XCARENET INC, 424B4, 2000-02-10

XCARENET INC
424B4, 2000-02-10
BUSINESS SERVICES, NEC

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-90165

DATED FEBRUARY 9, 2000

LOGO

5,000,000 SHARES

COMMON STOCK

XCare.net, Inc. is offering 5,000,000 shares of its common stock. This is
our initial public offering and no public market currently exists for our
shares. Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "XCAR."

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public Offering Price:...................................... $18.00 $90,000,000
Underwriting Discounts and Commissions:..................... $ 1.26 $ 6,300,000
Proceeds to XCare.net:...................................... $16.74 $83,700,000
</TABLE>

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

XCare.net has granted the underwriters a 30-day option to purchase up to an
additional 750,000 shares of common stock to cover over-allotments.

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

ROBERTSON STEPHENS
SG COWEN
E*OFFERING
ADVEST, INC.

THE DATE OF THIS PROSPECTUS IS FEBRUARY 9, 2000.
<PAGE> 2
DESCRIPTION OF ARTWORK

[Artwork on page 35]

In the middle of the artwork are pictures of an envelope, with the caption
"U.S. Mail" on it, a telephone, a fax machine, with the caption "Fax" on it,
and a computer with the caption "Legacy System" on it.

Surrounding these pictures are pictures depicting health care participants
as follows:

On the top left is a picture of a person, with the caption "Employer" to
the left of it. Under the caption are the phrases "Enroll employees," "Select
plans," "Choose benefit levels" and "maintain eligibility data."

On the bottom left is a picture of a person with the caption "Consumer" to
the left of it. Under the caption are the phrases "Compare plans," "Choose
physicians" and "Submit claims."

On the bottom center is a picture of a person with a stethoscope holding a
piece of paper with "Rx" written on it and with the caption "Providers
(Physicians' Offices, Hospitals, Clinics)" below and to the left of the
picture. Above the caption are the phrases "Verify patient eligibility,"
"Collect patient lists," "Order tests and x-rays," "Receive and interpret
tests," "Render diagnoses," "Issue referrals" and "Submit claims to payers."

On the bottom right is a picture of a laboratory flask and test tube with
the caption "Suppliers (Pharmacies, Clinical Labs, Pharmaceutical Companies,
Device Mfgs. and Distributors)" above and the right of the picture. Underneath
the caption are the phrases "Analyze and process patient samples and tests,"
"Provide test results," "Fill prescriptions" and "Submit claims to payers."

On the top right is a picture of an office building with the caption
"Payers (HMOs, PPOs, TPAs, Insurers)" above and to the rights of it. Underneath
the caption are the phrases "Establish protocols and reimbursement policy,"
"Manage referrals" and "Process claims."

Lines run from each of the captions to the pictures of the envelope,
telephone, fax machine and the computer and between each of these pictures.

[Artwork on p.40]

On the top left of the artwork is a picture of a person with a stethoscope
holding a piece of paper with "Rx" written on it. To the right of the picture
is the caption "1. User initiates request for information."
<PAGE> 3
To the right of this picture is a picture of a wall with two openings with
a conveyer belt running away from and into the openings in the wall.

The conveyer belt running away from the wall has two pictures of pieces of
paper on it. The first piece of paper is on the edge of the conveyer belt next
to the wall and has "Rx" written on it. The second piece of paper is in the
middle of the conveyer belt and has a graphic representing data. Standing next
to the conveyer belt is a picture of a person holding a piece of paper with "Rx"
written on it and shown to be saying "XML." Connected by a line to this person
is a caption placed underneath the conveyer belt which states "2. The Context
Broker describes the user's request and passes it to the Semantic Broker."

The conveyer belt runs into a six level structure with the caption "Topic
Navigation Mapping" on it. The levels have captions on them which alternate
between "Logic" and "Data." Connected by a line from the structure is a caption
to the right of the structure stating "3. The Semantic Broker queries the Logic
Fabric for the transaction that will satisfy the request."

On top of the structure is a picture of a robot with the caption "Semantic
Broker" on it show to be taking a piece of paper with "Rx" on it from the
picture of the person next to the conveyer belt.

The conveyer belt running into the opening in the wall begins at the
six-level structure. On the conveyer belt at the end next to the wall is a
picture of an open box with the word "XML" written on the inside of the box.
Standing next to the box to the side of the conveyer belt is a picture of a
person with the caption "5. Information is returned to the Context Broker, which
presents the information in a customized view for users."

Above this conveyer belt and to the right is a picture of a cloud with
"WWW" written on it. Conveyer belts run into and out of the cloud. The robot on
top of the structure is show to be placing pieces of paper on the conveyer belt
running into the cloud. The pieces of paper have graphics depicting data on
them. The conveyer belt running out of the cloud as a picture of a stack of
paper on it. In between these to conveyer belts is a picture of a person.
Connected to this person by a line a caption stating "4. The Semantic Broker
dispatches the Service Broker to obtain information from the Internet."

[Artwork on inside front cover]

There are three pictures, one on the far left is entitled "Solution
Model", one in the middle entitled "Technology Model", and one on the far right
entitled "Business Model".

"Solution Model"

<PAGE> 4
On the top left of the artwork is a picture of a person standing with the
word "Employer" written above the person. On the top right is a picture of a
person holding a large pill with the word "Consumer" written above the person.
On the bottom left is a picture of a building, with the words "Health Plan"
written above it. On the bottom right is a picture of a person wearing a
stethoscope and holding a piece of paper with "Rx" written on it. Above this
person is the word "Provider."

Connecting the pictures of the three person and the building is an
x-shape, with the words, "Community," "Connectivity," and "Commerce" in the
middle,with the words "An Internet Solution for Healthcare" above the
x-shape. On the top left part of the x-shape is a rectangle, inside of which is
a smaller picture of the building and a smaller picture of the person holding
the pill. Below that and closer to the center of the x-shape are two smaller
rectangles on top of an arrow pointing toward the center of the x-shape. Inside
the two smaller rectangles are a picture of a person holding a pill, and a
question mark.

On the top right of the x-shape is a rectangle, inside of which is a
smaller picture of the building, and a smaller picture of the person holding
the pill. Below that and closer to the center of the x-shape is a smaller
rectangle on top of an arrow pointing toward the center of the x-shape. Inside
the rectangle is a question mark.

On the bottom left of the x-shape is a rectangle, inside of which is a
smaller picture of the person standing, the person holding the pill and the
person wearing the stethoscope. Above that and closer to the center of the
x-shape are two smaller rectangles on top of an arrow pointing toward the
center of the x-shape. Inside the two rectangles are a picture of a pill and a
picture of a person holding a pill.

On the bottom right of the x-shape is a rectangle, inside of which is a
smaller picture of the building and a smaller picture of the person wearing a
stethoscope. Above that and closer to the center of the x-shape are two smaller
rectangles on top of an arrow pointing toward the center of the circle. Inside
the two rectangles are an "Rx" and a cross-shape.

"Technology Model"

On the top left of the artwork is a picture of a person with a
stethoscope. To the right of the picture is the caption "1. User."

To the right of this picture is a picture of a wall with two openings with
a conveyer belt running away from and into the openings in the wall.

<PAGE> 5
person holding a piece of paper with "Rx" written on it and shown to be saying
"XML." Connected by a line to this person is a caption placed underneath the
conveyor belt which states "2. The Context Broker."

This conveyor belt runs into a six level structure with the caption "Topic
Navigation Mapping" on it. The levels have captions on them which alternate
between "Logic" and "Data." Connected by a line from the structure is a caption
to the right of the structure stating "3. The Semantic Broker."

On top of the structure is a picture of a robot with the caption "Semantic
Broker" on it shown to be taking a piece of paper with "Rx" on it from the
picture of the person next to the conveyor belt.

The conveyor belt running into the opening in the wall begins at the
structure. On the conveyor belt at the end next to the wall is a picture of an
open box with the word "XML" written on the inside of the box. Standing next to
the box to the side of the conveyor belt is a picture of a person with the
caption "5. Context Broker/Personalization."

Above this conveyor belt and to the right is a picture of a cloud with
"WWW" written on it. Conveyor belts run into and out of the cloud. The robot on
top of the structure is shown to be placing pieces of paper on the conveyor belt
running into the cloud. The pieces of paper have graphics depicting data on
them. The conveyor belt running out of the cloud has a picture of a stack of
paper on it. In between these two conveyor belts is a picture of a person.
Connected to this person by a line is a caption stating "4. The Semantic
Broker/Service."

"Business Model"

This picture is an x-shape, with a round, ball-shape in the middle, above
which is the caption "Applications, Products and Services." Connected to the
large ball-shape in the middle are five smaller ball-shapes. On the upper left
of the x-shape is a ball-shape, sitting above an arrow pointing toward the
center of the x-shape, with the caption "Xcare.net Products" to the left of
it. Connected to this ball-shape is one smaller ball-shape. Below that and
closer to the center of the x-shape is another ball-shape with the caption
"Customer Products" to the left of it. Attached to this ball-shape are
two smaller ball-shapes. Below that and closer to the center of the x-shape are
two smaller ball-shapes with no captions.

Coming out of the large ball-shape in the center is an arrow heading
toward the upper right of the x-shape. On top of the arrow is another ball-shape
with five smaller ball-shapes connected to it. Further up the upper right axis
of the x-shape is another ball-shape with five smaller balls connected to it,
inside a cylinder shape, and a smaller cylinder shape through which an arrow
points to a picture of a person.
<PAGE> 6
Coming out of the large ball-shape in the center is an arrow pointing
toward the lower right of the x-shape. On the top of the arrow is a ball-shape
with five smaller ball-shapes connected to it.

Coming toward the large ball-shape in the center from the lower left of
the x-shape is a ball-shape with two smaller ball-shapes connected to it, with
the caption "Vendor Products" to the left. To the right of that and
closer to the center of the x-shape is one small ball-shape.

To the left of the x-shape is the caption "Component Partners." To the
right of the x-shape is the caption "Solution Channels."
<PAGE> 7

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF A COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF TIME OF DELIVERY OF THIS PROSPECTUS
OR OF ANY SALE OF OUR COMMON STOCK.

UNTIL MARCH 5, 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT BUY, SELL, OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 7
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 34
Management.................................................. 53
Certain Transactions with Related Parties................... 62
Principal Stockholders...................................... 65
Description of Capital Stock................................ 68
Shares Eligible for Future Sale............................. 70
Underwriting................................................ 72
Legal Matters............................................... 75
Change in Independent Accountants........................... 75
Experts..................................................... 75
Available Information....................................... 76
Index to Financial Statements............................... F-1
Appendix: "Meet the Management" Presentation available
through online prospectus [click here for "Meet the
Management" Presentation]................................. A-1
</TABLE>

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

XCare.net is a trademark of XCare.net, Inc. Trade names, trademarks and
service marks of other companies appearing in this prospectus are the property
of the respective holders.

i
<PAGE> 8

SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including the financial statements and
related notes, before deciding to invest in shares of our common stock.

XCARE.NET, INC.

XCare.net is an electronic commerce service provider for health care
businesses. We have developed an Internet-based technology platform using
extensible mark-up language, or XML, that processes health care transactions and
provides related services for payers, providers and other health care industry
participants. We process transactions such as eligibility checking, claims
submission, referral processing, physician credentialling and appointment
scheduling. We also provide consulting services to define, develop and implement
Internet health care strategies as well as Web-site hosting, transaction support
and maintenance services for our customers. Our customers include providers such
as American Medical Pathways, Inc., Asthma Management Services, Inc. and
Methodist Care, Inc.; health care payers such as Advica Health Resources,
Employers Mutual, Inc., Brokerage Services, Inc., and Delta Health Services; and
suppliers such as ADIS International Ltd., Nursefinders, Inc., Digital Medical
Registrar, Delta Health Services and Quest Diagnostics Incorporated. This list
includes all but two of our customers.

Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into an Internet exchange to create a community. We use the
XCare.net platform to deliver a broad range of applications, services and
electronic product offerings that streamline and automate high-volume,
data-intensive transactions and processes. This automation reduces the need for
information exchange by telephone, facsimile or mail and redundant manual data
entry into multiple computer systems. Our portal applications are designed to
improve workflow efficiencies, reduce administrative costs and enhance
efficiency of the health care delivery and payment system. We use our XCare.net
platform as the central element for a network of business relationships among
healthcare industry participants who use our technology, thus creating
collaborative electronic communities for the exchange of healthcare data,
products and services. We call these communities our Solution Channels, and use
them to distribute our applications, services and product offerings. In
addition, our Solution Channels are designed to provide a means for our
customers, vendors, distributors, co-marketers and others to offer their own
related products and services to each other, as well as to their own customers.

Our XCare.net platform uses a proprietary set of search, filtering and
integration technologies, based on XML, an extensible mark-up language for
Internet programming, in conjunction with the Topic Navigation Mapping
publishing standard. Extensible mark-up language enables us to attach meaning to
a piece of data. For example, information in numerical format acquires meaning
once it is defined as representing a healthcare plan number, a social security
number, birth date or a zip code. Topic Navigation Mapping provides a standard
format for indexing and structuring the extensible mark-up language formatted
content. The resulting technology platform increases flexibility and
cost-effectiveness and enables a high degree of content integration from
different databases and applications, easier data manipulation and more
efficient searches. In addition, the technology platform enhances our ability to
present data in a dynamic, customized format tailored to the individual
performing a particular transaction or retrieving specific information.

MARKET OPPORTUNITY

The health care market is highly fragmented through geographic dispersion,
a large number of participants and significant differences in technology
infrastructure. Furthermore, health care is delivered in a marketplace which has
become increasingly complex given the transition to managed care, the data-

1
<PAGE> 9

intensive nature of health care transactions, the lack of standard data formats,
the complicated procurement process and the pervasiveness of government
regulation. As a result of this fragmentation and complexity, health care market
participants are unable to cost-effectively manage, communicate and exchange
information in real-time.

The Internet is currently being used to speed and streamline a variety of
business transactions. Nonetheless, additional improvements in the ability to
search, structure, integrate and filter vast amounts of disparate data and to
dynamically customize and display information in contexts relevant to particular
users would increase the usefulness of Internet-based applications. These
improvements would be particularly useful in health care transaction processing
and information retrieval systems, where streamlining data exchanges among
industry participants can reduce process inefficiencies and costs. The enhanced
capabilities of our XCare.net platform, applications, services and product
offerings are designed to provide such improvements.

STRATEGY

Our objective is to become a significant provider of Internet-based
solutions to health care businesses to enable them to exchange information,
process transactions, conduct electronic commerce and communicate with each
other. To implement our strategy we will continue to:

- utilize our Solution Channels to deploy new applications, services and
electronic commerce product offerings developed by us or obtained through
customer and vendor relationships;

- pursue payer/third party administrator and at-risk provider customers,
which are well positioned to influence and drive change in health care
processes;

- identify new application development opportunities as Internet strategies
in the health care industry evolve and new relationships between
organizations develop;

- identify functions that are critical to particular industry participants
and develop solutions, services and products supporting these functions;
and

- aggressively pursue customer, vendor, distributor, co-marketing and other
relationships with leaders in key health industry segments to increase
our portfolio of applications, services and product offerings, increase
the scope of the community of users of our XCare.net platform and provide
specialized industry expertise for new solutions.

OUR HISTORY

We were incorporated in Delaware in March 1989 under the name Reilly Dike
Dosher Corporation, Inc. In December 1996, we changed our name to MPower
Solutions, Inc. In April 1999, we changed our name to XCare.net, Inc. We have
historically derived a significant portion of our revenue from sales of
mainframe and client-server software for managed health care systems and from
providing services to health care organizations seeking to outsource
administrative functions. In early 1998 we identified an emerging opportunity to
utilize the Internet to connect health care participants together into a
community structure. We saw this as an opportunity to provide a more efficient
service to health care and to offer our existing services, as well as additional
applications, services and products, through a more efficient delivery medium.
Beginning in mid-1998, we began to focus on Internet-based health care
solutions. We intend to derive an increasing portion of our future revenue from
our Internet-based applications, services and product offerings.

We operate in a highly competitive market. We do not know whether our new
applications, services and product offerings will be accepted by health care
market participants. We started developing our Internet-based technologies in
early 1998 and first made them available to our customers during the third
quarter of 1999. As a result, we have a limited operating history as an Internet
company. We incurred losses of $7.3 million for fiscal 1997, $4.1 million for
fiscal 1998 and $2.2 million for the nine months

2
<PAGE> 10

ended September 30, 1999. For the nine months ended September 30, 1999, sales to
four customers accounted for 82% of our revenues. We are controlled by a limited
number of investors. As of September 30, 1999, our directors, officers and
affiliated entities controlled 87.2% of our common stock and will continue to
control 61.2% of our common stock after completion of this offering, based on
our outstanding capitalization on that date.

Our principal executive office is located at 6400 S. Fiddler's Green
Circle, Suite 14000, Englewood, CO 80111, and our telephone number at that
office is (303) 488-2019.

3
<PAGE> 11

THE OFFERING

Common stock offered by us...................... 5,000,000 shares

Common stock to be outstanding after the
offering........................................ 15,368,209 shares

Use of proceeds................................. General corporate purposes,
working capital and capital
expenditures for operations,
including for research and
development, sales and
marketing, hardware and
software purchases and
general and administrative
expenses.

Proposed Nasdaq National Market symbol.......... XCAR

The number of shares of our common stock to be outstanding after this
offering is based on shares outstanding as of September 30, 1999, and reflects a
one-for-ten reverse stock split that was effected in January 2000. It excludes
1,491,492 shares issuable upon exercise of outstanding options at September 30,
1999, with a weighted average exercise price of $1.35 per share, 541,345 shares
reserved for future issuance under our stock plan, and 750,000 shares reserved
for future issuance under our director plan and employee stock purchase plan,
both of which become effective upon the closing of the offering. In the fourth
quarter ended December 31, 1999, we granted options to purchase 145,451 shares
of common stock, leaving a total of 400,444 shares reserved for future issuance;
and options to purchase a total of 20,500 shares were exercised. See
"Capitalization," "Management -- Employee Benefit Plans" and notes 4, 6 and 9 of
notes to the financial statements.

Generally, unless otherwise indicated in this prospectus, the number of
shares of common stock to be outstanding after the offering, pro forma and pro
forma as adjusted information give effect to the conversion of all outstanding
convertible preferred stock to common stock, including convertible preferred
stock issuable upon the assumed cashless exercise of all outstanding convertible
preferred stock warrants, and the assumed cashless exercise of all outstanding
common stock warrants. Information in this prospectus also assumes no exercise
of the underwriters' over-allotment option.

4
<PAGE> 12

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $4,310 $7,708 $ 9,726 $ 5,984 $ 2,270 $ 1,564 $ 2,654
Total costs and expenses........ 4,120 6,083 10,523 14,641 5,915 4,215 4,680
Income (loss) from operations... 190 1,625 (797) (8,657) (3,645) (2,651) (2,026)
Total other income (expense).... (77) (42) 2,250 255 (437) (306) (150)
Income (loss) before income
taxes......................... 113 1,583 1,453 (8,402) (4,082) (2,957) (2,176)
Net income (loss)............... $ 113 $1,583 $ 253 $(7,324) $(4,082) $(2,957) $(2,176)
Net income (loss) per common
share -- basic and diluted.... $ 0.19 $ 2.64 $ 0.53 $(18.92) $(10.64) $ (7.71) $ (5.09)
Weighted average common shares
outstanding -- basic and
diluted....................... 596 599 476 390 390 390 438
Pro forma:
Income before income taxes.... $ 113 $1,583
Net income.................... $ 65 $ 980
Pro forma net income (loss) per
common share -- basic and
diluted....................... $ 0.11 $ 1.64 $ (1.00) $ (0.32)
Pro forma weighted average
common shares
outstanding -- basic and
diluted....................... 596 599 4,070 6,729
</TABLE>

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 11,031 $11,031 $93,181
Working capital...................................... 10,222 10,222 92,372
Total assets......................................... 13,523 13,523 95,673
Long-term debt....................................... 25 25 25
Mandatorily redeemable convertible preferred stock... 23,821 -- --
Stockholders' equity (deficit)....................... (12,586) 11,235 93,385
</TABLE>

- During 1996, a major customer terminated its contract with us and paid
$2.3 million to settle all claims arising under the termination. During
1997, another major customer terminated its contract with us and paid
$250,000 to settle all claims associated with the termination. These
amounts are included above in total other income (expense).

- As a result of the contract terminations referred to above, during 1997
we abandoned an operating lease and incurred impairment charges for
related fixed assets aggregating $887,000. This amount is included above
in total costs and expenses.

- Prior to January 1, 1996, XCare.net was an S corporation for federal and
state income tax purposes, and accordingly, our income was taxed directly
to our stockholders. Pro forma income before income taxes, pro forma net
income and pro forma net income per common share for the years ended
December 31, 1994 and 1995 give effect to pro forma adjustments that
reflect the estimated federal and state income taxes that would have been
recorded if XCare.net had been a C corporation prior to January 1, 1996.

5
<PAGE> 13

- See note 1 of notes to the financial statements for a description of the
method used to compute net income (loss) per common share and pro forma
net income (loss) per common share for all periods presented.

- Pro forma balance sheet data reflect the conversion of convertible
preferred stock, which will occur automatically upon the closing of this
offering, the assumed cashless exercise of all outstanding common stock
warrants and convertible preferred stock warrants, and the conversion of
the convertible preferred stock issued upon assumed exercise of the
latter warrants into common stock. See note 1 of notes to the financial
statements.

- Pro forma as adjusted balance sheet data reflect the receipt of the
estimated net proceeds from this offering at an initial public offering
price of $18.00 per share, after deducting estimated underwriting
discounts and offering expenses. See "Capitalization" and "Use of
Proceeds."

6
<PAGE> 14

RISK FACTORS

You should carefully consider these risk factors, together with all of the
other information included in this prospectus, before you decide whether to
purchase shares of our common stock. The risks set out below may not be
exhaustive. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed, the value of our
common stock could decline and you may lose all or part of your investment.

OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE ARE IN A
TRANSITIONAL STAGE OF DEVELOPMENT

It is difficult to evaluate our business and our prospects because our
business model is new and unproven. We commenced operations in March 1989, but
we did not begin focusing on Internet-based health care solutions until early
1999. We have historically derived a significant portion of our revenue from
sales of maintenance and client/server software for managed health care systems
and from providing services to health care organizations seeking to outsource
administrative functions. We intend to derive an increasing portion of our
future revenue from our Internet-based applications, services and product
offerings. As a result, even though we have been in existence for over ten
years, we are prone to the risks and difficulties frequently encountered by
early stage companies, particularly companies in new and rapidly evolving
technology-related markets.

WE WILL HAVE DIFFICULTY PREDICTING OUR FUTURE RESULTS OF OPERATIONS

Due to our limited operating history in the Internet-based health care
market, it is difficult for us to predict with any accuracy our future results
of operations. For example, we cannot accurately forecast expenses based on our
historical results because our experience in our current market is limited, and
we are required to forecast expenses in part on future revenue projections. The
provision of services using Internet technology in the health care industry is a
developing business that is inherently riskier than business in industries where
companies have established operating histories. Accordingly, our historical
financial results are not necessarily indicative of our future financial
performance.

WE HAVE INCURRED LOSSES SINCE CHANGING OUR FOCUS TO INTERNET-BASED SOLUTIONS AND
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY

We incurred net losses and losses from operations for the nine months ended
September 30, 1999 and the years ended December 31, 1998 and 1997. As of
September 30, 1999, we had an accumulated deficit of approximately $13.3
million. Since we began developing and marketing our Internet-based health care
products and services in early 1999, we have funded our business primarily by
borrowing funds and from the sale of our stock, not from cash generated by our
business. We expect to continue to incur significant sales and marketing,
research and development and general and administrative expenses. As a result,
we will experience losses and negative cash flows for the foreseeable future.
Factors which may prevent us from achieving or maintaining profitability and
cause our stock price to decline include the demand for and acceptance of our
products, product enhancements and services, and our ability to attract new
customers, as well as a number of other factors described elsewhere in this
"Risk Factors" section.

OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, CAUSING OUR
SHARE PRICE TO DECLINE

Our quarterly operating results have fluctuated significantly in the past
and are likely to fluctuate in the future depending on a number of factors
described below and elsewhere in this "Risk Factors" section of the prospectus,
including:

- any delay in the introduction of new applications, services and product
offerings and enhancements of existing solutions;

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<PAGE> 15

- the loss of a major customer;

- reductions in the average selling prices of our applications, services
and product offerings;

- cost pressures from shortages of skilled technical employees, increased
product development and engineering expenditures; and

- changes in industry market conditions.

Due to the factors described above and other factors, our results of
operations could fluctuate substantially in the future, and quarterly
comparisons may not indicate reliable trends of future performance. If our
operating results do not meet the expectations of securities analysts and
investors, our share price is likely to decline.

IF WE FAIL TO DEVELOP RELATIONSHIPS WITH ESTABLISHED HEALTH CARE INDUSTRY
PARTICIPANTS, WE MAY EXPERIENCE DELAYS IN THE GROWTH OF OUR BUSINESS

Relationships with established health care industry participants are
critical to our success. These relationships include customer, vendor,
distribution and co-marketing relationships. To date, we have established only a
limited number of these relationships, and these relationships are in the early
stages of development. Entering into relationships is complicated because it
involves identifying opportunities and collaborating with a number of our
customers, vendors and competitors. In addition, we may not be able to establish
relationships with particular key participants in the health care industry if we
have established relationships with competitors, and therefore it is important
that we are perceived as independent of any particular customer or partner.
Moreover, many potential customers and vendors may resist working with us until
our applications, services and product offerings have been successfully
introduced and have achieved market acceptance. If we cannot successfully
establish relationships with key health care industry participants, our business
will grow slowly.

IF WE CANNOT MAINTAIN OUR RELATIONSHIPS WITH ESTABLISHED HEALTH CARE INDUSTRY
PARTICIPANTS, OUR APPLICATIONS, SERVICES AND PRODUCTS MAY NOT ACHIEVE MARKET
ACCEPTANCE

Once we have established a relationship with an established health care
industry participant, we rely on that participant's ability to assist us in
generating increased acceptance and use of our applications, services and
product offerings. We have limited experience in maintaining relationships with
health care industry participants. Additionally, the other parties to these
relationships may not view these relationships with us as significant to their
own business, and they may reassess their commitment to us or decide to compete
directly with us in the future. We generally do not have agreements that
prohibit them from competing against us directly or from contracting with our
competitors. We cannot guarantee that any such party will perform its
obligations as agreed or contemplated or that we would be able to specifically
enforce any agreement with it. Our arrangements generally do not establish
minimum performance requirements, but instead rely on the voluntary efforts of
the other party. Therefore, we cannot guarantee that these relationships will be
successful. If we were to lose any of these relationships, or if the other
parties were to fail to collaborate with us to pursue additional business
relationships, we would not be able to execute our business plans and our
business would suffer significantly. Moreover, we may not experience increased
use of our applications, services and product offerings even if we establish and
maintain these relationships.

For additional information regarding these relationships, see
"Business -- Strategy."

IF THE HEALTH CARE INDUSTRY DOES NOT ACCEPT THE NEED FOR A COMMON TECHNOLOGY
PLATFORM, OUR BUSINESS WOULD NOT GROW

To be successful and to grow, we must attract a significant number of
customers throughout the health care industry. To date, the health care industry
has been resistant to adopting new information technology applications, services
and product offerings. Electronic information exchange and transaction
processing by the health care industry is still developing. Complexities in the
nature of health care
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<PAGE> 16

transactions and lack of a common technology platform are significant issues in
the development and acceptance of information technology applications, services
and product offerings by the industry. There are currently hundreds of different
incompatible hardware, software and database components. If health care industry
participants do not accept the need to integrate pre-existing information
technology components, the market for our applications and services would not
develop and our business would not grow.

IF PHYSICIANS AND OTHER HEALTH CARE PROVIDERS DO NOT ACCEPT INTERNET-BASED WORK
FLOW MODIFICATIONS, THE MARKET FOR OUR PRODUCTS MAY NOT GROW

Acceptance of Internet technology by physicians and other providers into
daily administrative and clinical workflow is a key factor in our ability to
meet our anticipated deployment levels for transaction services and process
automation components. However, without the acceptance by physicians and
providers of workflow modifications, new installation projects, such as our
applications, services and product offerings, may be stalled.

IF THE EXTENSIBLE MARK-UP LANGUAGE FAILS TO BECOME A STANDARD DATA EXCHANGE
PROTOCOL FOR THE INTERNET, THE MARKETABILITY OF OUR PRODUCTS MAY BE LIMITED

Our XCare.net platform operates with the extensible mark-up language, or
XML. The failure of extensible mark-up language to become well-accepted would
seriously impede the marketability of our products and force us to adapt our
products to other data exchange protocols. Any such adaptation may entail
substantial costs, may require substantial time and effort, and may not lead to
marketable and competitive products. In addition, if incompatible versions of
the extensible mark-up language standard arise in the market, the market for
extensible mark-up language-based applications may grow slowly or not at all. If
the version of extensive mark-up language for which we have developed
applications, services and product offerings does not gain widespread
acceptance, we will have to adapt our products to another version of extensible
mark-up language, which will cause delays in shipments of our application and
product offerings and impede our ability to provide services.

OUR REVENUE IS CONCENTRATED IN A FEW CUSTOMERS, WHICH PUTS OUR REVENUE AT RISK

We receive a substantial majority of our revenue from a limited number of
customers. In 1998, sales to Employers Mutual, Inc. accounted for 29% of
revenue, sales to Brokerage Services, Inc. accounted for 20% of revenue, sales
to Quest Diagnostics Incorporated accounted for 12% of revenue and sales to ADIS
International accounted for 11% of revenue. For the nine months ended September
30, 1999, sales to Methodist Care, Inc. accounted for 29% of revenue, sales to
American Medical Pathways, Inc. a subsidiary of American Medical Response, Inc.,
accounted for 19% of revenue, sales to Quest Diagnostics Incorporated accounted
for 17% of revenue and sales to Brokerage Services Incorporated accounted for
17% of revenue. We expect that a significant portion of our revenue will
continue to depend on sales to a small number of customers. If we do not
generate as much revenue from these major customers as we expect to, or if we
lose any of them as customers, our total revenue will be significantly reduced.

