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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2007

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



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HEALTHEXTRAS,
INC.

(Exact name of registrant as specified in its charter)



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

800 King Farm Boulevard, Rockville, Maryland 20850

(Address of principal executive offices, zip code)

(301) 548-2900

(Registrants phone number, including area code)



---

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 whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. (See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act).

Large accelerated filer  x    Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No   x

As of April 30, 2007 there were 41,951,648 shares outstanding of the Registrants $0.01 par value common stock.



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##### Table of Contents

HEALTHEXTRAS, INC.

and Subsidiaries

First Quarter 2007 Form 10-Q

TABLE OF CONTENTS



|           |  |                       |  |                                                                                             |  |     
|---------- |  | --------------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|           |  |                       |  |                                                                                             |  | Page
|PART I     |  | FINANCIAL INFORMATION |  |                                                                                            
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements (Unaudited)                                                            |  |     
|           |  |                       | 
|           |  |                       |  | Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                      |  | 1   
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006    |  | 2   
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006    |  | 3   
|           |  |                       | 
|           |  |                       |  | Consolidated Statements of Comprehensive Income for the Three Ended March 31, 2007 and 2006 |  | 4   
|           |  |                       | 
|           |  |                       |  | Notes to Consolidated Financial Statements                                                  |  | 5   
|           |  |                       | 
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 11  
|           |  |                       | 
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                  |  | 16  
|           |  |                       | 
|           |  | Item 4.               |  | Controls and Procedures                                                                     |  | 16  
|           |  |                      
|PART II    |  | OTHER INFORMATION     |  |                                                                                            
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                           |  | 17  
|           |  |                       | 
|           |  | Item 1A.              |  | Risk Factors                                                                                |  | 17  
|           |  |                       | 
|           |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                 |  | 17  
|           |  |                       | 
|           |  | Item 3.               |  | Defaults Upon Senior Securities                                                             |  | 17  
|           |  |                       | 
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                         |  | 17  
|           |  |                       | 
|           |  | Item 5.               |  | Other Information                                                                           |  | 17  
|           |  |                       | 
|           |  | Item 6.               |  | Exhibits                                                                                    |  | 18  
|           | 
|SIGNATURES |  |                      



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | Financial Statements
|------- | --------------------

HEALTHEXTRAS, INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                                                |  |                |         |   |                   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                |  | March 31, 2007 |         |   | December 31, 2006 |  
|ASSETS                                                                                                                                          |  |                |         |   |                   |   |         |  
|Current assets:                                                                                                                                 |  |                |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                       |  | $              | 19,626  |   |                   | $ | 49,501  |  
|Marketable securities                                                                                                                           |  |                | 44,050  |   |                   |   | 42,200  |  
|Accounts receivable, net of allowances of $2,837 and $2,122 at March 31, 2007 and December 31, 2006, respectively                               |  |                | 182,509 |   |                   |   | 169,432 |  
|Deferred charges                                                                                                                                |  |                | 800     |   |                   |   | 1,506   |  
|Deferred income taxes                                                                                                                           |  |                |        |   |                   |   | 60      |  
|Other current assets                                                                                                                            |  |                | 5,109   |   |                   |   | 4,875   |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total current assets                                                                                                                            |  |                | 252,094 |   |                   |   | 267,574 |  
|Property and equipment, net of accumulated depreciation of $6,778 and $5,949 at March 31, 2007 and December 31, 2006,
respectively              |  |                | 13,320  |   |                   |   | 12,859  |  
|Intangible assets, net                                                                                                                          |  |                | 34,577  |   |                   |   | 34,362  |  
|Goodwill                                                                                                                                        |  |                | 148,448 |   |                   |   | 118,055 |  
|Restricted cash                                                                                                                                 |  |                | 1,000   |   |                   |   | 1,000   |  
|Other assets                                                                                                                                    |  |                | 1,849   |   |                   |   | 2,174   |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total assets                                                                                                                                    |  | $              | 451,288 |   |                   | $ | 436,024 |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|                                                                                                                                                |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            |  |                |         |   |                   |   |         |  
|Current liabilities:                                                                                                                            |  |                |         |   |                   |   |         |  
|Accounts payable                                                                                                                                |  | $              | 167,864 |   |                   | $ | 167,066 |  
|Accrued expenses and other current liabilities                                                                                                  |  |                | 9,955   |   |                   |   | 8,721   |  
|Income taxes payable                                                                                                                            |  |                | 5,177   |   |                   |   | 2,208   |  
|Deferred income taxes                                                                                                                           |  |                | 15      |   |                   |   |        |  
|Deferred revenue                                                                                                                                |  |                | 2,336   |   |                   |   | 3,802   |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total current liabilities                                                                                                                       |  |                | 185,347 |   |                   |   | 181,797 |  
|Deferred rent expense                                                                                                                           |  |                | 1,731   |   |                   |   | 1,478   |  
|Deferred income taxes                                                                                                                           |  |                | 11,926  |   |                   |   | 11,454  |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total liabilities                                                                                                                               |  |                | 199,004 |   |                   |   | 194,729 |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                   |  |                |         |   |                   |   |         |  
|                                                                                                                                                |  |               
|Minority interest                                                                                                                               |  |                |        |   |                   |   | 1,248   |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                           |  |                |         |   |                   |   |         |  
|Preferred stock, $0.01 par value, 5,000 shares authorized, none issued                                                                          |  |                |        |   |                   |   |        |  
|Common stock, $0.01 par value, 100,000 shares authorized, 41,551 and 41,379 shares issued at March 31, 2007 and December 31, 2006,
respectively |  |                | 416     |   |                   |   | 414     |  
|Additional paid-in capital                                                                                                                      |  |                | 173,374 |   |                   |   | 170,552 |  
|Treasury stock, at cost, 48 shares and 36 shares at March 31, 2007 and December 31, 2006, respectively                                          |  |                | (1,226  | ) |                   |   | (930    | )
|Retained earnings                                                                                                                               |  |                | 79,720  |   |                   |   | 70,011  |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                      |  |                | 252,284 |   |                   |   | 240,047 |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                      |  | $              | 451,288 |   |                   | $ | 436,024 |  
|                                                                                                                                                |  |                |         |   |                   |   |         |  

