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

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

                   For the fiscal year ended December 31, 2000

                        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: None


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


     Title of each class                                Name of each exchange on
                                                            which registered

Common Stock, par value $0.01
          per share                                              NASDAQ


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 X    No
                      ---     ---

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

The aggregate market value of the voting common stock held by non-affiliates of
the registrant was $42 million based on the last reported sale price of the
common stock of the registrant on the Nasdaq National Market on March 27, 2001.
This determination is not necessarily conclusive for other purposes.

As of March 27, 2001, there were 16,412,566 shares of Common Stock of the
registrant outstanding.

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                                 XCARE.NET, INC.

                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
    Item
   Number                                                                                                Page
   ------                                                                                                ----
<S>            <C>                                                                                       <C>
                                                      PART I
      1        Business............................................................................         3
      2        Properties..........................................................................        18
      3        Legal Proceedings...................................................................        18
      4        Submission of Matters to a Vote of Security Holders.................................        18

                                                     PART II
      5        Market for Registrant's Common Equity and Related Stockholder Matters...............        20
      6        Selected Financial Data.............................................................        21
      7        Management's Discussion and Analysis of Financial Condition and
                   Results of Operations...........................................................        22
     7A        Qualitative and Quantitative Disclosures About Market Risk..........................        29
      8        Consolidated Financial Statements and Supplementary Data............................        29
      9        Changes in and Disagreements with Accountants on Accounting and
                   Financial Disclosure............................................................        29

                                                     PART III
     10        Directors and Executive Officers of the Registrant..................................        30
     11        Executive Compensation..............................................................        30
     12        Security Ownership of Certain Beneficial Owners and Management......................        30
     13        Certain Relationships and Related Transactions......................................        30

                                                     PART IV
     14        Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................
               Signatures..........................................................................        31
               Consolidated Financial Statements...................................................        F1-F22
</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.net,",
the "Company", "we" or "us") 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, XTiera(TM),
using extensible mark-up language ("XML"). Utilizing XTiera(TM), we design,
develop and host custom health care Web sites, known as portals, for payers,
providers and other health care industry participants. Through these portals, we
link health care providers, payers and other industry participants into a
community to create an Internet exchange. We use XTiera(TM) to deliver a broad
range of applications, services and electronic product offerings that streamline
and automate high-volume, data-intensive transactions and processes. We process
transactions such as eligibility checking, claims status, referral processing
and physician credentialing and enrollment. We also provide consulting services
to define, develop and implement Internet health care strategies as well as Web
site hosting, transaction processing, transaction support and maintenance
services for our customers. XTiera(TM) is based on XML, in conjunction with the
Topic Navigation Mapping standard. The enhanced integration and filtering
capabilities are designed to meet the demands of health care industry
participants. We expect XML 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 XML formatted content. We take advantage
of the benefits of both XML and Topic Navigation Mapping technologies to process
data trapped in usually incompatible legacy computer systems, allow for
automation of health care processes and integrate a wide variety of health care
data including audio, video and text. We operate in two segments: development
and consulting services, and recurring services. The development and consulting
services segment includes revenue generated from software engineering and
integration. The recurring services segment includes revenue generated from
hosting services, maintenance services, transaction services, recurring license
fees and other services.

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. 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. In April 1999, we
changed our name to XCare.net, Inc. We intend to derive an increasing portion of
our future revenue from our Internet-based applications, services and product
offerings.

    On February 9, 2000, the Securities and Exchange Commission ("SEC") declared
effective the Company's Registration Statement on Form S-1. Pursuant to this
Registration Statement, we completed an Initial Public Offering ("IPO") of
5,750,000 shares of our common stock (including 750,000 shares sold pursuant to
the exercise of the underwriter's over-allotment option) at an offering price of
$18.00 per share (the "Offering"). Proceeds to us from the



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Offering, after calculation of the underwriter's discount, totaled approximately
$94.2 million, net of offering costs of approximately $2.1 million. Concurrent
with the closing of the IPO, all outstanding shares of our 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.

    On November 8, 2000, we purchased all of United Healthscope, Inc.'s d/b/a
Advica Health Resources ("Advica") common shares. The purchase price totaling
approximately $2.2 million included 70,000 shares of XCare.net common stock,
approximately $830,000 in cash, and professional fees directly related to the
acquisition, net of accounts receivable and the Company's net investment in
Advica. The purchase price was allocated to the acquired assets and liabilities
at their fair values as of November 8, 2000. The acquired intangibles consisted
of approximately $549,000 in customer base, $488,000 in acquired workforce, and
$86,000 to trade name. The remaining excess purchase price of approximately
$402,000 was recorded as goodwill.

    In conjunction with the purchase of Advica Health Resources, the Company
incurred approximately $273,000 in costs primarily related to the involuntary
termination benefits of Advica employees and for other costs to integrate
operating activities. Approximately $95,000 of these employee termination
benefits had been paid as of December 31, 2000. The remaining balance was paid
in January 2001.

    On November 29, 2000, we purchased all of Integrated Media Inc.'s common
stock. The purchase price, totaling approximately $2.1 million, consisted
primarily of cash and professional fees directly related to the acquisition. The
total purchase price was allocated to the assets and liabilities at their fair
values as of November 29, 2000. The acquired identifiable intangible assets
totaling approximately $322,000 consisted primarily of acquired workforce and
customer base with the remaining excess purchase price of approximately $1.62
million being recorded as goodwill. In addition to the $2.1 million purchase
price, the Company will pay $1 million to the former president of Integrated
Media as compensation for his assistance with the transition over the next year.
This $1 million has been paid into escrow, is included in other current assets,
and will be amortized to sales and marketing expense over the one year term of
the agreement.

    The Company retained an independent appraiser to assist with the assigning
of the fair values to the intangibles. The valuations relied on methodologies
that most closely related to the fair market value assignment with the economic
benefits provided by each asset and risks associated with the assets. The total
goodwill and identifiable intangible assets acquired of $3.5 million are being
amortized over their estimated lives of 3 years.

    Advica and Integrated Media became wholly-owned subsidiaries of XCare.net
effective on the date of the acquisitions and both transactions were accounted
for under the purchase method of accounting in the fourth quarter of 2000.
Operating results for both Advica and Integrated Media from the date of
acquisition are included in our consolidated financial results.

Health Care Market Overview

    The U.S. Health Care Finance Administration estimates that health care
expenditures currently represent $1.3 trillion, or 13.1% of the U.S. economy,
and that these expenditures will increase to $2.6 trillion by 2010 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.

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.



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    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, 830,000 active physicians and 6,000 hospitals. Additionally,
        there are over 17,000 nursing homes, and 9,000 home health agencies.

    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, over 60% 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 have 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 is
        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.

    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 changes
        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.

OUR SOLUTION

    We are an electronic commerce services provider for health care businesses.
Using XTiera(TM), 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. These custom portals
facilitate health care transactions such as eligibility checks, referrals,
authorizations, claims submissions and inquiry, or 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. XTiera(TM)
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:



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    Use of new standard for information exchange. XTiera(TM) and associated
applications and services are based on XML. We expect XML to be a predominant
protocol for exchanging multimedia data for information exchange and electronic
commerce on the Internet in the future. XML 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 XML 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. XCare.net will leverage an accelerated development methodology
to analyze, design and implement web-based solutions for our customers. We use
our proprietary eHealth Development Discipline(TM) ("eDD") methodology to
develop the proposed eHealth solution. In the analysis and design phase,
XCare.net's team works side by side with business, product and IT experts from
our customers to develop the project objectives, scope and requirements. In the
design stage, the use cases, information inventory and navigation maps created
during the analysis phase are used to develop the prototype. We use a
prototyping approach to develop the logical design for the Web application. The
implementation phase is carried out in a phased approach. First, the staging
environment is established and the customer is given access to conduct testing.
Once the application is accepted, the application is moved to a production
environment and is then accessible. XTiera(TM) is designed to provide a
comprehensive set of applications, services and product offerings while
preserving previous technology investments 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 XTiera(TM) 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, 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 new and
        existing 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.

    o   Identify new revenue opportunities for us. Our customers can produce
        complementary applications or services that operate on XTiera(TM) 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 XTiera(TM). Our
        customers can extend the scope and reach of XTiera(TM) 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 XTiera(TM) as well as extend
        the community to new users.

TECHNOLOGY

    XTiera(TM) is based on an XML-based infrastructure in conjunction with XML
Topic Map ("XTM"), the Topic Navigation Mapping standard. The enhanced
capabilities of XTiera(TM) are designed to meet the demands of health care
industry participants. Unlike the current Internet standard, hypertext mark-up
language, or HTML, XML in combination with the Topic Navigation Mapping standard
allows a higher degree of flexibility for customized data exchange between
health care participants. We expect XML to be a predominant protocol for
exchanging multimedia data for information exchange and electronic commerce in
the future. Topic Navigation Mapping provides a standard



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format for indexing and structuring the XML formatted content. We call the
resulting indices and structures Topic Maps. We take advantage of the benefits
of both XML 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.

    XML 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 is not 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 or user management services 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.

    XTM Manager. The XTM Manager uses Topic Navigation Mapping technology to
organize and index information and index information and to provide workflow
navigation. The primary components of the XTM Manager are the DataFabric and
LogicFabric.

    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.

    Service Broker. The Service Broker or Transaction Switch 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 XTiera(TM) 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



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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 fireproof
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.

    XTiera(TM) 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.

CUSTOMERS

    In 2000, sales to HealthNet, Inc. accounted for 17% of revenue and sales to
Nursefinders, Inc. accounted for 10% of revenue. 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. 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.

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.

    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.

RESEARCH AND DEVELOPMENT

    At December 31, 2000, our development and engineering group consisted of 8
employees. For the years ended December 31, 1998, 1999 and 2000, we incurred
$670,000, $575,000 and $2,952,000 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 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;



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    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.

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.

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 2002. We designed XTiera(TM)and our 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 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.



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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.

EMPLOYEES

    As of December 31, 2000, we had a total of 244 employees, of whom 184 are
engaged in professional services and customer support functions, 18 in the
electronic commerce operations center, 15 in sales and marketing, 19 in
management, finance and administration and 8 in research and 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 significantly in 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.

EXECUTIVE OFFICERS OF THE COMPANY

    The following persons were serving as executive officers of the Company as
of March 27, 2001.

<TABLE>
<CAPTION>
NAME                                        AGE   POSITION
----                                        ---   --------
<S>                                         <C>   <C>
Lorine R. Sweeney.......................... 43    President and Chief Executive Officer
Gary T. Scherping ......................... 41    Senior Vice President, Finance and Chief Financial Officer
John D. Hickey............................. 44    Senior Vice President and Chief Operating Officer
Thomas M. Pianko........................... 40    Senior Vice President, Sales and Business Development
</TABLE>

----------

    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.



