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

                                   FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                                       OR
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
            For the transition period from __________ to ___________

                         COMMISSION FILE NUMBER 1-15535

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


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


         2275  Research Boulevard, 7th Floor, Rockville, Maryland 20850 (Address
               of principal executive offices, zip code)

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

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

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes  X     No
                                       ---       ---

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

The number of shares of Common Stock,  par value $.01 per share,  outstanding on
March 21, 2000 was 27,600,000.  As of March 21, 2000, assuming as fair value the
last sale price of $5.25 per share on The Nasdaq  Stock  Market,  the  aggregate
fair value of shares held by non-affiliates was approximately $28,875,000.

                      Documents incorporated by reference:
The Company's  Proxy Statement for its annual meeting of stockholders to be held
in June,  2000,  a  definitive  copy of which  will be filed  within 120 days of
December 31, 1999,  is  incorporated  by reference in Part III of this Report on
Form 10-K.


<PAGE>

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                       Page
PART I
     <S>       <C>                                                      <C>
     Item 1.   Business..........................................        3
     Item 2.   Properties........................................       11
     Item 3.   Legal Proceedings.................................       11
     Item 4.   Submission of Matters for a Vote of Security
               Holders...........................................       11

PART II

     Item 5.   Market for Registrant's Common Equity and Related
               Stockholder Matters................................      12
     Item 6.   Selected Financial Data...........................       13
     Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations...............       14
     Item 7A   Quantitative and Qualitative Disclosures About Market
               Risk..............................................       21
     Item 8.   Financial Statements and Supplementary Data.......       21
     Item 9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure...............       21

PART III

     Item 10.  Directors and Executive Officers of the Registrant      22
     Item 11.  Executive Compensation............................      22
     Item 12.  Security Ownership of Certain Beneficial Owners
               and Management....................................      22
     Item 13.  Certain Relationships and Related Transactions....      22

PART IV

     Item 14.  Exhibits, Financial Statement Schedules, and
               Reports on Form 8-K..............................       23
</TABLE>

SIGNATURES

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

                                       2

<PAGE>

                                     PART 1

ITEM 1. BUSINESS

   OVERVIEW

         HealthExtras,  Inc.  ("the  Company" or  "HealthExtras")  is a Delaware
corporation  organized on July 9, 1999 and the successor to certain  predecessor
companies (the  "Predecessor  Companies").  The Predecessor  Companies  include:
Sequel  Newco,  Inc.,  Sequel Newco Joint  Venture (the Joint  Venture),  Health
Extras  Partnership  (HEP),  Sequel Newco, LLP (SN LLP) and  HealthExtras,  LLC.
Through December 31, 1998, the Company was considered to be a development  stage
enterprise.  The Company commenced business  operations with its health benefits
program on November 1, 1998. Sequel Newco, Inc.  (Sequel),  an Iowa Corporation,
was originally  incorporated  on October 23, 1996 as PB Newco II, Inc.  Sequel's
business,  which  consisted  of  developing  and  evaluating  international  and
domestic  healthcare  management service  opportunities,  was contributed to the
Joint Venture as of January 1, 1997. The Joint Venture was originally  formed on
December 1, 1996 and its business  involved the development of provider software
applications  and  the  development  of  international   healthcare   management
opportunities.  Effective  April 7, 1997,  the Joint  Venture  was merged into a
limited  liability  partnership,  SN LLP. SN LLP  continued  the business of the
Joint Venture,  i.e., the development of provider software  applications and the
development  of  international  healthcare  management  opportunities.  HEP  was
originally  formed on April 7, 1997 and its business involved the development of
supplemental catastrophic health benefit programs.  Effective August 1, 1998, SN
LLP and HEP were  merged into  HealthExtras  LLC, a Maryland  limited  liability
company, with HealthExtras,  LLC being the surviving business entity. On May 27,
1999,  HealthExtras,  LLC, which was then a Maryland limited liability  company,
contributed  substantially  all of its assets to  HealthExtras,  LLC, a Delaware
limited liability company,  and Capital Z Healthcare  Holding Corp.  invested $5
million in that entity in exchange for a 20% ownership interest. On December 17,
1999, in connection with the closing of the initial public offering of 5,500,000
shares of the  Company's  common stock at an initial  public  offering  price of
$11.00 per share,  HealthExtras LLC was merged into the Company with the Company
being  the  surviving   entity  (the   "Reorganization")   and  the  members  of
HealthExtras LLC received an aggregate 22,100,000 shares of the Company's common
stock in exchange for their member  interests.  The net proceeds received by the
Company from the initial public  offering (net of  underwriting  commissions and
expenses of $5.6 million) were approximately $54.9 million.

         HealthExtras intends to be the leading  Internet-based seller of health
and disability  benefit  programs.  We design and develop  membership  programs,
which are  marketed  directly to  consumers  over the  Internet at our  website,
www.healthextras.com.  At our  website,  consumers  can  enroll  as  members  of
HealthExtras  and tailor  their  benefit  packages  to best suit their needs and
circumstances.  By joining  HealthExtras,  members can address  critical gaps in
their insurance protection.  Those gaps have traditionally not been addressed by
insurance  agents or brokers due to the low price point of that  protection  and
the high costs associated with that distribution  channel. We believe we are the
first company to develop and sell  Internet-based  membership  programs offering
products and services that incorporate health and disability  benefits.  We have
contracted  with insurance  companies to underwrite the insurance  components of
our programs. As a result, we do not assume any insurance underwriting risk. The
financial  responsibility  for the payment of claims resulting from a qualifying
disability, or other event covered by the insurance features of our programs, is
borne  by  third-party  insurers.  All of the  insurance  and  service  features
included in our  membership  programs  are  supplied by outside  vendors.  Since
launching our programs in January 1999,  and through  December 31, 1999, we have
enrolled over 105,000 program members.

         The features of  membership  in  HealthExtras  include  health  related
services that can be utilized in the absence of a qualifying disability, medical
condition or organ transplant.  These include unlimited access to a nurse-advice
line,  air-evacuation  in the event of qualifying  emergency while traveling and
access to cost savings through the national health care provider network. In the
event  of a  qualifying  disability,  medical  condition  or  organ  transplant,
HealthExtras  offers  consultation  services to ensure that the benefits payable
under the insurance features are used appropriately.

                                       3

<PAGE>

         The Internet is an increasingly  significant  medium for communication,
information and commerce.  International Data Corporation,  commonly referred to
as IDC, estimates that there were 97 million Internet users worldwide at the end
of 1998 and anticipates that number will grow to approximately 320 million users
by the end of 2002.  In addition,  IDC  estimates  that the  worldwide  consumer
electronic commerce market is expected to grow from approximately $11 billion in
1998 to  approximately  $94 billion in 2002.  That  growth is being  driven by a
number of factors, including:

         * A growing base of PCs in the home and workplace;

         * Improvements in network security, infrastructure and bandwidth;

         * Faster and less expensive Internet access;

         * Increases in the quantity and quality of content available on the
           Internet;

         * The overall increase in public awareness of the Internet; and

         * The convenience, timeliness and reduced costs of electronic commerce.

         Over the last few years,  consumers have significantly  increased their
usage of the Internet and expanded the  categories of products and services they
purchase over the Internet. A new class of Internet-based  companies has emerged
to address  these online  opportunities.  These  companies  are focusing on such
areas as books, CDs, videocassettes,  airline tickets, online stock trading and,
increasingly, other consumer financial products and services.

  OUR MARKET

         According to Forrester  Research,  a leading  e-commerce and technology
research  firm,  Internet-influenced  sales of  insurance  will  grow  from $1.5
billion in 1998 to $11.0 billion in 2003. In addition,  Booz,  Allen & Hamilton,
Inc. has estimated that the cost of distribution of insurance  products over the
Internet  can be as much as 71% less  than the  distribution  costs of  products
through  traditional brokers and agents. We believe our programs are well-suited
for delivery over the Internet because:

         * health and disability benefits are information-based products that
           need neither physical shipment nor warehousing of merchandise;

         * the cost advantages and direct contact with customers afforded by the
           Internet  enable us to target and serve  segments of the market which
           would not be as profitable  if they had to be accessed  through large
           sales staffs and costly local offices;

         * effective  two-way  communication  flow via the Internet  facilitates
           interaction with consumers and rapidly delivers  feedback on consumer
           preferences; and

         * the Internet provides customers with convenience, privacy and control
           over the process of  researching  and pricing  benefits,  without the
           pressure of a commissioned agent.