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



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HEALTHEXTRAS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                               |  |                                     |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                               |  | For the three monthsended March 31, |        
|                                                                                                                               |  | 2007                                |         |   | 2006 |  
|Revenue (excludes member co-payments of $156,069 and $98,634 for the three months ended March 31, 2007 and 2006,
respectively) |  | $                                   | 406,372 |   |      | $ | 238,671 |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Direct expenses                                                                                                                |  |                                     | 378,814 |   |      |   | 218,929 |  
|Selling, general and administrative expenses                                                                                   |  |                                     | 12,812  |   |      |   | 10,945  |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Total operating expenses                                                                                                       |  |                                     | 391,626 |   |      |   | 229,874 |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Operating income                                                                                                               |  |                                     | 14,746  |   |      |   | 8,797   |  
|Interest income                                                                                                                |  |                                     | 1,331   |   |      |   | 854     |  
|Interest expense                                                                                                               |  |                                     | (36     | ) |      |   | (218    | )
|Other income                                                                                                                   |  |                                     | 1       |   |      |   | 18      |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Income before minority interest and income taxes                                                                               |  |                                     | 16,042  |   |      |   | 9,451   |  
|Minority interest                                                                                                              |  |                                     | 31      |   |      |   | 40      |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Income before income taxes                                                                                                     |  |                                     | 16,011  |   |      |   | 9,411   |  
|Income tax expense                                                                                                             |  |                                     | 6,302   |   |      |   | 3,649   |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Net income                                                                                                                     |  | $                                   | 9,709   |   |      | $ | 5,762   |  
|                                                                                                                               |  |                                     |         |   |      |   |         |  
|Net income per share, basic                                                                                                    |  | $                                   | 0.24    |   |      | $ | 0.14    |  
|Net income per share, diluted                                                                                                  |  | $                                   | 0.23    |   |      | $ | 0.14    |  
|Weighted average shares of common stock outstanding, basic                                                                     |  |                                     | 40,952  |   |      |   | 39,810  |  
|Weighted average shares of common stock outstanding, diluted                                                                   |  |                                     | 42,765  |   |      |   | 42,053  |  

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



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HEALTHEXTRAS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                                     |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | For the three monthsended March 31, |        
|                                                                                  |  | 2007                                |         |   | 2006 |  
|Cash flows from operating activities:                                             |  |                                     |         |   |      |   |         |  
|Net income                                                                        |  | $                                   | 9,709   |   |      | $ | 5,762   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                     |         |   |      |   |         |  
|Depreciation expense                                                              |  |                                     | 832     |   |      |   | 500     |  
|Amortization of intangibles and other assets                                      |  |                                     | 988     |   |      |   | 558     |  
|Allowances on accounts receivable                                                 |  |                                     | 720     |   |      |   | 50      |  
|Deferred income taxes                                                             |  |                                     | 79      |   |      |   | 140     |  
|Equity based compensation charges                                                 |  |                                     | 1,209   |   |      |   | 881     |  
|Minority interest in earnings of a subsidiary                                     |  |                                     | 31      |   |      |   | 40      |  
|Changes in assets and liabilities, net of effects from acquisitions:              |  |                                     |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                     | (13,797 | ) |      |   | (22,207 | )
|Income taxes payable                                                              |  |                                     | 2,969   |   |      |   | (1,092  | )
|Other assets                                                                      |  |                                     | 78      |   |      |   | (1,040  | )
|Deferred charges                                                                  |  |                                     | 705     |   |      |   | (216    | )
|Accounts payable, accrued expenses, and other liabilities                         |  |                                     | 236     |   |      |   | 16,418  |  
|Deferred revenue                                                                  |  |                                     | (1,467  | ) |      |   | 487     |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                                     | 2,292   |   |      |   | 281     |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |                                     |         |   |      |   |         |  
|Purchases of property and equipment                                               |  |                                     | (1,292  | ) |      |   | (659    | )
|Business acquisitions and related payments, net of cash acquired                  |  |                                     | (29,065 | ) |      |   |        |  
|Acquisition of remaining minority interest                                        |  |                                     | (1,279  | ) |      |   |        |  
|Purchases of marketable securities                                                |  |                                     | (31,350 | ) |      |   | (14,125 | )
|Maturities of marketable securities                                               |  |                                     | 29,500  |   |      |   | 7,000   |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                                     | (33,486 | ) |      |   | (7,784  | )
|                                                                                  |  |                                     |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |                                     |         |   |      |   |         |  
|Repayments of notes payable                                                       |  |                                     |        |   |      |   | (1,250  | )
|Proceeds from exercise of stock options and warrants                              |  |                                     | 657     |   |      |   | 3,066   |  
|Excess tax benefits due to option exercises and restricted stock vesting          |  |                                     | 839     |   |      |   | 4,376   |  
|Proceeds from shares issued under employee stock purchase plan                    |  |                                     | 119     |   |      |   | 121     |  
|Purchases of treasury stock                                                       |  |                                     | (296    | ) |      |   |        |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                                     | 1,319   |   |      |   | 6,313   |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                                     | (29,875 | ) |      |   | (1,190  | )
|Cash and cash equivalents at the beginning of period                              |  |                                     | 49,501  |   |      |   | 27,900  |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Cash and cash equivalents at the end of period                                    |  | $                                   | 19,626  |   |      | $ | 26,710  |  
|                                                                                  |  |                                     |         |   |      |   |         |  
|Supplemental disclosure:                                                          |  |                                     |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                                   | 23      |   |      | $ | 194     |  
|Cash paid for taxes                                                               |  | $                                   | 2,416   |   |      | $ | 225     |  

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



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HEALTHEXTRAS, INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



|                                      |  |                                     |       |      |   |      
|------------------------------------- |  | ----------------------------------- | ----- | ---- | - | -----
|                                      |  | For the three monthsended March 31,
|                                      |  | 2007                                |       | 2006
|Comprehensive income:                 |  |                                     |       |      |   |      
|Net income                            |  | $                                   | 9,709 |      | $ | 5,762
|Other comprehensive income:           |  |                                     |       |      |   |      
|Unrealized gain on interest rate swap |  |                                     |      |      |   | 4    
|                                      |  |                                     |       |      |   |      
|Total comprehensive income            |  | $                                   | 9,709 |      | $ | 5,766
|                                      |  |                                     |       |      |   |      

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



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HEALTHEXTRAS, INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | BASIS OF PRESENTATION
|-- | ---------------------

The accompanying unaudited
consolidated financial statements have been prepared by HealthExtras, Inc. (the Company, we or us), a Delaware corporation, in accordance with accounting principles generally accepted in the United States for
interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring
adjustments and accruals, necessary for a fair presentation of the consolidated balance sheets, statements of operations and statements of cash flows for the periods presented. Operating results for the three months ended March 31, 2007, are
not necessarily indicative of the results that may be expected for the year ending December 31, 2007. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles
generally accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date, but does not include
all of the disclosures required by accounting principles generally accepted in the United States. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on February 28, 2007.

