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

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2001
                                       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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          Delaware                                     52-2181356
-------------------------------        --------------------------------------
(State or other jurisdiction of        (I.R.S. Employer Identification Number)
incorporation or organization)
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          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: ( __ )

The number of shares of Common Stock, par value $.01 per share,  outstanding on
March 26, 2002 was 31,969,087.  As of March 26, 2002, assuming as fair value the
last sale price of 2.80 per share on The Nasdaq National  Market,  the aggregate
fair value of shares held by non-affiliates was approximately $41,562,082.

 Documents incorporated by reference:  ------------------------------------  The
Company's  Proxy  Statement for its annual meeting of stockholders to be held in
June, 2002, a definitive copy of which will be filed within 120 days of December
31, 2001, is incorporated by reference in Part III of this Report on Form 10-K.

<PAGE>


<PAGE>



                                TABLE OF CONTENTS
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                                                                        Page
                                                                        ----
PART I

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     Item 1.  Business....................................................3
     Item 2.  Properties.................................................14
     Item 3.  Legal Proceedings..........................................14
     Item 4.  Submission of Matters for a Vote of Security Holders.......14

PART II

     Item 5.  Market for Registrant's Common Equity and Related
              Stockholder Matters........................................15
     Item 6.  Selected Financial Data....................................16
     Item 7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations........................17
     Item 7A  Quantitative and Qualitative Disclosures About Market
              Risk.......................................................29
     Item 8.  Financial Statements and Supplementary Data................29
     Item 9.  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure........................29

PART III

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

PART IV

     Item 14. Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K................................................31
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SIGNATURES

    This Form 10-K, including the documents incorporated by reference,  contains
certain  forward-looking  statements,  including without limitation,  statements
concerning  the  Company's   operations,   economic  performance  and  financial
condition. These forward-looking statements are made pursuant to the safe harbor
provisions of the Private  Securities  Litigation  Reform Act of 1995. The words
"believe,"  "expect,"  "anticipate"  and  other  similar  expressions  generally
identify  forward-looking  statements.  Readers are cautioned not to place undue
reliance  on these  forward-looking  statements,  which  speak  only as of their
dates.  These  forward-looking  statements  are based  largely on the  Company's
current  expectations  and are  subject to a number of risks and  uncertainties,
including,  without limitation,  those identified under "Management's Discussion
and Analysis of Financial  Condition and Results of Operations" and elsewhere in
this Form 10-K,  including  the  documents  incorporated  by  reference.  Actual
results could differ materially from results referred to in the  forward-looking
statements.  In  addition,  important  factors to  consider in  evaluating  such
forward-looking  statements include changes in external market factors,  changes
in the  Company's  business or growth  strategy or an  inability  to execute its
strategy  due to changes in its industry or the economy  generally.  In light of
these  risks and  uncertainties,  there can be no  assurances  that the  results
referred to in the forward-looking  statements  contained in this Form 10-K will
in fact occur.  The Company  undertakes no  obligation to publicly  revise these
forward-looking statements to reflect any future events or circumstances.

                                       2
<PAGE>


                                     PART 1

ITEM 1.  BUSINESS
-------  --------

     OVERVIEW

         HealthExtras,  Inc. (the "Company" or  "HealthExtras") is a diversified
provider of pharmacy,  health and  disability  benefits.  The Company  currently
provides  benefits to over 1.2 million members and the Company's clients include
managed care organizations,  large employer groups, unions, government agencies,
small  businesses,  as well  as  individual   consumers.   Since  its  inception
HealthExtras  has  focused  on the  sale  of  supplemental  health  programs  to
individual  consumers and small  businesses.  While the Company will continue to
benefit from its  supplemental  health  membership  base, the Company's  primary
strategic  focus is expanding its pharmacy  benefit  management  (PBM)  business
through sales to self-insured  employer  groups and managed care  organizations.
The Company operates and reports in two segments: pharmacy benefit management
and supplemental health.  Financial information about each segment is presented
in the footnotes to the financial statements filed with this Form 10-K.

         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.

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

         The Company's  integrated pharmacy benefit management services include:
network  pharmacy  claims  processing,   mail  order  services,  benefit  design
consultation,  drug  utilization  review,  formulary  management  and drug  data
analysis services. Additionally, the Company operates a national retail pharmacy
network with over 50,000 participating  pharmacies.  The significant majority of
the Company's  pharmacy  benefit  management  revenues are derived from pharmacy
benefit  management  services  provided  to  health  plan  sponsors,   including
self-insured  employers.  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 active client specific program management.

     INDUSTRY OVERVIEW

         Prescription  drug spending is the fastest growing  component of health
care costs in the United  States.  The Centers for Medicare  and Medicaid  (CMS)
estimate  that 2000 U.S.  prescription  drug spending  ($116.9  billion) made up
almost 9% of total U.S. health care  expenditures  ($1.3 trillion) for the year.
CMS projects  that by 2010,  prescription  drug  spending  will be $366 billion,
making up almost 14% of total U.S. health care  expenditures.  CMS is projecting
average annual increases in prescription drug spending of over 12% through 2010,
compared to  approximately  7% per year  increases for total health costs during
this period.

         Some of the primary factors influencing these trends include:

         *   Higher drug utilization as pharmaceuticals  increasingly become the
             first approach in disease  treatment
         *   Increasing  availability  of  prescription  benefits to health plan
             members, individuals, and retirees
         *   An anticipated  increase in new drugs  available in the marketplace
             due  to  ongoing   research   and   development   on  the  part  of
             pharmaceutical  companies
         *   Higher  costs  for  newly-developed   drug  therapies
         *   An aging population
         *   Growing   demand   for   prescription   drugs   due  to   effective
             direct-to-consumer advertising by drug manufacturers

         These  trends  create  significant   challenges  for  health  insurers,
employers,  government entities, and other payors that provide a drug benefit as
part  of  the  health   plans   they  offer  to  members  of  their   respective
organizations.  Many of these payors  utilize the  services of pharmacy  benefit
management  companies to assist them in providing a cost-effective  prescription
drug benefit as part of their health plan,  and to better  understand the impact
of prescription  drug  utilization on their overall health  expenditures and the
quality of the treatments members receive.

                                       3
<PAGE>



         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. Even though this market is highly competitive,  HealthExtras  believes it
can  capitalize on market  segments that are not well served by these large PBMs
and become a national alternative to the larger competitors in the PBM industry.

     ACQUISITION OF CATALYST RX, INC.

         On November 14, 2001 the Company  acquired control of Catalyst Rx, Inc.
and Catalyst  Consultants,  Inc.  ("Catalyst").  The  acquisition is intended to
accelerate our marketing of pharmacy benefits to large employer groups,  managed
care  organizations  and  third  party  administrators.  Catalyst's  success  is
attributable to offering employer groups differentiated  benefit design options,
personal service, consultative expertise, clinical review programs and access to
market specific retail pharmacy  networks,  all of which enhances its ability to
manage pharmacy benefit costs for clients.  Catalyst  provides  pharmacy benefit
management  services  to  a  variety  of  organizations  including  governmental
sponsors,  self-insured  employers  and third party  administrators.  Catalyst's
website allows clients and members access to plan-specific information including
covered and excluded benefits,  member copayments and drug/disease  information.
The operations of Catalyst are located in Las Vegas, Nevada.

     PRESCRIPTION BENEFIT MANAGEMENT PRODUCTS

         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
pro-active client specific program management. Our PBM services include:

         *   Benefit plan design and consultation
         *   Formulary administration
         *   Development of 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
         *   Mail order pharmacy
         *   Prescription benefits and discount programs tailored for businesses
             with a high percentage of low wage or part time employees

     BUSINESS STRATEGY

         Prescription  drug costs  continue  to grow  rapidly,  reflecting  both
increased drug utilization and price inflation.  These factors should contribute
to an  increasing  opportunity  to  market  cost  effective  pharmacy  benefits.
Additionally,  we  believe  that there  will be a growing  market  for  pharmacy
benefits   including   potentially   significant   opportunities  with  Medicare
eligibles.  Pharmacy  programs are attractive  because the discount  pricing and
benefit  administration  are highly automated and reliable at the point of sale.
We anticipate  that the refinement and  distribution  of pharmacy  benefits and
services  will be the major  focus of our  growth  strategy  in the  future.  We
believe   this  growth   will  be  driven  by   traditional   pharmacy   benefit
administration services marketed to employer groups, managed care organizations,
and third party administrators, as well as direct to consumer and small business
offerings.  HealthExtras  provides  its  clients  the  tools,  information,  and
specialized  expertise  needed  to  provide  the  best  drug  therapy  to  their
membership,  while  simultaneously  working to lower the costs associated with a
pharmacy benefit plan.

         We Intend to Increase Our Pbm Client Base by Targeting  Certain  Market
Segments
------------------------------------------------------------------------------

         *  Mid-Tier Managed Care Organizations  (MCOs):
            ---------------------------------------------
            MCOs  represent  over 20 million lives and $8 billion in annual drug
            spending.  There are  hundreds  of MCOs which  cover  under  200,000
            lives.  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
            Mid-Tier 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.

                                       4
<PAGE>

         *  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,  particularly in the
            Western United States where many of Catalyst's self-insured employer
            clients  are  based.   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 over 150  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 in
            2001,  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.

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

         *  Seniors and Medicare-Eligibles:
            -------------------------------
            This market segment is the least 'mature' of any in the prescription
            benefits arena.  More than 40% of all  prescriptions  written in the
            U.S. are for retirees,  who make up only 13% of the U.S. population.
            In  addition,  the  Medicare  health care program for the 39 million
            Americans  over age 65 does not  include any  prescription  benefit.
            Similarly,  3.2  million  Americans  between  ages 55 and 64 have no
            prescription   benefit.   Total  drug   spending  for  the  Medicare
            population is estimated to be $71 billion in 2001,  with the average
            annual per capita drug spending for the Medicare population reaching
            $1,750.  Through targeted  marketing of the affordable generic copay
            products,   fully  insured  products,   and  prescription   discount
            programs,  we believe we will be successful in generating revenue by
            providing  seniors  and  retirees  prescription  benefits  that  may
            otherwise be unavailable or prohibitively  expensive.  Additionally,
            in August of 2001,  HealthExtras  submitted its  application  to the
            Centers   for   Medicare   and   Medicaid    (CMS)   to   become   a
            Medicare-endorsed provider of Prescription Discount Cards to members
            of the Medicare population.  This discount card program was proposed
            by  President  Bush in July 2001 as a  near-term  effort to  provide
            Medicare  enrollees some form of savings on prescription drug costs,
            while  Congress  begins  to  develop a more  comprehensive  Medicare
            prescription  benefit.   Although  initial   implementation  of  the
            discount card program was delayed,  the CMS has stated that it still
            intends on proceeding with the program.

         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 Las Vegas, NV, Tidewater, VA and
            Albuquerque,  NM regions and intends to develop similar  networks in
            other parts of the country.

                                       5

<PAGE>

         *  Physician  `Counter-Detailing':
            -------------------------------
            To help its clients effectively manage their prescription drug
            spending without compromising patient care,  HealthExtras works
            closely with its clients' top prescribing  physicians  to  identify
            opportunities   for  cost  savings,   through  the  use  of  generic
            equivalents, formulary compliance, and over-the-counter medications.
            This  `counter-detailing'  is  performed  by  HealthExtras  clinical
            pharmacists  who meet with  physicians at their practices and review
            their   prescribing   trends  for  members  of  PBM  programs   that
            HealthExtras offers or manages. The interaction in these meetings is
            clinician-to-clinician,  and is usually welcomed by physicians,  who
            often do not  realize  the  savings  they can help a patient or plan
            sponsor   achieve   through   increased   utilization   of   generic
            equivalents,  lower-priced brands, or over-the-counter products. Our
            experience indicates that client savings through `counter-detailing'
            can range from five to twenty percent.