                                       10
<PAGE>   11

    Gary T. Scherping. Mr. Scherping has been Senior Vice President of Finance
and Chief Financial Officer of XCare.net since March 2001. Mr. Scherping was
Vice President of Finance and acting Chief Financial Officer from August 2000
until March 2001, Vice President and Controller from May 2000 until August 2000
and Vice President of Acquisitions from February 2000 until May 2000. Mr.
Scherping was Treasurer from February 1999 to February 2000, Director of
Marketing and Banking from July 1997 to February 1999 and Director of Financial
Accounting and Reporting from September 1994 to July 1997 at Echo Bay Mines Ltd.

    John D. Hickey. Mr. Hickey has been Chief Operating Officer since November
2000. Mr. Hickey was Vice President of Operations for FastIdeas.com, Inc., a
start-up accelerator and incubator from February 2000 until October 2000. He
co-founded and managed eProve, Inc., an Application Service Provider from
December 1998 until February 2000. Previously he held executive management
positions at consulting organizations, including Sybase, Inc. and GE Consulting
Services Corporation.

    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. Prior
thereto, Mr. Pianko was the Regional Accounts Manager for Eli Lilly & Co., a
company engaged in the business of ethical pharmaceutical development and sales.

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 will continue 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.

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 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 for the years ended December 31, 2000, 1999 and 1998.
As of December 31, 2000, we had an accumulated deficit of $31.7 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 in the 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 section.



                                       11
<PAGE>   12

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 section, including: any delay in the
introduction of new applications, services and product offerings and
enhancements of existing solutions; the loss of a major customer; reductions in
the average selling prices of our applications, services and product offerings;
cost pressures from shortages of skilled technical employees, increased product
development and engineering expenditures; and 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,
distributor and co-marketer 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 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.

If the health care industry does not accept the need for a common technology
platform, our business may 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 may not grow.



                                       12
<PAGE>   13

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 XML fails to become a standard data exchange protocol for the Internet,
the marketability of our products may be limited.

    XTiera(TM) operates with the extensible mark-up language, or XML. The
failure of XML 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 XML standard arise in the
market, the market for XML-based applications may grow slowly or not at all. If
the version of XML 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 XML, which will cause delays in shipments of our
application and product offerings and impede our ability to provide services.

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 2000, sales to HealthNet, Inc. accounted for 17% of revenue and
sales to Nursefinders, Inc. accounted for 10% of revenue. 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.
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 certain of them as customers, our total revenue will be significantly
reduced.

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.

If our transaction hosting services suffer interruptions, our business and
reputation could be harmed.

    In the past, our customers have 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



                                       13
<PAGE>   14

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.

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
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 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. Our long and unpredictable sales cycle can
result in delayed revenues, difficulty in



                                       14
<PAGE>   15

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. We may not be successful in developing and marketing 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 compliance with government regulation of health care becomes costly and
difficult for our customers, 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 2002.

    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.

Because we provide utilization review services, we may be liable for the denial
of payments for medical claims or medical services.

    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.



                                       15
<PAGE>   16

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 has 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.

    Although the Company and its customers test the 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.

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 our current cash resources, will be sufficient to meet our
requirements for the next 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 technology companies to increase
the number and variety of applications, services and product offerings we offer
and to increase our customer base. For example, we acquired Advica and
Integrated Media in the fourth quarter of 2000. 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



                                       16
<PAGE>   17

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
non-infringing 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.

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," "XTiera," "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.

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



                                       17
<PAGE>   18

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.

We have anti-takeover defenses that could delay or prevent an acquisition of our
company.

    On July 12, 2000, the Company's Board of Directors approved a preferred
stock rights agreement. This plan is not intended to prevent a takeover, but to
protect and maximize the value of shareholders' interests. In addition,
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 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.

ITEM 2. PROPERTIES.

    Our principal executive and corporate offices are located in Englewood,
Colorado, where we lease approximately 30,426 square feet of subleased office
space. The leases on this facility expires at various dates ranging from 2001
through 2003. We also sublease 37,925 square feet of office space, primarily for
operations and research and development, in various locations in the Unites
States that expire at dates ranging from 2001 through 2007. We believe that our
current facilities will be sufficient to meet our needs for at least the next
twelve months.

ITEM 3. LEGAL PROCEEDINGS.

    Our Company and its subsidiaries are subject to claims and proceedings
arising in the ordinary course of business. There are no pending claims or
proceedings that management expects to be material. See also Note 8 to the
consolidated financial statements on page F-19.

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

    We held our annual meeting of shareholders (the "Annual Meeting") on
November 1, 2000. The number of common votes present at the Annual Meeting
voting and withholding authority to vote was 14,369,561 which represented 88% of
the common votes outstanding, which were 16,249,801 votes, on September 20,
2000, the record date for the Annual Meeting. At the meeting, the following
items relating to the Company were submitted to a vote of shareholders of the
Company:

1.       Election of Class I Directors:

<TABLE>
<CAPTION>
                                       VOTES FOR                   VOTES ABSTAINED
                                       ----------                  ---------------
<S>                                    <C>                         <C>
Fred L. Brown                          13,493,440                      876,121
L. Ben Lytle                           13,492,340                      877,221
Daniel J. Mitchell                     13,507,440                      862,121
</TABLE>



                                       18
<PAGE>   19

2.       Amendment of the Company's 1997 Stock Plan to increase the number of
         shares of common stock reserved for issuance under the plan from
         2,200,000 to 3,600,000 shares.

<TABLE>
<CAPTION>
                  VOTES FOR                VOTES AGAINST            VOTES ABSTAINED
                  ----------               -------------            ---------------
<S>                                        <C>                      <C>
                  10,176,820                 1,745,188                   8,000
</TABLE>

Based on the aforementioned voting results, both proposals were approved by our
shareholders.



                                       19
<PAGE>   20

                                     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 to March 31, 2000) .......   $31.25     $14.13
Second Quarter .............................................    11.44       5.31
Third Quarter ..............................................     6.00       3.00
Fourth Quarter .............................................     9.25       4.00

2001
----
First Quarter  (January  1, 2001 through March 27, 2001) ...   $ 7.63     $ 5.38
</TABLE>

    At March 27, 2001 the last reported sale price of the common stock was $6.56
per share, and the number of holders of record of the common stock was
approximately 40. 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 $2.1 million and underwriting discounts and
commissions of $7.2 million, was approximately $94.2 million.

    We expect to use our cash and cash equivalents for general corporate
purposes, working capital and capital expenditures to fund our 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 our cash and cash equivalents for other purposes. A
portion of our cash, cash equivalents and short-term investments may also be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. Pending the use of the proceeds for
the above purposes, we invested such funds in short-term, interest-bearing,
investment-grade securities.

    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.



                                       20
<PAGE>   21

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. Historical results are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------------
                                                       1996        1997        1998        1999        2000
                                                     --------    --------    --------    --------    --------
                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ....................................   $  9,726    $  5,984    $  2,270    $  4,853    $ 10,681
Total costs and expenses .........................     10,523      14,641       5,915       7,974      33,025
                                                     --------    --------    --------    --------    --------
Loss from operations .............................       (797)     (8,657)     (3,645)     (3,121)    (22,344)
Settlements received from contract
  terminations ...................................      2,250         250          --          --          --
Interest income (expense), net ...................         --           5        (437)        (67)      5,027
                                                     --------    --------    --------    --------    --------
Income (loss) before income taxes ................      1,453      (8,402)     (4,082)     (3,188)    (17,317)
Income tax (benefit) expense .....................      1,200      (1,078)         --          --          --
                                                     --------    --------    --------    --------    --------
Net income (loss) ................................   $    253    $ (7,324)   $ (4,082)   $ (3,188)   $(17,317)
                                                     ========    ========    ========    ========    ========
Net income (loss) per common share--basic
  and diluted ....................................   $   0.53    $ (18.92)   $ (10.64)   $   (6.9)   $  (1.20)
                                                     ========    ========    ========    ========    ========
Weighted average common shares
  outstanding -- basic and diluted ...............        476         390         390         472      14,399
                                                     ========    ========    ========    ========    ========
</TABLE>


<TABLE>
<CAPTION>
                                                                DECEMBER  31,
                                           -------------------------------------------------------
                                             1996       1997        1998        1999        2000
                                           --------   --------    --------    --------    --------
                                                               (IN THOUSANDS)
<S>                                        <C>        <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
  short-term investments ...............   $  1,394   $    697    $    198    $  7,455    $ 78,319
Working capital ........................        243       (952)     (5,335)      8,138      82,759
Total assets ...........................      4,492      4,026       2,805      13,183      96,908
Long-term debt .........................      1,317        939         284          --          --
Mandatorily redeemable convertible
  preferred stock ......................         --      6,728       6,827      23,842          --
Stockholders' equity (deficit) .........        842     (6,537)    (10,620)    (13,172)     92,839
</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, during 1997 we abandoned an
        operating lease and incurred impairment charges for related fixed assets
        aggregating $887,000.

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

    o   Our registration statement on Form S-1 covering our 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



                                       21
<PAGE>   22

        $18.00 per share was declared effective on February 9, 2000. 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 $2.1 million and underwriting discounts
        and commissions of $7.2 million, was $94.2 million.

    o   In October 2000, the Company entered into a Software License and
        Services Agreement (the "Agreement") with MedUnite, Inc. ("MedUnite") to
        provide software development services related to the pilot program.
        These services are provided on a time and materials basis and the
        Agreement is cancellable at MedUnite's discretion subsequent to the
        delivery of the first pilot and prior to the contract contingency date
        ("Contingency Date"), which is expected in mid-2001. In addition, the
        Company will host MedUnite's pilot program. If MedUnite does not
        terminate the Agreement before the Contingency Date, the Company will
        sell MedUnite a software license and is expected to provide ongoing
        hosting, transaction processing, maintenance, software development and
        technical services.