We have a contract with American Medical Pathways, Inc., a wholly owned
subsidiary of American Medical Response, Inc., to provide third-party
administrative services in connection with its contracts to provide medical
transportation services. Our revenue under this contract accounted for 19% of
our revenue during the nine month period ended September 30, 1999. American
Medical Pathways, Inc. may terminate our contract on 120 days notice. In
addition, Laidlaw, Inc., the owner of American Medical Response, Inc., recently
announced its decision to seek a buyer for American Medical Response, Inc. A new
owner of American Medical Response, Inc. may not continue to provide the same
level of medical transportation services or may seek to terminate our contract.
Any termination of the contract or reduction in license fees earned under the
contract would reduce our revenue and could slow our growth. American Medical
Response, Inc. is the largest provider of private ambulance service in the
United States. Therefore, if we lose revenue due to termination of the contract
or reduction in license
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<PAGE> 17

fees, it will be difficult to replace such revenue through contracts with other
providers of medical transportation services.

IF WE LOSE KEY LICENSES WE MAY BE REQUIRED TO DEVELOP OR LICENSE ALTERNATIVE
TECHNOLOGY, WHICH MAY CAUSE DELAYS, ADD CONSIDERABLE EXPENSE OR REDUCE SALES

We currently rely on software that we have licensed from Sinclair Montrose
Healthcare plc of London, England for our Match.Net Staffing and Scheduling
product. We will integrate this software with our software applications,
services and product offerings to centralize the scheduling and staffing
functions for health care providers in a secure Internet environment. We
currently have an exclusive license to the software, although exclusivity may
terminate if we are unable to meet milestones. This license may not continue to
be available to us on commercially reasonable terms in the future. The loss of
this license could result in delays or reductions of shipments of our MatchNet
Staffing & Scheduling product until equivalent software could be identified,
developed, licensed and integrated. In addition, other products and services we
may offer in the future may rely on licensed software. The loss of any current
or future license could result in delays in the introduction of our products and
services, add additional expense, and reduce sales of our products and services
until equivalent software could be developed, identified, licensed and
integrated.

IF OUR TRANSACTION AND DATA PROCESSING FACILITY FAILS, CUSTOMER SATISFACTION
COULD DECLINE

We currently process substantially all of our customer transactions and
data at our facility in Albuquerque, New Mexico. Although we have safeguards for
emergencies, we do not have back-up facilities to process information if this
facility is not functioning. The occurrence of a major catastrophic event or
other system failure at our Albuquerque, New Mexico facility could interrupt
data processing or result in the loss of stored data. In addition, we depend on
the efficient operation of Internet connections from customers to our systems.
These connections, in turn, depend on the efficient operation of Web browsers,
Internet service providers and Internet backbone service providers, all of which
have had periodic operational problems or experienced outages. Any system
delays, failures or loss of data, whatever the cause, could reduce customer
satisfaction with our applications, services and product offerings.

IF SECURITY OF OUR CUSTOMER AND PATIENT INFORMATION IS COMPROMISED, PATIENT CARE
COULD SUFFER, WE COULD BE LIABLE FOR DAMAGES AND OUR REPUTATION COULD DECLINE

We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure remain
secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive problems. If
we fail to meet our clients' expectations, we could be liable for damages and
our reputation could suffer. In addition, patient care could suffer and we could
be liable if our systems fail to deliver correct information in a timely manner.
Our insurance may not protect us from this risk.

IF OUR TRANSACTION HOSTING SERVICES SUFFER INTERRUPTIONS, OUR BUSINESS AND
REPUTATION COULD BE HARMED

Our customers have in the past experienced some interruptions with our
transaction hosting services. Similar interruptions may continue to occur from
time to time. These interruptions could be due to hardware and operating system
failures. We expect a large portion of our revenue to be derived from customers
who use our transaction hosting services. As a result, our business will suffer
if we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosting. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired

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<PAGE> 18

quality and degradation in levels of customer service. If this were to continue
to happen, our business and reputation could be seriously harmed.

OUR MARKETS ARE HIGHLY COMPETITIVE AND COMPETITION COULD HARM OUR ABILITY TO
SELL APPLICATIONS, SERVICES AND PRODUCT OFFERINGS

Competition could seriously harm our ability to sell additional products
and services. Potential competitors fall primarily into three categories: health
care Internet companies focused on providing connectivity and transactions
within business-to-business and business-to-consumer frameworks; traditional
health care information system vendors who seek to extend the services of their
core products using Internet-based technology; and traditional managed care
information system and outsourcing vendors who are focusing on extending the
services of their core products to the Internet. In addition, from time to time
our customers may develop applications, services and product offerings
competitive with those offered by us.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements. Our
competitors may develop and successfully market Internet-based health care
products and services in a manner that could have an adverse effect on our
business model. See "Business -- Competition."

IF WE CANNOT EXPAND OUR MANAGEMENT SYSTEMS AND NETWORK INFRASTRUCTURE, WE MAY
EXPERIENCE DELAYS IN THE GROWTH OF OUR BUSINESS

In order to grow, we intend to rapidly expand our management, product
development, testing, network operations, marketing, sales and customer service
personnel over the next year. This growth has and will continue to place a
significant strain on our managerial, operational, financial and information
systems resources. We may not be able to effectively manage expansion of our
operations, and our facilities, systems, procedures or controls may not be
adequate to support our operations. Moreover, our systems may not accommodate
increased use while maintaining acceptable overall performance.

As we grow, we will also need to expand and adapt our network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. So far, we have processed a limited number
and variety of transactions over our network infrastructure and only a limited
number of health care participants use our infrastructure. Many of our service
agreements contain performance standards. If we fail to meet these standards,
our customers could terminate their agreements with us. The loss of any of our
service agreements would cause a decline in our revenues. We may be unable to
expand or adapt our network infrastructure to meet additional demand or our
customers' changing needs on a timely basis and at a commercially reasonable
cost, or at all.

IF OUR OPERATING RESULTS VARY SIGNIFICANTLY DUE TO THE LENGTHY SALES AND
IMPLEMENTATION CYCLES FOR OUR PRODUCTS AND SERVICES, OUR REVENUES MAY BE DELAYED
AND OUR RESULTS OF OPERATIONS AND SHARE PRICE MAY FLUCTUATE

Because our applications, services and product offerings have lengthy sales
and implementation cycles, it is difficult for us to forecast the timing and
recognition of revenues from sales of our applications, services and product
offerings. Since we are unable to control many of the factors that will
influence our customers' buying decisions, the lengthy sales cycle could cause
our operating results to be below the expectations of analysts and investors.

A key element of our strategy is to market our applications, services and
product offerings to large organizations with significant data management and
access needs. The sales process normally involves a significant evaluation
process, and commitment of budgets may be subject to delays due to a customer's
internal procedures for approving new expenditures and deploying new
technologies. The period of time between initial customer contact and a purchase
order can span up to three months or more.
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<PAGE> 19

In addition, we often must provide a significant level of education to our
prospective customers regarding the use and benefit of our applications,
services and product offerings, which may cause additional delays during the
evaluation and acceptance process. General concerns regarding year 2000
compliance may further delay purchasing decisions by prospective customers. Our
long and unpredictable sales cycle can result in delayed revenues, difficulty in
matching revenues with expenses and increased expenditures, which together may
contribute to fluctuations in our results of operations and share price.

WE MAY LOSE EXISTING CUSTOMERS OR BE UNABLE TO ATTRACT NEW CUSTOMERS IF WE DO
NOT DEVELOP NEW APPLICATIONS, SERVICES AND PRODUCTS OR IF THESE SOLUTIONS DO NOT
KEEP PACE WITH TECHNOLOGICAL CHANGES

Internet technologies are evolving rapidly and the technology used by any
electronic commerce business is subject to rapid change and obsolescence. If we
are not able to maintain and improve our products and develop new products that
keep pace with competitive product introductions and technological developments,
satisfy diverse and evolving customer requirements and achieve market
acceptance, we may lose existing customers or be unable to attract new
customers. For example, we currently are developing Physician Credentialing,
Electronic Medical Record, Case Management, Medication and Medical Assessment
Inquiry Systems, Physician Practice Management, MD Pay Accelerator, Online Drug
Store, Medical Supply Product, Health and Medical Bookstore products. We may not
be successful in developing and marketing these or other product enhancements or
new products that respond to technological advances by others on a timely or
cost-effective basis. In addition, such applications, services and product
offerings may contain licensed components which may be difficult to integrate or
may cause the solutions to be ineffective. These products, if developed, may not
achieve market acceptance. Any delay or problems in the installation or
implementation of new products or services may cause customers to forego
purchases from us and could cause them to purchase from our competitors.

IF WE ARE REQUIRED TO COMMIT UNANTICIPATED RESOURCES TO COMPLETE FIXED-PRICE
CONTRACTS, OUR OPERATING RESULTS MAY DECLINE

We had historically derived a majority of our revenue from contracts that
were billed on a time-and-materials basis. Beginning in 1998, a significant
portion of our revenue has been derived from contracts that were billed on a
fixed-price basis. These contracts specify certain obligations and deliverables
to be met by us regardless of our actual costs incurred. We cannot assure you
that we can successfully complete these contracts on budget, and our inability
to do so could seriously harm our business, financial condition and results of
operations.

Our failure to accurately estimate the resources required for a fixed-price
contract could cause our operating results to decline. In the past, we have been
required to commit unanticipated additional resources to complete certain
project plans during the project to ensure that the project was completed on
schedule. We may experience similar situations in the future.

IF COMPLIANCE WITH GOVERNMENT REGULATION OF HEALTH CARE BECOMES COSTLY AND
DIFFICULT FOR US AND OUR CUSTOMERS, WE MAY NOT BE ABLE TO GROW OUR BUSINESS

Participants in the health care industry are subject to extensive and
frequently changing regulation under numerous laws administered by governmental
entities at the federal, state and local levels, some of which are, and others
of which may be, applicable to our business. Furthermore, our health care
service provider, payer and plan customers are also subject to a wide variety of
laws and regulations that could affect the nature and scope of their
relationships with us.

Laws regulating health care providers, health insurance, health maintenance
organizations and similar organizations, employee benefit plans and governmental
health benefit programs cover a broad array of subjects, including but not
limited to licensing, billing, collection and reimbursement,

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<PAGE> 20

advertising, confidentiality, financial relationships with, and referral of
services and goods among and to, suppliers and providers, mandated benefits and
grievance and appeal procedures. Furthermore, the federal Health Insurance
Portability and Accountability Act of 1996 mandates the use of standard
transactions, standard identifiers, security and other provisions by the year
2000.

These laws are often not uniform between states, and could require us to
undertake the expense and difficulty of tailoring our business procedures,
information systems, or financial relationships in order for our customers to be
in compliance with applicable laws and regulations. Compliance with such laws
could also interfere with the scope of our applications, services and product
offerings, or make them less cost effective for our customers. Furthermore, the
impact of regulatory developments in the health care industry is complex and
difficult to predict, and we cannot guarantee that we will not be adversely
affected by new regulatory requirements or interpretations.

Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
FDA. We do not believe that our current applications, services or product
offerings are subject to FDA regulation. If we expand our applications, services
and product offerings into areas subject to FDA regulation, complying with these
regulations could be time consuming, burdensome and expensive and could delay
our introduction of new products. For more information on government regulation
affecting our business, see "Business -- Government Regulation."

BECAUSE WE PROVIDE UTILIZATION REVIEW SERVICES, WE MAY INCUR LIABILITY

One of the functions of our applications is automatic adjudication of
whether or not a claim for payment or service should be denied or whether
existing coverage should be continued based upon particular plans or contracts
and industry-standard, clinical-support criteria. Our payer customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of payment of medical claims or medical service. The
contractual protections included in our customer contracts and our insurance
coverage may not be sufficient to protect us against such liability.

IF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL DO NOT REMAIN WITH US IN THE FUTURE,
WE MAY EXPERIENCE DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED PERSONNEL

Our future success depends upon the continued service of our executive
officers and other key employees as well as our ability to hire a significant
number of new employees. In particular, it would be difficult for us to replace
the services of our President and Chief Executive Officer, Lorine Sweeney. In
addition, we are particularly dependent on the continued services of software
developers with programming skills in extensible mark-up language, Java and
Oracle. Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. None of our executive officers or key personnel have employment
agreements with us, except for standard agreements we have with all of our
employees providing for confidentiality and invention assignment obligations.

WE MAY FACE PRODUCT-RELATED LIABILITIES THAT COULD FORCE US TO PAY DAMAGES WHICH
WOULD HURT OUR REPUTATION

While we and our customers test our applications, services and product
offerings, they may contain defects or result in system failures. These defects
or problems could result in the loss of or delay in generating revenue, loss of
market share, failure to achieve market acceptance, diversion of development
resources, injury to our reputation or increased insurance costs.

Our contracts limit our liability arising from our errors; however, these
provisions may not be enforceable and may not protect us from liability. While
we have general liability insurance that we believe is adequate, including
coverage for errors and omissions, we may not be able to maintain this

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<PAGE> 21

insurance on reasonable terms in the future. In addition, our insurance may not
be sufficient to cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim or if our
premiums increase significantly, our financial condition could be materially
harmed.

IF WE DO NOT ESTABLISH AND MAINTAIN THE XCARE.NET BRAND, OUR REPUTATION COULD BE
ADVERSELY AFFECTED

In order to increase our customer base and expand our online traffic, we
must establish, maintain and strengthen the XCare.net brand. For us to be
successful in establishing our brand, health care professionals must perceive us
as offering quality, cost-effective, communications, information and
administrative services. Our reputation and brand name could be adversely
affected if we experience difficulties in introducing new applications, services
and product offerings, if these applications, services and product offerings are
not accepted by customers, if we are required to discontinue existing
applications, services and product offerings or if our products and services do
not function properly.

OUR GROWTH AND OPERATING RESULTS WOULD BE IMPAIRED IF WE WERE UNABLE TO MEET OUR
FUTURE CAPITAL REQUIREMENTS

We expect that the money generated from this offering, combined with our
current cash resources, will be sufficient to meet our requirements for
approximately 18 months. However, we expect that we will continue to experience
negative cash flow in the near term. Accordingly, we may need to raise
additional capital to support expansion, develop new or enhanced applications,
services and product offerings, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. We may need to raise additional funds by selling debt or equity
securities, by entering into strategic relationships or through other
arrangements. We cannot assure you that we will be able to raise any additional
amounts on reasonable terms, or at all, when they are needed.

ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS AND DILUTE
STOCKHOLDER VALUE

We expect to acquire technologies and other health care technology
companies to increase the number and variety of applications, services and
product offerings we offer and to increase our customer base. To be successful,
we will need to identify applications, technologies and businesses that are
complementary to ours, integrate disparate technologies and corporate cultures
and manage a geographically dispersed company. Acquisitions could divert our
attention from other business concerns and expose us to unforeseen liabilities
or risks associated with entering new markets. Finally, we may lose key
employees while integrating these new companies. Integrating newly acquired
organizations and technologies into XCare.net could be expensive, time consuming
and may strain our resources. In addition, we may lose our current customers if
any acquired companies have relationships with competitors of our customers.
Consequently, we may not be successful in integrating any acquired businesses or
technologies and may not achieve anticipated revenue and cost benefits. The
health care industry is consolidating and we expect that we will face
intensified competition for acquisitions, especially from larger, better-funded
organizations. If we fail to execute our acquisition strategy successfully for
any reason, our business will suffer significantly.

We intend to pay for some of our acquisitions by issuing additional common
stock and this could dilute our stockholders. We may also use cash to buy
companies or technologies in the future. If we do use cash, we may need to incur
debt to pay for these acquisitions. Acquisition financing may not be available
on favorable terms or at all. In addition, we may be required to amortize
significant amounts of goodwill and other intangible assets in connection with
future acquisitions, which would seriously harm our results of operations.

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IF OUR PROPRIETARY TECHNOLOGY IS SUBJECTED TO INFRINGEMENT CLAIMS, WE MAY HAVE
TO PAY DAMAGES OR SEEK A LICENSE FROM THIRD PARTIES, WHICH COULD DELAY SALES OF
OUR PRODUCTS, AND IF OUR PROPRIETARY TECHNOLOGY IS INFRINGED UPON, WE MAY
EXPERIENCE LOSSES

Our intellectual property is important to our business. We expect that we
could be subject to intellectual property infringement claims as the number of
our competitors grows and the functionality of our applications overlap with
competitive offerings. These claims, whether or not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
would be required to pay a substantial damage award and to develop noninfringing
technology, obtain a license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop noninfringing
technology or obtain a license on commercially reasonable terms, or at all. In
addition, we may not be able to protect against misappropriation of our
intellectual property. Third parties may infringe upon our intellectual property
rights, we may not detect this unauthorized use and we may be unable to enforce
our rights. See "Business -- Intellectual Property."

IF WE ARE NOT ABLE TO PROTECT AND ENFORCE OUR TRADENAMES, INTERNET ADDRESS AND
INTELLECTUAL PROPERTY RIGHTS, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MAY SUFFER

We seek to protect our brand and our other intellectual property through a
combination of copyright, trade secret and trademark laws. Our XCare.net brand
is an important component of our business strategy. We have recently filed
federal trademark applications for "XCare.net," "XCare," "Solution Channels" and
"the Business to Business Platform for eHealth." We cannot guarantee that any of
these trademark applications will be granted. If we are unable to secure
registration of these marks or otherwise obtain the right to use these marks
under contract or common law, we may be required to stop using these marks. This
could cause confusion to our customers and in the marketplace and harm our
business, financial condition and results of operations.

In addition, our future success and ability to compete in our markets may
be dependent in part on our proprietary rights to products and services which we
develop. We rely on copyright, trademark and trade secret laws and contractual
restrictions. We also expect to rely on patents to protect our proprietary
technology and to rely on similar proprietary rights of any of our technology
providers. We have filed a patent application to protect certain of our
proprietary technology. We cannot assure you that such application will be
approved or, if approved, will be effective in protecting our proprietary
technology. We enter into confidentiality agreements with all of our employees,
as well as with our customers and potential customers seeking proprietary
information, and limit access to and distribution of our software, documentation
and other proprietary information. We cannot assure you that the steps we take
or the steps such providers take would be adequate to prevent misappropriation
of our respective proprietary rights.

POTENTIAL YEAR 2000 PROBLEMS WITH OUR PRODUCTS OR INTERNAL SYSTEMS MAY INVOLVE
SIGNIFICANT TIME AND EXPENSE AND MAY REDUCE OUR FUTURE SALES

Many currently installed computer systems and software products store dates
using only the last two digits of the calendar year. As a result, such systems
may not be able to distinguish whether "00" means 1900 or 2000, which may cause
system failures or erroneous results. Although no material year 2000 problems
with our application, services and product offerings have been brought to our
attention to date, year 2000 problems emerging in the future could subject us to
liability claims and disrupt our customers' purchasing patterns, either of which
could harm our business.

Our applications, services and product offerings operate in complex network
environments and directly or indirectly interact with a number of other hardware
and software systems that we cannot adequately evaluate for year 2000
compliance. We may face claims based on year 2000 problems in other companies'
products, or issues arising from the integration of multiple products within an
overall system. Although we have not been a party to any litigation or
arbitration proceeding involving our

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solutions related to year 2000 compliance issues, we may in the future be
required to defend our applications, services and product offerings in such
proceedings, or to negotiate resolutions of claims based on year 2000 issues.
Defending and resolving year 2000-related disputes, regardless of the merits of
such disputes, and any liability we have for year 2000-related damages,
including consequential damages, could be expensive to us. In addition,
customers and potential customers may limit purchases of new applications,
services and product offerings due to year 2000 issues as companies expend
significant resources to correct or upgrade their current software systems for
year 2000 compliance. These expenditures may result in reduced funds available
to purchase our applications, services and product offerings. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

GOVERNMENT REGULATION OF INTERNET COMMUNICATIONS MAY IMPACT OUR BUSINESS BY
DIRECTLY OR INDIRECTLY INCREASING OUR COSTS

We provide Internet services, in part, through data transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wireline communications. We currently are not
subject to direct regulation by the Federal Communications Commission or any
other governmental agency, other than regulations applicable to businesses
generally.

However, in the future we could become subject to regulation by the Federal
Communications Commission or another regulatory agency as a provider of basic
telecommunications services. Changes in the regulatory environment relating to
the application of access charges and Universal Service Fund support payments to
Internet and Internet telephony providers, regulation of Internet services,
including Internet telephony, and other regulatory changes that directly or
indirectly affect costs imposed on Internet or Internet telephony providers,
telecommunications costs or increase in the likelihood or scope of competition,
could harm our business and financial results.

OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL
OVER US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO OUR STOCKHOLDERS' VOTE

Our executive officers and directors, together with their affiliates, will
beneficially own an aggregate of approximately 61.2% of our outstanding common
stock following the completion of the offering. These stockholders, if acting
together, will be able to significantly influence all matters requiring approval
by our stockholders, including the election of directors and the approval of
mergers or similar transactions even if other stockholders disagree. See
"Principal Stockholders."

WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY

Provisions of our certificate of incorporation, bylaws, other agreements
and Delaware law could make it more difficult for a third-party to acquire us,
even if doing so would be beneficial to our stockholders. See "Description of
Capital Stock."

WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS AND OUR INVESTMENT OF
THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN

We intend to use the proceeds from the offering for general corporate
purposes, including working capital, capital expenditures and repayment of
long-term indebtedness, and may use a portion of proceeds to acquire other
businesses, products or technologies. Our management will have considerable
discretion in the application of the net proceeds of this offering, and you will
not have the opportunity, as part of your investment decision, to assess whether
the proceeds are being used appropriately. The net proceeds of this offering may
be used for corporate purposes that do not increase our results of operations or
our market value. Pending any such uses, we plan to invest the net proceeds of
the offering in investment-grade, interest-bearing securities. We cannot predict
that such investments will yield a favorable return. See "Use of Proceeds."

16
<PAGE> 24

OUR SECURITIES HAVE NO PRIOR MARKET AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING

Our common stock has never been sold in a public market. An active trading
market for our common stock may not develop or be sustained after completion of
the offering. The initial public offering price may not be indicative of the
prices that will prevail in the public market after the offering, and the market
price of the common stock could fall below the initial public offering price. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology companies and which have often been unrelated to the operating
performance of such companies. See "Underwriting."

WE MAY BE SUBJECT TO LITIGATION IF OUR COMMON STOCK PRICE IS VOLATILE

In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against the company. The institution of class action litigation
against us could result in substantial costs to us and a diversion of our
management's attention and resources which would harm our business, financial
condition and results of operations. Any adverse determination in this
litigation could also subject us to significant liabilities.

SHARES ELIGIBLE FOR FUTURE SALE AFTER THE OFFERING COULD CAUSE OUR STOCK PRICE
TO FALL

If our stockholders sell substantial amounts of our common stock in the
public market following the offering, the market price of our common stock could
fall. Such sales also might make it more difficult for XCare.net to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Based upon the number of our shares outstanding as of September 30,
1999, upon completion of the offering, we will have outstanding 15,368,209
shares of common stock, assuming no exercise of the underwriters' option to
purchase additional shares and no exercise of outstanding options after
September 30, 1999. Of these shares, the 5,000,000 shares sold in the offering
will be freely tradable. The remaining 10,368,209 shares of common stock will be
available for sale in the public market 180 days after the date of this
prospectus or afterwards.

Based on the number of our shares outstanding as of September 30, 1999,
after the offering, the holders of approximately 9,809,976 shares of common
stock, which represents 64% of our outstanding stock after completion of the
offering, will be entitled to certain rights to have the resale of their shares
registered under the Securities Act of 1933. If these holders, by exercising
their registration rights, cause a large number of securities to be registered
and sold in the public market, such sales could materially and adversely affect
the market price for our common stock. In addition, if we were to include in a
registration statement shares held by these holders pursuant to the exercise of
their registration rights, such sales may impede our ability to raise needed
capital. See "Shares Eligible for Future Sale" and "Underwriting."

NEW INVESTORS IN OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION

If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. Investors
participating in the offering of our common stock will pay a price per share,
which substantially exceeds the value of our assets after subtracting our
liabilities. These investors will contribute 78.8% of the total amount paid to
fund us but will own only 32.5% of our outstanding shares. If the holders of
outstanding options or warrants exercise those options or warrants, you will
suffer further dilution. See "Dilution."

17
<PAGE> 25

USE OF PROCEEDS

The net proceeds to us from the sale of shares of our common stock in the
offering at an initial public offering price of $18.00 per share, after
deducting estimated expenses of $1.6 million and underwriting discounts and
commissions, are estimated to be approximately $82.2 million (approximately
$94.7 million if the underwriters' over-allotment option is exercised in full).

We expect to use the net proceeds from this offering for general corporate
purposes, working capital and capital expenditures to fund our operations,
including to continue expanding and enhancing our sales and marketing operations
and to continue expanding our product offerings. We have not yet determined our
expected use of these proceeds, but we currently anticipate that we will incur
approximately $3 million in research and development expenses, $7 million in
sales and marketing expenses, $2 million in hardware and software purchases and
other capital expenditures and $6 million in general and administrative expenses
over the next 12 months. Actual expenditures may vary substantially from these
estimates. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the status of our product development efforts,
marketing and sales activities, and the amount of cash generated by our
operations and competition. We may find it necessary or advisable to use
portions of the proceeds for other purposes.

A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies, although there are no current plans, negotiations or discussions
for any such transactions. Pending use of the net proceeds for the above
purposes, we intend to invest such funds in short-term, interest-bearing,
investment grade obligations.

DIVIDEND POLICY

Except for dividends declared in connection with our status as an S
corporation prior to January 1996, we have never declared or paid any cash
dividends on our common stock or other securities. We currently anticipate that
we will retain all of our future earnings for use in the expansion and operation
of our business and do not anticipate paying any cash dividends in the
foreseeable future.

18
<PAGE> 26

CAPITALIZATION

The following table sets forth our total capitalization as of September 30,
1999 on an actual, pro forma and pro forma as adjusted basis. The pro forma
capitalization reflects the automatic conversion of all outstanding shares of
our convertible preferred stock into common stock upon the closing of this
offering, the assumed cashless exercise of all outstanding common and
convertible preferred stock warrants, the conversion of the convertible
preferred stock issued upon the assumed cashless exercise of the latter warrants
into common stock, and amendments to our certificate of incorporation effective
after September 30, 1999. The pro forma as adjusted capitalization reflects our
receipt of estimated net proceeds from the sale of the 5,000,000 shares of
common stock in this offering (at an initial public offering price of $18.00 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses):

<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------
(UNAUDITED)
PRO FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C> <C>
Long-term debt............................................. $ 25 $ 25 $ 25
-------- -------- --------
Series A mandatorily redeemable convertible preferred
stock, $0.01 par value; 6,000,000 shares authorized;
2,450,000 shares outstanding, actual; no shares
authorized or outstanding, pro forma and pro forma as
adjusted................................................. 6,793 -- --
Series B mandatorily redeemable convertible preferred
stock, $0.01 par value; 75,000,000 shares authorized;
63,053,144 shares outstanding, actual; no shares
authorized or outstanding, pro forma and pro forma as
adjusted................................................. 16,944 -- --
Value ascribed to mandatorily redeemable convertible
preferred stock warrants................................. 84 -- --
-------- -------- --------
23,821 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, no shares authorized or
outstanding, actual; 5,000,000 shares authorized, no
shares outstanding, pro forma and pro forma as
adjusted.............................................. -- -- --
Common stock, $0.01 par value; 12,500,000 shares
authorized, actual; 100,000,000 shares authorized, pro
forma and pro forma as adjusted; 557,163 shares
outstanding, actual; 10,368,209 shares outstanding,
pro forma; 15,368,209 shares outstanding, pro forma as
adjusted.............................................. 6 104 154
Additional paid-in capital............................... 3,120 26,843 108,943
Unearned compensation.................................... (2,383) (2,383) (2,383)
Accumulated deficit...................................... (13,329) (13,329) (13,329)
-------- -------- --------
Total stockholders' equity (deficit)................ (12,586) 11,235 93,385
-------- -------- --------
Total capitalization................................ $ 11,260 $ 11,260 $ 95,673
======== ======== ========
</TABLE>

We expect to incur a charge to operations of approximately $116,000 that
will further increase the accumulated deficit and decrease unearned compensation
upon completion of this offering, representing the acceleration of the vesting
of an option granted to a consultant. We also expect to record a charge of
$132,000, during the first quarter of 2000, relating to the settlement of a
dispute with a holder of a warrant to purchase common stock.

Outstanding shares in the above table excludes 1,491,492 shares issuable
upon exercise of outstanding options at September 30, 1999, with a weighted
average exercise price of $1.35 per share, 541,345 shares reserved for future
issuance under our stock plan after September 30, 1999, and 750,000 shares
reserved for future issuance under our director option plan and employee stock
purchase plan, both of which become effective upon the closing of the offering.
In the fourth quarter ended December 31, 1999, we granted options to purchase
145,451 shares of common stock, leaving a total of 400,444 shares reserved for
future issuance; and options to purchase a total of 20,500 shares were
exercised. See "Management -- Employee Benefit Plans" and notes 4, 6 and 9 of
notes to the financial statements.

19
<PAGE> 27

DILUTION

Our pro forma net tangible book value as of September 30, 1999 was
approximately $10.6 million or $1.02 per share of common stock, after giving
effect to the conversion of our outstanding convertible preferred stock, the
cashless exercise of all outstanding common and convertible preferred stock
warrants, and the conversion of the convertible preferred stock issued upon
assumed exercise of the warrants into common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities, divided
by the number of outstanding shares of common stock after giving effect to the
transactions described in the previous sentence.

Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of our common stock in
this offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 5,000,000 shares
of common stock in this offering at an initial public offering price of $18.00
per share, and after deducting estimated underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book value at
September 30, 1999 would have been approximately $92.7 million or $6.04 per
share. This represents an immediate increase in net tangible book value to
existing stockholders of $5.02 per share and an immediate dilution to new public
investors of $11.96 per share. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $18.00
Pro forma net tangible book value per share as of
September 30, 1999..................................... $1.02
Increase per share attributable to new public investors... 5.02
-----
Pro forma net tangible book value per share after
offering.................................................. 6.04
------
Dilution per share to new public investors.................. $11.96
======
</TABLE>

The following table sets forth, on a pro forma basis as of September 30,
1999, the difference between the number of shares of common stock purchased from
us, the total consideration paid, and the average price per share paid by
existing stockholders and by new public investors before deducting estimated
underwriting discounts and commissions and offering expenses payable by us,
using an initial public offering price of $18.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 10,368,209 67.5% $ 24,085,569 21.1% $ 2.32
New public investors......... 5,000,000 32.5 90,000,000 78.9% 18.00
---------- ------ ------------ ------
Total................... 15,368,209 100.0% $114,085,569 100.0%
========== ====== ============ ======
</TABLE>

As of September 30, 1999, we had outstanding options to purchase 1,491,492
shares of common stock at a weighted average exercise price of $1.35 per share.
In addition, we have reserved 541,345 additional shares for future issuance
under our stock plan at September 30, 1999, and 750,000 shares reserved for
future issuance under our director option plan and employee stock purchase plan,
both of which become effective upon the closing of the offering. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. In the fourth quarter ended December 31, 1999, we
granted options to purchase 145,451 shares of common stock, leaving a total of
400,444 shares reserved for future issuance; and options to purchase a total of
20,500 shares were exercised. See "Management -- Employee Benefit Plans" and
notes 4, 6 and 9 of notes to the financial statements.

20
<PAGE> 28

SELECTED FINANCIAL DATA

The following selected financial data are qualified by reference to, and
should be read in conjunction with, our financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The balance sheet data as of
December 31, 1997 and 1998 and statement of operations data for each of the
three years ended December 31, 1998 have been derived from our audited financial
statements and the notes thereto included elsewhere in this prospectus. The
statement of operations data for the years ended December 31, 1994 and 1995 and
the balance sheet data as of December 31, 1994, 1995 and 1996 are derived from
our historical financial statements not included in this prospectus. The
unaudited statement of operations data for the nine-month periods ended
September 30, 1998 and 1999 and the balance sheet data as of September 30, 1999
are derived from unaudited financial statements included in this prospectus
which have been prepared on the same basis as the audited financial statements
and, in our opinion, include all adjustments, consisting only of normal
recurring adjustments, which are necessary to present fairly the results of
operations and financial position of XCare.net for the period in accordance with
generally accepted accounting principles. Historical results are not necessarily
indicative of results for any future period.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................... $4,310 $7,708 $ 9,726 $ 5,984 $ 2,270 $ 1,564 $ 2,654
------ ------ ------- ------- ------- ------- -------
Costs and expenses:
Cost of revenue........................... 1,450 2,593 3,744 4,575 2,086 1,440 2,421
Sales and marketing....................... 181 236 1,369 2,531 965 792 545
General and administrative................ 1,121 1,465 2,220 2,436 2,194 1,389 1,185
Research and development.................. 1,368 1,789 3,190 4,212 670 594 417
Impairment of long-lived assets and
abandonment of operating lease.......... -- -- -- 887 -- -- --
Stock compensation expense................ -- -- -- -- -- -- 112
------ ------ ------- ------- ------- ------- -------
Total costs and expenses........... 4,120 6,083 10,523 14,641 5,915 4,215 4,680
Income (loss) from operations............... 190 1,625 (797) (8,657) (3,645) (2,651) (2,026)
Settlements received from contract
terminations.............................. -- -- 2,250 250 -- -- --
Interest income (expense), net.............. (77) (42) -- 5 (437) (306) (150)
------ ------ ------- ------- ------- ------- -------
Income (loss) before income taxes........... 113 1,583 1,453 (8,402) (4,082) (2,957) (2,176)
Income tax (benefit) expense................ -- -- 1,200 (1,078) -- -- --
------ ------ ------- ------- ------- ------- -------
Net income (loss)........................... $ 113 $1,583 $ 253 $(7,324) $(4,082) $(2,957) $(2,176)
====== ====== ======= ======= ======= ======= =======
Net income (loss) per common share -- basic
and diluted............................... $ 0.19 $ 2.64 $ 0.53 $(18.92) $(10.64) $ (7.71) $ (5.09)
====== ====== ======= ======= ======= ======= =======
Weighted average common shares outstanding--
basic and diluted......................... 596 599 476 390 390 390 438
====== ====== ======= ======= ======= ======= =======
Pro forma:
Income before income taxes................ $ 113 $1,583
Net income................................ $ 65 $ 980
Pro forma net income (loss) per common
share -- basic and diluted................ $ 0.11 $ 1.64 $ (1.00) $ (0.32)
====== ====== ======= =======
Pro forma weighted average common shares
outstanding -- basic and diluted.......... 596 599 4,070 6,729
====== ====== ======= =======
</TABLE>

21
<PAGE> 29

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------- -------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 123 $ 172 $1,394 $ 697 $ 198 $ 11,031
Working capital........................... 61 840 243 (952) (5,335) 10,222
Total assets.............................. 1,266 4,190 4,492 4,026 2,805 13,523
Long-term debt............................ 402 1,012 1,317 939 284 25
Mandatorily redeemable convertible
preferred stock......................... -- -- -- 6,728 6,827 23,821
Stockholders' equity (deficit)............ 347 1,770 842 (6,537) (10,620) (12,586)
</TABLE>

In reviewing the above data, you should consider the following:

- During 1996, a major customer terminated its contract with us and paid
$2.3 million to settle all claims arising from the termination. During
1997, another major customer terminated its contract with us and paid
$250,000 to settle all claims associated with the termination.

- As a result of the contract terminations referred to above, during 1997
we abandoned an operating lease and incurred impairment charges for
related fixed assets aggregating $887,000.

- Prior to January 1, 1996, XCare.net was an S corporation for federal and
state income tax purposes, and, accordingly, our income was taxed
directly to our stockholders. Pro forma income before income taxes and
pro forma net income and pro forma net income (loss) per common share for
the years ended December 31, 1994 and 1995 give effect to pro forma
adjustments that reflect the federal and state income taxes that would
have been recorded if XCare.net had been a C corporation prior to January
1, 1996.

- See note 1 of notes to the financial statements for a description of the
method used to compute net income (loss) per share and pro forma net loss
per common share for all periods presented.

- During June and July 1999, we completed a sale of Series B convertible
preferred stock with net proceeds totaling $13.7 million, of which $7.3
million was received in June 1999 and $6.4 million was received in July
1999.

22
<PAGE> 30

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in revenue,
gross margins and anticipated expense levels, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus.

OVERVIEW

We commenced operations in March 1989, but we did not begin to focus on
Internet-based health care solutions until mid-1998. We have historically
derived a significant portion of our revenue from sales of mainframe and
client-server software for managed health care systems and from providing
services to health care organizations seeking to outsource administrative
functions. We intend to derive an increasing portion of our future revenue from
our Internet-based applications, services and product offerings. Due to our
limited operating history in the Internet-based health care market, it is
difficult for us to predict with any accuracy our future results of operations.
Accordingly, we believe that our historical financial results are not
necessarily indicative of our future financial performance.

At the end of the first quarter of 1996, our largest customer at the time,
who accounted for approximately 67% of 1996 revenue, changed its information
technology strategy and terminated its contract with us. In June 1996, the
customer paid approximately $2.3 million to settle all claims arising under the
termination.

In the first quarter of 1997, we obtained financing from new investors
through the issuance of Series A convertible preferred stock. This financing
enabled us to develop and pursue a new strategic plan to supplement our
mainframe-based business with client-server applications and services. In
pursuing this strategy, we increased our expenditures in marketing, research and
development, and general administration.

At the beginning of the third quarter of 1997, our largest customer at the
time, who accounted for approximately 74% of 1997 revenue, decided to pursue an
alternative software approach and terminated its contract with us. In August
1997, the customer paid $250,000 to settle all claims arising under the
termination. In response, we reduced total personnel by 40% and 26%, as well as
other expenditures, during the fourth quarter of 1997 and the first quarter of
1998, respectively.

Also at the end of 1997 and during the first quarter of 1998, we obtained
additional financing through the issuance of convertible promissory notes. This
financing allowed us to continue to license

23
<PAGE> 31

and implement our client-server based product to new customers and begin
development of our Internet-based applications and services. Notwithstanding
this financing, we had limited available working capital during the latter part
of 1998 through the first part of 1999, causing us to reduce our sales and
marketing, research and development, and general and administration expenditures
from 1997 levels.

At the end of 1998, we obtained additional financing from our existing
investors through the issuance of convertible promissory notes, and in June and
July 1999, we obtained financing through the issuance of Series B convertible
preferred stock. These financings have enabled us to add personnel and other
resources to facilitate the development and marketing of the new Internet-based
applications, services and product offerings.

For contracts entered into subsequent to January 1, 1998, we recognize
revenue in accordance with the provisions of Statement of Position 97-2,
"Software Revenue Recognition." We derive revenue from license fees and related
services under the terms of fixed price contracts. Maintenance revenue is
derived from agreements for supporting and providing periodic updates to
licensed software. Consulting revenue consists of revenue from consulting
services provided pursuant to time and materials contracts. Transaction
processing revenue is derived from outsourcing and transaction hosting services
and is recognized on a per-transaction basis as services are performed.

License fees and related services revenue is generally recognized from
fixed price contracts using the percentage-of-completion method of accounting
where collectibility of fees is probable. Where collectibility of fees is not
probable, we defer revenue and related costs as deferred contract costs and
recognize revenue and cost of revenue as cash is collected.

We may encounter budget and schedule overruns on fixed price contracts
caused by increased material, labor or overhead costs. Adjustments to cost
estimates are made in the periods in which the facts requiring such revisions
become known. Estimated losses, if any, are recorded in the period in which
current estimates of total contract revenue and contract costs indicate a loss.
We do not require collateral for our receivables and an allowance is maintained
for potential credit losses.

Maintenance revenue is recorded as unearned revenue and is recognized
ratably over the service period, which is generally 12 months. When maintenance
is bundled with the original license fee arrangement, its fair value is deferred
and recognized during the period such services are provided.

Revenue from consulting services provided pursuant to time-and-materials
contracts is recognized as the services are performed.

For contracts entered into prior to January 1, 1998, we recognized revenue
in accordance with Statement of Position 91-1, "Software Revenue Recognition."
Our revenue recognition for such pre-1998 contracts was substantially the same
as that discussed above.

For the nine months ended September 30, 1999, sales to Methodist Care, Inc.
accounted for 29% of revenue, sales to American Medical Pathways, Inc. accounted
for 19% of revenue, sales to Quest Diagnostics Incorporated accounted for 17% of
revenue and sales to Brokerage Services, Inc. accounted for 17% of revenue. If
we do not generate as much revenue from these major customers as we expect to,
or if we lose any of them as customers, our revenue will be significantly
reduced.

We incurred net losses and losses from operations for the nine months ended
September 30, 1999 and the years ended December 31, 1998 and 1997. As of
September 30, 1999, we had an accumulated deficit of approximately $13.3
million. Since we began developing and marketing our Internet-based health care
applications, services, and product offerings in early 1999, we have funded our
business primarily by borrowing funds and from the sale of convertible preferred
stock, not from cash generated by our business. We expect to continue to incur
significant sales and marketing, research and development and general and
administrative expenses. As a result, we will experience losses and negative
cash flows for the foreseeable future. Factors which may prevent us from
achieving or maintaining profitability and cause our stock price to decline
include the demand for and acceptance of

24
<PAGE> 32

our solutions, and our ability to attract new customers, as well as a number of
other factors described in the "Risk Factors" section.

During the nine months ended September 30, 1999, in connection with stock
options granted to certain employees under the stock plan, we have recorded
unearned stock compensation representing the difference between the exercise
price of the options and the deemed fair value of our common stock at the date
of grant. This unearned stock compensation will be amortized to expense over the
period during which the options or common stock subject to repurchase vest,
generally four years, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28. Subsequent to September 30,
1999, the Company granted additional options with exercise prices below the
deemed fair value of the Company's common stock at the date of grant and will
record unearned compensation of approximately $233,000 in the fourth quarter of
1999 to be amortized over the period of vesting. We also expect to incur a
charge to operations of approximately $116,000 that will further increase the
accumulated deficit and decrease unearned compensation upon completion of this
offering, representing the acceleration of the vesting of an option granted to a
consultant. Amortization of unearned stock compensation amounted to
approximately $112,000 during the nine months ended September 30, 1999. We
expect to recognize amortization expense related to unearned compensation for
the aforementioned grants of approximately $397,000 in the fourth quarter of
1999, $1,441,000 in 2000, $538,000 in 2001, $243,000 in 2002 and $47,000 in
2003.

We expect to record a charge during the first quarter of 2000, of $132,000,
relating to the settlement of a dispute with a holder of a warrant to purchase
common stock.

In September 1999 Laidlaw Inc., the Canadian parent company of American
Medical Response, Inc. announced its intention to divest its interest in that
company in order to focus on its transportation business. American Medical
Response, Inc. is the parent company of one of our customers, American Medical
Pathways, Inc. If such a sale is consummated, and the new owner decided to
terminate our agreement, there would likely be a material adverse impact on our
future earnings and cash flow.

RESULTS OF OPERATIONS

The following table sets forth financial data for the periods indicated as
a percentage of revenue.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ------ ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue............................ 38.5 76.5 91.9 92.1 91.2
Sales and marketing........................ 14.1 42.3 42.5 50.6 20.5
General and administrative................. 22.8 40.7 96.7 88.8 44.7
Research and development................... 32.8 70.4 29.5 38.0 15.7
Impairment of long-lived assets and
abandonment of operating lease.......... -- 14.8 -- -- --
Stock compensation expense................. -- -- -- -- 4.2
----- ------ ------ ------ -----
Total costs and expenses........... 108.2 244.7 260.6 269.5 176.3
----- ------ ------ ------ -----
Loss from operations......................... (8.2) (144.7) (160.6) (169.5) (76.3)
Settlements received from contract
terminations............................... 23.1 4.2 -- -- --
Interest income (expense), net............... -- 0.1 (19.2) (19.6) (5.7)
----- ------ ------ ------ -----
Income (loss) before income taxes............ 14.9 (140.4) (179.8) (189.1) (82.0)
----- ------ ------ ------ -----
Income tax (benefit) expense................. 12.3 (18.0) -- -- --
----- ------ ------ ------ -----
Net income (loss)............................ 2.6% (122.4)% (179.8)% (189.1)% (82.0)%
===== ====== ====== ====== =====
</TABLE>

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<PAGE> 33

NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998

Revenue. Revenue increased 70% to $2.7 million for the nine months ended
September 30, 1999 from $1.6 million for the nine months ended September 30,
1998. This increase reflects revenue recognized from new customers coupled with
an increase in average total arrangement fees as compared to average total
arrangement fees in the nine months ended September 30, 1998 partially offset by
decreased transaction processing revenue, as two customers did not continue
their transaction processing arrangements after they completed implementation of
our software.

Cost of revenue. Cost of revenue includes personnel and related overhead
costs, payments to third party consultants who assist with implementation and
support services, facilities costs and equipment depreciation. Cost of revenue
increased 68% to $2.4 million for the nine months ended September 30, 1999 from
$1.4 million for the nine months ended September 30, 1998. This increase
reflects the cost of additional third party consultants utilized to support the
current license implementation contracts and custom development projects, as
well as the amortization of purchased software. Cost of revenue as a percentage
of revenue was relatively consistent between the two nine-month periods.

Sales and marketing. Sales and marketing expenses consist of personnel and
related overhead costs, including commissions and travel expenses, field sales
office expenses, and advertising and promotion costs. Sales and marketing
expenses decreased 31% to $545,000 for the nine months ended September 30, 1999
from $792,000 for the nine months ended September 30, 1998, representing 21% and
51% of revenue, respectively. The decrease in sales and marketing expenses in
absolute dollars and as a percentage of revenue reflects a 15% reduction in
sales force personnel, and other promotional marketing activities as a result of
the limited working capital available during the nine months ended September 30,
1999 as compared to the nine months ended September 30, 1998. During the third
quarter we began to expand our sales and marketing organization using the
proceeds from the issuance of the Series B convertible preferred stock received
in June and July 1999.

General and administrative. General and administrative expenses include
personnel and related overhead costs for our executive, administrative, finance
and human resources functions, as well as legal and accounting fees. General and
administrative expenses decreased 15% to $1.2 million for the nine months ended
September 30, 1999 from $1.4 million for the nine months ended September 30,
1998, representing 45% and 89% of revenue, respectively. General and
administrative costs in absolute dollars were relatively consistent in absolute
dollars in both periods. However, general and administrative expenses decreased
as a percentage of revenue reflecting the 70% increase in revenue, as discussed
above, during the nine months ended September 30, 1999.

Research and development. Research and development expenses include
personnel and related overhead costs for product development, enhancements to
existing applications and services, and quality assurance activities. Research
and development expenses decreased 30% to $417,000 for the nine months ended
September 30, 1999 from $594,000 for the nine months ended September 30, 1998,
representing 16% and 38% of total revenue, respectively. The decrease in
research and development expenses in absolute dollars and as a percentage of
revenue reflects a reduction in the number of third party consultants used
during the nine months ended September 30, 1999 as compared to nine months ended
September 30, 1998. During the nine months ended September 30, 1998, these
consultants assisted in the development of the XCare.net platform.

Stock compensation expense. During the third quarter of 1999, we recorded
aggregate unearned compensation of $2.4 million in connection with the grant of
certain stock options. Amortization of such compensation amounted to
approximately $112,000 during the nine months ended September 30, 1999.

Interest income (expense), net. Interest income (expense), net includes
interest expense on our convertible promissory notes and capital lease
obligations partially offset by interest income on cash and cash equivalent
balances. Interest expense, net of interest income, decreased 51% to $150,000
for the nine months ended September 30, 1999 from $306,000 for the nine months
ended September 30, 1998

26
<PAGE> 34

due to the conversion of the convertible promissory notes to Series B
convertible preferred stock in June 1999.

Provision for (benefit from) income taxes. No provision for federal and
state income taxes has been recorded for the nine months ended September 30,
1999 or 1998 as we have incurred net operating losses for each of these periods.
We believe that, based on the history of losses and other factors, the weight of
available evidence indicates that it is more likely than not that we will not be
able to realize our deferred tax assets, and thus a full valuation allowance has
been recorded against such assets as of September 30, 1999 and 1998.

Net income (loss). Net loss decreased 26% to $2.2 million for the nine
months ended September 30, 1999 from $3.0 million for the nine months ended
September 30, 1998, primarily due to a 70% increase in revenue, partially offset
by an increase in total costs and expenses as discussed above.

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

Revenue. Revenue decreased 62% to $2.3 million for the year ended December
31, 1998 from $6.0 million for the year ended December 31, 1997. This decrease
reflects a significant reduction in consulting revenue due to the loss of a
major customer during July 1997 that accounted for approximately $4.4 million,
or 74%, of total 1997 revenue.

Cost of revenue. Cost of revenue decreased 54% to $2.1 million for the year
ended December 31, 1998 from $4.6 million for the year ended December 31, 1997.
As a percentage of revenue, cost of revenue increased to 92% in 1998 from 77% in
1997. The decrease in absolute dollars reflects a 55% reduction in the number of
employees who perform implementation services due to limited availability of
working capital in 1998. The increase in cost of revenue as a percentage of
revenue reflects decreased revenue associated with a major contract termination
in 1997 which was not completely offset by a decline in cost of revenue due to
certain fixed infrastructure costs which are included in cost of revenue.

Sales and marketing. Sales and marketing expenses decreased 62% to $965,000
for the year ended December 31, 1998 from $2.5 million for the year ended
December 31, 1997, representing 43% and 42% of revenue, respectively. The
decrease in absolute dollars reflects a 29% reduction in sales and marketing
personnel, and decreased travel and entertainment costs due to the loss of the
significant customer described above. In addition, we incurred higher costs for
marketing, consulting, advertising and promotion and attendance at trade shows
in 1997 as compared to 1998 in connection with our new strategic focus on
client-server applications and services, including various marketing studies and
analyst research projects on the client-server market.

General and administrative. General and administrative expenses decreased
10% to $2.2 million for the year ended December 31, 1998 from $2.4 million for
the year ended December 31, 1997, representing 97% and 41% of revenue,
respectively. The increase as a percentage of revenue is due to significantly
reduced revenue and losses on the disposal of fixed assets. The decrease in
absolute dollars reflects a 68% reduction in general and administrative
management personnel due to the loss of the significant customer described
above, which was partially offset by charges relating to the loss on disposal of
property and equipment referred to above.

Research and development. Research and development expenses decreased 84%
to $670,000 for the year ended December 31, 1998 from $4.2 million for the year
ended December 31, 1997, representing 30% and 70% of revenue, respectively. The
decrease in absolute dollars reflects management's decision to reduce research
and development staff by 96%, and support costs, as a result of the significant
decrease in revenue. In addition, during 1997, we had focused on developing and
maintaining two separate software applications, one for the mainframe market and
one for the client-server market, while in 1998 we were developing only the
client-server product.

27
<PAGE> 35

Interest income (expense), net. Interest expense, net, significantly
increased to $437,000 for the year ended December 31, 1998 from $5,000 of
interest income for the year ended December 31, 1997, as a result of interest
expense incurred on the December 1997 and April 1998 convertible promissory
notes.

Provision for (benefit from) income taxes. No provision for federal and
state income taxes has been recorded for the year ended December 31, 1998, as we
incurred a net operating loss. We believe that based on the history of losses
and other factors, the weight of available evidence indicates that it is more
likely than not that we will not be able to realize our deferred tax assets, and
thus a full valuation allowance has been recorded as of December 31, 1998.

Net income (loss). Net loss decreased 44% to $4.1 million for the year
ended December 31, 1998 from $7.3 million for the year ended December 31, 1997,
primarily due to a 60% decrease in total costs and expenses as discussed above,
partially offset by a decrease in total revenue.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Revenue. Revenue decreased 38% to $6.0 million for the year ended December
31, 1997 from $9.7 million for the year ended December 31, 1996. This decrease
reflects a significant reduction in consulting revenue due to the loss of a
major customer, who accounted for approximately $6.5 million, or 67%, of 1996
revenue.

Cost of revenue. Cost of revenue increased 22% to $4.6 million for the year
ended December 31, 1997 from $3.7 million for the year ended December 31, 1996.
As a percentage of revenue, cost of revenue increased to 77% in 1997 from 39% in
1996. This increase in absolute dollars and as a percentage of revenue is due to
an increase in the use of third party consultants and travel expenses during
1997 and the decrease in revenue associated with a major contract termination
during 1997.

Sales and marketing. Sales and marketing expenses increased 85% to $2.5
million for the year ended December 31, 1997 from $1.4 million for the year
ended December 31, 1996, representing 42% and 14% of revenue, respectively.
After we received the proceeds from the issuance of convertible preferred stock
in the first quarter of 1997, we focused on increasing our marketing
expenditures in an attempt to bring in new customers. The increase in absolute
dollars and as a percentage of revenue reflects decreased revenue, an increase
of 115% in the number of sales and marketing employees, increased advertising
and promotional activities, and increased travel expenses during 1997.

General and administrative. General and administrative expenses increased
10% to $2.4 million for the year ended December 31, 1997 from $2.2 million for
the year ended December 31, 1996, representing 41% and 23% of revenue,
respectively. The increase in absolute dollars and as a percentage of revenue
reflects the decreased revenue during 1997 and a 28% increase in the number of
general and administrative employees during 1997, as several executive level
employees were hired and relocated to Albuquerque, New Mexico after we received
proceeds from the issuance of convertible preferred stock in the first quarter
of 1997.

Research and development. Research and development expenses increased 32%
to $4.2 million for the year ended December 31, 1997 from $3.2 million for the
year ended December 31, 1996, representing 70% and 33% of revenue, respectively.
During 1997, we increased research and development personnel by 23% to continue
development of our software applications after the issuance of convertible
preferred stock in the first quarter of 1997.

Impairment of long-lived assets and abandonment of operating
lease. Impairment of long-lived assets and abandonment of operating lease
increased 100% to $887,000 for the year ended December 31, 1997 from $0 for the
year ended December 31, 1996. During 1997, due to the loss of our largest
customer, we abandoned an operating lease and incurred impairment charges for
related fixed assets aggregating $887,000.

28
<PAGE> 36

Settlement received from contract termination. During 1996, our largest
customer terminated its contract with us and paid $2.3 million to settle all
claims arising under the termination. During 1997, another major customer
terminated its contract with us and paid $250,000 to settle all claims
associated with the termination.

Interest income (expense), net. Interest income (expense), net did not
change significantly in the year ended December 31, 1997 from the year ended
December 31, 1996.

Provision for (benefit from) income taxes. The 1997 tax benefit was
primarily due to net operating losses generated in 1997 which were partially
realized through a carryback of the net operating loss against income taxes paid
in 1996. The 1996 tax expense was related to taxable income generated in 1996.

The effective tax rate for 1997 was approximately 12.8% which was lower
than the Federal statutory rate primarily because of the effect of recording a
valuation allowance against all of our remaining deferred tax assets at December
31, 1997. The effective tax rate for 1996 was approximately 82.6% which was
higher than the Federal statutory rate primarily because of the effect of our
conversion to a taxable corporation on January 1, 1996.

Net income (loss). Net loss increased significantly to $7.3 million for the
year ended December 31, 1997 from net income of $253,000 for the year ended
December 31, 1996, primarily due to the loss of our most significant customer
during 1997 resulting in a reduction of revenue and decreased settlements
received from contract terminations as discussed above. Further, total expenses
increased by 39% during 1997 as discussed above.

QUARTERLY RESULTS OF OPERATIONS

We have experienced quarterly fluctuations in our operating and financial
results due to the timing and relative size of new custom software development
projects, cancellations of contracts, and fluctuations in costs, including
personnel, equipment and facilities costs. We expect quarterly results to
fluctuate in the future due to the timing and introduction of new applications
and services and other market factors. See "Risk Factors."

The following tables set forth unaudited statement of operations data for
each of the seven quarters ended September 30, 1999, as well as the percentage
of our revenue represented by each line item. This information has been derived
from our unaudited financial statements. The unaudited financial statements have
been prepared on the same basis as the audited financial statements contained in
this prospectus and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of this
information. These unaudited quarterly results should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in the
prospectus. Our

29
<PAGE> 37

operating results are expected to vary significantly from quarter to quarter and
are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF REVENUE)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................... $ 521 $ 521 $ 522 $ 706 $1,311 $ 530 $ 813
Costs and expenses:
Cost of revenue......... 547 445 448 646 923 714 784
Sales and marketing..... 334 232 226 173 155 138 252
General and
administrative........ 612 431 346 805 144 282 759
Research and
development........... 396 150 48 76 104 57 256
Stock compensation
expense............... -- -- -- -- -- -- 112
------- ------- ------- ------- ------ ------- -------
Total costs and
expenses....... 1,889 1,258 1,068 1,700 1,326 1,191 2,163
------- ------- ------- ------- ------ ------- -------
Income (loss) from
operations.............. (1,368) (737) (546) (994) (15) (661) (1,350)
Interest income (expense),
net..................... (74) (106) (126) (131) (136) (122) 108
------- ------- ------- ------- ------ ------- -------
Loss before income
taxes................... (1,442) (843) (672) (1,125) (151) (783) (1,242)
Income tax (benefit)
expense................. -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------- -------
Net loss.................. $(1,442) $ (843) $ (672) $(1,125) $ (151) $ (783) $(1,242)
======= ======= ======= ======= ====== ======= =======
AS A PERCENT OF REVENUE:
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenue......... 105.0 85.4 85.8 91.5 70.4 134.7 96.4
Sales and marketing..... 64.1 44.5 43.3 24.5 11.8 26.0 31.0
General and
administrative........ 117.5 82.7 66.3 114.0 11.0 53.2 93.4
Research and
development........... 76.0 28.8 9.2 10.8 7.9 10.8 31.5
Stock compensation
expense............... -- -- -- -- -- -- 13.8
------- ------- ------- ------- ------ ------- -------
Total costs and
expenses....... 362.6 241.4 204.6 240.8 101.1 224.7 266.1
------- ------- ------- ------- ------ ------- -------
Income (loss) from
operations.............. (262.6) (141.4) (104.6) (140.8) (1.1) (124.7) (166.1)
------- ------- ------- ------- ------ ------- -------
Interest income (expense),
net..................... (14.2) (20.4) (24.1) (18.5) (10.4) (23.0) 13.3
------- ------- ------- ------- ------ ------- -------
Loss before income
taxes................... (276.8) (161.8) (128.7) (159.3) (11.5) (147.7) (152.8)
Income tax (benefit)
expense................. -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------- -------
Net loss.................. (276.8)% (161.8)% (128.7)% (159.3)% (11.5)% (147.7)% (152.8)%
======= ======= ======= ======= ====== ======= =======
</TABLE>

Revenue increased significantly during the quarter ended March 31, 1999 due
to the progress made in completing several custom software development projects.
Revenue for the quarter ended June 30, 1999 decreased relative to the prior
quarter as limited working capital available during the six months ended June
30, 1999 resulted in a reduction in our sales force personnel and other
promotional marketing activities, which impeded our ability to generate new
sales leads. Revenue for the quarter ended September 30, 1999 included $240,000
for the settlement of outstanding amounts owed by a customer relating to work
that had been performed in a prior quarter and for which the revenue had not
previously been recognized because collectibility of fees was not probable.

Cost of revenue as a percentage of revenue has varied from quarter to
quarter due to fluctuations in quarterly revenue and changes in associated
personnel costs. During the quarter ended March 31, 1999, cost of revenue
decreased as a percentage of revenue due to increased revenue from the
completion of several custom software development projects during the quarter.
During the quarter ended June 30, 1999, the increase in cost of revenue as a
percentage of revenue reflects the decreased revenue

30
<PAGE> 38

recognized during the quarter the utilization of third party consultants for
license implementation contracts and custom development projects, and the
amortization of purchased software.