         Further,  we believe  that the  Internet  provides us with  significant
opportunities  in the direct  marketing of our benefit  programs,  including the
ability to:

         * evaluate and respond rapidly to consumer reactions to marketing
           programs and product offerings;

         * target the most attractive customer segments and customize
           advertising to them across different websites; and

         * provide customers flexibility to customize benefit programs.

                                       4
<PAGE>

         The market of health and disability insurance is large and continues to
grow. We believe that the demand for insurance  products will grow and be driven
by:

         * significant growth in Internet commerce, through which more consumers
           will have access to  alternatives to traditional  insurance  products
           and distribution channels;

         * a growing awareness by consumers of their financial exposure to
           catastrophic events, due to limitations in their insurance coverage;
           and

         * the growth in elective  employee  benefit  plans which  incorporate a
           variety of insurance options.

  THE HEALTHEXTRAS OPPORTUNITY

         Many  individuals and families are financially  exposed to the costs of
catastrophic  injuries and  illnesses.  According to Employee  Benefit  Research
Institute, more than 60% of insured Americans are covered by policies that limit
overall  lifetime health benefits to $1.0 million or less and fewer than half of
American  workers  covered by group health  insurance  are covered by disability
policies.  Most disability insurance is limited to short-term income replacement
and does not address longer-term financial security.  Thus,  individuals covered
by employer-sponsored health plans frequently have a significant amount of their
net worth exposed to loss through  catastrophic  illness or injury. In addition,
many  uninsured  Americans  lack an effective  means of  accessing  catastrophic
coverage because the comparatively  low premiums  associated with those products
make their  commission  yield  unattractive to agents and brokers.  As a result,
these products often are not actively marketed.

         In  response  to  these  market  opportunities,  HealthExtras  began to
develop membership  program  descriptions  including  coverage features,  health
services, levels of benefits, exclusions and age parameters. HealthExtras sought
out insurers and  reinsurers  to  underwrite  specific  features  intended to be
included in its membership program.  At its own expense,  HealthExtras had group
policies  filed in all fifty states and has  continued  to monitor  progress and
respond  to changes  requested  in the  regulatory  process.  HealthExtras  also
established  the   qualification   provisions  that  allow  cardholders  of  our
participating  financial  institutions to be group members through membership in
HealthExtras.

  BUSINESS STRATEGY

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

    Become the Leading Online Seller of Health and Disability Benefit
Programs.

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

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

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

                                       5
<PAGE>

    Develop Strategic Marketing Relationships.

         We have established  strategic marketing  relationships with six of the
nation's  largest  credit card issuing banks for access to their  customers.  We
have  entered  into   marketing   programs  with  selected   Internet   portals,
insurance-related  websites,  and other  websites  with  attractive  demographic
profiles.

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

         We are  continuing to develop an expanded list of insurance and service
options for inclusion in our  membership  programs.  These  additional  products
would provide flexibility in coverage amounts to our program members and address
additional insurance needs.

  BRAND DEVELOPMENT

    Christopher Reeve

         Christopher  Reeve has entered  into an  exclusive  agreement to assist
HealthExtras  in  developing   products,   making  consumers  aware  of  various
catastrophic  events that could threaten their families'  security and promoting
the HealthExtras  brand. Mr. Reeve appears in a number of television,  radio and
print advertisements to promote HealthExtras programs and our website.

         We have an agreement with Cambria  Productions,  Inc. f/s/o Christopher
Reeve,  which had an initial  three-year  term from July 8, 1997. This agreement
has been extended for an additional two-year term, to July 8, 2002.

         HealthExtras  has  exclusive  rights  to  use  the  advertisements  and
promotional  materials  involving  Mr.  Reeve that it develops  for  television,
radio,  Internet and print,  including  newspapers,  magazines,  direct mail and
other consumer print materials, but excluding life-size cut-outs, billboards and
shelf-facing  materials,  during  the term of the  agreement  and for a  10-year
annuity  period  thereafter,  within  the  United  States  and its  possessions,
territories and commonwealth.  Further,  under the agreement,  Christopher Reeve
shall not  promote,  create  commercials,  or endorse  any other  product  which
combines  credit  cards and  health-related  benefits;  however,  Mr.  Reeve may
perform in  television or  productions  sponsored by  competitive  companies and
products and may appear in promotions for such programs.

         Mr. Reeve has the absolute right to approve all advertisements created
under the agreement, or to give a notice of disapproval. If Mr. Reeve gives
proper disapproval notice and the parties are unable to agree as to the
advertisement content, either party may terminate the agreement.

         HealthExtras  is required to make  payments  for Mr.  Reeve's  services
based on the number of persons  who  purchase a  HealthExtras  benefit  program,
subject to the payment of guaranteed amounts. Mr. Reeve's representative has the
right to terminate the agreement  immediately upon giving notice to HealthExtras
if any payment due under the agreement is not received within 30 days of its due
date.  In such case,  HealthExtras  relinquishes  any right to use any materials
previously created with Mr. Reeve's likeness.

  STRATEGIC MARKETING RELATIONSHIPS

         We have established  strategic marketing  relationships with six of the
nation's largest credit card issuing banks for access to their customers.  These
banks are  assisting  us in  establishing  brand name  recognition  and  driving
traffic to our website with their installed base of customers, which we estimate
represents more than 55 million  households.  In addition,  we have  established
marketing   relationships  with  selected  Internet  content  sites,  electronic
commerce sites and Internet portals.  These  relationships  drive traffic to our
website and increase our brand name recognition.

                                       6
<PAGE>

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

         Under  the  contracts  which  govern  our  relationships  with our bank
partners, the banks have the right to review and approve all marketing materials
and to determine whether to send those materials to customers. HealthExtras pays
for the marketing material used and generally compensates the banks based on the
purchases of HealthExtras benefit programs by bank customers.

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

  PRODUCTS OFFERED

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

         * Catastrophic Disability.   This provides a $1 million to $2 million
           cash payment to members who become permanently disabled as the
           result of an accident

         * Excess  Medical.  This  provides  program  members an  additional  $5
           million in health  insurance  coverage after the exhaustion of the $1
           million  lifetime  limit  on  a  member's  primary  health  insurance
           coverage.

         * Organ  Transplant.  Many  employer-sponsored  health  insurance plans
           contain an embedded  limitation  on organ  transplant  coverage.  The
           organ  transplant  benefit  provides up to $250,000 to cover expenses
           for an organ  transplant  in  excess  of a  member's  primary  health
           insurance coverage.

         * Out of Area Expense  Reimbursement.  This  provides up to $2,500 per
           year in  reimbursements  for  co-payments and deductibles for health
           services  furnished  to  members  when they are over 100 miles  from
           home.

         * Emergency  Evacuation and Repatriation.  This provides a member who
           needs  emergency  medical  treatment with up to $50,000 of coverage
           for air ambulance transportation to an appropriate medical facility
           abroad or in the United States.

         * 24-Hour Nurse Consultation. This provides access to general medical
           information  from a  centralized  nursing staff 24 hours per day, 7
           days per week, through a toll-free  telephone number.  This service
           does not provide any diagnosis of medical  conditions,  nor does it
           provide or control medical services.

         * Provider Network Access.   This allows members to receive the
           discounts or the price concessions for medical services available
           through the United Payors & United Providers, Inc. nationwide
           network of medical care providers. The United Payors & United
           Providers, Inc. network includes over 2,500 hospitals and 150,000
           physicians.

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

                                       7
<PAGE>

  OTHER STRATEGIC RELATIONSHIPS

    Reliance National Insurance Company

         Our  relationship  with  Reliance  National  is  governed  by a Program
Administrator's  Agreement  between  HealthExtras  and Reliance  National.  This
agreement  runs  through  February  28,  2002.  Under this  agreement,  Reliance
National  agreed to file the  underlying  benefit  insurance  policies in all 50
states and to use its best efforts to obtain  approvals  from the various  state
insurance  departments.   Reliance  National  identifies  for  HealthExtras  the
regulatory status in the various states for the insurance  coverage it provides.
Reliance  National is not,  however,  obligated  to issue  insurance  under this
agreement.  Also,  Reliance National provides  marketing and sales expertise for
the  HealthExtras  benefits  programs.  HealthExtras is required to pay Reliance
National for the cost of the insurance coverage provided to HealthExtras program
members.  HealthExtras maintains a prepaid balance with respect to the insurance
coverages obtained from Reliance National.