        In connection with the Agreement, the Company issued warrants to
        MedUnite to purchase 1,350,000 shares of XCare.net's common stock at an
        exercise price of $4.06. The warrants were immediately vested
        exercisable and non-forfeitable for a period of eighteen months from the
        date of grant. The fair value of the warrants was calculated to be $3.1
        million and was determined using the Black-Scholes option pricing model
        utilizing a volatility factor of 120%, risk-free interest rate of 6.0%
        and an expected life of 18 months. The amounts billed to MedUnite up to
        the date that the first pilot is delivered (March 2001) will be reduced
        by the fair value attributed to the warrants. For the year ended
        December 31, 2000, the Company allocated $2.2 million of the warrant
        charge to billings and amounts billable. The remaining value of the
        warrants is $0.9 million at December 31, 2000 and is included in other
        current assets. As of December 31, 2000, the Company expects future
        billings to be in excess of the remaining fair value of the warrants.

    o   In 2000, we purchased all the outstanding stock of Advica Health
        Resources for 70,000 shares our common stock in a transaction accounted
        for as a purchase. The total purchase price of Advica was $2.2 million.
        We also acquired all the outstanding stock of Integrated Media Inc. for
        $2.1 million in transaction accounted for as a purchase. The
        acquisitions generated goodwill and intangible assets totaling $3.5
        million and an annual amortization expense of $1.2 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, XTiera(TM),
using extensible mark-up language ("XML"). Utilizing XTiera(TM), we design,
develop and host custom health care Web sites, known as portals, for payers,
providers and other health care industry participants. Through these portals, we
link health care providers, payers and other industry participants into a
community to create an Internet exchange. We use XTiera(TM) to deliver a broad
range of applications, services and electronic product offerings that streamline
and automate high-volume, data-intensive transactions and processes. We process
transactions such as eligibility checking, claims status, referral processing
and physician credentialing and enrollment. We also provide consulting services
to define, develop and implement Internet health care strategies as well as Web
site hosting, transaction processing, transaction support and maintenance
services for our customers. XTiera(TM) is based on XML, in conjunction with the
Topic Navigation Mapping standard. The enhanced integration and filtering
capabilities are designed to meet the demands of health care industry
participants. We expect XML 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 XML formatted content. We take advantage
of the benefits of both XML and Topic Navigation Mapping technologies to process
data trapped in usually incompatible legacy computer systems, allow for
automation of health care processes and integrate a wide variety of health care
data including audio, video and text. We operate in two segments: development
and consulting services, and recurring services. The development and consulting
services segment includes revenue generated from software engineering and
integration. The recurring services segment includes revenue generated from
hosting services, maintenance services, transaction services, recurring license
fees and other services.



                                       22
<PAGE>   23

    On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, we completed an
Initial Public Offering ("IPO") of 5,750,000 shares of our common stock
(including 750,000 shares sold pursuant to the exercise of the underwriter's
over-allotment option) at an offering price of $18.00 per share (the
"Offering"). Proceeds to the Company from the Offering, after calculation of the
underwriter's discount of $7.2 million, totaled $94.2 million, net of offering
costs of approximately $2.1 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 October 2000, the Company entered into a Software License and Services
Agreement (the "Agreement") with MedUnite, Inc. ("MedUnite") to provide software
development services related to the pilot program. These services are provided
on a time and materials basis and the Agreement is cancellable at MedUnite's
discretion subsequent to the delivery of the first pilot and prior to the
contract contingency date ("Contingency Date"), which is expected in mid-2001.
In addition, the Company will host MedUnite's pilot program. If MedUnite does
not terminate the Agreement before the Contingency Date, the Company will sell
MedUnite a software license and is expected to provide ongoing hosting,
transaction processing, maintenance, software development and technical
services.

    In connection with the Agreement, the Company issued warrants to MedUnite to
purchase 1,350,000 shares of XCare.net's common stock at an exercise price of
$4.06. The warrants were immediately vested exercisable and non-forfeitable for
a period of eighteen months from the date of grant. The fair value of the
warrants was calculated to be $3.1 million and was determined using the
Black-Scholes option pricing model utilizing a volatility factor of 120%,
risk-free interest rate of 6.0% and an expected life of 18 months. The amounts
billed to MedUnite up to the date that the first pilot is delivered (March 2001)
will be reduced by the fair value attributed to the warrants. For the year ended
December 31, 2000, the Company allocated $2.2 million of the warrant charge to
billings and amounts billable. The remaining value of the warrants is $0.9
million at December 31, 2000 and is included in other current assets. As of
December 31, 2000, the Company expects future billings to be in excess of the
remaining fair value of the warrants.

    On November 8, 2000, we purchased all of United Healthscope, Inc.'s d/b/a
Advica Health Resources ("Advica") common shares. The purchase price totaling
approximately $2.2 million included 70,000 shares of XCare.net common stock,
approximately $830,000 in cash, and professional fees directly related to the
acquisition, net of accounts receivable and the Company's net investment in
Advica. The purchase price was allocated to the acquired assets and liabilities
at their fair values as of November 8, 2000. The acquired intangibles consisted
of approximately $549,000 in customer base, $488,000 in acquired workforce, and
$86,000 to trade name. The remaining excess purchase price of approximately
$402,000 was recorded as goodwill.

    In conjunction with the purchase of Advica Health Resources, the Company
incurred approximately $273,000 in costs primarily related to the involuntary
termination benefits of Advica employees and for other costs to integrate
operating activities. Approximately $95,000 of these employee termination
benefits had been paid as of December 31, 2000. The remaining balance was paid
in January 2001.

    On November 29, 2000, we purchased all of Integrated Media Inc.'s common
stock. The purchase price, totaling approximately $2.1 million, consisted
primarily of cash and professional fees directly related to the acquisition. The
total purchase price was allocated to the assets and liabilities at their fair
values as of November 29, 2000. The acquired identifiable intangible assets
totaling approximately $322,000 consisted primarily of acquired workforce and
customer base with the remaining excess purchase price of approximately $1.62
million being recorded as goodwill. In addition to the $2.1 million purchase
price, the Company will pay $1.0 million to the former president of Integrated
Media as compensation for his assistance with the transition over the next year.
This $1.0 million has been paid into escrow, is included in other current
assets, and will be amortized to sales and marketing expense over the one-year
term of the agreement.

    The Company retained an independent appraiser to assist with the assigning
of the fair values to the intangibles. The valuations relied on methodologies
that most closely related to the fair market value assignment with the economic
benefits provided by each asset and risks associated with the assets. The total
goodwill and identifiable intangible assets acquired of $3.5 million are being
amortized over their estimated lives of 3 years.



                                       23
<PAGE>   24


    Advica and Integrated Media became wholly-owned subsidiaries of XCare.net
effective on the date of the acquisitions and both transactions were accounted
for under the purchase method of accounting in the fourth quarter of 2000.
Operating results for both Advica and Integrated Media from the date of
Acquisition are included in our consolidated financial results.

    We recognize revenue in accordance with the provisions of Statement of
Position 97-2, "Software Revenue Recognition" as amended. 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 when
services are essential to the functionality of the delivered software and
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.

    In arrangements where services are not essential to the functionality of the
delivered software, and the Company has no other obligations, the Company
recognizes license revenue when the agreement has been signed, delivery has
occurred, the fee is fixed or determinable and collectibility is probable.

    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.

    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. Sales and marketing expenses
consist of personnel and related overhead costs, including commissions, travel
expenses, field sales office expenses and advertising and promotion costs.
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, insurance expense, investor relation costs
and bad debt expense. Research and development expense includes personnel and
related overhead costs for product development, enhancements to existing
applications and services and quality assurance activities.



                                       24
<PAGE>   25

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,
                                                     ----------------------------------
                                                       1998         1999         2000*
                                                     --------     --------      -------
<S>                                                  <C>          <C>           <C>
Total revenue ....................................      100.0%       100.0%       100.0%
Costs and expenses:
  Cost of revenue ................................       91.9         80.8        132.7
  Sales and marketing ............................       42.5         22.8         48.8
  General and administrative .....................       96.7         38.5         86.2
  Research and development .......................       29.5         11.8         27.6
  Goodwill and other intangibles amortization ....         --           --          0.1
  Stock compensation expense .....................         --         10.4         12.9
                                                     --------     --------      -------
          Total costs and expenses ...............      260.6        164.3        309.2
                                                     --------     --------      -------
Loss from operations .............................     (160.6)       (64.3)      (209.2)
Interest income (expense), net ...................      (19.2)        (1.4)        47.1
                                                     --------     --------      -------
Net loss .........................................     (179.8)%      (65.7)%     (162.1)%
                                                     ========     ========      =======
</TABLE>

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

    Total Revenue. Total revenue increased $5.8 million, or 120.0%, to $10.7
million for the year ended December 31, 2000 from $4.9 million for the year
ended December 31, 1999. Amounts billed or billable to MedUnite of $2.2 million
as of December 31, 2000 were reduced by the same amounts which relate to the
fair value of the warrants issued to MedUnite in connection with the Agreement
discussed above. The increase in total revenue is primarily related to increased
development and consulting revenues derived from increased Internet-based
development projects over the prior year. Internet-based development projects
generally are higher in dollar value than our other services. Higher recurring
revenue from Web site hosting, transaction processing and maintenance services
for the twelve months ended December 31, 2000 as compared to the twelve months
December 31 1999 also added to the increase in total revenue. Total revenue also
increased due to the acquisition of Advica and Integrated Media in the fourth
quarter of 2000.

    Cost of revenue. Cost of revenue increased $10.3 million, or 261.3%, to
$14.2 million for the year ended December 31, 2000 from $3.9 million for the
prior comparable period. The increase in the cost of revenue is related to the
cost of additional personnel and third party contractors to support the growth
in our Internet-based development projects. Expenses also increased due to the
acquisitions of Advica and Integrated Media.

    Sales and marketing. Sales and marketing expenses increased $4.1 million, or
372.0%, to $5.2 million for the year ended December 31, 2000 from $1.1 million
for the year ended December 31, 1999. Sales and marketing expenses increased due
to additional personnel, benefits and increased travel and entertainment, trade
show and conference expenses as our sales force and marketing efforts were
expanded and intensified. Increased commission expense related to obtaining
significant contracts also added to the increase.

    General and administrative. General and administrative expenses increased
$7.3 million, or 393.1%, to $9.2 million for the year ended December 31, 2000
from $1.9 million for the year earlier period. The increase in general and
administrative expenses was primarily due to:

    o   an increase in personnel in the areas of human resources, accounting and
        administration and an increase in benefits expense related to the
        increase in personnel and recruiting costs,

    o   higher legal and accounting fees associated with periodic reporting
        requirements of a public company,

    o   increased insurance expense related to purchasing directors and officers
        insurance,

    o   higher rent expense related to expansion of our facilities,

    o   higher depreciation expense related to an increase in capital
        expenditures to support our operations,

    o   higher bad debt expense related to increased revenues,



                                       25
<PAGE>   26

    o   the acquisition of Advica and Integrated Media, and

    o   increased investor relations expense associated with a public company.

    Research and development. Research and development expenses increased $2.4
million, or 413.4%, to $3.0 million for the year ended December 31, 2000 from
$0.6 million for the year ended December 31, 1999. The increase in research and
development expenses reflects an increased use of third-party contractors
related to the development of our transaction platform, XTiera(TM) offset by a
decrease in salary expense. Additionally, higher rent expense related to our new
Santa Clara research and development facility also added to the increase in
research and development expense.