Certain reclassifications were made to prior year amounts to conform to current year presentation. Specifically, for the three months ended March 31, 2006, $5.5 million of certain selling, general and
administrative expenses, such as third-party commissions, client and member services costs, and information technology costs, have been reclassified to direct expenses. This reclassification, which is comprised of $5.1 million and $0.4 million to
our pharmacy benefit management (PBM) segment and Supplemental Benefits segment, respectively, was made to better reflect the nature of these costs as being more indicative of the direct effort to manage and process our client revenue.
These changes have no impact on our previously reported revenue, total operating expenses or operating income.



|2. | RECENT ACCOUNTING PRONOUNCEMENTS
|-- | --------------------------------

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements(FAS 157), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles. FAS 157 applies to financial statements that are issued for fiscal years beginning after November 15, 2007 and to interim periods within those fiscal years. We are required to adopt FAS 157 on
January 1, 2008. We are currently evaluating the impact the adoption of FAS 157 may have on our financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159), which permits reporting entities to elect to measure many
financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. FAS 159 will be effective in the first quarter of fiscal 2008. We are currently evaluating the
impact the adoption of FAS 159 may have on our financial condition, results of operations or cash flows.



|3. | BUSINESS COMBINATIONS
|-- | ---------------------

Acquisition of R/xx

On November 3, 2006, we purchased all of the outstanding common stock of R/xxPharmacy Solutions, Inc. (R/xx), an Arizona corporation, for $16.0 million in cash and $0.7 million in related transaction costs. As provided for in the acquisition agreement, an additional cash consideration of $2.1 million
was earned, but not yet paid, based on successful achievement of certain client retention criteria during the period ended March 31, 2007. R/xxis a provider of pharmacy benefit management services with a strategic focus on clients in the Arizona, Nevada and



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Hawaii markets. We have also established a business development marketing relationship with an R/xxaffiliate, Pharmacy Benefit Consultants, Inc. (PBC), and have agreed to purchase PBC if requested by its shareholder on terms determined by
PBCs success in generating new business, primarily during 2007.

The
acquisition of R/xxresulted in goodwill of $15.5 million and intangible assets of $5.6 million. The allocation of
the purchase price to the net assets acquired is preliminary and may be adjusted upon completion of a valuation study which is currently in progress. Consequently, the allocation of purchase price to intangible assets is subject to adjustment.
Additionally, the cost of the acquisition may be increased depending on the resolution of the contingent consideration.

Acquisition of EBRx

On December 16, 2005, we acquired the common stock of EBRx, Inc. (EBRx). The acquisition was structured as a merger
between our wholly-owned subsidiary, HCEM Corp., and the parent company of EBRx, with the former parent as the surviving entity following the merger. Consideration consisted of a cash payment of $27.9 million and $0.8 million in related transaction
costs. HCEM was funded by us with a $4.0 million equity investment and the remaining consideration was provided in the form of subsidiary debt. As contemplated by the original structure and terms of the transaction, a separate entity owned by former
owners of EBRx and its management team, purchased a 20% ownership interest in the parent of EBRx through a $1.0 million equity investment, on January 3, 2006. This equity investment was made in the form of a note receivable and is recorded in
the current other assets category in our consolidated balance sheet. The note receivable is collateralized by certificates of deposit having an aggregate principal amount of $1.0 million. The note bears interest of 4.38% per annum.

In addition, the transaction provided that we may purchase the remaining 20% interest beginning after twelve months and ending after
fifteen months from closing at specified amounts based on the financial performance of EBRx. On February 6, 2007, we acquired the remaining 20% minority ownership interest in the parent of EBRx through the acquisition of a separate entity and
transferred the shares in the operating subsidiary to HCEM Corp., our wholly owned subsidiary. The transaction resulted in a cash payment of $30.3 million, of which $29.0 million was recorded as additional goodwill, prior to the repayment of related
transaction debt and accrued interest.

The acquisition also provided for an additional contingent consideration payment of up to $3.0
million subject to performance based standards including certain specified client retention and gross profit criteria for the twelve months ended December 31, 2006. The contingent consideration earned in 2006 was approximately $2.4 million.

Based on a valuation report of the allocation of the purchase price to the net assets acquired, the acquisition of EBRx resulted in
goodwill of $55.6 million and customer relationship intangibles of $8.5 million and non-competition agreements of $0.3 million. The customer relationship intangibles are being amortized on a straight-line basis over an 11-year life and the
non-competition agreements are being amortized on a straight-line basis over a 3-year life.



|4. | GOODWILL AND INTANGIBLE ASSETS
|-- | ------------------------------

The changes in
goodwill for the three months ended March 31, 2007 are as follows (in thousands):



|                                                             |  |      |         |  
|------------------------------------------------------------ |  | ---- | ------- | -
|                                                             |  | 2007 |        
|Balance as of January 1, 2007                                |  | $    | 118,055 |  
|Contingent consideration incurred                            |  |      | 2,050   |  
|Additional transaction costs related to previous acquisition |  |      | 29,065  |  
|Adjustment to purchase price allocation                      |  |      | (722    | )
|                                                             |  |      |         |  
|Balance as of March 31, 2007                                 |  | $    | 148,448 |  
|                                                             |  |      |         |  

Goodwill represents the excess of the purchase price over the fair value of the net assets of
acquired businesses. We performed our annual impairment testing at December 31, 2006 and concluded that no impairment of goodwill exists. All goodwill is recorded in the PBM segment.



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The following table sets forth the components of intangible assets (in thousands):



|                            |  |                |        |   |               |   |        |                     |  |                    
|--------------------------- |  | -------------- | ------ | - | ------------- | - | ------ | ------------------- |  | -------------------
|                            |  | March 31, 2007 |        |   | Dec. 31, 2006 |   |        | Amortization period
|Catalyst customer contracts |  | $              | 5,700  |   |               | $ | 5,700  |                     |  | 20 years           
|PNNC customer contracts     |  |                | 8,000  |   |               |   | 8,000  |                     |  | 20 years           
|MHS customer contracts      |  |                | 8,289  |   |               |   | 8,289  |                     |  | 15 years           
|EBRx customer contracts     |  |                | 8,507  |   |               |   | 7,393  |                     |  | 11 years           
|R/xxcustomer contracts      |  |                | 5,600  |   |               |   | 5,600  |                     |  | 12 years           
|Non-compete agreements      |  |                | 374    |   |               |   | 298    |                     |  | 2  3 years        
|Other PBM contracts         |  |                | 6,755  |   |               |   | 6,755  |                     |  | 5 months  20 years
|                            |  |                |        |   |               |   |        |                     |  |                    
|Total intangible assets     |  |                | 43,225 |   |               |   | 42,035 |                     |  |                    
|Accumulated amortization    |  |                | (8,648 | ) |               |   | (7,673 | )                   |  |                    
|                            |  |                |        |   |               |   |        |                     |  |                    
|                            |  | $              | 34,577 |   |               | $ | 34,362 |                     |  |                    
|                            |  |                |        |   |               |   |        |                     |  |                    

Catalyst Rx (Catalyst),
Pharmacy Network National Corporation (PNNC), Managed Healthcare Systems, Inc. (MHS) and EBRx customer contracts represent the estimated fair value of customer contracts held by Catalyst, PNNC, MHS, R/xxand EBRx at the dates of acquisition. This estimated fair value and the weighted average useful-lives are based on
income-method valuation calculations. Other PBM contracts allow us to provide PBM services, which are amortized over the future cash flow, based on managements best estimate.