     Data Analysis and Reporting to Improve Cost Experience and Quality of Care
-------------------------------------------------------------------------------

         HealthExtras manages prescription drug spending while enhancing patient
care by performing  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
pro-actively  influence the drivers of  prescription  drug  utilization;  and to
monitor clinical formulary and disease management trends.

         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,  prescriber,  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.

     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 size,  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,
large  national  companies,   specialized   disease  management   companies  and
information service providers.

                                       6
<PAGE>


     Supplemental Health Programs
     ----------------------------

         HealthExtras  is  a  provider  of  supplemental  health  programs  that
utilizes a variety of direct  marketing  channels  to offer  individuals,  small
businesses and employer groups customizable and affordable benefits. The Company
has strategic  relationships with nationally recognized insurance  underwriters,
and its  marketing  partners  include  many of the  nation's  largest  financial
institutions,  along with leading  affinity groups,  associations,  and Internet
companies. Additionally, HealthExtras has a relationship with actor and advocate
Christopher  Reeve  to  promote  its  supplemental  health  programs.   We  have
contracted  with insurance  companies to underwrite the insurance  components of
our programs. As a result, we do not assume any insurance underwriting risk. The
financial  responsibility  for the payment of claims resulting from a qualifying
disability, or other event covered by the insurance features of our programs, is
borne  by  third-party  insurers.  All of the  insurance  and  service  features
included in these programs are supplied by outside vendors.

         The benefits of our supplemental health programs have historically been
uneconomic  to  offer  to  consumers  through   traditional,   commission-driven
distribution  channels. By leveraging our membership base to obtain group rates,
we are able to offer benefits to members at a cost which we believe is less than
they would have to pay individually for comparable benefits.

     BUSINESS STRATEGY

         We have established strategic marketing  relationships with many of the
nation's  largest  credit card issuing banks for access to their  customers.  We
have also entered into agreements with national  insurance  companies and direct
insurance marketers to expand the distribution of our products. These agreements
provide for various marketing initiatives, including telemarketing, direct mail,
statement  inserts,  statement  messages,   direct-response  television,  banner
placements  and  e-mail.  These  communications  feature  Christopher  Reeve and
provide   information   about   HealthExtras   supplemental   health   programs.
HealthExtras  compensates these partners based principally on a commission basis
for  the   supplemental   health   programs   purchased  in  response  to  these
communications.

         Our marketing partner agreements 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.

     COMPETITION

         We consider  that our  supplemental  health  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
health markets are price, brand  recognition,  marketing  expertise,  ability to
fulfill customer purchase requests,  customer service,  reliability of delivery,
ease of use, and technical  expertise and capabilities.  Many of our current and
potential  competitors,  including  Internet  directories and search engines and
traditional  insurance  agents and  brokers,  have longer  operating  histories,
larger  consumer bases,  greater brand  recognition  and  significantly  greater
financial,  marketing,  technical and other  resources than 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 firms  described  above could seek to compete  against us in
providing  supplemental  health  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.

                                       7

<PAGE>

     GOVERNMENT REGULATION

         Various  aspects of our  businesses  are  governed by federal and state
laws and  regulations.  Since  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 cannot  provide any assurance
that federal or state  governments  will not impose  additional  restrictions or
adopt interpretations of existing laws that could have a material adverse affect
on our business or financial position.

         *  Pharmacy Benefit Management Regulation.
            --------------------------------------
            Certain federal and state laws and regulations  affect or may affect
            aspects of our PBM business. Among these are the following:

            -  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 withdrew the Notice and Draft Guidance in
               the fall of 1998,  stating that it would reconsider the basis for
               such  Guidance.  The FDA has not  addressed  the issue  since the
               withdrawal.  However, there can be no assurance that the FDA will
               not again attempt 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.

            -  Anti-Remuneration/Fraud and Abuse Laws.
               ---------------------------------------
               Federal law 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 under  Medicare,  Medicaid,  CHAMPUS or other
               federally  funded health care programs.  Several states also have
               similar laws that are not limited to services for which  Medicare
               or Medicaid  payment may be made.  Sanctions for violating  these
               federal   and   state    anti-remuneration   laws   may   include
               imprisonment,  criminal  and  civil  fines,  and  exclusion  from
               participation in the Medicare and Medicaid programs.

               The federal 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 federal statute's broad scope, federal regulations  establish
               certain  "safe  harbors" from  liability.  Safe harbors exist for
               certain  properly  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 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.

                                       8
<PAGE>


               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 and formulary
               management  programs,   to  therapeutic   intervention   programs
               conducted   by   independent   PBMs,   or  to   the   contractual
               relationships  such as those we have with certain of our clients.
               In late 1999, it was reported that the U.S.  Attorney's Office in
               Philadelphia  had issued  subpoenas to  Merck-Medco  and PCS (now
               AdvancePCS),    both   PBMs,   and   Schering-Plough   Corp.,   a
               pharmaceutical   manufacturer.   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.  We believe  that the
               conduct of our business is not generally 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, 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 health care statute.  Like the
               health care anti-remuneration laws, the corresponding  provisions
               of ERISA are broadly written and their  application to particular
               cases is often  uncertain.  We have implemented  policies,  which
               include  disclosure  to health plan  sponsors with respect to any
               commissions  paid by 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  to meet the
               requirements of the statute.

          Numerous  state  laws and  regulations  also  affect  aspects of our
business.

         Among these are the following:

         *  Comprehensive   PBM   Regulation.
            --------------------------------
            Although no state has passed legislation regulating PBM activities
            in a comprehensive manner, such legislation  has  been  introduced
            previously   in  a  number   of   states.   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.

         *  Consumer Protection Laws.
            -------------------------
            Most states have consumer  protection  laws that have been the basis
            for investigations and multi-state settlements relating to financial
            incentives  provided by drug  manufacturers to retail  pharmacies in
            connection with drug switching programs. In addition,  pursuant to a
            settlement  agreement  entered into with seventeen states on October
            25,  1995,   Merck-Medco  Managed  Care,  LLC  ("Medco"),   the  PBM
            subsidiary of  pharmaceutical  manufacturer  Merck & Co.,  agreed to
            have  pharmacists  affiliated  with  Medco mail  service  pharmacies
            disclose to  physicians  and  patients the  financial  relationships
            between   Merck-Medco  and  the  mail  service  pharmacy  when  such
            pharmacists contact physicians seeking to change a prescription from
            one drug to another.  We believe that our contractual  relationships
            with drug manufacturers and retail pharmacies do not include the

                                       9

<PAGE>

            features  that  were  considered  problematic  in  these  settlement
            agreements.  However,  no assurance can be given that we will not be
            subject to scrutiny or challenge under one or more of these laws.

         *  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 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.

         *  Licensure Laws.
            ---------------
            Many states have licensure or  registration  laws governing  certain
            types of ancillary health care organizations,  including PPOs, TPAs,
            and companies that provide utilization review services. 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 have  registered  under such laws in
            those states in which we have concluded,  after  discussion with the
            appropriate state agency, that such registration is required.

         *  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. Other states have enacted "unitary pricing" legislation,
            which  mandates  that all  wholesale  purchasers of drugs within the
            state be given access to the same discounts and incentives.

            In addition, various federal and state Medicaid agencies have raised
            the issue of how average wholesale price ("AWP") is calculated.  AWP
            is a standard pricing unit used throughout the industry,  as well as
            by us, as the basis for calculating drug pricing under our contracts
            with clients, pharmacies and pharmaceutical  manufacturers.  Changes
            to the standard have been suggested that could alter the calculation
            of drug  prices  for  federal  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.

         *  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.

                                       10
<PAGE>



            Many of the state laws described above 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,
            and we provide  services to certain  clients,  such as  governmental
            entities,  that are not  subject  to the  preemption  provisions  of
            ERISA.  Other  state  laws 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.  Accordingly,  compliance with state laws and regulations
            remains a significant operational requirement for us.

         *  Privacy and Confidentiality Legislation.
            ----------------------------------------
            Our  activities  may  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.  Regulations  have been  proposed at the federal level and
            legislation has been proposed, and in some cases enacted, in several
            states to restrict the use and  disclosure of  confidential  medical
            information.  To date,  no such  legislation  has been  enacted that
            adversely impacts 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.

            In December 2000, the Department of Health and Human Services issued
            final  privacy   regulations,   pursuant  to  the  Health  Insurance
            Portability and Accountability  Act of 1996 ("HIPAA"),  which impose
            extensive  restrictions  on the use and  disclosure of  individually
            identifiable  health  information  by  certain  entities.  We may be
            required to comply with certain aspects of the  regulations.  We are
            assessing  the steps we will have to take in  complying  with  these
            regulations,  which  provide for a two-year  implementation  period.
            While this  assessment  is not yet complete,  we believe  compliance
            with these regulations may have a significant impact on our business
            operations.  We have not yet completed an assessment of the costs we
            will  incur in  complying  with these  regulations,  and can give no
            assurance that such costs will not be material to us.

            Even  without  new   legislation   and  beyond  the  final   federal
            regulations, individual health plan sponsor customers could prohibit
            us from including their patients' medical information in our various
            databases of medical data. They could also prohibit us from offering
            services that involve the compilation of such information.

         *  Regulation of Supplemental Health 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  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

                                       11
<PAGE>

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

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

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

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

            One of the means by which  the  Company   markets  its  programs  is
            telemarketing,  which it  generally  out  sources 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.  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.  Compliance with these regulations is
            generally   the   shared   responsibility   of  the   Company,   its
            sub-contractors and its marketing partners.


         *  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.

                                       12
<PAGE>



     EMPLOYEES

         As of December 31, 2001, we had 82 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.

                                       13

<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  10,000  square feet under  leases
which expire in the first  quarter of 2003.  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 state regulators that we may have violated state  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, 2001.


                                       14

<PAGE>



                                     PART II

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

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

<TABLE>
<CAPTION>

                                                       High        Low
                                                       ----        ---
<S>                                                   <C>        <C>
 1999
 ----
 December 14 - December 31...................         $ 12.38     $  7.38

 2000
 ----
 First quarter...............................         $ 11.97     $  3.88
 Second quarter..............................         $  6.13     $  3.31
 Third quarter...............................         $  6.06     $  2.50
 Fourth quarter..............................         $  6.00     $  2.38

 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 (through March 26, 2002)......         $  6.63     $  2.80

</TABLE>

         On March 26, 2002, the last closing sale price of the common stock,  as
reported  by the Nasdaq  National  Market  was $2.80 per share.  As of March 26,
2002, the Company had approximately 572 stockholders of record.  The Company did
not pay any cash dividends in 2001 and has no plans to do so in the  foreseeable
future.

         In connection with the  acquisition of Catalyst,  the Company issued an
aggregate  of 366,730  shares of its common  stock to Kevin C.  Hooks,  the sole
shareholder of Catalyst.  The shares of stock were valued at $6.30.  The Company
relied upon the exemptions from the registration  requirements of the Securities
Act of 1933 provided by Section 4(2) of the Act.