During the quarter ended December 31, 1998, general and administrative
expense increased in absolute dollars and as a percentage of revenue due to an
approximate $360,000 loss on disposal of fixed assets. During the quarter ended
March 31, 1999, sales and marketing and general administrative expense declined
in both dollars and as a percentage of revenue due to substantial reductions of
personnel costs. During the quarter ended September 30, 1999, we increased
general and administrative personnel by 68%, and recruiting and relocation costs
increased by $192,000 reflecting costs associated with recruiting new employees.

Research and development expenses sharply declined following the quarter
ended March 31, 1998 due to reduction of research and development personnel
caused by limited working capital. During the quarter ended September 30, 1999,
we increased research and development employees by 266% reflecting our
commitment to enhance the XCare.net platform.

ANTICIPATED FINANCIAL RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999

Our results of operations for the three months ended December 31, 1999 are
expected to reflect approximately $2.0 million of revenue (unaudited), an
increase of 146% from $813,000 (unaudited) for the three months ended September
30, 1999, and approximately $3.3 million of total costs and expenses
(unaudited), an increase of 50% from $2.2 million (unaudited) for the three
months ended September 30, 1999, resulting in a net loss of approximately $1.3
million (unaudited), an increase of 8% from $1.2 million (unaudited) for the
three months ended September 30, 1999. Revenue increased for the three months
ended December 31, 1999 due to revenue recognized from new customers coupled
with an increase in total arrangement fees. Total costs and expenses increased
during the same period as a result of additional personnel hired to execute new
custom development projects and implement our Internet-based sales and marketing
initiatives. Although we have increased revenues during 1999, we have continued
to add personnel and invest in improving our existing technology and
infrastructure to support future growth which has resulted in net losses and
negative cash flows from operations. Additionally, our cash and cash equivalents
as of December 31, 1999 was $7.5 million (unaudited), a decrease of
approximately $3.5 million from $11.0 million (unaudited) as of September 30,
1999. The cash and cash equivalents balance decreased during the fourth quarter
ended December 31, 1999 due to the purchase of computer equipment, expenditures
related to the Company's initial public offering, and an increase in accounts
receivable. Results of operations for the three months ended December 31, 1999
include all adjustments, consisting only of normal recurring adjustments, which
management considers necessary for a fair presentation and should not be
considered indicative of results to be expected for any future period. See "Risk
Factors -- Our quarterly operating results are likely to fluctuate significantly
and may fail to meet the expectations of security analysts and investors,
causing our share price to decline" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed our operations through a combination of cash
flow from operations, private sales of common and convertible preferred stock,
and issuances of convertible promissory notes.

During March 1997, we completed a sale of Series A convertible preferred
stock for net proceeds of $6.6 million. From the period December 1997 through
December 1998, we issued $2.7 million of convertible promissory notes. During
June and July 1999, we completed a sale of Series B convertible preferred stock
with net proceeds totaling $13.7 million of which $7.3 million was received in
June 1999 and $6.4 million was received in July 1999. A portion of these
proceeds amounting to $438,000 was used to pay the majority of our capital lease
obligations during the third quarter of 1999 and $302,000 was used to repay debt
during that quarter.

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<PAGE> 39

At September 30, 1999, our principal sources of liquidity included $10.2
million in working capital with $107,000 in outstanding debt. Outstanding debt
at September 30, 1999 consists of a capital lease which is secured by the
underlying equipment and matures in December 2000.

Net cash used in operating activities was $1.9 million in the nine months
ended September 30, 1999, $2.2 million in 1998 and $6.6 million in 1997. Net
cash provided by operating activities was $2.8 million in 1996. Net cash used in
operating activities is primarily attributable to net losses.

Net cash used in investing activities was $109,000 in the nine months ended
September 30, 1999 and net cash provided by investing activities was $167,000 in
1998. Net cash used in investing activities was $318,000 in 1997 and $330,000 in
1996. Investing activities consist primarily of purchases of computer hardware
and software, office furniture and equipment, offset by proceeds from the sale
of property and equipment.

Net cash provided by financing activities was $12.8 million in the nine
months ended September 30, 1999, $1.5 million in 1998, and $6.2 million in 1997
and consists primarily of net proceeds from the issuance of convertible
preferred stock and convertible promissory notes. Net cash used in financing
activities was $1.3 million in 1996, which reflects principal payments on debt
and cash paid for the repurchase of common stock from former employees.

We anticipate that our cash and cash equivalents of $11.0 million at
September 30, 1999 will be sufficient to meet our working capital and
anticipated capital expenditure requirements for the next eighteen months. This
is regardless of whether or not the anticipated proceeds from this offering are
received and is based on and assuming our targets for cash flow are achieved.
Thereafter, we may require additional funds to support our working capital
requirements or for other purposes, and we may seek, even before such time, to
raise additional funds through public or private equity financing or from other
sources. Such additional financing may not be available at all or, if available,
on terms acceptable to us and that are not dilutive to our stockholders.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

We recognize revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," which provides guidance on recognizing revenue
from software transactions, as amended by SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition." We applied the
provisions of SOP 97-2 on a prospective basis for new software transactions
entered into as of January 1, 1998. The adoption of this guidance did not have a
material impact on our financial condition or results of operations.

Further guidance was published during 1998 in SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions."
Additionally, the AICPA issued technical questions and answers on financial and
reporting issues related to SOP 97-2 in January 1999. The adoption of this
guidance is not expected to have a material impact on our financial condition or
results of operations.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We currently develop and market our products in the United States. As all
sales are currently made in U.S. dollars, a strengthening of the dollar could
make our product less competitive in foreign markets. Our interest income is
sensitive to changes in the general level of U.S. interest rates. Due to the
short-term nature of our investments, we believe that there is no material risk
exposure. Based on the foregoing, no quantitative disclosures have been
provided.

YEAR 2000 ISSUES

We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of our
applications are year 2000 ready -- that is, they are capable of
32
<PAGE> 40

adequately distinguishing 21st century dates from 20th century dates. Although
no material year 2000 problems with our application have been brought to our
attention to date, our applications operate in complex network environments and
directly or indirectly interact with a number of other hardware and software
systems that we cannot completely evaluate for year 2000 readiness.

We may face claims based on year 2000 problems in other companies'
products, or issues arising from the integration of multiple products within an
overall system, although we have not been a party to any litigation or
arbitration proceeding or services involving our applications related to year
2000 readiness issues or services. We may in the future be required to defend
our applications or services in such proceedings, or to negotiate resolutions of
claims based on year 2000 issues. The costs of defending and resolving year
2000-related disputes, regardless of the merits of such disputes, and any
liability we have for year 2000-related damages, including consequential
damages, could harm our business. In addition, we believe that the purchasing
patterns of customers and potential customers may be affected by year 2000
issues, as companies expend significant resources to correct or upgrade their
current software systems for year 2000 readiness. These expenditures may result
in reduced funds available to purchase applications and services like those we
offer. To the extent year 2000 issues cause a significant delay in, or
cancellation of, decisions to purchase our applications, services or product
offerings, our business would suffer.

We have reviewed our internal management information and other critical
business systems to identify any year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems to determine their year 2000 readiness. Based on our vendors'
representations, we believe that the third-party hardware and software we use is
year 2000 ready.

To date, we have not incurred any material costs directly associated with
year 2000 readiness efforts, except for compensation expense associated with
salaried employees who have devoted some of their time to year 2000 assessment
and remediation efforts. As discussed above, we do not expect the total cost of
year 2000 problems to be material to our business, financial condition and
operating results. However, we will continue to evaluate new versions of our
applications and services, software and information systems provided by third
parties, and any new infrastructure systems that we acquire, to determine
whether they are year 2000 ready. Despite our current assessment, we may not
identify and correct all significant year 2000 problems on a timely basis. Year
2000 readiness efforts may involve significant time and expense and unremediated
problems could harm our business, financial condition and operating results. We
currently have no contingency plans to address the risks associated with
unremediated year 2000 problems.

33
<PAGE> 41

BUSINESS

The following description of our business should be read in conjunction
with the information included elsewhere in this prospectus. This description
contains certain forward-looking statements that are based largely on our
current expectations and are subject to a number of risks and uncertainties. Our
actual results could differ significantly from the results discussed in the
forward-looking statements as a result of certain of the factors set forth below
and elsewhere in this prospectus.

OVERVIEW

Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into a community to create an Internet exchange. We use the
XCare.net platform to deliver a broad range of applications, services and
electronic product offerings that streamline and automate high-volume,
data-intensive transactions and processes. The XCare.net platform is based on
extensible mark-up language, or XML, in conjunction with the Topic Navigation
Mapping standard. The enhanced integration and filtering capabilities of this
platform are designed to meet the demands of health care industry participants.
We expect extensible mark-up language to be a predominant protocol for
exchanging data for electronic commerce in the future. Topic Navigation Mapping
provides a standard format for indexing and structuring the extensible mark-up
language formatted content. We take advantage of the benefits of both extensible
mark-up language and Topic Navigation Mapping technologies to process data
trapped in usually incompatible existing computer systems, allow for automation
of health care processes and integrate a wide variety of health care data
including audio, video and text.

The XCare.net platform has been adopted by health care providers, payers
and suppliers. Some of our customers include American Medical Pathways, Inc. and
Asthma Management Services, Inc. in the provider field, Advica Health Resources,
Employers Mutual, Inc. and Brokerage Services, Inc. in the health care payer
field and ADIS International Ltd, Nursefinders, Inc., Digital Medical Registrar,
Delta Health Services, Quest Diagnostic Incorporated and Methodist Care, Inc. in
the health care supplier field.

Health Care Market Overview

The U.S. Health Care Finance Administration estimates that health care
expenditures currently represent $1.2 trillion, or 14% of the U.S. economy, and
that these expenditures will increase to $2.0 trillion by 2007 due both to
rising health care costs and an aging population. Health care claims, which
totalled approximately 4.4 billion in 1998, generally are processed through
antiquated computer systems via paper, fax or phone. These systems can be
inefficient due to their inability to communicate with the systems of other
health care participants and lead to unnecessary and duplicative costs. We
believe that the provision of new, Internet-based, business-to-business
information exchange and electronic commerce services that effectively address
processing inefficiencies is one of the significant market opportunities in
health care today.

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<PAGE> 42

The health care industry is currently one of the most complex markets due
to the numerous interrelationships among health care participants.

[Marketing Participants Graphic]

The payment for and delivery of health care requires that consistent,
accurate information be shared confidentially among health care participants
across a large and fragmented industry. Employers select health plans, determine
benefit levels, enroll employees and maintain employee eligibility data.
Individuals compare medical plans, choose physicians and submit claims for
reimbursement. Physicians, hospitals and other providers verify patient
eligibility, collect patient histories, order diagnostic tests and x-rays,
receive and interpret test results, render diagnoses, issue referrals and submit
claims to payers. Payers manage referrals, establish medical care protocols and
reimbursement policies and process claims. Laboratories analyze and process
patient samples or tests, provide results and submit claims for reimbursement.
Pharmacies fill prescriptions and submit claims for reimbursement. Medical
supply companies distribute medical devices and pharmaceutical supplies. These
health care transactions all are highly dependent on the collection and
communication of information, and each participant is dependent on the others
for portions of that information.

Market Characteristics

Market fragmentation. The health care market is highly fragmented with wide
geographic dispersion, a large number of participants and significant
differences in technology infrastructure.

- Geographic fragmentation. Because health care is delivered locally, there
are hundreds of thousands of market participants in different locations.
For example, there are approximately 750 HMOs in the United States,
644,000 active physicians and 6,200 hospitals. Additionally, there are
over 16,500 nursing homes, 8,000 home health agencies and 4,500
independent laboratories.

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<PAGE> 43

- Technological fragmentation. Information technology investment has not
been coordinated among health care participants. Current technology
infrastructure in health care is characterized by numerous, incompatible
and, in many cases, antiquated computer systems. Consequently,
communication of information generally takes place via paper, fax and
telephone.

Complex processes. Health care is delivered in a marketplace which has
become increasingly complex given the transition to managed care, the
data-intensive nature of health care transactions, the lack of standard data
formats, the complicated procurement process and the pervasiveness of government
regulation.

- Transition to managed care. One of the most important changes in the U.S.
health care system since the 1980s has been the shift away from
fee-for-service indemnity plans to managed care organizations. Currently,
67.1% of the U.S. population is covered through some form of managed
care. As managed care has become more prevalent and the number of payers
has increased, provider reimbursement and general administration has
become increasingly burdensome.

- Intensive data management. Upkeep of health care data is largely a
labor-intensive, paper-based and error-prone process in which data are
manually collected, authenticated, edited, categorized and updated. For
example, eligibility and plan information, which is basic information
about an individual and his or her dependents, is cumbersome to manage,
given that the data must be constantly updated to reflect any changes
affecting coverage status, such as marriage, child births and address
changes. However, this information is required at all points of health
care delivery.

- No standard data format or business rules. Data formats vary considerably
throughout the health care industry and typically are unique to each
particular health plan or provider. The data are stored in different
formats and health care participants often rely on proprietary business
rules for information such as plan coverage, eligibility and physician
co-payments.

- Complexity of procurement, purchasing and payment processes. There are
numerous types of health care transactions due to the large number of
both suppliers and buyers of care. In addition, there are multiple
payment mechanisms depending on who has assumed the health care coverage
risk. Payment mechanisms can range from fee-for-service to a fully
insured health care maintenance organization, known as an HMO, and may be
paid for by the individual, the individual's employer, the government, or
a combination of all three.

- Increasing government regulation. Numerous federal, state and local laws
and regulations govern the health care industry, which change frequently
depending on political and economic influences. For example, the Health
Insurance Portability and Accountability Act of 1996 has recently placed
substantial new administrative requirements on many health care
participants, including rules regarding compliance with industry
standards, data formats, portability of insurance and data security.

Current Health Care Market Issues

As a result of the fragmentation and complexity of the health care market,
participants are unable to cost-effectively manage, communicate and exchange
information in real-time. This fragmentation and complexity has resulted in
increasing dissatisfaction among health care participants.

- Inability to manage and exchange data. In order to achieve efficient
delivery of health care, information must flow within and between health
care participants. The enrollment and eligibility process requires shared
employee information among employers, health plans and provider groups.
The referral and authorization process involves physicians seeking
approval from health plans and patients scheduling appointments with
other physicians. To diagnose and treat patients, physicians need access
to clinical information, such as medical history data or lab results,
from various hospitals, laboratories or other providers. Prescription
services require communication of medication histories and payer rules
among patients, physicians, pharmacy benefit managers,

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<PAGE> 44

pharmacies and payers. Finally, for the health care supply chain to
generate and fulfill transactions, medical supply vendors and
laboratories require information about the availability and pricing of
supplies. The inability to transfer information between participants is
exacerbated by the fact that several different data formats can exist
even within one health plan.

- Lack of real-time and secure communication. The current, paper-based
processes do not allow for automated, daily workflow or the secure
exchange of time-sensitive and critical information. This often results
in administrative inefficiencies related to the manual retrieval of
information, delivery of unnecessary care and the performance of
redundant tests and procedures.

- Rising costs. Despite payers' use of a number of techniques designed to
control the cost of care and administration -- such as lowering
reimbursement rates, shifting costs to providers and restricting coverage
for services -- health care costs are continuing to escalate. To
compensate for operating margin pressures, payers are raising premiums.
This, in turn, is increasing the costs of health care for individuals and
their employers.

Growth of the Internet and Applicability to Health Care

The Internet has emerged as the fastest growing communication medium in
history. International Data Corporation, an independent research firm, estimates
that the total number of Internet users worldwide will grow from 142 million at
the end of 1998 to 502 million by the end of 2003. The ubiquitous nature, low
cost and ability to scale of the Internet have created new opportunities for
conducting secure commerce. Recently, the widespread adoption of intranets and
the acceptance of the Internet as a business communications platform have
created a foundation for business-to-business electronic commerce that should
enable organizations to streamline complex processes, lower costs and improve
productivity.

Forrester Research, Inc., an independent research firm, estimates that
business-to-business electronic commerce will grow from $43.1 billion in the
United States in 1998 to $1.3 trillion in 2003 while business-to-consumer
electronic commerce will grow from $7.8 billion in 1998 to $108.0 billion in
2003. We believe that the lower cost nature of the Internet can serve as a
catalyst to lower the cost of business-to-business commerce and bring market
participants across industry lines together in more efficient and productive
relationships.

The Internet is currently being used to speed and streamline a variety of
business transactions. Nonetheless, additional improvements in the ability to
search, structure, integrate and filter vast amounts of disparate data and to
dynamically customize and display information in contexts relevant to particular
users would increase the usefulness of Internet-based applications. These
improvements would be particularly useful in health care transaction processing
and information retrieval systems, where streamlining data exchanges among
industry participants can reduce process inefficiencies and costs. In order for
an Internet-based health care solution to be successful, the following key
technology and business components are important:

- a common, secure and scaleable platform for structuring information
exchange and commerce among multiple market participants;

- an effective and cost-efficient interface with existing computer systems;

- automation of health care transaction processes to reduce paper, improve
work flow and streamline administration;

- integration of disparate data from a variety of multimedia sources such
as audio, video and written documents;

- ability to dynamically retrieve and update data in a view customizable
for each particular health care participant; and

- quick returns on investment to facilitate adoption by health care
participants.

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OUR SOLUTION

We are an electronic commerce services provider for health care businesses.
Using the XCare.net platform, we can customize Web-site portals to meet our
customers' needs in a flexible and cost-effective manner. Through these
customized portals, we deliver applications, services and electronic commerce
product offerings that are designed to improve workflow efficiencies, reduce
administrative costs and create new revenue opportunities for our customers. Our
applications consist of software modules facilitating health care transactions
such as eligibility checks, referrals and health plan enrollment. Our services
include formulating and implementing Internet strategies for our customers,
administering back office operations and operating and hosting their technology
environments in our electronic commerce operations center. Our electronic
commerce product offerings include drug store products, medical supplies and
credit cards with smart card technology for claims payment. Our technology
platform, applications, services and product offerings are designed to enhance
the efficiency of the health care delivery and payment system. Our approach to
the market is based on the following:

Use of new standard for information exchange. The XCare.net platform and
associated applications and services are based on extensible mark-up language,
or XML. We expect extensible mark-up language to be a predominant protocol for
exchanging multimedia data for information exchange and electronic commerce on
the Internet in the future. Extensible mark-up language provides a document
structure that allows complex data from multiple sources to be dynamically
processed and displayed to users in personalized ways. We believe that these
capabilities are particularly applicable to the health care industry because
extensible mark-up language can process data trapped in pre-existing computer
systems, allow for automation of health care processes and integrate a wide
array of health care data including audio, video and text.

Ability to develop comprehensive customer strategies. We have developed a
step by step approach to assist our customers in designing a health care
Internet strategy, creating a customized portal and hosting their Internet
offerings and transactions in a secure and reliable data operations
infrastructure. The XCare.net platform is designed to provide a comprehensive
set of applications, services and product offerings while preserving previous
technology investments by integrating diverse multimedia content, including data
and information from large, existing and usually incompatible computer systems.

Solution Channels that provide value to other healthcare industry
participants. We use our XCare.net platform as the central element for a network
of business relationships among healthcare industry participants who use our
technology, thus creating collaborative electronic communities for the exchange
of healthcare data, products and services. We call these communities our
Solution Channels, and use them to distribute our applications, services and
product offerings through our Solution Channels, in addition to our normal sales
activities. In addition, our Solution Channels are designed to provide a means
for our customers, vendors, distributors, co-marketers and others to offer their
own related products and services to each other, as well as to their own
customers. Solution Channels allow us to:

- Create new revenue opportunities for others. Customers and vendors can
utilize our Solution Channels as distribution channels for existing as
well as new products and services that allow them to generate new sources
of incremental revenue. For example, we package our eXtensible CARE
applications system with medical management and third party
administration services provided by Employers Mutual, Inc. for
distribution to members of the XCare.net community such as American
Medical Pathways, Inc., a subsidiary of American Medical Response, Inc.

- Identify new revenue opportunities for us. Our customers can produce
complementary applications or services that operate on the XCare.net
platform and enhance the value of the specific applications, services and
product offerings we have developed. We can deliver these new
applications and services to the XCare.net community through our Solution
Channels, generating additional revenue for us. For example, we can
license credentialing applications from one existing customer, and then
resell these applications through our Solution Channels to other
community members.
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- Establish growing communities connected through the XCare.net
platform. Our customers can extend the scope and reach of the XCare.net
platform by distributing our applications, services and product offerings
to their customers. By leveraging our customer base as channels for wider
deployment of our solutions, we encourage increased usage of the
XCare.net platform as well as extend the community to new users.

STRATEGY

Our objective is to become the leading electronic commerce service provider
for health care businesses. Our strategy focuses on the following:

Cross-sell applications, services and electronic commerce product offerings
in our Solution Channels. We will sell additional applications, services and
product offerings to existing customers through our Solution Channels. Our
Solution Channels distribution model is designed to promote new applications,
services and electronic commerce product offerings that are either internally
developed or obtained through our growing number of customer and vendor
relationships. This cross-selling approach is designed to simplify the sales
process, and may shorten our sales cycle and reduce our cost of sales.

Penetrate target market segments. We will continue to target the more than
12,000 entities in the payer/third-party administrator, at-risk provider and
health care supplier market segments. These potential customers have the
influence to drive change in health care processes, and have the incentive to
lower their operating costs by adopting new process improvement technologies
such as the Internet.

Develop new applications, services and product offerings. We will continue
to develop a variety of applications, services and product offerings to address
operational inefficiencies in the health care industry. As Internet strategies
in the health care and other industries evolve and new relationships between
organizations are formed, we intend to continue to identify new development
opportunities.

Leverage existing applications, services and product offerings. We seek to
identify key functions that are critical to particular industry participants and
develop solutions supporting these functions. We intend to regularly review
existing applications, services and product offerings to extend their
functionality, transaction capabilities and features as customer needs dictate.
In addition, we may modify existing solutions to pursue new market
opportunities. We plan to accomplish this by building extensible mark-up
language-based applications encompassing the identified functionality, by
acquiring businesses or technologies, by enabling industry-leading, third-party
applications to operate on our platform, and by increasing our product
offerings. We have initially targeted applications, service and product
offerings that streamline mission critical processes and transactions such as
managed care administration and personnel management. These applications,
services and product offerings offer the highest value to health care
participants and are readily adaptable to our XCare.net platform.

Form customer, vendor, distributor, and co-marketing relationships with
leading health care participants. We are aggressively pursuing relationships
with leaders in key health care industry segments to increase our portfolio of
applications, services and product offerings, to increase the scope of our
XCare.net community of users and to provide specialized industry expertise for
new solutions. These relationships are intended to accelerate market awareness
and demand for our applications, services and product offerings, through the
influence of these partners both directly, through their use of our solutions
and sales efforts, and indirectly, through their relationships with other
potential customers.

TECHNOLOGY

Our XCare.net platform is based on an extensible mark-up language, or
XML-based infrastructure in conjunction with the Topic Navigation Mapping
standard. The enhanced capabilities of this platform are designed to meet the
demands of health care industry participants. Unlike the current Internet
standard, hypertext mark-up language, or HTML, extensible mark-up language in
combination with the Topic Navigation Mapping standard allows a higher degree of
flexibility for customized data exchange between health care participants. We
expect extensible mark-up language to be a predominant protocol
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for exchanging multimedia data for information exchange and electronic commerce
in the future. Topic Navigation Mapping provides a standard format for indexing
and structuring the extensible mark-up language formatted content. We call the
resulting indices and structures Topic Maps. We take advantage of the benefits
of both extensible mark-up language and Topic Navigation Mapping technologies to
process data previously trapped in usually incompatible existing computer
systems, allow for automation of health care processes and integrate a wide
variety of health care data including data in audio, video and text form.

Extensible mark-up language is a method of writing programming instructions
which attaches invisible labels describing the objects contained in the web
page. As a result, for example, a number isn't just a number. A number on a Web
page can also be in a format specifying whether the number represents a price,
an invoice, a date or a zip code. This makes it easier to extract information
from a page to suit a particular use, and/or increase the speed and accuracy of
Internet searches. It also enables users to select information from different
Web sites without having to re-enter the same information repeatedly. Topic Maps
are Web-based software tools used to organize information in a way that is
optimized for navigation. They address the problem of excess information and
provide a tool to filter and extract efficiently the kind of information which
is most relevant to the user.

We use a set of software applications, known as brokering components, to
find, integrate and present relevant, customized information to individual
users.

[Graphic]

Context Broker. The Context Broker acts as a user's personal information
manager and transaction assistant. It stores information about the user and
learns personal preferences. With each use, the Context Broker further refines a
user's personal preferences, and, as a result, the user's experience with the
Web site is continually tailored to his or her particular needs based on current
and past sessions. As

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the user moves from one transaction to another, the Context Broker also ensures
that information is carried through and remains consistent across multiple
transactions.

DataFabric. The DataFabric is a map formed by linking data and weighting
relationships. This fabric filters out irrelevant information and allows for
more intelligent searching.

LogicFabric. The LogicFabric is a map assembled by the rules and workflow
associated with the data relationships. This fabric provides the order and
assembly instructions for the information.

Semantic Broker. The Semantic Broker is responsible for interpreting a
user's request and finding the relevant information. It does this by reading the
DataFabric and LogicFabric for interpretation, location and assembly
instructions. It then dispatches the Service Broker to obtain the information
from any location throughout the Web. The final integration of data may involve
multi-media content, transactions and associated rules and workflow.

Service Broker. The Service Broker is the gateway out to the Internet,
locating and collecting the information as specified by the Semantic Broker. The
Service Broker then returns the information to the Context Broker, which
presents the relevant information in a manner customized to individual users.

The technology components which comprise our platform are developed using
the Oracle 8i relational database management system, Enterprise JavaBeans
programming language and Object Store, a global object-oriented database
management system. To support the ability of our technology platform to enable
and facilitate electronic commerce, we have built and maintain an electronic
commerce operations center designed for high performance, scalability and
stability utilizing Sun Microsystems, Inc.'s Solaris operating system.

Our platform architecture was designed for use in highly confidential,
health care computing environments where security is a high priority. A Web
server authenticates the identity of the end-users to ensure only authorized
end-users have access to our Web applications. Users are authenticated by a
valid user identification and password, a security token or a digital
certificate, or a certificate authority. We address data security using digital
certificate technology signed with private keys and verified with public keys.

Our facilities and operations utilize redundancy and back-up to minimize
exposure to systems failure. Telecommunications and server infrastructures
support redundant processing and data back-up capabilities. Our routine back-up
procedures are performed incrementally on a daily basis with a full system
back-up performed monthly. In addition, we use RAID5 systems which provide
real-time back-up of data. All back-ups are maintained in fire proof storage
with critical support information. Technical and operations support staff are
available on a 24-hours-a-day, seven-days-a-week basis to assist with any
critical processing incidents or failures.

The XCare.net platform provides our customers with the capability to scale
their applications, services, and product offerings as their business grows.
This ability to scale can extend these solutions across multiple organizations
in diverse geographic settings supporting high volumes of users. Our flexible
technology architecture can also accommodate high volumes of transactions and
dynamic customization for the multiple participants within the health care
marketplace.

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APPLICATIONS, SERVICES AND PRODUCT OFFERINGS

We provide a range of applications, services and product offerings that
support the management of health care data and facilitate health care business
connectivity, information exchange and electronic commerce among health care
industry participants. Our applications, services and product offerings, which
may incorporate licensed components, are designed to enable our customers to
preserve investments in existing computer systems while integrating new
Internet-based products and services.

<TABLE>
------------------------------------------------------------------------------------------
APPLICATION DESCRIPTION
<S> <C>
------------------------------------------------------------------------------------------
eXtensible CARE System Provides back-office processing for managed care
transactions by health plan payers and at-risk provider
organizations.
- -------------------------------------------------------------------------------------------
eXtensible CARE Transactions Facilitates submission, adjudication, remittance and
verification transactions for a variety of managed care
functions such as claims, capitation, authorizations,
referrals, eligibility, enrollment, and benefits.
- -------------------------------------------------------------------------------------------
MatchNet Staffing & Facilitates staffing, scheduling, management and reporting
Scheduling* transactions.
- -------------------------------------------------------------------------------------------
Physician Credentialing* Stores physician credentialing data with the ability to
automatically populate fields of associated managed care
applications.
- -------------------------------------------------------------------------------------------
Electronic Medical Record* Facilitates the data collection and review of
patient-level medical conditions based on access to
disease, allergy, medication and other related historical
data and clinical observations.
- -------------------------------------------------------------------------------------------
Medication and Medical Provides comprehensive patient-level information on
Assessment Inquiry Systems* prescription and over-the-counter medications, as well as
common medical conditions.
- -------------------------------------------------------------------------------------------
Physician Practice Management* Automates physician practice management functions
including patient scheduling, third-party billing,
contract maintenance, receivables management, accounting
and reporting.
- -------------------------------------------------------------------------------------------
Provider and Payer Profiling Provides access to a national provider database of
and Report Cards* demographic, clinical and National Committee for Quality
Assurance-specific information, as well as a national
payer database containing Health Plan Employer Data and
Information Set ratings and National Committee for Quality
Assurance accreditation status.
- -------------------------------------------------------------------------------------------
Document Management* Automates various paper-based processes through a
Web-based workflow combining document imaging, storage and
retrieval by authorized users.
- -------------------------------------------------------------------------------------------
Decision Support System* Web-enabled ad-hoc reporting system for mining and
analysis of data from managed care information system
sources.
- -------------------------------------------------------------------------------------------
Remote Patient Monitoring* Combines an external monitoring device with a Web-based
workflow engine to facilitate communication of test
results from patient to physician for chronic disease
management.
- -------------------------------------------------------------------------------------------
</TABLE>

*We are currently marketing these applications but have not yet recognized
revenue from sales.