The estimated aggregate amortization expense of existing intangible assets for the years ending December 31, 2007, 2008, 2009, 2010 and 2011, is
$3.9 million, $3.6 million, $3.4 million, $3.0 million and $2.6 million, respectively.



|5. | CREDIT FACILITY AND NOTES PAYABLE
|-- | ---------------------------------

In September
2006, we entered into a new $50.0 million revolving credit facility with our primary commercial bank. The facility is for a three-year term expiring September 2009 and bears interest at LIBOR plus a variable margin based on funded debt to earnings
before interest, taxes, depreciation and amortization expense (EBITDA), payable in arrears on the first day of each month. There was no outstanding balance at March 31, 2007 or at December 31, 2006 on the credit facility. The
credit facility is collateralized by all of our assets. The facility contains affirmative and negative covenants including those related to indebtedness and EBITDA.

Concurrent with entering into this revolving credit facility, we repaid the then outstanding balance on the term loan facility with our primary commercial bank and terminated the related interest rate swap
arrangement.



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

Effective January 1, 2007, we
adopted the provisions of FASBs Interpretation No. 48, Accounting for Uncertain Tax Positions (FIN 48). This interpretation clarifies the accounting for uncertain tax positions in accordance with FASB Statement
No. 109, Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have evaluated our tax positions in the tax returns filed, as well as un-filed
tax positions and the amounts comprising our deferred tax assets. We have determined that FIN 48 will not have a material impact on our financial condition, results of operations or cash flows.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Our federal income tax returns for 2003 through 2006 are
open tax years. State jurisdictions that remain subject to examinations range from 2000 to 2006.

We may from time to time be assessed
interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits
as a component of income tax expense.



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|7. | STOCKHOLDERS EQUITY
|-- | --------------------

Stock Options

A summary of our stock option activity for the three months ended March 31, 2007 is as follows (in thousands, except for weighted average exercise
price):



|                                 |  |         |   |  |                                 |     
|-------------------------------- |  | ------- | - |  | ------------------------------- | ----
|                                 |  | Options |   |  | Weighted-Average Exercise Price
|Outstanding at December 31, 2006 |  | 3,091   |   |  | $                               | 7.14
|Granted                          |  |        |   |  |                                 |    
|Exercised                        |  | (119    | ) |  |                                 | 5.51
|Forfeited or expired             |  |        |   |  |                                 |    
|                                 |  |         |   |  |                                 |     
|Outstanding at March 31, 2007    |  | 2,972   |   |  |                                 | 7.21
|                                 |  |        
|Exercisable at March 31, 2007    |  | 2,972   |   |  | $                               | 7.21

The aggregate intrinsic value of exercisable stock options at March 31, 2007 was
approximately $21.4 million with a weighted average remaining life of 5.3 years. The total intrinsic value of stock options exercised during the three months ended March 31, 2007 was approximately $2.4 million.

Restricted Stock Awards

A summary of our restricted
share activity for the three months ended March 31, 2007 is as follows (in thousands, except for fair market value):



|                                                   |  |        |   |  |                   |      
|-------------------------------------------------- |  | ------ | - |  | ----------------- | -----
|                                                   |  | Shares |   |  | Fair Market Value
|Non-vested shares outstanding at December 31, 2006 |  | 482    |   |  | $                 | 25.61
|Granted                                            |  | 36     |   |  |                   | 24.46
|Vested                                             |  | (31    | ) |  |                   | 31.42
|Forfeited or expired                               |  | (8     | ) |  |                   | 28.69
|                                                   |  |        |   |  |                   |      
|Non-vested shares outstanding at March 31, 2007    |  | 479    |   |  |                   | 25.09

As of March 31, 2007, the total remaining unrecognized compensation cost related to
non-vested restricted shares was approximately $10.4 million with a weighted average period over which it is expected to be recognized of 3.0 years.

Performance-based Shares

In February 2007, we granted 94,000 performance-based shares, having a fair market value of $24.82
per share, to our senior executives under our 2006 Equity Incentive Plan. These performance-based shares will be earned based upon the achievement of 2007 operating profitability targets established by the Board of Directors, subject also to
time-based vesting over a period of four years. As of March 31, 2007, the total remaining unrecognized compensation cost related to performance-based shares was approximately $2.3 million.

We adopted the alternative transition method provided in FASB Staff Position No. FAS 123R-3,Transition Election Related to Accounting for
Tax Effects of Share-Based Payment Awards(SFAS 123(R)-3) for calculating the tax effects of equity-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the
beginning balance of the Additional Paid-In Capital Pool (APIC Pool) related to the tax effects of employee equity-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statement of cash flows of
the tax effects of employee equity-based compensation awards that were outstanding upon the implementation of SFAS 123(R), Share-based Payment.



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Treasury Stock

Recipients of restricted stock grants are provided the opportunity to sell a portion of those shares to the Company at the time the shares vest, in order to pay their withholding tax obligations. We account for
these share purchases as treasury stock transactions using the cost method. For the three months ended March 31, 2007, 12,000 shares were purchased at a cost of approximately $0.3 million, and for the year ended December 31, 2006,
36,000 shares were purchased at a cost of approximately $0.9 million

Employee Stock Purchase Plan

Effective January 1, 2007, the employee stock purchase plan (ESPP) was modified, allowing eligible employees to purchase shares of the
Companys common stock each quarter at 95% of the market value on the last day of the quarter. The ESPP, as modified, is not considered compensatory under the provisions of SFAS No. 123(R) and therefore no portion of the costs related to
ESPP purchases is included in the Companys stock-based compensation expense for the three-month period ended March 31, 2007.



|8. | CO-PAYMENTS
|-- | -----------

In our PBM segment, member co-payments
are not recorded as revenue. We incur no obligation for co-payments to pharmacies and have never made such payments. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payments from the members. Under our client
contracts, we do not assume liability for member co-payments in pharmacy transactions. As such, we do not include member co-payments to pharmacies in revenue or operating expenses.



|9. | NET INCOME PER SHARE
|-- | --------------------

Basic net income per common
share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that
could occur (using the treasury stock method) if stock options, restricted stock awards and warrants to issue common stock were exercised.

The following represents a reconciliation of the number of shares used in the basic and diluted net income per share computations (amounts in thousands, except per share data):



|                                                                       |  |                             |        |      |   |       
|---------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                                                       |  | Three months endedMarch 31,
|                                                                       |  | 2007                        |        | 2006
|Net income available to common stockholders                            |  | $                           | 9,709  |      | $ | 5,762 
|                                                                       |  |                             |        |      |   |       
|Calculation of shares:                                                 |  |                             |        |      |   |       
|Weighted average common shares outstanding, basic                      |  |                             | 40,952 |      |   | 39,810
|Dilutive effect of stock options, restricted stock awards and warrants |  |                             | 1,813  |      |   | 2,243 
|                                                                       |  |                             |        |      |   |       
|Weighted average common shares outstanding, diluted                    |  |                             | 42,765 |      |   | 42,053
|                                                                       |  |                             |        |      |   |       
|Net income per common share, basic                                     |  | $                           | 0.24   |      | $ | 0.14  
|Net income per common share, diluted                                   |  | $                           | 0.23   |      | $ | 0.14  

During all periods presented, all options were included in the computation of diluted net income
per share because the exercise prices were greater than the average market price of our common shares.



|10. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

During the routine
course of our business, we are sometimes required to provide financial guarantees related to certain customer contracts. These financial guarantees may include performance bonds, standby letters of credit or other performance guarantees. These
financial guarantees represent obligations to make payments to customers if we fail to fulfill an obligation under a contractual arrangement with that customer. We have had no history of significant claims, nor are we aware of circumstances that
would require us to perform under these arrangements and believe that the resolution of any claim that might arise in the future, either individually or in the aggregate, would not have a material adverse effect on our financial condition, results
of operations or cash flows.