                                       15
<PAGE>



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

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



<TABLE>
<CAPTION>

                                                         For the Years Ended December 31,
                                                         --------------------------------
                                             1997         1998         1999          2000          2001
                                             ----         ----         ----          ----          ----

<S>                                         <C>           <C>         <C>           <C>           <C>
Statement of Operations Data:
Revenue...............................    $      --      $     --     $   5,327     $  44,178     $ 124,351

Direct expenses.......................           --            --         3,096        24,303        93,668
Product development and
     marketing........................        3,380         4,936        10,331        31,211        27,212
General and administrative............        1,306         1,598         2,996         8,458        11,242
                                          ---------      --------     ---------     ---------     ---------


Operating loss........................      (4,686)       (6,534)      (11,096)      (19,794)       (7,771)
Interest income (expense), net........        (556)         (110)         (351)         2,069        1,092
Other income (expense), net                     589            --          (73)           499           --
Minority Interest.....................           --            --            --         --             (96)
                                          ---------      --------     ----------    ---------       -------

Net loss..............................    $ (4,653)      $(6,644)     $(11,520)     $(17,226)     $ (6,775)
                                          =========      ========     =========     =========     =========

Basic and diluted net loss per share.           --            --      $  (0.56)     $  (0.62)     $  (0.23)
Weighted average shares of
     common stock outstanding.........          --            --        20,588        28,010        29,731

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

<TABLE>
<CAPTION>

                                                                     December 31,
                                          ----------------------------------------------------------------
                                             1997         1998         1999          2000            2001
                                             ----         ----         ----          ----            ----
<S>                                       <C>            <C>          <C>           <C>           <C>
Balance Sheet Data:
Cash and cash equivalents...........      $  9,651       $  219       $  46,971     $  28,921     $   32,009
Total assets........................        12,710        4,608          53,662        52,044         88,153
Total liabilities...................         7,770        5,531           6,298        15,806         42,372
Total stockholders' (members') equity
(deficit)...........................         4,940        (923)          47,364        36,239         45,237
</TABLE>

--------------
(1) Reflects the formation of  HealthExtras,  Inc. and the  Reorganization  as
if those events had taken place at the beginning of the period,  except that no
effect is given to the investment by Capital Z Healthcare  Holding Corp. in
HealthExtras  prior to May 27, 1999.


                                       16
<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
--------

    Since its  inception  HealthExtras  has focused on the sale of  supplemental
health programs to individual  consumers.  These products are generally marketed
to consumers in collaboration with nationally recognized financial  institutions
through  means  including  telemarketing,  direct  mail and  statement  inserts.
However,  over the past year,  the Company has  changed its  strategic  emphasis
through its acquisitions of International  Pharmacy  Management,  Inc., ("IPM"),
now operating as  HealthExtrasRx,  and Catalyst  both of which provide  pharmacy
benefit  management  services to  self-insured  employer groups and managed care
organizations.  These  acquisitions  have positioned the Company to aggressively
grow this  segment of its  business.  The Company  expects  this  portion of its
business to be the primary  source of growth and profit  potential  in the years
ahead.  The consumer  segment will continue to provide  revenue and gross margin
contributions  but the Company  expects to be more  selective in  marketing  and
product  development  expenditures as a result of increasing direct expenses for
the components of our programs, increasing customer acquisition costs and higher
attrition rates.

    PHARMACY BENEFIT MANAGEMENT

    Our primary PBM  services  consist of the  automated  online  processing  of
prescription claims on behalf of our employer and managed care customers. When a
member of one of our customer  accounts  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-pay  to the  retail  pharmacy  and the
pharmacist  fills  the  prescription.  On behalf of our  customer  accounts,  we
electronically  aggregate  pharmacy benefit claims,  which include  prescription
costs plus our claims processing fees for consolidated  billing and payment.  We
receive payments from customer accounts 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 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 customers.
Pharmacy  benefit  claim  payments from our health plan sponsors are recorded as
revenues,  and reflect  prescription  costs to be paid to retail  pharmacies are
recorded as direct expenses.

    Acquisitions

    We have made two  acquisitions in order to generate  increased  revenues and
scale in the  pharmacy  benefit  management  business.  The  revenues  from this
business segment are now larger than those of the health and disability  segment
and are growing at a higher rate as well. On November 14, 2001, we completed the
acquisition  of 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 excess of the purchase price paid over the net fair value of
identifiable assets and liabilities of Catalyst was recorded as goodwill.

                                       17

<PAGE>

    The terms of the Catalyst acquisition agreements also require the Company to
purchase the remaining 20% of the Catalyst common stock outstanding by March 14,
2003,  for a price based on the future  EBITDA of Catalyst.  Effective  March 1,
2002, this clause was amended when the Catalyst  minority interest agreed to the
sell the  remaining  20%  ownership  of Catalyst  to the Company for  additional
consideration  of $5,280,000.  The  consideration  consists of 319,033 shares of
Company stock,  valued at $1,056,000 on the closing date of the  amendment,  and
$4,224,000  in cash.  The stock is to be  transferred  to the seller on April 1,
2002, and the cash will be paid in four installments of $1,056,000, due on April
1, 2002, October 1, 2002, January 1, 2003 and March 1, 2003.

    Effective  November 1, 2000,  we  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 newly
issued common stock. The acquisition of IPM was accounted for using the purchase
method of accounting.


    Anticipated Advantages Related to Catalyst Acquisition

    We  anticipate   being  able  to  generate   competitive   and   operational
efficiencies as a result of the Catalyst acquisition by:

    *    Pursuing  new  marketing  opportunities  with a  broader  set  of  plan
         sponsors and pharmaceutical manufacturers.  Our acquisition of Catalyst
         provides  us with a more  diverse  and  complete  set of  products  and
         services to sell to a larger  customer base.  For example,  Catalyst is
         engaged in demand management,  generic  substitution and other clinical
         programs  that will  significantly  enhance our ability to serve larger
         and more sophisticated customers.

    *    Generating corporate overhead and information technology  efficiencies.
         Our  combination   with  Catalyst  will  allow  us  to  better  capture
         efficiencies   in  corporate   overhead  and   information   technology
         investments. We expect cost savings to result from the consolidation of
         certain corporate  activities and the elimination of certain duplicated
         components of our corporate operations.

         Integration of the Catalyst Acquisition

    We have  successfully  completed the initial steps in  integrating  Catalyst
that are necessary for us 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 and employees and suppliers  have access to consistent
and reliable  organizational  infrastructure.  Over the next several quarters we
expect to complete additional integration steps around data processing platforms
and other technology systems.

    SUPPLEMENTAL HEALTH PROGRAMS

    We generate a significant portion of our revenue from the sale of membership
programs which provide disability insurance benefits. To date, we have primarily
focused on the  distribution  of our  programs  to  customers  of our  financial
institution partners. Christopher Reeve is featured prominently in our marketing
campaigns for these programs.

    Revenue is  generated by payments  for program  benefits  and payments  from
certain  business  partners  related  to new  member  enrollments.  For  program
benefits,  revenue  reflects the numbers of individuals  enrolled as well as the
price level of the benefits  selected.  The factors which most  directly  effect
this  business  include  customer  acquisition  costs,  the cost of the benefits
provided relative to the fee charged,  the level of compensation shared with our
business  partners and the attrition rate in our membership  base. Over the past
year we have generated lower average fees while facing  increasing  direct costs
for benefits provided and the compensation shared with our partners. Accordingly
we are evaluating  opportunities to maintain the  profitability of this business
segment while  shifting more of the up front customer  acquisition  cost risk to
our business partners.

                                       18

<PAGE>



    The primary  determinant of  HealthExtras'  program  revenue  recognition is
monthly program  enrollment and payments from business  partners  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
fee  collected  from the  member  or paid by the  marketing  partner  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 business partners related to
new member  enrollments  are recorded as revenue to the extent of related direct
expenses, which to date have exceeded payments from business partners.

    Direct expenses consist principally of marketing and processing fees and the
cost of benefits provided to program members.  Direct expenses are a function of
the level of  membership  during  the  period  and the  specific  set of program
features selected by members.  The coverage obligations of our benefit suppliers
and the related  expense are  determined  monthly,  as are the remaining  direct
expenses.

    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.  As of December 31, 2001,  more than 725,000 members
had  enrolled in our  supplemental  health  programs.  As of December  31, 2001,
initial program revenue was deferred for  approximately  65,000 program members.
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  HealthExtras  without any related  revenue.
HealthExtras  believes  that  current  enrollment  trends will allow the minimum
future  commitments  at  December  31,  2001 to be  fully  utilized  by  current
enrollment levels.

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

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

         HealthExtras  incurred an  operating  loss of $7.8 million for the year
ended December 31, 2001,  including a non-cash  warrant charge of  approximately
$6.1 million relating to services  provided under a marketing  agreement.  Total
revenues  of $124.4  million for 2001  included  $77.5  million  earned from the
supplemental  health  segment and $46.9  million  earned from  pharmacy  benefit
management services. Total revenues increased $80.2 million in 2001 with revenue
from pharmacy benefit  management,  program member payments and business partner
revenues contributing 52.4%, 25.1% and 22.5% respectively of that growth. As the
Company has increased its strategic focus on pharmacy  services during the year,
the majority of its revenue and revenue  growth were derived from such  services
by the  end of  2001.  Much  of the  growth  in  pharmacy  service  revenue  was
attributable to the  acquisitions of HealthExtras Rx (formerly IPM) and Catalyst
during the fourth quarters of 2000 and 2001 respectively.  HealthExtras incurred
an operating loss of $19.8 million for the year ended  December 31, 2000.  Total
revenues of $44.2 million for 2000 included $39.3 million from the  supplemental
health segment and $4.9 million from the pharmacy benefit management segment.

         The  following  table details  financial  data by segment for the years
ended  December 31, 2000 and December 31, 2001. PBM services  operating  results
include  the  results  for   HealthextrasRx  and  Catalyst  from  the  dates  of
acquisition.

<TABLE>
<CAPTION>

                                             Supplemental
                                             Health and
         Year Ended December 31, 2000        Disability           PBM            Total

         <S>                             <C>              <C>             <C>
         Revenue                         $   39,300,891   $  4,877,149    $  44,178,040
         Operating expenses                  58,983,554      4,988,403       63,971,957
         Net loss                           (17,122,208)      (104,008)     (17,226,216)
         Total assets                        47,795,234      4,248,872       52,044,106
         </TABLE>

                                       19

<PAGE>


<TABLE>
<CAPTION>

                                             Supplemental
                                             Health and
         Year Ended December 31, 2001        Disability           PBM            Total

         <S>                             <C>              <C>             <C>
         Revenue                         $   77,457,307   $ 46,893,749    $ 124,351,056
         Operating expenses                  84,832,141     47,290,368      132,122,509
         Net loss                            (6,774,263)          (386)      (6,774,649)
         Total assets                        39,637,025     48,516,310       88,153,335
         Accounts receivable                  2,758,367     19,652,601       22,410,968
         Accounts payable                     3,128,698     22,580,270       25,708,968
         </TABLE>

         Operating expenses for the year ended December 31, 2001, totaled $132.1
million. Direct expenses of $93.7 million, consisted of $50.1 million in benefit
costs,  warrant  charges and fees payable to our  distribution  partners for our
supplemental  health and  disability  products and $43.6 million in direct costs
associated with pharmacy benefit services  consisting  largely of reimbursements
to network  pharmacies.  These direct  expenses  represented  70.9% of operating
expenses for the period.  For the year ended  December  31,  2001,  HealthExtras
incurred $27.2 million in product development and marketing  expenses,  or 20.6%
of total operating expenses.  The primary component of the expenditures  related
to direct sales activities  including  telemarketing,  direct mail and statement
inserts. The expenses for these direct sales activities were approximately $21.4
million. In addition, the Company incurred approximately $2.0 million in product
endorsement  costs,  $2.6 million for media  production,  including  television,
radio,   Internet   and  print   advertisements   and  $1.2   million  in  other
marketing-related  expenses.  General and  administrative  expenses for the year
totaled $11.2 million or 8.5% of total operating expenses, $7.5 million of which
was related to the Company's  supplemental  health and disability  segment while
the remaining $3.7 million was related to the  management of pharmacy  benefits.
These expenses included $6.1 million in compensation and benefits,  $1.1 million
in  professional  fees,  $843,000 in facility  costs,  $313,000 in telephone and
software costs,  $466,000 in travel  expenses,  and $1.8 million in depreciation
and  amortization.  Interest  income  for the  period  was  approximately  $ 1.1
million.

