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, 2002
                                       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 0-31014

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

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     <S>                                  <C>

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

</TABLE>


          2273 Research Boulevard, 2nd 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: ( __ )

 Indicate  by check mark  whether the  registrant  is an  accelerated  filer (as
 defined in Rule 12b-2 of the ACT) Yes X   No ____
                                       --

 The  market  value  of  the  voting  and  non-voting   common  equity  held  by
 non-affiliates  was $77,291,800 based upon the closing price of $5.07 as quoted
 on the NASDAQ National Market as of June 28, 2002, the last business day of the
 registrant's  most recently  completed  second fiscal  quarter.  Solely for the
 purposes of this  calculation,  directors  and officers of the  registrant  are
 deemed to be affiliates.

                      Documents incorporated by reference:
                      ------------------------------------

 The Company's Proxy Statement for its annual meeting of stockholders to be held
 in June,  2003,  a  definitive  copy of which will be filed  within 120 days of
 December 31, 2002, is  incorporated  by reference in Part III of this Report on
 Form 10-K.



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                                TABLE OF CONTENTS
                                                                           Page
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PART I

     Item 1.     Business.....................................................3
     Item 2.     Properties..................................................16
     Item 3.     Legal Proceedings...........................................16
     Item 4.     Submission of Matters for a Vote of Security Holders........16

PART II

     Item 5.     Market for Registrant's Common Equity and Related
                   Stockholder Matters.......................................17
     Item 6.     Selected Financial Data.....................................18
     Item 7.     Management's Discussion and Analysis of Financial
                   Condition and Results of Operations.......................19
     Item 7A     Quantitative and Qualitative Disclosures About Market
                   Risk......................................................33
     Item 8.     Financial Statements and Supplementary Data.................33
     Item 9.     Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure.......................33

PART III

     Item 10.    Directors and Executive Officers of the Registrant..........33
     Item 11.    Executive Compensation......................................33
     Item 12.    Security Ownership of Certain Beneficial Owners and
                   Management................................................33
     Item 13.    Certain Relationships and Related Transactions..............34
     Item 14.    Controls and Procedures.....................................34

PART IV

     Item 15.    Exhibits, Financial Statement Schedules, and Reports on
                   Form 8-K..................................................34
</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.

CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


                                       2
<PAGE>


                                     PART 1

ITEM 1.  BUSINESS


     BUSINESS OVERVIEW
     -----------------

         HealthExtras,  Inc.  ("HealthExtras") is a provider of pharmacy benefit
 management  services  ("PBM") and  supplemental  benefits.  The  Company's  PBM
 clients include managed-care  organizations,  self-insured employers, and third
 party   administrators   ("payors"),   who  contract   with   HealthExtras   to
 cost-effectively  administer the  prescription  drug component of their overall
 health benefit programs.  As a PBM, the Company provides access to a contracted
 national   network  of  over  50,000   pharmacies,   maintains  an   electronic
 point-of-sale  system of  eligibility  verification  and plan design while also
 offering access to rebate  arrangements  for certain  branded  pharmaceuticals.
 These services  provide our clients'  members with timely and accurate  benefit
 adjudication while controlling pharmacy spending trends through innovative plan
 designs, physician orientation programs and member education.

         Much of HealthExtras' competitive  differentiation is attributable to a
 strong local market  presence in Nevada,  New Mexico,  Oklahoma,  Texas and the
 Carolinas.  The  Company's  significant  market share in each of these  regions
 allows it to offer  attractive  benefit pricing based on local pharmacy network
 rates and formulary  design.  The Company maintains  operational  facilities in
 Rockville,  Maryland as well as Las Vegas, Nevada and Raleigh,  North Carolina.
 These offices provide account management, customer service and clinical support
 programs  including  dedicated  clinical  pharmacists  with  expertise  in plan
 design,  treatment  protocols  and various  cost  management  initiatives.  PBM
 revenues  have grown to more than $180 million or 73% of total  revenue in 2002
 from approximately $5 million or 11% of total revenue in 2000. The remainder of
 the  Company's  revenues  relate to the  supplemental  benefits  segment of our
 operations.  HealthExtras  has  over  800  PBM  clients  and no  single  client
 generated more than 8% of total revenue in 2002.

         In 2002,  the Company  processed  more than 4.5 million  pharmacy claim
 transactions  and completed the year with an annualized claim rate in excess of
 8 million  transactions.  The  Company  continues  to develop  its PBM  service
 offerings and has successfully  integrated several strategic  acquisitions over
 the last three years. In each acquisition  transaction the Company has executed
 on its  objectives  by  integrating  operations,  improving  profitability  and
 growing  the revenue  base of the  acquired  businesses.  In the most recent of
 these transactions, HealthExtras acquired Pharmacy Network National Corporation
 ("PNNC"),  a PBM company  located in Raleigh,  North  Carolina,  on December 1,
 2002.  The Company will continue to look for  acquisition  opportunities  which
 complement its existing operations and have the same or similar characteristics
 as the  previously  acquired  companies.  These  characteristics  would include
 geographic  membership  concentrations,  opportunities to improve profitability
 and a base from which to generate significant revenue growth.

         The Company was incorporated in Delaware in July 1999, as the successor
 to certain predecessor  companies.  Our principal executive offices are located
 at 2273 Research Boulevard,  Rockville, Maryland 20850. Our telephone number is
 301-548-2900.

         The Company's  Internet  website is  www.healthextras.com.  The Company
 makes  available free of charge on or through its website its annual reports on
 Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
 amendments  to those  reports  filed or furnished  pursuant to Section 13(a) or
 15(d) of the Securities Exchange Act of 1934 as soon as reasonably  practicable
 after the Company  electronically files such material with, or furnishes it to,
 the Securities and Exchange Commission. This reference to the Company's website
 is for the  convenience  of  shareholders  as  required by the  Securities  and
 Exchange  Commission and shall not be deemed to incorporate  any information on
 the website into this report.

     Pharmacy Benefit Management
     ---------------------------

         The PBM industry has  developed  and grown in response to the increased
 utilization of  pharmaceuticals,  increasing unit costs and broader application
 of  prescription  drugs to various  conditions.  These factors have combined to
 create a  significant  and  recurring  escalation  in the cost of drug coverage
 offered by managed-care  organizations,  self-insured employers and third party
 administrators.  In order to understand, manage and mitigate these trends, many
 of these payor  organizations  have  contracted  for the  specialized  services
 offered by PBMs.

                                       3
<PAGE>

         According  to 2003  survey  data from  national  benefits  consultants,
 employer  sponsored  pharmacy  benefit costs increased  between 14.2% and 16.9%
 annually  in each  of the  four  years  ending  in  2002.  Current  projections
 generally anticipate that increases for 2003 will again be in excess of 15%. In
 the context of overall employer-sponsored health care cost increases,  pharmacy
 costs have been  escalating  at a rate  approximately  50% higher  than that of
 overall spending. The persistence of these trends has resulted in an increasing
 willingness  on the part of payors to embrace  plan  design  changes  and other
 options to curb these levels of cost escalation.

         The factors contributing to the increase in pharmacy spending include:

         -  The  introduction  of new and expensive  drug  therapies and greater
            reliance on drug therapy by the physician community,
         -  Increased  "preventative  prescribing"  to manage  high  cholesterol
            levels and digestive disorders,
         -  Efforts by drug  manufacturers  to increase  market share and extend
            single-source brand use,
         -  The  introduction of  improvements  over existing  therapies,  which
            normally carry higher unit prices than existing formulations,
         -  Increased   patient   demand   and   education   as  a   result   of
            direct-to-consumer advertising and other pharmaceutical marketing or
            promotional efforts,
         -  An aging workforce,
         -  Increased obesity among all age groups, and
         -  Improved techniques and technology to detect and diagnose diseases.

         Overall  cost   increases   are  a  function  of  both  the  number  of
 pharmaceuticals  dispensed  and their unit cost.  Each  factor has  contributed
 approximately half of recent trend increases.

         PBMs are responsible for implementing and  administering  benefit plans
 that  seek to  lower  overall  prescription  spending  by  encouraging  generic
 utilization,  increasing  the  proportion  of brand  drugs  dispensed  from the
 preferred category and encouraging, where appropriate, non-prescription therapy
 and  treatment  alternatives.  These  objectives  are  accomplished  through  a
 combination of administrative,  educational and technology initiatives directed
 towards pharmacies, physicians and members.

         Over the past several years,  plan design has  increasingly  focused on
 the use of three-tier co-payment structures. Co-payments represent that portion
 of the cost of a  prescription  paid for by the  member at the time the drug is
 dispensed.  The purpose of these designs and the use of drug specific formulary
 lists is to create  financial  incentives for members to utilize  generic drugs
 where available and to select the most cost-effective brand drugs indicated for
 a specific  diagnosis or condition.  In general,  these plans  incorporate  the
 lowest member co-payments for generic drugs, with increases for preferred brand
 drugs and reaching  their highest  level for  non-preferred  brands.  Typically
 these  categories  might  require  member  co-payments  of  $10,  $20  and  $35
 respectively.  The use of these tiered plans has increased  significantly  over
 the  past   several   years   and  now   applies   to   approximately   70%  of
 employer-sponsored   members.  As  importantly,   both  the  levels  of  member
 co-payment and the differential between tiers has continued to increase.

         While market share for PBM services in the U.S. is highly concentrated,
 with a small number of firms  controlling  over 70% of prescription  volume and
 member lives,  HealthExtras has demonstrated its ability to serve a broad range
 of clients from large managed-care  organizations to employer groups with fewer
 than a thousand members.

     BUSINESS STRATEGY
     -----------------

         Our strategy is to capitalize  on our  competitive  differentiation  in
 addressing the challenges  confronting payors. The increasing focus on pharmacy
 cost management  should contribute to an attractive and dynamic market for cost
 effective  pharmacy  benefit programs such as ours.  HealthExtras  provides its
 clients the tools,  information,  and specialized expertise needed to offer the
 best drug therapy to their membership,  while  simultaneously  working to lower
 the costs  associated with a pharmacy benefit plan. We believe that growth will
 be driven by demonstrating  the effectiveness of these programs as alternatives
 to  the  programs   currently   utilized  by  employer   groups,   managed-care
 organizations, and third party administrators.

                                       4
<PAGE>

         Our PBM services entail managing member  prescription  drug utilization
 to  ensure   high-quality,   cost-effective   pharmaceutical   care  through  a
 combination   of   managed-care   principles,   advanced   data   analysis  and
 technologies,  and the management of client specific cost control  initiatives.
 Our PBM services include:

         -  Benefit plan design and consultation
         -  Formulary administration
         -  Formulary compliance and therapeutic intervention programs
         -  Retail pharmacy network contracting and administration
         -  Advanced decision support and data analysis services
         -  Flexible,   customized   reporting  available  via  secure  Internet
            connection
         -  Contracted mail order pharmacy
         -  Prescription  benefits and discount programs tailored for businesses
            with a high percentage of low-wage or part-time employees

         Because we are not affiliated with any pharmaceutical manufacturer, and
 because we do not own a mail-order facility,  the formulary and plan designs we
 suggest to clients are free from  exposure to certain  potential  conflicts  of
 interest.  Our larger competitors are often subject to either or both conflicts
 in that  they may  benefit  from  increasing  the  volume  of drug  utilization
 generally  or that of certain  specific  drugs.  These  conflicts  arise  where
 revenues from pharmaceutical manufacturers may support the inclusion of certain
 drugs on formulary where not otherwise  indicated or may result from mail order
 utilization  serving as a visible and  important  profit center for the PBM. By
 not  actively  pursuing  pharmaceutical  manufacturer  revenue  sources  and by
 outsourcing mail order as a cost center, we believe that our interests are more
 fully aligned with the cost saving interests of our clients.

     We Intend to Increase our PBM Client Base by Targeting Certain Market
Segments
--------------------------------------------------------------------------

         Our analysis of the market opportunity by segment is as follows:

      -  LARGE  EMPLOYER  GROUPS  (SELF-INSURED):  Representing  over 12 million
         lives,   employers   in  this  segment  are  large  enough  to  need  a
         full-service  PBM  solution  to manage  their  increasing  prescription
         benefits costs, but are not Fortune 500-size companies that the largest
         PBMs typically serve.  HealthExtras has a significant number of clients
         in this segment.  By utilizing the  information-based  cost containment
         strategies described below, HealthExtras offers these clients favorable
         results as  compared  to larger  PBMs,  and  greater  level of customer
         service.

      -  THIRD PARTY  ADMINISTRATORS  (TPAS):  There are hundreds of TPAs in the
         U.S.  which focus  primarily on  administering  the health  benefits of
         their  clients.  TPAs provided  services to over 17 million  employees,
         dependents,  and  retirees,  paying  over $17  billion in total  health
         claims.  As the TPA market  continues to  consolidate,  and TPA clients
         increasingly  seek out complete  health  benefits  solutions from their
         TPA,  we  believe  an  increasing  number of TPAs will be seeking a PBM
         partner to administer the prescription benefits of their clients.

      -  MID-TIER MANAGED-CARE  ORGANIZATIONS (MCOS): There are hundreds of MCOs
         which cover under 200,000  lives.  These MCOs represent over 20 million
         lives and $8 billion in annual drug  spending.  We are targeting  these
         MCOs  as a  source  of  significant  growth.  MCOs  of  this  size  are
         increasingly  dissatisfied  with the level of service and results  they
         are  receiving  from  larger PBM  companies  that  devote most of their
         attention   to   one-million-plus   member   MCOs.   HealthExtras   has
         demonstrated   that  it  can  provide   these  MCOs  with  a  complete,
         full-service  PBM that includes all of the features  larger PBMs offer,
         with superior  customer  service,  market  specific retail networks and
         customized benefit plans.

      -  STATE AND LOCAL GOVERNMENTS:  Clients in this market segment often have
         fixed budgets for the prescription benefits that are offered to current
         members  as well as  retirees.  With some  state  governments  having a
         workforce and retiree  population  that rivals a Fortune 1000 employer,
         these  clients are  seeking the same  customer  service,  attention  to
         detail,  and bottom line results.  Because the vast majority of members
         in this market segment are  geographically  concentrated,  HealthExtras
         can analyze the prescribing and  utilization  trends  associated with a
         state and local government  entity and actively  influence  physicians'
         prescribing   practices  in  a  particular   region.   These  physician
         interactions draw on peer-reviewed clinical studies, generic drug

                                       5
<PAGE>

         utilization   patterns,   and  the  insights  offered by the physicians
         themselves to deliver better care at lower costs.

     We Seek to Leverage Local Market Dynamics to Build Customized Networks and
Manage Drug Spending
-------------------------------------------------------------------------------

         Although  clients  contract with  HealthExtras  to provide PBM services
 nationwide,  capitalizing on local and regional market dynamics is an effective
 way to manage drug  spending  and  differentiate  our PBM  services  from those
 offered by our competitors.

      -  CUSTOMIZED  PHARMACY  NETWORKS:  In order to  obtain  greater  pharmacy
         discounts for its clients,  HealthExtras works with clients to identify
         pharmacies  that  will  agree to  deeper  prescription  discounts  in a
         specific locality, based on the concentration of client members in that
         area,  and  the  `foot-traffic'  those  members  represent  to a  drug,
         grocery,  or retail chain's  non-pharmacy  business.  HealthExtras  has
         established   customized  pharmacy  networks  in  the  Texas,   Nevada,
         Virginia,  New Mexico,  Tennessee  and Carolina  regions and intends to
         develop similar networks in other parts of the country.

      -  DATA ANALYSIS AND REPORTING TO IMPROVE COST  EXPERIENCE  AND QUALITY OF
         CARE:  HealthExtras  performs  client-specific data analysis to develop
         trends,  insights,  and conclusions  that result in improved care while
         reducing costs.  Many PBMs offer a variety of data analysis  techniques
         from  both  a  clinical   and   financial   perspective.   HealthExtras
         differentiates  itself by using the  information  it  derives  from its
         systems  to  obtain  regionally  favorable   prescription  pricing;  to
         actively influence the drivers of prescription drug utilization; and to
         monitor clinical formulary and disease management trends.

      -  EXTENSIVE  USE OF INTERNET  FACILITIES  TO ENHANCE  ACCOUNT  MANAGEMENT
         EFFECTIVENESS:  HealthExtras  provides its clients Web-enabled decision
         support for prescription benefit plan management, clinical evaluations,
         disease management, and compliance monitoring.  These data analysis and
         reporting   capabilities   allow  clients  to  assess  top-level  trend
         information for total population  management and to analyze detail in a
         particular drug,  physician,  member, or pharmacy.  This  functionality
         enables   HealthExtras'   clients  to  measure  successes  relative  to
         formulary  and disease  management  initiatives  and will assist in the
         identification  of specific patient  populations that will benefit from
         specialty pharmacy programs.

    We Offer Our Clients a Variety of Specialized Services Focused On Improving
Health Outcomes
-------------------------------------------------------------------------------

         Clinical and Other Services.  Our clinical  services teams work closely
 with  clients  to  design  and  administer  pharmacy  benefit  plans  that  use
 formularies  and  other  techniques  to  promote  clinically   appropriate  and
 cost-effective drug usage. We are often able to influence physician prescribing
 patterns  by  comparing  individual  behavior  to  physician  peer  groups  and
 encouraging  change  where  practices  differ from peer group norms and medical
 best  practices.  Because  we operate  with  significant  geographic  focus the
 consultations  between our clinical  pharmacists  and local  physicians tend to
 have high levels of effectiveness compared with less concentrated  initiatives.
 Similarly,  our programs with retail pharmacies support therapeutic interchange
 programs that  encourage the  evaluation of  cost-effective  drug  alternatives
 where  appropriate.  We also offer  consulting  services  to assist  clients in
 designing   education   and   communication   programs   designed   to  support
 cost-effective prescription drug programs.

         Disease  Management.  We  assist  clients  in  managing  the  cost  and
 treatment of specific  chronic  diseases to improve medical  outcomes and lower
 the  overall  cost of  health  care.  These  programs  monitor  the  contracted
 population and intervene when  individuals  demonstrate  symptoms of a specific
 disease or high risk indications.

         Our disease  management  programs are the responsibility of a dedicated
 team of clinicians and have been developed around three-key approaches:

      -  Data  Analysis  and  Integration.  We evaluate  and  identify  medical,
         laboratory,  pharmacy  and other  relevant  data  within an  identified
         population.

      -  Case Identification. We identify patients who have the specific disease
         and evaluate the appropriateness of targeted interventions.

                                       6
<PAGE>

      -  Clinical and Program  interventions.  We  communicate  with  identified
         patients  and  offer  enhanced  education  about  their  condition  and
         effective  management tools. We also integrate our recommendations with
         physicians including treatment guidelines, patient profiles and patient
         management tools. Case management intervention programs are coordinated
         with other care-givers to monitor outcomes and improve overall care.

    COMPETITION
    -----------

         We believe the primary  competitive  factors in our PBM  businesses are
 price,  quality  of  service  and  scope  of  available  services.  Scale is an
 important  factor in  negotiating  prices with  pharmacies  and  manufacturers.
 Though we have other  advantages to offset our  comparatively  small scale,  we
 could face more pricing  competition  in the future.  We believe our  principal
 competitive  advantages are our  commitment to provide  flexible and customized
 service to our clients,  our ability to leverage local market dynamics to build
 customized   networks  and  manage   prescription   drug   spending,   and  the
 information-based  cost-containment  methods  we  use  to  enhance  care  while
 lowering costs.

         There are a  significant  number of national and  regional  PBMs in the
 United States, several of which have significantly greater financial, marketing
 and  technological  resources at their disposal to expand their client base and
 grow their businesses.  The largest,  national  companies  include  Merck-Medco
 Managed  Care,  L.L.C.,  a subsidiary  of Merck & Co.,  Inc.,  ("Merck-Medco");
 AdvancePCS,  Express  Scripts,  and  CaremarkRx,  Inc.; as well as large health
 insurers and certain HMOs which have their own PBM capabilities. In addition, a
 competitor  that is owned by a  pharmaceutical  manufacturer  may have  pricing
 advantages that are unavailable to us and other independent PBMs.  However,  we
 believe our independence from pharmaceutical  manufacturer  ownership allows us
 to make  unbiased  formulary  recommendations  to our clients,  balancing  both
 clinical efficacy and cost.

         Consolidation  has been, and may continue to be, an important factor in
 all aspects of the pharmaceutical industry,  including the PBM segment. We will
 continue to evaluate additional  acquisition and joint venture opportunities to
 enhance our business strategy of differentiated pharmacy services.

         Some of our PBM services, such as disease management services, informed
 decision  counseling  services  and medical  information  management  services,
 compete with those being offered by pharmaceutical  manufacturers,  other PBMs,
 specialized disease management companies and information service providers.

    Supplemental Benefits
    ---------------------

         Approximately  25% of our revenues are attributable to the Supplemental
 Benefits segment.  Supplemental benefits programs developed by HealthExtras are
 offered to individuals and small  businesses  through various direct  marketing
 initiatives.  The Company has distribution agreements with many of the nation's
 largest  financial  institutions  (the  "distributors"),   along  with  leading
 affinity groups and associations. Additionally, HealthExtras has a relationship
 with actor and advocate  Christopher Reeve to promote these benefits  programs.
 The marketing  expenditures  for these programs are now funded  entirely by the
 distributors.  Accordingly an increasing  percentage of total program  revenues
 are retained by the  distributors as  compensation  and accounted for as direct
 expenses by us.

