------------------------------    ----------------------------
                                             WEIGHTED AVERAGE
                                                REMAINING            WEIGHTED                        WEIGHTED
           RANGE OF           NUMBER OF      CONTRACTUAL LIFE        AVERAGE        NUMBER OF         AVERAGE
        EXERCISE PRICES        SHARES            (YEARS)          EXERCISE PRICE     SHARES       EXERCISE PRICE
        ---------------       ---------      ---------------      --------------    ---------     --------------
<S>                           <C>            <C>                  <C>               <C>           <C>

             $ 0.25             820,400            8.8                $ 0.25          820,400         $ 0.25
               2.70             658,876            9.7                  2.70          658,876           2.70
               2.80              11,667            7.3                  2.80           11,667           2.80
               7.50              95,950            9.9                  7.50           95,950           7.50
              10.00              25,000           10.0                 10.00           25,000          10.00
                              ---------                                             ---------
         $0.25 - 10.00        1,611,893            9.2                $ 1.85        1,611,893         $ 1.85
                              =========                                             =========
</TABLE>


    Activity of the Plan is summarized in the following table:

<TABLE>
<CAPTION>
                                                                     WEIGHTED                        WEIGHTED
                                                    NUMBER OF        AVERAGE          OPTIONS        AVERAGE
                                                      SHARES      EXERCISE PRICE    EXERCISABLE   EXERCISE PRICE
                                                   -----------    --------------    -----------   --------------
<S>                                                <C>            <C>               <C>           <C>

    Options outstanding, December 31, 1996                 --         $   --                --         $   --
    Options granted                                    94,701           2.80
    Less: options forfeited                           (62,833)          2.80
                                                   ----------
    Options outstanding, December 31, 1997             31,868           2.80            12,967           2.80
    Options granted                                 1,120,600           0.25
    Less: options forfeited                           (22,351)          1.10
                                                   ----------
    Options outstanding, December 31, 1998          1,130,117           0.28           424,885           0.32
    Options granted                                 1,175,276           2.48
    Less: options exercised                          (187,663)          0.52
    Less: options forfeited                          (505,837)          0.28
                                                   ----------
    Options outstanding, December 31, 1999          1,611,893           1.85         1,611,893           1.85
                                                   ==========
</TABLE>


401(k) Plan

    The Company has adopted an employee savings and retirement plan (the "401(k)
Plan") covering substantially all of the Company's employees. Pursuant to the
401(k) Plan, eligible employees may elect to reduce their current compensation
by up to the statutory prescribed limit and have the amount of such reduction
contributed to the 401(k) Plan. The Company may make contributions to the 401(k)
Plan on behalf of eligible employees. The Company has not made any contributions
to the 401(k) Plan.

7. INCOME TAXES

    Prior to January 1, 1996, the Company elected to be taxed under Subchapter S
of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
stockholders were responsible for payment of taxes on income earned by the
Company, and the Company distributed to stockholders annually an amount equal to
the estimated tax liability arising from operations. On January 1, 1996, the
Company revoked its election to be taxed under Subchapter S of the Code and
elected to be taxed under Subchapter C of the Code. In connection with the
change in status, the Company reclassified accumulated earnings of $576,000 to
additional paid-in capital to reduce accumulated earnings to zero as of the date
of the conversion. At December 31, 1998 and December 31, 1999 the Company had
net operating loss ("NOL") carryforwards of approximately $9.4 million and $12.6
which may be used to offset future taxable income. These carryforwards expire
beginning in 2012. The Code contains provisions that may limit the NOL available
for use in any given year upon the occurrence of certain events, including
significant changes in ownership interest. A change in ownership of a company of
greater than 50% within a three-year period results in an annual limitation on
the Company's ability to utilize its NOL carryforwards from tax periods prior to
the ownership change. The Company's NOL carryforwards as of December 31, 1999
are subject to annual limitations due to changes in ownership occurring in March
1997 and in June 1999. Approximately $1,080,000 are limited to annual
utilization of approximately $60,000 and NOL carryforwards of approximately
$9,000,000 are limited to annual utilization of approximately $600,000, subject
to adjustment for



                                      F-16
<PAGE>   68

realization of any built-in gains or losses. Future ownership changes could
further limit the utilization of the Company's NOLs.