         Under this agreement,  Reliance National has appointed  HealthExtras as
administrator and designated the Sklover Group, Inc. as the program manager. The
Sklover Group is an independent  insurance agent.  HealthExtras has no authority
to adjust,  compromise,  settle or pay any claim made on the insurance policies.
HealthExtras  maintains  a toll free  telephone  number to provide  its  members
convenient  access to  information;  however,  all  inquiries  regarding  policy
certificate  holder  services,  including claim  inquiries,  are referred to the
licensed program manager.

         This   agreement   gives   Reliance   National  the  right  to  suspend
HealthExtras as  administrator  or terminate the agreement based on an inability
to obtain and maintain in force  reinsurance  satisfactory to Reliance  National
and in  various  circumstances  pertaining  to  HealthExtras,  for  example,  an
administrative  accusation against it for violation of insurance laws, a default
in  its  duties  and   responsibilities,   excessive  consumer  complaints,   or
insolvency.  In addition,  Reliance National could  unilaterally  decide to stop
issuing policies for our programs at any time.

    United Payors & United Providers, Inc.

  Network Access

         Our relationship with United Payors & United Providers, Inc. enables us
to offer  our  program  members  access  to the price  concessions  for  medical
services available through the United Payors & United Providers, Inc. network of
health care providers. This network consists of over 2,500 hospitals and 150,000
physicians throughout the United States.

         HealthExtras  has entered into a contract  with United  Payors & United
Providers,  Inc. to allow  HealthExtras  program  members to access,  subject to
various criteria,  the United Payors & United Providers,  Inc. network of health
care providers.  United Payors & United Providers, Inc. has the unilateral right
to revise the criteria for network  access.  In exchange,  we have agreed to pay
United  Payors & United  Providers  $1.00 per  program  member per month for the
initial  year of  membership,  which amount  escalates in stages for  subsequent
membership  years to a maximum  of $1.50  per  program  member  per month in the
fourth year of continued  membership and thereafter.  However,  we can terminate
these  payments by conveying  $25 million in market value of our common stock to
United Payors & United Providers, Inc.

         The  contract  contains  mutual   confidentiality  and  indemnification
provisions.  The contract terminates on December 31, 2003, but may be terminated
prior to that time by either party upon breach of a provision  of the  contract,
provided  the party  gives the  breaching  party 30 days  written  notice of the
breach and the breaching party fails to correct the breach.

                                       8
<PAGE>

  ADMINISTRATIVE SERVICES

         HealthExtras  has relied on United Payors & United  Providers,  Inc. to
furnish operating and  administrative  services and facilities  necessary to its
business,  which  include  personnel,  office space,  furniture  and  equipment,
telephone  service,  both  voice  and  facsimile,   and  computer  capabilities.
HealthExtras  reimburses United Payors & United Providers,  Inc. on a cost basis
for these services.  In December 1999,  HealthExtras entered into a sublease for
office space with United Payors & United Providers. In addition, effective April
1, 2000 all employees of United Payors & United  Providers,  Inc. whose services
are devoted full time to HealthExtras will become our employees. From that date,
services  to be  provided  by United  Payors & United  Providers,  Inc.  will be
limited   primarily  to  services   relating  to   information   technology  and
communications.  Compensation to United Payors & United Providers, Inc. for such
services will be based on a cost plus fee basis.

         The Chairman of the Board of HealthExtras  was also the Chairman of the
Board and Co-Chief  Executive Officer of United Payors & United Providers,  Inc,
until its merger with a subsidiary of BCE Emergis Inc. on March 28, 2000.

  COMPETITION

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

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

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

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

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

                                       9
<PAGE>

  REGULATION

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

         Complex laws,  rules and  regulations  of each of the 50 states and the
District of Columbia  pertaining  to  insurance  impose  strict and  substantial
requirements on insurance coverage sold to consumers and businesses.  Compliance
with these laws,  rules and regulations  can be arduous and imposes  significant
costs. Each  jurisdiction's  insurance  regulator typically has the power, among
other things, to:

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

         * approve policy forms and regulate premium rates;

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

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

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

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

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

                                       10
<PAGE>

  EMPLOYEES

         As of December 31, 1999, we had 46 personnel whose services are devoted
full time to  HealthExtras.  As  discussed  under  "Business  - Other  Strategic
Relationships - United Payors & United Providers,  Inc." our personnel currently
are employees of United Payors & United Providers,  Inc. This arrangement is for
our convenience.  Effective April 1, 2000, we will establish  employee  benefits
similar to the benefits these personnel  currently  receive.  At that time, they
will become  direct  employees  of ours.  We have never had a work  stoppage.  A
collective  bargaining  unit does not represent our  personnel.  We consider our
relations  with our  personnel to be good.  Our future  success will depend,  in
part,  on our ability to continue to  attract,  integrate,  retain and  motivate
highly  qualified  technical and managerial  personnel,  for whom competition is
intense.


ITEM 2.  PROPERTIES

         Our  existing  executive,  administrative  and  operating  offices  are
located  in  approximately  2,473  square  feet of  office  space in  Rockville,
Maryland  under a sublease  with United  Payors & United  Providers,  Inc.  that
expires on February 28, 2001. We anticipate that we will be moving to new office
space in Rockville, MD consisting of approximately 19,700 square feet during the
second  quarter of 2000.  The new office space will be the subject of a sublease
with United  Payors & United  Providers,  Inc. that expires May 2004. We believe
that the new office space is adequate for our existing  needs and that  suitable
additional space on commercially reasonable terms will be available as required.


ITEM 3.  LEGAL PROCEEDINGS

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

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

         There were no matters  submitted to a vote of security  holders  during
the quarter ended December 31, 1999.

                                       11
<PAGE>

                                    PART II

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

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

<TABLE>
<CAPTION>

                                              High           Low
                                              ----           ---
<S>                                           <C>             <C>

1999
----
December 14 - December 31.........            $12.38          $7.38

2000
----
First quarter (through March 21, 2000)...     $11.97          $4.39
</TABLE>

         On March 21, 2000 the last closing sale price of the common  stock,  as
reported by the Nasdaq National Market was 5.25 per share. As of March 21, 2000,
the Company had approximately  3,418 stockholders of record. The Company did not
pay any cash  dividends  in 1999  and has no  plans to do so in the  foreseeable
future.

                                       12

<PAGE>

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

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

<TABLE>
<CAPTION>


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

                                 1996         1997       1998         1999
                                 ----         ----       ----         ----
<S>                              <C>          <C>        <C>          <C>

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

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

Operating loss ..............     (956)     (4,686)     (6,534)      (11,096)
Interest expense, net .......       --        (556)       (110)         (351)
Other income (expense), net .       (5)        589          --           (73)
                                -------    --------    --------     ---------
Net loss ....................   $ (961)    $(4,653)   $ (6,644)     $(11,520)
                                =======    ========   =========     =========

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

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

<TABLE>
<CAPTION>

                                                  December 31,
                                        ---------------------------------
                                        1996      1997       1998    1999
                                        ----      ----      -----   -----
<S>                                  <C>       <C>       <C>       <C>
Balance Sheet Data:
Cash and cash equivalents            $ 3,526   $ 9,651   $   219   $46,971
Total assets ...............           4,226    12,710     4,608    53,662
Total liabilities ..........             188     7,770     5,531     6,298
Total stockholders' (members')
equity (deficit)............           4,038     4,940      (923)   47,364
</TABLE>
--------------
(1) Reflects the formation of HealthExtras,  Inc. and the  Reorganization  as if
those  events had taken place at the  beginning  of the  period,  except that no
effect is given to the  investment  by Capital Z  Healthcare  Holding  Corp.  in
HealthExtras prior to May 27, 1999.

                                       13
<PAGE>


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

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

OVERVIEW

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

         We believe our consumer  research and  marketing  efforts have given us
valuable  insight into the consumer  perceptions and  preferences  regarding the
value and limitations of prevailing insurance products.  Accordingly, we believe
that our  programs  are well  positioned  to address  the needs of our  targeted
market segments. As of December 31, 1999, more than 105,000 members had enrolled
in our programs.

         Revenue is  generated  by payments  for program  benefits.  The primary
determinant of HealthExtras'  revenue recognition is monthly program enrollment.
In general,  revenue is  recognized  based on the number of members  enrolled in
each  reporting  period  multiplied  by the  applicable  monthly  fee for  their
specific membership program. The revenue recognized by HealthExtras includes the
cost of the  membership  benefits,  which are supplied by others,  including the
insurance components. Revenue from program payments received, and related direct
expenses,  are deferred to the extent that they are applicable to future periods
or to any refund guarantee we offer for an initial 90-day period. As of December
31, 1999, initial revenue was deferred for approximately 40,000 program members.