    Amortization of goodwill and acquired intangibles. The amortization of
goodwill and acquired intangibles results from our acquisitions of
Advica and Integrated Media. Goodwill and identifiable intangibles of $3.5
million was recognized for the amount of the excess of the purchase price over
the fair market value of the net assets acquired and will be amortized on a
straight-line basis over the estimated useful life of 3 years. We obtained
independent appraisals of the identified intangible assets and their remaining
useful lives. Goodwill and other intangibles amortization for the twelve months
ended December 31, 2000 was $96,000.

    Stock compensation expense. 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. We recorded aggregate unearned compensation
of $2.8 million in connection with these stock options. This 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 stock compensation expense amounted to $1.4 million for the
year ended December 31, 2000 compared to $504,000 in 1999. We expect to
recognize amortization expense related to unearned compensation for the
aforementioned grants of $425,000 in 2001, $193,000 in 2002 and $39,000 in 2003.
See Note 6 of Notes to Financial Statements.

    Interest income (expense), net. Interest income (expense), net includes
interest income on cash and cash equivalent balance partially offset by interest
expense on our convertible promissory notes and capital lease obligations.
Interest income, net of interest expense, increased $5.1 million, to interest
income of $5.0 million for the year ended December 31, 2000 from interest
expense of $67,000 for the prior year. The increase in net interest income is
primarily due to the interest income realized from the investment of the
proceeds from our IPO in the first quarter 2000, the conversion of our
convertible promissory notes into common shares simultaneously with our IPO and
the reduction of debt and capital lease obligations during 1999.

    Income tax (benefit) expense. No provision for federal and state income
taxes has been recorded for the years ended December 31, 2000 and 1999, 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, 2000.

    Segment results. Segment results represent margins which, for segment
reporting purposes, exclude certain costs and expenses, including corporate
expenses, taxes other than income and other non-recurring charges. See Note 10
to the consolidated financial statements.

<TABLE>
<CAPTION>
                                1999          2000       (DECREASE)
                             ----------    ----------    ----------
<S>                          <C>           <C>           <C>
Development and consulting   $      720    $   (3,216)   $   (3,936)
Recurring services                  210          (276)         (486)
Other                            (4,118)      (13,825)       (9,707)
                             ----------    ----------    ----------
                             $   (3,188)   $  (17,317)   $  (14,129)
                             ==========    ==========    ==========
</TABLE>

    The decrease in margins for both the development and consulting and
recurring services segments is primarily related to the cost of additional
personnel hired to support the growth in our Internet-based development projects
and



                                       26
<PAGE>   27
an increase in the ratio of third-party contractors to Company personnel in the
first three quarters of 2000. Third-party contractors generally cost the Company
more than our own personnel and consequently generate lower gross profit
margins.

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 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 in 1999 of contract expenses deferred from the prior
year.

    Sales and marketing. Sales and marketing expenses increased $140,000, or
15%, to $1.1 million during the year ended December 31, 1999 from $1.0 million
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.

    General and administrative. 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, to accommodated growth and prepare for our IPO in
the first quarter of 2000.

    Research and development. Research and development expenses decreased
$95,000, or 14%, to $0.6 million for the year ended December 31, 1999 from $0.7
million for the year ended December 31, 1998. This decrease reflects 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 as well
as 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 funding
through the sale convertible preferred stock in the second and third quarters of
1999.

    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 6 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 in the second and third quarter of 1999.

    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.

         Segment Results. Segment results represent margins which, for segment
reporting purposes, exclude certain costs and expenses, including corporate
expenses, taxes other than income and other non-recurring charges. Because all
XCare.net's revenues were generated from recurring services in 1998, comparative
information for the twelve



                                       27
<PAGE>   28


months ended December 31, 1999 and 1998 are not presented. See Note 10 to the
consolidated financial statements on pages F-19 through F-20.

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,
issuances of convertible promissory notes and public sales of common stock.

    We expect to use our cash, cash equivalents and short-term investments for
general corporate purposes, working capital and capital expenditures to fund our
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,
the amount of cash generated by our operations and competition. We may find it
necessary or advisable to use portions of our cash and cash equivalents for
other purposes. A portion of our cash, cash equivalents and short-term
investments may also be used to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. Pending use
of our cash and cash equivalents for the above purposes, we intend to invest
such funds in short-term, interest-bearing, investment-grade securities.

    Net cash used in operating activities was $17.3 million in 2000, $4.4
million in 1999 and $2.2 million in 1998. Net cash used in operating activities
is primarily attributable to net losses.

    Net cash used in investing activities was $48.2 million in 2000 and $1.2
million in 1999, and net cash provided by investing activities was $167,000 in
1998. Investing activities increased in 2000 primarily due to purchases of
short-term investments of $41.0 million and purchases of computer hardware and
software, office furniture and equipment of $3.6 million. In the fourth quarter
of 2000, we purchased all of Integrated Media, Inc.'s common stock for $2.1
million and spent $0.7 million in the purchase of Advica, net of cash received.
See Note 2 to the consolidated financial statements regarding these purchases.
We anticipate total capital expenditures for 2001 to be approximately $3.6
million.

    Net cash provided by financing activities of $95.4 million for 2000 was
primarily related to the net proceeds received from our initial public offering.
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 $94.2 million in cash proceeds, net of underwriting discounts,
commissions and other offering costs. The net cash provided by financing
activities of $12.9 million for 1999 was primarily related to the net proceeds
received from the issuance of convertible preferred stock. The net cash provided
by financing activities of $1.5 million for 1998 was primarily related to the
net proceeds received from the issuance of convertible promissory notes.

    We expect our current cash resources, will be sufficient to meet our
requirements for the next 18 months. 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (the "Bulletin"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. The implementation of
the Bulletin was delayed until the fourth quarter of 2000 for fiscal years
beginning after December 15, 1999. The application of the Bulletin was
retroactive to January 1, 2000. The impact of the Bulletin on the consolidated
financial statements has not been material.

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires, among other things, that all derivative instruments be
recognized at fair value as assets or liabilities on the balance sheet and that
changes in fair value generally be recognized currently in earnings unless
specific hedge accounting criteria are met. Because the Company does not hold
any derivative financial instruments and has not engaged in hedging activities,
the Company does not expect the adoption of SFAS 133 to have a material impact
on its consolidated results of operations, financial position or cash flows. The
Company will adopt the provisions of SFAS 133 in the first quarter of 2001.



                                       28
<PAGE>   29

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-term nature of our investments, we believe that there is no material
interest risk exposure. Based on the foregoing, no quantitative disclosures have
been provided.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For a discussion of the information required by this item, you should refer to
pages F-1 through F-22.

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 for the period ended December 31, 1997 and
through their termination on 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, 1998, 1999 and 2000 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.



                                       29
<PAGE>   30

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

    The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Information About Nominees and Other Directors," "Directors' Compensation," and
"Section 16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement
for the 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement") to be
filed with the Commission within 120 days after the end of the Company's fiscal
year ended December 31, 2000, except that 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" in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the section entitled
"Executive Compensation" in the Company's 2001 Proxy Statement to be filed with
the Commission within 120 days after the end of the Company fiscal year ended
December 31, 2000.

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

    The information required by this regarding security ownership of certain
beneficial owners and management is incorporated by reference to the information
set forth in the section entitled "Security Ownership of Certain Beneficial
Holders and Management" in the Company's 2001 Proxy Statement to be filed with
the Commission within 120 days after the end of the Company`s fiscal year ended
December 31, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item regarding security ownership of
certain relationships and related transactions is incorporated by reference to
the information set forth in the section entitled "Certain Relationships and
Related Transactions" in the Company's 2001 Proxy Statement to be filed with the
Commission within 120 days after the end of the Company`s fiscal year ended
December 31, 2000.



                                       30
<PAGE>   31

                                     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.       Consolidated Financial Statements

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

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

                  2.       Consolidated Financial Statement Schedules. The
                           following consolidated financial statement schedule
                           of the Company for each of the years ended December
                           31, 1998, 1999 and 2000, is filed as part of this
                           Form 10-K and should be read in conjunction with the
                           Consolidated Financial Statements, and the related
                           notes thereto, of the Company.

<TABLE>
<CAPTION>
                                                                                          Page Number
                                                                                          -----------
<S>                                                                                       <C>
                  Schedule II - Valuation and Qualifying Accounts                             S-1
</TABLE>

                           Schedules other than the one listed above have been
                           omitted since they are either not required, not
                           applicable, or the information is otherwise included.

                  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:

                  1.       On December 4, 2000, XCare.net filed a Current Report
                           on Form 8-K announcing the acquisition of United
                           Healthscope, Inc.

                  2.       On January 22, 2001, XCare.net filed an Amendment to
                           the Current Report on Form 8-K, filed on December 4,
                           2000, to include the Financial Statements and Pro
                           Forma Financial Information of the United
                           Healthscope, Inc. acquisition.

         (c)      Index to Exhibits

        Exhibit
        Number    Description of Document

         1.1      Form of Underwriting Agreement.(1)

         3.1      Amended and Restated Certificate of Incorporation.(1)

         3.3      Bylaws.(1)

         4.1      Form Common Stock Certificate.(1)

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

         10.1     Form of Indemnification Agreement entered into by the Company
                  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)



                                       31
<PAGE>   32

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         10.19    Master Licensing and Services Agreement, dated August 24,
                  1998, between the Company 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 Company
                  and Echo Bay Management Corp.(1)

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

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

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

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

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

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

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



                                       32
<PAGE>   33

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

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

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

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

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

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

         10.37    2000 Nonstatutory Stock Option Plan and related agreements.*

         10.38    United Healthscope, Inc. purchase agreement, dated November 8,
                  2000.*

         10.39    Registration Rights Agreement by and Between XCare.net. and
                  AHR Seller Group, LLC, the sole stockholder of
                  United/HealthScope, Inc.(dba Advica Health Resources), dated
                  November 8, 2000.*

         10.40    Stock Purchase Agreement by and Between XCare.net. and
                  Integrated Media, Inc. and Alan Hochman., dated November 29,
                  2000.*

         10.41    Escrow Agreement Between XCare.net. and Alan Hochman, dated
                  November 29, 2000.*

         16.1     Letter regarding change in certifying accountant.(1)

         21.1     List of Subsidiaries.*

         23.2     Consent of PricewaterhouseCoopers LLP.*

         24.1     Power of Attorney (Contained in Signature Page to this Annual
                  Report).*


 *   Filed herewith.

(1)  Previously filed with the Securities and Exchange Commission (the
     "Commission") as an Exhibit to the Company'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.



                                       33
<PAGE>   34

                                 XCARE.NET, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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



                                      F-1
<PAGE>   35

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 31 present fairly, in all material
respects, the financial position of XCare.net, Inc. and its subsidiaries at
December 31, 1999 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the accompanying index under item 14(a)(2) on page 31 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP
Broomfield, Colorado
March 23, 2001



                                      F-2
<PAGE>   36

                                 XCARE.NET, INC.