         Operating  expenses for the year ended December 31, 2000, totaled $64.0
million. Direct expenses of $24.3 million, consisted of $19.8 million in benefit
costs,  warrant  charges and fees payable to our  distribution  partners for our
supplemental  health and  disability  products  and $4.5 million in direct costs
associated with pharmacy benefit services,  consisting largely of reimbursements
to network  pharmacies.  These direct  expenses  represented  38.0% of operating
expenses for the period.  For the year ended  December  31,  2000,  HealthExtras
incurred $31.2 million in product development and marketing  expenses,  or 49.0%
of total operating expenses.  The primary component of the expenditures  related
to direct sales activities  including  telemarketing,  direct mail and statement
inserts. The expenses for these direct sales activities were approximately $26.1
million. In addition, the Company incurred approximately $1.1 million in product
endorsement  costs, and $4.0 million in other product  development and marketing
related expenses.  General and administrative expenses for the year totaled $8.5
million or 13.0% of total operating expenses,  $8.0 million of which was related
to the Company's  supplemental health and disability segment while the remaining
$448,000 was related to the  management  of pharmacy  benefits.  These  expenses
included $4.2 million in  compensation  and benefits,  $653,000 in  professional
fees,  $467,000 in facility  costs,  $308,000 in telephone  and software  costs,
$380,000 in other personnel costs, $274,000 in travel expenses,  and $702,000 in
depreciation and amortization.  Interest income for the period was approximately
$2.1 million.

                                       20
<PAGE>



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

         HealthExtras  incurred an operating  loss of $19.8 million for the year
ended  December 31 2000,  consisting  of a $19.7 million loss from the Company's
supplemental  health operations,  and a $100,000 loss from IPM. Revenue of $44.2
million  consisted of program member  payments earned during the period of $39.3
million  and  sales  revenue  for  2000  generated  by  IPM's  pharmacy  benefit
management  services of $4.9  million from the  acquisition  date of November 1,
2000.  HealthExtras  incurred an  operating  loss of $11.1  million for the year
ended  December 31, 1999.  Revenue of $5.3 million  consisted of annual  program
member  payments  earned during the period.  The increase in revenue and program
receipts was primarily  attributable to the net growth in our membership for the
year  ended  December  31,  2000.  The  increase  in the net loss was  primarily
attributable to significantly increased marketing expenses.

         Operating  expenses for the year ended  December 31, 2000 totaled $64.0
million.  Direct expenses of $24.3 million,  consisted of $19.8 million in costs
for  benefits  included in our  programs  and fees  payable to our  distribution
partners and $4.5 million in direct costs associated with IPM operations.  These
direct expenses  represented 38% of operating  expenses for the period.  For the
year ended  December 31, 2000,  HealthExtras  incurred  $31.2 million in product
development and marketing  expenses,  or 49% of total operating  expenses,  $1.2
million of which was for the  continuing  creative  development  of  promotional
sales materials, $4.9 million for media production, including television, radio,
Internet and print  advertisements,  $21.2 million for media distribution,  $1.1
million in  product  endorsement  costs,  and $2.8  million in market  research,
product  development,   and  other  marketing-related   expenses.   General  and
administrative  expenses  for the  year  totaled  $8.5  million  or 13% of total
operating  expenses,  $8.0 million of which was  attributable  to the  Company's
supplemental  health operations and  approximately  $448,000 was associated with
IPM  operations.  These  expenses  included  $4.2  million in  compensation  and
benefits, $653,000 in professional fees, $467,000 in facility costs, $308,000 in
telephone and software  costs,  $380,000 in other personnel  costs,  $274,000 in
travel expenses, and $702,000 in depreciation and amortization.  Interest income
for the period was approximately $2.1 million.

         Total operating  expenses for the year ended December 31, 1999, totaled
$16.4  million.  Direct  expenses  of  $3.1  million  consisted  of the  cost of
obtaining the benefits  included in our  programs,  and marketing and other fees
payable to our distribution  partners.  These direct expenses represented 19% of
operating  expenses  for the  year.  For  the  year  ended  December  31,  1999,
HealthExtras  incurred  $10.3  million  in  product  development  and  marketing
expenses,  or 63% of total operating expense, $4.3 million of which was incurred
for the continuing  creative  development of  promotional  and sales  materials,
including  television  and print  advertisements,  and $1.1 million of which was
product  endorsement costs.  Media production  expenses totaled $5.1 million for
print and  Internet  advertisement  production  and  distribution.  General  and
administrative  expenses  for the  year  totaled  $3.0  million  or 18% of total
operating  expenses.  These expenses  included $1.7 million in compensation  and
benefits  and  $205,000  in  professional  services.  Interest  expense  totaled
$350,000.  The increase in operating expenses was attributable to the net growth
in our membership as well as expanded product  development and marketing for the
year ended December 31, 2000.

LIQUIDITY AND CAPITAL RESOURCES

         As of  December  31,  2001,  we had  $33.0  million  in cash  and  cash
equivalents,  $24.6 million in operating  working capital and short-term debt of
$8.9  million  related  to the  acquisition  of  Catalyst.  As the  Company  has
increased  its PBM  operations,  its accounts  receivable  and accounts  payable
balances have grown  significantly.  In order to remain in  compliance  with its
contractual  arrangements  with network  pharmacies,  the Company generally must
reimburse claims within approximately thirty days. The Company expects to reduce
its claims payable balance by between $8 and $10 million in the first quarter of
2002.  In order to meet these  obligations,  the Company may borrow  against its
accounts  receivable as necessary.  The Company  intends to manage its cash flow
cycle by reducing its days  outstanding  on accounts  receivable  to as close to
thirty days as is commercially practical.

         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 when combined with available cash resources will be
sufficient  to meet  our  planned  working  capital,  capital  expenditures  and
business expansion 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 assure you that such financing
will be available on acceptable  terms,  if at all, or that such  financing will
not be dilutive to our stockholders.

                                       21

<PAGE>





         The Company has no off balance sheet transactions.  The following table
reflects our current contractual commitments as of December 31, 2001:

<TABLE>
<CAPTION>

                                                               Payments Due by Period
                                         --------------------------------------------------------------------
                                               Total      (1 Year      1 - 3 Years   4 - 5 Years) 5 Years
                                         --------------------------------------------------------------------
<S>                                       <C>            <C>             <C>          <C>          <C>
         Operating leases                 $ 1,847        $   830         $ 1,017      $  --         $  --
         Unconditional purchase
         obligations                      $ 1,300        $ 1,300         $    --      $  --         $  --

         Other long-term obligations      $ 3,000        $ 1,000         $ 2,000      $  --         $  --
                                         -------------------------------------------------------------------
         Total contractual cash
         obligations                      $ 6,147        $  3,130        $ 3,017      $  --         $  --
                                         ====================================================================
</TABLE>

CRITICAL ACCOUNTING POLICIES

         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

         The Company  records direct expense for the fair market value of common
stock  warrants  earned or  expected to be earned by a  marketing  partner.  The
Company  estimates the value of the warrants at each balance sheet date using an
appropriate  equity-pricing model with assumptions consistent with those used in
preparing the Company's fair value stock option compensation disclosures. Direct
expense  is 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 marketing partner.

    Pharmacy Benefit Management Rebate Revenues

         Rebate  revenues  earned  under  arrangements  with  manufacturers  are
recognized  as they are earned in accordance  with  contractual  agreements  and
recorded as a reduction  of direct  expenses  and a reduction  of revenue if the
Company has agreed to share a portion of the manufacturers rebates with the plan
sponsors.  Manufacturers  rebates are based on  estimates,  which are subject to
final settlement with the contracted party.

                                       22
<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
health  benefits,  almost all revenues are  collected in advance via credit card
and as such generate no accounts receivable exposure.

    Goodwill

         The Company  carries  the value of goodwill on its books at  historical
values.  In the future,  the Company will subject these historical values to the
impairment  testing required under FASB Statement No. 142 (described below). The
Company  intends to complete its initial  impairment test no later than June 30,
2002.

    Intangible Assets

         Intangible  assets related to the November 2001 acquisition of Catalyst
were  recognized  under  the  provisions  of FASB  Statement  No.  141 (FAS 141)
(described  below).  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.  These  calculations  are in the process of being
finalized;  thus the  allocation of the purchase  price to intangible  assets is
subject to refinement.  The remaining  useful life of intangible  assets will be
evaluated  periodically  and adjusted as necessary to match expected period that
the assets are expected to provide economic benefits.



RECENT ACCOUNTING PRONOUNCEMENTS

         FASB  Statement  No. 141 (FAS  141),  Business  Combinations,  and FASB
Statement No. 142 (FAS 142),  Goodwill and Other  Intangible  Assets were issued
July 20, 2001.

         FAS 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.  FAS 141 is effective for all business  combinations
occurring after June 30, 2001.

         FAS  142  establishes  the  accounting   principles  for  goodwill  and
intangible  assets  subsequent to their initial  recognition.  Some  significant
changes  from the  previous  principles  are: a) goodwill  and  indefinite-lived
intangible assets are no longer amortized; and b) goodwill and intangible assets
deemed to have an indefinite life are tested for impairment at least annually.

         The  provisions  of FAS 142 are not  effective  for the  Company  until
January 1, 2002;  however,  certain  provisions of FAS 142 apply to goodwill and
intangible  assets  acquired  after June 30, 2001.  Those  provisions  have been
applied to the Catalyst  acquisition  and other  purchases of intangible  assets
that occurred after June 30, 2001. Upon adoption of FAS 142, the Company will be
required  to  perform  an  impairment  analysis  on the  goodwill  from  the IPM
acquisition. The Company will perform the required analysis by June 30, 2002.

         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") will be effective  for the Company in 2002.  EITF 01-9
will change the way the Company recognizes the cost of consideration provided to
a marketing partner under a warrant  agreement.  This consideration is currently
recognized as a direct expense in the consolidated  statements of operations and
comprehensive  loss.  Effective  January  1,  2002,  the  Company  will begin to
recognize  the cost of this  consideration  as a reduction  of revenue  from the
marketing  partner.  Financial  statements  from  prior  periods  presented  for
comparative purposes must be reclassified to comply with these provisions.

         On October 3, 2001 the FASB  issued FASB  Statement  No. 144 (FAS 144),
Accounting for the Impairment or Disposal of Long-Lived  Assets.  The objectives
of FAS 144 are to address  significant  issues relating to the implementation of
FASB  Statement No. 121 (FAS 121),  Accounting  for the Impairment of Long-Lived
Assets  and for  Long-Lived  Assets to Be  Disposed  Of, and to develop a single
accounting model, based on the framework  established in FAS 121, for long-lived
assets to be  disposed  of by sale,  whether  previously  held and used or newly
acquired.  FAS 144  supersedes  FAS 121,  however  it  retains  the  fundamental
provision of FAS 121 for (1) the  recognition  and measurement of the impairment
of long-lived  assets to be held and used and (2) the  measurement of long-lived
assets to be disposed of by sale.  FAS 144 will be effective  for the Company in
2002.  Implementation  of FAS 144 is not  expected  to have  any  effect  on the
Company's financial statements.

                                       23
<PAGE>

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

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

         The limited  history of operating our business  means that our business
prospects  are subject to a great deal of  uncertainty  and risks.  Our changing
strategic emphasis creates additional industry and competitive uncertainty.

    We have not been  consistently  profitable and may not be profitable in
the future
---------------------------------------------------------------------------

         We have  incurred  operating  losses  since our  inception.  Even if we
achieve  profitability,  we may  not be able to  maintain  profitability  in the
future.  In addition,  as our business model  evolves,  we expect to introduce a
number of new products and services that may or may not be profitable for us.

    Our 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 operate
profitably
-----------------------------------------------------------------------------

         Our growth strategy, if successful, will result in further expansion of
our PBM operations.  We can achieve 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 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.