         Direct  expenses  consist  principally of bank marketing and processing
fees and the cost of benefits provided to program members. Direct expenses are a
function of the level of  membership  during the period and the  specific set of
program features  selected by members.  The coverage  obligations of our benefit
suppliers and the related expense are determined  monthly,  as are the remaining
direct  expenses.  HealthExtras  has  historically  maintained a prepaid expense
balance with respect to the insurance  features of its  programs.  Where amounts
are prepaid,  direct expense is recognized based on the actual membership levels
in each program.  These  prepaid  amounts were $879,300 and $731,800 at December
31,  1998  and  December  31,  1999,  respectively.  The  carrying  value of the
prepayment  is adjusted at the end of each  quarter  based on factors  including
enrollment levels in each product,  enrollment trends, and the remaining portion
of the unexpired  prepayment  period. In the event that a period of coverage was
purchased  in  advance,  and there were  insufficient  members  to  utilize  the
coverage,  the value would  expire and be expensed by  HealthExtras  without any
related revenue. HealthExtras believes that current enrollment levels will allow
the balance at December 31, 1999 to be fully utilized prior to expiration.

         We have entered into three-year  employment agreements with five of our
officers.  The annual base salaries under these arrangements range from $120,000
to $210,000,  and one executive will be entitled to a bonus equal to one percent
of our after-tax profits.  Our minimum aggregate payments under these employment
agreements are expected to be $837,000 annually.

                                       14
<PAGE>

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

RESULTS OF OPERATIONS

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

         HealthExtras  incurred an operating  loss of $11.5 million for the year
ended  December 31, 1999.  Revenue of $5.3 million  consisted of annual  program
member  payments  earned  during  the  period.   Cash  collections  for  program
subscriptions  through  December 31, 1999 totaled  $10.5  million.  There was no
revenue in 1998.

         Operating  expenses for the year ended  December 31, 1999 totaled $16.4
million.  Direct expenses of $3.1 million consisted of the cost of obtaining the
benefits  included in our programs,  and marketing and other fees payable to our
distribution  partners.  These  direct  expenses  represented  19% of  operating
expenses for that  period.  For the year ended  December 31, 1999,  HealthExtras
incurred $10.3 million in product development and marketing expenses,  or 63% of
total operating expenses,  $4.3 million of which was incurred for the continuing
creative  development of promotional and sales materials,  including  television
and print  advertisements,  and $1.1  million of which was  product  endorsement
costs.  Media  production  expenses  totaled $5.1 million for print and Internet
advertisement  production  and  distribution.   Market  research  expenses  were
$380,000.  General and  administrative  expenses  for that period  totaled  $3.0
million or 18% of total operating expenses. These expenses included $1.7 million
in compensation and benefits and $205,000 in professional services.

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

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

         Total operating expenses for the year ended December 31, 1998 were $6.5
million  compared  to  $4.7  million  for  1997.  This  difference  was  largely
attributable  to a $1.6 million  increase in product  development  and marketing
expenses,  reflecting the implementation of marketing agreements,  initial focus
groups and  product  evaluation.  In 1997,  product  development  and  marketing
expenses included $674,000 for media development and $976,000 in market research
and product development  consulting.  Other costs for 1997 totaled approximately
$1,730,000,  of which  $513,000  was in  compensation  expense,  $555,000 was in
travel  expenses  and  approximately  $660,000  was in other  product  and media
development costs. In 1998, product  development and marketing expenses included
$2.4  million  for media  development,  consisting  of $1.0  million  in product
endorsement costs, $631,000 in business partner marketing materials, $133,000 in
test-marketing  costs and  approximately  $650,000  in  pre-production  creative
costs.  Production-related  expenses  in 1998  totaled  $1.1  million,  of which
$765,000 was in print advertisements and fulfillment  materials and $330,000 was
for the production of television and radio  promotions.  Also in 1998,  $626,000
was devoted to market research and product  development  consulting.  Additional
costs of $237,000 of  compensation  expense,  $324,000  in travel  expense,  and
$220,000  of other  costs were  incurred as product  development  and  marketing
expenses.  General and administrative  expenses were largely unchanged from year
to year. In 1997, these expenses included approximately $330,000 in compensation
and $541,000 in  professional  and  consulting  fees.  In 1998,  these  expenses
included approximately $630,000 in compensation and $224,000 in professional and
consulting  fees.  Net other income  decreased  from $589,000 for the year ended
December 31, 1997 to a net expense of $100 for the year ended December 31, 1998.
This  decrease  reflected a  reduction  in realized  securities  trading  gains.
Interest expense decreased from a net expense of $555,000 for the year

                                       15
<PAGE>

ended  December  31, 1997 to $110,000 for the year ended  December 31, 1998,  as
more liquid assets were invested in interest-bearing instruments.

LIQUIDITY AND CAPITAL RESOURCES

         Our operations  since inception were funded  primarily  through capital
investments,  advances  from  the  Chairman  of the  Board  of the  Company  and
borrowings  under a line of credit.  In December  1999, we completed the sale to
the  public of  5,500,000  shares of the  Company's  common  stock and  received
proceeds  (net of  underwriting  commissions  and  expenses of $5.6  million) of
approximately  $54.9  million.  As of December 31, 1999, we had $47.0 million in
cash and cash equivalents, $45.2 in working capital and no debt.

         The primary commitment of our capital resources is to fund expenditures
relating to  marketing  and brand  development  we intend to incur over the next
several years and to fund the operating losses we anticipate in the near term.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

         In March 1998, the American  Institute of Certified Public  Accountants
issued  Statement of Position 98-1,  "Software for Internal Use," which provides
guidance on accounting for the cost of computer  software  developed or obtained
for internal use. We have adopted this  statement of position for the year ended
December 31, 1999. The adoption did not have a material  impact on our financial
statements for the year ended December 31, 1999.

INTEREST RATE AND EQUITY PRICE SENSITIVITY

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

YEAR 2000

         To date, we have not experienced any significant adverse effect related
to the Year 2000 issue. Due to our recent founding, we developed our systems and
technology in light of the Year 2000  problem,  as opposed to many older systems
designed  before this  problem was known.  On June 15, 1999,  we  completed  our
review and testing of Year 2000  compliance for all of our internally  developed
software,  which include  substantially  all of the systems for the operation of
our website,  customer  interaction  and  transaction  systems and our security,
monitoring  and  back-up  capabilities.  On  May  31,  1999,  we  completed  our
assessment of the Year 2000 readiness of our third party  supplied  software and
hardware,  and of our vendors.  During the assessment phase, we identified those
vendors critical to us, and received certifications of Year 2000 compliance or a
readiness  disclosure  statement from them.  Testing was completed in the fourth
quarter of 1999.

         While we have not experienced any significant  adverse effects to date,
there can be no assurance that currently  unidentified Year 2000 issues, if any,
will not arise and that these issues will not have a material  adverse effect on
us.


                                       16
<PAGE>

  CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OR STOCK PRICES

    FACTORS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

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

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

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

         A  substantial  majority of all of our programs  sold to date have been
through mailings sent by banks to their credit card and other  customers.  If we
lose one or more of our marketing relationships with credit card issuers and are
unable to replace those  relationships with other marketing outlets,  our access
to potential customers would decline and sales and revenues would suffer.

                                       17

<PAGE>

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

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

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

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

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

         We are dependent on the providers of benefits included in our programs.
These benefits are provided  pursuant to  arrangements  with Reliance  National,
Chubb & Son and others that may be terminated on relatively short notice.  If we
lose  these  relationships  and are  unable to  replace  them  quickly  and cost
effectively, we would not be able to satisfy consumer demand for our programs.

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

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

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

         * our levels of marketing expenditures;

         * renewal rate experience for our benefit programs;

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

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

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

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

                                       18
<PAGE>

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

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

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

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

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

    FACTORS RELATED TO REGULATION

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

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

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

         * approve policy forms and regulate premium rates;

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

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

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

                                       19
<PAGE>

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

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

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

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

    FACTORS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE

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

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

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

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

                                       20
<PAGE>


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


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Our audited Financial Statements are contained in a separate section of
this Annual Report on Form 10-K on pages F-1 through F-13, attached hereto.