    The benefit from income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31,
                        -----------------------------
                          1997       1998       1999
                        ---------  ---------  -------
<S>                     <C>        <C>        <C>
Current:
  Federal               $    (627)   $  --     $  --
  State                        --       --        --
Deferred:
  Federal                    (383)      --        --
  State                       (68)      --        --
                         --------    -----     -----
Total                   $  (1,078)   $  --     $  --
                        =========    =====     =====
</TABLE>

    The components of the Company's deferred income tax assets and liabilities
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  DECEMBER 31,
                                               -----------------
                                                 1998     1999
                                               -------   -------
<S>                                            <C>       <C>
Deferred tax assets:
  Deferred revenue                             $    50   $    48
  Impairment and exit cost accruals                355        12
  Employee benefits                                 57        49
  Reserves                                          35       107
  Net operating loss carryforwards               3,681     4,871
Deferred tax liabilities:
  Cash to accrual Section 481(a)                  (281)     (187)
  Fixed asset sale and depreciation               (187)     (246)
  Amortization                                     (57)      (57)
Less: Valuation allowance                       (3,653)   (4,597)
                                               -------   -------
  Net deferred tax asset                       $    --   $    --
                                               =======   =======
</TABLE>

    The Company's deferred tax assets represent unrecognized future tax benefit.
A valuation allowance has been established for the entire tax benefit, and no
benefit for income taxes has been recognized in the accompanying statement of
operations as the realization of the potential assets is not more likely than
not.

    The benefit for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 34% to loss before income taxes as follows
(in thousands):

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                    --------------------------------
                                                        1997       1998       1999
                                                    ---------   ---------  ---------
<S>                                                 <C>         <C>        <C>
        Federal income tax benefit at 34%           $ (2,856)   $ (1,388)  $ (1,084)
        State income tax, net of federal benefit        (381)       (166)      (103)
        Change in valuation allowance                  2,136       1,517        944
        Unearned compensation
                                                          --          --        209
        Other                                             23          37         34
                                                    --------    --------   --------
        Income tax expense (benefit)                $ (1,078)   $     --   $     --
                                                    ========    ========   ========
</TABLE>




                                      F-17
<PAGE>   69

8. COMMITMENTS AND CONTINGENCIES

    The Company leases equipment and office space under various long-term
non-cancelable operating leases that expire in 2005. The following is a schedule
by year of future minimum lease payments under operating leases, at December 31,
1999 (in thousands):

<TABLE>
<S>                                           <C>
                2000                          $   634
                2001                              624
                2002                              210
                2003                              112
                2004                              115
                Thereafter                         10
                                              -------
                                                1,705
                Less: sublease income             (13)
                                              -------
                                              $ 1,692
                                              =======
</TABLE>


    Total rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $356,000, $438,000 and $375,000, respectively.

    In December 1998, the Company purchased an exclusive license for certain
software to be resold. This arrangement requires the Company to pay a royalty of
17.5% of all of its sales of the software. In the event the Company does not
satisfy specified minimum sales levels through June 30, 2000, the Company may
forfeit the exclusive rights to resell this software.

    The Company has entered into another arrangement with a customer that
provides for a 10% royalty payment to the customer in the event the Company
resells the proprietary module developed for this customer.

9. RELATED PARTY TRANSACTIONS

    During 1999, the Company entered into a professional services agreement with
an entity whose managing member is a general partner of one of the holders of
the Company's Convertible Preferred Stock. The Company recognized $453,000 in
revenue under such agreement during the fourth quarter ended December 31, 1999,
and accounts receivable from this entity was $453,000 at December 31, 1999.

10. SUBSEQUENT EVENTS

    In January 2000, the Company's certificate of incorporation was amended,
whereby, after the IPO, the board of directors will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the designations, powers, preferences,
privileges, which may be greater than the rights of the common stock.

   In January 2000, the Company's certificate of incorporation was amended, to
increase the number of authorized common shares to 100,000,000, as adjusted, for
the one-for-ten reverse stock split.

    In January 2000, the Company's certificate of incorporation was amended, to
effect a one-for-ten reverse stock split of its common stock. All references in
the financial statements to shares, share prices, and per share amounts have
been adjusted retroactively for all periods presented to reflect the reverse
stock split.

    In January 2000, the board of directors adopted an employee stock purchase
plan (the "Employee Stock Purchase Plan,"), which became effective immediately
on the effective date of the IPO. A total of 500,000 shares of common stock have
been reserved for issuance under the Employee Stock Purchase Plan. The Employee
Stock Purchase Plan permits eligible employees to purchase common stock totaling
up to 20% of an employee's compensation through payroll deductions. The Employee
Stock Purchase Plan for U.S. employees is intended to qualify under Section 423
of the Internal Revenue Code and contains consecutive overlapping twelve-month
offering periods. Each offering period includes two six-month purchase periods.
The price of common stock to be purchased will be 85% of the lower of the fair
market value of the common stock either at the beginning of the offering period
or at the end of that purchase period.