         Insurance  companies  underwrite  the  insurance  components  of  these
 programs.  As a result, we do not assume any insurance  underwriting  risk. The
 financial  responsibility for the payment of claims resulting from a qualifying
 event  covered  by  the  insurance  features  of  our  programs,  is  borne  by
 third-party  insurers.  All of the insurance and service  features  included in
 these  programs are  supplied by outside  vendors and the programs are marketed
 through an independent, licensed and non-affiliated insurance agency.

         Our  agreements  with the  distributors  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. The significant majority of new enrollees in HealthExtras  programs are
 attributable  to marketing  initiatives  funded  entirely by the  distributors.
 Accordingly,  the level of revenues  from this segment will depend upon funding
 levels for marketing campaigns that are not controlled by us.

                                       7
<PAGE>

    COMPETITION
    -----------

         We consider that our  supplemental  benefits  programs compete with 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.

         We believe that the principal  competitive  factors in our supplemental
 benefits  markets are price,  brand  recognition,  marketing  expenditures  and
 customer  service.  Many of our current and potential  competitors  have longer
 operating  histories,  larger  consumer  bases,  greater brand  recognition and
 significantly greater financial,  marketing, technical and other resources than
 our own.  Certain  of these  competitors  may be able to  secure  products  and
 services on more favorable terms than we can obtain.

         Any of the  distributors  described above could seek to compete against
 us in  providing  supplemental  benefits  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.

    GOVERNMENT REGULATION
    ---------------------

         Various  aspects of our  businesses  are  governed by federal and state
 laws and regulations.  Because sanctions may be imposed for violations of these
 laws, compliance is a significant operational requirement. We believe we are in
 substantial  compliance  with all existing legal  requirements  material to the
 operation of our  businesses.  There are,  however,  significant  uncertainties
 involving the application of many of these legal  requirements to our business.
 In addition,  there are numerous  proposed  health care laws and regulations at
 the federal and state levels, many of which could adversely affect our business
 or  financial  position.  We are unable to predict what  additional  federal or
 state  legislation  or  regulatory  initiatives  may be  enacted  in the future
 relating to our business or the health care industry in general, or what effect
 any such  legislation or  regulations  might have on us. We also cannot provide
 any  assurance  that federal or state  governments  will not impose  additional
 restrictions  or adopt  interpretations  of existing laws or  regulations  that
 could have a material adverse effect on our business or financial position.

      -  PHARMACY BENEFIT  MANAGEMENT FEDERAL  REGULATION.  Certain federal laws
         and regulations affect or may affect aspects of our PBM business. Among
         these are the following:

         - ANTI-REMUNERATION/FRAUD   AND  ABUSE  LAWS.  The  federal  healthcare
           anti-kickback statute (the "Statute") prohibits,  among other things,
           an entity from paying or receiving, subject to certain exceptions and
           "safe   harbors",  any   remuneration   to  induce  the  referral  of
           individuals   covered  by  federally  funded  health  care  programs,
           including  Medicare,  Medicaid  and CHAMPUS or the  purchase  (or the
           arranging for or  recommending  of the purchase) of items or services
           for which  payment  may be made in whole or in part  under  Medicare,
           Medicaid,  CHAMPUS or other  federally  funded health care  programs.
           Sanctions  for  violating  these  federal  laws and  regulations  may
           include  imprisonment,  criminal and civil fines,  and exclusion from
           participation in the Medicare and Medicaid programs.

           The Statute  has been  interpreted  broadly by courts,  the Office of
           Inspector  General  ("OIG") within the Department of Health and Human
           Services,  and administrative  bodies. Because of the Statute's broad
           scope,  federal  regulations  establish  certain "safe  harbors" from
           liability.  Safe harbors  exist for certain  properly  disclosed  and
           reported   discounts   received  from  vendors,   certain  investment
           interests,  certain  properly  disclosed  payments made by vendors to
           group  purchasing  organizations,  and certain  discount  and payment
           arrangements  between PBMs and HMO risk contractors  serving Medicaid
           and  Medicare  members.  A practice  that does not fall within a safe
           harbor is not  necessarily  unlawful,  but may be subject to scrutiny

                                       8
<PAGE>

           and  challenge.  In the absence of an  applicable  exception  or safe
           harbor, a violation of the statute may occur even if only one purpose
           of a payment arrangement is to induce patient referrals or purchases.
           Among  the  practices  that  have  been  identified  by  the  OIG  as
           potentially   improper   under  the  statute  are  certain   "product
           conversion   programs"   in  which   benefits   are   given  by  drug
           manufacturers   to   pharmacists   or   physicians   for  changing  a
           prescription  (or  recommending or requesting such a change) from one
           drug to another.  Such laws have been cited as a partial basis, along
           with  state   consumer   protection   laws   discussed   below,   for
           investigations  and  multi-state  settlements  relating to  financial
           incentives  provided by drug  manufacturers  to retail  pharmacies in
           connection with such programs.

           Additionally,  it is a  crime  under  the  Federal  Employees  Health
           Benefit Programs  ("FEHBP") for any person to knowingly and willfully
           include,  directly or  indirectly,  the amount of any kickback in the
           contract price charged by a subcontractor  or prime contractor to the
           United  States.  Violators  of this law also may be  subject to civil
           monetary penalties.

           To our knowledge,  these anti-remuneration laws have not been applied
           to prohibit PBMs from receiving  amounts from drug  manufacturers  in
           connection  with drug  purchasing,  drug  reimbursing,  and formulary
           management programs,  therapeutic  intervention programs conducted by
           independent PBMs, or the contractual  relationships  such as those we
           have with certain of our clients. However:

           - In mid-2002,  it was  reported  publicly  that the U.S.  Attorney's
             Office in Boston,  Massachusetts  had issued  subpoenas  to Express
             Scripts,  Inc. and Caremark Rx, Inc.,  both PBMs,  and to WellPoint
             Health Networks,  Inc., and PacifiCare  Health Systems,  Inc., both
             managed care companies, in connection with documents related to TAP
             Pharmaceuticals   ("TAP").  TAP,  a  pharmaceutical   manufacturer,
             reached a public  settlement with the federal and state governments
             in  late   2001,   in  a  case   that   included   allegations   of
             anti-remuneration  law  violations.  At  this  time,  there  is  no
             indication that the PBMs and managed-care organizations are targets
             of this investigation.

           - In October 2002, the OIG published a "Draft OIG Compliance  Program
             Guidance  for   Pharmaceutical   Manufacturers"   (the  "Compliance
             Guidance").  The  Compliance  Guidance is voluntary and is directly
             aimed at the compliance  efforts of  pharmaceutical  manufacturers.
             Moreover,  the Compliance Guidance is in draft and has not yet been
             finalized.  However,  the Compliance  Guidance  highlights  several
             compliance "risk areas" that include certain potentially prohibited
             remuneration   in  connection  with   pharmaceutical   manufacturer
             financial  relationships  with other  entities  that might  include
             PBMs.

           - In late 1999,  it was  reported  publicly  that the U.S. Attorney's
             Office in Philadelphia,  Pennsylvania had issued subpoenas to Medco
             Managed Care, LLC (now Medco Health Solutions,  Inc.,  "Medco") and
             PCS (now  "AdvancePCS"),  both PBMs, and  Schering-Plough  Corp., a
             pharmaceutical  manufacturer.  The  investigation  is  reported  to
             involve,    among   other   things,    practices    under   certain
             anti-remuneration statutes.

           We  believe  that we are in  substantial  compliance  with the  legal
           requirements imposed by such laws and regulations. However, there can
           be no assurance  that we will not be subject to scrutiny or challenge
           under  such laws or  regulations.  Any such  challenge  could  have a
           material adverse effect on us.

           - ERISA  REGULATION.  The Employee  Retirement Income Security Act of
             1974 ("ERISA")  regulates  certain aspects of employee  pension and
             health benefit plans,  including self-funded corporate health plans
             with which we have agreements to provide PBM services.

           - In late 2002, it was reported publicly that Medco, was preparing to
             settle a class action suit,  which suit alleged that Medco violated
             "fiduciary"  obligations  under ERISA in steering  clients  towards
             Merck  products  through a variety  of  means.  Under the  proposed
             settlement,  Medco  reportedly  will not admit any liability  under
             ERISA or otherwise.
                                       9
<PAGE>


           - Additionally,  other PBMs, including Caremark and AdvancePCS,  have
             disclosed   publicly  that  they  are  defending  private  litigant
             lawsuits alleging that they are ERISA fiduciaries.

           We believe that the conduct of our business  generally is not subject
           to the  fiduciary  obligations  of  ERISA.  However,  there can be no
           assurance that the U.S. Department of Labor, which is the agency that
           enforces  ERISA,  or a private  litigant  would not  assert  that the
           fiduciary obligations imposed by the statute apply to certain aspects
           of our operations.

           In addition to its  fiduciary  provisions,  ERISA  imposes  civil and
           criminal  liability on service  providers to health plans and certain
           other  persons if certain forms of illegal  remuneration  are made or
           received.  These provisions of ERISA are similar,  but not identical,
           to  the  health  care  anti-remuneration  statutes  discussed  in the
           immediately preceding section; in particular,  ERISA does not provide
           the statutory and regulatory  "safe harbor"  exceptions  incorporated
           into the Statute.  Like the health care  anti-remuneration  laws, the
           corresponding  provisions  of ERISA  are  written  broadly  and their
           application to particular cases is often  uncertain.  The Company has
           implemented  policies,   which  include  disclosure  to  health  plan
           sponsors with respect to any commissions  paid by or to us that might
           fall within the scope of such provisions,  and accordingly believe we
           are  in  substantial  compliance  with  these  provisions  of  ERISA.
           However, we can provide no assurance that our policies in this regard
           would  be  found  by  the  appropriate  enforcement  authorities  and
           potential private litigants to meet the requirements of the statute.

         - FDA  REGULATION.  The  U.S.  Food  and  Drug  Administration  ("FDA")
           generally has authority to regulate drug  promotional  materials that
           are disseminated "by or on behalf of" a drug manufacturer. In January
           1998, the FDA issued a Notice and Draft Guidance regarding its intent
           to regulate  certain  drug  promotion  and  switching  activities  of
           pharmacy   benefit   managers  that  are   controlled,   directly  or
           indirectly, by drug manufacturers. After extending the comment period
           due to numerous  industry  objections to the proposed draft,  the FDA
           has  taken no  further  action  on the  Notice  and  Draft  Guidance.
           However,  there  can be no  assurance  that the FDA will not  attempt
           again to assert jurisdiction over certain aspects of our PBM business
           in the  future  and,  in such  event,  the  impact  could  materially
           adversely affect our operations, business or financial position.

         - PHARMACY BENEFIT MANAGEMENT STATE REGULATION.  Certain state laws and
           regulations  affect  or  may  affect  aspects  of our  PBM  business.
           Accordingly,  compliance  with state laws and  regulations  remains a
           significant  operational  requirement  for us.  These  state laws are
           described  below.  Some of the  state  laws  described  below  may be
           preempted  in  whole  or  in  part  by  ERISA,   which  provides  for
           comprehensive  federal regulation of employee benefit plans. However,
           the  scope  of  ERISA  preemption  is  uncertain  and is  subject  to
           conflicting  court  rulings.  We also  provide  services  to  certain
           clients, such as governmental  entities,  that are not subject to the
           preemption  provisions of ERISA. Other state laws described below may
           be  invalid in whole or in part as an  unconstitutional  attempt by a
           state to regulate interstate commerce,  but the outcome of challenges
           to these laws on this basis is uncertain.

         - ANTI-REMUNERATION/FRAUD  AND ABUSE  LAWS.  Several  states  have laws
           and/or  regulations  similar to those federal  anti-remuneration  and
           fraud  and  abuse  laws  described  above.  Such  state  laws are not
           necessarily  limited to services or items for which federally  funded
           programs  such  as  Medicare  payment  may  be  made.  Sanctions  for
           violating these state  anti-remuneration laws may include injunction,
           imprisonment,   criminal  and  civil  fines,   and   exclusion   from
           participation in the state Medicaid programs.  We believe that we are
           in substantial compliance with the legal requirements imposed by such
           laws and regulations. However, there can be no assurance that we will
           not  be  subject  to  scrutiny  or  challenge   under  such  laws  or
           regulations.  Any such challenge could have a material adverse effect
           on the Company.

         - CONSUMER  PROTECTION LAWS. Most states have consumer  protection laws
           that  generally  prohibit  payments  and other  broad  categories  of
           conduct deemed  harmful to consumers.  These statutes may be enforced
           by  the  states  and,  in  fact,   have  been  the  basis  for  state
           investigations  and at least one multi-state  settlement  relating to
           financial   incentives  provided  by  drug  manufacturers  to  retail
           pharmacies in connection with drug switching programs.

                                       10
<PAGE>

         - In January  2003, it was reported  publicly that New York's  Attorney
           General  is  investigating  Medco,  in  connection  with  therapeutic
           interchange programs that may have been improper under state consumer
           protection laws.

         - In November  2002,  it was  reported  publicly  that West  Virginia's
           Attorney  General  sued Medco,  for consumer  protection  violations,
           allegedly in connection with  misrepresentations  and  nondisclosures
           regarding  potential  savings  to the state  public  employees'  drug
           benefit plan.

         - In 2002, it was reported  publicly that  Florida's  Attorney  General
           initiated   investigations  into  two  separate  drug  discount  card
           companies,  Medplan,  Inc.  and  the  "People's  Prescription  Plan",
           regarding possible consumer protection violations.

         - Pursuant to a settlement agreement entered into with seventeen states
           on October 25, 1995,  Medco,  agreed to have  pharmacists  affiliated
           with  Medco  mail  service  pharmacies  disclose  to  physicians  and
           patients   the   financial   relationships   between   pharmaceutical
           manufacturer  Merck  (Medco's  parent  company),  Medco  and the mail
           service pharmacy when such pharmacists  contact physicians seeking to
           change a prescription from one drug to another.

         We do not  believe  that we have  contractual  relationships  with drug
         manufacturers and retail pharmacies that include the features that have
         been  identified as  problematic  in these  settlement  agreements  and
         investigations.  However, no assurance can be given that we will not be
         subject to scrutiny or challenge under one or more of these laws.

         In addition to  enforcement  by state  regulators,  many of these state
         consumer  protection laws allow for  enforcement by private  litigants.
         For example:

         - In March 2003, the American  Federation of State County and Municipal
           Employees,  a public  employee  union,  and the  Prescription  Access
           Litigation  project, a nationwide  coalition of consumer groups filed
           suit in  California  state court  against  AdvancePCS,  Caremark  Rx,
           Express  Scripts,  and Medco.  The suit alleges that a variety of PBM
           practices in connection with accepting various forms of payments from
           pharmaceutical    manufacturers   violate   the   California   Unfair
           Competition  Law. Some of the PBMs  involved  have asserted  publicly
           that the allegations are without merit.

         No  assurance  can be given that we will not be subject to  scrutiny or
         challenge under similar consumer protection theories.

         - COMPREHENSIVE   PBM   REGULATION.   States   continue  to   introduce
           legislation to regulate PBM activities in a comprehensive  manner. In
           addition,  certain  quasi-regulatory   organizations,   such  as  the
           National  Association of Boards of Pharmacy ("NABP",  an organization
           of state boards of pharmacy),  the National  Association of Insurance
           Commissioners   ("NAIC",   an   organization   of   state   insurance
           regulators), and the National Committee on Quality Assurance ("NCQA",
           an accreditation  organization) are considering proposals to regulate
           PBMs  and/or  PBM  activities,  such  as  formulary  development  and
           utilization management.  While the actions of the NABP and NAIC would
           not have the  force of law,  they may  influence  states to adopt any
           requirements or model acts they  promulgate.  In addition,  standards
           established by NCQA could materially impact us directly as a PBM, and
           indirectly  through  the impact on our  health  plan  clients,  where
           applicable. Many states have licensure or registration laws governing
           certain types of ancillary health care organizations, including PPOs,
           TPAs,  companies  that  provide  utilization  review  services,   and
           companies  that engage in the  practices of a pharmacy.  The scope of
           these  laws  differs  significantly  from  state  to  state,  and the
           application  of  such  laws to the  activities  of  pharmacy  benefit
           managers  often is  unclear.  We believe  that we are in  substantial
           compliance with all such laws and  requirements  where required,  and
           continue to monitor  legislative and regulatory  developments.  There
           can be no assurance,  however, regarding the future interpretation of
           these  laws and  their  applicability  to the  activities  of our PBM
           business.  Future  legislation or regulation,  or  interpretations by

                                       11
<PAGE>


           regulatory   authorities  of  existing  laws  and  regulations  could
           materially  affect the cost and nature of the  business as  currently
           conducted.

         - NETWORK ACCESS  LEGISLATION.  A majority of states now have some form
           of  legislation  affecting  our ability to limit access to a pharmacy
           provider network or removal of a network  provider.  Such legislation
           may require us or our clients to admit any retail pharmacy willing to
           meet the plan's price and other terms for network participation ("any
           willing  provider"  legislation);  or may provide that a provider may
           not be  removed  from a network  except in  compliance  with  certain
           procedures ("due process"  legislation).  We have not been materially
           affected by these statutes.

         - LEGISLATION  AFFECTING  PLAN OR  BENEFIT  DESIGN.  Some  states  have
           enacted legislation that prohibits certain types of managed-care plan
           sponsors from implementing  certain restrictive design features,  and
           many states have legislation  regulating  various aspects of managed-
           care plans,  including  provisions  relating to the pharmacy benefit.
           For  example,  some  states,  under  so-called  "freedom  of  choice"
           legislation,  provide that members of the plan may not be required to
           use network  providers,  but must instead be provided  with  benefits
           even if they choose to use non-network  providers.  Other states have
           enacted legislation purporting to prohibit health plans from offering
           members  financial  incentives  for use of mail  service  pharmacies.
           Legislation  has  been  introduced  in some  states  to  prohibit  or
           restrict  therapeutic  intervention,  or to require  coverage  of all
           FDA-approved drugs. Other states mandate coverage of certain benefits
           or conditions and require health plan coverage of specific  drugs, if
           deemed  medically  necessary  by  the  prescribing  physician.   Such
           legislation does not generally apply to us directly, but it may apply
           to certain of our clients,  such as HMOs and health insurers. If such
           legislation  were to become  widely  adopted  and broad in scope,  it
           could have the effect of limiting  the economic  benefits  achievable
           through pharmacy benefit  management.  This development  could have a
           material adverse effect on our business.

         - REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug
           plans are  generally  not  subject  to  financial  regulation  by the
           states.  However,  if the PBM  offers to  provide  prescription  drug
           coverage on a capitated basis or otherwise accepts material financial
           risk in providing  the benefit,  laws in various  states may regulate
           the plan.  Such  laws may  require  that the party at risk  establish
           reserves or otherwise demonstrate financial responsibility. Laws that
           may apply in such cases include  insurance  laws, HMO laws or limited
           prepaid  health  service  plan laws.  We do not believe  that our PBM
           business currently accepts financial risk of the type subject to such
           regulation.

         - DISCOUNT DRUG CARD  REGULATION.  Several states recently have enacted
           laws  and/or  promulgated  or  proposed  regulations  regulating  the
           selling,  marketing,   promoting,   advertising  or  distributing  of
           discount  drug cards for cash  purchases.  Such laws and  regulations
           provide  generally that any person may bring an action for damages or
           injunction  for  violations.  While we offer a very limited  discount
           drug card program which we do not consider  material to our business,
           there can be no  assurance  that the  existence of such laws will not
           materially  impact our ability to offer  certain new products  and/or
           services in the future.

      -  PHARMACY  BENEFIT  MANAGEMENT  State and  Federal  Regulation.  Certain
         aspects of our PBM  business  are or may be  affected  by bodies of law
         that exist at both the  federal and state  levels.  Among these are the
         following:

         - PRIVACY AND CONFIDENTIALITY  LEGISLATION.  Our activities involve the
           receipt  or  use  of  confidential  medical  information   concerning
           individual  members.  In addition,  we use  aggregated and anonymized
           data for research and analysis  purposes.  Many states' laws restrict
           the use and disclosure of confidential medical  information,  and new
           legislative  and  regulatory  initiatives  are  underway  in  several
           states. To date, no such laws adversely impact our ability to provide
           our  services,  but there can be no  assurance  that federal or state
           governments will not enact legislation,  impose restrictions or adopt
           interpretations  of existing laws that could have a material  adverse
           effect on our operations.

                                       12
<PAGE>


           As of April 14, 2003,  the final  privacy  regulations  (the "Privacy
           Rule")  issued  by the  Department  of  Health  and  Human  Services,
           pursuant to the Health Insurance  Portability and  Accountability Act
           of  1996   ("HIPAA"),   become   effective,   and  impose   extensive
           restrictions on the use and disclosure of  individually  identifiable
           health  information by certain  entities known under the Privacy Rule
           as "covered  entities".   While PBMs, in general, are not  considered
           covered  entities,   our   clients  are  covered  entities,  and  are
           required to enter into "business associate  agreements" with vendors,
           such as PBMs,  that  perform a function or  activity  for the covered
           entity  that  involves  the  use  or   disclosure   of   individually
           identifiable  health information.  The business associate  agreements
           mandated by the Privacy Rule create a contractual  obligation for the
           PBM to perform its duties for the covered  entity in compliance  with
           the Privacy  Rule. As of October 16, 2002 (October 16, 2003 for those
           who filed for an  extension)  the  final  transactions  and code sets
           regulation (the  "Transactions  Rule") promulgated under HIPAA became
           effective. That regulation requires that all covered entities engaged
           in electronic transactions use standardized formats and code sets. It
           is incumbent upon PBMs to conduct all such transactions in accordance
           with the Transaction Rule to satisfy the obligations of their covered
           entity  clients.  We have made the  necessary  arrangements  to offer
           compliant   electronic    transactions   to   our   clients.    While
           implementation  of the Privacy  Rule and the  Transactions  Rule (the
           "HIPAA  Regulations")  is  just  beginning,   and  future  regulatory
           interpretations could alter our assessment, we currently believe that
           compliance  with the HIPAA  Regulations  should  not have a  material
           adverse impact on our business  operations.  Also, pursuant to HIPAA,
           state laws that are more  protective of medical  information  are not
           pre-empted  by HIPAA.  Therefore,  to the  extent  states  enact more
           protective  legislation,  we could be  required  to make  significant
           changes to our business operations.