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

         Our recent  acquistion  of Catalyst 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.

                                       24
<PAGE>

    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 marketing relationships, our access to
potential customers would decline and sales and revenues would suffer
-------------------------------------------------------------------------

         A significant  majority of all of our supplemental health program sales
is attributable to two marketing partner  relationships.  The relationships with
JCPenney and American Express provide us with access to customer leads resulting
in sales to individual  consumers.  These  relationships  directly or indirectly
were  responsible  for 62% and 17% of our  supplemental  health  and  disability
segment  revenues  for  2001.  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 health membership growth is increasingly dependent on
telemarketing
--------------------------------------------------------------------------

         A  significant  percentage  of our  membership  growth  during 2001 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.

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

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

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

         We are dependent on the providers of benefits included in our programs.
These benefits are provided  pursuant to  arrangements  with 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.

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

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

    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:

                                       25
<PAGE>

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

         *  changing business mix between brand and generic prescription;

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

         *  our 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, we could be subject
to fines, additional licensing requirements or the inability to market in
particular jurisdictions
-------------------------------------------------------------------------------

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

         One of  the  means  by  which  the  Company  markets  its  programs  is
telemarketing, which it generally outsourced 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 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.  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.  Compliance  with  these
regulations  is  generally  the  shared   responsibility  of  the  Company,  its
sub-contractors  and its marketing partners.  The Company maintains  operational
controls to ensure that its marketing  practices  conform with applicable  state
and federal regulations.


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

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

                                       26
<PAGE>


Any  new  laws  or  regulations  or new  interpretations  of  existing  laws  or
regulations  relating to the Internet could hinder our ability to offer programs
over the Internet.

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

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

    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:

         Open  Network  Legislation.  Numerous  states have adopted "any willing
provider"  legislation,  which requires  pharmacy  network sponsors to admit for
network  participation  any retail pharmacy willing to meet a healthcare  plan's
price and other terms.

         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 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.

         Patient Choice. 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.

         Consumer Protection  Legislation.  Most states have consumer protection
laws that have been the basis for  investigations  and  multi-state  settlements
relating  to  financial  incentives  provided  by drug  manufacturers  to retail
pharmacies  in  connection  with drug  switching  programs.  We believe that our
contractual  relationships  with drug manufacturers and retail pharmacies do not
include the  features  that were 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.

         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.  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.

                                       27
<PAGE>

         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.  Legislation  has been  proposed at the federal level and in
several  states to  restrict  the use and  disclosure  of  confidential  medical
information the enactment of such legislation could require  significant changes
to a 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 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.


                                       28
<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-27, attached hereto.


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

    None


                                       29
<PAGE>


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------

    Information  required  under this item is contained in the section  entitled
"Executive   Officers  and  Directors"  in  our  2001  Proxy  Statement  and  is
incorporated herein by reference.


ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------

    Information  required under this item is contained in the sections  entitled
"Directors   Compensation"  and  "Executive  Compensation"  in  our  2001  Proxy
Statement and is incorporated herein by reference.


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

    Information  required  under this item is contained in the section  entitled
"Stock  Ownership"  in our 2001 Proxy  Statement and is  incorporated  herein by
reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------

    Information  required  under this item is contained in the section  entitled
"Certain Transactions" in our 2000 Proxy Statement and is incorporated herein by
reference.



                                       30

<PAGE>


                                     PART IV

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

    (a) Documents filed as part of this report

<S>     <C>
        (1)    Financial Statements
               Report of Independent Accountants
               Consolidated Balance Sheets as of December 31, 2000 and 2001
               Consolidated Statements of Operations and Comprehensive Loss for
                the years ended December 31, 1999, 2000 and 2001
               Consolidated Statements of Stockholders' (Members') Equity
                (Deficit) for the years ended December 31, 1999, 2000 and 2001
               Consolidated Statements of Cash Flows for the years ended
                December 31, 1999, 2000 and 2001
               Notes to Financial Statements
</TABLE>
        (2)    All required information is included in the Company's financial
                statements

    (b) Reports on Form 8-K

    The Company filed a Current Report on Form 8-K dated November 29, 2001
reporting items in connection with the acquisition of an 80% interest in
Catalyst Rx, Inc. and Catalyst Consultants, Inc.

    The Company filed a Current Report on form 8-K dated October 5, 2001
reporting the completion of a private placement involving the issuance of
3,020,782 shares of common stock.

                                       31

<PAGE>


    (c) Exhibits

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

     Exhibit No.                                          Description
     ---------------------------------------------------------------------------
       2.1        Form of Reorganization Agreement by and among HealthExtras,
                  Inc., HealthExtras, LLC and Capital Z Healthcare Holding Corp
                  (1)
       2.2        CatalystRx, 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.
       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
      10.13       Form of HealthExtras, Inc. 2000 Directors' Stock Option
                  Plan (filed herewith)
      10.14       Warrant Agreement by and among HealthExtras, Inc. and J.C.
                  Penney Life Insurance Company
      10.15       Amended Agreement by and between Cambria Productions, Inc.
                  f/s/o Christopher Reeve and HealthExtras, Inc.
       21.1       Subsidiaries of Registrant (filed herewith)
       23.1       Consent of Independent Accountants  (filed herewith)

--------------
(1)  Incorporated herein by reference into this document from the Exhibits to
     the Form S-1 Registration Statement, as amended, Registration No.
     333-83761, initially filed on July 26, 1999.
(2)  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.


                                       32
<PAGE>




                                   SIGNATURES

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


                              HEALTHEXTRAS, INC.


Date March 29, 2002           By:  /s/ David T. Blair
                                  -------------------------------
                                   David T. Blair
                                   Chief Executive Officer and Director



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

Date March 29, 2002           By: /s/ Thomas L. Blair
                                  -------------------------------
                                  Thomas L. Blair
                                  Chairman of The Board


Date March 29, 2002           By: /s/ David T. Blair
                                  -------------------------------
                                  David T. Blair
                                  Chief Executive Officer and Director


Date March 29, 2002           By: /s/ Michael P. Donovan
                                  -------------------------------
                                  Michael P. Donovan
                                  Chief Financial Officer and
                                  Chief Accounting Officer


Date March 29, 2002           By: /s/  Edward S. Civera
                                  -------------------------------
                                  Edward S. Civera
                                  Director


Date March 29, 2002           By: /s/ Bette B. Anderson
                                  -------------------------------
                                  Bette B. Anderson
                                  Director


Date March 29, 2002           By: /s/ William E. Brock
                                  -------------------------------
                                  William E. Brock
                                  Director


Date March 29, 2002           By: /s/ Thomas J. Graf
                                  -------------------------------
                                  Thomas J. Graf
                                  Director


<PAGE>


Date March 29, 2002           By: /s/ Carey G. Jury
                                  -------------------------------
                                  Carey G. Jury
                                  Director


Date March 29, 2002           By: /s/ Karen E. Shaff
                                  -------------------------------
                                  Karen E. Shaff
                                  Director

Date March 29, 2002           By: /s/ Frederick H. Graefe
                                  -------------------------------
                                  Frederick H. Graefe
                                  Director




<PAGE>


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

                        CONSOLIDATED FINANCIAL STATEMENTS
                          at December 31, 2001 and 2000
                               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  loss, of changes in
stockholders'  (members') equity (deficit) and of cash flows, present fairly, in
all material  respects,  the financial  position of  HealthExtras,  Inc. and its
subsidiaries at December 31, 2001 and 2000, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 2001, in conformity with  accounting  principles  generally  accepted in the
United States 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 audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP




McLean, Virginia
February 5, 2002, except for the third
  paragraph of Note 3, as to which the
  date is March 1, 2002




<PAGE>


                               HEALTHEXTRAS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                    --------
<TABLE>
<CAPTION>

                                                                                                        December 31,
                                                                                                 2000                 2001
                                                                                         -------------------  ------------------
ASSETS
<S>                                                                                     <C>                   <C>
Current assets:
  Cash and cash equivalents                                                              $       28,921,312   $       33,009,143
  Accounts receivable, net of allowance for doubtful accounts
    of $453,954 and $457,390
    in 2000 and 2001, respectively                                                                3,799,270           22,410,968
  Deferred charges:
     Direct                                                                                       3,050,603            1,204,526
     Marketing and promotion                                                                        508,447              881,832
  Other current assets                                                                              731,061              653,627
                                                                                         -------------------  -------------------
         Total current assets                                                                    37,010,693           58,160,096

Fixed assets, net                                                                                 4,588,153            5,056,235
Goodwill, net of accumulated amortization of $102,473 and
   $717,312 in 2000 and 2001, respectively                                                        9,120,104           17,566,866
Intangible assets, net of accumulated amortization of $45,713                                            --            4,449,487
Restricted cash                                                                                          --            1,000,000
Other assets                                                                                      1,325,156            1,920,651
                                                                                         -------------------  -------------------
         Total assets                                                                    $       52,044,106   $       88,153,335
                                                                                         ===================  ===================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                       $        4,780,832   $       25,708,968
  Purchase consideration due for IPM                                                                956,075                   --
  Notes payable                                                                                          --            8,883,069
  Accrued expenses and other current liabilities                                                  2,947,286            3,270,967
  Deferred revenue                                                                                7,121,349            4,509,055
                                                                                         -------------------  -------------------
         Total liabilities                                                                       15,805,542           42,372,059

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, 28,902,600 and
    31,868,012 shares issued and outstanding at December 31, 2000 and 2001,
    respectively                                                                                    289,026              318,680
  Additional paid-in capital                                                                     54,149,068           69,747,302
  Accumulated deficit                                                                           (17,946,192)         (24,720,841)
  Deferred compensation                                                                            (253,338)            (107,665)
                                                                                         -------------------  ------------------
         Total stockholders' equity                                                              36,238,564           45,237,476
                                                                                         -------------------  ------------------
         Total liabilities and stockholders' equity                                      $       52,044,106   $       88,153,335
                                                                                         ===================  ===================

</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                   statements
                                       F-2
<PAGE>

                               HEALTHEXTRAS, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS AND
                               COMPREHENSIVE LOSS
                                    --------



<TABLE>
<CAPTION>
                                                                       For the years ended December 31,
                                                                -----------------------------------------------
                                                                      1999              2000            2001
                                                                ---------------   --------------  ----------------

<S>                                                             <C>               <C>             <C>
Revenues                                                        $    5,326,527    $   44,178,040  $   124,351,056
                                                                ----------------  --------------  ----------------
Direct expenses                                                      3,095,397        24,302,775       93,667,813
Product development and marketing                                   10,331,163        31,210,649       27,212,514
General and administrative                                           2,996,345         8,458,533       11,242,182
                                                                ----------------  --------------  ---------------
           Total operating expenses                                 16,422,905        63,971,957      132,122,509
                                                                ----------------  --------------  ---------------

Operating loss                                                     (11,096,378)      (19,793,917)      (7,771,453)

Interest income (expense), net (includes imputed interest
  applicable to related-party transactions of $268,063 for
  the year ended December 31, 1999)                                   (350,487)        2,068,421        1,092,446
Other income (expense), net                                            (73,234)          499,280          -
                                                                ----------------  --------------  ---------------
Loss before minority interest                                      (11,520,099)      (17,226,216)      (6,679,007)
Minority interest                                                           --                --          (95,642)
                                                                ----------------   -------------- ----------------
Net loss                                                           (11,520,099)      (17,226,216)      (6,774,649)

Unrealized holding losses on marketable securities arising
  during the period                                                   (479,270)               --               --
Reclassification adjustment for realized gains included in
  net loss                                                                  --          (132,669)              --
                                                                ----------------  --------------  ---------------
Comprehensive loss                                              $  (11,999,369)   $  (17,358,885) $    (6,774,649)
                                                                ================  ==============  ===============