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In 2006, we entered into formal arbitration proceedings to recover funds owed to us by a former service
provider. We believe that the amount we have recognized in the financial statements represents the true and valid amount due from this service provider. Nonetheless, the counter party is contesting the amount due and there is risk that a
determination resulting from the arbitration process could differ from the amounts recognized in the financial statements. We do not expect the ultimate outcome of this proceeding to have a material adverse effect on our financial condition,
results of operations or cash flows.



|11. | SEGMENT REPORTING
|--- | -----------------

We operate in two business
segments, PBM and Supplemental Benefits. We measure the performance of our operating segments through segment gross margin, defined as segment revenue less segment direct expenses. Selling, general and administrative expenses are reported as
corporate expenses. In addition, interest and other income (expense), which includes interest income, interest expense and other income, is reported in the corporate category. Corporate assets consist of all cash, marketable securities, income tax
receivable and deferred income taxes.

Segment information for the three months ended March 31, 2007 and 2006 is as follows (in
thousands):



|                                             |  |     |         |                       |   |           |  |       |        |  |   |        
|-------------------------------------------- |  | --- | ------- | --------------------- | - | --------- |  | ----- | ------ |  | - | -------
|Three months ended March 31, 2007            |  | PBM |         | Supplemental Benefits |   | Corporate |  | Total
|Revenue                                      |  | $   | 398,080 |                       | $ | 8,292     |  |       |        |  | $ | 406,372
|Direct expenses                              |  |     | 373,844 |                       |   | 4,970     |  |       |        |  |   | 378,814
|                                             |  |     |         |                       |   |           |  |       |        |  |   |        
|Segment gross margin                         |  |     | 24,236  |                       |   | 3,322     |  |       |        |  |   | 27,558 
|Selling, general and administrative expenses |  |     |         |                       |   |           |  | $     | 12,812 |  |   | 12,812 
|Other income/(expense), net                  |  |     |         |                       |   |           |  |       | 1,265  |  |   | 1,265  
|                                             |  |     |         |                       |   |           |  |       |        |  |   |        
|Income before income taxes                   |  |     |         |                       |   |           |  |       |        |  |   | 16,011 
|Total assets                                 |  |     | 385,593 |                       |   | 2,019     |  |       | 63,676 |  |   | 451,288
|Goodwill and intangible assets, net          |  |     | 183,025 |                       |   |          |  |       |       |  |   | 183,025
|Accounts receivable                          |  |     | 182,105 |                       |   | 404       |  |       |       |  |   | 182,509
|Accounts payable                             |  |     | 167,491 |                       |   | 373       |  |       |       |  |   | 167,864
|                                             |  |     |         |                      
|Three months ended March 31, 2006            |  | PBM |         | Supplemental Benefits |   | Corporate |  | Total
|Revenue                                      |  | $   | 227,439 |                       | $ | 11,232    |  |       |        |  | $ | 238,671
|Direct expenses                              |  |     | 210,798 |                       |   | 8,131     |  |       |        |  |   | 218,929
|                                             |  |     |         |                       |   |           |  |       |        |  |   |        
|Segment gross margin                         |  |     | 16,641  |                       |   | 3,101     |  |       |        |  |   | 19,742 
|Selling, general and administrative expenses |  |     |         |                       |   |           |  | $     | 10,945 |  |   | 10,945 
|Other income/(expense), net                  |  |     |         |                       |   |           |  |       | 614    |  |   | 614    
|                                             |  |     |         |                       |   |           |  |       |        |  |   |        
|Income before income taxes                   |  |     |         |                       |   |           |  |       |        |  |   | 9,411  
|Total assets                                 |  |     | 250,344 |                       |   | 2,896     |  |       | 63,824 |  |   | 317,064
|Goodwill and intangible assets, net          |  |     | 127,475 |                       |   |          |  |       |       |  |   | 127,475
|Accounts receivable                          |  |     | 108,187 |                       |   | 199       |  |       |       |  |   | 108,386
|Accounts payable                             |  |     | 85,203  |                       |   | 676       |  |       |       |  |   | 85,879 



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q may contain forward-looking statements 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. Factors that we have identified that may materially affect our results are discussed in our Annual Report on Form 10-K for the year ended
December 31, 2006 under Item 1 A. Risk Factors. 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

The Company

HealthExtras provides pharmacy benefit management services, referred to as PBM, and supplemental benefit programs. Our PBM segment,
which operates primarily under the brand name Catalyst Rx, accounted for 98% and 95% of our revenue in the three months ended March 31, 2007 and 2006, respectively, and is expected to be the primary source of our growth and profits in the
future. Our PBM clients include more than 1,000 self-insured employers, including state and local governments, managed care organizations, third-party administrators, referred to as TPAs, and unions, who contract with us to administer the
prescription drug component of their overall health benefit programs. Our PBM segment revenue increased by 75% to $398.1 million for the three months ended March 31, 2007 from $227.4 million for the same period in 2006. During 2006, we
initiated services with several large new PBM clients. In particular, beginning July 1, 2006, we commenced providing PBM services to over 1.0 million members of Wellmark Blue Cross and Blue Shield of Iowa. For the three months ended
March 31, 2007, this new client was responsible for over 2.7 million claims and accounted for approximately 21% of our total revenue. Total PBM claims processed increased to 9.7 million in the three-month period ended March 31,
2007 from 5.6 million during the same period in 2006.

We also offer supplemental benefit programs developed by us under the brand
name HealthExtras, which include lump sum accidental disability benefits, accidental death and dismemberment benefits, and emergency accident and sickness medical benefits. We contract with insurance companies to underwrite the insurance components
of these programs. As a result, the financial responsibility for the payment of claims resulting from a qualifying event covered by the insurance features of our programs is borne by the third-party insurers. Our supplemental benefits segment
accounted for 2% and 5% of our revenue in the three months ended March 31, 2007 and 2006, respectively. Individuals are the major purchasers of these programs.