           Independent of any regulatory  restrictions,  individual  health plan
           sponsor  clients  could  increase  limitations  on our use of medical
           information, which could prevent us from offering certain services.

         - LEGISLATION AFFECTING DRUG PRICES. Various federal and state Medicaid
           agencies,  as well as legislators  and private  litigants have raised
           the issue of how average  wholesale price ("AWP") is determined.  AWP
           is a standard  pricing unit published by third party data sources and
           used  throughout  the  industry  as the  basis for  determining  drug
           pricing under contracts with clients,  pharmacies and  pharmaceutical
           manufacturers. Changes to how AWP is determined and reported, as well
           as the extent to which it is used in pricing,  have been suggested at
           both the state and federal levels and  could alter the calculation of
           drug  prices for  federal  and/or  state  programs.  We are unable to
           predict whether any such changes will be adopted,  and if so, if such
           changes  would  have a  material  adverse  impact  on  our  financial
           operations.

           Additionally,  some  states  have  adopted  so-called  "most  favored
           nation"  legislation  providing that a pharmacy  participating in the
           state  Medicaid  program  must give the state the best price that the
           pharmacy makes  available to any third-party  plan. Such  legislation
           may adversely affect our ability to negotiate discounts in the future
           from network pharmacies.

         - VOLUNTARY   INDUSTRY   ETHICAL   GUIDELINES.   In  June   2002,   the
           Pharmaceutical  Research  and  Manufacturers  of America  published a
           voluntary ethical code for its members  governing their  interactions
           with healthcare professionals. Although it does not have the force of
           law,  this code  provides  guidance  relating  to  several  facets of
           pharmaceutical manufacturers' marketing practices,  particularly with
           respect to  payments  to  providers.  We believe  that these  ethical
           guidelines  will not have a material  adverse effect on our financial
           operations.


      -  REGULATION OF SUPPLEMENTAL  BENEFITS.  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. Independent licensed

                                       13

<PAGE>

         insurance  agencies are 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,  including their  application to
         use of the Internet,  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 the  distributors  are otherwise not in compliance
         with applicable regulations could result in fines, additional licensing
         requirements   or  inability  to  market  the  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.

         One  of  the  means  by  which  distributors  market  the  programs  is
         telemarketing,  which the distributors may out source to third parties.
         Telemarketing has become subject to an increasing amount of Federal and
         state regulation as well as general public scrutiny in the past several
         years.  For  example  such  regulation  limits the hours  during  which
         telemarketers  may call  consumers  and  prohibits the use of automated
         telephone  dialing  equipment to call certain  telephone  numbers.  The
         Federal  Telemarketing  and Consumer Fraud and Abuse  Prevention Act of
         1994  and  Federal  Trade  Commission  ("FTC")   regulations   prohibit
         deceptive, unfair or abusive practices in telemarketing sales. Both the
         FTC and state  attorneys  general  have  authority  to prevent  certain
         telemarketing activities deemed by them to violate consumer protection.
         On January 29, 2003,  the FTC  published a final rule on  telemarketing
         sales that, among other things,  provides for a national  "do-not-call"
         registry. While the registry will require additional federal funding to
         become  effective,  and  additional  time  to  be  implemented,  it  is
         anticipated  that  as of  October  2003 it will  be  illegal  for  most
         telemarketers  to call  anyone  who has  elected  to be  listed  on the
         registry.  Implementation  of the registry could have an adverse effect
         on the sale of the Company's  programs.  In addition,  some states have
         enacted laws and others are considering enacting laws targeted directly
         at regulating  telemarketing  practices,  and there can be no assurance
         that any such laws, if enacted,  will not adversely affect or limit the
         Company's  current or future  operations.  While  compliance with these
         regulations is generally the  responsibility  of the  distributors  and
         subcontractors,  there can be no assurance  that the Company would have
         no exposure to liability.

      -  FUTURE REGULATION.  We are unable to predict accurately what additional
         federal or state  legislation or regulatory  initiatives may be enacted
         in the future relating to our businesses or the health care industry in
         general,  or what effect any such legislation or regulations might have
         on us. There can be no assurance that federal or state governments will
         not impose additional restrictions or adopt interpretations of existing
         laws that could  have a  material  adverse  effect on our  business  or
         financial position.

                                       14
<PAGE>



    EMPLOYEES
    ---------

    As of December 31, 2002,  we had 105  personnel  whose  services are devoted
 full  time to  HealthExtras  and its  subsidiaries.  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.

                                       15
<PAGE>



ITEM 2.  PROPERTIES

    Our offices are located in approximately  19,700 square feet of office space
 in  Rockville,  Maryland  under a sublease  that expires on May 30,  2004.  Our
 subsidiaries  lease a total of  approximately  25,400  square  feet under three
 leases that expire in March 2003,  February  2006, and October 2011. We believe
 that our 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 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,
 notices from government  regulators  alleging that we may have violated certain
 regulations,  and  employment-related  disputes.  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,  significantly  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, 2002.


                                       16
<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>
         2001
         First quarter...............                    $  6.44       $  3.25
         Second quarter..............                    $ 10.25       $  4.88
         Third quarter...............                    $ 11.01       $  4.10
         Fourth quarter..............                    $  6.80       $  4.09

         2002
         First quarter...............                    $  6.61       $  2.69
         Second quarter..............                    $  5.49       $  2.40
         Third quarter...............                    $  5.45       $  3.31
         Fourth quarter.............                     $  4.46       $  3.80

         2003
         First quarter (through March 21, 2003).....     $  4.30       $  3.40
</TABLE>


    On March 21,  2003,  the last  closing  sale price of the common  stock,  as
 reported  by the Nasdaq  National  Market was $3.99 per share.  As of March 21,
 2003, the Company had approximately 546 stockholders of record. The Company did
 not pay any cash dividends in 2002 and has no plans to do so in the foreseeable
 future.



                                       17

<PAGE>


ITEM 6.  SELECTED FINANCIAL 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
 consolidated financial statements, including notes thereto.

<TABLE>
<CAPTION>

                                                                For the Years Ended December 31,
                                                                --------------------------------
                                                              (In thousands except per share data)

                                                       1998         1999         2000          2001        2002
                                                    ---------    ---------    --------      ---------    ---------
<S>                                                 <C>          <C>          <C>           <C>          <C>
Statement of Operations Data
Revenues ....................................       $      --    $   5,327    $ 43,924      $ 118,226    $ 248,408
Direct expenses..............................              --        3,096      24,049         87,543      209,523
Selling, general and administrative .........           6,534       13,327      39,669         38,454       35,485
                                                    ---------    ---------    --------      ---------    ---------

Operating income (loss) .....................          (6,534)     (11,096)    (19,794)        (7,771)       3,400

Interest income (expense), net ..............            (110)        (351)      2,069          1,092          (82)
Other income (expense), net .................              --          (73)        499             --           --
                                                    ---------    ---------    --------      ---------    ---------
Income (loss) before income taxes
     and minority interest ..................          (6,644)     (11,520)    (17,226)        (6,679)       3,318
Income tax benefit ..........................              --           --          --             --       10,205
Minority interest ...........................              --           --          --            (96)         (45)
                                                    ---------    ---------    --------      ---------    ---------
Net income (loss) ..........................        $  (6,644)   $ (11,520)  $ (17,226)     $  (6,775)    $ 13,478
                                                   ==========    =========   =========      =========     ========

Basic and diluted net income (loss) per share              --    $  (0.56)  $   (0.62)     $   (0.23)     $   0.42
Weighted average shares of
     common stock outstanding, basic ........              --       20,588      28,010         29,731       32,234
Weighted average shares of
     common stock outstanding, diluted ......              --       20,588      28,010         29,731       32,420
Pro forma basic and diluted net loss
     per share (1) ..........................       $   (0.38)   $      --   $      --      $      --     $     --
Pro forma weighted average shares of
     common stock outstanding (1) ...........          17,680           --          --             --           --
Balance Sheet Data:
Cash and cash equivalents ...................             219       46,971      28,921         33,009       17,531
Total assets ................................           4,608       53,662      52,044         88,153      120,002
Total liabilities ...........................           5,531        6,298      15,806         42,372       60,478
Total stockholders' (members') equity
     (deficit) ..............................            (923)      47,364      36,238         45,237       59,524
</TABLE>

--------------
(1) Reflects the formation of HealthExtras, Inc. 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.

                                       18
<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

         HealthExtras is a provider of PBM services and  supplemental  benefits.
 The  Company's  clients  include   managed-care   organizations,   self-insured
 employers, third party administrators, as well as individual customers. The PBM
 segment now generates the significant  majority of our revenues and is expected
 to be the primary  source of growth and profit  potential in years  ahead.  The
 acquisitions of International  Pharmacy Management,  Inc. ("IPM"),  Catalyst Rx
 ("Catalyst") and PNNC have  contributed  significantly to the growth of our PBM
 business.

         PHARMACY BENEFIT MANAGEMENT
         ---------------------------

         Our primary PBM services consist of the automated online  processing of
 prescription  claims  on  behalf  of our  clients.  When a member of one of our
 clients presents a prescription or health plan  identification card to a retail
 pharmacist in our network,  our system provides the pharmacist with accesses to
 online  information  regarding  eligibility,   patient  history,   health  plan
 formulary listings,  and contractual  reimbursement rates. The member generally
 pays a  co-payment  to  the  retail  pharmacy  and  the  pharmacist  fills  the
 prescription.  On behalf of our clients,  we electronically  aggregate pharmacy
 benefit claims,  which include  prescription  costs plus our claims  processing
 fees for consolidated billing and payment. We receive payments from clients and
 remit the amounts  owed to the retail  pharmacies  pursuant  to our  negotiated
 rates and retaining the difference, including claims processing fees.

         We  have  established  a  nationwide  network  of  over  50,000  retail
 pharmacies. In general,  self-insured employers and managed-care  organizations
 contract  with us to access  our  negotiated  retail  pharmacy  network  rates,
 participate  in  certain  rebate   arrangements  with  manufacturers  based  on
 formulary design and benefit from the other care  enhancement  protocols in our
 system. Under these contracts, we have an independent obligation to pay network
 retail  pharmacies for the drugs dispensed and  accordingly,  have assumed that
 risk  independent  of  our  clients.  When  the  Company  administers  pharmacy
 reimbursement  contracts and does not assume a credit risk, the Company records
 only its  administrative or dispensing fees as revenue.  Pharmacy benefit claim
 payments from our clients are recorded as revenues,  and prescription  costs to
 be paid to pharmacies are recorded as direct expenses.  Member  co-payments are
 not recorded as revenue.  Rebates earned under  arrangements with manufacturers
 are recorded as a reduction  of direct  expenses.  The portion of  manufacturer
 rebates due to plan sponsors is recorded as a reduction of revenue.

         Acquisitions
         ------------

         The Company has supported  the growth of its PBM segment  through three
 acquisitions.  The revenues from this business segment are larger than those of
 the supplemental benefits segment and are continuing to grow at a higher rate.

         On December 1, 2002,  the Company  acquired 100% of the common stock of
 PNNC. Total  consideration for PNNC stock was $20.2 million.  Total acquisition
 cost included transaction costs of approximately $1.4 million.  Funding for the
 $21.6 million cash transaction was derived from the Company's  working capital.
 The  acquisition  of PNNC was  accounted  for  using  the  purchase  method  of
 accounting.  The  acquisition  resulted  in  goodwill  of  approximately  $10.6
 million.

                                       19
<PAGE>


         On November 14, 2001, the Company  acquired an 80% interest in Catalyst
 for an aggregate purchase price of approximately  $14.3 million.  Consideration
 for the  transaction  consisted of $10.4 million in cash, $8.9 million of which
 was payable at December 31, 2001, and the remainder consisted of the assumption
 of debt and the  issuance of common  stock.  The  acquisition  of Catalyst  was
 accounted for using the purchase method of accounting.  The $9.1 million excess
 of the purchase price paid over the net fair value of  identifiable  assets and
 liabilities of Catalyst was recorded as goodwill.

         During the first quarter of 2002, the Company purchased the outstanding
 20% minority  interest in Catalyst for 319,033  shares of the  Company's  stock
 valued  at $1.1  million  and  notes  payable  of $4.2  million.  The stock was
 transferred  to the seller on April 1, 2002,  and the $3.1  million in cash was
 paid in 2002, with the final installment of $1.1 million paid on March 1, 2003.

         Effective  November 1, 2000, the Company  completed the  acquisition of
 IPM  for  an  aggregate   purchase   price  of   approximately   $9.2  million.
 Consideration  for the transaction  consisted of approximately 95% cash and the
 remainder in common stock.  The  acquisition of IPM was accounted for using the
 purchase  method of  accounting.  Goodwill  recorded  at  acquisition  was $9.2
 million.

         Integration of Acquisitions
         ---------------------------

         HealthExtras  has  successfully  integrated  IPM and Catalyst  into the
 Company's financial,  organizational,  management and technology structure. Our
 acquisitions  have provided the Company with a more diverse and complete set of
 products  and  services  to  sell  to a  larger  customer  base.  For  example,
 Catalyst's  previously  developed demand management,  generic substitution and
 other clinical  programs have  significantly  enhanced the Company's ability to
 serve  larger and more  sophisticated  customers.  The  acquisitions  have also
 allowed us to better capture efficiencies in corporate overhead and information
 technology  investments.  The  Company  has  achieved  cost  savings  from  the
 consolidation  of certain  corporate  activities and the elimination of certain
 duplicated components of the Company's corporate operations.

         The Company has completed the initial  steps of  integrating  PNNC that
 are necessary for  HealthExtras to operate as a single,  combined  company.  We
 intend to operate  with a combined  financial,  organizational  and  management
 structure so that all of our customers,  employees and suppliers have access to
 a consistent and reliable organizational infrastructure.  Over the next several
 quarters the Company expects to complete  additional  integration  steps around
 data processing platforms and other technology systems.

         SUPPLEMENTAL BENEFITS PROGRAMS
         ------------------------------

         The Company's  supplemental benefits segment generates revenue from the
 sale of membership  programs which provide  insurance and other  benefits.  The
 Company has distribution agreements with many of the nation's largest financial
 institutions  (the  "distributors"),  along with  leading  affinity  groups and
 associations.  Additionally,  HealthExtras  has a  relationship  with actor and
 advocate Christopher Reeve to promote these benefits programs.

         Revenue is generated by payments for program benefits and payments from
 certain  distributors.  In general,  program revenue is recognized based on the
 number  of  members  enrolled  in  each  reporting  period  multiplied  by  the
 applicable fee collected from the member or paid by the  distributor  for their
 specific  membership  program.  The program revenue  recognized by HealthExtras
 includes  the cost of the  membership  benefits,  which are supplied by others,
 including the insurance  components.  Payments from the distributors related to
 new member  enrollments  are  recorded  as revenue to the extent of the related
 direct expenses, which to date have exceeded payments from the distributors.

         Direct expenses consist principally of the cost of benefits provided to
 program members,  distributors' compensation,  and transaction processing fees.
 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.

                                       20

<PAGE>



         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.  HealthExtras  has  committed  to minimum  premium
 volumes with  respect to the  insurance  features of its  programs  supplied by
 others.  In the event  that  there were  insufficient  members  to utilize  the
 minimum premium  commitment,  the differential would be expensed by the Company
 with out any related  revenue.  The Company  believes  that current  enrollment
 trends will allow the minimum  future  commitments  at December 31, 2002, to be
 fully utilized by current enrollment levels.


RESULTS OF OPERATIONS
---------------------

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

    REVENUE.  Revenue from  operations for the year ended December 31, 2002, was
 $248.4  million,  compared to $118.2  million for the year ended  December  31,
 2001.  The PBM segment  contributed  $135.4  million of this revenue  increase,
 while the  supplemental  benefits  segment  decreased  by $5.2  million.  Total
 revenue for the year ended increased 289% and decreased 7.3% in the PBM segment
 and the  supplemental  benefits  segment,  respectively.  The PBM  increase was
 principally  due to the  Catalyst  acquisition  on  November  14,  2001,  which
 increased  revenues by $115.2 million from 2001 to 2002. Of the $115.2 million,
 $49.8 million is  attributed  to new business for Catalyst in 2002.  Due to the
 Company's  adoption of Emerging  Issues Task Force Issue No. 01-9,  "Accounting
 for Consideration  Given by a Vendor to a Customer or a Reseller of the Vendors
 Products"  ("EITF  01-9"),  revenues  and  direct  expenses  for 2001 have been
 retroactively  reduced by $6.2 million in the comparative financial statements.
 For more  information  about the adoption of EITF 01-9, see Note 2 of the Notes
 to Consolidated Financial Statements.

    DIRECT  EXPENSES.  Direct  expense for the year ended  December  31, 2002 of
 $209.5 million  consisted of $168.0 million in direct costs associated with the
 PBM segment and $41.5 million attributable to benefit costs and compensation to
 our distributors for supplemental  benefits  products.  Direct expenses for the
 year ended 2001 were $87.5 million,  consisting of approximately  $43.6 million
 and $43.9 million  attributable to the pharmacy benefit management services and
 supplemental benefits segments,  respectively.  The PBM increase is principally
 due to the Catalyst  acquisition,  which  increased  direct  expenses by $106.6
 million from 2001 to 2002. Of the $106.6  million,  $45.6 million is attributed
 to new business for Catalyst in 2002. The direct expenses of $209.5 million and
 $87.5 million for the years ended 2002 and 2001,  represent  85.5% and 69.5% of
 operating expenses for the respective periods.

    SELLING,  GENERAL AND  ADMINISTRATIVE.  Selling,  general and administrative
 expenses for the year ended  December 31, 2002,  totaled $35.5 million or 14.5%
 of operating  expenses,  $7.0 million of which was related to the Company's PBM
 segment,  while the remaining  $28.5 million  related to the  management of the
 supplemental benefits segment. These expenses include $4.1 million for creative
 development,  product endorsement and market research,  $12.6 million in direct
 marketing,  $8.2 million in  compensation  and benefits,  $1.3 in  professional
 fees,  insurance  and taxes,  $2.8 million in other  expenses,  $1.4 million in
 facility  costs,  $826,000 in travel  expenses and $1.7 million in depreciation
 and amortization and $2.7 million related to the impairment of and write-off of
 fixed assets.

    Selling and general  administrative  expenses for the year ended 2001,  were
 approximately $38.5 million or 30.5% of total operating expenses,  $3.7 million
 which related to the Company's PBM segment,  while the remaining  $34.8 million
 related to the  supplemental  benefits  segment.  These expenses  included $5.8
 million for creative  development,  product  endorsements  and market research,
 $21.4 million in direct  marketing,  $6.1 million in compensation and benefits,
 $1.1 million in professional  fees,  insurance and taxes, $1.0 million in other
 expenses,  $843,000 in facility costs,  $466,000 in travel  expenses,  and $1.8
 million in depreciation and amortization.

    INTEREST  INCOME  (EXPENSE) NET.  Interest  expense,  net for the year ended
 December 31, 2002, was approximately $(82,000) compared to interest income, net
 of $1.1 million for the year ended December 31, 2001.  This was principally due
 to lower invested balances, interest rates and interest on borrowings initiated
 in 2002. Interest expense on borrowings for 2002 was $319,000.

                                       21
<PAGE>

    INCOME TAX BENEFIT.  Through 2001,  the Company  maintained a full valuation
 allowance  against the Company's  deferred tax assets due to the uncertainly as
 to their  ultimate  realization.  In the fourth quarter of 2002, as a result of
 the  Company's  current and  projected  profitability,  the Company  recognized
 approximately  a $10.2  million  tax  benefit  principally  resulting  from the
 Company releasing the valuation  allowance for its deferred tax asset. See Note
 7 to the Notes to Consolidated Financial Statements for further information.

    MINORITY INTEREST. The minority interest charge for the years ended December
 31, 2002 and 2001, was  approximately  $45,000 and $96,000,  respectively.  The
 charges  represent  the net income  attributable  to the 20% minority  interest
 holder of Catalyst  for the months of January and February  2002,  and November
 and  December  2001,  respectively.  As the  Company  purchased  the  remaining
 minority interest on March 1, 2002, no additional  minority interest charge for
 Catalyst will appear on the Company's future financial statements.

    NET INCOME  (LOSS).  Net income for the year ended  December 31,  2002,  was
 $13.5 million compared to a $(6.8) million net loss in 2001. As a percentage of
 revenue, net income increased from (5.6)% to 5.4%.