Basic and diluted net loss per share                            $        (0.56)   $        (0.62) $         (0.23)
Weighted average shares of common stock outstanding (in
  thousands)                                                            20,588            28,010           29,731

</TABLE>

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

                                       F-3
<PAGE>

                               HEALTHEXTRAS, INC.
               CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
                           (MEMBERS') EQUITY (DEFICIT)
                                    --------
              for the years ended December 31, 1999, 2000, and 2001

<TABLE>
<CAPTION>


                                 HealthExtras, LLC                            HealthExtras, Inc.
                               ----------------------- ------------------------------------------------------------------
                             Accumulated Accumulated
                                             Other                                       Other
                                          Comprehensive                    Additional Comprehensive
                                Members     Income       Common Stock      Paid-in      Income     Accumulated Deferred
                                                       ------------------

                               (Deficit)    (Loss)     Shares   Amount    Capital      (Loss)      Deficit    Compensation    Total
                               ---------- ----------   -------- --------- ---------- -----------   --------   ------------ ---------

 <S>                          <C>          <C>                    <C>        <C>       <C>          <C>        <C>          <C>
Balance, December 31,
 1998                       $( 1,535,232) $611,939           --  $    --    $    --   $    --      $    --    $     --     (923,293)

Grants of effective
  member interests to
  management, net of
  deferred
  compensation of
  $370,232                        97,341        --           --       --         --        --           --          --       97,341
Capital contribution
  by new member                5,000,000        --           --       --         --        --           --          --    5,000,000
Unrealized gain (loss)
  on marketable
  securities                          --  (491,817)          --       --         --    12,547           --          --     (479,270)
Noncash interest
  expense and loan
  guarantee fees                 268,063        --           --       --         --        --           --          --      268,063
Net loss for the period
  from January 1, 1999
  to December 16, 1999
  (see Note 1)               (10,800,123)       --           --       --         --        --           --          --  (10,800,123)
Reorganization, December
  17, 1999 (see Note 1)        6,969,951  (120,122)  22,100,000  221,000  (6,820,719) 120,122           --    (370,232)          --
Net proceeds from
  initial public
  offering (see
  Note 1)                             --        --    5,500,000   55,000  54,866,354       --           --          --   54,921,354
Net loss for the period
  from December 17,
  1999 to December 31,
  1999                                --        --           --       --          --       --     (719,976)         --     (719,976)
                               ---------- --------     --------  -------  ----------    -----   ----------   ---------    ---------
Balance at December 31,
  1999                                --        --   27,600,000  276,000  48,045,635  132,669     (719,976)   (370,232)  47,364,096
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       --  (17,947,192)   (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    $  --  $(24,720,841) $(107,665) $45,237,476
                               =========  ========   ==========  ======== ===========    =====  ============  ========== ===========
</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,
                                                               ---------------------------------------------
                                                                   1999           2000            2001
                                                              -------------- -------------- ---------------
<S>                                                           <C>            <C>            <C>
Cash flows from operating activities:
  Net loss                                                    $ (11,520,099) $ (17,226,216) $   (6,774,649)
  Depreciation expense                                               89,889        599,337       1,110,281
  Noncash compensation expense and fees                              97,341        371,023       6,210,808
  Noncash interest expense                                          268,064             --              --
  Amortization of goodwill                                               --        102,473         614,839
  Amortization of intangible and other assets                            --             --          95,138
  Minority interest                                                      --             --          95,642
  Gain on sale of marketable securities                                  --       (551,735)             --
  Changes in assets and liabilities, net of effects from
   acquisitions of IPM in 2000 and Catalyst in 2001:
       Accounts receivable, net                                     (62,795)      (780,522)     (4,045,099)
       Other assets                                                (538,006)       (89,823)        298,514
       Deferred charges                                            (976,045)       (38,705)      1,472,692
       Accounts payable, accrued expenses and other
     liabilities                                                 (1,128,181)     2,189,998       1,501,902
       Deferred revenue                                           4,979,464      1,884,138      (2,612,294)
                                                              -------------- -------------- ---------------
           Net cash used in operating activities                 (8,790,368)   (13,540,032)     (2,032,226)
                                                              -------------- -------------- ---------------

Cash flows from investing activities:
  Capital expenditures                                           (1,994,736)    (3,061,247)     (1,509,391)
  Payments for purchase of IPM, net of cash acquired                     --     (7,406,398)       (608,225)
  Purchase of pharmacy contracts                                         --             --        (300,000)
  Maturity of certificate of deposit                                700,000             --              --
  Cash acquired in Catalyst acquisition, net of cash paid                --             --       2,242,370
  Sales of available for sale securities                                 --      1,084,050              --
  Deposits, restricted cash and other                                    --       (988,500)       (414,000)
                                                              -------------- -------------- ---------------
           Net cash used in investing activities                 (1,294,736)   (10,372,095)       (589,246)
                                                              -------------- -------------- ---------------

Cash flows from financing activities:
  Repayment of line of credit                                    (1,750,000)            --              --
  Cash received related to agency transaction                            --             --       1,186,000
  Proceeds from exercise of stock options                                --             --         121,800
  Capital contribution                                            5,000,000             --              --
  Repayment to members, net                                      (1,334,429)            --              --
  Payments to reacquire common stock                                     --             --      (4,305,000)
  Net proceeds from sale of common stock                         54,921,354      5,862,333      10,892,503
                                                              -------------- -------------- ---------------
  Net cash provided by financing activities                      56,836,925      5,862,333       6,709,303
                                                              -------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents             46,751,821    (18,049,794)      4,087,831
Cash and cash equivalents at the beginning of year                  219,285     46,971,106      28,921,312
                                                              -------------- -------------- ---------------
Cash and cash equivalents at the end of year                  $  46,971,106  $  28,921,312  $   33,009,143
                                                              ============== ============== ===============

  Supplemental disclosure:
     Cash paid for interest                                   $     181,729  $          --  $           --

</TABLE>


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

                                       F-5
<PAGE>


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


1.  COMPANY
--  -------

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

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

    The Company operates in two business  segments,  Pharmacy Benefit Management
    ("PBM") and the sale of supplemental  health  programs to  individuals.  The
    pharmacy  benefit  management  segment  provides  self-insured  employer and
    managed care customers with access the Company's  negotiated retail pharmacy
    network   rates,   participation   in  certain  rebate   arrangements   with
    manufacturers   based  on  formulary  design,  and  other  care  enhancement
    protocols in our system.

    The  supplemental  health segment of the Company develops and markets health
    and disability  programs to  individuals.  Revenues are generated from fixed
    monthly  membership  fees and payments from marketing  partners based on new
    member enrollments.  The insurance component of the programs is underwritten
    through group  insurance  agreements  purchased by the Company.  The Company
    does not assume any insurance underwriting risk.


                                       F-6
<PAGE>

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--  ------------------------------------------

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

    The accompanying  consolidated  financial statements include the accounts of
    HealthExtras,   Inc.  and  its  wholly  owned   subsidiary,   HealthExtrasRx
    ("HealthExrasRx")  formerly International Pharmacy Management,  Inc. ("IPM")
    and its 80% owned subsidiaries,  Catalyst Rx, Inc. and Catalyst Consultants,
    Inc. (collectively "Catalyst"). HealthExtrasRx and Catalyst are providers of
    Pharmacy Benefit Management ("PBM") Services.  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,  2001, the Company has  $1,000,000  on deposit in a restricted
    account with the State of Nevada as security for performance of its pharmacy
    benefit management obligations.

    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 seven years.  Leasehold improvements are amortized using
    the  straight-line  method  over the shorter of the  estimated  lives of the
    assets or the  lease  term.  The  Company  capitalizes  costs  incurred  for
    software for internal use that is still 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".

                                       F-7
<PAGE>

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

    In  accordance  with  Statement  of Financial  Accounting  Standard No. 121,
    "Accounting  for the  Impairment  of  Long-Lived  Assets and for  Long-Lived
    Assets to be Disposed of", 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.

    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.

    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  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 estimates included in these financial
    statements include the following: rebates due from pharmaceutical companies,
    the value of intangible assets acquired in business combinations and related
    amortization  period,  bad debt expense,  income tax  provisions and related
    valuation  allowances,  and the  estimate  of the value and number of common
    stock  warrants  to be  issued  to a  marketing  partner  under a  marketing
    compensation agreement. Actual results could differ from those estimates.

                                       F-8


<PAGE>

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

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

    Goodwill  related to the November 2000  acquisition  of IPM  represents  the
    excess of acquisition  costs over the fair value of net assets  acquired and
    is amortized on a straight-line  basis over its estimated  useful life of 15
    years.

    Goodwill and intangible  assets related to the November 2001  acquisition of
    Catalyst were recognized under the provisions of FASB Statement No. 141 (FAS
    141) (described below).  Accordingly, a portion of the excess purchase price
    was  assigned  to  intangible  assets  that  were  recognizable  apart  from
    goodwill. Goodwill resulting from this acquisition is not amortized.

    FAS 141,  BUSINESS  COMBINATIONS,  and FASB  Statement  No.  142 (FAS  142),
    GOODWILL AND OTHER INTANGIBLE ASSETS were issued July 20, 2001.

    FAS 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. FAS 141 is effective for all business
    combinations  occurring after June 30, 2001 and the Company's acquisition of
    Catalyst was accounted for in accordance with FAS 141.

    FAS 142  establishes  the accounting  principles for goodwill and intangible
    assets  subsequent to their initial  recognition.  Some significant  changes
    from  the  previous   principles  are:  a)  goodwill  and   indefinite-lived
    intangible  assets are no longer  amortized;  and b) goodwill and intangible
    assets deemed to have an indefinite  life are tested for impairment at least
    annually.

    The provisions of FAS 142 are not effective for the Company until January 1,
    2002;  however,  certain  provisions  of  FAS  142  apply  to  goodwill  and
    intangible  assets acquired after June 30, 2001.  Those provisions have been
    applied to the Catalyst acquisition and other purchases of intangible assets
    that  occurred  after June 30, 2001.  Upon  adoption of FAS 142, the Company
    will be required to perform an impairment  analysis on the goodwill from the
    IPM acquisition.  The Company's analysis will be completed by June 30, 2002.
    Amortization  of  goodwill  from  the IPM  acquisition,  which  amounted  to
    $614,839  in 2001,  will  cease upon the  adoption  of FAS 142 on January 1,
    2002.


                                       F-9

<PAGE>

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

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

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

    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.  The  Company  has  recorded a full
    valuation  allowance  against the  Company's  deferred tax assets due to the
    uncertainty as to their ultimate realization.

    Net loss per share
    ------------------

    Basic net loss per share is based on the weighted  average  number of shares
    outstanding  during  the  year.  Diluted  net loss per share is based on the
    weighted  average  number of shares and  dilutive  common  stock  equivalent
    shares  outstanding  during the year. Diluted net loss per share is equal to
    basic net loss per share since the Company has operated at a loss  position.
    The effect of common stock equivalents, which totaled 894,000 shares for the
    year ended  December 31, 2001,  has been  excluded from the  computation  of
    diluted loss per share as the effect would be anti-dilutive.

    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.

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

    The primary  determinant of revenue  recognition for supplemental health and
    disability  benefits is monthly program enrollment and payments from certain
    business  partners 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

                                       F-10
<PAGE>

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

    business partners related to new member  enrollments are recorded as revenue
    to the  extent of  related  direct  expenses,  which to date  have  exceeded
    payments from business partners.

    Revenue  from  program  benefits 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 generally  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 is adjusted at the end of each quarter based on factors including
    enrollment  levels in each  product,  enrollment  trends,  and the remaining
    portion of the unexpired  prepayment  period.  In the event that a period of
    coverage was purchased in advance,  and there were  insufficient  members to
    utilize the coverage,  the value would expire and be expensed by the Company
    without any related  revenue.  In 2001,  these prepaid  insurance costs were
    fully  utilized,   however,   the  Company  does  maintain  minimum  premium
    commitments  to  various  underwriters  covering  $1,350,000  in  annualized
    premiums.  The Company believes that current enrollment levels will allow it
    to fully utilize this commitment without losses for unused coverage.