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

         None

                                       21
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


ITEM 11. EXECUTIVE COMPENSATION

         Information  required  under  this item is  contained  in the  sections
entitled "Directors Compensation" and "Executive Compensation" in our 1999 Proxy
Statement and is incorporated herein by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                       22
<PAGE>

                                    PART IV

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

    (a)  Documents filed as part of this report

         (1)  Financial Statements
              Report of Independent Accountants
              Balance Sheets as of December 31, 1998 and 1999
              Statements  of  Operations  and  Comprehensive  Loss for the years
              ended December 31, 1997, 1998 and 1999 Statements of Stockholders'
              (Members') Equity (Deficit) for the years ended December 31, 1997,
              1998  and  1999  Statements  of Cash  Flows  for the  years  ended
              December 31, 1997, 1998 and 1999 Notes to Financial Statements

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

    (b)  Reports on Form 8-K

         None

    (c)  Exhibits

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


    Exhibit No.                Description
    -----------     --------------------------------------------------
    2.1             Form of Reorganization  Agreement by and among HealthExtras,
                    Inc., HealthExtras, LLC and Capital Z Healthcare Holding
                    Corp (1)
    3.1(a)          Certificate of Incorporation of HealthExtras, Inc(1)
    3.1(b)          Form of Amended and Restated Certificate of Incorporation(1)
    3.2             Bylaws of HealthExtras, Inc.(1)
    4.1             Specimen Stock Certificate of HealthExtras, Inc.
    4.2             Form of Stockholders' Agreement(1)
    10.1            Form of Employment Agreement between HealthExtras, Inc. and
                    David T. Blair(1)
    10.2            Form of Employment Agreement between HealthExtras, Inc. and
                    certain Executive Officers (1)
    10.3            Program Administrator's Agreement by and between
                    HealthExtras LLC and Reliance National Insurance Company (1)
    10.4            Agreement between United Payors & United Providers, Inc. and
                    HealthExtras, Inc. (filed herewith)
    10.5            Agreement by and between United Payors & United Providers,
                    Inc. and HealthExtras, LLC.re: network access(1)
    10.6            Agreement by and between Cambria Productions, Inc. f/s/o
                    Christopher Reeve and HealthExtras, Inc. (1) (2)
    10.7            Indemnification Agreement (1)
    10.8            Sublease Agreement by and between United Payors & United
                    Providers, Inc. and HealthExtras, Inc. (filed herewith)
    10.9            Form of HealthExtras, Inc. 1999 Stock Option Plan (1)
    10.10           Form of Registration Rights Agreement (1)
    27.1            Financial Data Schedule (filed herewith)

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

(1) Incorporated herein by reference into this document from the Exhibits to the
Form  S-1  Registration  Statement,  as  amended,  Registration  No.  333-83761,
initially  filed on July 26, 1999.

(2)  Confidential  treatment  requested  for portion of agreement  pursuant to
Section 406 of Regulation C. promulgated under the Securities Act of 1933, as
amended.

                                       23
<PAGE>

                                   SIGNATURES

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


                                      HEALTHEXTRAS, INC.


Date March 29, 2000                   By: /s/ David T. Blair
                                          -----------------------
                                          David T. Blair
                                          Chief Executive Officer and Director



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

Date:  March 29, 2000                 By: /s/ Thomas L. Blair
                                          -----------------------
                                          Thomas L. Blair
                                          Chairman of The Board


Date:  March 29, 2000                 By: /s/ David T. Blair
                                          -----------------------
                                          David T. Blair
                                          Chief Executive Officer and Director


Date:  March 29, 2000                 By: /s/ Michael P. Donovan
                                          -----------------------
                                          Michael P. Donovan
                                          Chief Financial Officer and
                                          Chief Accounting Officer


Date:  March 29, 2000                 By: /s/ Julian A. L. Allen
                                          -----------------------
                                          Julian A. L. Allen
                                          Director


Date:  March 29, 2000                 By: /s/ Bette B. Anderson
                                          ----------------------
                                          Bette B. Anderson
                                          Director


Date:  March 29, 2000                 By: /s/ William E. Brock
                                          -----------------------
                                          William E. Brock
                                          Director


Date:  March 29, 2000                 By: /s/ Thomas J. Graf
                                          -------------------
                                          Thomas J. Graf
                                          Director
<PAGE>




Date:  March 29, 2000                 By: /s/ Julia M. Lawler
                                          -----------------------
                                          Julia M. Lawler
                                          Director


Date:  March 29, 2000                 By: /s/ Karen E. Shaff
                                          -----------------------
                                          Karen E. Shaff
                                          Director


Date:  March 29, 2000                 By: /s/ Paul H. Warren
                                          -----------------------
                                          Paul H. Warren
                                          Director


<PAGE>





                       Report of Independent Accountants

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

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


                                            PricewaterhouseCoopers LLP

McLean, Virginia
March 2, 2000


                                      F-1


<PAGE>
                               HealthExtas, Inc.
                                 Balance Sheets

<TABLE>
<CAPTION>

                                               December 31,     December 31,
                                                   1998             1999
                                                ------------    -------------
<S>                                             <C>             <C>
Current assets:
 Cash and cash equivalents ....................   $    219,285    $ 46,971,106
 Certificate of deposit .......................        700,000            --
 Marketable securities of a related party .....      1,144,255         664,984
 Accounts receivable ..........................           --            62,795
 Deferred charges:
    Direct ....................................        879,300       1,203,854
    Marketing and promotion ...................      1,110,000       2,316,491
 Other current assets .........................           --           240,153
                                                  ------------    ------------
      Total current assets ....................      4,052,840      51,459,383
Deferred marketing and promotion charges ......        555,000            --
Fixed assets, net .............................           --         1,904,847
Other assets ..................................           --           297,853
                                                  ------------    ------------
      Total assets ............................   $  4,607,840    $ 53,662,083
                                                  ============    ============

Current liabilities:
 Accounts payable and accrued expenses .......    $    426,396    $  1,056,777
 Accrued benefit expense ......................        546,562            --
 Marketing expenses payable ...................      1,016,000           4,000
 Contribution payable .........................        200,000            --
 Deferred revenue .............................        257,746       5,237,210
 Due to member ................................      1,334,429            --
                                                  ------------    ------------
      Total current liabilities ...............      3,781,133       6,297,987
 Line of credit ...............................      1,750,000            --
                                                  ------------    ------------
      Total liabilities .......................      5,531,133       6,297,987
                                                  ------------    ------------

Commitments

Stockholders' (members') equity (deficit)
 Preferred stock, $0.01 par value, 5,000,000
    shares authorized, none issued ............           --              --
 Common stock, $0.01 par value, 100,000,000
    shares authorized, 27,600,000 shares issued
    and outstanding at December 31, 1999 ......           --           276,000
 Additional paid-in capital ...................           --        48,045,635
 Accumulated deficit ..........................           --          (719,976)
 Members' deficit .............................     (1,535,232)           --
 Deferred compensation ........................           --          (370,232)
 Accumulated other comprehensive income .......        611,939         132,669
                                                  ------------    ------------
      Total stockholders' (members') equity
        (deficit) .............................       (923,293)     47,364,096
                                                  -------------   ------------
      Total liabilities and stockholders'
       (members')equity (deficit) ............   $  4,607,840    $ 53,662,083
                                                  ============    ============
</TABLE>


       The accompanying notes are an integral part of these financial statements

                                      F-2
<PAGE>

                               HealthExtras, Inc.
                Statements of Operations and Comprehensive Loss
<TABLE>
<CAPTION>

                                                     For the years ended December 31,
                                                   1997             1998            1999
                                                 ---------       ---------       -----------
<S>                                            <C>             <C>             <C>

Revenue ...................................   $       --      $       --      $  5,326,527
                                              ------------    ------------    ------------
Direct expenses ...........................           --              --         3,095,397
Product development and marketing .........      3,379,770       4,935,831      10,331,163
General and administrative (includes
     expenses from related parties of
  $182,364, $964,023 and $2,287,832 for
  the years ended December 31,
  1997, 1998 and 1999, respectively) ......      1,306,519       1,597,660       2,996,345
                                              ------------    ------------    ------------
    Total operating expenses ..............      4,686,289       6,533,491      16,422,905
                                              ------------    ------------    ------------

    Operating loss ........................     (4,686,289)     (6,533,491)    (11,096,378)

Interest income (expense), net (includes
     imputed interest applicable
     to related-party transactions of
     $483,191, $238,479 and $268,064 for
     the years ended December 31, 1997,
     1998, and 1999, respectively) ........       (555,651)       (110,273)       (350,487)
Other income (expense), net ...............        589,228            (100)        (73,234)
                                              ------------    ------------    ------------

     Net loss .............................     (4,652,712)     (6,643,864)    (11,520,099)

Unrealized holding gains (losses) on
     marketable securities arising
     during the period ....................         71,000         542,189        (479,270)
                                              ------------    ------------    ------------

     Comprehensive loss ...................   $ (4,581,712)   $ (6,101,675)   $(11,999,369)
                                              ============    ============    ============