                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                      DECEMBER 31,
                                                                                ------------------------
                                                                                   1999          2000
                                                                                ----------    ----------
<S>                                                                             <C>           <C>
Cash and cash equivalents                                                       $    7,455    $   37,319
Short-term investments                                                                  --        41,000
Accounts receivable, net of allowance of $141 and
 $546 at December 31, 1999 and 2000, respectively                                      890         2,801
Receivable from affiliate                                                              453            --
Work performed in advance of billings                                                  557         1,855
Other current assets                                                                 1,296         3,853
                                                                                ----------    ----------
  Total current assets                                                              10,651        86,828
Property and equipment, net                                                          1,368         5,104
Purchased software, net                                                                566           333
Goodwill and other intangible assets                                                    --         3,378
Other assets                                                                           598         1,265
                                                                                ----------    ----------
  Total assets                                                                  $   13,183    $   96,908
                                                                                ==========    ==========

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

Current liabilities:
  Accounts payable                                                              $      819    $    2,028
  Accrued liabilities                                                                1,449         1,847
  Unearned revenue                                                                     153           137
  Current portion of long-term debt and capital lease obligations                       92            57
                                                                                ----------    ----------
  Total current liabilities                                                          2,513         4,069
Commitments and contingencies (Note 8)
 Series A mandatorily redeemable convertible preferred stock, $.01 par value;
  6,000,000 and 0 shares authorized as of December 31, 1999 and 2000,
  respectively; 2,450,000 and 0 shares issued and
  outstanding at December 31, 1999 and 2000, respectively                            6,810            --
 Series B mandatorily redeemable convertible preferred stock, $.01
  par value; 75,000,000 and 0 shares authorized as of December 31, 1999, and
  2000, respectively; 63,053,144 and 0 issued and outstanding
  at December 31, 1999 and 2000, respectively                                       16,948            --
Value ascribed to mandatorily redeemable convertible preferred stock
  warrants                                                                              84            --
                                                                                ----------    ----------
                                                                                    23,842            --
                                                                                ----------    ----------
 Stockholders' equity (deficit):
  Preferred stock, $0.01 par value, 0 and 5,000,000 shares authorized as of
   December 31, 1999 and 2000, respectively; no shares issued
   and outstanding at December 31, 1999 and 2000, respectively                          --            --
  Common stock, $.01 par value; 12,500,000 and 100,000,000 authorized
   as of December 31, 1999 and 2000, respectively; 577,663 and
   16,408,274 shares issued and outstanding as of December 31, 1999
   and 2000, respectively                                                                6           164
 Additional paid-in capital                                                          3,432       124,990
 Unearned compensation, net                                                         (2,269)         (657)
 Accumulated deficit                                                               (14,341)      (31,658)
                                                                                ----------    ----------
   Total stockholders' equity (deficit)                                            (13,172)       92,839
                                                                                ----------    ----------
   Total liabilities and stockholders' equity (deficit)                         $   13,183    $   96,908
                                                                                ==========    ==========
</TABLE>

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



                                      F-3
<PAGE>   37

                                 XCARE.NET, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                        1998        1999        2000
                                                      --------    --------    --------
<S>                                                   <C>         <C>         <C>
Revenue                                               $  2,270    $  4,400    $  9,965
Revenue from affiliates                                     --         453         716
                                                      --------    --------    --------
  Total revenue                                          2,270       4,853      10,681
                                                      --------    --------    --------

Costs and expenses:
  Cost of revenue                                        2,086       3,923      14,173
  Sales and marketing                                      965       1,105       5,216
  General and administrative                             2,194       1,867       9,207
  Research and development                                 670         575       2,952
  Amortization of goodwill and acquired intangibles         --          --          96
  Stock compensation expense                                --         504       1,381
                                                      --------    --------    --------
      Total cost and expenses                            5,915       7,974      33,025
                                                      --------    --------    --------
Loss from operations                                    (3,645)     (3,121)    (22,344)
Interest income (expense), net                            (437)        (67)      5,027
                                                      --------    --------    --------
Net loss                                              $ (4,082)   $ (3,188)   $(17,317)
                                                      ========    ========    ========
Net loss per common
  share--basic and diluted                            $ (10.64)   $  (6.91)   $  (1.20)
                                                      ========    ========    ========
Weighted average common shares
  outstanding--basic and diluted                           390         472      14,399
                                                      ========    ========    ========
</TABLE>



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



                                      F-4
<PAGE>   38

                                 XCARE.NET, INC.

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

<TABLE>
<CAPTION>
                                    COMMON STOCK     ADDITIONAL
                                   ---------------    PAID-IN          UNEARNED         ACCUMULATED
                                   SHARES   AMOUNT    CAPITAL      COMPENSATION, NET     (DEFICIT)       TOTAL
                                   ------   ------   ----------    -----------------    -----------    ---------
<S>                                <C>      <C>      <C>           <C>                  <C>            <C>
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)
Conversion of preferred stock
  into common stock  and
  exercise of warrants at
  Initial Public Offering           9,811       98       23,743                   --             --       23,841
Common stock issued at Initial
  Public Offering, net of
  offering costs                    5,750       57       94,176                   --             --       94,233
Stock option exercises and
  issuances under employee stock
  purchase plan                       199        2          305                   --             --          307
Common stock warrants issued to
  customer                             --       --        3,058                   --             --        3,058
Unearned compensation, net             --       --         (231)               1,612             --        1,381
Stock issued in Advica Health
  Resources purchase                   70        1          507                   --             --          508
Net loss                               --       --           --                   --        (17,317)     (17,317)
                                   ------   ------   ----------    -----------------    -----------    ---------
Balance at December 31, 2000       16,408   $  164   $  124,990    $            (657)   $   (31,658)   $  92,839
                                   ======   ======   ==========    =================    ===========    =========
</TABLE>


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



                                      F-5
<PAGE>   39

                                 XCARE.NET, INC.

                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                               --------------------------------
                                                                                 1998        1999        2000
                                                                               --------    --------    --------
<S>                                                                            <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                       $ (4,082)   $ (3,188)   $(17,317)
Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation and amortization                                                     815         797       1,602
  Amortization of goodwill and acquired intangibles                                  --          --          96
  Charge related to issuance of warrants                                             --          --       2,182
  Provision for losses on receivables                                                50          91         636
  Loss on impairment and disposal of assets                                         408           9         295
  Amortization of unearned compensation                                              --         504       1,381
  Other                                                                              99         198         (43)
  Change in assets and liabilities: (net of assets and liabilities acquired)
    Accounts receivable                                                            (300)       (278)     (2,015)
    Receivable from affiliate                                                        --        (453)        453
    Work performed in advance of billings                                            --        (557)     (1,298)
    Other current assets                                                             99      (1,218)     (2,566)
    Income taxes receivable                                                         617          --          --
    Purchased software                                                             (850)         --         (50)
    Other assets                                                                   (285)       (313)        (10)
    Accounts payable                                                                488          92         539
    Accrued liabilities                                                             473         298      (1,218)
    Unearned revenue                                                                312        (347)        (16)
                                                                               --------    --------    --------
         Net cash used in operating activities                                   (2,156)     (4,365)    (17,349)
                                                                               --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                                  (19)     (1,245)     (3,631)
Purchase of Integrated Media, Inc., net of cash acquired                             --          --      (2,107)
Purchase of Advica Health Resources, Inc., net of cash acquired                      --          --        (764)
Purchase of short-term investments                                                   --          --     (41,000)
Other investing activities                                                          186           4        (681)
                                                                               --------    --------    --------
         Net cash provided by (used in) investing activities                        167      (1,241)    (48,183)
                                                                               --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt                                                    2,230         205          --
Principal payments on debt                                                         (166)       (430)         (4)
Principal payments under capital leases                                            (574)       (749)        (31)
Proceeds from issuance of mandatorily redeemable
  convertible preferred stock, net                                                   --      13,740          --
Proceeds from Initial Public Offering                                                --          --      95,326
Proceeds from issuance of common stock                                               --          --         307
Other                                                                                --          97        (202)
                                                                               --------    --------    --------
         Net cash provided by financing activities                                1,490      12,863      95,396
                                                                               --------    --------    --------

Net increase (decrease) in cash and cash equivalents                               (499)      7,257      29,864
Cash and cash equivalents at beginning of period                                    697         198       7,455
                                                                               --------    --------    --------
Cash and cash equivalents at end of period                                     $    198    $  7,455    $ 37,319
                                                                               ========    ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                                                                  $    127    $     74    $     --
Income taxes refunded                                                              (615)         --          --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
  FINANCING TRANSACTIONS
Conversion of convertible promissory notes and accrued
  interest to Series B mandatorily redeemable
  convertible preferred stock                                                  $     --    $  3,204    $     --
  Issuance of common stock in acquisition of Advica                                  --          --         508
  Issuance of common stock warrants to customer                                      --          --       3,058
</TABLE>


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



                                      F-6
<PAGE>   40

                                 XCARE.NET, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

    XCare.net, Inc. (the "Company" or "XCare.net") develops, deploys and
supports business-to-business software solutions for the health care industry.
XTiera(TM), 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.

Basis of Presentation

         We are incorporated under the laws of the State of Delaware. The
consolidated financial statements include the accounts of XCare.net and our
wholly-owned subsidiaries, Advica Health Resources, Inc. ("Advica") and
Integrated Media, Inc. ("Integrated Media"). All significant intercompany
amounts and transactions have been eliminated.

Initial Public Offering

    On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, we completed an
Initial Public Offering ("IPO") of 5,750,000 shares of our common stock
(including 750,000 shares sold pursuant to the exercise of the underwriter's
over-allotment option) at an offering price of $18.00 per share (the
"Offering"). Proceeds to us from the Offering, after calculation of the
underwriter's discount, totaled $94.2 million, net of offering costs of $2.1
million. Concurrent with the closing of the IPO, all outstanding shares of our
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.

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

    The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition" as amended. 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 when
services are essential to the functionality of the delivered software and the
collectibility of the fees is probable. Where collectibility of fees is not
probable, the Company defers revenue and related costs as deferred contract
costs and recognize 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.

    In arrangements where services are not essential to the functionality of the
delivered software and the Company has no other obligations, the Company
recognizes license revenue when the agreement has been signed, delivery has
occurred, the fee is fixed or determinable and collectibility is probable.

    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.