    Revenues  recognized  from PBM services  provided to  employer-based  health
    plans (the "plan  sponsors")  which include sales of  prescription  drugs by
    pharmacies in the Company's nationwide network and related claims processing
    fees are recognized  when the claims are  adjudicated.  Pharmacy  claims are
    adjudicated  at  the  point-of-sale   using  the  Company's  on-line  claims
    processing system.  Because the Company has an independent obligation to pay
    its network  pharmacy  providers,  the Company  includes  payments from plan
    sponsors  for these  benefits  as  revenues  and  payments  to its  pharmacy
    providers as direct expense.  Rebate revenues earned under arrangements with
    manufacturers   are  recognized  as  they  are  earned  in  accordance  with
    contractual  agreements and recorded as a reduction of direct expenses and a
    reduction  of  revenue if the  Company  has agreed to share a portion of the
    manufacturers  rebates  with the plan  sponsors.  Manufacturers  rebates are
    based  on  estimates,  which  are  subject  to  final  settlement  with  the
    contracted party.

                                       F-11

<PAGE>

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

    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") will be  effective  for the  Company in 2002.  EITF 01-9 will
    change the way the Company recognizes the cost of consideration  provided to
    a marketing  partner under the warrant  agreement  described in note 7. This
    consideration   is  currently   recognized  as  a  direct   expense  in  the
    consolidated  statements of operations  and  comprehensive  loss.  Effective
    January 1,  2002,  the  Company  will  begin to  recognize  the cost of this
    consideration  as  a  reduction  of  revenue  from  the  marketing  partner.
    Financial  statements from prior periods presented for comparative  purposes
    must be reclassified to comply with these  provisions.  As a result,  in the
    Company's 2002 financial  statements,  revenues and direct expenses for 2001
    and 2000 will be reduced by $6,125,137 and $254,129, respectively.

    Marketing agreements
    --------------------

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

    Common stock warrants
    ---------------------

    The Company records direct expense for the fair market value of common stock
    warrants earned or expected to be earned by a marketing partner. The Company
    estimates  the value of the  warrants  at each  balance  sheet date using an
    appropriate equity-pricing model with assumptions consistent with those used
    in preparing the Company's fair value stock option compensation disclosures.
    Direct  expense is 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 marketing partner. (see note 7.)

3.  BUSINESS COMBINATIONS AND NOTE PAYABLE
--  --------------------------------------

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

    On November 14, 2001, the Company executed  securities  purchase  agreements
    ("the Agreements") to purchase 80% of the outstanding ownership of 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

                                       F-12

<PAGE>

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

    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.

    The terms of the  Agreements  also  require  the  Company  to  purchase  the
    remaining 20% of the Catalyst  common stock  outstanding  by March 14, 2003,
    for a price based on the future EBITDA of Catalyst. Effective March 1, 2002,
    this clause was amended when the Catalyst  minority  interest  agreed to the
    sell the remaining  20% ownership of Catalyst to the Company for  additional
    consideration of $5,280,000. The consideration consists of 319,033 shares of
    Company  stock,  valued at $1,056,000 on the closing date of the  amendment,
    and  $4,224,000  in cash.  The stock is to be  transferred  to the seller on
    April 1, 2002, and the cash will be paid in four installments of $1,056,000,
    due on April 1, 2002, October 1, 2002, January 1, 2003, and March 1, 2003.

    The  acquisition of Catalyst  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  Catalyst's
    potential to generate future cash flows from its existing customer contracts
    and through acquisition of new customers.

    The  following  table  summarizes  the  estimated  fair values 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.
    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>

                                       F-13

<PAGE>

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

    Acquisition of IPM
    ------------------

    On November  1, 2000,  the Company  acquired a  controlling  interest in IPM
    through a purchase  of all of the issued and  outstanding  voting  preferred
    stock and the  majority of  outstanding  common  stock  warrants of IPM. The
    preferred  stock and warrants  represented  approximately  70% of the voting
    control of IPM. The preferred stock and related  warrants were purchased for
    an aggregate cash  consideration of $6.5 million.  Following the purchase of
    the voting  preferred  shares,  the Company  tendered for all the issued and
    outstanding common stock and options of IPM. Substantially all of the common
    stock and options were tendered or were committed to be tendered by December
    31, 2000. The total  consideration  payable for securities  tendered totaled
    $1.6 million in cash and 77,300 shares of the Company's  common stock with a
    fair market value of $347,850.  Total acquisition cost included  transaction
    costs of $156,050.  As of December 31, 2000,  $956,075 of such consideration
    (including  all of the common stock  valued at  $347,850)  was included as a
    liability in the  accompanying  balance sheet. The acquisition was accounted
    for as a purchase, with the purchase prices allocated to the assets acquired
    and liabilities assumed based upon their respective estimated fair values at
    the dates of  acquisition.  IPM now  conducts  its  business  under the name
    "HealthExtrasRx".


    The  acquisition  resulted in goodwill of  approximately  $9.2 million.  The
    assets acquired were net of an allowance for doubtful accounts of $454,000.

<TABLE>
         <S>                                <C>
         Total assets acquired..........    $  3,891,238
         Total liabilities assumed......       4,475,692
                                            ------------
         Net liabilities assumed........         584,454
         Total acquisition cost.........       8,638,123
                                            ------------
         Goodwill.......................    $  9,222,577
                                            ============
</TABLE>


    The following  pro forma  consolidated  results of operations  for the years
    ended  December  31, 2001 and 2000 are  presented as though IPM and Catalyst
    had been acquired at the beginning of 2000,  after giving effect to purchase
    accounting   adjustments  relating  to  the  amortization  of  goodwill  and
    intangible assets. Results are in thousands, except for per share data.

<TABLE>
<CAPTION>

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


<S>                                                <C>         <C>
Revenue                                            $ 112,629   $     178,156
Net loss                                           $ (17,093)  $      (5,390)
Net loss per share - basis and diluted:            $   (0.60)  $       (0.18)
Weighted average shares - basic and diluted           28,454          30,050
</TABLE>

                                       F-14
<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 Catalyst's acquisition been consummated
    as of  January  1,  2000,  nor are they  necessarily  indicative  of  future
    operating results.


4.  INTANGIBLE ASSETS
--  -----------------

    As of December 31, 2001, intangible assets consisted of the following:

<TABLE>
<CAPTION>

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

<S>                                             <C>              <C>
Catalyst customer contracts                     $ 4,000,000      20 years
Other PBM contracts                                 495,200      10 years
                                                ------------
                                                  4,495,200
Accumulated amortization                            (45,713)
                                                ------------
                                                $ 4,449,487
                                                ============
</TABLE>


    Catalyst customer  contracts  represent the estimated fair value of customer
    contracts held by Catalyst at the date of  acquisition.  This estimated fair
    value  and the  weighted  average  useful-life  are  based on  income-method
    valuation  calculations,  performed by an independent consulting firm. These
    calculations are in the process of being  finalized;  thus the allocation of
    the purchase price to intangible assets is subject to refinement.

    Other  PBM  contracts  represent  the  cost of PBM  contracts  purchased  by
    HealthextrasRx from a third party administrator,  which allow HealthextrasRx
    to  provide  PBM   services  to  the   administrator   and  its   customers.
    Consideration  paid for the  contacts 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  is based on  management's  estimate  of the  period of
    future cash flows from the contracts purchased.

    In addition to the initial  purchase price,  the purchase  agreement for the
    PBM contracts  includes a provision for  contingent  consideration  based on
    revenue generated from the contracts  purchased for the period from April 1,
    2002 to  September  30,  2002.  Up to 15,000  shares of common  stock of the
    Company can be issued as contingent consideration.

                                       F-15
<PAGE>

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

    The estimated  aggregate  amortization  expense of intangible assets through
    2006 is as follows:

<TABLE>
<S>      <C>                  <C>
         2002                 $    249,520
         2003                      249,520
         2004                      249,520
         2005                      249,520
         2006                      249,520
                             -------------
          Total               $  1,247,600
                             =============
</TABLE>



5.  FIXED ASSETS
--  ------------

    Fixed assets consist of the following:

<TABLE>
<CAPTION>

                                                      2000         2001
                                              -------------    ------------
<S>                                           <C>            <C>
Computer equipment                            $  2,039,328   $   1,933,511
Software development costs                         886,367       1,901,747
Furniture, fixtures and office equipment           770,271       1,438,658
Medical equipment                                   85,362         103,198
Leasehold improvements                           1,778,526       1,851,537
                                              -------------    ------------
    Total fixed assets                           5,559,854       7,228,651
Accumulated depreciation and amortization         (971,701)     (2,172,416)
                                              -------------    ------------
    Fixed assets, net                         $  4,588,153   $   5,056,235
                                              =============  ==============
</TABLE>


    Depreciation  expense for the years ended  December 31, 1999,  2000 and 2001
    was $89,889, $599,337 and $1,110,281 respectively.

    Software  development  costs  are costs  related  to the  development  of an
    integrated customer relationship management system. This system was still in
    the  development  phases as of December 31, 2001;  therefore no amortization
    has been recorded.  The Company  expects to begin  amortization in 2002. The
    estimated useful life of the software will be three years.


                                       F-16

<PAGE>

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

6.  INCOME TAXES
--  ------------

    A summary of the  components  of deferred  income taxes at December 31, 2000
    and 2001 computed at an effective tax rate of 38.6% as follows:

<TABLE>
<CAPTION>

                                                 2000            2001
                                         --------------   --------------
<S>                                      <C>             <C>
Deferred tax assets (liabilities):
Fixed assets                             $          --   $     (25,542)
Accrued expenses                                96,550           6,840
Allowance for doubtful accounts                175,313         176,644
Deferred charges                            (1,178,143)       (465,188)
Deferred revenue                             2,750,227       1,741,397
Net operating loss carryforwards             7,332,863       9,996,554
Capital loss carryforward                       38,620          38,620
                                         --------------   --------------

                                             9,215,430      11,470,325
Valuation allowance                         (9,215,430)    (11,470,325)
                                         --------------  --------------
    Net deferred tax asset               $          --   $          --
                                         ==============  ==============
</TABLE>


    The Company has net operating  loss  carryforwards  of  approximately  $25.9
    million at December 31, 2001,  available for carryforward to future periods.
    The carryforwards expire at various times beginning in 2010 through 2021.

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

<TABLE>
<CAPTION>
                                                      1999            2000           2001
                                                      ----           ------         -------
<S>                                                  <C>             <C>            <C>
    U.S. Federal Statutory tax rate.............     (34.0%)         (34.0%)        (34.0%)
    State tax, net of federal benefit...........      (4.6)           (4.6)          (4.2)
    Non-deductible expenses.....................                       1.5            3.3
    Valuation allowance.........................      38.5            37.0           34.9
    Other.......................................       0.1             0.1            --
                                                    ------           ------         -----
    Effective tax rate..........................        --%              --%          --%
                                                    =========        ======         ======
</TABLE>


                                       F-17

<PAGE>

                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------
7.  STOCKHOLDERS' EQUITY
--  ---------------------

    STOCK (MEMBER INTERESTS) GRANTS

    In February 1999, certain management employees were granted effective member
    interests  aggregating  1.87%  (equivalent to 413,333  common  shares,  post
    Reorganization)  of  the  Company,   after  giving  effect  to  an  existing
    commitment  to sell a 20%  interest  in the  Company  to a third  party  for
    $5,000,000 cash. Such grants vest over a four-year  period  commencing March
    1, 1999. The Company recorded the estimated fair value of these interests of
    $467,573  ($1.13  per post  Reorganization  common  share) as  stockholders'
    equity and deferred compensation expense.  During 2001, two of the employees
    left  the  Company  and one of them  restructured  a  compensation  package,
    forfeiting the interest in the unvested stock grants.  During 1999, 2000 and
    2001,  amortization of deferred  compensation  expense  amounted to $97,341,
    $116,894  and $73,136  respectively.  The value of  interests  forfeited  of
    $72,537 was  deducted  from the  additional  paid-in  capital  and  deferred
    compensation  in 2001.  The remainder of the deferred  compensation  expense
    will be amortized over the vesting period for the interests.