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<TABLE>
------------------------------------------------------------------------------------------
SERVICES DESCRIPTION
<S> <C>
------------------------------------------------------------------------------------------
eHealth Development Discipline Provides a framework for development and design of
Internet strategies.
- -------------------------------------------------------------------------------------------
Custom Portal Integration & Provides professional services and operations management
Hosting for customers through the analysis of business,
operational and technology needs, including next
generation information and transaction portal
customizations for virtual health care organizations.
- -------------------------------------------------------------------------------------------
Third-Party Administration/ Provides outsourcing services for health care
Management Service organizations not utilizing internally managed information
Organization Outsourcing systems, including back- office administration,
Services timesharing services and additional service bureau
functions.
- -------------------------------------------------------------------------------------------
eHealth Operations Management Provides a secure, 24 hours a day, seven days a week
environment for Internet hosting of transactions and
multi-media content, application maintenance and customer
service.
- -------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
------------------------------------------------------------------------------------------
PRODUCT OFFERINGS DESCRIPTION
<S> <C>
------------------------------------------------------------------------------------------
MDPay Accelerator* Links eligibility verification, claims submission, co-pay
collection and receivables management within the
physician's or hospital's point-of-service environment.
- -------------------------------------------------------------------------------------------
Online Drug Store* Facilitates the purchase of brand-name pharmaceutical and
personal health care products, as well as access to
decision-making resources.
- -------------------------------------------------------------------------------------------
Medical Supply Product* Provides Internet-based medical supply ordering service
for use by health care buyers and suppliers.
- -------------------------------------------------------------------------------------------
</TABLE>

* We are currently marketing these product offerings but have not yet recognized
revenue from sales.

We are actively developing new applications, services and product
offerings, and from time to time, we license technology necessary for such
development. Nonetheless, new applications, services and product offerings may
not be introduced as scheduled, and we may not be able to enter into needed
licensing arrangements in a timely manner or at all.

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CUSTOMERS

The following is a representative list of our customers that have purchased
applications or services:

<TABLE>
<CAPTION>
MARKET SEGMENT CUSTOMERS
-------------- ---------
<S> <C>
Health Care Providers American Medical Pathways, Inc., a subsidiary of American
Medical Response, Inc.
Breathnet LLC
Methodist Care, Inc.
Quest Diagnostics Incorporated
University of Southern California -- Doheny Eye Institute

Health Care Payers Advica Health Resources
Community Health Electronic Clearing House
Delta Health Systems
Employers Mutual, Inc., a wholly owned subsidiary of Florida
Physicians Insurance Company, and Brokerage Services, Inc.,
a division of Employers Mutual, Inc.
Provider Services, Incorporated

Health Care Suppliers ADIS International Ltd
Clinical Solutions LLC
Expert Practice Inc.
NotifyMD, Inc.
Nursefinders, Inc.
</TABLE>

In 1998, sales to Employers Mutual, Inc. accounted for 29% of revenue,
sales to Brokerage Services, Inc. accounted for 20% of revenue, sales to Quest
Diagnostics Incorporated accounted for 12% of revenue and sales to ADIS
International Ltd accounted for 11% of revenue. For the nine months ended
September 30, 1999, sales to American Medical Pathways, Inc. accounted for 19%
of revenue, sales to Methodist Care, Inc. accounted for 29% of revenue, sales to
Quest Diagnostics Incorporated accounted for 17% of total revenues, and sales to
Brokerage Services, Inc. accounted for 17% of revenue. The above list includes
all but two of our customers.

The following are summaries of some of our contracts, including several
contracts with customers listed above:

Licensing Agreement entered into on December 30, 1998 with Match Health
Care Services, Ltd. whereby Match granted us a license to modify the Match
proprietary software; integrate Match software with XCare.net software; or
sublicense the Match proprietary software. In consideration of the license
grant, we shall pay $850,000 to Match plus 17.5% of all amounts received by us
for sales or sublicenses of any products containing Match software. There are no
fees to be received by us from Match related to this arrangement.

Master Licensing Agreement entered into on February 4, 1999 with Methodist
Care, Inc. whereby we agreed to provide a license to Methodist Care for use of
the XCare.net software in exchange for a $205,000 licensing fee; implementation,
interface development, installation services of the XCare.net software and 80
hours of training for $600,000; software maintenance services which include
phone support, bug fixes and unspecified updates and enhancements to the
XCare.net software for 18% of the license fee of $205,000; and additional
consulting services at the request of Methodist Care at the rate of $108 per
hour.

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<PAGE> 52

Master Licensing, Processing and Services Agreement entered into on
February 16, 1997 with Healthscope/United, Inc. whereby we agreed to provide a
license to Heathscope/United, Inc. for use of the XCare.net software and
development and implementation services related to the XCare.net software.
Additionally, the contract provided for software maintenance services which
include phone support, bug fixes and unspecified updates and enhancements to the
XCare.net software; and Supplemental Services Fees for additional development or
consulting projects as described in separate work orders from Healthscope/United
will be charged on a time-and-materials basis. Included is initial training
services to be provided by us. As Healthscope/United was the beta testing site
and first customer to license the XCare.net proprietary software, we waived the
license and implementation fee.

Administration Services Agreement entered into on March 29, 1999 with
American Medical Pathways, Inc. whereby we agreed to provide claims processing
services for American Medical Pathways' medical transportation services; medical
review services associated with the claims processing; and receipt of inquiries
concerning eligibility, benefits and claims status; and related reports. We
agreed to customize and develop our XCare.net software and other necessary
network connections to provide the services outlined above for a fixed fee of
$778,000. Software for on-site customer workstations is charged per workstation.
In addition to the fixed fee noted above, American Medical Pathways agreed to
pay a monthly transaction fee based on a tiered pricing structure as outlined in
the Agreement. Also,we granted to American Medical Pathways an option to license
the American Medical Pathways customized XCare.net software after completion of
the first two years of the initial term of the Agreement. If American Medical
Pathways chooses to license the XCare.net software, American Medical Pathways
will have the option of purchasing maintenance services which include phone
support, bug fixes and unspecified upgrades and enhancements. At its option,
American Medical Pathways may also purchase operational systems management
services.

Processing and Services Agreement entered into on January 1, 1997 with
Brokerage Services, Incorporated whereby we agreed to provide Brokerage
Services, Incorporated remote processing services for $0.65 per Brokerage
Services member residing in the XCare.net database per month. Fees for Brokerage
Services members who are only entitled to Life Insurance or Dental benefits were
$0.22 per member per month. As part of the monthly processing fees described
above, we agreed to provide telephone support related to bug fixes, simple
inquiries, and account management and coordination. Additional development and
consulting services would be provided at $100 -- $150 per hour, depending on the
level of our staff required for the project.

Addendum to Processing and Services Agreement entered into on July 25, 1997
with Brokerage Services, Incorporated whereby we agreed to provide a license to
use the XCare.net software and third party HUBLINK interface software for
$400,000 and $50,000, respectively; development and implementation services
related to the XCare.net software for $125,000; rental of system server for
$127,634; (4) PC and network setup fees for $16,800; Brokerage Services PC
upgrade for $216,673; monthly operational support fees which included server and
database support for $21,000 per month based on an active membership base of up
to 75,000 members; maintenance services which included telephone support, bug
fixes and unspecified upgrades and enhancements for $75,000 per year for the
XCare.net software and $10,000 per year for the HUBLINK software; and
supplemental development or consulting services at $100 per hour for 1997 and
thereafter at our applicable rates.

Master License and Services Agreement, dated June 24, 1998, with Employers
Mutual, Inc. whereby we agreed to provide a license to use the XCare.net
software at a single site for $400,000 less a credit equal to $95,489 plus
Employers Mutual's June processing fees; members added to Employers Mutual's
business as a result of merger or acquisition may be added to the license by
payment per member; development and implementation services related to the
XCare.net software; monthly operational support fees which included server and
database support; maintenance services which included telephone support, bug
fixes and unspecified upgrades and enhancements; additional members as described
above will be charged an annual maintenance fee of 22.5% of the license fee paid
by Employers Mutual for such additional members; supplemental development or
consulting services; and a customer of Employers Mutual may acquire a license to
use the data and XCare.net software developed
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for Employers Mutual in which case we would pay a royalty to Employers Mutual
for reselling their software in consideration of the reduced implementation
effort because XCare.net will have already developed the data and setups for the
Employers Mutual project. At the request of Employers Mutual through a separate
agreement, we agree to develop eligibility interfaces for Employers Mutual's
customers on a time and materials basis. XCare.net also agrees to sublicense to
Employers Mutual the HUBLINK interface engine for a license fee and annual
maintenance per year, if requested by Employers Mutual. The total anticipated
payment under this contract is $1,348,151. The initial license fee amount is
$304,151.

Contractor Agreement, dated February 19, 1999 with Employers Mutual, Inc.
whereby we agreed to provide Employers Mutual with all necessary information
from Employers Mutual Health Plan Agreements and Member Agreements and
requirements for Employers Mutual to perform claims processing services for us;
and all administrative and other connections and arrangements necessary for the
transfer of data. We will bill the applicable tiered encounter fee and remit the
agreed upon fixed fee to Employers Mutual per the schedule outlined in the
Agreement. The total anticipated payment amount under this contract is unknown
as this is a per encounter fee contract.

Master Licensing and Services Agreement, dated February 20, 1998, with
Provider Services, Incorporated whereby we agreed to provide a license to use
the XCare.net software for up to a certain number of members; Provider Services
may add additional lives for an additional license fee; development,
implementation and data conversion services related to the XCare.net software;
maintenance services which included telephone support, bug fixes and unspecified
upgrades and enhancements for an annual maintenance fee equal to 12% of the
license fee; training services; and Provider Services agrees to pay us at a
time-and-materials rate for problem resolution services rendered that are not
covered under the terms of the maintenance provisions outlined in the Agreement.
The total anticipated payment amount under this contract is $221,400.

Contract Agreement, dated April 27, 1999, with Provider Services, Inc.
whereby we agreed to provide Provider Services with all necessary information
from Provider Services Health Plan Agreements and Member Agreements and
requirements for Provider Services to perform claims processing services for us;
and all administrative and other connections and arrangements necessary for the
transfer of data. We will bill the applicable tiered encounter fee and remit the
agreed upon fixed fee to Provider Services per the schedule outlined in the
Agreement. The total anticipated payment amount under this contract is unknown
as this is a per encounter fee contract.

Master Licensing and Services Agreement, dated August 24, 1998, with Quest
Diagnostics Incorporated whereby we agreed to provide a license to use the
XCare.net software for up to a certain number of members for $250,000 ; Quest
may add additional lives for a fee; development, implementation, data conversion
services and 40 hours training related to the XCare.net software for $100,000;
maintenance services which included telephone support, bug fixes and unspecified
upgrades and enhancements for an annual maintenance fee equal to $45,000;
extended support services which include database and server maintenance as well
as general system utilities for Quest's technology environment for $7,500 per
month; and training services for a total of 40 hours for no charge. The total
anticipated payment amount under this contract is $1,295,000. Assuming a seven
year term, the total payment for maintenance is anticipated to be $315,000.

Software License and Services Agreement dated as of October 25, 1999 with
Oracle Corporation whereby we agreed to pay aggregate fees of $236,567.75 to
Oracle including a nonexclusive two-year license to use Oracle software for a
fee of $139,735.75 and the provision of one year of technical support for
Oracle's software for a fee of $96,832. The total anticipated payment amount is
$236,568.

Professional Services Agreement entered into on September 9, 1999 with
Asthma Management Company whereby we will provide consulting and development
services to Asthma including the development of a beta website version 1.0 for
fees of approximately $240,000 to $270,000 based on a billing rate of $150 per
hour, the development of a beta website version 2.0 for fees to be defined in a
subsequent addendum to the agreement, the provision of final website integration
and implementation for
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<PAGE> 54

fees to be defined in subsequent addendum to the agreement, the provision of
website maintenance of Asthma's website for a initial fee of approximately 25%
of the final application development fee and an annual fee thereafter of
approximately 25% of the total application development fee, and the provision of
website hosting services for a monthly fee of $3500 and a hosting transaction
fee of $.04 per transaction.

SALES AND MARKETING

Sales. We sell our applications, services and product offerings through our
direct sales and business development groups, targeting the payer/third-party
administrator, risk-bearing provider and health care supplier market segments.
Our sales office is located at our principal offices in Englewood, Colorado. The
direct sales process involves the generation of sales leads through direct
marketing, tele-prospecting, public relations, Web advertising and promotion,
attendance and presentations at major health care and technology-oriented trade
shows and industry conferences. The time between initial customer contact and an
actual sales order may span three months or more. See "Risk Factors -- If our
operating results vary significantly due to the lengthy sales and implementation
cycles for our products and services, our revenues may be delayed and our
results of operations and share price may fluctuate."

In addition, our direct sales and business development groups use our
Solution Channels to cultivate strategic relationships with our customers and
vendors to encourage them to provide value-added applications, services and
products for redistribution through the network of users of the XCare.net
platform.

Marketing. Our primary marketing initiatives include public relations,
direct mail and outreach programs to customers and vendors. We use our Web site,
www.xcare.net, to establish our market presence, generate leads and extend our
program offerings to health care industry participants.

As of September 30, 1999, we had 11 employees in sales and marketing
functions.

CUSTOMER SUPPORT

We provide a range of customer support services through our staff of
customer service personnel, multiple call centers and an e-mail help desk all of
which are available 24 hours a day, seven days a week and are frequently updated
to improve existing information and to support new services. We also employ
technical support personnel who work directly with our direct sales force and
customers of our applications and services. We provide our customers with the
ability to purchase maintenance for our applications and services, which
includes technical support and upgrades. We also provide training programs for
our customers. As of September 30, 1999, we had 22 employees in addition to one
independent contractor in customer support functions.

RESEARCH AND DEVELOPMENT

As of September 30, 1999, our development and engineering group consisted
of 11 employees divided into extensible mark-up language, Topic Navigation
Mapping and infrastructure groups. For the years ended December 31, 1996, 1997
and 1998, we incurred $3.2 million, $4.2 million and $670,000 in research and
development expenses respectively. In addition, for the nine month period ended
September 30, 1999, we had incurred $417,000 in research and development
expenses. We believe that timely development of new and enhanced applications
and technology is necessary to remain competitive in the marketplace.
Accordingly, we intend to continue recruiting and hiring experienced development
personnel and to make investments in development and engineering.

COMPETITION

The emerging Internet-based health care market is undergoing rapid
technological change. The ubiquitous reach of the Internet, coupled with the
availability and acceptability of new Internet-based

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technologies, has created significant opportunities in health care for both
traditional and new Internet-based system vendors. Potential competitors fall
primarily into three categories: health care Internet companies focused on
providing connectivity and transactions within business-to-business and
business-to-consumer frameworks; traditional health care information system
vendors who seek to extend the services of their core products using
Internet-based technology; and traditional managed care information system and
outsourcing vendors who are focusing on extending the services of their core
products to the Internet. In addition, from time to time our customers may
develop products and services competitive with those offered by us.

We believe that our main competitors currently are CareInsite, Inc., Exodus
Communications Inc., Healtheon Corporation, IDX Systems Corporation, iXL
Enterprises, Inc., McKesson HBOC Inc., and Razorfish, Inc. and that the
principal competitive factors in the Internet-based health care market are the:

- ability of technology to integrate data from existing computer systems
and other multimedia content;

- timeliness and price of new applications, services and electronic
commerce product offerings;

- degree of customer service offered to purchasers of Internet health care
solutions;

- scope of industry knowledge and familiarity with needs of health care
market participants; and

- size and scope of a solution's user base.

INTELLECTUAL PROPERTY

We seek to protect our software, documentation and other written materials
primarily through a combination of trade secret, trademark and copyright laws,
confidentiality procedures and contractual provisions. For example, we license
rather than sell our software applications and require licensees to enter into
license agreements that impose certain restrictions on the licensees' ability to
utilize the software code. In addition, we seek to avoid disclosure of our trade
secrets, by, among other things, requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and
restricting access to our source code.

We have filed a patent application in the United States with respect to
certain aspects of our content brokering technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. While we are unable to
determine the extent to which piracy of our products exists, software piracy can
be expected to be a persistent problem, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the United
States.

From time to time, we may be involved in intellectual property disputes. We
have not been notified that any of our products infringe the proprietary rights
of third parties. However, in the future, third parties may claim infringement
against us with respect to current or future products. We expect that providers
of Internet health care solutions will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and
traditional suppliers of health care data and transaction solutions begin to
offer Internet-based products. See "Risk Factors -- If our proprietary
technology is subjected to infringement claims, we may have to pay damages or
seek a license from third parties, which could delay sales of our products, and
if our proprietary technology is infringed upon, we may experience losses."

We rely upon software we have licensed from Sinclair Montrose Healthcare
PLC to perform key functions of our MatchNet Staffing & Scheduling product. We
currently have an exclusive license to the software, although exclusivity may
terminate if we are unable to meet milestones. This license may not continue to
be available to us on commercially reasonable terms. The loss of this license
could result in delays or reductions of shipments of the MatchNet Staffing &
Scheduling application until equivalent software could be identified, developed,
licensed and integrated. See "Risk Factors -- If we lose key

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licenses we may be required to develop or license alternative technology which
may cause delays, at considerable expense or reduce sales."

GOVERNMENT REGULATION

Standards

The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. We are designing our XCare.net platform and
applications, services and product offerings to enable compliance with the
proposed regulations. However, until such regulations become final, they could
change, which could require us to expend additional resources to comply with the
revised standards. In addition, the success of our compliance efforts may be
dependent on the success of health care participants in dealing with the
standards.

Confidentiality

The confidentiality of patient records and the circumstances under which
such records may be released for inclusion in our databases are subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and the use of confidential patient medical record
information. Additional legislation governing the dissemination of medical
record information has been proposed at both the state and federal level. This
legislation may require holders of such information to implement security
measures that may require substantial expenditures by us. Changes to state or
federal laws may materially restrict the ability of health care providers to
submit information from patient records using our applications.

We utilize an architecture that incorporates a secured socket layer
encryption which surpasses required security protection. Additionally the use of
firewalls and other security schemes assure customers of a compliant and secure
computing environment. Additionally, we utilize a formal, authority-based use of
digital certificates to assure the identity of electronic trading partners. For
support of identification requirements we utilize an exchange of passwords and
identities by U.S. certified mail or telephonic identification. If unauthorized
persons were to gain access to patient records notwithstanding our efforts to
maintain their security, this could result in our liability for these security
breaches and damage to our reputation.

Third Party Administration and Utilization Review Licensure and Registration

Certain of the administrative services we provide health plans, payers and
providers, including our third-party administration and utilization review
operations, are regulated by the statutes and regulations of various states and
require that we obtain appropriate licensure or registration.

False Claims Act

Under the federal False Claims Act, liability may be imposed on any
individual or entity who knowingly submits or participates in submitting claims
for payment to the federal government which are false or fraudulent, or which
contain false or misleading information. Liability may also be imposed on any
individual or entity who knowingly make or use a false record or statement to
avoid an obligation to pay the federal government. Various state laws impose
liability for similar acts. Claims under the federal False Claims Act may be
brought by the federal government or private whistleblowers. If we are found
liable for a violation of the federal False Claims Act, or any similar state
law, it may result in substantial civil and criminal penalties. In addition, we
could be prohibited from processing Medicaid or Medicare claims for payment.

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Prompt Payment Laws

Various states have passed laws regarding the prompt payment of medical
claims by health plans. If a claim is brought against us and we are found to
have violated a law regarding the prompt processing of claims for payment, we
may incur civil or other penalties.

Government Investigations

There is increasing scrutiny by law enforcement authorities, the U.S.
Department of Health and Human Services Office of Inspector General, the courts
and Congress of agreements between health care providers and suppliers or other
contractors which have a potential to increase utilization of government health
care resources. In particular, scrutiny has been placed on the coding of claims
for payment and contracted billing arrangements. Investigators have demonstrated
a willingness to look beyond the formalities of business arrangements to
determine the underlying purposes of payments between health care participants.
Although, to our knowledge, neither we nor any of our customers is the subject
of any investigation, we cannot tell whether we or our customers will be the
target of governmental investigations in the future.

Regulation of the Practice of Medicine and Other Health Care Professions

The practices of medicine, nursing and pharmacology are generally defined
by state law and vary from state to state. These practices require a license
under state law and, depending on state law, practicing without a license can be
a civil or criminal violation. We have endeavored to structure our existing
operations to be in substantial compliance with state health care professional
licensing requirements. However, the application of this area of the law to
Internet services such as ours is new. Also, we have not conducted a state by
state survey of licensing requirements and policies. Accordingly, a state
regulatory authority and/or one or more licensed professionals or advocacy
groups or consumers may allege that one or more elements of our business
requires a license to practice under existing or future laws or statutes. Any
application of professional practice regulations to our business could
negatively impact our business. Further, liability based on a determination that
we engaged in a professional practice without a license may cause us to be
excluded from coverage under the terms of our current general liability
insurance policy and may also subject us to a higher standard of care than would
be applicable to activities which do not require a professional license.

Regulation of Pharmacy Prescription Drug Activities

The business of providing prescription drugs and other medical products is
subject to federal, state and local regulations, many of which are specific to
pharmacies. In addition, the Federal Trade Commission and many state agencies
regulate advertising and product performance claims for prescription drugs.
Pharmacy operations are subject to federal, state and local licensing and
registration regulations with respect to the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and local
laws and regulations relating to pharmacy operations, including registration,
security, recordkeeping, and reporting requirements related to the purchase,
storage and dispensing of controlled substances, prescription drugs and certain
over-the-counter drugs.

The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focusing on those who prescribe drugs online and
pharmacies that fill invalid prescriptions, including those that are written
online. The committee on commerce requested that the General Accounting Office
undertake a formal review of a number of issues pertaining to online pharmacies,
including an assessment of mechanisms to ensure that online pharmacies are
obeying the various state and federal regulations for the industry. In addition,
various state legislatures are considering new legislation related to the
regulation of nonresident pharmacies. The inclusion of prescription drugs as a
Medicare benefit has been the subject of numerous bills in the U.S. Congress.

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Should we commence providing prescription drugs to consumers, we will be
required to comply with many of the laws, regulations and initiatives described
above. These efforts may require the commitment of additional resources by us.

Federal and State Anti-Kickback Laws

Provisions of the Social Security Act, which are commonly known as the
Federal Anti-Kickback Law, prohibit knowingly or willfully, directly or
indirectly, paying or offering to pay, or soliciting or receiving, any
remuneration in exchange for the referral of patients to a person participating
in, or for the order, purchase or recommendation of items or services that are
subject to reimbursement by, Medicare, Medicaid and similar other federal or
state healthcare programs. Violations may result in civil and criminal sanctions
and penalties. Applications, services or product offerings. If any of our health
care communications or electronic commerce activities were deemed to be
inconsistent with the Federal Anti-Kickback Law or with state anti-kickback or
illegal remuneration laws, we could face civil and criminal penalties or be
barred from such activities. Further, we could be required to restructure our
existing or planned sponsorship compensation arrangements and electronic
commerce activities in a manner which could harm our business.

Regulation of the Sale of Over-the-Counter Drugs, Nutritional Supplements,
Cosmetics and Medical Devices

The U.S. Food and Drug Administration and Federal Trade Commission and
similar state agencies regulate drug and cosmetic advertising and promotion,
including direct-to-consumer advertising, done by or on behalf of drug and
cosmetic manufacturers and marketers. In addition, the Federal Trade Commission
regulates product safety for nutritional supplements as well as over-the-counter
drugs, medical devices and prescription drugs. In the event that we provide such
products or services, we will be subject to U.S. Food and Drug Administration
and Federal Trade Commission regulation and enforcement for false advertising
and misleading advertising, including overstatements regarding product
performance, especially regarding nutritional supplements. While we have rights
against the manufacturer as to adulteration issues and product claims to the
extent we have received the claims from the manufacturer, we may have liability
if the manufacturer cannot or will not indemnify us in a specific situation.

FDA Regulation of Medical Devices

The FDA is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Computer applications and
software are considered medical devices and subject to regulation by the FDA
when they are indicated, labeled or intended to be used in the diagnosis of
disease or other conditions, or in the cure, mitigation, treatment or prevention
of disease, or are intended to affect the structure or function of the body. We
do not believe that any of our current applications, services or product
offerings are subject to FDA jurisdiction or regulation; however, we may expand
our applications, services and offerings into areas that may subject it to FDA
regulation. We have no experience in complying with FDA regulations and
compliance with FDA regulations could prove to be time consuming, burdensome and
expensive, which could impede our ability to introduce new applications,
services or product offerings in a timely manner.

Please see "Risk Factors -- If compliance with government regulation of
health care becomes costly and difficult for us and our customers, we may not be
able to grow our business" for more information regarding the risks government
regulation pose for our business.

LEGAL PROCEEDINGS

There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.

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EMPLOYEES

As of September 30, 1999, we had a total of 57 employees, of whom 22 are
engaged in professional services and customer support functions, 11 in product
development, seven in the electronic commerce operations center, 11 in sales and
marketing and six in management, finance and administration. None of our
employees is represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.

Our future performance depends in significant part upon the continued
service of our key personnel, none of whom is bound by an employment agreement
requiring service for any defined period of time. Our future success also
depends on our continued ability to attract, integrate, retain and motivate
highly qualified sales, technical and managerial personnel. Competition for such
qualified personnel is intense. See "Risk Factors -- If our executive officers
and key personnel do not remain with us in the future, we may experience
difficulty in attracting and retaining qualified personnel."

FACILITIES

Our principal executive and corporate offices are located in Englewood,
Colorado, in approximately 21,978 square feet of subleased office space under a
sublease that expires on December 30, 2001. We also sublease 4,145 square feet
of office space in the same building, which expires on December 30, 2002. We
also maintain an electronic commerce operations center in Albuquerque, New
Mexico, in 6,800 square feet of subleased office space under a lease that
expires in January 2000. We have recently entered into a lease for a new 5,240
square foot facility for our Albuquerque electronic commerce operations center.
This lease commences in January 2000 and expires in January 2005. We believe our
space is adequate for our current operations and that additional leased space
can be obtained on commercially reasonable terms if needed.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors as of September 30, 1999, are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lorine R. Sweeney........................ 42 President and Chief Executive Officer, Director
Peter H. Cheesbrough..................... 47 Senior Vice President, Finance and Chief
Financial Officer
Lawrence S. Dike......................... 52 Senior Vice President and Chief Scientist
Mark Rangell............................. 36 Senior Vice President, Marketing and Product
Management
Thomas M. Pianko......................... 39 Senior Vice President, Sales and Business
Development
Tammy McLaren............................ 33 Vice President, Professional Services
Jon B. Wisda(5).......................... 33 Vice President, Product Development
Jeffrey M. Krauss(1)..................... 42 Chairman of the Board of Directors
Fred L. Brown(3)......................... 59 Director
J. Andrew Cowherd(2)..................... 46 Director
James B. Hoover(2)....................... 44 Director
L. Ben Lytle(4).......................... 53 Director
Daniel J. Mitchell(1).................... 42 Director
William F. Reilly(1)..................... 57 Director
Robert Tsao(2)........................... 27 Director
</TABLE>

- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Director as of December 30, 1999.
(4) Director as of January 11, 2000.
(5) Mr. Wisda has announced his resignation.

Lorine R. Sweeney. Ms. Sweeney has been President, Chief Executive Officer
and a director of XCare.net since October 1997. From November 1994 until
September 1997, Ms. Sweeney was Vice President of Software Development and
Technology and Vice President of the UltiMedex Business Unit of Micromedex,
Inc., an international supplier of clinical reference information to the health
care and environmental industries. From August 1993 until November 1994, Ms.
Sweeney was a Managing Consultant for Microsoft Consulting Services, the
management consulting division of Microsoft Corporation. Ms. Sweeney has over 19
years of executive leadership experience in the commercial software, CD-ROM,
online information services, consulting and systems integration industries. Ms.
Sweeney received her B.S. degree in Engineering from the University of Arizona
and her M.B.A. from the University of Phoenix.

Peter H. Cheesbrough. Mr. Cheesbrough has been Senior Vice President,
Finance and Chief Financial Officer of XCare.net since September 1999. From
April 1993 until August 1999, Mr. Cheesbrough was Senior Vice President of
Finance and Chief Financial Officer of Echo Bay Mines, Ltd., a gold mining and
exploration company. Mr. Cheesbrough is a director of HealthGrades.com, Inc., an
Internet company that provides online health care ratings and information. Mr.
Cheesbrough was educated in England and qualified as a Chartered Accountant
(equivalent to the CPA designation) in the United Kingdom in 1974 and in Canada
in 1977.

Lawrence S. Dike. Mr. Dike was one of three founders of Reilly Dike Dosher
Corporation, XCare.net's predecessor company. From April 1989 until April 1999,
Mr. Dike was Senior Vice President of Technology Platforms and a director of
Reilly Dike Dosher Corporation. Mr. Dike received his B.S. degree in Mathematics
and his M.S. degree in Computing Science from the University of New Mexico.

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Mark Rangell. Mr. Rangell has been Senior Vice President, Marketing and
Product Management since December 1999 and was previously Senior Vice President
of Sales and Marketing of XCare.net since January 1998. From May 1997 until
December 1997, Mr. Rangell was Vice President of Marketing at GreenPages Data
Services, LLC, a development stage organization focused on building an
electronic commerce network for pharmaceutical contracting and negotiation. From
January 1996 until May 1997, Mr. Rangell was Director of Marketing for the
Ultimedex Business Unit of Micromedex, Inc. From November 1992 until December
1995, Mr. Rangell was Product Manager at Medical Economics Co., a
publisher/database supplier to pharmaceutical, medical device and health care
delivery sectors. Mr. Rangell received his B.S. degree in Computer Information
Systems and Economics at New York University and his M.S. degree in Marketing
and Corporate Strategy at the MIT Sloan School of Management.

Thomas M. Pianko. Mr. Pianko has been Senior Vice President, Sales and
Business Development of XCare.net since December 1999. From December 1998 to
December 1999 Mr. Pianko was Vice President of Sales, Information Technology
Business, Enterprise Sales -- Intermountain Region and from February 1996 to
December 1998 he was Regional Director and Sales Executive with McKesson HBOC
Inc., a health information technology and supply services corporation. Mr.
Pianko was the Regional Accounts Manager for Eli Lilly & Co., a company engaged
in the business of ethical pharmaceutical development and sales. Mr. Pianko
received his M.B.A. in finance and marketing from the Simon School of Business
at the University of Rochester and his B.S. degree in physiology and immunology
from Cornell University.