                                      F-7
<PAGE>   41

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Reclassifications

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

Cash, Cash Equivalents and Short-Term Investments

    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. Short-term investments consist
of U.S. government agency debt securities and auction rate certificates with
maturities less than 12 months. The Company has classified $2.0 million of its
portfolio of U.S. government agency debt securities as held to maturity as
defined in Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At December
31, 2000, all investments were carried at cost, which approximates fair market
value based on the Company's intent to hold such securities to maturity. The
Company's portfolio of auction rate certificates totaling $39.0 million have
been classified as available-for-sale and recorded at fair value in the
accompanying consolidated balance sheet. Investment securities classified as
available for sale are measured at market value and net unrealized gains and
losses are recorded as comprehensive income. Any gains and losses on sales of
investments are computed on specific identification. As of December 31, 2000,
net unrealized gains and losses on investments available for sale were not
material.

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.

Work Performed in Advance of Billings

    Unbilled receivables arise as revenues are recognized for time and costs
incurred on time and material contracts which have not been billed and for
revenues that are recognized on fixed price contracts under the percentage of
completion method of accounting.

Major Customers

    The Company performs ongoing evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.

    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                                    1998       1999      2000
                  --------                                    ----       ----      ----
<S>                                                           <C>        <C>       <C>
                     A                                          --         --        17%
                     B                                          --         --        10%
                     C                                          --         20%       --
                     D                                          29%        --        --
                     E                                          20%        11%       --
                     F                                          12%        10%       --
                     G                                          11%        --        --
                     H                                          --         12%       --
                     I                                          --         12%       --
</TABLE>

    Three customers accounted for 75% of the accounts receivable balance at
December 31, 1999. Three customers accounted for 73% of the accounts receivable
balance at December 31, 2000.

Property and Equipment

    Property and equipment are recorded at cost and depreciated using
straight-line methods over the estimated useful lives of the assets, ranging
from two to five years. Internally used software, whether purchased or developed
is capitalized and amortized over an estimated useful life of three 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 leases.



                                      F-8
<PAGE>   42

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Goodwill and Other Acquired Intangible Assets

    Intangible assets consist of goodwill, customer base, acquired workforce and
trade names related to the acquisitions accounted for under the purchase method
of accounting. Goodwill and other acquired intangibles are amortized on a
straight-line basis over three years. Management periodically assesses the
amortization period and recoverability of the carrying amount of goodwill and
other acquired intangibles. Amortization expense was $0, $0 and $96,000 for the
year ended December 31, 1998, 1999 and 2000, respectively.

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
goodwill and other acquired intangibles, 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
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 of the assets.

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, 1998, 1999 and 2000 were approximately $66,000,
$271,000 and $648,000, 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 to be used with the Company's existing software as
well as to be held for resale under an exclusive license and is capitalized and
amortized ratably over a three-year estimated useful life. Amortization expense
was $0, $284,000 and $283,000 in 1998, 1999 and 2000, respectively. Accumulated
amortization was $284,000 and $567,000 as of December 31, 1999 and 2000,
respectively.

Income Taxes

    Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis 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>   43

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Stock Option Compensation

    Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation, permits the use of either a fair value based method or
the method defined in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, to account for stock-based
compensation arrangements. Companies that elect to use the method provided in
APB 25 are required to disclose the pro forma net income (loss) and earnings per
share that would have resulted from the use of the fair value based method. We
have elected to continue to determine the value of stock-based compensation
arrangement under the provisions of APB 25 and included the pro forma
disclosures required under SFAS No. 123 in Note 6.

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.

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

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                          -----------------------------------
                                                                             1998         1999          2000
                                                                          ----------   ----------   ---------
<S>                                                                       <C>          <C>          <C>
Numerator:
  Net loss                                                                $  (4,082)   $ (3,188)    $ (17,317)
  Accretion of mandatorily redeemable convertible preferred stock               (66)        (75)           --
                                                                          ---------    --------     ---------
  Net loss available to common stockholders                               $  (4,148)     (3,263)      (17,317)
                                                                          =========    ========     =========
Denominator:
  Weighted average common shares outstanding -- basic and diluted               390         472        14,399
                                                                          =========   =========     =========
</TABLE>

    Potentially dilutive securities totaling 11,432,265 and 3,940,072 for the
years ended December 31, 1999 and 2000, respectively, were excluded from basic
and diluted loss per common share because of their anti-dilutive effect.



                                      F-10
<PAGE>   44

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Comprehensive Income

    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, 2000,
the Company has not had any significant transactions that are required to be
reported as adjustments to determine comprehensive income.

New Accounting Standards

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (the "Bulletin"), "Revenue Recognition in Financial
Statements," which addresses revenue recognition issues. The implementation of
the Bulletin was delayed until the fourth quarter of 2000 for fiscal years
beginning after December 15, 1999. The application of the Bulletin was
retroactive to January 1, 2000. The impact of the Bulletin on the Company's
consolidated financial statements was not material.

    In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires, among other things, that all derivative instruments be
recognized at fair value as assets or liabilities on the balance sheet and that
changes in fair value generally be recognized currently in earnings unless
specific hedge accounting criteria are met. Because the Company does not hold
any derivative financial instruments and has not engaged in hedging activities,
the Company does not expect the adoption of SFAS 133 to have a material impact
on its consolidated results of operations, financial position or cash flows. The
Company will adopt the provisions of SFAS 133 in the first quarter of 2001.


2. ACQUISITION OF ADVICA HEALTH RESOURCES AND INTEGRATED MEDIA

    On November 8, 2000, we purchased all of United Healthscope, Inc.'s d/b/a
Advica Health Resources ("Advica") common shares. The purchase price totaling
approximately $2.2 million included 70,000 shares of XCare.net common stock,
approximately $830,000 in cash, and professional fees directly related to the
acquisition, net of accounts receivable and the Company's net investment in
Advica. The purchase price was allocated to the acquired assets and liabilities
at their fair values as of November 8, 2000. The acquired intangibles consisted
of approximately $549,000 in customer base, $488,000 in acquired workforce, and
$86,000 to trade name. The remaining excess purchase price of approximately
$402,000 was recorded as goodwill.

    In conjunction with the purchase of Advica, the Company incurred
approximately $273,000 in costs primarily related to the involuntary termination
benefits of Advica employees and for other costs to integrate operating
activities. Approximately $95,000 of these employee termination benefits had
been paid as of December 31, 2000. The remaining balance was paid in January
2001.

    On November 29, 2000, we purchased all of Integrated Media Inc.'s common
stock. The purchase price, totaling approximately $2.1 million, consisted
primarily of cash and professional fees directly related to the acquisition. The
total purchase price was allocated to the assets and liabilities at their fair
values as of November 29, 2000. The acquired identifiable intangible assets
totaling approximately $322,000 consisted primarily of acquired workforce and
customer base with the remaining excess purchase price of approximately $1.62
million being recorded as goodwill. In addition to the $2.1 million purchase
price, the Company will pay $1 million to the former president of Integrated
Media as compensation for his assistance with the transition over the next year.
This $1 million has been paid into escrow, is included in other current assets,
and will be amortized to sales and marketing expense over the one year term of
the agreement.

    The Company retained an independent appraiser to assist with the assigning
of the fair values to the identifiable intangibles acquired from both Advica
and Integrated Media. The total goodwill and identifiable intangible assets
acquired of $3.5 million are being amortized over their estimated lives of 3
years.

    Advica and Integrated Media became wholly-owned subsidiaries of XCare.net
effective on the date of the acquisitions and both transactions were accounted
for under the purchase method of accounting in the fourth quarter of 2000 for
which the results operations are included in the consolidated financial
statements from the date of acquisition.



                                      F-11
<PAGE>   45

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


    The unaudited pro forma results of operations as though the acquisitions had
been completed as of the beginning of 1999 and 2000 are as follows (in thousands
except for per share amounts):

<TABLE>
<CAPTION>
                                      Year Ended December 31,
                                   ----------------------------
                                       1999            2000
                                   ------------    ------------
<S>                                <C>             <C>
Revenues                           $      9,404    $     17,989
Net loss                                (10,442)        (23,064)
Pro forma diluted loss per share   $     (19.27)   $      (1.59)
</TABLE>

    The pro forma results above do not include any anticipated cost savings or
other effects of the integration of Advica and Integrated Media into XCare.net
and are not necessarily indicative of the results which would have occurred if
the acquisitions had been in effect on the dates indicated, or which may result
in the future.

3. BALANCE SHEET COMPONENTS

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

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                 -------------------
                                                   1999       2000
                                                 --------   --------
<S>                                              <C>        <C>
OTHER CURRENT ASSETS
  Prepaid licenses                               $     --   $  1,659
  Prepaid salary (see note 2)                          --        917
  Deferred warrants charges (see note 6)               --        876
  Deferred IPO costs                                1,093         --
  Other                                               203        401
                                                 --------   --------
                                                 $  1,296   $  3,853
                                                 ========   ========
</TABLE>

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                 --------------------
                                                   1999        2000
                                                 --------    --------
<S>                                              <C>         <C>
PROPERTY AND EQUIPMENT
  Furniture, fixtures and equipment              $    412    $  1,906
  Computer hardware                                 1,927       5,225
  Computer software                                   618       2,843
                                                 --------    --------
                                                    2,957       9,974
Less accumulated depreciation and amortization     (1,589)     (4,870)
                                                 --------    --------
                                                 $  1,368    $  5,104
                                                 ========    ========
</TABLE>

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                 -------------------
                                                   1999       2000
                                                 --------   --------
<S>                                              <C>        <C>
ACCRUED LIABILITIES
  Accrued compensation and related accruals      $    173   $  1,056
  Accrued license fee payable                         600         --
  Accrued professional fees                           446        104
  Other                                               230        687
                                                 --------   --------
                                                 $  1,449   $  1,847
                                                 ========   ========
</TABLE>



                                      F-12
<PAGE>   46

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

    Debt and capital lease obligations consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                              --------------------
                                                                                1999        2000
                                                                              --------    --------
<S>                                                                           <C>         <C>
Unsecured notes payable                                                       $     --    $     57
Unsecured notes payable to software vendors for software
  licenses; interest rate at 10.5%;                                                 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          2          --
Capitalized lease obligations                                                       46          --
                                                                              --------    --------
     Total long-term debt                                                           92          57
Less current portion                                                               (92)        (57)
                                                                              --------    --------
     Long-term debt, excluding current portion                                $     --    $     --
                                                                              ========    ========
</TABLE>

5. 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 $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 $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.

Conversion

    In connection with the Company's Initial Public Offering in February 2000,
the 2,450,000 outstanding shares of Series A mandatorily redeemable convertible
preferred stock were converted 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. In addition, the
63,053,144 shares of Series B mandatorily redeemable convertible preferred stock
were converted into 6,305,322 shares of common stock, reflecting the rounding
upwards of all resulting fractional shares. See Note 1.