<TABLE>
<CAPTION>

      December 31, 2002
                                                  Supplemental
                                    PBM               Benefits         Total
                               -------------      -------------   --------------
<S>                            <C>               <C>              <C>
    Revenue ...............    $ 182,275,943     $  66,131,523    $ 248,407,466
    Operating expenses....       174,993,333        58,162,480      233,155,813
    Operating income .....         7,282,610         7,969,043       15,251,653
    Total assets .........       103,174,621        16,827,515      120,002,136
    Accounts receivable...        37,527,001           272,777       37,799,778
    Accounts payable .....        33,863,566           588,223       34,451,789

</TABLE>

<TABLE>
<CAPTION>

      December 31, 2001
                                                  Supplemental
                                    PBM               Benefits         Total
                               -------------      -------------   --------------

<S>                            <C>               <C>              <C>
    Revenue ...............    $ 46,893,749      $  71,332,170    $ 118,225,919
    Operating expenses ....      46,233,164         77,326,609      123,559,773
    Operating income (loss)         660,585         (5,994,439)      (5,333,854)
    Total assets ..........      67,526,792         20,626,543       88,153,335
    Accounts receivable ...      19,652,601          2,758,367       22,410,968
    Accounts payable ......      22,580,269          2,014,000       24,594,269
</TABLE>


    Operating expenses of the segments exclude $11.9 million and $2.4 million in
 corporate  overhead that was not  allocated by management in assessing  segment
 performance for the years ended December 31, 2002 and 2001, respectively.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

    REVENUE.  Revenue from  operations  for the year ended December 31, 2001 was
 $118.2 million, compared to $43.9 million for the year ended December 31, 2000.
 PBM  segment  revenue was $46.9  million,  while  revenue for the  supplemental
 benefits segment was $71.3 million.  As the Company had increased its strategic
 focus on pharmacy services during 2001, the majority of its revenue and revenue
 growth were derived from such  services at the end of 2001.  Much of the growth
 in the PBM segment was attributable to the acquisitions IPM and Catalyst during
 the  fourth  quarters  of 2000 and 2001,  respectively.  The 2001  increase  in
 revenue due to the IPM acquisition was  approximately  $28.9 million.  Catalyst
 revenue  accounted for $13.0 million in 2001. Due to the Company's  adoption of
 EITF 01-9,  revenue  of  previously  reported  2001 and 2000  revenue  has been
 reduced by $6.2 million and $255,000,

                                       22
<PAGE>


 respectively,  in the comparative  financial  statements.  For more information
 about  the  adoption  of EITF  01-9,  see Note 2 of the  Notes to  Consolidated
 Financial Statements.

    DIRECT  EXPENSES.  Direct  expense for the year ended  December  31, 2001 of
 $87.5 million  consisted of $43.6 million in direct costs  associated  with the
 PBM segment and $43.9 million attributable to benefit costs and compensation to
 our distributors for supplemental  benefits  products.  Direct expenses for the
 year ended 2000 were $24.0 million,  consisting of  approximately  $4.5 million
 and $19.5 million  attributable to the pharmacy benefit management services and
 supplemental  benefits  segments,  respectively.  Much of the growth in the PBM
 segment was  attributable  to the  acquisitions  of IPM and Catalyst during the
 fourth  quarters of 2000 and 2001,  respectively.  The 2001  increase in direct
 expenses due to the IPM acquisition was approximately  $22.7 million.  Catalyst
 direct  expenses  accounted for $12.2 million in 2001.  The direct  expenses of
 $87.5  million and $24.0  million for the years ended 2001 and 2000,  represent
 69.5% and 37.7% of operating  expenses for the respective  periods.  Due to the
 Company's adoption of EITF 01-9,  revenue of previously  reported 2001 and 2000
 direct  expenses have been reduced by $6.2 million and $255,000,  respectively,
 in the  comparative  financial  statements.  For  more  information  about  the
 adoption  of EITF  01-9,  see  Note 2 of the  Notes to  Consolidated  Financial
 Statements.

    SELLING,  GENERAL AND  ADMINISTRATIVE.  Selling,  general and administrative
 expenses for the year ended  December 31, 2001,  totaled $38.5 million of 30.5%
 of operating  expenses,  $3.7 million of which was related to the Company's PBM
 segment,  while the  remaining  $34.8  million  related  to the  management  of
 supplemental benefits segment. These expenses include $5.8 million for creative
 development, product endorsements, and market research, $21.4 million in direct
 marketing,   $6.1  million  in  compensation  and  benefits,  $1.1  million  in
 professional  fees,  insurance and taxes, $1.0 million in other fees,  $843,000
 million in facility  costs,  $466,000 in travel  expenses  and $1.8  million in
 depreciation and amortization.

    Selling and general  administrative  expenses for the year ended 2000,  were
 approximately  $39.7  million or 62.3% of total  operating  expenses,  $448,000
 which related to the Company's PBM segment,  which $39.2 million related to the
 supplemental  benefits  segment.  These  expenses  included  $5.1  million  for
 creative development,  product endorsements and market research,  $26.1 million
 in direct marketing, $4.6 million in compensation and benefits, $2.5 million in
 other fees and insurance  and taxes,  $467,000 in facility  costs,  $274,000 in
 travel expenses, and $702,000 in depreciation and amortization.

    INTEREST  INCOME  (EXPENSE)  NET.  Interest  income,  net for the year ended
 December 31, 2001, was $1.1 million compared to interest income of $2.1 million
 for the year ended  December  31, 2000,  a decrease of 48%  principally  due to
 lower invested balances, interest rates and interest on borrowings initiated in
 2001.

    MINORITY INTEREST. The minority interest charge for the year ended December
 31, 2001 was approximately  $96,000.  There was no minority interest charge for
 the year ended  December 31, 2000.  The 2001 charge  represents  the net income
 attributable due to the 20% minority interest holder of Catalyst for the months
 November and December 2001.

                                       23
<PAGE>



    NET LOSS.  Net loss for the year ended  December 31, 2001,  was $6.8 million
 compared to a $17.4 million net loss in 2000.  As a percentage of revenue,  net
 loss decreased from 39.2% in 2000 to 5.6% in 2001.

<TABLE>
<CAPTION>

             December 31, 2001
                                               Supplemental
                                  PBM            Benefits           Total
                              -------------    -------------    --------------

<S>                           <C>              <C>              <C>
    Revenue ...............   $  46,893,749    $  71,332,170    $ 118,225,919
    Operating expenses ....      46,233,164       77,326,609      123,559,773
    Operating income (loss)         660,585       (5,994,439)      (5,333,854)
    Total assets ..........      67,526,792       20,626,543       88,153,335
    Accounts receivable ...      19,652,601        2,758,367       22,410,968
    Accounts payable ......      22,580,269        2,014,000       24,594,269

</TABLE>

<TABLE>
<CAPTION>

    December 31, 2000

                                                Supplemental
                                  PBM            Benefits           Total
                              -------------    -------------    --------------

<S>                           <C>              <C>              <C>
    Revenue ...............   $   4,877,149    $  39,046,762    $  43,923,911
    Operating expenses ....       4,988,403       51,031,389       56,019,792
    Operating loss ........        (111,254)     (11,984,627)     (12,095,881)
    Total assets ..........      32,356,816       19,687,290       52,044,106
    Accounts receivable ...         101,944        3,697,326        3,799,270
</TABLE>


    Operating  expenses of the segments exclude $2.4 million and $7.7 million in
 corporate  overhead that was not  allocated by management in assessing  segment
 performance for the years ended December 31, 2001 and 2000, respectively.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

    Cash and cash  equivalents  at December  31,  2002,  totaled  $17.5  million
 compared to $33.0  million at  December  31,  2001.  During  2002,  the Company
 received  $30.5  million  in cash from  borrowings,  repaid  $12.5  million  on
 borrowings,  paid $31.6 million for business  acquisitions  and related  costs,
 paid  $2.0  million  in  capital  expenditures,  and used $6.9  million  of the
 borrowed  funds and $1.4 million of the  Company's  cash to reduce  outstanding
 payables and accrued  expenses in order to negotiate more favorable  rates with
 specific vendors.

    CASH USED IN OPERATING ACTIVITIES. Cash used for operating activities during
 2002 was  $22,000  compared  to $2.0  million  during  2001.  The  variance  is
 primarily  due to a $10 million  increase in income  before  taxes  offset by a
 large reduction in accounts payable and, accrued  expenses,  and an increase in
 deferred charges.

    CASH USED IN INVESTING  ACTIVITIES.  Cash used in investing  activities  for
 2002 was $33.5 million  compared to  approximately  $589,000  during 2001.  The
 increase is primarily attributed to the $19.6 million paid in cash for the PNNC
 acquisition  and  related  costs  and the $12.1  million  paid to  satisfy  the
 Catalyst acquisition promissory notes.

    CASH FROM FINANCING  ACTIVITIES.  Cash provided by financing  activities for
 2002 was  approximately  $18.0 million compared to $6.7 million at December 31,
 2001.  In January  2002,  the  Company  arranged  for a line of credit for $5.0
 million  to  support  the  working   capital   requirements  of  the  Company's
 acquisition  of  Catalyst.  In March 31,  2002,  the  Company  arranged an $8.0
 million  revolving  credit  facility.  In April 2002,  the  Company  repaid the
 outstanding  principal  of  $4.5  million  on the  credit  facility  previously
 arranged  in  January  2002.  The  Company  repaid  the  remaining  outstanding
 principal of $8.0 million in the fourth quarter of 2002. In December 2002, the

                                       24
<PAGE>

 Company arranged to an $18.0 million revolving credit facility. At December 31,
 2002, the  outstanding  balance on the credit  facility was $18.0 million.  All
 principal and accrued interest is due to the bank on May 31, 2004.

    By  managing  accounts  receivable  to conform  more  closely to our payment
 obligations  to  suppliers,  the Company  should be able to  generate  positive
 operating  cash flow which  combined  with  available  cash  resources  will be
 sufficient  to met  our  planned  working  capital,  capital  expenditures  and
 business expense requirements.  However, there can be no assurance that we will
 not require  additional  capital.  Even if such funds are not required,  we may
 seek  additional  equity or debt  financing.  We  cannot  be  assume  that such
 financing  will be  available  on  acceptable  terms,  if at all,  of that such
 financing will not be dilutive to our stockholders.

    The Company has no off  balance  sheet  transactions.  The  following  table
 reflects our current contractual commitments as of December 31, 2002.

<TABLE>
<CAPTION>


                                                                    Payments Due by Period
                                ---------------------------------------------------------------------------------------
                                       Total           < 1 year         1-3 years         4-5 years      After 5 years
                                ---------------------------------------------------------------------------------------
<S>                             <C>                    <C>              <C>               <C>            <C>
Operating leases                $  4,409,494           $ 1,208,945      $   1,656,248     $  327,739     $ 1,216,562
Unconditional purchase
     obligations                   1,900,000             1,900,000                 --             --              --
Other long-term obligations        2,000,000             1,000,000          1,000,000             --              --
                                ------------------------------------------------------------------------------------
                                $  8,309,494           $ 4,108,945      $   2,656,248     $  327,739     $ 1,216,562
                                ====================================================================================
</TABLE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------

    Management's  Discussion and Analysis of the Financial Condition and Results
 of Operations discusses the Company's  consolidated  financial statements.  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.  The
 most  significant  accounting  estimates  made by the Company in preparing  its
 financial statements include the following:

    COMMON STOCK WARRANTS

         In 2000 and 2001,  the  Company  recorded  as direct  expense  the fair
 market value of common  stock  warrants  earned,  or expected to be earned by a
 distributor.  The Company  estimated  the value of the warrants at each balance
 sheet date using an equity-pricing model with assumptions consistent with those
 used  in  preparing  the  Company's   fair  value  stock  option   compensation
 disclosures.  Direct expense was based on the number of warrants expected to be
 issued,  which is  determined  based on an estimate of  annualized  revenues as
 defined under the agreement with the  distributor.  Effective  January 1, 2002,
 the Company adopted EITF 01-9, which was issued in November 2001. The Company's
 adoption of EITF 01-9 resulted in changing the way the Company  recognizes  the
 cost of  consideration  provided to a  distributor  under a warrant  agreement.
 Effective January 1, 2002, the charge for this  consideration was recorded as a
 reduction  to revenue  from the  distributor  rather than as a charge to direct
 expense,  as reflected in prior periods. To comply with EITF 01-9, the non-cash
 warrant  expenses of $6.2 million and $255,000 for 2001 and 2000,  respectively
 from prior  years have been  reclassified  as a reduction  to revenue  from the
 distributor.

    PHARMACY BENEFIT MANAGEMENT REBATE REVENUES

         Rebates earned under  arrangements with manufacturers are recorded as a
 reduction of direct expenses.  The portion of such rebates due to plan sponsors
 is  recorded  as a reduction  of  revenue.  Manufacturers  rebates are based on
 estimates,  which are subject to final  settlement  with the contracted  party.
 Member co-payments are not recorded as revenue.

                                       25
<PAGE>

    ALLOWANCE FOR BAD DEBTS

         The Company estimates reserves for doubtful PBM accounts  receivable as
 of each  balance  sheet date.  The Company has  historically  had very  limited
 exposure to bad debts due to the nature of the employee benefits involved,  the
 necessity of maintaining  benefit continuity for its customers  employees,  and
 the  general  financial   strength  of  its  customer  base.  With  respect  to
 supplemental benefits,  substantially all revenues are collected in advance via
 credit card and as such generate no accounts receivable exposure.

    INTANGIBLE ASSETS

         Intangible  assets related to the  acquisitions  of Catalyst,  and PNNC
 were  recognized  under the  provisions of FASB  Statement No. 141 ("FAS 141").
 Accordingly,  a portion of the excess purchase price was assigned to intangible
 assets that were  recognizable  apart from goodwill.  This estimated fair value
 and the weighted  average  useful-life  of the  intangible  assets are based on
 income-method  valuation  calculations,  performed by an independent consulting
 firm.  The  remaining  useful  life of  intangible  assets  will  be  evaluated
 periodically  and adjusted as necessary to match the period that the assets are
 expected to provide economic benefits.

    GOODWILL

         The Company  adopted  Statement of Financial  Accounting  Standards No.
 142, Goodwill and Other Intangible Assets ("FAS No. 142"), and discontinued the
 amortization  of goodwill  and  indefinite-lived  intangible  assets  effective
 January 1, 2002. The Company completed its initial adoption  impairment testing
 of goodwill and concluded  that no impairment of goodwill  exists.  The Company
 performed  a similar  test as of  December  31,  2002,  and  concluded  that no
 impairment of goodwill exists.

    INCOME TAXES

         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.  In 2000 and  2001,  the  Company
 maintained a full valuation allowance against the Company's deferred tax assets
 due to the uncertainty as to their ultimate realization.  In the fourth quarter
 of 2002, as a result of the Company's current and projected profitability,  the
 Company  recognized  approximately  $10.2  million in tax benefits  principally
 resulting  from the Company  releasing  the full  valuation  allowance  for its
 deferred tax asset.

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

    In  October  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
 Impairment  or  Disposal  of  Long-Lived  Assets",  which  addresses  financial
 accounting and reporting for the  impairment or disposal of long-lived  assets.
 SFAS No.  144  supersedes  SFAS No.  121,  "Accounting  for the  Impairment  of
 Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of";  however,  it
 retains many of the fundamental provisions of that Statement. SFAS No. 144 also
 supersedes  the  accounting  and  reporting  provisions  of APB Opinion No. 30,
 "Reporting  the Results of  Operations--Reporting  the Effects of Disposal of a
 Segment of a Business,  and Extraordinary,  Unusual and Infrequently  Occurring
 Events and Transactions", for the disposal of a segment of a business. However,
 it retains  the  requirement  in APB No. 30 to report  separately  discontinued
 operations  and extends that  reporting to a component of an entity that either
 has been disposed of (by sale, abandonment,  or in a distribution to owners) or
 is classified as held for sale. By broadening the  presentation of discontinued
 operations  to  include  more  disposal  transactions,  the FASB  has  enhanced
 management's  ability to provide  information  that helps  financial  statement
 users to assess the effects of a disposal transaction on the ongoing operations
 of an  entity.  SFAS No. 144 is  effective  for fiscal  years  beginning  after
 December  15,  2001 and  interim  periods  within  those  fiscal  years.  Early
 application is  encouraged.  The provisions of SFAS No. 144 generally are to be
 applied  prospectively.  The Company  recognized  an  impairment  loss on fixed
 assets of $2.6  million for the year ended  December  31,  2002.  See  footnote
 financial statement disclosure for additional detail.

                                       26
<PAGE>



    In December 2002, the FASB issued SFAS No. 148,  "Accounting for Stock-Based
 Compensation  - Transition and  Disclosure,  an amendment of FASB Statement No.
 123", to provide  alternative  methods of transition for a voluntary  change to
 the  fair  value  based  method  of   accounting   for   stock-based   employee
 compensation.  In addition,  SFAS No. 148 amends the disclosure requirements of
 SFAS No. 123 to  require  prominent  disclosures  in both  annual  and  interim
 financial  statements  about the method of accounting for stock-based  employee
 compensation  and the  effect  of the  method  used on  reported  results.  The
 application  of the  transition  provisions  of SFAS No. 148 is  effective  for
 fiscal years ending after December 15, 2002. The  application of the disclosure
 requirements is effective for financial  reports for interim periods  beginning
 after  December 15, 2002.   We are currently  evaluating the impact of SFAS No.
 148 on our financial position, results of operations and liquidity.

    In  November  2002,  the FASB  issued  FASB  Interpretation  (FIN)  No.  45,
 "Guarantor's  Accounting and Disclosure  Requirements for Guarantees  Including
 Indirect  Guarantees  of  Indebtedness  of  Others",  which  elaborates  on the
 disclosures  to be made by a  guarantor  in its  interim  and annual  financial
 statements about its obligations  under certain  guarantees that it has issued.
 It also clarifies  that a guarantor is required to recognize,  at the inception
 of a guarantee,  a liability for the fair value of the obligation undertaken in
 issuing  the  guarantee.   The  initial  recognition  and  initial  measurement
 provisions of FIN No. 45 are  applicable  on a prospective  basis to guarantees
 issued or modified after  December 31, 2002,  irrespective  of the  guarantor's
 fiscal year end.  The  disclosure  requirements  are  effective  for  financial
 statements of interim or annual  periods  ending after December 15, 2002. As of
 December 31, 2002, there is no impact on the Company's financial  statements as
 a result of the issuance of FIN 45.

INTEREST RATE AND EQUITY PRICE SENSITIVITY
------------------------------------------

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

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
--------------------------------------------------------

         FACTORS RELATED TO OUR BUSINESS

    Our pharmacy benefit management operations face significant competition
    -----------------------------------------------------------------------

         The pharmacy benefit management industry is relatively consolidated and
 dominated by large  companies  with  significant  resources.  Many of the large
 pharmacy benefit management  companies are owned by large companies,  including
 pharmaceutical   manufacturers,   which  can  provide  them  with   significant
 purchasing  power and other  advantages,  which we do not have.  Competitors in
 this  industry  include  other  pharmacy  benefit  management  companies,  drug
 retailers,    physician   practice   management   companies,    and   insurance
 companies/health maintenance organizations.  We may also experience competition
 from other sources in the future. Pharmacy benefit management companies compete
 primarily on the basis of price, service,  reporting  capabilities and clinical
 services. In most cases, the competitors referenced above are large, profitable
 and  well-established   companies  with  substantially  greater  financial  and
 marketing  resources than our resources.  The  significant  majority of our PBM
 revenues are generated by our twenty largest plan sponsors.  The loss of any of
 these  significant  customers  could have an adverse affect on our revenues and
 profitability.

    If we do not manage our growth effectively, we may not be able to maintain
profitability
-----------------------------------------------------------------------------

         Our growth strategy, if successful, will result in further expansion of
 our PBM operations. We can maintain profitable operations,  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,  including  those from Catalyst and PNNC, and to attract,  hire and
 retain  additional  highly  skilled  and  motivated   officers,   managers  and
 employees.

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

                                       27
<PAGE>

    If we do not effectively manage and integrate our acquisition of PNNC our
business prospects could be damaged
----------------------------------------------------------------------------

         Our recent  acquisition of PNNC is important to achieving the scale and
 operating  leverage  necessary  to compete in this  segment.  Should we fail to
 integrate these operations and realize the expected opportunities our prospects
 could be damaged.

    Our pharmacy benefit management business relies on real-time management
information systems
-----------------------------------------------------------------------------

         Our  pharmacy  operations  utilizes an  electronic  network  connecting
 approximately  50,000 retail  pharmacies  to process  third-party  claims.  The
 systems  we  utilize  are  provided  by  a  third-party.   Because  claims  are
 adjudicated  in real time,  systems  availability  and  reliability  are key to
 meeting customers' service expectations. Any interruption in real time service,
 either through  systems  availability  or  telecommunications  disruptions  can
 significantly  damage the quality of service we provide.  Our pharmacy  benefit
 management  services  depend on  third-party  proprietary  software  to perform
 automated  transaction  processing.   While  our  pharmacy  benefit  management
 services have not experienced significant or detrimental service interruptions,
 and have  significant  back-up database  capability,  there can be no assurance
 that the business will not be harmed by these service interruptions.


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

         A  significant  majority of all of our  supplemental  benefits  program
 sales is attributable to two distribution relationships. The relationships with
 Aegon and American  Express  provide us with access to customer leads resulting
 in sales to  individual  consumers.  If we lose one or more of these  marketing
 relationships and are unable to replace them with other marketing outlets,  our
 access to potential customers would decline and sales and revenue would suffer.

    Our supplemental benefits membership growth is dependent on telemarketing
    -------------------------------------------------------------------------

         A  significant  percentage  of our  membership  growth  during 2002 was
 attributable  to  telemarketing  sales.  These  sales  involve  a  much  higher
 percentage  of  monthly   rather  than  annual  sales  than  was  our  previous
 experience.   The   combination   of  these  has  resulted  in  higher  initial
 cancellation rates and reduced enrollment persistency. Moreover, it is possible
 that FTC rule  regarding  a national  "do-not-call"  registry  could  adversely
 affect telemarketing sales.