Tammy McLaren. Ms. McLaren has been Vice President, Professional Services
of XCare.net since July 1998. From January 1998 until June 1998, Ms. McLaren was
a Manager in the management consulting branch of Ernst & Young, L.L.P. From May
1996 until January 1998, Ms. McLaren was a Program Manager for Commercial
Software at Micromedex, Inc. From January 1989 until May 1996, Ms. McLaren was a
Manager of Business Systems at AtlanticRichfield Corporation, a natural resource
company. Ms. McLaren received her B.A. in Computer Information Systems from the
University of Texas.

Jon B. Wisda. Mr. Wisda has been Vice President, Product Development of
XCare.net since February 1999. From February 1995 until February 1999, Mr. Wisda
was Director of Information Technology for Toxicology and Environmental Health
at Micromedex, Inc. From August 1994 until February 1995, Mr. Wisda was a Senior
Consultant at Raymond James Consulting Inc., an information systems consulting
firm. Mr. Wisda received his B.S. in Engineering and Mathematics from Colorado
School of Mines.

Jeffrey M. Krauss. Mr. Krauss has been Chairman of the Board of Directors
of XCare.net since March 1997. Since May 1990, Mr. Krauss has been a General
Partner of Nazem & Company, a venture capital firm. From January 1983 until
April 1990, Mr. Krauss was an attorney with the law firm of Simpson Thatcher &
Bartlett. Mr. Krauss is a director of Tegal Corporation, a publicly traded
company engaged in the manufacture of semi-conductor capital equipment. Mr.
Krauss received his B.S. in Accounting from the State University of New York and
his J.D. from Harvard Law School.

Fred L. Brown. Mr. Brown has been a director of XCare.net since December
30, 1999. Since January 1999, Mr. Brown has been Chairman of the American
Hospital Association, a public policy advocate and educational think tank for
the American hospital industry. From June 1993 until December 1998, Mr. Brown
was the founding President and Chief Executive Officer of BJC Health System, a
healthcare organization comprised of a comprehensive health network featuring
200 care sites, 30,000 care givers and physicians, and health plans covering
more than 200,000 patients. From January 1986 until February 1993, Mr. Brown was
President of Christian Hospital Northeast-Northwest. Mr. Brown is also currently
a director of Citation Computers, Inc., a publicly traded company that designs,
develops, markets and supports patient-centered clinical information systems for
health care providers; Superior Consultant Company, a publicly traded company
that consults for a broad cross-section of the health care industry; the
Advisory Board of American's Doctor.com, a privately held

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company; the Healthcare Research and Development Institute, a research institute
comprised of 35 chief executives who direct hospitals and major health care
systems that undertake research studies; and Morrison Management Specialists,
Inc., a publicly traded company that provides food, nutrition and dining
services to the health care senior living industries. He is also a Visiting
Professor at George Washington University in Washington, D.C., and has been a
member of President Clinton's Council of Year 2000 Conversion since January
1999. Mr. Brown received his B.A. in 1962 from Northwestern University, his M.A.
in 1966 from George Washington University, and a doctorate of humane letters
from the University of Missouri-St. Louis.

J. Andrew Cowherd. Mr. Cowherd has been a director of XCare.net since March
1997. Since July 1996, Mr. Cowherd has been a Managing Member of the general
partner of Atlantic Medical Capital, L.P., a venture capital firm that is
managed by Atlantic Medical Management, L.L.C. From April 1991 until January
1993, Mr. Cowherd was a Managing Director in the Global Merchant Banking Group
at BT Securities, a division of Bankers Trust Company. From September 1977 until
March 1991, Mr. Cowherd was an investment banker at Salomon Brothers, where he
served as Managing Director in Corporate Finance from January 1989 until March
1991. Mr. Cowherd is a director of Nursefinders, Inc., a privately-held company
providing health care staffing and home health care services and NotifyMD, a
privately-held company providing unified messaging and other communications
services to physicians. Mr. Cowherd received his A.B. in History from Princeton
University and his M.B.A. from the Graduate School of Business at Stanford
University.

James B. Hoover. Mr. Hoover has been a director of XCare.net since June
1999. Mr. Hoover is the Managing Member of Dauphin Capital Partners I, L.P., a
venture capital firm that he founded in June 1998. From November 1992 until June
1998, Mr. Hoover was a General Partner of Welsh, Carson, Anderson & Stowe, a
private equity firm specializing in the acquisition of healthcare and
information services businesses. Prior to joining Welsh, Carson, Anderson &
Stowe, Mr. Hoover was a General Partner of Robertson, Stephens & Company from
February 1984 until October 1992. From June 1977 until February 1984, Mr. Hoover
was a Vice President of Citibank N.A. Mr. Hoover is a director of Centennial
Healthcare, New American Healthcare and U.S. Physical Therapy, three publicly
traded health care companies. Mr. Hoover received his B.S. in Business
Administration from Elizabethtown College and his M.B.A. from the Graduate
School of Business at Indiana University.

L. Ben Lytle. Mr. Lytle has been a director of XCare.net since January 11,
2000. Since 1992, Mr. Lytle has been the Chairman of the Board of Anthem, Inc.,
a mutual insurance company that provides a wide range of managed care products
including health maintenance organizations, preferred provider organizations and
point of service organizations and integrated health networks. From 1982 to
1989, Mr. Lytle also served as Anthem, Inc.'s Chief Operating Officer. He served
as President and CEO of Anthem, Inc. from 1989 to October 1999. Mr. Lytle serves
on the boards of directors of IPALCO Enterprises, a publicly traded energy
company; Central Newspapers, Inc., a publicly traded media company; CID Equity
Partners, a venture capital firm; Duke REIT, a publicly traded real estate
investment firm; and AllScripts, Inc., a publicly traded electronic
pharmaceutical dispensing firm. Mr. Lytle is a Fellow with the American
Enterprise Institute of Washington, D.C., and a guest lecturer at the University
of Arizona School of Business. He also served on President Clinton's Commission
on Consumer Protection and Quality in the Health Care Industry. Mr. Lytle
received his B.A. in 1970 from East Texas University, and his J.D. in 1980 from
Indiana University.

Daniel J. Mitchell. Mr. Mitchell has been a director of XCare.net since
August 1999. Since January 1997, Mr. Mitchell has been a Manager of Sequel
Venture Partners, LLC, a venture capital firm. Since June 1992, Mr. Mitchell has
been a General Partner of Capital Health Venture Partners, a venture capital
firm. From July 1981 until August 1985, Mr. Mitchell was an investment officer
at Institutional Venture Capital Fund at the First National Bank of Chicago. Mr.
Mitchell received his B.S. degree in Finance from the University of Illinois at
Urbana-Champaign and his M.B.A. in Finance from the Haas School of Business at
the University of California -- Berkeley.

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<PAGE> 63

William F. Reilly. Mr. Reilly has been a director of XCare.net since May
1989. Mr. Reilly was one of the three founders of Reilly Dike Dosher
Corporation, XCare.net's predecessor company. From May 1989 until October 1997,
Mr. Reilly was President and Chief Executive Officer of XCare.net. Since June
1998, Mr. Reilly has been an independent consultant. Mr. Reilly received his
A.B. degree in Philosophy from Stonehill College and his M.B.A. from Harvard
University.

Robert Tsao. Mr. Tsao has been a director of XCare.net since June 1999.
Since August 1997, Mr. Tsao has been an Investment Manager at Vertex Management,
Inc., a venture capital firm. From July 1995 until July 1997, Mr. Tsao was a
Corporate Finance Analyst at SoundView Technology Group, Inc., an investment
banking firm. Mr. Tsao received his B.A. degree in Physics and Economics from
the University of California -- Berkeley.

BOARD OF DIRECTORS AND COMMITTEES

XCare.net's board of directors consists of nine directors divided into
three classes with each class serving for a term of three years. At each annual
meeting of stockholders, directors will be elected to succeed those directors
whose terms are expiring. Daniel J. Mitchell, Fred L. Brown, and L. Ben Lytle
are the Class I directors whose terms expire in 2000. William F. Reilly, James
B. Hoover and Robert Tsao are Class II directors whose terms will expire in
2001. Jeffrey M. Krauss, J. Andrew Cowherd and Lorine R. Sweeney are Class III
directors whose terms will expire in 2002.

The board of directors has a compensation committee and an audit committee.
The compensation committee, which is comprised of James B. Hoover, J. Andrew
Cowherd and Robert Tsao, administers the stock option plan and all matters
concerning executive compensation. The audit committee, which is comprised of
Daniel J. Mitchell, Jeffrey M. Krauss and William F. Reilly, approves the
selection of XCare.net's independent auditors, reviews the results and scope of
annual audits and other accounting related services, and evaluates our internal
audit and control functions. Each of these committees was established in July
1999.

DIRECTOR COMPENSATION

We do not pay any cash compensation to directors for serving in that
capacity. The board has the discretion to grant options to non-employee
directors pursuant to the director plan. In September 1999, each director then
in office other than Lorine R. Sweeney, our President and Chief Executive
Officer, was granted an option to purchase 10,000 shares of common stock. In
December 1999, Fred L. Brown was granted an option to purchase 25,000 shares of
common stock. In January, 2000, L. Ben Lytle was granted an option to purchase
25,000 shares of common stock. See "Management -- 1999 Director Option Plan" and
"Certain Transactions."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The compensation committee is currently comprised of Messrs. Hoover,
Cowherd and Tsao. None of these individuals has at any time been an officer or
employee of XCare.net. Prior to formation of the compensation committee, all
decisions regarding executive compensation were made by the full board. No
interlocking relationship exists between the board of directors or compensation
committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be held personally liable for monetary damages for
breach of their fiduciary duties as directors, except for breaches of the
director's duty of loyalty to XCare.net or its stockholders, acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, unlawful payments of dividends or
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<PAGE> 64

unlawful stock repurchases, redemptions or other distributions, and transactions
from which a director derives an improper personal benefit.

Our bylaws provide that we must indemnify our directors and executive
officers and may indemnify our other officers and employees and agents to the
fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to obtain insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.

We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provided that we will indemnify each of our directors and officers
for various expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by them in any action or proceeding, including any action by or
arising out of their services as one of our directors or officers, any
subsidiaries or any other company or enterprise to which he or she provides
services at our request. In addition, we intend to obtain directors' and
officers' insurance providing indemnification for our directors and officers. We
believe that these provisions, agreements and insurance are necessary to attract
and retain qualified directors and officers.

At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation that
we paid during the year ended December 31, 1999, for services rendered during
1999, to our Chief Executive Officer and the only other executive officers whose
salary and bonus exceeded $100,000 during such fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
--------------------------- --------- -------- ---------------
<S> <C> <C> <C>
Lorine R. Sweeney.................................. $175,000 $2,815
President and Chief Executive Officer
Lawrence S. Dike................................... 135,000 -- 3,909
Senior Vice President and Chief Scientist
Mark Rangell....................................... 135,000 2,814
Senior Vice President, Sales and Marketing
Tammy McLaren...................................... 113,462 $1,500 2,665
Vice President, Professional Services
Jon Wisda.......................................... 106,154 -- 2,123
Vice President, Product Development
</TABLE>

- -------------------------
(1) Consists of premiums we paid for life insurance, dental insurance, health
insurance and long-term disability insurance for each executive officer.

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<PAGE> 65

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information with respect to stock
options granted in 1999 to each of the officers named in the above table,
including the potential realizable value over the ten-year term of the options,
based on assumed rates of stock appreciation of 5% and 10%, compounded annually.
These assumed rates of appreciation comply with the rules of the Securities and
Exchange Commission and do not represent our estimate of our future stock price.
Actual gains, if any, on stock option exercises will be dependent on the future
performance of our common stock.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM
OPTIONS GRANTED TO PRICE PER EXPIRATION -----------------------
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Lorine R. Sweeney........... 151,100 12.9% $0.25 03/16/09 $ 23,756 $ 60,204
285,726 24.3 2.70 09/01/09 485,167 1,229,509
Lawrence S. Dike............ -- -- -- -- -- --
Mark Rangell................ 60,300 5.1 0.25 03/16/09 9,481 24,026
66,800 5.7 2.70 09/01/09 113,427 287,447
Tammy McLaren............... 50,000 4.3 0.25 02/08/09 7,861 19,922
44,000 3.7 2.70 09/01/09 74,713 189,337
Jon Wisda................... 50,000 4.3 0.25 02/08/09 7,861 19,922
30,000 2.6 2.70 09/01/09 50,940 129,093
</TABLE>

In 1999, we granted options to purchase an aggregate of 1,175,276 shares to
employees, directors and consultants. All options were granted under our stock
option plan at exercise prices equal to the fair market value of our common
stock on the date of grant, as determined in good faith by our board of
directors, based on our financial results and prospects and at the share prices
paid in arms-length transactions. All options typically vest over four years and
are exercisable for up to ten years. In July 1999, we amended our option
agreements so that all options are immediately exercisable upon grant; however,
any unvested shares are subject to repurchase by us at their cost in the event
of the optionee's termination of employment.

OPTION EXERCISES AND HOLDINGS

The following table sets forth for each of the named officers information
concerning exercisable and unexercisable options held as of December 31, 1999.
The value of in-the-money options is based on a value of $10.00 per share, the
fair market value of our common stock at December 31, 1999, as determined by our
board, and net of the option exercise price.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES VALUE DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lorine R. Sweeney......... 80,000 216,000 788,726 -- $6,990,050 --
Lawrence S. Dike.......... -- -- -- -- -- --
Mark Rangell.............. 22,800 61,560 277,200 -- $2,539,040 --
Tammy McLaren............. 20,000 54,000 80,000 -- $ 672,200 --
John Wisda................ -- -- 80,000 $ 706,500 --
</TABLE>

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<PAGE> 66

The number of unexercised options at December 31, 1999 which are
exercisable reflects that all options are immediately exercisable upon grant,
although the shares issued upon exercise are subject to our right to repurchase
them upon termination of employment, which right lapses progressively over time.

EMPLOYMENT AGREEMENTS

We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon termination
the employee will not work for a competitor and may not solicit our customers
and employees. At the time of commencement of employment, our employees also
generally sign offer letters specifying basic terms and conditions of
employment. Each of Lorine R. Sweeney, Mark Rangell and Tammy McLaren have
signed offer letters with of this type, see "Certain Transactions -- Offers of
Employment."

1997 STOCK PLAN

Our stock plan provides for the grant of incentive stock options to
employees, including officers and employee directors, and for the grant of
nonstatutory stock options and stock purchase rights to employees, officers,
directors and consultants. The stock plan was adopted by our board of directors
in March 1997 and approved by the stockholders in March 1997. The board of
directors approved amendments to the stock plan to increase the number of shares
reserved under the stock plan in December 1997, April 1998, July 1998, May 1999
and September 1999. The stockholders also approved these amendments to the stock
plan in December 1997, April 1998, July 1998, May 1999 and September 1999.

As of September 30, 1999 a total of 2,200,000 shares of our common stock
has been reserved for issuance under the stock plan. As of September 30, 1999,
options to purchase 1,491,492 shares of common stock were outstanding under the
stock plan and 541,345 were available for future issuance. In the fourth quarter
ended December 31, 1999, we granted options to purchase 145,451 shares of common
stock, leaving a total of 400,444 shares reserved for future issuance; and
options to purchase a total of 20,500 shares were exercised.

Unless terminated sooner, the stock plan terminates in 2007.

The administrator of our stock plan has the power to determine among other
things:

- the terms of the options or stock purchase rights granted, including
exercise price;

- the number of shares subject to each option or stock purchase right;

- the exercisability of each option or stock purchase right; and

- the form of consideration payable upon the exercise of each option or
stock purchase right.

In addition, the administrator has the authority to amend, suspend or
terminate the stock plan, so long as no such action affects any shares
previously issued or any option previously granted under the stock plan. During
any fiscal year, no optionee may be granted options to purchase more than
1,050,000 shares, although, in connection with an optionee's initial employment
with us, such optionee may be granted an option covering an additional 1,050,000
shares.

Options and stock purchase rights granted under our stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the stock plan must generally be exercised within three
months after the end of the optionee's status as an employee, director or
consultant of XCare.net, or within 12 months after termination by death or
disability, but in no event later than the expiration of the option's term.

In the case of stock purchase rights, unless the administrator determines
otherwise, we retain a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's
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<PAGE> 67

employment or consulting relationship with XCare.net for any reason, including
death or disability. The repurchase price is the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to XCare.net. The repurchase option shall lapse at a rate determined by the
administrator.

The exercise price of all incentive stock options granted under the stock
plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options and stock
purchase rights is determined by the administrator, but for nonstatutory stock
options intended to qualify as "performance-based compensation" under Section
162(m) of the Internal Revenue Code, the exercise price must be at least equal
to the fair market value of our common stock on the date of grant. For any
participant who possesses more than 10% of the voting power of all classes of
the our outstanding stock, the exercise price of any incentive stock option must
be at least equal to 110% of the fair market value on the grant date and the
term of the incentive stock option must not exceed five years. The term of all
other options granted under the stock plan may not exceed ten years.

The stock plan provides that if we merge with another corporation, or sell
substantially all our assets, each option and stock purchase right will be
assumed or an equivalent option will be substituted by the successor
corporation. If the outstanding options and stock purchase rights are not
assumed or substituted for, the optionees will become fully vested in and have
the right to exercise their options or stock purchase rights in full. In such
case, the administrator will notify the optionees that their options or stock
purchase rights are fully exercisable for a period of 15 days from the date of
the notice, and the options or stock purchase rights will terminate upon the
expiration of that period.

1999 EMPLOYEE STOCK PURCHASE PLAN

Our employee stock purchase plan was adopted by our board of directors in
October 1999, and approved by our stockholders in January 2000, although it will
not become effective until the date of this offering. A total of 500,000 shares
of our common stock has been reserved for issuance under the 1999 purchase plan.

The employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains consecutive, overlapping, 12
month offering periods. Each offering period includes two six-month purchase
periods. The offering periods generally start on the first trading day on or
after November 1 and May 1 of each year, except for the first offering period,
which commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before April 30, 2001.

Employees are eligible to participate if they are customarily employed by
us for at least 20 hours per week and more than five months in any calendar
year. However, employees may not participate in the employee stock purchase plan
if at the beginning of a purchase period, they own 5% or more of the total
combined voting power or value of all classes of our stock. In addition, no
employee may participate in the employee stock purchase plan at a rate which
would exceed $25,000 worth of stock in any calendar year.

The employee stock purchase plan permits employees to purchase our common
stock through payroll deductions of up to 20% of the employee's "compensation."
Compensation is defined as the employee's base straight time gross earnings and
commissions, but excluding payments for overtime, profit sharing payments, shift
premium payments, incentive compensation and bonuses. The maximum number of
shares a participant may purchase during a single purchase period is 10,000
shares.

Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased is generally 85% of the lower of the fair market value of our common
stock either at the beginning of the offering period or at the end of that
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, all participants will be withdrawn from the

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<PAGE> 68

current offering period following exercise and automatically re-enrolled in a
new offering period. The new offering period will use the lower fair market
value as of the first date of the new offering period to determine the purchase
price for future purchase periods.

Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment.

Rights granted under the employee stock purchase plan are not transferable
by a participant other than by will, the laws of descent and distribution, or as
otherwise provided under the employee stock purchase plan. The employee stock
purchase plan provides that, in the event we merge with another corporation or
sell substantially all of our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new exercise date will be set.

The employee stock purchase plan will terminate in 2009. Our board of
directors has the authority to amend or terminate the employee stock purchase
plan, except that no such action may adversely affect any outstanding rights to
purchase stock under the employee stock purchase plan.

1999 DIRECTOR OPTION PLAN

All non-employee directors are entitled to participate in our director
option plan. The director option plan was adopted by our board of directors in
October 1999 and approved by our stockholders in January 2000, although it will
not become effective until the date of this offering. The director option plan
has a term of ten years, unless terminated sooner by our board of directors. A
total of 250,000 shares of our common stock have been reserved for issuance
under the 1999 director option plan.

The director option plan generally provides for an automatic initial grant
of an option to purchase 25,000 shares of our common stock to each non-employee
director on the date that person first becomes a non-employee director. After
the initial grant, a non-employee director will automatically be granted
subsequent options to purchase 10,000 shares of our common stock each year on
the date of our annual stockholder's meeting, if on such date he or she has
served on our board of directors for at least six months. Each initial option
grant and each subsequent option has a term of 10 years. Each initial option,
vests as to 25% of the shares subject to the option on each anniversary of the
date of grant, and each subsequent option grant vests as to 100% of the shares
subject to the option on the first anniversary of the date of grant. The
exercise price of all options will be 100% of the fair market value of our
common stock on the date of grant.

The director option plan provides that if we merge with another
corporation, or sell substantially all our assets, each option will become fully
vested and exercisable for a period of thirty days from the date our board of
directors notifies the optionee of the option's full exercisability, after which
period the option will terminate. Options granted under the director option plan
must be exercised within three months of the end of the optionee's tenure as a
director of the Company, or within 12 months after termination by death or
disability, but in no event later than the expiration of the option's ten year
term. Options granted under the director option plan are not transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable, during the lifetime of the optionee, only by the
optionee.

401(k) PLAN

We have a 401(k) plan covering full-time employees located in the United
States who are at least 21 years of age. The 401(k) plan is intended to qualify
under Section 401(k) of the Internal Revenue Code. Contributions to the 401(k)
plan by employees or by us, and the investment earnings on these contributions,
are not taxable until withdrawn from the 401(k) plan. Employees may elect to
reduce their pre-tax earnings up to a statutorily prescribed annual limit, which
was $10,000 in 1999, and to have the amount of that reduction contributed to the
401(k) plan. The 401(k) plan permits, but does not require, additional matching
contributions by us on behalf of all participants in the 401(k) plan. To date,
we have not made any contributions to the 401(k) plan.

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<PAGE> 69

CERTAIN TRANSACTIONS WITH RELATED PARTIES

During the fourth quarter ended December 31, 1999, the Company entered into
a professional services agreement with munshee.com LLC, whose managing member is
a general partner of Nazem & Company IV, L.P. and of Transatlantic Venture Fund
C.V., which hold preferred stock in XCare net. Jeffrey M. Krauss, one of our
directors, is also a general partner of Nazem & Company IV, L.P. and an
investment manager of Transatlantic Venture Fund C.V. We recognized $453,000 in
revenue under this agreement during the fourth quarter ended December 31, 1999.

With the exception as described above since January 1996, there has not
been nor is there currently proposed any transaction or series of similar
transactions to which we were or are to be a party in which the amount involved
exceeds $60,000 and in which any of our directors, executive officers, holders
of more than five percent of our stock or any member of their immediate families
had or will have a direct or indirect material interest other than compensation
agreements and other arrangements, which are described where required in
"Management," and the transactions described below.

EQUITY INVESTMENT TRANSACTIONS

On March 12, 1997, we sold an aggregate of 2,450,000 shares of our Series A
convertible preferred stock at a price per share of $2.86. In June and July
1999, we sold an aggregate of 63,053,144 shares of our Series B convertible
preferred stock at a price per share of $0.27, including 11,867,959 shares of
Series B convertible preferred stock issued upon conversion of convertible
promissory notes. Upon the closing of this offering, all shares of preferred
stock will be converted into shares of common stock. The holders of Series A
convertible preferred stock are entitled to convert their shares into an
aggregate of 2,802,800 shares of common stock, based on a conversion price of
$2.50 per common share. The holders of Series B convertible preferred stock are
entitled to convert their shares into an aggregate of 6,305,322 shares of common
stock, based on a conversion price of $2.70 per common share. Listed below are
those directors, executive officers and stockholders who beneficially own five
percent or more of our securities who participated in the preferred stock
financings. We believe that the shares issued in these transactions were sold at
the then fair market value and that the terms of these transactions were no less
favorable than we could have obtained from unaffiliated third parties.

<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE AGGREGATE
STOCKHOLDER PREFERRED PREFERRED CONSIDERATION
----------- -------------------- -------------------- --------------
<S> <C> <C> <C>
Atlantic Medical Capital, L.P. ............. 1,225,000 6,401,921 $5,232,019
C.B. Healthcare Fund, L.P. ................. -- 11,111,111 3,000,000
Dauphin Capital Partners I, L.P. ........... -- 9,259,259 2,500,000
Entities Affiliated with Nazem & Company IV,
L.P. ..................................... 1,225,000 11,422,335 6,587,530
Entities affiliated with Sequel Venture
Partners II, LLC.......................... -- 11,111,111 3,000,000
Vertex Technology Fund (II) Ltd. ........... -- 11,111,111 3,000,000
</TABLE>

J. Andrew Cowherd, one of our directors, is a member of Atlantic Medical
Management LLC. Atlantic Medical Management LLC is the Management Services
Company for Atlantic Medical Capital L.P. James B. Hoover, one of our directors,
is a Managing Member of Dauphin Capital Partners I, L.P. The shares purchased by
entities affiliated with Nazem & Company IV, L.P. include 5,555,556 shares of
Series B convertible preferred stock purchased by Transatlantic Venture Fund
C.V. Jeffrey M. Krauss, one of our directors, is a general partner of Nazem &
Company IV, L.P. Mr. Krauss is also an investment manager of Transatlantic
Venture Fund C.V. The Series B convertible preferred stock purchased by entities
affiliated with Sequel Venture Partners II, LLC includes 10,740,741 shares
purchased by Sequel Limited Partnership II and 370,370 shares purchased by
Sequel Entrepreneurs Fund II, L.P. Daniel J. Mitchell, one of our directors, is
a manager of Sequel Venture Partners II, LLC. Robert Tsao, one of our directors,
is an investment manager with Vertex Technology Fund.

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<PAGE> 70

Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of these shares. See
"Description of Capital Stock -- Registration Rights."

LOAN AND WARRANT AGREEMENTS

On December 29, 1997, we entered into a loan agreement pursuant to which,
during 1997 and 1998, we borrowed $750,000 from Atlantic Medical Capital, L.P.
at an interest rate of 12% per year. In connection with the loan, Atlantic
Medical Capital, L.P. received warrants to purchase 131,119 shares of Series A
convertible preferred stock at an exercise price of $0.50 per share. On April
10, 1998, we entered into a loan agreement pursuant to which we borrowed
$500,000 from Atlantic Medical Capital, L.P. at an interest rate of 12% per
year. In connection with the loan, Atlantic Medical Capital, L.P. received
warrants to purchase 87,412 shares of Series A convertible preferred stock at an
exercise price of $0.25 per share. Also in connection with the April 10, 1998
loan, the exercise price of the warrants issued on December 29, 1997 was
decreased from $0.50 to $0.25 per share. On November 20, 1998, we entered into a
loan agreement pursuant to which we borrowed $150,000 from Atlantic Medical
Capital, L.P. at an interest rate of 12% per year. In connection with the loan,
Atlantic Medical Capital, L.P. received warrants to purchase 100,000 shares of
common stock at an exercise price of $0.10 per share. On June 4, 1999, Atlantic
Medical Capital, L.P. converted all principal and accrued interest into
6,001,180 shares of Series B convertible preferred stock. J. Andrew Cowherd, one
of our directors, is a member of Atlantic Medical Management LLC, the management
services company of Atlantic Medical Capital, L.P.

On December 29, 1997, we entered into a loan agreement pursuant to which,
during 1997 and 1998, we borrowed $750,000 from Nazem & Company IV, L.P. at an
interest rate of 12% per year. In connection with the loan, Nazem & Company IV,
L.P. received warrants to purchase 131,119 shares of Series A convertible
preferred stock at an exercise price of $0.50 per share. On April 10, 1998, we
entered into a loan agreement pursuant to which we borrowed $500,000 from Nazem
& Company IV, L.P. at an interest rate of 12% per year. In connection with the
loan, Nazem & Company IV, L.P. received a warrant to purchase 87,412 shares of
Series A convertible preferred stock at an exercise price of $0.25 per share.
Also in connection with the April 10, 1998 loan, the exercise price of the
warrants issued on December 29, 1997 was decreased from $0.50 to $0.25 per
share. On November 20, 1998, we entered into a loan agreement pursuant to which
during 1998 and 1999 we borrowed $115,000 from Nazem & Company IV, L.P. at an
interest rate of 12% per year. In connection with the loan, Nazem & Company IV,
L.P. received a warrant to purchase 100,000 shares of common stock at an
exercise price of $0.10 per share. On June 4, 1999, Nazem & Company IV, L.P.
converted all principal and accrued interest into 5,866,779 shares of Series B
convertible preferred stock. Jeffrey M. Krauss, one of our directors, is a
general partner of Nazem & Company IV, L.P.

OPTION GRANTS TO DIRECTORS

On September 1, 1999, we granted an option to purchase 10,000 shares of
common stock to each of Jeffrey M. Krauss, Robert Tsao, and William F. Reilly,
each of whom is one of our directors. In addition, on September 1, 1999, we
granted an option to purchase 10,000 shares of common stock to each of Atlantic
Medical Management LLC, with which J. Andrew Cowherd, one of our directors, is
affiliated; to Sequel Venture Partners II, LLC, with which Daniel J. Mitchell,
one of our directors, is affiliated; and to Dauphin Management L.L.C., with
which James B. Hoover, one of our directors, is affiliated. The options each
have an exercise price of $2.70 per share. Twenty-five percent of the shares
subject to each option vests on September 7, 2000, and 1/48th of the shares
subject to each option vests at the end of each month after September 7, 2000,
subject to the continued services of the particular individual as a director. On
December 30, 1999, we granted an option to purchase 25,000 shares of common
stock to Fred L. Brown, a director appointed to our board on that date. The
option has an exercise price of $10.00 per share. Twenty-five percent of the
shares subject to the option vest on December 30, 2000, and 1/48th of the shares
vest at the end of each month after December 30, 2000,

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<PAGE> 71

subject to the continued service of Mr. Brown as a director. On January 11,
2000, we granted an option to purchase 25,000 shares of common stock to L. Ben
Lytle, a director appointed to our board on that date. The option has an
exercise price of $10.00 per share. Twenty-five percent of the shares subject to
the option vest on February 10, 2002, and 1/48th of the shares vest at the end
of each month after January 10, 2000, subject to the continued service of Mr.
Lytle as a director.