Stock Warrants

    In conjunction with the issuance of the 1997 and 1998 Convertible Promissory
Notes and the Series A mandatorily redeemable convertible preferred stock
offering, the Company issued warrants to purchase a total of 649,312 shares of
common stock at an average price of $0.89. In connection with the Company's
Initial Public Offering in February 2000, certain of these warrants were
exercised and the Company issued 702,294 common shares for net proceeds of
$84,000.



                                      F-13
<PAGE>   47

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


6. STOCKHOLDERS' EQUITY (DEFICIT)

Stock Split

   The Company effected a one-for-ten reverse stock split of its common stock in
January 2000. 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 stock split.

Stock Options

    During 1997, the Company adopted a stock option plan (the "1997 Plan") which
provides for the grant of stock options to directors, key employees, and
consultants. The 1997 Plan has a term of ten years, unless terminated by our
board of directors. An amendment of the Company's 1997 Plan to increase the
number of shares of common stock reserved for issuance under the plan from
2,200,000 to 3,600,000 shares was approved by the stockholders in November 2000.
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 options generally expire ten years after the date of grant.
Options granted under the 1997 Plan vest over a four year vesting period
beginning on the date of grant.

    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 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 using FIN 28.

    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.

    During 1999, the Company issued stock options to certain employees under the
1997 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. In 1999, the Company recorded $2,773,000
of unearned compensation related to these options, of which the net amount of
$504,000 and $1,381,000 have been amortized to expense in the periods ended
December 31, 1999 and 2000, respectively.

    If stock compensation expense for the years ended December 31, 1999 and 2000
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         2000
                             ----------   ----------
<S>                          <C>          <C>
Cost of revenue              $       80   $      124
Sales and marketing                  52          194
General and administrative          343        1,089
Research and development             29          (26)
                             ----------   ----------
                             $      504   $    1,381
                             ==========   ==========
</TABLE>

    The Company's board of directors adopted a 1999 Director Option Plan in
October 1999 (the "Director Plan"). The Director Plan was approved by the
Company's Stockholders in January 2000, and became effective upon completion of
our Initial Public Offering. A total of 250,000 shares of common stock have been
reserved for issuance under the Director Plan. The Director Plan has a term of
ten years, unless terminated by our board of



                                      F-14
<PAGE>   48

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


directors. Options granted under the Director Plan vest over a one year vesting
period beginning on the date of grant. Members of the board of directors who are
not employees of XCare.net are eligible to participate in the Director Plan. The
Director 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 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 each
year on the date of our annual shareholder's meeting.

    In September 2000, the board of directors of the Company adopted the 2000
Nonstatutory Stock Option Plan (the "NSO Plan"). Under the NSO Plan, the board
of directors may issue options to purchase up to an aggregate of 600,000 shares
of the Company Common Stock to employees of the Company. The NSO Plan has a term
of ten years, unless terminated by our board of directors. Options granted under
the NSO Plan vest ratably at 25% per year, beginning on the date of grant. No
options will be issued under the NSO Plan to directors or executive officers of
the Company.

    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 years ended December 31,
1998 and 1999, the value of each option on the date of grant was estimated using
the minimum value method, as the Company was not public. For the year ended
December 31, 2000, the fair value of each option on the date of grant was
determined using the Black-Scholes valuation model. The following assumptions
were used for grants in 1999 and 2000: risk-free rates corresponding to
government securities with original maturities similar to the expected option
lives of 4.5% to 5.6% in 1998, 4.9% to 6.3% in 1999 and 5.5% for 2000; expected
dividend yield of 0% for all periods; volatility factor of zero for 1998 and
1999 and 120% for 2000; and expected lives of one year for 1998 and 1999 and 3.4
years for 2000.

    Based on calculations using a Black-Scholes-type value option pricing model,
the weighted-average fair value of options at grant date was $0.06, $0.64 and
$5.10 in 1998, 1999 and 2000, 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          2000
                             ----------    ----------    ----------
<S>                          <C>           <C>           <C>
Net loss:
  As reported                $   (4,082)   $   (3,188)   $  (17,317)
  Pro forma                      (4,155)       (3,319)      (17,683)
Net loss per common share:
  As reported                $   (10.64)   $    (6.91)   $    (1.20)
  Pro forma                      (10.65)        (7.03)        (1.23)
</TABLE>



                                      F-15
<PAGE>   49

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


    Total stock options outstanding and exercisable under the option plans as of
December 31, 2000 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     664,009         7.8          $         0.25     664,009   $         0.25
           2.70     504,086         8.5                    2.70     504,086             2.70
    2.80 - 5.88     264,317         9.5                    4.84     118,417             4.10
    5.94 - 5.94     438,275         9.7                    5.94     341,000             5.94
    6.19 - 7.07     434,850         9.7                    6.79     336,850             6.71
   7.50 - 10.00     205,575         9.0                    8.73     205,575             8.73
          11.00      58,710         9.1                   11.00      58,710            11.00
          14.38         650         9.3                   14.38         650            14.38
          15.94      19,100         9.2                   15.94      19,100            15.94
          18.50         500         9.1                   18.50         500            18.50
---------------   ---------        -----         --------------   ---------   --------------
  $0.25 - 18.50   2,590,072         8.9          $         4.30   2,248,897   $         4.03
===============   =========        =====         ==============   =========   ==============
</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, 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
  Options granted                        1,461,020              6.92
  Less: options exercised                 (185,429)             1.22
  Less: options forfeited                 (297,412)             5.88
                                         ---------    --------------
Options outstanding, December 31, 2000   2,590,072    $         4.30     2,248,897   $         4.03
                                         =========    ==============   ===========   ==============
</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.

Initial Public Offering

    On February 9, 2000, the SEC declared effective the Company's Registration
Statement on Form S-1. Pursuant to this Registration Statement, we completed an
Initial Public Offering ("IPO") of 5,750,000 shares of our common stock
(including 750,000 shares sold pursuant to the exercise of the underwriter's
over-allotment option) at an offering price of $18.00 per share (the
"Offering"). Proceeds to us from the Offering, after calculation of the
underwriter's discount, totaled $94.2 million, net of offering costs of $2.1
million. Concurrent with the closing of the IPO, all outstanding shares of our
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



                                      F-16
<PAGE>   50

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


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.

Employee Stock Purchase Plan

    In October 1999, the board of directors adopted an employee stock purchase
plan (the "Employee Stock Purchase Plan,") subject to shareholder approval,
which became effective immediately on the effective date of the IPO. A total of
350,000 shares of common stock have been reserved for issuance under the
Employee Stock Purchase Plan permits eligible 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 Service 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 purchase 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. In October 2000, the
Company issued 15,885 of the 350,000 authorized shares at $4.68 per share and
converted $73,000 in accrued employee contributions into shares of common stock
upon conversion.

MedUnite Warrants

   In October 2000, the Company entered into a Software License and Services
Agreement (the "Agreement") with MedUnite, Inc. ("MedUnite") to provide software
development services related to the pilot program. These services are provided
on a time and materials basis and the Agreement is cancellable at MedUnite's
discretion subsequent to the delivery of the first pilot and prior to the
contract contingency date ("Contingency Date"), which is expected in mid-2001.
In addition, the Company will host MedUnite's pilot program. If MedUnite does
not terminate the Agreement before the Contingency Date, the Company will sell
MedUnite a software license and is expected to provide ongoing hosting,
transaction processing, maintenance, software development and technical
services.

   In connection with the Agreement, the Company issued warrants to MedUnite to
purchase 1,350,000 shares of XCare.net's common stock at an exercise price of
$4.06. The warrants were immediately vested exercisable and non-forfeitable for
a period of eighteen months from the date of grant. The fair value of the
warrants was calculated to be $3.1 million and was determined using the
Black-Scholes option pricing model utilizing a volatility factor of 120%,
risk-free interest rate of 6.0% and an expected life of 18 months. The amounts
billed to MedUnite up to the date that the first pilot is delivered (March 2001)
will be reduced by the fair value attributed to the warrants. For the year ended
December 31, 2000, the Company allocated $2.2 million of the warrant charge to
billings and amounts billable. The remaining value of the warrants is $0.9
million at December 31, 2000 and is included in other current assets. As of
December 31, 2000, the Company expects future billings to be in excess of the
remaining fair value of the warrants.

   In addition, under the terms of the agreement, XCare.net may make an
investment in MedUnite between $10.0 and $20.0 million.

Preferred Stock Rights Agreement

     On July 12, 2000, the Company's board of directors approved a preferred
stock rights agreement. Each right would entitle stockholders to purchase one
one-thousandth of a share of Series A Participating Preferred Stock. The rights
are not currently exercisable, but would become exercisable if certain events
occurred relating to a person or group acquiring or attempting to acquire 15
percent or more of the outstanding shares of common stock. The rights expire in
2010 unless redeemed or exchanged by the Company earlier.

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



                                      F-17
<PAGE>   51

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


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, 1999 and December 31, 2000, the Company had net operating
loss ("NOL") carryforwards of approximately $12.6 million and $31.7 million,
respectively, 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, 2000 are subject to annual limitations due to changes in
ownership.

    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,
                                           --------------------------------
                                             1998        1999        2000
                                           --------    --------    --------
<S>                                        <C>         <C>         <C>
Federal income tax benefit                 $ (1,388)   $ (1,084)   $ (6,061)
State income tax, net of federal benefit       (166)       (103)       (545)
Change in valuation allowance                 1,517         944       5,492
Unearned compensation                            --         209         483
Value attributed to warrants                     --          --         764
Other                                            37          34        (133)
                                           --------    --------    --------
Income tax expense                         $     --    $     --    $     --
                                           ========    ========    ========
</TABLE>

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

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                      --------------------
                                        1999        2000
                                      --------    --------
<S>                                   <C>         <C>
Deferred tax assets:
  Deferred revenue                    $     48    $     53
  Impairment and exit cost accruals         12          --
  Employee benefits                         49         288
  Reserves                                 107         474
  Other temporary items                     --         155
  Net operating loss carryforwards       4,871      12,457
Deferred tax liabilities:
  Cash to accrual Section 481(a)          (187)        (96)
  Fixed asset sale and depreciation       (246)       (275)
  Amortization                             (57)         --
Less: valuation allowance               (4,597)    (13,056)
                                      --------    --------
  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.

8. COMMITMENTS AND CONTINGENCIES

Commitments

    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,
2000 (in thousands):



                                      F-18
<PAGE>   52

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


<TABLE>
<S>                                                                         <C>
                            2001                                            $    1,735
                            2002                                                 1,142
                            2003                                                   864
                            2004                                                   745
                            2005                                                   616
                            Thereafter                                             440
                                                                            ----------
                                                                            $    5,542
                                                                            ==========
</TABLE>


    Total rent expense for the years ended December 31, 1998, 1999 and 2000 was
$438,000, $375,000 and $1,295,000, respectively.