                                      F-18
<PAGE>   70

    In January 2000, the board of directors adopted the Director Option Plan,
which became effective immediately on the effective date of the IPO. A total of
250,000 shares of common stock have been reserved for issuance under the
Director Option Plan. Members of the board of directors who are not employees of
XCare.net are eligible to participate in the Director Option Plan. The Director
Option Plan provides for an automatic initial grant of an option to purchase
25,000 shares of common stock (the "Initial Grant") upon the later of the
effective date of the Director Option Plan or the date a person first becomes a
non-employee director. After the Initial Grant, a non-employee director will
automatically be granted options to purchase 10,000 shares of common stock
("Subsequent Grant") each year on the date of XCare.net's annual stockholder's
meeting, if such director has served as a member of the board for at least six
months. The term of such options is ten years, provided that they will terminate
three months following the date the director ceases to be a director of
XCare.net or twelve months if the termination is due to death or disability.
Each Initial Grant will vest as to 25% of the shares on each anniversary date of
the date of grant and each Subsequent Grant will vest as to 100% of the shares
on the anniversary date of the date of grant.

    In January 2000, in order to settle a dispute, the board of directors agreed
to revise the exercise price of a warrant to purchase 12,250 shares of common
stock from $31.46 per share to $3.146 per share. As a result, the Company
expects to record a charge of $132,000 during the first quarter of 2000.

    On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, the Company
completed an IPO of 5,750,000 shares of its common stock (including 750,000
shares sold pursuant to the exercise of the Underwriters' over-allotment option)
at an IPO offering price of $18.00 per share (the "Offering"). Proceeds to the
Company from the Offering, after calculation of the underwriters' discount and
commission, totaled approximately $94.7 million, net of offering costs of
approximately $1.6 million. Concurrent with the closing of the IPO, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into 9,108,122 shares of common stock. In addition, upon
closing of the IPO, all outstanding common stock warrants and the Series A
convertible preferred stock warrants were exercised. The Series A convertible
preferred stock issued upon the exercise of the latter warrants was
automatically converted into common stock and together with the exercise of the
common stock warrants, resulted in the issuance of 702,924 additional shares of
common stock.

    In January and February 2000, the Company granted incentive stock options to
certain employees to purchase 124,700 shares of common stock with exercise
prices below the deemed fair value of the Company's common stock at the date of
grant. In connection with such option grants, the Company recognized unearned
compensation totaling $123,000, which is being amortized over the four year
vesting period of the related options.



                                      F-19
<PAGE>   71
                                    EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit
  Number               Description of Document
  -------              -----------------------
<S>              <C>

     1.1      Form of Underwriting Agreement. (1)

     3.1      Amended and Restated Certificate of Incorporation of Registrant. (1)

     3.2      Form of Amended and Restated Certificate of Incorporation of Registrant to be filed
              upon the closing of the offering made under the Registration Statement. (1)

     3.3      Bylaws of Registrant. (1)

     3.4      Amendment to the Amended and Restated Certificate of Incorporation of Registrant
              effecting a reverse stock split. (1)

     4.1      Form of Registrant's Common Stock Certificate. (1)

     4.2      Second Amended and Restated Registration Rights Agreement, dated as of July 27, 1999,
              between the Registrant and the parties named therein. (1)

     5.1      Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. (1)

     10.1     Form of Indemnification Agreement entered into by Registrant with each of its
              directors and executive officers. (1)

     10.2     Amended and Restated 1997 Stock Option Plan. (1)

     10.3     1999 Employee Stock Purchase Plan and related agreements. (1)

     10.4     1999 Director Option Plan and related agreements. (1)

     10.5     Licensing Agreement, dated as of December 30, 1998, between the Registrant and Match
              Health Care Services, Ltd. (1) (2)

     10.6     Master Licensing Agreement, dated February 4, 1999, between the Registrant and
              Methodist Care, Inc. (1) (2)

     10.7     Services Agreement Subcontract, dated December 17, 1998, between the Registrant and
              PRC, Inc. (1)

     10.8     Master Licensing, Processing and Services Agreement, dated February 16, 1997, between
              the Registrant and Healthscope/United, Inc. (1) (2)