    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,  in  connection  with the  Reorganization  and initial  public
    offering,  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-18
<PAGE>

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

    The following table summarized stock option activity under all plans for the
    three years ended December 31, 2001:

<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, 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              3.91
   Canceled                              (2,792,500)               13.20             13.20
                                       -------------     ----------------     -------------
Balance, December 31, 2001                2,239,050     $     3.50 -9.65    $         5.02
                                       =============    =================   ==============
Exercisable, December 31, 1999                   --     $             --    $           --
Exercisable, December 31, 2000              698,125     $          13.20    $        13.20
Excerisable, December 31, 2001              353,750     $    4.06 - 5.63    $         4.62
</TABLE>

                                       F-19

<PAGE>

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

    The  following  table  summarizes  information  about  the  outstanding  and
    exercisable options at December 31, 2001:

<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:
     $3.50-5.63             1,790,650        8.7            $4.62
     $6.55-9.65               448,400        9.8            $6.63
     $3.50-9.65             2,239,050        9.0            $5.02
                            =========    ===========      =======
</TABLE>


    The following  table  reflects pro forma net loss and net loss per share for
    the years ended December 31, 1999,  2000 and 2001 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>

                                                   1999             2000              2001
                                               -------------  ----------------- ---------------
<S>                                          <C>              <C>               <C>
Net loss
   As reported                               $  (11,520,099)  $    (17,226,216) $   (6,774,649)
   Pro forma                                    (11,693,258)       (21,894,402)     (8,404,492)

Net loss per share
   As reported - basic and diluted               $(0.56)           $(0.62)          $(0.23)
   Pro forma - basic and diluted                 $(0.57)           $(0.78)          $(0.28)
</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 1999, 2000 and 2001:

<TABLE>
<CAPTION>

                                                   1999             2000              2001
                                               -------------  ----------------- ---------------

<S>                                                <C>            <C>               <C>
Risk-free interest rate                            4.7%           5.6-6.4%          3.8-5.2%
Expected years until exercise                    5 years           5 years          5 years
Expected volatility                               61.3%             95.9%            84.2%
Dividend yield                                      -                 -                -
Weighted average fair value per share             $5.70             $3.47            $3.76
</TABLE>

                                       F-20
<PAGE>

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

    WARRANT AGREEMENT

    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 marketing  partner 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 marketing partner 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  marketing  partner'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.  The Company  recorded
    $5,116,621  in  direct  expense  related  to the  expense  related  to these
    warrants in 2001. In addition,  during 2001, the Company recorded $1,008,516
    in direct  expense  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 marketing  partner
    through December 31, 2001.

    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.


                                       F-21
<PAGE>

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

8.  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>                  <C>
         2002                 $    830,475
         2003                      694,706
         2004                      322,000
                             -------------
               Total          $  1,847,181
                             =============
</TABLE>



    Rent  expense for the years ended  December  31,  1999,  2000 and 2001,  was
    $60,000, $364,000 and $753,000, respectively.


9.  COMMITMENTS
--  -----------

    In 2000, the Company extended a marketing agreement, whereby the Company has
    committed  to  total  non-refundable  payments  of $5  million  due in equal
    installments   over  a  five-year  term  in  exchange  for  an  individual's
    participation  in various  marketing  campaigns.  As of December  31,  2001,
    installments totaling $3 million remain 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  health  and
    disability  program member in excess of one million members,  in addition to
    the base payment of $1 million per year.

    During 1998, the Company entered into various  agreements with participating
    companies requiring aggregate payments by the Company of $1,260,900, whereby
    the Company guaranteed  minimum enrollment in its programs.  The Company has
    historically  maintained a prepaid  expense  balance with respect to benefit
    features of its programs.  Direct expense is recognized  based on the actual
    membership  levels in each program.  The deferred  amount at the end of each
    quarter is adjusted  to reflect  advances,  if any,  made during the period,
    expenses  recognized and remaining coverage periods and membership levels to
    which such advances can be applied. As of December 31, 2001, the Company did
    not have any prepaid balances but maintains  minimum premium  commitments to
    various  underwriters  covering  $1,350,000  in  annualized  premiums.   The
    Company's  current  enrollment  levels  should  allow  it  to  utilize  this
    commitment without incurring losses for unused coverage.

                                       F-22

<PAGE>

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

    The Company has entered into three-year  employment  agreements with certain
    executive  officers.  The annual base salaries under these  agreements range
    from  $175,000 to $280,000,  and one  executive  will be entitled to a bonus
    equal  to one  percent  of  the  Company's  annual  after-tax  profits.

    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.

10. SEGMENT REPORTING
--- -----------------

    The Company  operates in two market  segments as a provider of  supplemental
    health  programs  to  individuals,   and  a  provider  of  pharmacy  benefit
    management  services  to  plan  sponsors.  HealthExtras'  supplement  health
    membership  is highly  concentrated  in  members  represented  by two of its
    marketing  partners.  The Company's two largest marketing partners accounted
    for 62% and 17%, respectively,  of supplemental health revenue for 2001. The
    following  table  presents  financial  data by segment  for the years  ended
    December  31, 2000 and  December  31,  2001.  Prior to 2000 the Company only
    operated in the  supplemental  health and disability  segment.  PBM services
    operating results include the results for  HealthextrasRx  and Catalyst from
    their respective dates of acquistion.

<TABLE>
<CAPTION>

                              Supplemental
                               Health and
    December 31, 2001          Disability             PBM            Total
                           -----------------   --------------   ---------------
<S>                        <C>                 <C>              <C>
    Revenue                $      77,457,307   $    46,893,749  $   124,351,056
    Operating expenses            84,832,141        47,290,368      132,122,509
    Net loss                      (6,774,263)             (386)      (6,774,649)
    Total assets                  39,637,025        48,516,310       88,153,335
    Accounts receivable            2,758,367        19,652,601       22,410,968
    Accounts payable               3,128,698        22,580,270       25,708,968
</TABLE>

                                      F-23

<PAGE>

<TABLE>
<CAPTION>

                              Supplemental
                               Health and
    December 31, 2000          Disability             PBM            Total
                           -----------------   --------------   ---------------
<S>                        <C>                 <C>              <C>
    Revenue                $      39,300,891   $     4,877,149  $    44,178,040
    Operating expenses            58,983,554         4,988,403       63,971,957
    Net loss                     (17,122,208)         (104,008)     (17,226,216)
    Total assets                  47,795,234         4,248,872       52,044,106
</TABLE>



                                       F-24
<PAGE>

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

11. 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 2001, 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 and 2001,  the  Company
    expensed $85,989 and $105,224 respectively, under this plan.


12. RELATED PARTY TRANSACTIONS
--- --------------------------

    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  $976,144  and  $926,719,  net of
    accumulated  depreciation  of  $12,356  and  $61,781,  for the  years  ended
    December  31, 2000 and 2001,  respectively.  These  amounts are  included in
    non-current other assets. 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, 2000 and 2001,  the Company
    paid $131,575 and $14,556  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  after
    December 31, 2001.

    The Company also maintains 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.

    In August of 2001,  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 price paid for the stock was  reviewed and approved
    by the Board of Directors.

    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.

                                       F-25

<PAGE>

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

    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.  Prior to January
    1, 1999,  the Company  had an  unwritten  arrangement  with UP&UP to provide
    similar services.  The amount paid by the Company for such services was $3.3
    million and $1.2  million,  for the years ended  December 31, 1999 and 2000,
    respectively. Under a revised agreement dated December 22, 1999, services to
    be provided by UP&UP (BCE Emergis  Corporation  following its acquisition of
    UP&UP)  subsequent  to March 31,  2000,  are limited  primarily  to services
    relating to information technology and communications and are paid on a cost
    plus fee basis.  The amount  expensed for these  services  under the revised
    agreement  were $829,000 and $190,000 for the years ended  December 31, 2000
    and 2001, respectively.

    In 1998,  the Company  entered into a credit  facility  with a bank totaling
    $2,000,000 and bearing  interest at the prime rate,  which was guaranteed by
    UP&UP.  As of December 31, 1999,  all amounts due under the credit  facility
    had been paid and the  Company  terminated  the credit  facility  in January
    2000.  Loan  guarantee  fees  were  imputed  based  on the  monthly  amounts
    outstanding  under the credit line at an annual rate of 2%. The imputed loan
    guarantee  fees have been  recorded as interest  expense in the statement of
    operations  and as  members'  capital.  Such fees were  $45,453 for the year
    ended December 31, 1999.

    From  time to time  in  1999,  the  Company  owed  UP&UP  for the  costs  of
    administrative  services.  Such  amounts  payable  did  not  bear  interest.
    Interest  on amounts  due UP&UP was imputed at an annual rate of 10% and was
    recorded  as  interest  expense  in  the  statement  of  operations  and  as
    stockholders'  equity.  Such interest expense was $72,501 for the year ended
    December 31, 1999.

    From time to time in 1999,  the Chairman of the Board of the Company  loaned
    the Company funds in excess of his pro-rata share of capital  contributions.
    Interest  was imputed on the monthly  outstanding  balance of the loan at an
    annual rate of 10%. The imputed interest was recorded as interest expense in
    the statement of operations and as  stockholders'  equity.  Imputed interest
    expense  was  $150,109  for the year  ended  December  31,  1999.  All funds
    advanced were repaid as of December 31, 1999.

                                       F-26

<PAGE>
                               HEALTHEXTRAS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    --------


13. SUPPLEMENTAL DISCLOSURE OF QUARTERLY RESULTS OF OPERATION (UNAUDITED)
--- ---------------------------------------------------------------------

    Quarterly  results of operations  for the years ended  December 31, 2000 and
    2001 (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                               First          Second     Third         Fourth
2001 Quarterly Operating Results               Quarter       Quarter     Quarter       Quarter
                                             ----------     --------    --------      --------
<S>                                          <C>            <C>         <C>           <C>
Revenue                                      $   23,097     $  25,846   $ 28,891      $ 46,517
Loss from operations                             (3,279)       (4,160)      (225)         (107)
(Loss) income before minority interest           (2,892)       (3,824)        35             2
Net (loss) income                                (2,892)       (3,824)        35           (94)

Basic & diluted net loss per common share
sharevable                                   $    (0.10)    $   (0.13)  $     --      $     --

2000 Quarterly Operating Results
Revenue                                      $    5,253     $   8,098   $ 10,784      $ 20,043
Loss from operations                             (7,877)       (5,240)    (3,905)       (2,771)
Net loss                                         (6,645)       (4,740)    (3,427)       (2,414)

Basis & diluted net loss per common share    $    (0.24)    $   (0.17)  $  (0.12)     $  (0.08)
</TABLE>


14. NON-CASH TRANSACTIONS
--- ---------------------

    Transactions that effected recognized assets and liabilities during 2000 and
    2001 that did not result in cash receipts or payments are as follows:

<TABLE>
<S>                                                      <C>

       2000
       ----
       Goodwill acquired through issuance
          of stock and notes payable                      $   956,075

       2001
       ----
       Goodwill and intangible assets acquired through
          issuance of notes payable, 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 acquistion           347,850
       Common stock issued for purchase of intangible
          assets                                              195,200
</TABLE>

                                       F-27