Basic and diluted net loss per share ......   $       --      $       --      $      (0.56)

Weighted average shares of common
     stock outstanding
     (in thousands) .......................           --              --            20,588


Pro forma basic and diluted net loss
     per share ............................   $      (0.26)   $      (0.38)   $       --
Pro forma weighted average shares of common
     stock outstanding
     (in thousands) .......................         17,680          17,680            --
</TABLE>

       The accompanying notes are an integral part of these financial statements

                                      F-3

<PAGE>
                               HealthExtras, Inc.
       Statement of Changes in Stockholders' (Members') Equity (Deficit)
<TABLE>
<CAPTION>


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

                              Accumulated    Common Stock                  Accumulated
                              Other          ------------                  Other
                  Members     Comprehensive                   Additional   Comprehensive
                  Capital     Income                          Paid In      Income         Accumulated    Deferred
                  (deficit)   Loss       Shares      Amount    Capital     (Loss)         Deficit       Compensation    Total
                  -------     --------   ----------  --------  -----------  -----------   ------------    ------------ -----------
<S>                   <C>     <C>        <C>         <C>       <C>          <C>            <C>           <C>           <C>
Balance at
  December
 31, 1996          $ 4,039,674 $  (1,250)         -- $    --    $    --      $    --       $        --         $   --   $ 4,038,424
Additional
  capital
  contributions
  by members         5,000,000        --          --      --         --           --                --             --     5,000,000
Unrealized gain
  on marketable
  securities               --     71,000          --      --         --           --                --             --        71,000
Noncash interest
  expense              483,191        --          --      --         --           --                --             --       483,191
Net loss            (4,652,712)       --          --      --         --           --                --             --     4,652.712)
                   -----------   -------      ------  -------   --------      ------          --------         --------   ---------
Balance at
  December
 31, 1997           4,870,153     69,750          --      --         --           --                --             --     4,939,903
Unrealized gain
  on marketable
  securities               --    542,189          --      --         --           --                --             --       542,189
Noncash interest
  expense              238,479        --          --      --         --           --                --             --       238,479
Net loss            (6,643,864)       --          --      --         --           --                --             --    (6,643,864)
                   -----------   --------     ------  -------   --------      ------          --------         ---------  ---------
Balance at
  December
 31, 1998           (1,532,232)  611,939          --      --          --          --                --             --      (923,293)
Grant of
 effective
 member
 interests to
 management,
 net of deferred
 compensation of
 $370,232               97,341        --          --      --           --         --                --             --        97,341
Capital
 contribution
 by new member       5,000,000        --          --      --           --         --                --             --     5,000,000
Unrealized gain
 (loss) on
 marketable
 securities                 --  (491,817)         --      --           --     12,547                --             --      (479,270)
Noncash interest
 expense and
 loan guarantee
 fees                  268,063        --          --      --           --         --                --             --       268,063
Net loss for the
 period from
 January 1, 1999
 to December 16,
 1999 (see Note 1) (10,800,123)       --          --      --           --         --                --             --   (10,800,123)
Reorganization,
 December 17,
 1999 (see
 Note 1)             6,969,951  (120,122) 22,100,000  221,000   (6,820,719)   120,122               --        (370,232)          --
Net proceeds
 from initial
 public offering
 (see Note 1)               --         --  5,500,000   55,000   54,866,354        --                --             --    54,921,354
Net loss for the
 period from
 December 17, 1999
 to December 31,
 1999                       --         --         --      --           --         --           (719,976)           --      (719,976)
                      --------     ------ ----------  -------   ----------    -------          ---------      ---------   ---------
 Balance at
  December 31,
  1999             $       --  $       -- 27,600,000 $276,000  $48,045,635   $132,669         $(719,976)     $(370,232)  $47,364,096
                      ========     ====== ========== ========  ===========    =======         ==========     ==========  ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                      F-4
<PAGE>

                               HealthExtras, Inc.
                            Statements of Cash Flows
<TABLE>
<CAPTION>

                                                           For the years ended December 31,
                                                           1997           1998            1999
                                                      -----------    ------------    ------------
<S>                                                  <C>             <C>             <C>
Cash flows from operating activities:
  Net loss .......................................   $ (4,652,712)   $ (6,643,864)   $(11,520,099)
  Depreciation expense ...........................           --              --            89,889
  Noncash compensation expense and fees ..........           --              --            97,341
  Change in deferred charges .....................     (2,775,000)        230,700        (976,045)
  Noncash interest expense .......................        483,191         238,479         268,064
  Changes in assets and liabilities:
    Accounts receivable ..........................           --              --           (62,795)
    Trading securities, net ......................        494,375            --                --
    Prepaid expenses and other assets ............         (1,437)         20,000        (538,006)
    Accounts payable and accrued expenses ........        201,635          73,901         630,381
    Accrued benefit expense ......................           --           546,562        (546,562)
    Marketing expenses payable ...................      2,031,713      (1,015,713)     (1,012,000)
    Contribution payable .........................        190,909           9,091        (200,000)
    Deferred revenue .............................           --           257,746       4,979,464
                                                       ----------      ----------      -----------
      Net cash used in operating activities ......     (4,027,326)     (6,283,098)     (8,790,368)
                                                       -----------     -----------     -----------
Cash flows from investing activities:
  Capital expenditures ...........................           --              --        (1,994,736)
  Deposits .......................................        152,000            --                --
  Maturity (purchase) of certificate of deposit ..           --          (700,000)        700,000
  Purchases of available for sale securities .....       (179,100)       (338,341)             --
  Sales of available for sale securities .........         20,750            --                --
                                                       -----------     -----------     -----------
      Net cash used in investing activities ......         (6,350)     (1,038,341)     (1,294,736)
                                                      ------------     -----------    ------------
Cash flows from financing activities:
  Proceeds from (repayment of) line of credit ....           --         1,750,000      (1,750,000)
  Capital contributions ..........................      5,000,000            --         5,000,000
  Borrowings from (repayment to) member, net .....      5,158,461      (3,860,282)     (1,334,429)
  Net proceeds from initial public offering ......           --              --        54,921,354
                                                       ----------      -----------     -----------
      Net cash provided by (used in) financing
      activities..................................     10,158,461      (2,110,282)     56,836,925
                                                       ----------      -----------     ----------
Net increase (decrease) in cash and cash
  equivalents ....................................      6,124,785      (9,431,721)     46,751,821
Cash and cash equivalents at the beginning
  of period ......................................      3,526,221       9,651,006         219,285
                                                        ---------       ---------      ----------
Cash and cash equivalents at the end of period ...   $  9,651,006    $    219,285     $46,971,106
                                                      ===========     ===========      ==========
Supplemental disclosure:
  Cash paid for interest .........................   $    131,515    $      3,248     $   181,729

</TABLE>






   The accompanying notes are an integral part of these financial statements

                                      F-5

<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS

1.  ORGANIZATION

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

    Sequel  Newco,  Inc.   (Sequel),   an  Iowa   Corporation,   was  originally
incorporated on October 23, 1996 as PB Newco II, Inc. Sequel's  business,  which
consisted of developing and  evaluating  international  and domestic  healthcare
management  service  opportunities,  was  contributed to the Joint Venture as of
January 1, 1997.

    The Joint Venture was originally formed on December 1, 1996 and its business
involved the development of provider  software  applications and the development
of international healthcare management  opportunities.  Effective April 7, 1997,
the Joint Venture was merged into a limited  liability  partnership,  SN LLP. SN
LLP  continued  the business of the Joint  Venture,  i.e.,  the  development  of
provider software  applications and the development of international  healthcare
management opportunities.

    HEP was  originally  formed on April 7, 1997 and its  business  involved the
development of  supplemental  catastrophic  health benefit  programs.  Effective
August 1, 1998,  SN LLP and HEP were merged  into Health  Extras LLC, a Maryland
limited liability company,  with HealthExtras,  LLC being the surviving business
entity.

    On May 27,  1999,  HealthExtras,  LLC,  which  was then a  Maryland  limited
liability company,  contributed substantially all of its assets to HealthExtras,
LLC, a Delaware  limited  liability  company,  and Capital Z Healthcare  Holding
Corp.  invested  $5  million  in that  entity in  exchange  for a 20%  ownership
interest.

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of presentation

    The accompanying  financial  statements  include the accounts of the Company
and the Predecessor Companies.

  Cash and cash equivalents

    Cash and cash  equivalents  consist of cash and investments in highly liquid
instruments with maturities of three months or less when purchased.