    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 Supplemental Benefits programs
------------------------------------------------------------------------------

         Our agreement for Christopher  Reeve to promote our programs  currently
 expires in July 2005. The loss of the Christopher Reeve identification with our
 programs,  upon termination of our contract or otherwise,  could  significantly
 reduce the distribution of our programs.

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

         We are dependent on the providers of benefits included in our programs.
 These benefits are provided  pursuant to arrangements  with Unum Life Insurance
 Company of America,  The Chubb Group of Insurance  Companies,  Zurich  American
 Insurance Company 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.

                                       28
<PAGE>



    If the providers of the benefits included in the programs fail to provide
those benefits, or the extent of those benefits is deemed to be greater than the
providers are obligated to pay, we could become subject to liability claims by
program members
-------------------------------------------------------------------------------

         We arrange for the provision by others of the benefits  included in the
 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, or if it is determined  that the level of benefits
 to which members are entitled  exceeds the  obligations  of the  providers,  we
 could become involved in any resulting claim or litigation.

    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:

         - levels of pharmacy  claims  expenditures,  seasonal  fluctuations  in
           demand and enrollment levels;

         - changing business mix between brand and generic prescriptions;

         - changes in acceptance levels for our supplemental benefits program by
           consumers;

         - levels of marketing expenditures;

         - renewal rate experience for our benefit programs;

         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.

        FACTORS RELATED TO REGULATION

    If we  fail  to  comply  with  all of  the  various  and  complex  laws  and
 regulations governing our products and marketing techniques,  including any use
 of the Internet regarding products and marketing, 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 the  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  the
 programs.

         One  of  the  means  by  which  distributors   market  the  program  is
 telemarketing,  which  the  distributors  may  out  source  to  third  parties.
 Telemarketing  has become subject to an increasing  amount of Federal and state
 regulation as well as general public  scrutiny in the past several  years.  For
 example such regulation  limits the hours during which  telemarketers  may call
 consumers  and prohibits the use of automated  telephone  dialing  equipment to
 call certain telephone  numbers.  The Federal  Telemarketing and Consumer Fraud
 and  Abuse  Prevention  Act  of  1994  and  Federal  Trade  Commission  ("FTC")
 regulations  prohibit  deceptive,  unfair or abusive practices in telemarketing
 sales.  Both the FTC and state  attorneys  general  have  authority  to prevent
 certain telemarketing activities deemed by them to violate consumer protection.
 On January 29,  2003,  the FTC  published a final rule on  telemarketing  sales
 that, among other things, provides for a national "do-not-call" registry. While
 the registry will require additional  federal funding to become effective,  and
 additional time to be implemented, it is anticipated that as of October 2003 it

                                       29

<PAGE>

 will be illegal  for most  telemarketers  to call  anyone who has elected to be
 listed on the registry.  Implementation  of the registry  could have an adverse
 effect on the sale of the  Company's  programs.  In addition,  some states have
 enacted laws and others are  considering  enacting  laws  targeted  directly at
 regulating telemarketing practices, and there can be no assurance that any such
 laws, if enacted,  will not adversely affect or limit the Company's  current or
 future  operations.  While  compliance with these  regulations is generally the
 responsibility  of  the  distributors  and  subcontractors,  there  can  be  no
 assurance that the Company would have no exposure to liability.

    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.

    Our pharmacy benefit management business must comply with a range of State
and Federal regulatory requirements
-------------------------------------------------------------------------------

         Various forms of legislation and government regulations affect or could
 affect  providers  of  pharmacy  benefit  management  services.  Among the most
 prominent forms of such regulation are the following:

         Network Access Legislation.  A majority of states now have some form of
 legislation  affecting  our  ability  to limit  access to a  pharmacy  provider
 network or removal of a network  provider.  Such  legislation may require us or
 our clients to admit any retail  pharmacy  willing to meet the plan's price and
 other terms for network participation ("any willing provider" legislation);  or
 may  provide  that a  provider  may not be  removed  from a  network  except in
 compliance with certain procedures ("due process" legislation).

         Anti-Remuneration Legislation.  "Anti-kickback" statutes at the federal
 and state level prohibit an entity from paying or receiving any compensation to
 induce the referral of healthcare plan  beneficiaries  or the purchase of items
 or  services  for  which  payment  may be made  under  such  healthcare  plans.
 Additionally,   state  and  federal   regulations   have  been  the  basis  for
 investigations  and multi-state  settlements  relating to financial  incentives
 provided by  pharmaceutical  manufacturers  to retail  pharmacies in connection
 with  pharmaceutical  "switching"  or  "product  conversion"  programs.  To our
 knowledge,  these  laws have not been  applied  to  prohibit  pharmacy  benefit
 management  companies from receiving amounts from pharmaceutical  manufacturers
 in connection with pharmaceutical purchasing and formulary management programs,
 to prohibit therapeutic substitution programs conducted by independent pharmacy
 benefit management companies, or to prohibit contractual  relationships such as
 we have regarding these types of programs.

         ERISA  Regulation.  ERISA regulates certain aspects of employee pension
 and health benefit plans,  including  self-funded  corporate  health plans with
 which we have  agreements to provide PBM services.  We believe that the conduct
 of our business generally is not subject to the fiduciary obligations of ERISA.
 However, other PBMs, including Caremark and AdvancePCS, have disclosed publicly
 that they are defending  private litigant lawsuits alleging that they are ERISA
 fiduciaries. There can be no assurance that the U.S. Department of Labor, which
 is the agency that enforces ERISA, or a private  litigant would not assert that
 the fiduciary  obligations  imposed by the statute apply to certain  aspects of
 our operations.

         In  addition  to its  fiduciary  provisions,  ERISA  imposes  civil and
 criminal  liability  on service  providers  to health  plans and certain  other
 persons if certain forms of illegal  remuneration  are made or received.  These
 provisions  of  ERISA  are  similar,  but not  identical,  to the  health  care
 anti-remuneration  statutes discussed in the immediately  preceding section; in
 particular,  ERISA does not provide for any "safe harbor" exceptions.  Like the
 health care anti-remuneration  laws, the corresponding  provisions of ERISA are
 written broadly and their  application to particular  cases is often uncertain.
 The Company has implemented  policies,  which include disclosure to health plan
 sponsors  with  respect  to any  commissions  paid by or to us that  might fall
 within  the  scope  of  such  provisions,  and  accordingly  believe  we are in
 substantial  compliance with these provisions of ERISA. However, we can provide
 no assurance that our policies in this regard would be found by the appropriate
 enforcement   authorities   and  potential   private   litigants  to  meet  the
 requirements of ERISA.

                                       30
<PAGE>

         Patient Choice and Benefit Design. Some states have enacted legislation
 that prohibits the plan sponsor from implementing  certain  restrictive  design
 features,  and many  states have  introduced  legislation  to regulate  various
 aspects of managed-care  plans,  including  provisions relating to the pharmacy
 benefit. Legislation has been introduced in some states to prohibit or restrict
 therapeutic  substitution,  or to require  coverage of all FDA approved  drugs.
 Other  states  mandate  coverage  of  certain  benefits  or  conditions.   Such
 legislation  does not generally apply to us, but it may apply to certain of our
 customers, such as HMOs and health insurers. If such legislation were to become
 widespread  and broad in  scope,  it could  have the  effect  of  limiting  the
 economic   benefits   achievable   through  pharmacy  benefit   management  and
 consequently make our services less attractive.

         Legislation  Affecting Drug Prices.  Some states have adopted so-called
 "most favored nation"  legislation  providing that a pharmacy  participating in
 the state Medicaid program must give the state the best price that the pharmacy
 makes available to any third-party  plan. Such legislation may adversely affect
 our ability to negotiate  discounts in the future from network  pharmacies.  In
 addition,  various Federal and state medicate agencies,  as well as legislators
 and private  litigants  have raised the issue of how  average  wholesale  price
 ("AWP") is determined.

         Consumer Protection  Legislation.  Most states have consumer protection
 laws that  generally  prohibit  payments and other broad  categories of conduct
 deemed harmful to consumers.  These statutes may be enforced by the states and,
 in  fact,  have  been the  basis  for  state  investigations  and at least  one
 multi-state  settlement  relating  to  financial  incentives  provided  by drug
 manufacturers to retail pharmacies in connection with drug switching  programs.
 We  believe  that  we  do  not  have   contractual   relationships   with  drug
 manufacturers  and retail  pharmacies  that include the features that have been
 viewed adversely by enforcement authorities. However, no assurance can be given
 that we will not be subject to scrutiny or challenge under one or more of these
 laws.

         Discount Drug Card  Regulation.  Several  states  recently have enacted
 laws  and/or  promulgated  or  proposed  regulations  regulating  the  selling,
 marketing,  promoting,  advertising or  distributing of discount drug cards for
 cash purchases. Such laws and regulations provide generally that any person may
 bring an action for damages or injunction for violations.

         Licensure.  Many states have licensure or  registration  laws governing
 certain  types  of  ancillary  healthcare  organizations,  including  preferred
 provider  organizations,  third party  administrators  and  utilization  review
 organizations.  Laws  requiring  registration  and regulating the operations of
 PBMs  meeting  certain  criteria  have also begun to appear.  These laws differ
 significantly  from  state to state,  and the  application  of such laws to the
 activities of pharmacy  benefit  managers is often unclear.  We have registered
 under such laws in those states in which we have concluded such registration is
 required.

         Confidential Information. Most of our activities involve the receipt or
 use by us of confidential  medical information  concerning  individual members,
 including the transfer of the  confidential  information to the member's health
 benefit plan. In addition,  we use aggregated  population data for research and
 analysis purposes.  The HIPAA Regulations require our PBM clients to enter into
 business  associate  agreements with us that require us to assure  confidential
 treatment  of  health  care  information  and  to  only  use or  disclose  such
 information as needed to provide our services and to use certain standard codes
 and data sets in processing claims. We believe that we have taken all necessary
 internal  measures,  and made all external vendor  arrangements,  to meet these
 obligations. However the HIPAA Regulations are just becoming effective on April
 14, 2003 regarding the privacy rule, and future  interpretation could result in
 expansion  of our  responsibilities.  Moreover,  any  failure  to meet  current
 requirements,  because of the heightened  profile given to the privacy issue by
 HIPAA,  could result in the loss of business by the Company.  In addition,  the
 laws of many  states  also  restrict  the use and  disclosure  of  confidential
 medical information.  Pursuant to HIPAA, state laws that are more protective of
 medical  information  are not  pre-empted  by HIPAA.  Therefore,  to the extent
 states  enact  more  protective  legislation,  we  could  be  required  to make
 significant changes to our business operations.

    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

                                       31
<PAGE>

 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.

                                       32
<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-28, attached hereto.


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

    None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Information  required  under  this item  will be  contained  in the  section
 entitled "Executive Officers and Directors" in our Proxy Statement for our 2003
 Annual Meeting of Stockholders and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

    Information  required  under  this item will be  contained  in the  sections
 entitled  "Directors  Compensation"  and "Executive  Compensation" in our Proxy
 Statement  for our 2003  Annual  Meeting of  Stockholders  and is  incorporated
 herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information  required  under this item by Item 403 of  Regulation SK will be
 contained in the section entitled "Stock  Ownership" in our Proxy Statement for
 our  2003  Annual  Meeting  of  Stockholders  and  is  incorporated  herein  by
 reference.

    Equity Compensation Plan Information
<TABLE>
<CAPTION>


         ------------------------------ ---------------------------- --------------------------- ----------------------
                                        Number of securities to be   Weighted average exercise   Number of securities
                                          issued upon exercise of       price of outstanding      remaining available
                                           outstanding options,        options, warrants and      for future issuance
                 Plan category              warrants and rights                rights
         ------------------------------ ---------------------------- --------------------------- ----------------------
                                                    (a)                         (b)                        (c)
         ------------------------------ ---------------------------- --------------------------- ----------------------
         <S>                            <C>                          <C>                         <C>
         Equity compensation plans
         approved by security holders           4,867,125                     $5.16                    293,500
         ------------------------------ ---------------------------- --------------------------- ----------------------
         Equity compensation plans
         not approved by security
         holders                                       --                        --                         --
         ------------------------------ ---------------------------- --------------------------- ----------------------
         Total                                  4,867,125                     $5.16                    293,500
         ------------------------------ ---------------------------- --------------------------- ----------------------
</TABLE>

                                       33


<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information  required  under  this item  will be  contained  in the  section
 entitled  "Certain  Transactions"  in our Proxy  Statement  for our 2003 Annual
 Meeting of Stockholders and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

    a) Disclosure  Controls and  Procedures.  The  Registrant's  Chief Executive
 Officer and Chief Financial Officer have evaluated the Registrant's  disclosure
 controls and procedures  within the 90 days prior to the date of filing of this
 Annual Report on Form 10-K. Based upon such review, the Chief Executive Officer
 and Chief  Financial  Officer have  concluded  that the Registrant has in place
 appropriate  controls  and  procedures  designed  to  ensure  that  information
 required to be disclosed by the  Registrant  in the reports it files or submits
 under  the  Securities  Exchange  Act  of  1934,  as  amended,  and  the  rules
 thereunder,  is recorded,  processed,  summarized and reported  within the time
 periods specified in the Commission's rules and forms.  Disclosure controls and
 procedures  include,  without  limitation,  controls and procedures designed to
 ensure that  information  required to be  disclosed  by an issuer in reports it
 files or  submitted  under  the  Securities  Exchange  Act is  accumulated  and
 communicated to the Registrant's management,  including its principal executive
 officer or officers and  principal  financial  officer or  officers,  or person
 performing similar functions as appropriate to allow timely decisions regarding
 required disclosure.

    b) Internal  Controls.  Since the date of the  evaluation  described  above,
 there have not been any significant changes in our internal accounting controls
 or in other factors that could significantly affect those controls.'


                                     PART IV

ITEM 15. 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
                Consolidated Balance Sheets as of December 31, 2001 and 2002
                Consolidated Statements of Operations and Comprehensive Income
                (Loss) for the years ended December 31, 2000, 2001, and 2002
                Consolidated Statements of Stockholders' Equity for the years
                ended December 31, 2000, 2001, and 2002
                Consolidated Statements of Cash Flows for the years ended
                December 31, 2000, 2001 and 2002
                Notes to Financial Statements

         (2) Financial statement schedule:

               Schedule II - Valuation and Qualifying Accounts

     (b) Reports on Form 8-K

         The Company filed a Current Report on Form 8-K/A dated February 5, 2003
 reporting items in connection with the acquisition of Pharmacy Network National
 Corporation.

    The  Company  filed a Current  Report on Form 8-K dated  December  16,  2002
 reporting items in connection with the acquisition of Pharmacy Network National
 Corporation.

    The  Company  filed a  Current  Report on form 8-K  dated  December  4, 2002
 reporting a complaint filed against the Company's exclusive placement agent for
 the Company's private investment in public equity offering.


                                       34
<PAGE>


     (c) Exhibits

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

<TABLE>
<CAPTION>

     Exhibit No.                                          Description
     --------------------------------------------------------------------------
     <S>             <C>
       2.1           Form of Reorganization Agreement by and among HealthExtras,
                     Inc., HealthExtras, LLC and Capital Z Healthcare Holding
                     Corp (1)
       2.2           Catalyst Rx, Inc. Securities Purchase Agreement Dated as of
                     November 14, 2001 by and among HealthExtras, Inc. as the
                     Purchaser, Catalyst Rx, Inc. and Kevin C. Hooks as the
                     Seller (2)
       2.3           Catalyst Consultants, Inc. Securities Purchase Agreement
                     Dated as of November 14, 2001 by and among HealthExtras,
                     Inc. as the purchaser, Catalyst Consultants, Inc. and Kevin
                     C. Hooks as the Seller (2)
       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. (1)
       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          Reserved
       10.4          Reserved
       10.5          Reserved
       10.6          Agreement by and between Cambria Productions, Inc. f/s/o
                     Christopher Reeve and HealthExtras, Inc. (1) (3)
       10.7          Indemnification Agreement (1)
       10.8          Sublease Agreement by and between United Payors & United
                     Providers, Inc. and HealthExtras, Inc.
       10.9          Form of HealthExtras, Inc. 1999 Stock Option Plan (1)
       10.10         Form of Registration Rights Agreement (1)
       10.11         Securities Purchase Agreement by and among HealthExtras,
                     Inc., as the Purchaser, and TD Javelin Capital Fund, L.P.,
                     Meriken Nominees, LTD, et. al, as the Sellers  (4)
       10.12         Form of HealthExtras, Inc. 2000 Stock Option Plan (5)
       10.13         Form of HealthExtras, Inc. 2000 Directors' Stock Option
                     Plan (5)
       10.14         Warrant Agreement by and among HealthExtras, Inc. and J.C.
                     Penney Life Insurance Company (5)
       10.15         Amended Agreement by and between Cambria Productions, Inc.
                     f/s/o Christopher Reeve and HealthExtras, Inc. (5)
       21.1          Subsidiaries of Registrant
       23.1          Consent of Independent Accountants
       99.1          Certifications Pursuant to Section 906 of the Sarbanes-
                     Oxley Act of 2002

</TABLE>

--------------
(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)  Incorporated herein by reference into this document from the Exhibits to
     the Form 8-K initially filed on November 29, 2001.
(3)  Confidential treatment requested for portion of agreement pursuant to
     Section 406 of Regulation C. promulgated under the Securities Act of 1933,
     as amended.
(4)  Incorporated herein by reference into this document from the Exhibits to
     the Form 8-K initially filed on November 21, 2000.
(5)  Incorporated herein by reference into this document from the Exhibits to
     the Form 10-K filed on April 2, 2001.

                                       35


<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 31, 2003          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 31, 2003          By:  /s/ Thomas L. Blair
                                  -------------------------------
                                  Thomas L. Blair
                                  Chairman of The Board


Date March 31, 2003          By:  /s/ David T. Blair
                                  -------------------------------
                                  David T. Blair
                                  Chief Executive Officer and Director


Date March 31, 2003          By:  /s/ Michael P. Donovan
                                  -------------------------------
                                  Michael P. Donovan
                                  Chief Financial Officer and
                                  Chief Accounting Officer


Date March 31, 2003          By:  /s/  Edward S. Civera
                                  -------------------------------
                                  Edward S. Civera
                                  Director


Date March 31, 2003          By:  /s/ Bette B. Anderson
                                  -------------------------------
                                  Bette B. Anderson
                                  Director


Date March 31, 2003          By:  /s/ William E. Brock
                                 -------------------------------
                                  William E. Brock
                                  Director


Date March 31, 2003          By:  /s/ Thomas J. Graf
                                  -------------------------------
                                  Thomas J. Graf
                                  Director


<PAGE>




Date March 31, 2003          By:  /s/ Carey G. Jury
                                  -------------------------------
                                  Carey G. Jury
                                  Director


Date March 31, 2003          By:  /s/ Deanna D. Strable-Soethout
                                 -------------------------------
                                  Deanna D. Strable-Soethout
                                  Director


Date March 31, 2003          By:  /s/ Frederick H. Graefe
                                 -------------------------------
                                  Frederick H. Graefe
                                  Director


<PAGE>

 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David T. Blair, Chief Executive Officer of HealthExtras, Inc., certify that:

 1.  I have reviewed this annual report on Form 10-K of HealthExtras, Inc.;

 2.  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

 3.  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

 4.  The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a. designed  such  disclosure  controls  and  procedures  to  ensure  that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

      b. evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         annual report (the "Evaluation Date"); and

      c. presented in this annual report our conclusions about the effectiveness
         of the disclosure controls and procedures based on our evaluation as of
         the Evaluation Date;

 5.  The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

      a. all  significant  deficiencies  in the design or  operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

      b. any fraud,  whether or not material,  that involves management or other
         employees  who have a  significant  role in the  registrant's  internal
         controls; and

 6.  The  registrant's  other  certifying  officer and I have  indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:   March 31 2003          By: /s/ David T. Blair
                               ------------------------------------------
                                  David T. Blair
                                  Chief Executive Officer and Director



<PAGE>



    CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael P Donovan, Chief Financial Officer of HealthExtras, Inc., certify
that:

 1.  I have reviewed this annual report on Form 10-K of HealthExtras, Inc.;

 2.  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

 3.  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

 4.  The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

      a. designed  such  disclosure  controls  and  procedures  to  ensure  that
         material  information   relating  to  the  registrant,   including  its
         consolidated  subsidiaries,  is made known to us by others within those
         entities, particularly during the period in which this annual report is
         being prepared;

      b. evaluated the effectiveness of the registrant's disclosure controls and
         procedures as of a date within 90 days prior to the filing date of this
         quarterly report (the "Evaluation Date"); and

      c. presented in this annual report our conclusions about the effectiveness
         of the disclosure controls and procedures based on our evaluation as of
         the Evaluation Date;

 5.  The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

      a. all  significant  deficiencies  in the design or  operation of internal
         controls  which  could  adversely  affect the  registrant's  ability to
         record,   process,   summarize  and  report  financial  data  and  have
         identified  for the  registrant's  auditors any material  weaknesses in
         internal controls; and

      b. any fraud,  whether or not material,  that involves management or other
         employees  who have a  significant  role in the  registrant's  internal
         controls; and

 6.  The  registrant's  other  certifying  officer and I have  indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:   March 31, 2003           /s/ Michael P. Donovan
                                 -------------------------------------
                                     Michael P. Donovan
                                     Chief Financial Officer and
                                     Chief Accounting Officer

<PAGE>



                               HEALTHEXTRAS, INC.
                                    --------

                        CONSOLIDATED FINANCIAL STATEMENTS
                          at December 31, 2002 and 2001
                               AND REPORT THEREON
                                    --------




<PAGE>




                        Report of Independent Accountants


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

 In our opinion,  the accompanying  consolidated balance sheets, and the related
consolidated  statements of  operations  and  comprehensive  income  (loss),  of
stockholders'  equity  and of  cash  flows,  present  fairly,  in  all  material
respects, the financial position of HealthExtras, Inc. and its subsidiaries (the
"Company") at December 31, 2001 and 2002,  and the results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
2002, in conformity with accounting  principles generally accepted in the United
States of America.  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  audit of these
financial statements in accordance with auditing standards generally accepted in
the United  States of America,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting  principles used and significant estimates made by management and
evaluating the overall financial  statement  presentation.  We believe our audit
provides a reasonable basis for our opinion.