    In December 1998, the Company purchased a license for certain software to be
resold or used with the Company's existing products. This arrangement requires
the Company to pay a royalty of 17.5% of all of its sales of the software.

Contingencies

    We are subject to other legal proceedings and claims that arise in the
ordinary course of business. Although there can be no assurance of the ultimate
disposition of these matters, it is management's opinion, based upon the
information available at this time, that the expected outcome, individually or
in the aggregate, will not have a material adverse effect on the Company's
consolidated results of operations, financial position or cash flows.

9. RELATED PARTY TRANSACTIONS

    For the year ended December 31, 2000, revenues from related parties include
$581,000 from a customer who is also a partner in an entity that is a
significant stockholder of the Company and $135,000 from Advica prior to our
acquisition of Advica. The accounts receivable related to these transactions had
been settled as of December 31, 2000.

    During 1999, the Company entered into a professional services agreement with
an entity whose managing member is a general partner in an entity that is a
significant stockholder of the Company. 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. SEGMENT INFORMATION

    Segment information has been prepared in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company defines operating segment as components of an
enterprise for which discrete financial information is available and is reviewed
regularly by the chief operating decision-maker or decision making group, to
evaluate performance and make operating decisions. The chief operating
decision-making group reviews the revenues and margins by the nature of the
services provided and reviews the overall results of the Company. Accounting
policies of the segments are the same as those described in the summary of
significant accounting policies (See Note 1).

    We operate in two segments: development and consulting services, and
recurring services. The development and consulting services segment includes
revenue generated from software engineering and integration. The recurring
services segment includes revenue generated from hosting services, maintenance
services, transaction services, recurring license fees and other services. In
1998, all XCare.net's revenues were generated from recurring services.



                                      F-19
<PAGE>   53

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


    Following is a breakout of our segments. The margin for the segments
excludes corporate expenses. The "other" category includes our corporate
expenses and eliminations.


<TABLE>
<CAPTION>
                         DEVELOPMENT AND        RECURRING                        CONSOLIDATED
    (IN THOUSANDS)     CONSULTING SERVICES      SERVICES         OTHER              TOTAL
                       -------------------    ------------    ------------       ------------
<S>                    <C>                    <C>             <C>                <C>
2000
Total revenues         $             7,488    $      3,193    $         --       $     10,681
Margin                              (3,216)           (276)        (13,825)(1)        (17,317)
Assets                                  --              --          96,908 (2)         96,908
Capital expenditures                    --              --           3,631 (2)          3,631

1999
Total revenues         $             3,740    $      1,113    $         --       $      4,853
Margin                                 720             210          (4,118)(1)         (3,188)
Assets                                  --              --          13,183 (2)         13,183
Capital expenditures                    --              --           1,245 (2)          1,245
</TABLE>


(1) Represents loss before income taxes. Adjustments that are made to the total
of the segments' income in order to arrive at income before income taxes include
the following:

<TABLE>
<CAPTION>
Costs and adjustments to reconcile segment data to the
  consolidated total:                                         1999       2000
                                                            --------   --------
<S>                                                         <C>        <C>
  Sales and marketing                                       $  1,105   $  5,216
  General and administrative                                   1,867      9,207
  Research and development                                       575      2,952
  Amortization of goodwill and other acquired intangibles         --         96
  Stock compensation expense                                     504      1,381
  Interest expense (income), net                                  67     (5,027)
                                                            --------   --------
                                                            $  4,118   $ 13,825
                                                            ========   ========
</TABLE>

(2) A breakout of assets and capital expenditures for all segments is not
provided to our chief operating decision maker. The other column represents the
amount to reconcile to the consolidated total.

11. QUARTERLY RESULTS (UNAUDITED)

    This information has been derived from our unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
on the same basis as the audited financial statements contained in this Annual
Report on Form 10-K 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 on Form 10-K. Our operating results are expected to vary
significantly from quarter to quarter and are not necessarily indicative of
results for any future period. Data relating to the results of operations for
the each quarter of the years ended December 31, 2000 and 1999 follows (in
thousands except per share amounts):



                                      F-20
<PAGE>   54

                                 XCARE.NET, INC.
          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED
                                                     -------------------------------------------------------------
                                                       MARCH 31,       JUNE 30,      SEPTEMBER 30,    DECEMBER 31,
                                                         1999            1999            1999             1999
                                                     ------------    ------------    -------------    ------------
<S>                                                  <C>             <C>             <C>              <C>
STATEMENT OF OPERATIONS DATA:
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
                                                     ------------    ------------    -------------    ------------
Loss from operations .............................            (15)           (661)          (1,350)         (1,095)
Interest income (expense), net ...................           (136)           (122)             108              83
                                                     ------------    ------------    -------------    ------------
Net loss .........................................   $       (151)   $       (783)   $      (1,242)   $     (1,012)
                                                     ============    ============    =============    ============
Net loss per common share-basic and diluted ......   $      (0.43)   $      (2.00)   $       (2.36)   $      (1.81)
                                                     ============    ============    =============    ============
</TABLE>



<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                    -------------------------------------------------------------
                                                                      MARCH 31,       JUNE 30,      SEPTEMBER 30,    DECEMBER 31,
                                                                        2000            2000            2000             2000
                                                                    ------------    ------------    -------------    ------------
<S>                                                                 <C>             <C>             <C>              <C>
STATEMENT OF OPERATIONS DATA:
Total revenue ...................................................   $      2,852    $      2,689    $       1,961    $      3,179
Costs and expenses:
  Cost of revenue ...............................................          2,797           3,016            3,190           5,170
  Sales and marketing ...........................................          1,110           1,891            1,203           1,012
  General and administrative ....................................          1,867           2,981            2,038           2,321
  Research and development ......................................            461             989              427           1,075
  Amortization of goodwill and other acquired intangibles .......             --              --               --              96
  Stock compensation expense ....................................            518             406              286             171
                                                                    ------------    ------------    -------------    ------------
         Total costs and expenses ...............................          6,753           9,283            7,144           9,845
                                                                    ------------    ------------    -------------    ------------
Loss from operations ............................................         (3,901)         (6,594)          (5,183)         (6,666)
Interest income, net ............................................            698           1,505            1,446           1,378
                                                                    ------------    ------------    -------------    ------------
Net loss ........................................................   $     (3,203)   $     (5,089)   $      (3,737)   $     (5,288)
                                                                    ============    ============    =============    ============
Net loss per common share-basic and diluted .....................   $      (0.37)   $      (0.31)   $       (0.23)   $      (0.32)
                                                                    ============    ============    =============    ============
</TABLE>



                                      F-21
<PAGE>   55

                                 XCARE.NET, INC.
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                             (DOLLARS IN THOUSANDS)



<TABLE>
<CAPTION>
      Allowance for          Balance at Beginning of                                            Balance at End of
     uncollectibles                  Period              Charged to Expense      Deduction           Period
     --------------          -----------------------     ------------------      ---------      -----------------
<S>                          <C>                         <C>                     <C>            <C>
     2000                             $141                      $636                $231              $546
     1999                               50                        91                  --               141
     1998                                0                        50                  --                50
</TABLE>


----------

(a) Represents credit losses written off during the period, less collection of
amounts previously written off.



                                      S-1
<PAGE>   56

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Englewood, State of
Colorado, on this 27th day of March, 2001.

                                       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
Gary T. Scherping 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 28, 2001
----------------------------------            (Principal Executive Officer)
Lorine R. Sweeney

    /s/ GARY T. SCHERPING                     Senior VP of Finance and Chief Financial    March 28, 2001
----------------------------------            Officer (Principal Financial and
Gary T. Scherping                             Accounting Officer)

    /s/ JEFFREY M. KRAUSS                     Chairman of the Board                       March 28, 2001
----------------------------------
Jeffrey M. Krauss

    /s/ FRED L. BROWN                         Director                                    March 28, 2001
----------------------------------
Fred L. Brown

    /s/ ANDREW COWHERD                        Director                                    March 28, 2001
----------------------------------
Andrew Cowherd

    /s/ JAMES B. HOOVER                       Director                                    March 28, 2001
----------------------------------
James B. Hoover

    /s/ DANIEL MITCHELL                       Director                                    March 28, 2001
----------------------------------
Daniel Mitchell

    /s/ WILLIAM F. REILLY                     Director                                    March 28, 2001
----------------------------------
William F. Reilly

    /s/ ROBERT TSAO                           Director                                    March 28, 2001
----------------------------------
Robert Tsao
</TABLE>



<PAGE>   57

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
        EXHIBIT
        NUMBER    DESCRIPTION
        -------   -----------
<S>               <C>
         1.1      Form of Underwriting Agreement.(1)

         3.1      Amended and Restated Certificate of Incorporation.(1)

         3.3      Bylaws.(1)

         4.1      Form Common Stock Certificate.(1)

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

         10.1     Form of Indemnification Agreement entered into by the Company
                  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)
</TABLE>



                                       31
<PAGE>   58

<TABLE>
<S>               <C>
         10.5     Licensing Agreement, dated as of December 30, 1998, between
                  the Company and Match Health Care Services, Ltd.(1)(2)

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

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

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

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

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

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

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

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

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

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

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

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

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

         10.19    Master Licensing and Services Agreement, dated August 24,
                  1998, between the Company 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 Company
                  and Echo Bay Management Corp.(1)

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

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

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

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

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

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

         10.30    Development Services Agreement, dated November 10, 1999 by and
                  between the Company and Delta Health Services.(1)(2)
</TABLE>



                                       32
<PAGE>   59

<TABLE>
<S>               <C>
         10.31    Hosting Services Agreement, dated November 10, 1999, by and
                  between the Company and Delta Health Services.(1)(2)

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

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

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

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

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

         10.37    2000 Nonstatutory Stock Option Plan and related agreements.*

         10.38    United Healthscope, Inc. purchase agreement, dated November 8,
                  2000.*

         10.39    Registration Rights Agreement by and Between XCare.net. and
                  AHR Seller Group, LLC, the sole stockholder of
                  United/HealthScope, Inc.(dba Advica Health Resources), dated
                  November 8, 2000.*

         10.40    Stock Purchase Agreement by and Between XCare.net. and
                  Integrated Media, Inc. and Alan Hochman., dated November 29,
                  2000.*

         10.41    Escrow Agreement Between XCare.net. and Alan Hochman, dated
                  November 29, 2000.*

         16.1     Letter regarding change in certifying accountant.(1)

         21.1     List of Subsidiaries.*

         23.2     Consent of PricewaterhouseCoopers LLP.*

         24.1     Power of Attorney (Contained in Signature Page to this Annual
                  Report).*
</TABLE>

----------

 *   Filed herewith.

(1)  Previously filed with the Securities and Exchange Commission (the
     "Commission") as an Exhibit to the Company'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.