  Marketable securities

    The Company has purchased certain marketable securities of a certain related
entity.  Management  considers all of the common stock purchased to be available
for sale as defined by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity  Securities."  Available  for sale  securities  are  reported at fair
value,  with net  unrealized  gains and losses  reported as a component of other
comprehensive income.

                                      F-6
<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)

    During 1997,  the Company  engaged in the trading of marketable  securities.
Trading  securities are reported at fair value,  with net  unrealized  gains and
losses reported in the statement of operations and comprehensive  loss. Realized
gains and  losses on the sale of trading  securities  are  determined  using the
specific  identification  method.  For the year ended  December  31,  1997,  net
realized gains of $732,977 were recorded. All trading securities were sold prior
to December 31, 1997.

    The  historical  cost,  gross  unrealized  holding  gains and fair  value of
marketable  securities  available for sale as of December 31, 1998, and 1999 are
as follows:

<TABLE>
<CAPTION>


                                                1998          1999
                                               -----         -----
<S>                                         <C>          <C>
Historical cost .................           $  532,316   $  532,315
Gross unrealized holding gains...              611,939      132,669
                                            ----------   ----------
Total marketable securities .....           $1,144,255   $  664,984
                                            ==========   ==========
</TABLE>

  Fixed assets

    Fixed  assets  are  stated  at cost.  Depreciation  is  computed  using  the
straight-line  method over the estimated useful lives of the assets, which range
from  three to seven  years.  Leasehold  improvements  are  amortized  using the
straight-line  method over the shorter of the  estimated  lives of the assets or
the lease term.

  Concentration of credit risk

    Financial  instruments that  potentially  subject the Company to significant
concentrations of credit risk consist  principally of cash and cash equivalents.
The Company  maintains such amounts in bank accounts which, at times, may exceed
federally insured amounts. The Company has not experienced any losses related to
its cash or cash  equivalents  and believes it is not exposed to any significant
credit risk on its cash or cash equivalents.

  Use of estimates

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

  Contributions

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

  Income taxes

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

    Upon the  Reorganization,  the Company  became  subject to federal and state
income  taxes.  No provision for federal or state income taxes has been made for
the period from  December 17, 1999 to December 31, 1999 as the Company  incurred
an operating loss for the period.

    The Company records  deferred tax assets and liabilities  based on temporary
differences  between  the  financial  statement  and the tax bases of assets and
liabilities  using  enacted  tax  rates  in  effect  in the  year in  which  the
differences are expected to reverse.

                                      F-7

<PAGE>
                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)

  Net loss per share

    Basic net loss per share is based on the weighted  average  number of shares
outstanding during the year. Diluted net loss per share is based on the weighted
average number of shares and dilutive common stock equivalent shares outstanding
during the year.  All  outstanding  stock  options  at  December  31,  1999 were
excluded from the computation of diluted net loss per share because the exercise
price of the stock  options  exceeded  the  average  market  price of the common
shares, and therefore, were antidilutive.

    Pro forma basic and diluted net loss per share and weighted  average  shares
outstanding  reflect  the  formation  of  HealthExtras,  Inc.  and  merger  with
HealthExtras,  LLC in  exchange  for Company  common  stock as if the merger was
effective January 1, 1997.

    Pro forma weighted average basic net loss per share is computed based on the
number of  outstanding  shares of common  stock.  Pro forma diluted net loss per
share  adjusts the pro forma basic  shares  weighted  average for the  potential
dilution that could occur if stock options or warrants,  if any, were exercised.
Pro forma diluted net loss per share is the same as pro forma basic net loss per
share because there were no dilutive securities outstanding at December 31, 1997
and 1998.

  Revenue and direct expense recognition

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

    Revenue from program benefits and related direct expenses  (principally bank
marketing and processing  fees and the cost of the benefits  provided to program
members) are initially  deferred for 90 days,  the period during which a program
member is generally  entitled to obtain a refund. If a member requests a refund,
HealthExtras  retains  any  interest  earned on funds held  during the  refunded
membership  period.  Revenue  and direct  expenses  attributable  to the initial
deferral are  recognized in the  subsequent  month.  After the initial  deferral
period, revenue is recognized as earned and direct expenses as incurred.

    HealthExtras has historically  maintained a prepaid balance for the benefits
included in its programs.  The carrying  value of the  prepayment is adjusted at
the end of each quarter  based on factors  including  enrollment  levels in each
product,   enrollment  trends,  and  the  remaining  portion  of  the  unexpired
prepayment  period.  In the event that a period of  coverage  was  purchased  in
advance, and there were insufficient members to utilize the coverage,  the value
would  expire and be expensed  by  HealthExtras  without  any  related  revenue.
HealthExtras  believes that current  enrollment levels will allow the balance at
December 31, 1999 to be fully utilized prior to expiration.

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

  Marketing agreements

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

                                      F-8
<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)


  Segment reporting

    The  Company   operates  in  only  one  market  segment  as  a  provider  of
supplemental health and disability benefit programs to individuals.  The Company
has no major customers and operates only in the United States.

3.  FIXED ASSETS

    Fixed assets as of December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
    <S>                                         <C>

    Computer equipment ......................   $   451,118
    Furniture, fixtures and office equipment         88,217
    Leasehold improvements in process .......     1,455,401
                                                 ----------
         Total fixed assets .................     1,994,736
    Accumulated depreciation and amortization       (89,889)
                                                 -----------
          Fixed assets, net ..................  $  1,904,847
                                                 ===========
</TABLE>

    Depreciation  expense for the year ended  December  31, 1999 was $89,889.

4.  INCOME TAXES

    No provision  for federal and state income taxes have been  recorded for the
period from  December 17, 1999 to December  31, 1999 as the Company  incurred an
operating loss for the period.

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

    Deferred tax assets (liabilities):
<TABLE>
<CAPTION>
    <S>                                         <C>

    Deferred charges ..........                 $  (464,928)
    Deferred revenue ..........                   2,022,610
    Net operating loss ........                       5,473
    Valuation allowance .......                  (1,563,155)
                                                ------------
         Net deferred tax asset                 $        --
                                               =============
</TABLE>


    The Company has a net operating loss  carryforward of approximately  $14,400
as of December 31, 1999.

         The  effective  tax rate  for the  period  from  December  17,  1999 to
December 31, 1999 varies from the U.S.  Federal  Statutory tax rate  principally
due to the following:

<TABLE>
<CAPTION>
    <S>                                         <C>

    U.S. Federal Statutory tax rate ...              (34.0%)
    State tax, net of federal benefit..               (4.6)
    Valuation allowance ...............               38.5
    Other .............................                 .1
                                                     -----
    Effective tax rate ................                 -%
                                                     =====
</TABLE>

                                      F-9

<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)


5.  STOCKHOLDERS' EQUITY

  Stock (member interests) grants

    In February 1999, certain management employees were granted effective member
interests   aggregating  1.87%  (equivalent  to  413,333  common  shares,   post
Reorganization) of the Company, after giving effect to an existing commitment to
sell a 20% interest in the Company to a third party for  $5,000,000  cash.  Such
grants  vest over a  four-year  period  commencing  March 1, 1999.  The  Company
recorded the estimated fair value of such interests of $467,573  ($1.13 per post
Reorganization  common share) as stockholders' equity and deferred  compensation
expense.  During the year ended  December  31,  1999,  amortization  of deferred
compensation  expensed  amounted  to  $97,341.  The  remainder  of the  deferred
compensation  expense  will  be  amortized  over  the  vesting  period  for  the
interests.

  Stock option plan

    In connection  with the  Reorganization  and initial  public  offering,  the
Company established the HealthExtras,  Inc. 1999 Stock Option Plan ("SOP").  The
maximum  number of shares of the  Company's  common stock  reserved for issuance
pursuant  to the  exercise of options  under the SOP is  4,000,000  shares.  All
officers,  employees and independent  contractors of the Company are eligible to
receive option awards.  A Committee of the Board of Directors  determines  award
amounts,  option prices and vesting  periods,  subject to the  provisions of the
SOP.

    Concurrent  with the  Reorganization  and  initial  public  offering,  stock
options to purchase  2,956,000  shares of the Company's  common stock, all at an
exercise  price of $13.20  per  share,  were  issued  to  certain  officers  and
employees of the Company. These stock options vest ratably over a period of four
years.  None of the stock options are exercisable and all remain  outstanding as
of December 31, 1999.  The  contractual  life of all of the stock options is ten
years.