As discussed in Note 4, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002.



/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
McLean, Virginia
February 4, 2003




<PAGE>


                               HEALTHEXTRAS, INC.

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                                    December 31,
                                                                                              2001             2002
                                                                                         -------------    -------------
<S>                                                                                      <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents ..........................................................   $  33,009,143    $  17,531,051
  Accounts receivable, net of allowance for doubtful accounts of
    $457,390 and $424,540 in 2001 and 2002, respectively .............................      22,410,968       37,799,778
  Income taxes receivable ............................................................              --        2,773,773
  Deferred income taxes ..............................................................              --        1,286,313
  Deferred charges ...................................................................       2,086,358        1,888,072
  Other current assets ...............................................................         653,627        1,282,484
                                                                                         -------------    -------------
         Total current assets ........................................................      58,160,096       62,561,471

Fixed assets, net ....................................................................       5,056,235        4,056,130
Deferred income taxes ................................................................              --        3,759,152
Intangible assets, net of accumulated amortization of $45,713 and
   $459,449 in 2001 and 2002, respectively ...........................................       4,449,487       14,185,751
Goodwill .............................................................................      17,566,866       33,538,142
Restricted cash ......................................................................       1,000,000        1,000,000
Other assets .........................................................................       1,920,651          901,490
                                                                                         -------------    -------------
         Total assets ................................................................   $  88,153,335    $ 120,002,136
                                                                                         =============    =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable ...................................................................   $  24,594,269    $  34,451,789
  Notes payable ......................................................................       8,883,069        1,056,000
  Accrued expenses and other current liabilities .....................................       4,385,666        2,156,165
  Deferred revenue ...................................................................       4,509,055        4,813,555
                                                                                         -------------    -------------
         Total current liabilities ...................................................      42,372,059       42,477,509

Notes payable ........................................................................              --       18,000,000
                                                                                         -------------    -------------
             Total liabilities .......................................................      42,372,059       60,477,509
                                                                                         -------------    -------------

Minority interest ....................................................................         543,800               --

Stockholders' equity:
  Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued .........              --               --
  Common stock, $0.01 par value, 100,000,000 shares authorized, 31,868,012 and
    32,295,120 shares issued and outstanding at December 31, 2001 and 2002,
    respectively .....................................................................         318,680          322,951
  Additional paid-in capital .........................................................      69,747,302       70,460,184
  Accumulated deficit ................................................................     (24,720,841)     (11,243,127)
  Deferred compensation ..............................................................        (107,665)         (15,381)
                                                                                         -------------    -------------
         Total stockholders' equity ..................................................      45,237,476       59,524,627
                                                                                         -------------    -------------
         Total liabilities and stockholders' equity ..................................   $  88,153,335    $ 120,002,136
                                                                                         =============    =============
</TABLE>


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

                                      F-2
<PAGE>

                               HEALTHEXTRAS, INC.

                    CONSOLIDATED STATEMENTS OF OPERATIONS AND
                           COMPREHENSIVE INCOME (LOSS)
                                    --------
<TABLE>
<CAPTION>



                                                                    For the years ended December 31,
                                                             -------------------------------------------

                                                                 2000           2001            2002
                                                             -----------    ------------    ------------
<S>                                                          <C>           <C>             <C>
Revenues .................................................   $ 43,923,911  $ 118,225,919   $ 248,407,466
                                                              -----------    ------------    -----------
Direct expenses ..........................................     24,048,646     87,542,676     209,522,984
Selling, general and administrative ......................     39,669,182     38,454,696      35,484,524
                                                             -----------    ------------    ------------

           Total operating expenses ......................     63,717,828     125,997,372    245,007,508
                                                             -----------    ------------    ------------

Operating income (loss) ..................................    (19,793,917)     (7,771,453)     3,399,958

Interest income (expense), net ...........................      2,068,421       1,092,446        (81,848)
Other income, net ........................................        499,280            --               --
                                                             -----------    ------------    ------------

Income (loss) before income taxes and minority interest ..    (17,226,216)     (6,679,007)     3,318,110

Income tax benefit-deferred ..............................             --              --     10,204,596

Minority interest ........................................             --         (95,642)       (44,992)
                                                               -----------    ------------    ------------

Net income (loss) ........................................    (17,226,216)     (6,774,649)    13,477,714

Reclassification adjustment for realized gains included in
  net loss ...............................................       (132,669)             --             --
                                                              -----------    ------------    ------------

Comprehensive income (loss) ..............................   $(17,358,885) $   (6,774,649) $  13,477,714
                                                             ============  ==============  ==============

Earnings (loss) per share, basic .........................   $      (0.62) $        (0.23) $        0.42
Earnings (loss) per share, diluted .......................   $      (0.62) $        (0.23) $        0.42
Weighted average shares of common stock outstanding, basic
  (in thousands) .........................................         28,010          29,731         32,234
Weighted average shares of common stock outstanding,
  diluted (in thousands) .................................         28,010          29,731         32,420
</TABLE>


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

                                      F-3
<PAGE>

                               HEALTHEXTRAS, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                    --------
              for the years ended December 31, 2000, 2001, and 2002

<TABLE>
<CAPTION>



                                                                             Accumulated
                                                                               Other        Retained
                                          Common Stock        Additional   Comprehensive     Earnings
                                    ----------------------      Paid-in       Income      (Accumulated     Deferred
                                       Shares       Amount      Capital      (Loss)         Deficit)   Compensation      Total
                                    ----------   ---------   -----------    ---------  -------------   ----------    ------------
<S>                                 <C>          <C>         <C>            <C>        <C>             <C>           <C>
Balance at December 31, 1999.....   27,600,000   $ 276,000   $48,045,635    $ 132,669  $    (719,976)  $ (370,232)   $ 47,364,096

Amortization of deferred
  compensation ..................           --          --            --           --             --      116,894         116,894
Warrants expected to be
  issued in connection with
  marketing agreement ...........           --          --       254,129           --             --           --         254,129
Net proceeds from private
  placement .....................    1,302,600      13,026     5,849,304           --             --           --       5,862,330
Reclassification adjustment
  for realized gains
  included in net loss ..........           --          --            --     (132,669)            --           --        (132,669)
Net loss for the year ...........           --          --            --           --    (17,226,216)          --     (17,226,216)
                                    ----------   ---------   -----------    ---------  -------------   ----------    ------------
Balance at December 31, 2000 ....   28,902,600     289,026    54,149,068           --    (17,946,192)    (253,338)     36,238,564
                                    ----------   ---------   -----------    ---------  -------------   ----------    ------------

Stock issued pursuant to
  stock grants...................      193,300       1,933        (1,933)          --             --           --              --

Stock issued in exchange
  for services ..................        2,300          23        12,512           --             --           --          12,535
Warrants issued or expected
  to be issued in
  connection with marketing
  agreement .....................           --          --     6,125,137           --             --           --       6,125,137
Amortization of deferred
  compensation, net of
  forfeitures ...................           --          --       (72,537)          --             --      145,673          73,136
Exercise of employee stock
  options .......................       30,000         300       121,500           --             --           --         121,800
Repurchase and retirement
  of stock ......................     (765,000)     (7,650)   (4,297,350)          --             --           --      (4,305,000)
Net proceeds from private
  placement .....................    3,020,782      30,208    10,862,295           --             --           --      10,892,503
Stock issued to acquire
  pharmacy management
  contracts .....................       40,000         400       194,800           --             --           --         195,200
Stock issued pursuant to
  Catalyst acquisition ..........      366,730       3,667     2,306,733           --             --           --       2,310,400
Stock issued pursuant to
  IPM acquisition ...............       77,300         773       347,077           --             --           --         347,850
Net loss for the year ...........           --          --            --           --     (6,774,649)          --      (6,774,649)
                                    ----------   ---------   -----------     ---------  -------------   ----------    ------------
Balance at December 31, 2001        31,868,012     318,680    69,747,302           --     (24,720,84)    (107,665)     45,237,476
                                    ----------   ---------   -----------     ---------  -------------   ----------    ------------

Exercise of employee
  options........................        9,375          94        33,375           --             --           --          33,469
Stock issued pursuant to
 stock grants ..................        81,700         817          (817)         --             --           --              --
Stock issued pursuant to
  Catalyst acquisition ..........      319,033       3,190     1,052,810           --             --           --       1,056,000
Stock issued in exchange
  for services ..................       17,000         170       236,030           --             --           --         236,200
Reversal for warrants issued or
  expected to be issued in
  connection with
  marketing agreement ...........           --          --    (1,008,516)          --             --           --      (1,008,516)
Issuance  of  common stock
  warrants ......................           --          --       400,000           --             --           --         400,000
Amortization of deferred
  compensation ..................           --          --            --           --             --       92,284          92,284
Net income for the year .........           --          --            --           --     13,477,714           --      13,477,714
                                    ----------   ---------   -----------    ---------  -------------   ----------    ------------
Balance at December 31, 2002.....   32,295,120   $ 322,951   $70,460,184    $      --  $ (11,243,127)  $  (15,381)   $ 59,524,627
                                    ----------   ---------   -----------    ---------  -------------   ----------    ------------
</TABLE>


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

                                      F-4


<PAGE>


                               HEALTHEXTRAS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    --------


<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                           ---------------------------------------------
                                                                2000            2001           2002
                                                           -------------    ------------   -------------
<S>                                                        <C>              <C>            <C>
Cash flows from operating activities:
  Net income (loss) .....................................  $ (17,226,216)   $ (6,774,649)  $  13,477,714
  Depreciation expense ..................................        599,337       1,110,281       1,294,663
  Impairment of and loss on disposal of fixed assets ....             --              --       2,679,777
  Deferred income taxes .................................             --              --     (10,204,596)
  Noncash charges (credits) .............................        371,023       6,210,808        (680,032)
  Amortization of goodwill ..............................        102,473         614,839              --
  Amortization of intangible and other assets ...........             --          95,138         547,692
  Minority interest .....................................             --          95,642          44,992
  Gain on sale of marketable securities .................       (551,735)             --              --
  Changes in assets and liabilities, net of effects from
   acquisitions of IPM in 2000, Catalyst in 2001 and PNNC
   in 2002:
       Accounts receivable, net .........................       (780,522)     (4,045,099)       (485,717)
       Other assets .....................................        (89,823)        298,514        (794,995)
       Deferred charges .................................        (38,705)      1,472,692         198,286
       Accounts payable, accrued expenses and other
       liabilities ......................................      2,189,998       1,501,902      (6,404,585)
       Deferred revenue .................................      1,884,138      (2,612,294)        304,500
                                                           -------------    ------------   -------------
           Net cash used in operating activities ........    (13,540,032)     (2,032,226)        (22,301)
                                                           -------------    ------------   -------------
Cash flows from investing activities:
  Capital expenditures ..................................     (3,061,247)     (1,509,391)     (1,991,400)
  Purchase of intangible assets .........................             --        (300,000)       (450,000)
  Payments for purchase of IPM, net of cash acquired ....     (7,406,398)       (608,225)             --
  Cash acquired (paid) in Catalyst acquisitions .........             --       2,242,370     (12,073,603)
  Payments for purchase of PNNC, net of cash acquired ...             --              --     (19,574,257)
  Sales of available for sale marketable securities .....      1,084,050              --              --
  Restricted cash, deposits and other ...................       (988,500)       (414,000)        600,000
                                                            -------------    ------------   -------------
           Net cash used in investing activities             (10,372,095)       (589,246)    (33,489,260)
                                                           -------------    ------------   -------------

Cash flows from financing activities:
  Proceeds from borrowings ..............................             --              --      30,500,000
  Repayment of line of credit ...........................             --              --     (12,500,000)
  Proceeds from exercise of stock options ...............             --         121,800          33,469
  Payments to reacquire common stock ....................             --      (4,305,000)             --
  Net proceeds from sale of common stock ................      5,862,333      10,892,503              --
                                                           -------------    ------------   -------------
  Net cash provided by financing activities .............      5,862,333       6,709,303      18,033,469
                                                           -------------    ------------   -------------

  Net increase (decrease) in cash and cash equivalents ..    (18,049,794)      4,087,831     (15,478,092)
  Cash and cash equivalents at the beginning of year ....     46,971,106      28,921,312      33,009,143
                                                           -------------    ------------   -------------
Cash and cash equivalents at the end of year ............   $ 28,921,312    $ 33,009,143    $ 17,531,051
                                                           =============    ============    ============

  Supplemental disclosure:
     Cash paid for interest .............................   $         --    $         --    $    318,783
     Cash paid for estimated income taxes ...............   $         --    $         --    $         --

</TABLE>

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

                                      F-5

<PAGE>


                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

1.  COMPANY

    HealthExtras  is a provider  of pharmacy  benefit  management  services  and
    supplemental   benefits.   The  Company's   clients   include   managed-care
    organizations,  self-insured employers, third party administrators,  as well
    as individual customers.

    The Company operates in two business  segments,  Pharmacy Benefit Management
    ("PBM") and Supplemental  Benefits. The Company's largest revenue generating
    segment  is the  PBM  segment  which  provides  managed-care  organizations,
    self-insured  employers  and third party  administrators  with access to the
    Company's negotiated retail pharmacy network rates, participation in certain
    rebate  arrangements  with  manufacturers  based on  formulary  design,  and
    benefits from other care enhancement protocols in our system.

    The Company's  supplemental benefits segment generates revenue from the sale
    of membership  programs  which provide  insurance  and other  benefits.  The
    Company  has  distribution  agreements  with  many of the  nation's  largest
    financial  institutions  (the  "distributors"),  along with leading affinity
    groups and associations.  Additionally, HealthExtras has a relationship with
    actor and advocate  Christopher  Reeve to promote these  benefits  programs.
    Revenues are generated from fixed monthly  membership fees and payments from
    distributors.  The  insurance  component  of the  programs  is  underwritten
    through group insurance agreements arranged by the Company. The Company does
    not assume any insurance underwriting risk.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Principles of consolidation
    ---------------------------

    The accompanying  consolidated  financial statements include the accounts of
    HealthExtras,  Inc. and all its wholly owned subsidiaries.  All intercompany
    accounts and transactions have been eliminated.

    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.  At
    December  31,  2002 the Company had  $1,000,000  on deposit in a  restricted
    account with the State of Nevada as security for performance of its pharmacy
    benefit management obligations.

                                      F-6
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    Marketable securities
    ---------------------

    Prior to 1999,  the Company  purchased  certain  marketable  securities of a
    related entity.  Management  considered 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 (loss). In 2000, the Company sold
    its shares in the  related  entity for  aggregate  proceeds  of  $1,084,050,
    resulting in a gain of $551,735.

    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 five years.  Leasehold  improvements are amortized using
    the  straight-line  method  over the shorter of the  estimated  lives of the
    assets or the  lease  term.  The  Company  capitalizes  costs  incurred  for
    software for internal use that is in the  application  development  stage in
    accordance  with  Statement of Position 98-1,  "Accounting  for the Costs of
    Computer Software Developed or Obtained for Internal Use".

    In accordance with SFAS No. 144, the carrying values of the Company's assets
    are re-evaluated  when events or changes in circumstances  indicate that the
    carrying amount of an asset may not be recoverable.  In the first quarter of
    2002, the Company  consolidated  its  HealthExtrasRx  Birmingham,  Alabama
    operations;  at that time fixed assets were  written-down  by  approximately
    $116,000.  In  the  fourth  quarter  of  2002,  the  Company  recognized  an
    impairment  charge  related to a software and hardware  system that had been
    under development to support the supplemental  benefits segment. In November
    2002,  the Company  undertook a review of the costs to fully  implement  and
    maintain  the  system.   Management  then  made  the  business  decision  to
    discontinue  development  of the system  because the operating  efficiencies
    gained at implementation  would not justify the further investment  required
    to complete  the  project.  As the Company  would not be  implementing  this
    system  into its primary  segment,  the Company  recognized  a $2.6  million
    impairment charge related to the system. See Note 6.

    Concentration of credit risk
    ----------------------------

    Financial  instruments that  potentially  subject the Company to significant
    concentrations  of  credit  risk  consist   principally  of  cash  and  cash
    equivalents and accounts receivable. The Company maintains its cash and cash
    equivalents 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.

                                      F-7
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    Accounts receivable  consists  principally of amounts due from the Company's
    PBM  customers.  Although,  the Company does not hold  collateral  to secure
    payment of its accounts  receivable,  its  collection  experience  indicates
    limited loss  exposure  due to the nature of the  benefits  involved and the
    necessity  of benefit  continuity  for plan  sponsor  employees.  Management
    performs ongoing credit evaluations of its customers and provides allowances
    as deemed  necessary.  The Company has not  experienced  significant  losses
    related to receivables in the past.

    Use of estimates
    ----------------

    The  preparation  of financial  statements  in  conformity  with  accounting
    principles  generally  accepted in the United States of America requires the
    Company to make estimates and assumptions  that affect the reported  amounts
    in  the  financial  statements  and  disclosure  of  contingent  assets  and
    liabilities.  Actual  results  could differ from those  estimates.  The most
    significant  estimates  included in these financial  statements  include the
    following:  rebates due from  pharmaceutical  manufacturing  companies,  the
    value of intangible  assets  acquired in business  combinations  and related
    amortization periods, bad debt provisions, income tax provisions and related
    valuation  allowances,  and the  estimate  of the value and number of common
    stock warrants to be issued to a distributor under a marketing  compensation
    agreement.

    Goodwill and other intangible assets
    ------------------------------------

    In July 2001, the Financial  Accounting Standards Board issued SFAS No. 141,
    "Business  Combinations,"  and SFAS No. 142,  "Goodwill and Other Intangible
    Assets."  SFAS No.  141  changes  the  accounting  principles  for  business
    combinations.  Some significant changes from the previous principles are: a)
    the purchase method of accounting must be used for all business combinations
    initiated  after June 30,  2001;  and b) specific  criteria are provided for
    recognizing   intangible   assets  apart  from   goodwill.   The   Company's
    acquisitions of Catalyst and PNNC have been accounted for in accordance with
    SFAS No. 141. See Note 3.

    SFAS  No.  142  establishes  the  accounting  principles  for  goodwill  and
    intangible  assets  subsequent  to  their  initial  recognition.   The  most
    significant   changes   made  by  SFAS  No.  142  were:   a)  goodwill   and
    indefinite-lived  intangible assets are no longer amortized; b) goodwill and
    intangible  assets  deemed to have an  indefinite  life are  tested at least
    annually for impairment; and c) the amortization period of intangible assets
    with finite lives will no longer be limited to forty years.  See Notes 4 and
    5.

                                      F-8
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    Income taxes
    -------------

    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.  In 2000 and 2001, the Company recorded
    a full valuation  allowance against the Company's deferred tax assets due to
    the uncertainty as to their ultimate  realization.  In the fourth quarter of
    2002, as a result of the Company's current and projected profitability,  the
    Company recognized  approximately $10.2 million in tax benefits  principally
    resulting from the Company  releasing the full  valuation  allowance for its
    deferred tax asset. See Note 7.

    Net income (loss) per share
    ---------------------------

    Basic net income (loss) per share is based on the weighted average number of
    shares  outstanding  during the year. Diluted net income (loss) per share is
    based on the weighted  average  number of shares and  dilutive  common stock
    equivalent shares outstanding during the year. In 2000 and 2001, diluted net
    loss per  share was  equal to basic  net loss per  share  since the  Company
    operated at a loss.  For the year ended  December  31,  2002,  the  dilutive
    effect  (186,000 shares using the treasury stock method) of stock options to
    purchase 1.4 million shares of common stock was included in the  computation
    of diluted  earnings per common share because the option price was less than
    the average market price of the common shares during the year ended December
    31,  2002.  The  dilutive  effect of 5.3 million  outstanding  common  stock
    options and warrants for the year ended December 31, 2002, has been excluded
    from the  computation  of 2002  diluted  net  income per share as the effect
    would be anitdilutive.

    Employee stock options
    -----------------------

    The  Company  accounts  for the fair value of its stock  options  granted to
    employees and  directors in  accordance  with  Accounting  Principles  Board
    Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,  no
    compensation  expense has been recognized for stock options granted,  as the
    exercise  price of the options was equal to the fair value of the underlying
    common stock on the date of grant.

                                      F-9

<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

     The  following  table  reflects pro forma net income  (loss) and net income
(loss) per share for the years  ended  December  31,  2000,  2001,  2002 had the
Company  elected  to adopt  the fair  value  approach  of  Financial  Accounting
Standards Board issued Financial  Accounting  Standard No. 123,  "Accounting for
Stock-Based Compensation":

<TABLE>
<CAPTION>

                                                2000             2001         2002
                                            ------------    ------------   -------------
<S>                                         <C>             <C>             <C>
        Net income (loss)

        As reported .....................   $(17,226,216)   $ (6,774,649)   $ 13,477,714
         Stock-based compensation, net of
          taxes in 2002 .................      4,668,186       1,265,843       1,765,957
        Pro forma .......................    (21,894,402)     (8,040,492)     11,711,757

        Net income (loss) per share

        As reported - basic and diluted .   $      (0.62)   $      (0.23)   $       0.42
        Pro forma - basic and diluted ...   $      (0.78)   $      (0.28)   $       0.36
</TABLE>


    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 2000, 2001 and 2002.