PHARMACY BENEFIT MANAGEMENT

Catalyst Rx

Our PBM segment provides its clients access to a contracted, non-exclusive national network of approximately 59,000 pharmacies. We provide our
clients members with timely and accurate benefit adjudication, while controlling pharmacy spending trends through customized plan designs, physician orientation programs, and member education. We use an electronic point-of-sale system of
eligibility verification and plan design information, and offer access to rebate arrangements for certain branded pharmaceuticals. When a member of one of our clients presents a prescription identification card or health plan identification card to
a retail pharmacist in our network, the system provides the pharmacist with access to online information regarding eligibility, patient history, health plan formulary listings, and contractual reimbursement rates. The member generally pays a
co-payment to the retail pharmacy and the pharmacist fills the prescription. We electronically aggregate pharmacy benefit claims, which include prescription costs plus our claims processing fees for consolidated billing and payment. We receive
payments from clients, make payments of amounts owed to the retail pharmacies pursuant to our negotiated rates, and retain the difference, including claims processing fees.

Pharmacy benefit claim payments from our clients are recorded as revenue, and prescription costs to be paid to pharmacies are recorded as direct
expenses. Under our network contracts, we generally have an independent



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obligation to pay pharmacies for the drugs dispensed and, accordingly, have assumed that risk independent of our clients. When we administer pharmacy
reimbursement contracts and do not assume a credit risk, we record only our administrative or processing fees as revenue. Rebates earned under arrangements with manufacturers are recorded as a reduction of direct expenses. The portion of
manufacturer rebates due to clients is recorded as a reduction of revenue.

Member co-payments to pharmacies are not recorded as revenue or
direct expenses. We incur no obligations for co-payments to pharmacies and have never made such payments. Under our pharmacy agreements, the pharmacy is solely obligated to collect the co-payments from the members.

If we had included co-payments in reported revenue and direct expenses, it would have resulted in an increase in our reported PBM revenue and direct
expenses of $156.1 million and $98.6 million for the three months ended March 31, 2007 and 2006, respectively. Our operating and net income, consolidated balance sheets and statements of cash flows would not have been affected.

The following tables illustrate the effects on our reported PBM revenue and direct expenses if we had included the actual member co-payments as indicated
by our claims processing system (in thousands):



|                                 |  |                             |         |      |   |        
|-------------------------------- |  | --------------------------- | ------- | ---- | - | -------
|                                 |  | Three months endedMarch 31,
|                                 |  | 2007                        |         | 2006
|Reported PBM revenue             |  | $                           | 398,080 |      | $ | 227,439
|Member co-payments               |  |                             | 156,069 |      |   | 98,634 
|                                 |  |                             |         |      |   |        
|Total                            |  | $                           | 554,149 |      | $ | 326,073
|                                 |  |                             |         |      |   |        
|                                 |  |                            
|Reported PBM direct expenses (1) |  | $                           | 373,844 |      | $ | 210,798
|Member co-payments               |  |                             | 156,069 |      |   | 98,634 
|                                 |  |                             |         |      |   |        
|Total                            |  | $                           | 529,913 |      | $ | 309,432
|                                 |  |                             |         |      |   |        

---

|(1) | Certain reclassifications were made to prior year amounts to conform to current year presentation. Specifically, for the three months ended March 31, 2006, $5.1 million of
certain selling, general and administrative expenses, such as third-party commissions, client and member services costs, and information technology costs have been reclassified to PBM segment direct expenses. This reclassification was made to better
reflect the nature of these costs as being more indicative of the direct effort to manage and process our client revenue. These changes have no impact on the previously reported revenue, total operating expenses or operating income of the Company.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ACQUISITIONS

We have supported the growth of our PBM segment through acquisitions.

On
November 3, 2006, we purchased all of the outstanding common stock of R/xxPharmacy Solutions, Inc. referred to
as R/xx, an Arizona corporation, for $16.0 million in cash and $0.7 million in related transaction
costs. As provided for in the acquisition agreement, an additional cash consideration of $2.1 million was earned, but not yet paid, based on successful achievement of certain client retention criteria during the period ended March 31, 2007.
R/xxis a provider of pharmacy benefit management services with a strategic focus on clients in the Arizona, Nevada
and Hawaii markets. We have also established a business development marketing relationship with an affiliate, Pharmacy Benefit Consultants, Inc., referred to as PBC, and have agreed to purchase PBC if requested by its shareholder on
terms determined by PBCs success in generating new business, primarily during 2007.

The acquisition of R/xxresulted in goodwill of $15.5 million and intangible assets of $5.6 million. The
allocation of the purchase price to the net assets acquired is preliminary and may be adjusted upon completion of a valuation study which is currently in progress. Consequently, the allocation of purchase price to intangible assets is subject to
adjustment. Additionally, the cost of the acquisition may be increased depending on the resolution of the contingent consideration

On
December 16, 2005, we acquired the common stock of EBRx, Inc. The acquisition was structured as a merger between a wholly-owned subsidiary of the Company, HCEM Corp., and the parent company of EBRx, with



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the former parent as the surviving entity following the merger. Consideration consisted of a cash payment of $27.9 million and $0.8 million in related
transaction costs. HCEM was funded by us with a $4.0 million equity investment and the remaining consideration was provided in the form of subsidiary debt. As contemplated by the original structure and terms of the transaction, a separate entity
owned by former owners of EBRx and its management team, purchased a 20% ownership interest in the parent of EBRx through a $1.0 million equity investment, on January 3, 2006. This equity investment was made in the form of a note receivable and
is recorded in the current other assets category in our consolidated balance sheet. The note receivable is collateralized by certificates of deposit having an aggregate principal amount of $1.0 million. The note bears interest of 4.38% per
annum.

In addition, the terms of the transaction provided that we may purchase the remaining 20% minority ownership interest beginning
after twelve months and ending after fifteen months from closing at specified amounts based on the financial performance of EBRx. On February 6, 2007, we acquired the minority ownership interest in the parent of EBRx through the acquisition of
a separate entity and transferred the shares in the operating subsidiary to HCEM. The transaction resulted in a cash payment of $30.3 million, of which $29.0 million was recorded as additional goodwill, prior to the repayment of related transaction
debt and accrued interest.

The acquisition of EBRx also provided for an additional contingent payment of up to $3.0 million subject to
performance based standards including certain specified client retention and gross profit criteria for the twelve months ended December 31, 2006. The contingent consideration earned in 2006 was $2.4 million and recorded as additional goodwill.

Based on a valuation report of the allocation of the purchase price to the net assets acquired, the acquisition of EBRx resulted in
goodwill of $55.6 million and customer relationship intangibles of $8.5 million and non-competition agreements of $0.3 million. The customer relationship intangibles are being amortized on a straight-line basis over an 11-year life and the
non-competition agreements are being amortized on a straight-line basis over a 3-year life.

SUPPLEMENTAL BENEFITS

Our supplemental benefits segment generates revenue from the sale of supplemental benefit programs, which include lump sum accidental disability
benefits, accidental death and dismemberment benefits, and emergency accident and sickness medical benefits. In recent periods, our supplemental benefits programs have been marketed and sold to individuals primarily by three nationally-recognized
companies, which incur the marketing expenses. Accordingly, our supplemental benefit revenue from new members is primarily dependent on the extent and timing of marketing campaigns funded by these three companies and the success they achieve.
Correspondingly, these companies are compensated with an increasing percentage of total program revenue, which is accounted for as direct expenses by us. All of the insurance and service features included in our programs are supplied by third-party
insurance companies or other vendors, and the programs are distributed through an independent, licensed and non-affiliated insurance agency.