     10.9     System Management Contract, dated April 1, 1999, between the Registrant and Advica
              Health Resources. (1) (2)

     10.10    Administration Services Agreement, dated March 29, 1999, between the Registrant and
              American Medical Pathways, Inc. (1) (2)

     10.11    Processing and Services Agreement, dated January 1, 1997, between the Registrant and
              Brokerage Services Incorporated. (1) (2)

     10.12    Addendum to Processing and Services Agreement, dated July 25, 1997, between the
              Registrant and Brokerage Services Incorporated. (1) (2)

     10.13    Supplemental Agreement, dated December 24, 1997, between the Registrant and Brokerage
              Services Incorporated. (1) (2)

     10.14    Employers Mutual, Inc. Assignment Letter, dated August 5, 1999, between the Registrant
              and Employers Mutual, Inc. (1) (2)

     10.15    Master License and Services Agreement, dated June 24, 1998, between Registrant and
              Employers Mutual, Inc. (1) (2)

     10.16    Contractor Agreement, dated February 19, 1999, between the Registrant and Employers
              Mutual, Inc. (1) (2)

     10.17    Master Licensing and Services Agreement, dated February 20, 1998, between the
              Registrant and Provider Services, Incorporated. (1) (2)

     10.18    Contractor Agreement, dated April 27, 1999, between the Registrant and Provider
              Services, Incorporated. (1) (2)

     10.19    Master Licensing and Services Agreement, dated August 24, 1998, between the Registrant
              and Quest Diagnostics Incorporated. (1) (2)

     10.20    Offer letter, dated September 22, 1997, with Lorine Sweeney. (1)

     10.21    Offer letter, dated December 12, 1997, with Mark Rangell. (1)

     10.22    Offer letter, dated June 12, 1998, with Tammy McLaren. (1)

     10.23    Sublease, dated as of May 11, 1998, by and between the Registrant and Echo Bay
              Management Corp. (1)
</TABLE>

<PAGE>   72

<TABLE>
<CAPTION>
  Exhibit
  Number               Description of Document
  -------              -----------------------
<S>              <C>
     10.24    Sub-sublease Agreement, dated as of December 18, 1998, by and between Registrant and
              Project Discovery, Inc. (1)

     10.25    Office lease, dated May 2, 1997, between Registrant and MBL Life Assurance
              Corporation. (1)

     10.26    Office lease, dated September 29, 1995 between Registrant and MBL Life Assurance
              Corporation. (1)

     10.27    Consulting Agreement, dated June 10, 1998, by and between Registrant and ADIS
              International Ltd. (1) (2)

     10.28    Consulting Agreement, dated September 16, 1998, by and between Registrant and ADIS
              International Ltd. (1) (2)

     10.29    Development Services Agreement, dated November 8, 1999, by and between Registrant and
              Doheny Eye Medical Group, Inc. (1) (2)

     10.30    Development Services Agreement, dated November 10, 1999 by and between Registrant and
              Delta Health Services. (1) (2)

     10.31    Hosting Services Agreement, dated November 10, 1999, by and between Registrant and
              Delta Health Services. (1) (2)

     10.32    Office Lease Agreement, dated November 1, 1999, by and between Registrant and Mountain
              States Mutual Casualty Company. (1)

     10.33    Software License and Services Agreement, dated October 25, 1999, by and between
              Registrant and Oracle Corporation. (1) (2)

     10.34    Professional Services Agreement, dated September 9, 1999, by and between Registrant
              and Asthma Management Company. (1) (2)

     10.35    Consulting Services Agreement, dated November 29, 1999, by and between Registrant and
              Decision Consultants, Inc. (1)

     10.36    Sublease dated December 17, 1999 by and between Registrant and The Pittsburgh & Midway
              Coal Mining Co. (1)

     16.1     Letter regarding change in certifying accountant. (1)

     23.1     Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in
              Exhibit 5.1). (1)

     23.2     Consent of PricewaterhouseCoopers LLP. (1)

     24.1     Power of Attorney (See page II-7).

     27.1     Financial Data Schedule.*
</TABLE>

 *  Filed herewith.

(1) Previously filed with the Securities and Exchange Commission (the
    "Commission") as an Exhibit to the Registrant's Form S-1 on November 2, 1999
    (File No. 333-90165).

(2) Confidential treatment has been requested with respect to certain portions
    of this exhibit. Omitted portions have been filed separately with the
    Securities and Exchange Commission.