<TABLE>
<CAPTION>

                                                   2000             2001              2002
                                               -------------  ----------------- ---------------

<S>                                              <C>              <C>              <C>
Risk-free interest rate                          5.6-6.4%         3.8-5.2%         2.94-5.11%
Expected years until exercise                    5 years           5 years          5 years
Expected volatility                               95.9%             84.2%            87.0%
Dividend yield                                      -                 -                -
Weighted average fair value per share             $3.47             $3.76            $3.72
</TABLE>




    Revenue and direct expense recognition
    --------------------------------------

    The Company  recognizes  revenues from PBM services,  which include sales of
    prescription  drugs by pharmacies in the  Company's  nationwide  network and
    related claims  processing  fees,  provided to  managed-care  organizations,
    self-insured employers and third party administrators. Revenue is recognized
    when the claims are  adjudicated.  Pharmacy  claims are  adjudicated  at the
    point-of-sale using the Company's on-line claims processing system. When the
    Company has a contractual  obligation to pay its network pharmacy  providers
    for benefits  provided to its clients'  members,  total  payments from these
    clients  are  recorded  as revenue  and  payments  to the  network  pharmacy
    provider are recorded as direct expenses.  The contracts require the Company
    to assume the credit risk of its  clients'  abilities  to pay. In  addition,


                                      F-10
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    under  most  of its  client  contracts,  the  Company  is at  risk  for  the
    difference  between the payments the Company  receives  from its clients and
    the negotiated  reimbursements the Company pays to its pharmacies.  When the
    Company administers pharmacy  reimbursement  contracts and does not assume a
    credit risk, the Company records only its  administrative or dispensing fees
    as  revenue.  Rebates  earned  under  arrangements  with  manufacturers  are
    recorded as a reduction of direct expenses.  The portion of such rebates due
    to plan  sponsors  is recorded  as a  reduction  of  revenue.  Manufacturers
    rebates are based on estimates,  which are subject to final  settlement with
    the contracted party. Member co-payments are not recorded as revenue.

    The primary determinant of revenue recognition for supplemental  benefits is
    monthly program enrollment and payments from certain distributors related to
    new member enrollments.  In general,  program 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 program
    revenue recognized by HealthExtras  includes the cost of membership features
    supplied by others,  including  the  insurance  components.  Direct  program
    expenses  consist  of the costs  that are a direct  function  of a period of
    membership and a specific set of program features.  The coverage obligations
    of our benefit suppliers and the related expense are determined  monthly, as
    are the remaining direct expenses. Payments from distributors related to new
    member  enrollments  are recorded as revenue to the extent of related direct
    expenses, which to date have exceeded payments from distributors.

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

    The Company has  historically  maintained a prepaid  balance for the cost of
    insurance  benefits  included in its  programs.  The  carrying  value of the
    prepayment  was  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
    the Company without any related revenue.  In 2002,  these prepaid  insurance
    costs were fully  utilized,  however,  the  Company  does  maintain  minimum
    premium  commitments  to  various  underwriters  covering  $1.9  million  in
    annualized  premiums.  The Company believes that current  enrollment  levels
    will allow it to fully  utilize this  commitment  without  losses for unused
    coverage.

                                      F-11
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    Effective  January 1, 2002, the Company  adopted  Emerging Issues Task Force
    Issue  No.  01-9,  "Accounting  for  Consideration  Given by a  Vendor  to a
    Customer or a Reseller of the Vendor's  Products"  ("EITF 01-9"),  which was
    issued in November 2001. The Company's adoption of EITF 01-9 changed the way
    the Company  recognizes the cost of consideration  provided to a distributor
    under a warrant  agreement.  Effective  January 1, 2002, the charge for this
    consideration  was recorded as a reduction  to revenue from the  distributor
    rather than as a charge to direct  expense,  as reflected in prior  periods.
    See Note 9. During the years ended  December 31, 2000 and 2001,  the company
    recorded  approximately  $255,000  and the $5.1  million in non-cash  direct
    expenses, respectively, related to warrants earned through June 30, 2001.

    In the third and fourth  quarters of 2001, the Company also recorded a total
    of  approximately  $1.0  million in an  estimated  non-cash  direct  expense
    related to common stock  warrants  expected to be issued to through June 30,
    2002 contingent on a distributor  exceeding a specific annualized threshold.
    Due to the lower fair value of the  warrants  in the first  quarter of 2002,
    the Company  recognized a non-cash  credit of $477,000 in the first quarter.
    In the second quarter of 2002, it was determined  that the  distributor  did
    not exceed the specific  annualized  revenue  thresholds;  thus, the Company
    reversed  the  remaining  charge of $531,000 for the warrant  agreement.  To
    comply  with EITF 01-9,  the $1.0  million  of total  non-cash  credits  was
    recorded as revenue in the year ended December 31, 2002. See Note 9.

    Recent accounting pronouncements
    --------------------------------

    In  October  2001,  the  FASB  issued  SFAS  No.  144,  "Accounting  for the
    Impairment  or Disposal of Long-Lived  Assets",  which  addresses  financial
    accounting  and  reporting  for the  impairment  or disposal  of  long-lived
    assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment
    of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of"; however,
    it retains many of the fundamental  provisions of that  Statement.  SFAS No.
    144 also  supersedes the accounting and reporting  provisions of APB Opinion
    No. 30,  "Reporting  the  Results of  Operations--Reporting  the  Effects of
    Disposal  of a  Segment  of  a  Business,  and  Extraordinary,  Unusual  and
    Infrequently  Occurring  Events and  Transactions",  for the  disposal  of a
    segment of a business.  However, it retains the requirement in APB No. 30 to
    report  separately  discontinued  operations and extends that reporting to a
    component  of  an  entity  that  either  has  been  disposed  of  (by  sale,
    abandonment,  or in a  distribution  to owners) or is classified as held for
    sale. By broadening the  presentation of discontinued  operations to include
    more disposal  transactions,  the FASB has enhanced  management's ability to
    provide  information  that  helps  financial  statement  users to assess the
    effects of a disposal  transaction  on the ongoing  operations of an entity.
    SFAS No. 144 is effective for fiscal years beginning after December 15, 2001
    and  interim  periods  within  those  fiscal  years.  Early  application  is
    encouraged.  The  provisions  of SFAS No.  144  generally  are to be applied
    prospectively.  As discussed in Note 6, the Company recognized an impairment
    loss on fixed assets of $2.6 million for the year ended December 31, 2002.

                                      F-12
<PAGE>


                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    In December 2002, the FASB issued SFAS No. 148,  "Accounting for Stock-Based
    Compensation - Transition and Disclosure, an amendment of FASB Statement No.
    123", to provide alternative methods of transition for a voluntary change to
    the  fair  value  based  method  of  accounting  for  stock-based   employee
    compensation.  In addition,  SFAS No. 148 amends the disclosure requirements
    of SFAS No. 123 to require prominent  disclosures in both annual and interim
    financial statements about the method of accounting for stock-based employee
    compensation  and the effect of the method  used on  reported  results.  The
    application  of the  transition  provisions of SFAS No. 148 is effective for
    fiscal  years  ending  after  December  15,  2002.  The  application  of the
    disclosure  requirements  is  effective  for the Company as of December  31,
    2002.  We are  currently  evaluating  the  impact  of  SFAS  No.  148 on our
    financial position, results of operations and liquidity.

    In  November  2002,  the FASB  issued  FASB  Interpretation  (FIN)  No.  45,
    "Guarantor's Accounting and Disclosure Requirements for Guarantees Including
    Indirect  Guarantees of  Indebtedness  of Others",  which  elaborates on the
    disclosures  to be made by a guarantor  in its interim and annual  financial
    statements  about  its  obligations  under  certain  guarantees  that it has
    issued. It also clarifies that a guarantor is required to recognize,  at the
    inception of a guarantee,  a liability for the fair value of the  obligation
    undertaken in issuing the  guarantee.  The initial  recognition  and initial
    measurement  provisions of FIN No. 45 are applicable on a prospective  basis
    to guarantees  issued or modified after December 31, 2002,  irrespective  of
    the guarantor's  fiscal year end. The disclosure  requirements are effective
    for financial  statements of interim or annual periods ending after December
    15,  2002.  As of December  31,  2002,  there is no impact on the  Company's
    financial statements as a result of the issuance of FIN No. 45.


3.  BUSINESS COMBINATIONS

    Acquisition of Catalyst
    -----------------------

    On November 14, 2001, the Company executed  securities  purchase  agreements
    ("the Agreements") to purchase 80% of the outstanding  ownership of Catalyst
    Rx  and  Catalyst  Consultants  ("Catalyst").   The  results  of  Catalyst's
    operations have been included in the consolidated  financial statements from
    such date.  Catalyst  provides PBM services to  managed-care  organizations,
    self-insured  employers  and  third-party  administrators.  Catalyst  serves
    members through a national network of approximately 50,000 pharmacies.

    Total consideration for the Catalyst stock was $14,343,358,  consisting of a
    $8,883,069  promissory note payable,  $1,500,000 in cash,  366,730 shares of
    the  Company's  common  stock  valued  at  $2,310,400,   and  $1,649,889  in
    liabilities  assumed on behalf of Catalyst's  owner. The value of the shares
    was based on the Company's  closing price on November 14, 2001.  Transaction
    costs of  $550,000  were  capitalized  to make the  total  acquisition  cost
    $14,893,358.  The Company  issued the 366,730 common shares to the seller on
    December 31, 2001. The note payable was settled in cash in January 2002.

                                      F-13
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    The  following  table  summarizes  the  estimated  fair values of the assets
    acquired and liabilities assumed at the date of acquisition. The acquisition
    was accounted for as a purchase.

<TABLE>
<CAPTION>


                                                                       At
                                                                   November 14,
                                                                       2001
                                                               -----------------

         <S>                                                    <C>
         Current assets, including cash of  $4,192,474          $     20,438,962
         Fixed assets                                                    146,063
         Intangible assets                                             4,000,000
         Goodwill                                                      9,061,601
                                                                ----------------
         Total assets acquired                                        33,646,626
         Current liabilities assumed                                 (18,305,110)
         Minority interest at acquisition date                          (448,158)
                                                               -----------------
         Net assets acquired                                    $     14,893,358
                                                               =================
</TABLE>

    During the first quarter of 2002, the Company  purchased the outstanding 20%
    minority  interest in Catalyst  for 319,033  shares of the  Company's  stock
    valued at $1.1  million  and notes  payable of $4.2  million.  The stock was
    transferred to the seller on April 1, 2002, and the $3.1 million in cash was
    paid in 2002,  with the final  installment  of $1.1 million paid on March 1,
    2003.

    During the second quarter of 2002,  the Company  finalized its allocation of
    the purchase  price  (including the  acquisition  of the remaining  minority
    interest) of the Catalyst acquisition resulting in an increase in intangible
    assets and a decrease in goodwill of $700,000.

    The  acquisition of Catalyst  provided  growth in the Company's PBM business
    and additional  diversification of the Company's customer base. The purchase
    price  was  determined  based  on the  Company's  assessment  of  Catalyst's
    potential to generate future cash flows from its existing customer contracts
    and through acquisition of new customers.

    Acquisition of PNNC
    -------------------

    On  December  1, 2002,  the  Company  acquired  100% of the common  stock of
    Pharmacy Network National Corporation ("PNNC"). Total consideration for PNNC
    stock was $20.2 million.  Total acquisition cost included  transaction costs
    of  approximately   $1.4  million.   Funding  for  the  $21.6  million  cash
    transaction  was  derived  from the  Company's  working  capital.  PNNC is a
    provider of pharmacy  benefit  management  services to a diverse client base

                                      F-14
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    with  significant  geographic  concentration in the Carolinas and Tennessee.
    The  acquisition  of PNNC provides  growth in the Company's PBM business and
    additional  diversification  of the Company's  customer  base.  The purchase
    price was determined  based on the Company's  assessment of PNNC's potential
    to  generate  future cash flows from its  existing  customer  contracts  and
    through acquisition of new customers.

    The acquisition  resulted in goodwill of  approximately  $10.6 million.  The
    following  table  summarizes the estimated fair value of the assets acquired
    and liabilities  assumed at the date of  acquisition.  The Company is in the
    process of finalizing third-party valuations of certain  intangible  assets;
    thus, the allocation of the purchase price is subject to refinement.

<TABLE>
<CAPTION>

                                                                   At
                                                               December 1,
                                                                   2002
                                                           -----------------

    <S>                                                    <C>
    Current assets, including cash of  $6,246,049          $      24,037,736
    Fixed assets                                                      46,428
    Intangible assets                                              8,000,000
    Goodwill                                                      10,578,728

    Deferred income taxes                                            286,329
                                                           -----------------

    Total assets acquired                                         42,949,221
    Current liabilities assumed                                 (18,294,316)
    Deferred income tax liability                                (3,089,600)
                                                           ----------------

    Net assets acquired                                    $      21,565,305
                                                           =================
</TABLE>



    The following unaudited pro forma consolidated results of operations for the
    years ended December 31, 2002 and 2001 are presented as though  Catalyst and
    PNNC had been  acquired at the  beginning of 2001,  after  giving  effect to
    purchase accounting  adjustments  relating to the amortization of intangible
    assets. Results are in thousands, except for per share data.

<TABLE>
<CAPTION>

                                              2001          2002
                                            ---------    ---------

<S>                                         <C>          <C>
    Revenue .............................   $ 280,193    $ 355,830
    Net income (loss) ...................   $  (1,860)   $  15,212

    Net income (loss) per share - basic .   $   (0.06)   $    0.47

    Net income (loss) per share - diluted   $   (0.06)   $    0.47
    Weighted average shares - basic .....      30,369       32,286
    Weighted average shares - diluted ...      30,369       32,472
</TABLE>

                                      F-15


<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    The pro forma results of operations  are not  necessarily  indicative of the
    results that would have  occurred had the Company owned 100% of Catalyst and
    PNNC at  January  1,  2001,  nor are  these  results  indicative  of  future
    operating results.


4.  GOODWILL

    The  changes in the  goodwill  for the year ended  December  31, 2002 are as
    follows:

<TABLE>


<S>                                                            <C>
    Balance as of January 1, 2002 ........................     $17,566,866
    Goodwill acquired in 20% minority interest acquisition
      of  Catalyst .........................................     3,891,208

    Adjustment to preliminary allocation of Catalyst
      purchase price .......................................     1,501,340

    Goodwill acquired in acquisition of PNNC ............       10,578,728
                                                               -----------
            Balance as of December 31, 2002                     33,538,142
                                                               ===========
</TABLE>


    The Company  adopted  SFAS No. 142, and  discontinued  the  amortization  of
    goodwill and  indefinite-lived  intangible assets effective January 1, 2002.
    The Company  completed its initial adoption  impairment  testing of goodwill
    and concluded that no impairment of goodwill exists. The Company performed a
    similar test as of December 31, 2002,  and  concluded  that no impairment of
    goodwill exists. The following table reflects  consolidated results adjusted
    as though the adoption of SFAS No. 142 occurred as of January 1, 2000:

                                      F-16

<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


<TABLE>
<CAPTION>

                                             ----------------------------------
                                                  2000                  2001

<S>                                          <C>                  <C>
Net loss, as reported ....................   $   (17,226,216)     $  (6,774,649)
Goodwill amortization ....................           102,473            614,839
                                             ---------------      -------------
Net loss as adjusted .....................   $   (17,123,743)        (6,159,810)
                                             ===============      =============

Net loss per share, basic, as reported ...   $         (0.62)     $       (0.23)
Goodwill amortization ....................              0.01               0.02
                                             ---------------      -------------

Net loss per share, basic, as adjusted ...   $         (0.61)             (0.21)
                                             ===============     ==============

Net loss per share, diluted, as reported .   $         (0.62)     $       (0.23)
                                             ===============     ==============

Goodwill amortization ....................              0.01               0.02
                                             ---------------      -------------

Net loss per share, basic, as adjusted ...   $         (0.61)             (0.21)
                                             ===============      =============

</TABLE>


5.  INTANGIBLE ASSETS


    As of December 31, 2002, intangible assets consisted of the following:

<TABLE>
<CAPTION>

                                                      Amortization
                                                         Period
                                                      ------------

<S>                                       <C>                <C>
     Catalyst customer contracts          $   5,700,000      20 years
     PNNC customer contracts                  8,000,000      20 years
     Other PBM contracts                        945,200    5 - 10 years
                                          -------------
     Total  intangible assets                14,645,200
     Accumulated amortization                  (459,449)
                                          -------------
                                          $  14,185,751
                                          =============
</TABLE>


    Catalyst and PNNC customer  contracts  represent the estimated fair value of
    customer  contracts  held by Catalyst and PNNC at the dates of  acquisition.
    This estimated fair value and the weighted average useful-lives are based on
    income-method valuation calculations, performed by an independent consulting
    firm.

                                      F-17
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


    Other PBM contracts  represent  the cost of PBM  contracts  purchased by the
    Company  from a third  party  administrator,  which  allow it to provide PBM
    services to the administrator and its customers.  Consideration paid in 2001
    for the  contracts  of  $495,200  consisted  of  $300,000 in cash and 40,000
    shares of the Company's  common stock valued at $195,200.  The  amortization
    period of 10 years is based on management's estimate of the period of future
    cash flows from the contracts purchased. The remaining $450,000 of other PBM
    contracts  represents initial costs of two contracts and are being amortized
    over the lives of the contracts.

    The estimated  aggregate  amortization  expense of intangible assets through
    2007 is as follows:

     <TABLE>

     <S>            <C>
     2003           $  815,949
     2004              815,949
     2005              815,949
     2006              815,949
     2007              775,949
                    ----------
       Total        $4,039,745
                    ==========
</TABLE>


6.  FIXED ASSETS

    Fixed assets consist of the following:

<TABLE>
<CAPTION>

                                             2001           2002
                                         -----------    -----------
<S>                                      <C>            <C>
    Computer equipment ...........       $ 1,933,511    $ 2,256,915

    Software development costs ...         1,901,747             --

    Furniture, fixtures and office
       equipment ....................      1,438,658      1,232,402

    Medical equipment ............           103,198             --

    Leasehold improvements .......         1,851,537       1,901,130

    Transportation equipment .....                --       1,666,413
                                         -----------    -----------

    Total fixed assets ........            7,228,651      7,056,860

    Accumulated depreciation and
       amortization ................      (2,172,416)    (3,000,730)
                                         -----------    -----------
    Fixed assets, net ...........        $ 5,056,235    $ 4,056,130
                                         ===========    ===========
</TABLE>


    Depreciation  expense for the years ended  December 31, 2000,  2001 and 2002
    was approximately $599,000, $1.1 million, and $1.3 million, respectively.

                                      F-18

<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    In the first quarter of 2002, the Birmingham,  Alabama office was closed and
    its operations were consolidated within the Company's  Rockville,  Maryland
    and Las Vegas, Nevada offices. At that time, the Company disposed of company
    assets with a net book value of approximately $116,000.

    In the  fourth  quarter  of 2002,  the  Company  recognized  a $2.6  million
    impairment  charge  related to a software and hardware  system that had been
    under  development.  In November 2002, the Company undertook a review of the
    costs to fully  implement and maintain the system.  Management then made the
    business  decision  to  discontinue  development  of the system  because the
    operating  efficiencies  gained  at  implementation  would not  justify  the
    further  investment  required to complete the project.  As the Company would
    not be  implementing  this  system  into its  primary  segment,  the Company
    recognized a $2.6 million impairment charge related to the system.

7.   INCOME TAXES

    The $10.2  million  deferred tax benefit  recorded in 2002  consists of $9.0
    million in  federal  and $1.2  million in state  deferred  tax  benefits.

    A summary of the  components  of deferred  income taxes at December 31, 2001
    and 2002 computed at an effective tax rate of 38.6% is as follows:

<TABLE>
<CAPTION>

                                              2001            2002
                                          -----------    -----------
     <S>                                  <C>            <C>
     Deferred tax assets (liabilities):
     Fixed assets .....................   $   (24,542)   $  (126,328)
     Accrued expenses .................         6,840         78,580
     Rebates payable ..................            --         95,758
     Allowance for doubtful accounts ..       176,644        159,779
     Deferred charges .................      (465,188)      (536,073)
     Deferred revenue .................     1,741,397      1,858,995
     Customer-based intangibles .......    (1,544,800)    (5,135,237)
     Rebates receivable ...............            --       (239,390)
     Non-compete agreements ...........            --        211,230
     Net operating loss carryforwards .     9,996,554      8,530,189
     Other ............................        38,620        147,962
                                          -----------    -----------
                                            9,925,525      5,045,465
     Valuation allowance ..............    (9,925,525)            --
                                          -----------    -----------
         Net deferred tax asset .......   $        --    $ 5,045,465
                                          ===========    ===========
</TABLE>


    The Company has net operating  loss  carryforwards  of  approximately  $22.0
    million at December 31, 2002,  available for carryforward to future periods.
    The carryforwards expire at various times beginning in 2010 through 2021.

                                      F-19
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


    The  effective  tax rate varies  from the U.S.  Federal  Statutory  tax rate
    principally due to the following:

<TABLE>
<CAPTION>

                                              2000     2001        2002

<S>                                          <C>      <C>          <C>
     U. S. Federal Statutory tax rate...     (34.0%)  (34.0%)      34.0%

     State tax, net of federal benefit..      (4.6)    (4.2)        4.6

     Non-deductible expenses ...........       1.5      3.3        (0.5)

     Valuation allowance (release) .....      37.0     34.9      (345.7)

     Other .............................       0.1       --          --
                                             ------   ------     -------

     Effective tax rate ................        --%      --%     (307.6)%
                                             ======   ======     =======
</TABLE>



    Although no estimated tax payments  were made for 2002,  the Company did pay
    approximately  $126,000  in cash  for  income  taxes in  2002,  relating  to
    Catalyst for the short-year  ended October 31, 2001.  These were liabilities
    that existed prior to the ownership of Catalyst.