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

<TABLE>
<CAPTION>
    <S>                                            <C>

    Net loss
        As reported .....................          $11,520,099
        Pro forma .......................           11,693,258
    Net loss per share
        As reported - basic and diluted..                0.56
        Pro forma - basic and diluted....                0.57

</TABLE>

    The exercise  price of each option granted in 1999 exceeded the market price
of the Company's common stock at the date of grant. The grant date fair value of
each option granted was $5.70 per share.

    The estimated  fair value of each option was  calculated  using the modified
American  Black-Scholes  economic  option-pricing  model.  The  following  table
summarizes  the  weighted-average  of the  assumptions  used for  stock  options
granted during 1999:

<TABLE>
<CAPTION>
     <S>                                                     <C>

    Risk-free interest rate........                          4.7%
    Expected years until exercise..                          5 years
    Expected volatility............                          61.3%
    Dividend yield.................                          -
</TABLE>

                                      F-10

<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)


6.  BANK LINE OF CREDIT

    In 1998,  the Company  entered into a credit  facility  with a bank totaling
$2,000,000  and  bearing  interest  at the prime rate (8.5% as of  December  31,
1999). The facility extends to February 2000, is collateralized by substantially
all the  Company's  assets  and has been  guaranteed  by United  Payors & United
Providers,  Inc. As of December  31, 1998,  the Company had borrowed  $1,750,000
under this credit  facility.  As of December 31, 1999, all amounts due under the
credit  facility have been paid. The Company  terminated the credit  facility in
January 2000.

    Loan  guarantee  fees  have  been  imputed  based  on  the  monthly  amounts
outstanding  under the credit  line at an annual  rate of 2%. The  imputed  loan
guarantee  fees have been  recorded  as  interest  expense in the  statement  of
operations  and as members'  capital.  Such fees amounted to $0, and $45,453 for
the years ended December 31, 1998, and 1999, respectively.

7.  LEASE COMMITMENTS

    The Company has entered into an agreement  dated December 22, 1999, to lease
office space under a  non-cancelable  sublease  agreement  with United  Payors &
United Providers,  Inc. The sublease  agreement  provides for annual escalations
and for the payment by the Company of its proportionate share of the increase in
the costs of operating  the  building.  For financial  reporting  purposes,  the
Company will  recognize rent expense on a  straight-time  basis over the term of
the sublease.

    Future minimum lease payments under the sublease are as follows:
<TABLE>
<CAPTION>

   <S>                   <C>
    2000.....            $   451,000
    2001.....                602,000
    2002.....                626,000
    2003.....                657,000
    2004.....                280,000
                           ---------
     Total...             $2,616,000
                           =========
</TABLE>

8.  COMMITMENTS

    During 1997, the Company entered into two marketing  agreements each with an
initial  three-year  term whereby the Company  committed to make  $3,030,000  of
non-refundable  payments,  payable  in  three  equal  installments,  to  certain
individuals in exchange for their participation in various marketing  campaigns.
Under both marketing agreements,  the Company has the option to extend and renew
the  agreements  for an  additional  two-year  period,  which  would  result  in
additional guaranteed minimum payments the Company of approximately $2,034,000.

    Under the  marketing  agreements,  the Company must pay annual fees of $1.00
and $0.10,  respectively,  per program  member that  subscribes  to the benefits
promoted by the  individuals  when program  members exceed the number of program
members covered under the guaranteed  payments  referenced  above. Such payments
are for the  initial  three-year  term of the  marketing  agreements  and  shall
continue for a 10-year period thereafter.

    Additionally,  during 1997, the Company pledged to contribute  $300,000 to a
charitable  foundation payable in equal  installments of $100,000  commencing on
August 1, 1997. The  contribution  commitment was made to support  education and
research in the areas of  paralysis  and  related  rehabilitation  efforts.  The
contribution  was made  independent of any direct or indirect  obligation on the
part of the recipient to further  HealthExtras'  business or program  marketing.
Through  December  31,  1998,  the  Company  paid  $100,000  to  the  charitable
foundation. As of December 31, 1999, the entire pledge has been satisfied.

                                      F-11
<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)


     During 1998, the Company entered into various agreements with participating
companies in the amount of $1,260,900,  whereby the Company committed to provide
minimum  enrollment in its programs.  The Company has historically  maintained a
prepaid expense balance with respect to benefit features of its programs. Direct
expense is recognized based on the actual membership levels in each program. The
deferred amount at the end of each quarter is adjusted to reflect  advances,  if
any, made during the period,  expenses recognized and remaining coverage periods
and  membership  levels to which such  advances can be applied.  The Company has
deferred  expense  recognition  for $879,300 and $731,786 in minimum and advance
payments at  December  31, 1998 and 1999,  respectively,  with  respect to these
commitments in order to match related future revenue recognition. A liability of
$546,562  for the  unpaid  amount  included  in accrued  benefit  expense on the
balance sheet as of December 31, 1998 was paid during 1999.

     During  July  1998,  the  Company  entered  into  an  agreement  for a mass
marketing  campaign requiring a minimum payment of $100,000 which is included in
sales and marketing expense for the year ended December 31, 1998. A liability of
$100,000 for such payment  included in accrued  expenses on the balance sheet as
of December 31, 1998 was paid during 1999.

    The Company has entered into three-year  employment  agreements with five of
its executive  officers.  The annual base salaries under these  agreements range
from $120,000 to $210,000,  and one executive  will be entitled to a bonus equal
to one percent of the Company's annual after-tax profits.  The Company's minimum
aggregate payments under these employment agreements are expected to be $837,000
annually.

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

9.  RELATED PARTY TRANSACTIONS

    For corporate  business  purposes,  the Company  utilizes the services of an
aircraft owned by Southern Aircraft  Leasing,  which is owned by the Chairman of
the Board of the Company.  For the years ended December 31, 1997, 1998 and 1999,
the Company paid $105,703,  $97,638, and $156,185,  respectively,  for utilizing
the services of the aircraft.

    The Company holds  available for sale  securities in a corporation for which
the  Chairman  of the  Board of the  Company  is the  Chairman  of the Board and
Co-Chief Executive Officer. Investments held were $1,144,255, and $664,984 as of
December 31, 1998 and 1999, respectively.

    The  Chairman  of the Board of the  Company,  from time to time,  loaned the
Company  funds,  in excess of his pro-rata  share of capital  contributions,  in
order to  underwrite  operating  expenses.  This loan  amounted to $1,334,429 at
December 31, 1998.  Interest has been imputed on the monthly outstanding balance
of the loan at an annual rate of 10%. The imputed  interest has been recorded as
interest  expense in the statement of operations  and as  stockholders'  equity.
Imputed interest expense amounted $476,346, $173,868, and $150,109 for the years
ended December 31, 1997, 1998, and 1999,  respectively.  All funds advanced have
been repaid as of December 31, 1999.

    Effective January 1, 1999, the Company entered into an agreement with United
Payors & United Providers,  Inc. ("UP&UP"), a corporation for which the Chairman
of the Board of the  Company is  Chairman  of the Board and  Co-Chief  Executive
Officer,  whereby UP&UP provides  administrative services for the Company and is
reimbursed for the costs incurred.  Prior to January 1, 1999, the Company had an
unwritten arrangement with UP&UP to provide similar services. The amount paid by
the Company for such services were $76,661,  $866,385, and $3.3 million, for the
years ended  December 31,  1997,  1998 and 1999,  respectively.  Under a revised
agreement dated December 22, 1999,  services to be provided by UP&UP  subsequent
to March 31, 2000, will be limited primarily to services relating to information
technology and communications and will be paid on a cost plus fee basis.

                                      F-12

<PAGE>

                               HEALTHEXTRAS, INC.

                         NOTES TO FINANCIAL STATEMENTS (Continued)



    From time to time the  Company  owes  UP&UP for the costs of  administrative
services.  Such amounts  payable do not bear  interest.  Interest on amounts due
UP&UP  has  been  imputed  at an  annual  rate of 10% and has been  recorded  as
interest  expense in the statement of operations  and as  stockholders'  equity.
Such  expense  amounted  to $6,845,  $64,611,  and  $72,501  for the years ended
December 31, 1997, 1998 and 1999, respectively.

    The Company also signed a five-year royalty  agreement  effective January 1,
1999  relating to the Company's  program  members  accessing the UP&UP  provider
network.  In return for providing  network access to UP&UP's national network of
healthcare providers,  the Company will pay UP&UP $1.00 per member per month for
the initial year of membership,  which amount escalates in stages for subsequent
membership  years to a maximum of $1.50 per member per month in the fourth  year
of continued membership an thereafter.  However, the Company can terminate these
payments by conveying $25 million in market value of the Company's  common stock
to UP&UP. Amounts paid under this agreement in 1999, approximated $529,000.