The primary determinant of revenue recognition for the supplemental benefits segment is monthly program enrollment. 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 us includes the cost of membership features supplied by others, including the insurance components. Revenue from program payments received, and related
direct expenses, is deferred to the extent that they are applicable to future periods or to any refund guarantee we offer.

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.



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RESULTS OF OPERATIONS

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Revenue. Revenue from operations for the three months ended March 31, 2007 was $406.4
million, consisting of $398.1 million generated from the PBM segment and $8.3 million from the supplemental benefits segment. PBM revenue increased over the comparable period in 2006 by $170.6 million, including $153.8 million from increased
prescription volume, which includes new clients since the prior year quarter including increases associated with the Wellmark Blue Cross Blue Shield of Iowa contract and the R/xxoperations; $8.8 million from an increase in unit prices; and $8.0 million from the proportionate amount of prescription costs paid by the plan sponsor. Total
claims processed increased to approximately 9.7 million for the three months ended March 31, 2007 from approximately 5.6 million for the same period in 2006. A significant contributor to the increase in revenue and prescription volume
was a new contract with Wellmark Blue Cross Blue Shield of Iowa covering over 1.0 million members, which commenced on July 1, 2006. This contract generated 21% of our total revenue for the three months ended March 31, 2007. The
supplemental benefits revenue for the three months ended March 31, 2007 decreased by $2.9 million from the comparable period in 2006. Revenue for the three months ended March 31, 2006 was $238.7 million, consisting of approximately $227.5
million and $11.2 million attributable to the PBM and supplemental benefits segments, respectively.

Direct Expenses.Direct
expenses for the three months ended March 31, 2007 were $378.8 million, consisting of $373.8 million in direct expenses from the PBM segment and $5.0 million in direct expenses from the supplemental benefits segment. PBM segment direct expenses
increased over the comparable period in 2006 by $163.0 million, while the supplemental benefits segment direct expenses decreased by approximately $3.1 million. The PBM segments increase in direct expenses is related to the $170.6 million
increase in PBM revenue. The decrease in direct expenses in the supplemental benefits segment was largely a result of a modest decrease in membership and the negotiation of lower costs for certain of the benefits in our programs.

Direct expenses for the three months ended March 31, 2006 were $218.9 million, consisting of approximately $210.8 million and $8.1 million
attributable to the PBM and supplemental benefit segments, respectively. The direct expenses of $378.8 million and $218.9 million for the three months ended March 31, 2007 and 2006 represented 96.7% and 95.2% of total operating expenses for the
respective periods.

Gross margins, calculated as segment revenue less segment direct expense, in the PBM segment are generally predictable
based on client contract terms and vendor/supplier contracts. Other factors that can result in changes in gross margins include generic substitution rates, changes in the utilization of preferred drugs with higher discounts and changes in the volume
of prescription dispensing at lower cost network pharmacies. None have materially changed in 2007 in a manner that would meaningfully affect current or anticipated results. In 2007, composite gross margin percentages were reduced by the addition of
several new large contracts including Wellmark Blue Cross Blue Shield of Iowa, which are more competitively priced due to their size. These decreases were somewhat offset by gross margin improvements resulting from an increased level of generic
substitution and higher network discount rates.

Gross margins in the supplemental benefits segment are generally consistent on a per
transaction basis. During 2006, we enhanced one of our telemarketing programs and modified one of our contracts with a partner. Both of these changes had a positive impact on our 2007 gross margin when compared to our 2006 gross margin.

Selling, General and Administrative.For the three months ended March 31, 2007, selling, general and administrative expenses increased by
approximately $1.9 million over the same period in the prior year to $12.8 million or 3.3% of operating expenses. This increase was primarily associated with PBM segment growth and the associated personnel and vendor costs to serve and implement new
clients.

Selling, general and administrative expenses of $12.8 million for the three months ended March 31, 2007, consisted of $6.6
million in compensation and benefits, which includes $1.1 million in non-cash compensation, $1.3 million in professional fees and technology services, $1.3 million in facility costs, $0.7 million in travel expenses, $0.6 million in insurance and
other corporate expenses, $0.1 million in product endorsement and marketing, $0.7 million in other, which includes $0.3 million in recruitment and temporary help, and $1.5 million in depreciation and amortization.



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Selling, general and administrative expenses of $10.9 million for the three months ended March 31,
2006, consisted of $6.1 million in compensation and benefits, which includes $1.2 million in non-cash compensation, $0.8 million in professional fees and technology service costs, $1.0 million in facility costs, $0.6 million in travel expenses, $0.5
million in insurance and other corporate expenses, $0.1 million for product endorsement and marketing, $0.8 million in other expenses, which includes $0.7 million in recruitment and temporary help, and $1.0 million in depreciation and amortization.

Interest Income. Interest income increased to $1.3 million for the three months ended March 31, 2007 from $0.9 million for the
three months ended March 31, 2006. The increase was primarily due to an increase in average funds available for investment during the period and an increase in the rate of return available in the marketplace.

Interest Expense.Interest expense decreased to under $0.1 million in the three months ended March 31, 2007 from $0.2 million in the three
months ended March 31, 2006. This decrease reflects the decrease in the average outstanding amount of debt during the periods. In September 2006, we fully repaid the balance outstanding on our term loan facility.

Minority Interest.Prior to February 6, 2007, EBRx was majority owned by us and 20% owned by investors affiliated with EBRxs former
parent. On February 6, 2007, we acquired the minority ownership interest. The minority interest represents 20% of the earnings of EBRx during the period in which there was an outstanding minority interest.

Income Tax Expense. The effective income tax rate of 39.4% during the three months ended March 31, 2007 and 38.6% during the comparable
period in 2006 represent the combined federal and state income tax rates adjusted as necessary based on the particular jurisdictions where we operate. The tax rate in 2006 was lower than in 2007, in particular due to an increase in 2007 in our
effective state income tax rate reflective of our expansion into additional state jurisdictions.