8.  NOTES PAYABLE

    On January 22, 2002,  the Company  arranged a line of credit of $5.0 million
    to support the working  capital  required for the Company's  acquisition  of
    Catalyst.  The line of credit was collateralized by a certificate of deposit
    with an  approximate  balance of $5.6 million held by the lending  financial
    institution. Under the terms of the agreement, all outstanding principal and
    accrued  interest were to be paid on or before July 22, 2002.  The note bore
    interest at a rate of 4.59% per annum,  which was paid monthly.  The Company
    repaid the outstanding principal of $4.5 million in April 2002.

    In March  2002,  the  Company  arranged  an $8.0  million  revolving  credit
    facility.   Borrowings  on  the  credit  facility  were   collateralized  by
    substantially  all of the Company's trade  receivables.  The credit facility
    contains affirmative and negative covenants related to indebtedness, capital
    expenditures,  and  consolidated  net worth.  The facility  bore interest at
    LIBOR plus 2.25%.  Interest  payable was payable in arrears on the fifth day
    of each month.  The Company  repaid the  outstanding  principal  in December
    2002.

    In December 2002,  the Company  arranged an $18.0 million  revolving  credit
    facility.   Borrowings  on  the  credit  facility  are   collateralized   by
    substantially  all of the Company's trade  receivables.  The credit facility
    contains  affirmative and negative covenants related to indebtedness,  other
    liabilities,  and  consolidated  net worth.  The facility  bears interest at
    LIBOR  plus  2.75%.  The  effective  rate at  December  31,  2002 was 4.17%.
    Interest  is  payable  in  arrears  on the  fifth  day of  each  month.  The

                                      F-20
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


    outstanding  balance on the credit  facility at December  31, 2002 was $18.0
    million.  All principal  and accrued  interest is due to the bank on May 31,
    2004.  Interest expense related to notes payable for the year ended December
    31, 2002 was approximately $319,000.

9.  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  share 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 these  interests of $467,573  ($1.13 per common
    share) as stockholders'  equity and deferred  compensation  expense.  During
    2000, 2001, and 2002, amortization of deferred compensation expense amounted
    to $116,894,  $73,136 and  $92,284,  respectively.  During 2001,  two of the
    employees  left  the  Company  and  one  of  the  employees  restructured  a
    compensation package,  forfeiting the interest in the unvested stock grants.
    The value of interests forfeited of $72,537 was deducted from the additional
    paid-in capital and deferred compensation in 2001.

    Stock option plans
    ------------------

    In 2000, the Company adopted the  HealthExtras,  Inc. 2000 Stock Option Plan
    ("2000  SOP")  and the  HealthExtras,  Inc.  Directors'  Stock  Option  Plan
    (Directors' SOP). The maximum number of the Company's common shares reserved
    for  issuance  pursuant  to the grant of options  under the 2000 SOP and the
    Directors'  SOP are 1,000,000 and 200,000  shares,  respectively.  Under the
    2000 SOP,  options granted vest ratably over a period of four years from the
    date of grant.  The  Directors'  SOP  provides  for  options  granted  to be
    exercisable  on the  first  anniversary  date  of  the  grant.  The  maximum
    contractual  life of all stock  options  granted  under the 2000 SOP and the
    Directors' SOP is ten years.

    During 1999,  the Company  established  the  HealthExtras,  Inc.  1999 Stock
    Option Plan ("1999  SOP").  The  maximum  number of shares of the  Company's
    common stock  reserved for issuance  pursuant to the grant of options  under
    the 1999 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 1999 SOP.  Stock
    options  granted under the 1999 SOP vest ratably over a period of four years
    and the contractual life of all of the stock options is ten years.


                                      F-21
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    In 2001, the Board of Directors approved a voluntary plan by which qualified
    individuals were offered an opportunity to surrender their 1999 stock option
    awards,  and receive,  at a future grant date, six months and one day beyond
    the surrender  date, up to two-thirds of the number of options  surrendered;
    2.8 million  options were  surrendered in 2001 and 1.6 million  options were
    granted in 2002 under the plan.

    The following table summarized stock option activity under all plans for the
    four years ended December 31, 2002:

<TABLE>
<CAPTION>

                                                   Number                          Weighted -
                                                 Of Shares          Price           Average
                                                 Of Common           Per            Exercise
                                                   Stock            Share            Price
                                                -------------   ---------------   -------------
<S>                                             <C>             <C>               <C>
 Initial grant of stock options, and
 Balance at December 31, 1999                      2,956,000   $         13.20   $       13.20
     Granted                                       1,463,000         4.06-5.63            4.58
     Forfeited                                     (163,500)             13.20           13.20
                                                -------------   ---------------   -------------
 Balance, December 31, 2000                        4,255,500      4.06 - 13.20           10.31

    Granted                                          996,900       3.50 - 9.65            5.44
    Exercised                                        (30,000)             4.06            4.06
    Forfeited                                       (190,850)      3.56 - 4.62            3.90
    Canceled                                      (2,792,500)            13.20           13.20
                                                -------------------------------   -------------
Balance, December 31, 2001                         2,239,050       3.50 - 9.65            5.02
                                                -------------  ----------------  --------------

    Granted                                        2,957,000       2.42 - 6.62            5.23
    Exercised                                         (9,375)             3.57            3.57
    Forfeited                                       (319,550)      3.31 - 7.15            4.51
                                                -------------------------------  --------------
 Balance, December 31, 2002                        4,867,125   $   2.42 - 9.65   $        5.16
                                                =============  ================  =============

 Exercisable, December 31, 1999                           --   $            --   $          --
 Exercisable, December 31, 2000                      698,125   $         13.20   $       13.20
 Exercisable, December 31, 2001                      353,750   $   4.06 - 5.63   $        4.62
 Exercisable, December 31, 2002                      827,156   $   3.25 - 9.65   $        5.40
</TABLE>

                                      F-22



<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


    The following table summarizes  information about the outstanding options at
    December 31, 2002:

<TABLE>
<CAPTION>

                                              Options Outstanding
                                  --------------------------------------------
                                                    Weighted-
                                                     Average        Weighted-
                                                    Remaining        Average
     Range of Exercise                             Contractual      Exercise
     Prices                           Number       Life (years)       Price
     ---------------------------- --------------  -------------   --------------

    <S>                               <C>          <C>             <C>
     Stock options:
     $2.42-5.63                       2,843,625         8.4            $4.12
     $6.55-9.65                       2,023,500         9.3            $6.62
     ---------------------------- -------------    ------------   --------------
     $2.42-9.65                       4,867,125         8.9            $5.16
                                      =========    ============   ==============
</TABLE>


    Common Stock Warrants
    ---------------------

    During  2000,  the Company  entered into an  agreement  whereby  warrants to
    acquire  up to 4.2  million  shares of  common  stock may be issued in three
    tranches to a distributor  at exercise  prices  ranging from $5.21 to $15.63
    per share.  The issuance of 3.4 million of these  warrants is  contingent on
    the  distributor  exceeding  specific  annualized  revenue  thresholds to be
    measured for the twelve-month  periods ending June 30, 2001, 2002, and 2003.
    The issuance of 800,000 of these warrants is contingent on the distributor's
    revenue  contributions  relative to other Company revenues as defined in the
    agreement  for the years  ending  December  31,  2001 and 2002.  The maximum
    contractual life of the warrants from the date of grant is five years.

    During 2001, warrants for 750,000 shares were issued with the exercise price
    at $5.21 with an expiration  date of July 22, 2006. In accordance  with EITF
    01-9,  the  Company  recorded  the $5.1  million  expense  related  to these
    warrants as a reduction of revenue from the distributor rather than as
    a charge to direct expense.

    Also in 2001, in accordance with EITF 01-9, the Company recorded a reduction
    of revenue of $1.0 million  related to common stock warrants  expected to be
    issued with respect to the annualized  revenue threshold for the year ending
    June 30, 2002.  Annualized  revenues  under the contract for the year ending
    June 30, 2002 were estimated  based on the  performance  of the  distributor
    through  December 31,  2001.  Due to the lower fair value of the warrants in
    the first  quarter of 2002,  the  Company  recognized  a non-cash  credit of
    $477,000 in the first quarter of 2002. In the second quarter of 2002, it was
    determined  that the  distributor  had not exceeded the specific  annualized
    revenue  thresholds;  thus,  the Company  reversed the  remaining  charge of
    $531,000  for the  warrant  agreement.  To comply  with EITF 01-9,  the $1.0
    million of total non-cash credits was recorded as revenue during 2002.

                                      F-23
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    During  2002,  the  Company  issued  common  stock  warrants  to Health Care
    Horizon's Inc., d/b/a Cimarron Health Plan  ("Cimarron")  that give Cimarron
    the right to purchase 250,000 shares of the Company's common stock for $5.22
    per share.  The warrants are  exercisable  at any time after the grant date,
    with a condition  that the  Company  must be the  exclusive  provider of PBM
    services  to  Cimarron  on the  date of the  exercise.  The  term of the PBM
    contract is from July 1, 2002, to September  30, 2009.  In  accordance  with
    EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
    Employees for Acquiring or in  Conjunction  With Selling Goods or Services,"
    the  measurement  date was determined to be the grant date of April 1, 2002.
    Using an  equity-pricing  model,  the  value  of the  250,000  warrants  was
    estimated to be $400,000  and was recorded as a deferred  charge at April 1,
    2002.  This  deferred  charge  is  being  recognized  over  the  life of the
    seven-year  contract  beginning  July 2002, on a  straight-line  basis.  The
    Company  recorded $28,572 of  contra-revenue  related to amortization of the
    cost of the warrants in 2002.

    Private Placement
    -----------------

    In September of 2001, the Company issued  3,020,782  shares of the Company's
    common stock to third  parties in exchange for net proceeds of  $10,893,000.
    The  purchase  price  was  based  on the  price  of the  Company's  stock at
    September 26, 2001.  Warrants to acquire 845,816 shares of common stock were
    also  granted in the private  placement  with the  exercise  price at $5.37,
    which were vested immediately and expire on September 26, 2005.


10. LEASE COMMITMENTS

    The Company  maintains  non-cancelable  lease agreements for office space in
    its three main  operating  locations.  These  agreements  provide for annual
    escalations  and  payment by the Company of its  proportionate  share of the
    increase in the costs of operating  the  buildings.  The Company also leases
    certain  office  equipment.   The  Company  recognizes  rent  expense  on  a
    straight-line  basis  over  the  terms of the  leases.  The  future  minimum
    payments due under non-cancelable leases are as follows:

<TABLE>

              <S>       <C>
              2003      $   1,208,945
              2004            802,971
              2005            481,057
              2006            372,220
              2007            327,739
              Thereafter    1,216,562
                         ------------
                Total    $  4,409,494
                         ============
</TABLE>


    Rent  expense for the years ended  December  31,  2000,  2001 and 2002,  was
    $364,000, $753,000, and $797,000 respectively.

                                      F-24
<PAGE>



11.      COMMITMENTS AND CONTINGENCIES

    In 2000, the Company  extended a marketing  agreement for a five-year  term,
    whereby  the  Company  committed  to total  non-refundable  payments of $5.0
    million due in equal annual  installments for an individual's  participation
    in various  marketing  campaigns.  As of  December  31,  2002,  installments
    totaling $2.0 million remained  committed under this agreement.  The Company
    has the option to extend this agreement for another five-year period,  which
    would result in an additional  commitment of $7.7 million.  The Company must
    also pay annual fees of $1.00 per  supplemental  benefits  program member in
    excess of one million members, in addition to the base payment of $1 million
    per year.

    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  adverse
    effect on the financial condition or results of operations of the Company.


                                      F-25
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


12. SEGMENT REPORTING

    The  Company  operates  in  two  business  segments,  PBM  and  supplemental
    benefits.  The following  table  presents  financial data by segment for the
    years ended  December  31, 2001 and 2002.  PBM  services  operating  results
    include the results for  Catalyst  and PNNC from their  respective  dates of
    acquisition.  In 2002 the Company  revised its  methodology  for  evaluating
    segment  performance  to exclude  certain  corporate  overhead  from segment
    operating expenses. Segment reporting disclosure for the year ended December
    31, 2001 has been modified to confirm to this new methodology.

<TABLE>
<CAPTION>

         December 31, 2002
                                                       Supplemental
                                        PBM              Benefits            Total
                                    -------------     -------------   ---------------
<S>                                 <C>               <C>             <C>
         Revenue .............      $ 182,275,943     $  66,131,523   $   248,407,466
         Operating expenses...        174,993,333        58,162,480       233,155,813
         Operating income ....          7,282,610         7,969,043        15,251,653
         Total assets .........       103,174,621        16,827,515       120,002,136
         Accounts receivable...        37,527,001           272,777        37,799,778
         Accounts payable .....        33,863,566           588,223        34,451,789
</TABLE>

<TABLE>
<CAPTION>

         December 31, 2001

                                                       Supplemental
                                         PBM              Benefits            Total
                                     -------------     -------------   ---------------
<S>                                 <C>               <C>             <C>
         Revenue ...............    $  46,893,749     $  71,332,170   $  118,225,919
         Operating expenses ....       46,233,164        77,326,609      123,559,773
         Operating income (loss)          660,585        (5,994,439)      (5,333,854)
         Total assets ..........       67,526,792        20,626,543       88,153,335
         Accounts receivable ...       19,652,601         2,758,367       22,410,968
         Accounts payable ......       22,580,269         2,014,000       24,594,269
</TABLE>


    Operating expenses of the segments exclude $11.9 million and $2.4 million in
    corporate overhead that was not allocated by management in assessing segment
    performance for the years ended December 31, 2002 and 2001, respectively.


                                      F-26
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


13. 401(K) SAVINGS PLAN

    In April  2000,  the Company  authorized  the  establishment  of an employee
    401(k) Savings Plan (the  "401(k)").  The 401(k) benefit is available to all
    of the Company  employees,  including those of its subsidiaries,  subject to
    certain service requirements. For 2002, the Company matched the first $1,000
    of the  employee's  contribution  and 50%  thereafter  subject to  statutory
    limits.  The  Company's  contribution  vests  ratably  over 5 years for each
    employee.  For the years ended December 31, 2000, 2001 and 2002, the Company
    expensed  approximately $86,000,  $105,000 and $165,000 respectively,  under
    this plan.

14. RELATED PARTY TRANSACTIONS

    The Company  previously  held available for sale securities in a corporation
    for which the  Chairman of the Board of the Company was the  Chairman of the
    Board and Co-Chief Executive  Officer.  Investments held were $664,984 as of
    December  31,  1999.  All of these  securities  were sold in March  2000 for
    aggregate proceeds of $1,084,050, resulting in a gain of $551,735.

    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  was the  Chairman  of the Board and
    Co-Chief Executive Officer,  whereby UP&UP provided  administrative services
    for the  Company  and was  reimbursed  for the costs  incurred.  The  amount
    expensed for these services was $208,000  prior to the  acquisition of UP&UP
    by an unrelated third party in March 2000.

    During 2000, the Company entered into a joint venture with Southern Aircraft
    Leasing  Corporation,  owned by the  Chairman  of the Board of the  Company,
    whereby  the  Company  invested  $988,500  for  a  fractional   interest  of
    approximately 45% in two aircraft used for corporate business purposes.  The
    carrying value of this investment was approximately $927,000 at December 31,
    2001.  This amount was  included in other  assets.  In  December  2002,  the
    Company dissolved the joint venture by acquiring the fractional ownership in
    its  entirety  for  approximately   $725,000.  The  carrying  value  of  the
    investment of  approximately  $881,000 at the date of  dissolution  together
    with  the  $725,000  payment  to  acquire  the  fractional  interest  in its
    entirety, are recorded in fixed assets at December 31, 2002.

    For corporate business  purposes,  the Company also utilizes the services of
    an aircraft owned by Southern  Aircraft Leasing  Corporation.  For the years
    ended December 31, 2001 and 2002, the Company paid approximately  $4,600 and
    $49,000  respectively,  for utilizing the services of such  aircraft.  As of
    December  31, 2001, a deposit of $600,000  related to this  arrangement  was
    held by Southern  Aircraft Leasing  Corporation.  Southern  Aircraft Leasing
    Corporation  returned  this  deposit to the Company in the first  quarter of
    2002.

                                      F-27
<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

    In August of 2001 in anticipation  of the exercise of certain  warrants held
    by a distributor  (see Note 9), the Company  repurchased and retired 750,000
    shares of Company common stock from the Chairman of Board.  The total amount
    paid to repurchase  the shares was  $4,305,000  based upon a discount to the
    market price of the stock.  The purchase  transaction and the price paid for
    the stock were reviewed and approved by the Board of Directors.

    During 2001, the Company maintained a corporate banking  relationship with a
    financial  institution  controlled  by  the  Chairman  of the  Board.  As of
    December  31,  2001,  the Company had  approximately  $12,911,000  in demand
    deposits and a certificate of deposit for $5,371,000 with such  institution.
    In 2002,  the  Company  withdrew  all funds  and  discontinued  its  banking
    relationship with the financial institution.


15. SUPPLEMENTAL DISCLOSURE OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    Quarterly  results of operations  for the years ended  December 31, 2001 and
    2002 (in thousands, except per share amounts):


<TABLE>
<CAPTION>
                                                      First       Second      Third       Fourth
    2002 Quarterly Operating Results                 Quarter     Quarter     Quarter     Quarter
                                                     -------     -------     -------     -------
    <S>                                             <C>          <C>         <C>        <C>
    Revenue .....................................   $ 54,652     $ 55,249    $ 63,907   $ 74,599
    Operating income (loss) .....................        573        1,587       1,540       (300)
    Income (loss) before income taxes and
      minority interest .......................          629        1,527       1,517       (355)
    Net income ..................................        584        1,527       1,517      9,850
    Basic and diluted net income per common share   $   0.02     $   0.05    $   0.05   $   0.30
</TABLE>


<TABLE>
<CAPTION>

                                                      First       Second      Third       Fourth
    2001 Quarterly Operating Results                 Quarter     Quarter     Quarter     Quarter
                                                    --------     --------    -------     --------
<S>                                                 <C>          <C>         <C>        <C>
    Revenue .....................................   $ 21,771     $ 22,056    $ 28,403   $  45,996
    Operating loss ..............................     (3,279)      (4,160)       (225)       (107)
    Income (loss) before income taxes and
      minority interest ........................      (2,892)      (3,824)         35           2
    Net (loss) income ...........................     (2,892)      (3,824)         35         (94)
    Basic and diluted net income per common share   $  (0.10)    $  (0.13)    $    --   $      --
</TABLE>

                                      F-28


<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------

        The $300,000 loss from operations in the 2002 fourth quarter is a direct
    result of the $2.6 million fixed asset impairment explained in Note 6.

16. NON-CASH TRANSACTIONS

    Transactions that effected recognized assets and liabilities during 2001 and
    2002 that did not result in cash receipts or payments are as follows:

<TABLE>
<CAPTION>

    2001
   <S>                                                     <C>
    Goodwill and intangible assets acquired through
       Issuance of notes payable, common stock, and
       assumption of liabilities ..................        $ 8,855,483
    Fixed assets included in accounts payable ......           158,909
    Forfeitures under stock grant plan .............            72,536
    Issuance of common stock to settle purchase
      consideration payable from IPM acquisition ...           347,850
    Common stock issued for purchase of intangible
      assets ......................................            195,200
</TABLE>


<TABLE>
<CAPTION>

    2002
<S>                                                        <C>
    Issuance of common stock warrants to Health Care
      Horizons Inc. ...................................... $   400,000
    Issuance of notes payable and stock for minority
      interest purchase of Catalyst ......................   5,480,000
    Issuance of common stock to settle notes payable
      to Catalyst minority interest holder ...............   1,056,000
    Increase to goodwill for deferred tax liabilities
      related to intangibles at Catalyst and PNNC ........   5,290,940
    Increase to goodwill for accrued acquisition
      transaction costs for PNNC .........................     125,000

</TABLE>

                                      F-29

<PAGE>


                               HEALTHEXTRAS, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                    --------

<TABLE>
<CAPTION>


                                            Balance      Additions       Additions
                                         Beginning of    Charge to       Due to                      Balance End of
                  Description             Period          Expense      Acquisition       Deductions      Period
-------------------------------------   ------------   ------------   ------------   ------------    ------------
<S>                                   <C>             <C>             <C>            <C>             <C>
Deduction from asset account:
    Allowance for doubtful accounts:
      Year ended December 31, 2002 ..   $    457,390   $     90,455   $    145,305   $   (268,610)   $    424,540
      Year ended December 31, 2001 ..        453,954         38,180             --        (34,744)        457,390

      Year ended December 31, 2000...             --             --        453,954             --         453,954

Deduction from asset account:
    Allowance for Deferred Tax Assets
      Year ended December 31, 2002 ..   $  9,925,525   $    279,071   $         --   $(10,204,596)   $         --
      Year ended December 31, 2001 ..      9,215,434        710,091             --             --       9,925,525
      Year ended December 31, 2000 ..      1,563,155      7,652,279             --             --       9,215,434

</TABLE>


    Additions to the valuation  allowance in 2002 represent the net increases in
    the Company's deferred tax asset before the decision was made to release the
    reserve in the fourth quarter of 2002.


                                      F-30