Net Income.Net income for three
months ended March 31, 2007 increased by approximately $3.9 million over the same period in 2006 to $9.7 million. The increase in net income was primarily a function of increased gross margin dollars in the PBM segment and an increase in
interest income, reduced by an increase in selling, general and administrative expenses. PBM segment gross margins increased to $24.2 million in 2007 from $16.6 million in 2006, largely attributable to new clients. Segment operating information for
2007 and 2006 is as follows (in thousands):



|                            |  |     |         |                      |   |        |  |   |        
|--------------------------- |  | --- | ------- | -------------------- | - | ------ |  | - | -------
|                            |  | PBM |         | SupplementalBenefits |   | Total 
|March 31, 2007              |  |     |         |                      |   |        |  |   |        
|Segment revenue             |  | $   | 398,080 |                      | $ | 8,292  |  | $ | 406,372
|Segment direct expenses     |  |     | 373,844 |                      |   | 4,970  |  |   | 378,814
|                            |  |     |         |                      |   |        |  |   |        
|Segment gross margin        |  | $   | 24,236  |                      | $ | 3,322  |  | $ | 27,558 
|                            |  |     |         |                      |   |        |  |   |        
|March 31, 2006              |  |     |         |                      |   |        |  |   |        
|Segment revenue             |  | $   | 227,439 |                      | $ | 11,232 |  | $ | 238,671
|Segment direct expenses (1) |  |     | 210,798 |                      |   | 8,131  |  |   | 218,929
|                            |  |     |         |                      |   |        |  |   |        
|Segment gross margin        |  | $   | 16,641  |                      | $ | 3,101  |  | $ | 19,742 
|                            |  |     |         |                      |   |        |  |   |        

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|(1) | Certain reclassifications were made to prior year amounts to conform to current year presentation. Specifically, for the three months ended March 31, 2006, $5.5 million of
certain selling, general and administrative expenses, such as third-party commissions, client and member services costs, and information technology costs have been reclassified to direct expenses. This reclassification, which is comprised of $5.1
million and $0.4 million to the PBM segment and Supplemental Benefits segment, respectively, was made to better reflect the nature of these costs as being more indicative of the direct effort to manage and process our client revenue. These changes
have no impact on our previously reported revenue, total operating expenses or operating income.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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LIQUIDITY AND CAPITAL RESOURCES

Our sources of funds are usually cash flows from operating activities. We have in the past raised funds by borrowing on bank debt and selling equity in
the capital markets to fund acquisitions. During the last several years, we have generated positive cash flow from operations and anticipate similar results in 2007 and the foreseeable near-term future. Cash and cash equivalents and marketable
securities at March 31, 2007 were $63.7 million. At March 31, 2007, we had available a $50.0 million revolving credit facility with no outstanding borrowings.

Net Cash Provided by Operating Activities.Our operating activities generated $2.3 million of cash from operations in the three-month period ended March 31, 2007, a $2.0 million increase from the $0.3
million generated in the comparable prior year period. This $2.3 million in cash provided by operating activities in 2007 reflects $9.7 million in net income, plus $3.9 million in non-cash charges and an $11.3 million net decrease in working capital
and other assets and liabilities. This $11.3 million net decrease in working capital was primarily due to a $13.8 million increase in accounts receivable. The cash provided by operating activities in the three-month period ended March 31, 2006
of $0.3 million reflects net income of $5.8 million, plus $2.1 million in non-cash charges, offset by a $7.6 million net decrease in working capital and other assets and liabilities.

Net Cash Used in Investing Activities.Net cash used in investing activities for the three months ended March 31, 2007 was $33.5 million
compared to $7.8 million in the prior year period. The current period use of cash reflects the net purchase of $1.9 million in marketable securities and $1.3 million in capital expenditures. Also, the acquisition of our remaining 20% minority
ownership interest resulted in a cash payment of $30.3 million, of which $1.3 million was attributable to the minority interest and approximately $29.0 million was recorded as additional purchase price. The $7.8 million use of cash in the
three-month period ended March 31, 2006 consisted of $7.1 million for the net purchase of marketable securities and $0.7 million in capital expenditures.

Net Cash Provided by Financing Activities.Net cash provided by financing activities for the three months ended March 31, 2007 was $1.3 million compared to $6.3 million in the prior year period. In the
current period we purchased $0.3 million of treasury stock, received proceeds of $0.7 million from the exercise of options and $0.1 million in proceeds from issuance of common stock pursuant to the employee stock purchase plan. In addition, the
company received an income tax payable benefit of $0.8 million from the exercise of stock options and restricted stock vesting. In the prior year period we repaid $1.3 million in notes payable, received proceeds of $3.1 million from the exercise of
options and received $4.4 million in income tax benefit proceeds from the exercise of stock options and restricted stock vesting.

We
anticipate continuing to generate positive operating cash flow which, combined with available cash resources, should be sufficient to meet our planned working capital, capital expenditures and operating expenses. However, there can be no assurance
that we will not require additional capital. Even if such funds are not required, we may seek additional equity or debt financing. We cannot be assured that such financing will be available on acceptable terms, if at all, or that such financing will
not be dilutive to our stockholders.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

There have been no significant changes in our market risk from that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Based on our most recent review, which was made as of the end of our first quarter ended March 31, 2007, our chief
executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit pursuant to
the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure and are
effective to provide us reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



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Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting for our quarter ended March 31, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | Legal Proceedings
|------- | -----------------

In the ordinary course of
business, we may become subject to legal proceedings and claims. We are not aware of any legal proceedings or claims, which, in the opinion of management, will have a material effect on our financial condition, results of operations or cash flows.

In 2006, we entered into formal arbitration proceedings to recover funds owed to us by a former service provider. We believe that the
amount we recognized in our financial statements represents the true and valid amount due from this service provider. Nonetheless, the counter party is contesting the amount due and there is risk that a determination resulting from the
arbitration process could differ from the amounts recognized in the financial statements. We do not expect the ultimate outcome of this proceeding to have a material adverse effect on our financial condition, results of operations or cash
flows.



|ITEM 1A. | Risk Factors
|-------- | ------------

In addition to the other information
set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business,
financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.



|ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|ITEM 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|ITEM 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None



|ITEM 5. | Other Information
|------- | -----------------

None



|ITEM 6. | Exhibits
|------- | --------



|            |  |                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                 
|3(i)        |  | Amended and Restated Certificate of Incorporation of HealthExtras, Inc.(1)                                  
|            | 
|3(ii)       |  | Bylaws of HealthExtras, Inc.(2)                                                                             
|            | 
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                           
|            | 
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                           
|            | 
|32.0        |  | Certifications pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes Oxley Act of 2002

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|(1) | Incorporated by reference to Exhibit 3.1(b) to the Registrants Form S-1/A Pre-Effective Amendment No. 1 to Form S-1 Registration Statement (Registration
No. 333-83761) filed on September 21, 1999.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3(ii) to the Registrants Form 8-K filed on April 11, 2007.
|--- | ------------------------------------------------------------------------------------------------



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SIGNATURES

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



|            |  |                    |  |                                                               
|----------- |  | ------------------ |  | --------------------------------------------------------------
|            |  | HEALTHEXTRAS, INC.
|            |  |                   
|May 8, 2007 |  | By:                |  | /s/ David T. Blair                                            
|            |  |                    |  | David T. Blair                                                
|            |  |                    |  | Chief Executive Officer and Director                          
|            |  |                   
|May 8, 2007 |  | By:                |  | /s/ Michael P. Donovan                                        
|            |  |                    |  | Michael P. Donovan                                            
|            |  |                    |  | Chief Financial Officer                                       
|            |  |                    |  | (Principal Financial Officer and Principal Accounting Officer)



19