OFFERS OF EMPLOYMENT

Ms. Lorine R. Sweeney, our President and Chief Executive Officer, is a
party to an offer letter dated September 27, 1997. Pursuant to the offer letter,
Ms. Sweeney received an annual salary of $175,000, a bonus of $30,000 payable on
the first anniversary of her employment with XCare.net, and an option to
purchase 3% of our then outstanding shares.

Mr. Mark Rangell, our Senior Vice President of Sales and Marketing, is a
party to an offer letter dated December 12, 1997. Pursuant to the offer letter,
Mr. Rangell received an annual salary of $135,000, sales commissions based on
achieving planned sales objectives and an option to purchase 2.5% of our then
outstanding shares.

Ms. Tammy McLaren, our Vice President of Professional Services, is a party
to an offer letter dated June 12, 1998. Pursuant to the offer letter, Ms.
McLaren received an annual salary of $95,000, which has since been increased to
$115,000.

OTHER TRANSACTIONS

We have entered into an indemnification agreement with each of our
executive officers and directors.

We have granted options to certain of our executive officers. See
"Management -- Option Grants in Last Fiscal Year."
------------------------------

XCare.net believes that all related-party transactions described above were
on terms no less favorable than could have been otherwise obtained from
unrelated third parties. All future transactions between XCare.net and its
principal officers, directors and affiliates will be approved by a majority of
the independent and disinterested members of the Board and will be on terms no
less favorable that could be obtained from unrelated third parties.

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<PAGE> 72

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to beneficial
ownership of our common stock as of September 30, 1999, as adjusted to reflect
the sale of common stock in this offering, the conversion of our outstanding
convertible preferred stock, including convertible preferred stock issuable upon
the assumed cashless exercise of all outstanding convertible preferred stock
warrants, and the cashless exercise of all outstanding common stock warrants.
Information is given for:

- each person who is known by us to beneficially own more than five percent
of our common stock;

- each of our directors;

- each of our officers; and

- all of our directors and officers as a group.

Percentages of the outstanding shares of common stock are based on
10,368,209 shares outstanding as of September 30, 1999, plus all shares of
common stock issuable on exercise of options within 60 days of September 30,
1999 held by the particular beneficial owner.

All percentages assume no exercise of the underwriter's over-allotment
option. The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the individual or entity has voting power or investment power and any shares
which the individual has the right to acquire within 60 days of September 30,
1999 through the exercise of any stock option or other right. Except pursuant to
applicable community property laws or as indicated in the footnotes to this
table, to our knowledge, each stockholder identified in the table possesses sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by such stockholder.

Unless otherwise indicated, the principal address of each of the
stockholders below is c/o XCare.net, Inc., 6400 South Fiddler's Green Circle,
Suite 14000, Englewood, Colorado 80111.

<TABLE>
<CAPTION>
PERCENTAGE
SHARES OWNED BENEFICIALLY OWNED
PRIOR TO THE ---------------------------------
NAME OF BENEFICIAL OWNER OFFERING BEFORE OFFERING AFTER OFFERING
------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Entities affiliated with Nazem & Company IV,
L.P.(1)....................................... 2,900,042 27.9% 18.9%
Jeffrey M. Krauss
645 Madison Avenue, 12th Floor
New York, New York 10022-1010
Atlantic Medical Capital, L.P.(2)............... 2,398,001 23.1 15.6
J. Andrew Cowherd
156 West 56th Street, Suite 1605
New York, New York 10019-3800
Entities affiliated with Sequel Venture
Partners II, LLC(3)........................... 1,121,112 10.8 7.3
Daniel J. Mitchell
4430 Arapahoe Avenue, Suite 220
Boulder, Colorado 80303
Vertex Technology Fund (II) Ltd.(4)............. 1,121,112 10.8 7.3
Robert Tsao
3 Lagoon Drive, Suite 220
Redwood City, California 94065
</TABLE>

65
<PAGE> 73

<TABLE>
<CAPTION>
PERCENTAGE
SHARES OWNED BENEFICIALLY OWNED
PRIOR TO THE ---------------------------------
NAME OF BENEFICIAL OWNER OFFERING BEFORE OFFERING AFTER OFFERING
------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
CB Healthcare Fund, L.P......................... 1,111,112 10.7 7.2
One Boston Place, Suite 4010
Boston, MA 02108
Dauphin Capital Partners I, L.P.(5)............. 935,926 9.0 6.1
James B. Hoover
108 Forest Avenue
Locust Valley, New York 11560
Lorine R. Sweeney(6)............................ 868,726 7.8 5.4
Peter H. Cheesbrough(7)......................... 100,000 1.0 *
Lawrence S. Dike................................ 120,000 1.2 *
Tammy McLaren(8)................................ 100,000 1.0 *
Mark Rangell(9)................................. 300,000 2.8 1.9
William F. Reilly(10)........................... 205,000 2.0 1.3
Jon B. Wisda(11)................................ 80,000 * *
All directors and officers as a group (12
persons)(12).................................. 10,249,919 87.2 61.2
</TABLE>

- -------------------------
* Represents less than one percent of the total.

(1) Represents 2,334,486 shares held by Nazem & Company IV, L.P., 555,556
shares held by Transatlantic Venture Fund C.V. and 10,000 shares subject to
stock options exercisable within 60 days of September 30, 1999 held by
Jeffrey M. Krauss. Mr. Krauss, one of our directors, is a general partner
of Nazem & Company IV, L.P. Nazem & Company IV, L.P. has four general
partners, each of whom shares voting and investment power over the shares
held by Nazem & Company IV, L.P. Mr. Krauss is also an investment manager
of Transatlantic Venture Fund C.V. Transatlantic Venture Fund C.V.'s
investment managers each shares voting and investment power over the shares
held by Transatlantic Venture Fund C.V. Mr. Krauss disclaims beneficial
ownership of the shares held by these entities except to the extent of his
proportionate pecuniary interest.

(2) Represents 2,388,001 shares held by Atlantic Medical Capital, L.P. and
10,000 shares subject to stock options exercisable within 60 days of
September 30, 1999 held by Atlantic Medical Management, LLC. J. Andrew
Cowherd, one of our directors, is a member of Atlantic Medical Management
LLC. Atlantic Medical Management LLC is the management services company of
Atlantic Medical Capital L.P. Atlantic Medical Management LLC has three
members, each of whom shares voting and investment power over the shares
held by Atlantic Medical Capital, L.P. Mr. Cowherd disclaims beneficial
ownership of the shares held by that entity except to the extent of his
proportionate pecuniary interest.

(3) Represents 1,074,075 shares held by Sequel Limited Partnership II, 37,037
shares held by Sequel Entrepreneurs Fund II, L.P. and 10,000 shares subject
to stock options exercisable within 60 days of September 30, 1999 held by
Sequel Venture Partners II, L.L.C. Sequel Venture Partners II, L.L.C., the
general partner of Sequel Limited Partnership II and Sequel Entrepreneurs
Fund II, L.P., has five managers, including Daniel J. Mitchell, one of our
directors. Each of these managers shares voting and investment power over
the shares held by Sequel Limited Partnership II and Sequel Entrepreneurs
Fund II, L.P. Mr. Mitchell disclaims beneficial ownership of the shares
held by these entities except to the extent of his proportionate pecuniary
interest.

(4) Represents 1,111,112 shares held by Vertex Technology Fund (II) Ltd. and
10,000 shares subject to stock options exercisable within 60 days of
September 30, 1999 held by Robert Tsao. Mr. Tsao, one of our directors, is
an Investment Manager with Vertex Technology Fund. Mr. Tsao disclaims

66
<PAGE> 74

beneficial ownership of the shares held by that entity except to the extent
of his proportionate pecuniary interest.

(5) Represents 925,926 shares held by Dauphin Capital Partners I, L.P. and
10,000 shares subject to stock options exercisable within 60 days of
September 30, 1999 held by Dauphin Management, L.L.C. James B. Hoover, one
of our directors, is a Managing Member of Dauphin Capital Partners I, L.P.
Mr. Hoover disclaims beneficial ownership of the shares held by that entity
except to the extent of his proportionate pecuniary interest.

(6) Includes 788,726 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(7) Includes 100,000 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(8) Includes 80,000 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(9) Includes 277,200 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(10) Includes 10,000 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(11) Includes 80,000 shares subject to stock options exercisable within 60 days
of September 30, 1999.

(12) Includes 1,385,926 shares subject to stock options exercisable within 60
days of September 30, 1999, as described in the above footnotes.

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<PAGE> 75

DESCRIPTION OF CAPITAL STOCK

Upon the closing of the offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, $0.01 par value, and 5,000,000 shares of
preferred stock, $0.01 par value.

The following summary of provisions of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its entirety
by, the provisions of our certificate of incorporation, which is included as an
exhibit to the registration statement of which this prospectus is a part, and by
the provisions of Delaware law.

COMMON STOCK

After giving effect to the conversion of all previously outstanding
preferred stock into shares of common stock, the assumed cashless exercise of
all outstanding common stock warrants and convertible preferred stock warrants,
and the conversion into common stock of the convertible preferred stock issued
upon the assumed exercise of the latter warrants, as of September 30, 1999,
there were 10,368,209 shares of common stock outstanding held of record by
approximately 36 stockholders. There will be 15,368,209 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options after September 30, 1999, after giving effect
to the sale of common stock in this offering.

The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably any dividends
declared by the board of directors out of funds legally available for the
payment of dividends. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of XCare.net, the holders of common stock are entitled
to share ratably in all assets, subject to prior distribution rights of the
preferred stock, if any, then outstanding. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued in the offering will
be fully paid and non-assessable.

PREFERRED STOCK

Upon the consummation of the offering, each share of convertible preferred
stock outstanding prior to this offering will automatically convert into common
stock. The Series A convertible preferred stock will each convert into 1.144
shares of common stock. The Series B convertible preferred stock will each
convert into one share of common stock. Pursuant to our certificate of
incorporation, after the offering our board of directors has the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges, which may be greater than the rights of the common
stock. The board, without stockholder approval, can issue preferred stock with
voting, conversion or other rights that could adversely affect the voting power
and other rights of the holders of common stock. Preferred stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
XCare.net or to make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock. At present, we have no plans to issue any preferred stock.

REGISTRATION RIGHTS

Upon completion of this offering, the holders of an aggregate of
approximately 9,809,976 shares of common stock will be entitled to certain
rights with respect to the registration of such shares under the Securities Act
of 1933. Under the terms of the registration rights agreements, if we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, the holders of registration rights are entitled to notice of such
registration and are entitled to include shares of common stock in the
registration. The rights are

68
<PAGE> 76

subject to conditions and limitations, among them the right of the underwriters
of the offering subject to the registration to limit the number of shares
included in such registration. Holders of these rights may also require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of common stock, and we are required to use our best
efforts to effect that registration, subject to conditions and limitations.
Furthermore, stockholders with registration rights may require us to file
additional registration statements on Form S-3, subject to conditions and
limitations.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Delaware Anti-Takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law. In general, these provisions prohibit a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that the
stockholder became an interested stockholder, unless the transaction in which
the person became an interested stockholder is approved in a manner presented in
Section 203 of the Delaware General Corporation Law. Generally, a "business
combination" is defined to include mergers, asset sales and other transactions
resulting in financial benefit to a stockholder. In general, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years, did own, 15% or more of a corporation's voting stock.

Certificate of Incorporation. In October 1999, our board approved
amendments to our certificate of incorporation, to provide:

- That the board of directors may issue, without further action by the
stockholders, up to 5,000,000 shares of undesignated preferred stock

- That any action to be taken by our stockholders must be effected at a
duly called annual or special meeting and not by a consent in writing

- For the division of the board of directors into three classes, with each
class serving for a term of three years

- That vacancies on the board, including newly created directorships, can
be filled only by a majority of the directors then in office

- That directors may be removed only for cause

Bylaws. In October 1999, our board approved amendments to our bylaws to
provide that special meetings of our stockholders may be called only by the
chairman of the board, the president or the board.

Our stockholders approved these amendments in January 2000. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board and in the policies formulated by the board and to
discourage certain types of transactions that may involve an actual or
threatened change of control of XCare.net. These provisions also are designed to
reduce our vulnerability to an unsolicited proposal for a takeover of XCare.net
that does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of XCare.net.
These provisions, however, could discourage potential acquisition proposals and
could delay or prevent a change in control of XCare.net. They may also have the
effect of preventing changes in our management.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services L.L.C.

LISTING

Application has been made to have our common stock approved for quotation
on the Nasdaq National Market under the trading symbol "XCAR." We have not
applied to list our common stock on any other exchange or quotation system.

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<PAGE> 77

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect the prevailing market price from time to time. Furthermore,
because only a limited number of shares will be available for sale shortly after
this offering as a result of contractual and legal restrictions on resale, sales
of substantial amounts of common stock in the public market after the
restrictions lapse could cause the prevailing market price of our common stock
to fall and impede our ability to raise equity capital in the future.

Upon completion of the offering, we will have outstanding an aggregate of
15,368,209 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after September 30,
1999. Of these outstanding shares, the 5,000,000 shares sold in the offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933 unless purchased by "affiliates" of XCare.net as that
term is defined in Rule 144 under the Securities Act. The remaining 10,368,209
shares of common stock outstanding upon completion of the offering will be
"restricted shares," as that term is defined in Rule 144 under the Securities
Act. Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below, or
another exemption. Sales of the restricted shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
our common stock.

We have agreed not to sell or otherwise dispose of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, or enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of FleetBoston Robertson Stephens Inc. In addition, all officers,
directors and certain other holders of common stock have entered into
contractual "lock-up" agreements providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of shares
of common stock owned by them or that could be purchased by them through the
exercise of options for a period of 180 days after the date of this prospectus
without the prior written consent of FleetBoston Robertson Stephens Inc. As a
result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:

- No shares of common stock will be eligible for sale as of the effective
date of the offering

- No additional shares will be eligible for sale beginning 90 days after
the effective date of the offering

- 10,368,209 additional shares will be eligible for sale beginning 180 days
after the effective date of the offering, subject in some cases to
certain volume limitations

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:

- 1% of the number of shares of common stock then outstanding, which will
equal approximately 154,000 shares immediately after this offering; or

- the average weekly trading volume of our common stock on the Nasdaq Stock
Market's National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.

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<PAGE> 78

Sales under Rule 144 are also subject to certain other requirements regarding
the manner of sale, notice filing and the availability of current public
information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
generally including the holding period of any prior owner other than an
"affiliate," is entitled to sell such shares without complying with the manner
of sale, notice filing, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.

Rule 701

In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the date of this offering in reliance on Rule 144, without having to comply with
certain restrictions, including the holding period, contained in Rule 144.

The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options (including exercises after this offering). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this offering, may be sold by persons other than "affiliates," as defined in
Rule 144, subject only to the manner of sale provisions of Rule 144. Securities
issued in reliance on Rule 701 may be sold by "affiliates" under Rule 144
without compliance with its one year minimum holding period requirement.

Registration on Form S-8

We intend to file a registration statement under the Securities Act
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 1997 stock option plan, employee stock purchase plan and
the director option plan. This registration statement is expected to be filed as
early as the effectiveness of the registration statement covering the shares of
common stock offered in this offering and will automatically become effective
upon filing. Shares registered under this registration statement will, subject
to Rule 144 volume limitations applicable to affiliates and the expiration of
any 180-day contractual lockup period, be available for sale in the open market,
except to the extent that these shares are subject to vesting restrictions.

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<PAGE> 79

UNDERWRITING

The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., SG Cowen Securities Corporation, E*OFFERING
Corp. and Advest, Inc., have severally agreed with us, subject to the terms and
conditions set forth in the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all shares if any are
purchased.

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
FleetBoston Robertson Stephens Inc. ........................ 1,756,000
SG Cowen Securities Corporation............................. 1,317,000
E*OFFERING Corp. ........................................... 1,317,000
Advest, Inc. ............................................... 100,000
Prudential Securities Incorporation......................... 75,000
Thomas Weisel Partners LLC.................................. 75,000
First Albany Corporation.................................... 60,000
Fidelity Capital Markets Company............................ 60,000
Gruntal & Co., L.L.C. ...................................... 60,000
Needham & Company, Inc. .................................... 60,000
Punk, Ziegel & Company, L.P. ............................... 60,000
Stifel, Nicolaus & Company, Incorporated.................... 60,000
---------
Total............................................. 5,000,000
=========
</TABLE>

We have been advised by the representatives that the underwriters propose
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not in excess of $0.76 per share, of which $0.10
may be reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No reduction shall change the amount of proceeds to be received
by us as set forth on the cover page of this prospectus. The common stock is
offered by the underwriters subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.

Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock
offered under this prospectus will be determined through negotiations between us
and the representatives. Among the factors to be considered in such negotiations
are prevailing market conditions, certain of our financial information, market
valuations of other companies that we and the representatives believe to be
comparable to us, estimates of our business potential and the present state of
our development.

The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.

Over-Allotment Option

We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to 750,000
additional shares of common stock at the same price per share as we will receive
for the shares that the underwriters have agreed to purchase. To the extent that
the underwriters exercise this option, each of the underwriters will have a firm
commitment to purchase approximately the same percentage of such additional
shares that the number of shares of common stock to be purchased by it shown in
the above table represents as a percentage of the shares offered under this
prospectus. If purchased, such additional shares will be sold by the
underwriters on the same terms as those on which the shares are being sold. We
will be obligated, pursuant to the option, to sell shares to the extent the
option is exercised. The underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered under this

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<PAGE> 80

prospectus. If such option is exercised in full, the total public offering
price, underwriting discounts and commissions and proceeds to us will be
$103,500,000, $7,245,000 and $96,255,000, respectively.

Discounts and Commissions

The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. This information is
presented assuming either no exercise or full exercise by the underwriters of
their over-allotment option.

<TABLE>
<CAPTION>
PER WITHOUT WITH
SHARE OPTION OPTION
------ ----------- ------------
<S> <C> <C> <C>
Public offering price.................................. $18.00 $90,000,000 $103,500,000
Underwriting discounts and commissions................. $ 1.26 $ 6,300,000 $ 7,245,000
Proceeds, before expenses, to us....................... $16.74 $83,700,000 $ 96,255,000
</TABLE>

The underwriting fee will be an amount equal to the offering price to the
public of the common stock, less the amount paid by the underwriters to
XCare.net per share of common stock. The underwriting fee will be determined
through an arms length negotiation between XCare.net and the representatives.
The expenses of the offering are estimated at $1,550,000 and are payable
entirely by us. FleetBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on February 9, 2000.

Indemnity

The underwriting agreement contains covenants of indemnity among the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.

Lock-Up Agreements

Each of our executive officers, directors and shareholders and
substantially all of optionholders have agreed with the representatives, for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock owned as
of the date of this prospectus or, with certain exceptions, thereafter acquired
directly by such holders or with respect to which they have or hereafter acquire
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to the lock-up agreements. There are no agreements
between the representatives and any of our shareholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
180 days after this prospectus.

Future Sales

In addition, we have agreed that during the period of 180 days after this
prospectus, we will not, subject to certain exceptions, without the prior
written consent of FleetBoston Robertson Stephens Inc.:

- consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 180 days after this prospectus; or

- issue, sell, contract to sell or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock.

73
<PAGE> 81

Directed Share Program

The underwriters have reserved up to 375,000 shares of our common stock to
be issued by us and offered for sale in this offering, at the initial public
offering price, to directors, officers, employees, business associates and
persons otherwise connected to XCare.net. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals purchase reserved shares. Any reserved shares which are not
purchased will be offered by the underwriters to the general public on the same
bases as the other shares offered in this offering.

Listing

We have applied for approval for quotation of our common stock on the
Nasdaq National Market under the symbol "XCAR."

Stabilization

The representatives have advised us that, pursuant to Regulation M under
the Securities Act, certain persons participating in this offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. The representatives may also impose a "penalty
bid" on underwriters and selling group members if the representatives purchase
shares of our common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock. The representatives may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.

Electronic Prospectuses

E*OFFERING Corp. is the exclusive Internet underwriter for this offering.
E*OFFERING Corp. has agreed to allocate a portion of the shares that it
purchases to E*TRADE Securities, Inc. E*OFFERING Corp. and E*TRADE Securities
Inc. will allocate shares to their respective customers in accordance with usual
and customary industry practices. A prospectus in electronic format, from which
you can link to a "Meet the Management" Presentation through an embedded
hyperlink, Iclick here for "Meet the Management" PresentationJ, is being made
available on the Web site maintained by E*OFFERING Corp., www.eoffering.com.
Other than the prospectus in electronic format, the information that is
identified as being a part of the prospectus and any other information that
references XCare.net, the information on E*OFFERING Corp.'s Web site and any
information provided in any other Web site maintained by E*OFFERING Corp. is not
part of this prospectus and has not been approved or endorsed by XCare.net and
should not be relied upon by prospective investors.

Certain Definitions

In this prospectus, references to "underwriters" means any person who
purchases shares of common stock directly from us in connection with the
distribution of shares in this offering. References to "representatives" means
FleetBoston Robertson Stephens Inc., SG Cowen Securities Corporation, E*Offering
Corp., and Advest, Inc. who will enter into an agreement with us and are acting
on behalf of the underwriters in the offering. In connection with this offering,
a "dealer" is an agent, broker or principal who buys our common stock from the
underwriters to sell to others. Dealers will not buy directly from us. "Selling
group members" and "syndicate members" are the group of dealers who sell our
securities to the public.

74
<PAGE> 82

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Arthur F. Schneiderman and Rachel S. Lovejoy, a member and
associate, respectively, of Wilson Sonsini Goodrich & Rosati, beneficially own
an aggregate of 15,483 shares of our common stock. Legal matters in connection
with this offering will be passed upon for the underwriters by Brobeck, Phleger
& Harrison LLP, San Francisco, California.

CHANGE IN INDEPENDENT ACCOUNTANTS

Effective September 1, 1999, PricewaterhouseCoopers LLP was engaged as our
independent accountants and replaced KPMG LLP, who were dismissed as our
independent accountants on August 25, 1999. The decision to change accountants
was approved by our Board of Directors. The audit reports of KPMG LLP for the
years ended December 31, 1997 and 1996 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle, except that the audit report issued by KPMG
LLP for the year ended December 31, 1997 included an explanatory paragraph
citing factors that raised substantial doubt surrounding our ability to continue
as a going concern. In connection with its audits through December 31, 1997 and
through August 25, 1999, there were no disagreements with KPMG LLP on any matter
of accounting principles or practices, financial statements disclosure or
auditing scope or procedures, which disagreements, if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. KPMG LLP has not audited or
reported on any of the financial statements or information included in this
prospectus. For purposes of this filing, the financial statements for the years
ended December 31, 1997 and 1996 as well as the financial statements for the
year ended December 31, 1998 have been audited by PricewaterhouseCoopers LLP.
Prior to September 1, 1999, we had not consulted with PricewaterhouseCoopers LLP
on items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements.

EXPERTS

The financial statements as of December 31, 1997 and 1998, and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

75
<PAGE> 83

AVAILABLE INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to XCare.net and the
shares we are offering pursuant to this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Section of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The Securities and Exchange Commission maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The Securities and Exchange Commission's World Wide Web
address is www.sec.gov. The Securities and Exchange Commission's phone number is
1-800-SEC-0330.

We intend to furnish holders of our common stock annual reports containing,
among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish such other reports as we may determine or as may be
required by law.

76
<PAGE> 84

XCARE.NET, INC.

INDEX TO FINANCIAL STATEMENTS

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

F-1
<PAGE> 85

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of XCare.net,
Inc. at December 31, 1997 and 1998 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Broomfield, Colorado
October 22, 1999, except for the last two paragraphs
of note 9 which are as of January 10, 2000

F-2
<PAGE> 86

XCARE.NET, INC.

BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 697 $ 198 $ 11,031
Accounts receivable, net of allowance of $0, $50 and $75
at December 31, 1997 and 1998 and September 30, 1999
(unaudited), respectively............................... 453 703 275
Income taxes receivable................................... 617 -- --
Other current assets...................................... 177 78 1,179
------- -------- --------
Total current assets.................................... 1,944 979 12,485
Property and equipment, net................................. 2,082 691 401
Purchased software, net..................................... -- 850 637
Deferred contract costs..................................... -- 285 --
------- -------- --------
$ 4,026 $ 2,805 $ 13,523
======= ======== ========

LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 239 $ 727 $ 887
Accrued liabilities....................................... 1,117 1,590 1,150
Unearned revenue.......................................... 188 500 144
Current portion of long-term debt and capital lease
obligations............................................. 1,352 3,497 82
------- -------- --------
Total current liabilities............................... 2,896 6,314 2,263
Long-term debt.............................................. 939 284 25
------- -------- --------
Total liabilities....................................... 3,835 6,598 2,288
------- -------- --------
Commitments and contingencies (Note 8)
Series A mandatorily redeemable convertible preferred stock,
$.01 par value; 5,000,000, 6,000,000 and 6,000,000 shares
authorized as of December 31, 1997, 1998 and September 30,
1999, respectively; 2,450,000 shares issued and
outstanding............................................... 6,677 6,743 6,793 $ --
Series B mandatorily redeemable convertible preferred stock,
$.01 par value; 0, 0 and 75,000,000 shares authorized as
of December 31, 1997, 1998 and September 30, 1999,
respectively; 63,053,144 issued and outstanding at
September 30, 1999........................................ -- -- 16,944 --
Value ascribed to mandatorily redeemable convertible
preferred stock warrants.................................. 51 84 84 --
------- -------- -------- --------
6,728 6,827 23,821 --
------- -------- -------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value; 3,500,000, 5,000,000 and
12,500,000 shares authorized as of December 31, 1997,
1998 and September 30, 1999, respectively; 390,000
shares issued and outstanding as of December 31, 1997
and 1998, respectively; 557,163 shares issued and
outstanding as of September 30, 1999; 10,368,209 pro
forma shares issued and outstanding (unaudited)......... 4 4 6 104
Additional paid-in capital................................ 530 529 3,120 26,843
Unearned compensation..................................... -- -- (2,383) (2,383)
Accumulated deficit....................................... (7,071) (11,153) (13,329) (13,329)
------- -------- -------- --------
Total stockholders' equity (deficit).................... (6,537) (10,620) (12,586) $ 11,235
------- -------- -------- --------
Total liabilities and stockholders' equity (deficit).... $ 4,026 $ 2,805 $ 13,523
======= ======== ========
</TABLE>

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

F-3
<PAGE> 87

XCARE.NET, INC.

STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue............................... $ 9,726 $ 5,984 $ 2,270 $ 1,564 $ 2,654
------- ------- ------- ------- -------
Costs and expenses:
Cost of revenue..................... 3,744 4,575 2,086 1,440 2,421
Sales and marketing................. 1,369 2,531 965 792 545
General and administrative.......... 2,220 2,436 2,194 1,389 1,185
Research and development............ 3,190 4,212 670 594 417
Impairment of long-lived assets and
abandonment of operating lease... -- 887 -- -- --
Stock compensation expense.......... -- -- -- -- 112
------- ------- ------- ------- -------
10,523 14,641 5,915 4,215 4,680
------- ------- ------- ------- -------
Loss from operations.................. (797) (8,657) (3,645) (2,651) (2,026)
Settlements received from contract
terminations........................ 2,250 250 -- -- --
Interest income (expense), net........ -- 5 (437) (306) (150)
------- ------- ------- ------- -------
Income (loss) before income taxes..... 1,453 (8,402) (4,082) (2,957) (2,176)
Income tax (benefit) expense.......... 1,200 (1,078) -- -- --
------- ------- ------- ------- -------
Net income (loss)..................... $ 253 $(7,324) $(4,082) $(2,957) $(2,176)
======= ======= ======= ======= =======
Net income (loss) per common
share -- basic and diluted.......... $ 0.53 $(18.92) $(10.64) $ (7.71) $ (5.09)
======= ======= ======= ======= =======
Weighted average common shares
outstanding -- basic and diluted.... 476 390 390 390 438
======= ======= ======= ======= =======
Pro forma net loss per common share
basic and diluted (unaudited)....... $ (1.00) $ (0.32)
======= =======
Pro forma weighted average common
shares basic and
diluted -- (unaudited).............. 4,070 6,729
======= =======
</TABLE>

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

F-4
<PAGE> 88

XCARE.NET, INC.

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

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
---------------- PAID-IN UNEARNED EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) TOTAL
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 1 $-- $ 20 -- $ 1,750 $ 1,770
Repurchase and retirement of
common stock.................. (0) -- (7) -- (1,096) (1,103)
Dividends declared.............. -- -- -- -- (78) (78)
Reclassification of accumulated
earnings upon conversion from
non-taxable to taxable
status........................ -- -- 576 -- (576) --
Net income...................... -- -- -- -- 253 253
--- --- ------ ------- -------- --------
Balance at December 31, 1996.... 1 -- 589 -- 253 842
Stock split..................... 389 4 (4) -- -- --
Accretion of mandatorily
redeemable convertible
preferred stock............... -- -- (55) -- -- (55)
Net loss........................ -- -- -- -- (7,324) (7,324)
--- --- ------ ------- -------- --------
Balance at December 31, 1997.... 390 4 530 -- (7,071) (6,537)
Accretion of mandatorily
redeemable convertible
preferred stock............... -- -- (66) -- -- (66)
Other........................... -- -- 65 -- -- 65
Net loss........................ -- -- -- -- (4,082) (4,082)
--- --- ------ ------- -------- --------
Balance at December 31, 1998.... 390 4 529 -- (11,153) (10,620)
Common stock issued upon
exercise of options
(unaudited)................... 167 2 40 -- 42
Accretion of mandatorily
redeemable convertible
preferred stock (unaudited)... -- -- (54) -- -- (54)
Unearned compensation, net...... -- -- 2,495 $(2,383) -- 112
Other........................... 110 -- -- 110
Net loss (unaudited)............ -- -- -- -- (2,176) (2,176)
--- --- ------ ------- -------- --------
Balance at September 30, 1999
(unaudited)................... 557 $ 6 $3,120 $(2,383) $(13,329) $(12,586)
=== === ====== ======= ======== ========
</TABLE>

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

F-5
<PAGE> 89

XCARE.NET, INC.

STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 253 $(7,324) $(4,082) $(2,957) $(2,176)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 733 918 815 695 535
(Gain) loss on impairment and disposal of assets...... 914 408 (11) 5
Deferred income tax provision......................... 451 (451) -- -- --
Stock options issued for services..................... -- -- -- -- 110
Amortization of unearned compensation................. -- -- -- -- 112
Other................................................. -- -- 99 113 119
Change in assets and liabilities:
Accounts receivable, net............................ 986 756 (250) (109) 428
Other current assets................................ (91) (17) 99 92 (1,101)
Income taxes receivable............................. -- (617) 617 617 --
Purchased software.................................. -- -- (850) -- --
Long-term deferred contract costs................... -- -- (285) (312) 285
Accounts payable.................................... (198) (367) 488 284 160
Accrued liabilities................................. 691 (565) 473 (425) (1)
Unearned revenue.................................... -- 188 312 (72) (356)
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities................................... 2,825 (6,565) (2,156) (2,085) (1,880)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment...................... (330) (348) (19) (18) (113)
Proceeds from sale of property and equipment............ -- 30 186 49 4
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities................................... (330) (318) 167 31 (109)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt.......................... 363 533 2,230 1,967 205
Principal payments on debt.............................. (1,128) (618) (166) (164) (425)
Principal payments under capital leases................. (49) (351) (574) (424) (740)
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net...................... -- 6,622 -- -- 13,740
Proceeds from issuance of common stock.................. -- -- -- -- 42
Cash paid for repurchase of common stock................ (381) -- -- -- --
Dividends paid.......................................... (78) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................... (1,273) 6,186 1,490 1,379 12,822
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents.... 1,222 (697) (499) (675) 10,833
Cash and cash equivalents at beginning of period........ 172 1,394 697 697 198
------- ------- ------- ------- -------
Cash and cash equivalents at end of period.............. $ 1,394 $ 697 $ 198 $ 22 $11,031
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid........................................... $ 83 $ 148 $ 127 $ 97 $ 73
Income taxes paid (refunded)............................ 213 -- (615) -- --
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING TRANSACTIONS
Capital lease obligations for purchase of equipment..... $ 378 $ 1,217 $ -- $ -- $ --
Note issued for repurchase of common stock.............. 722 -- -- -- --
Conversion of convertible promissory notes and accrued
interest to Series B mandatorily redeemable
convertible preferred stock........................... -- -- -- -- 3,204
</TABLE>

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

F-6
<PAGE> 90

XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

XCare.net, Inc. (the "Company") develops, deploys and supports
business-to-business software solutions for the health care industry. The
Company's proprietary XML-based platform and professional services allow it to
create customizable transaction-based application solutions that are designed to
address the complex administrative processing requirements of health care
companies. In addition, the Company provides outsourcing and transaction hosting
services that improve workflow processes and reduce administrative costs for
customers.

Use of Estimates

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

Revenue Recognition

For contracts entered into subsequent to January 1, 1998, the Company
recognizes revenue in accordance with the provisions of Statement of Position
97-2, "Software Revenue Recognition". The Company derives revenue from license
fees and related services under the terms of fixed price contracts. Maintenance
revenue is derived from agreements for supporting and providing periodic updates
to licensed software. Consulting revenue consists of revenue from consulting
services provided pursuant to time and materials contracts. Transaction
processing revenue is derived from outsourcing and transaction hosting services
and is recognized on a per-transaction basis as services are performed.

License fees and related services revenue is generally recognized from
fixed price contracts using the percentage-of-completion method of accounting
where collectibility of fees is probable. Where collectibility of fees is not
probable, the Company defers revenue and related costs as deferred contract
costs and recognizes revenue and cost of revenue as cash is collected.

The Company may encounter budget and schedule overruns on fixed price
contracts caused by increased material, labor or overhead costs. Adjustments to
cost estimates are made in the periods in which the facts requiring such
revisions become known. Estimated losses, if any, are recorded in the period in
which current estimates of total contract revenue and contract costs indicate a
loss. The Company does not require collateral for its receivables and an
allowance is maintained for potential credit losses.

Revenue from consulting services provided pursuant to time-and-materials
contracts is recognized as the services are performed.

For contracts entered into prior to January 1, 1998, the Company recognized
revenue in accordance with Statement of Position 91-1, "Software Revenue
Recognition." The Company's revenue recognition for such pre-1998 contracts was
substantially the same as that discussed above.

F-7
<PAGE> 91
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents. All cash equivalents are
carried at cost, which approximates fair value.

Fair Value of Financial Instruments

The Company's financial instruments include cash, accounts receivable,
prepaids, accounts payable and accrued liabilities. The carrying amounts of
financial instruments approximate fair value due to their short maturities.
Additionally, based upon the borrowing rates currently available to the Company
for debt agreements with similar terms and average maturities, management
believes the carrying amount of its debt approximates fair value.

Concentration of Credit Risk

The Company performs ongoing evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. All such
customers operate in the health care industry.

The Company had the following customers which accounted for greater than
10% of each respective period's revenue:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
CUSTOMER 1996 1997 1998
- -------- ------ ------ ------
<S> <C> <C> <C>
A 67% -- --
B 10% 74% --
C -- -- 29%
D -- -- 20%
E -- -- 12%
F -- -- 11%
</TABLE>

At December 31, 1998, customer's D, E and F accounted for 20%, 23% and 10%
of accounts receivable, respectively. Two other customers accounted for 27% and
13% of accounts receivable at December 31, 1998.

Property and Equipment

Property and equipment are recorded at cost and depreciated using
straight-line methods over the estimated useful lives of the related assets,
ranging from two to five years. Equipment under capital lease arrangements as
well as leasehold improvements are amortized over the shorter of their useful
lives or the terms of the related leases.

Long-Lived Assets and Impairments

The Company periodically evaluates the carrying value of long-lived assets,
including, but not limited to, purchased software, property and equipment, and
other assets, when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately indentifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the long-lived asset. Fair
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Loss on long-lived assets to be

F-8
<PAGE> 92
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

disposed of is determined in a similar manner, except that fair values are
reduced for the cost to dispose.

Unaudited Pro Forma Stockholders' Equity

In accordance with the requirements of the Securities and Exchange
Commission ("SEC"), which provide that the total redemption value of Series A
and B mandatorily redeemable convertible preferred stock (the "Convertible
Preferred Stock") be excluded from stockholders' equity (deficit), the
redemption value of the Convertible Preferred Stock has been reflected in the
accompanying balance sheet as mandatorily redeemable convertible preferred
stock.

The board of directors has authorized management of the Company to file a
registration statement with the SEC permitting the Company to sell shares of its
common stock to the public. If the Company's initial public offering (the "IPO")
is consummated under the terms currently anticipated, all outstanding shares of
Convertible Preferred Stock will convert into 9,108,115 shares of common stock
of the Company. Unaudited Pro Forma Stockholders' Equity as of September 30,
1999, as set forth in the accompanying balance sheet, is adjusted to reflect
such conversion, the assumed "cashless exercise" of all outstanding common stock
warrants and Series A mandatorily redeemable convertible preferred stock
warrants, and the conversion of the Series A mandatorily redeemable convertible
preferred stock issued upon the assumed exercise of the latter warrants into
common stock, resulting in the issuance of 9,811,046 additional shares of common
stock.

Research and Development

Research and development expense includes costs incurred by the Company to
develop and enhance the Company's software. Research and development costs are
charged to expense as incurred.

Advertising

The Company expenses advertising costs as incurred. Advertising expenses
for the years ended December 31, 1996, 1997 and 1998 were approximately $98,000,
$433,000 and $66,000, respectively.

Software Development Costs

Software development costs are required to be expensed until the point that
technological feasibility of the product is established, after which time such
costs are capitalized until general availability of the product. The period
between achieving technological feasibility and the general availability of such
software has historically been short. Consequently, costs otherwise
capitalizable after technological feasibility have historically been immaterial
and therefore expensed as incurred.

Purchased software

Purchased software is held for resale under an exclusive license and is
capitalized and amortized ratably over a three-year estimated life. Accumulated
amortization was $0 and $213,000 (unaudited) as of December 31, 1998 and
September 30, 1999, respectively. See Note 8.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce

F-9
<PAGE> 93
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

deferred tax assets to the amount more likely than not to be realized. Income
tax expense is the tax payable for the period and the change during the period
in deferred tax assets and liabilities.

Stock Option Compensation

Stock option compensation expense is recognized in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.

Net Income (Loss) Per Share

Net income (loss) per common share is calculated in accordance with SFAS
No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per common share is computed by dividing the net income (loss) for the period by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per common share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
potential shares outstanding during the period if their effect is dilutive.
Potential common shares consist of incremental common shares issuable upon the
exercise of stock options and warrants and upon conversion of the Convertible
Preferred Stock and convertible promissory notes.

Unaudited Pro Forma Net Income (Loss) Per Common Share

The Company has computed unaudited pro forma basic net loss per common
share in accordance with the methodology in SFAS No. 128. The Company's
historical capital structure is not indicative of its prospective structure due
to the automatic conversion of all shares of Convertible Preferred Stock into
common stock concurrent with the closing of the Company's anticipated IPO.
Accordingly, historical basic net income (loss) per common share should not be
used as an indicator of future earnings per common share.

Unaudited pro forma basic net loss per common share is computed using the
weighted average number of common shares outstanding during the period. The
Company has assumed the conversion of all outstanding Convertible Preferred
Stock issued into common stock for all periods presented on a weighted average
share basis and the assumed "cashless exercise" of all outstanding common stock
warrants and Series A mandatorily redeemable convertible preferred warrants, and
the conversion of the Series A mandatorily redeemable convertible preferred
stock issued upon the assumed exercise of the latter warrants into common shares
as if such transactions occurred at the beginning of the respective period or at
the date of original issuance, if later.

F-10
<PAGE> 94
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)........................ $ 253 $(7,324) $(4,082) $(2,957) $(2,176)
Accretion of mandatorily redeemable
convertible preferred stock........... -- (55) (66) (50) (54)
------ ------- ------- ------- -------
Net income (loss) available to common
stockholders.......................... $ 253 $(7,379) (4,148) $(3,007) (2,230)
====== ======= =======
Effect of pro forma conversion of
securities:
Accretion of mandatorily redeemable
convertible preferred stock......... 66 54
------- -------
Pro forma net loss available to common
stockholders (unaudited)............ $(4,082) $(2,176)
======= =======
Denominator
Weighted average common shares
outstanding -- basic and diluted...... 476 390 390 390 438
====== ======= ------- ======= -------
Weighted average effect of pro forma
securities:
Series A mandatorily redeemable
convertible preferred stock......... 2,823 3,297
Series B mandatorily redeemable
convertible preferred stock......... 824 2,785
Common stock warrants................. 33 209
------- -------
Pro forma weighted average common shares
outstanding -- basic and diluted
(unaudited).............................. 4,070 6,729
======= =======
</TABLE>

Potentially dilutive securities totaling 1,782,855 and 5,737,092 for the
years ended December 31, 1997 and 1998, respectively, and 5,421,062 and
11,311,864 for the nine month periods ended September 30, 1998 and 1999,
respectively, were excluded from historical basic and diluted loss per common
share because of their anti-dilutive effect.

Comprehensive Income

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity during a period from
non-owner sources. During each of the three years ended December 31, 1998, and
the nine-month periods ended September 30, 1998 and 1999, the Company has not
had any significant transactions that are required to be reported as adjustments
to determine comprehensive income.

Unaudited Interim Financial Statements

The accompanying interim financial statements as of and for the nine-month
periods ended September 30, 1998 and 1999 are unaudited. In the opinion of the
Company, the unaudited interim financial statements have been prepared on the
same basis as the audited financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of

F-11
<PAGE> 95
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

the results of the interim periods. The financial data and other information
disclosed in these notes to financial statements for the related periods are
unaudited. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for any future periods.

Stock Split

On March 15, 1997, the Company effected a 600-for-one split of its common
stock. All references to shares, share prices and per share amounts have been
adjusted to reflect the stock split.

Recent Accounting Pronouncements

The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," which provides guidance on
recognizing revenue from software transactions, as amended by SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition." The Company applied the provisions of SOP 97-2 on a prospective
basis for new software transactions entered into as of January 1, 1998. The
adoption of this guidance did not have a material impact on the Company's
financial condition or results of operations.

Further guidance was published during 1998 in SOP 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions."
Additionally, the AICPA issued technical questions and answers on financial and
reporting issues related to SOP 97-2 in January 1999. The adoption of this
guidance will not have a material impact on the Company's financial condition or
results of operations.

2. BALANCE SHEET COMPONENTS

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
ACCRUED LIABILITIES
Accrued payroll.................................... $ 518 $ 171 $ 183
Operating lease obligation payable................. 461 203 74
Accrued interest................................... 18 269 10
Accrued license fee payable........................ -- 850 650
Other.............................................. 120 97 233
------ ------ ------
$1,117 $1,590 $1,150
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment......................... $ 879 $ 301
Computer hardware......................................... 2,241 1,435
Computer software......................................... 755 257
------- -------
3,875 1,993
Less accumulated depreciation and amortization.............. (1,793) (1,302)
------- -------
$ 2,082 $ 691
======= =======
</TABLE>

F-12
<PAGE> 96
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Assets underlying capital leases included above were approximately
$1,525,000 and $1,192,000 as of December 31, 1997 and 1998, respectively.
Accumulated amortization of assets under capital leases was approximately
$322,000 and $614,000 as of December 31, 1997 and 1998, respectively.

3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Unsecured convertible promissory notes payable to preferred
stockholders, net of debt discount of $51 and $50 at
December 31, 1997 and 1998, respectively; interest rate at
12%; principal and interest due at maturity on September
30, 1999.................................................. $ 449 $ 2,680
Note payable to bank, as modified on April 22, 1997;
principal and interest payable in monthly installments of
$11,165 until December 22, 1998; interest on the note is
at the prime rate plus 1.0% (9.5% as of December 31,
1997); secured by equipment and intellectual property
rights.................................................... 62 --
Unsecured notes payable to former employees; interest rates
ranging from 5.73% to 6.84%; principal and interest due in
equal annual installments with maturity dates through
2000...................................................... 290 246
Unsecured notes payable to software vendors for software
licenses; interest rate at 10.5%; principal and interest
were payable on January 1, 1998........................... 86 44
Unsecured notes payable to landlord for leasehold
improvements; interest rate at 9.5%; principal and
interest payable in monthly installments of $1,207 until
February 1, 2000.......................................... 33 16
Capitalized lease obligations............................... 1,371 795
------- -------
Total long-term debt................................... 2,291 3,781
Less current portion........................................ (1,352) (3,497)
------- -------
Long-term debt, excluding current portion.............. $ 939 $ 284
======= =======
</TABLE>

Maturities of long-term debt, including future minimum lease payments under
capitalized lease obligations, at December 31, 1998 are as follows (in
thousands):

<TABLE>
<CAPTION>
CAPITALIZED OTHER TOTAL LONG-TERM
LEASES DEBT DEBT COMMITMENTS
----------- ------ -----------------
<S> <C> <C> <C>
1999....................................... $614 $2,984 $3,598
2000....................................... 242 52 294
---- ------ ------
856 $3,036 $3,892
====== ======
Less: Amount representing interest......... (61)
----
Present value of capitalized lease
obligations (including $564 classified as
current)................................. $795
====
</TABLE>

Certain equipment financing agreements recorded as capital lease
obligations are subject to restrictive covenants contained in the credit
agreement that require XCare.net to maintain certain financial ratios. XCare.net
was not in compliance with the covenants as of December 31, 1998 and obtained a
waiver of compliance for all covenants through September 30, 1999. The capital
lease obligations under the financing agreements that included the restrictive
covenants were paid off during September 1999.

F-13
<PAGE> 97
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

On December 29, 1997 and April 10, 1998, the Company entered into bridge
loan agreements with related parties who were the holders of all the Company's
then outstanding preferred stock. There were two related party lenders, each of
which is represented by one of its general partners on our board of directors.
One of those directors is the chairman of the board. The loan agreements
provided for commitments for $2,500,000 of financing (the "1997 Convertible
Promissory Notes"), of which $500,000 was received in 1997. The remaining
$2,000,000 was received throughout 1998. In June 1999, the 1997 Convertible
Promissory Notes plus accrued interest aggregating approximately $2,924,000
converted at $0.27 per share into 10,831,800 shares of Series B mandatorily
redeemable convertible preferred stock in conjunction with the sale of Series B
mandatorily redeemable convertible preferred stock. In connection with the 1997
Convertible Promissory Notes, the Company issued warrants to purchase 437,062
shares of the Company's Series A mandatorily redeemable convertible preferred
stock at $0.25 per share. The warrants expire in 2002 through 2003 or upon an
IPO, if earlier. The value assigned to the warrants of $84,000, determined using
a Black-Scholes option pricing model, resulted in additional debt discount which
is being amortized to interest expense over the period that the Convertible
Promissory Notes are outstanding.

In November 1998, the Company entered into a second bridge loan agreement
with related parties who were the holders of all the Company's then outstanding
preferred stock. There were two related party lenders, each of which is
represented by one of its general partners on our board of directors. One of
those directors is the chairman of the board. These were the same related
parties that invested in the December 29, 1997 and April 10, 1998 bridge loans
described above. The loan agreement provided for $265,000 financing of which
$230,000 was received in 1998 and $35,000 was received in 1999 (the "1998
Convertible Promissory Notes"). In June 1999, the 1998 Convertible Promissory
Notes plus accrued interest aggregating approximately $280,000 converted at
$0.27 per share into 1,036,159 shares of Series B mandatorily redeemable
convertible preferred stock in conjunction with the sale of Series B mandatorily
redeemable convertible preferred stock. In connection with the 1998 Convertible
Promissory Notes, the Company issued warrants to purchase 200,000 shares of the
Company's common stock at $0.10 per share. The warrants expire in 2003 or upon
an IPO, if earlier. The value assigned to the warrants of $43,000 resulted in
additional debt discount which is being amortized to interest expense over the
period that the Convertible Promissory Notes are outstanding.

4. STOCKHOLDERS' EQUITY

Mandatorily Redeemable Convertible Preferred Stock

In March 1997, the Company issued 2,450,000 shares of $.01 par value Series
A mandatorily redeemable convertible preferred stock and received proceeds net
of issuance costs totaling approximately $6,622,000.

In June 1999, the Company issued 27,111,111 shares of $.01 par value Series
B mandatorily redeemable convertible preferred stock and received proceeds
totaling $7,320,000. Concurrently, outstanding Convertible Promissory Notes plus
accrued interest of approximately $3,204,000 in the aggregate were converted
into an additional 11,867,959 shares of Series B mandatorily redeemable
convertible preferred stock.

In July 1999, the Company issued 24,074,074 shares of $.01 par value Series
B mandatorily redeemable convertible preferred stock and received proceeds net
of issuance costs totaling $6,420,000.

F-14
<PAGE> 98
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

The holders of the Convertible Preferred Stock have the following rights
and preferences:

Voting Rights

The holders of the Convertible Preferred Stock and the common stock, voting
together as a single class, are entitled to vote upon any matter submitted to
the shareholders. The holders of the Convertible Preferred Stock are entitled to
one vote for each share of common stock that such holder would be entitled to
receive if the Convertible Preferred Stock were converted into common stock. The
holders of common stock have one vote per share of common stock.

Dividends

The holders of the Series A mandatorily redeemable convertible preferred
stock are entitled to receive, out of funds legally available, dividends payable
at amounts equal to the equivalent per share dividend declared on the common
stock. Holders of Series B mandatorily redeemable convertible preferred stock
are entitled to receive noncumulative dividends at the per annum rate of
$0.00216 per share, when and if declared by the board of directors. No dividends
have been declared to date.

Liquidation

In the event of any sale, liquidation, dissolution or winding up of the
Company, the holders of Series A and Series B mandatorily redeemable convertible
preferred stock are entitled to receive up to five times their original cost.
The holders of Series A mandatorily redeemable convertible preferred stock are
entitled to receive an amount of $2.86 per share plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
common stock. The holders of the Series B mandatorily redeemable convertible
preferred stock are entitled revise to receive an amount of $0.27 per share plus
any declared but unpaid dividends prior to and in preference to any distribution
to the holders of common stock. The remaining assets, if any, shall be
distributed ratably among the holders of common stock and the holders of
Convertible Preferred Stock on an as-converted basis. The holders of the
Convertible Preferred Stock stop participating in the remaining assets once they
have recovered five times their original cost.

Conversion

The 2,450,000 outstanding shares of Series A mandatorily redeemable
convertible preferred stock are convertible at the option of the holder into
2,802,800 shares of common stock. The original conversion ratio of the Series A
mandatorily redeemable convertible preferred stock into common stock was
one-for-one. This conversion ratio was adjusted during 1997 and 1998 to 1.144
shares of common stock for each share of Series A mandatorily redeemable
convertible preferred stock. The 63,053,144 shares of Series B mandatorily
redeemable convertible preferred stock are convertible at the option of the
holders into 6,305,322 shares of common stock, reflecting the rounding upwards
of all resulting fractional shares. Each share of Convertible Preferred Stock
automatically converts into common stock upon the closing of a public offering
at a per share price of at least $9.50 with gross proceeds of greater than
$15,000,000.

Redemption Rights

As of January 1, 2002, 2003 and 2004, each holder of the Convertible
Preferred Stock has the individual right to require the Company to redeem the
holder's shares by paying in cash $2.86 per share of Series A Convertible
Preferred Stock and $0.27 per share of Series B Convertible Preferred Stock, for
up to a maximum on each such date of one-third of the total shares of
Convertible Preferred Stock

F-15
<PAGE> 99
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

outstanding. The difference between the recorded value and the redemption value
of the mandatorily redeemable convertible preferred stock is being accreted
ratably over the period from issuance to redemption dates which approximates the
effective interest method.

Stock Warrants

In conjunction with the Series A mandatorily redeemable convertible
preferred stock offering, the Company issued warrants to purchase a total of
12,250 shares of common stock for $31.46 per share. The value assigned to these
warrants using a Black-Scholes option pricing model was immaterial. The warrants
are exercisable immediately and expire in 2005 or upon an IPO, if earlier.

In connection with the issuance of the 1997 Convertible Promissory Notes,
warrants to purchase 437,062 shares of the Company's Series A mandatorily
redeemable convertible preferred stock at $0.25 per share were issued to the
promissory noteholders. The exercise price of 262,238 of these warrants was
repriced from $0.50 to $0.25 in April 1998. The warrants expire December 2002
through April 2003 or upon an IPO, if earlier.

In connection with the issuance of the 1998 Convertible Promissory Notes,
warrants to purchase 200,000 shares of the Company's common stock at $0.10 per
share were issued to the promissory noteholders. The warrants expire November
and December of 2003 or upon IPO, if earlier.

As of September 30, 1999, all warrants remain outstanding.

5. CONTRACT TERMINATIONS AND RELATED CHARGES

During 1996, a major customer terminated its contract with the Company and
paid $2.3 million to settle all claims arising from the termination. During
1997, another major customer terminated its contract with the Company and paid
$250,000 to settle all claims associated with the termination.

As a result of these contract terminations, during 1997, the Company
abandoned an operating lease and incurred impairment charges for related fixed
assets aggregating $887,000.

6. EMPLOYEE BENEFIT PLANS

Stock Options

During 1997, the Company adopted a stock option plan (the "Plan") which
provides for the grant of stock options to directors, key employees, and
consultants. As of September 30, 1999, a total of 2,200,000 shares of common
stock are reserved for issuance under the Plan. The Plan provides for the
granting of incentive stock options to employees and nonqualified options to
employees, directors and consultants.

Stock options are granted with an exercise price not less than fair market
value of the common stock on the date of the grant, as determined by the board
of directors. The vesting period is determined by the board of directors and is
generally four years. The options generally expire ten years after the date of
grant. During February 1998, the board of directors reduced the exercise price
of 14,026 options from $2.80 to $0.50 and in July 1998, they reduced the
exercise price for 1,850 options from $0.50 to $0.25.

The Company records compensation expense related to stock options granted
to employees using the intrinsic value based method and includes a pro forma
disclosure in the footnotes for compensation value measured using the fair value
accounting treatment. Options granted to consultants are accounted for based on
the fair value of the consideration received or the fair value of the options
issued, whichever is more reliably measurable. For the fair value disclosure
below, compensation value is estimated for each option grant under the Plan on
the date of grant using a Black-Scholes-type option

F-16
<PAGE> 100
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

pricing model. The following assumptions were used for grants in 1997 and the
1998: risk-free rates corresponding to government securities with original
maturities similar to the expected option lives of 6.3% to 6.8% in 1997 and 4.5%
to 5.6% for 1998; expected dividend yield of 0% for both periods; volatility
factor of zero; and expected lives of approximately one year beyond vesting
dates for all periods.

Based on calculations using a Black-Scholes-type minimum value option
pricing model, the weighted-average fair value of options at grant date was
$0.79, $0.06 and $0.46 in 1997 1998, and for the nine months ended September 30,
1999, respectively. The pro forma impact on the Company's net loss and net loss
per share had compensation cost been recorded as determined in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" is shown below (in
thousands, except per share data).

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Net loss:
As reported............................................... $(7,324) $(4,082)
Pro forma................................................. (7,333) (4,089)
Net loss per common share:
As reported............................................... $(18.92) $(10.64)
Pro forma................................................. (18.94) (10.65)
</TABLE>

Total stock options outstanding and exercisable under the Plan as of
December 31, 1998 are as follows:

<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ---------------------------------------------------------------- ---------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICES SHARES EXERCISE PRICES
- --------------- --------- ---------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.25 1,118,450 9.5 $0.25 413,218 $0.25
2.80 11,667 8.3 2.80 11,667 2.80
--------- -------
$0.25 - 2.80 1,130,117 9.5 $0.28 424,885 $0.32
========= =======
</TABLE>

Total stock options outstanding and exercisable under the Plan as of
September 30, 1999 are as follows (unaudited):

<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
- ---------------------------------------------------------------- ---------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.25 820,400 9.2 $0.25 820,400 $0.25
2.70 659,425 9.9 2.70 659,425 2.70
2.80 11,667 7.5 2.80 11,667 2.80
---------
$0.25 - 2.80 1,491,492 1.35
=========
</TABLE>

F-17
<PAGE> 101
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Activity of the Plan is summarized in the following table:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
SHARES EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1996...... -- $ -- -- $ --
Options granted............................. 94,701 2.80
Less: options forfeited..................... (62,833) 2.80
----------

Options outstanding, December 31, 1997...... 31,868 2.80 12,967 2.80
Options granted............................. 1,120,600 0.25
Less: options forfeited..................... (22,351) 1.10
----------

Options outstanding, December 31, 1998...... 1,130,117 0.28 424,885 0.32
Options granted (unaudited)................. 1,029,825 1.82
Less: options exercised (unaudited)......... (167,163) 0.25
Less: options forfeited (unaudited)......... (501,287) 0.25
----------
Options outstanding, September 30, 1999
(unaudited)............................... 1,491,492 1.35 1,491,492 1.35
==========
</TABLE>

401(k) Plan

The Company has adopted an employee savings and retirement plan (the
"401(k) Plan") covering substantially all of the Company's employees. Pursuant
to the 401(k) Plan, eligible employees may elect to reduce their current
compensation by up to the statutory prescribed limit and have the amount of such
reduction contributed to the 401(k) Plan. The Company may make contributions to
the 401(k) Plan on behalf of eligible employees. The Company has not made any
contributions to the 401(k) Plan.

7. INCOME TAXES

Prior to January 1, 1996, the Company elected to be taxed under Subchapter
S of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly the
stockholders were responsible for payment of taxes on income earned by the
Company, and the Company distributed to stockholders annually an amount equal to
the estimated tax liability arising from operations. On January 1, 1996, the
Company revoked its election to be taxed under Subchapter S of the Code and
elected to be taxed under Subchapter C of the Code. In connection with the
change in status, the Company reclassified accumulated earnings of $576,000 to
additional paid-in capital to reduce accumulated earnings to zero as of the date
of the conversion. At December 31, 1998, the Company had net operating loss
("NOL") carryforwards of approximately $9.4 million which may be used to offset
future taxable income. These carryforwards expire beginning in 2012. The Code
contains provisions that may limit the NOL available for use in any given year
upon the occurrence of certain events, including significant changes in
ownership interest. A change in ownership of a company of greater than 50%
within a three-year period results in an annual limitation on the Company's
ability to utilize its NOL carryforwards from tax periods prior to the ownership
change. The Company's NOL carryforwards as of September 30, 1999 are subject to
annual limitations due to changes in ownership occurring in March 1997 and in
June 1999. Approximately $1,080,000 are limited to annual utilization of
approximately $60,000 and NOL carryforwards of approximately $9,000,000 are
limited to annual utilization of approximately $600,000, subject to adjustment
for realization of any built-in gains or losses. Future ownership changes could
further limit the utilization of the Company's NOLs.

F-18
<PAGE> 102
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

The provision for (benefit from) income taxes consists of the following (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 623 $ (627) $ --
State............................................. 126 -- --
Deferred:
Federal........................................... 374 (383) --
State............................................. 77 (68) --
------ ------- -------
Total............................................... $1,200 $(1,078) $ --
====== ======= =======
</TABLE>

The components of the Company's deferred income tax assets and liabilities
under FAS 109 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................................... $ -- $ 50
Impairment and exit cost accruals......................... 339 355
Employee benefits......................................... 77 57
Other..................................................... -- 35
Net operating loss carryforwards.......................... 2,122 3,681
Deferred tax liabilities:
Cash to accrual Section 481(a)............................ (375) (281)
Fixed asset sale and depreciation......................... (27) (187)
Amortization.............................................. -- (57)
Less: Valuation allowance................................... (2,136) (3,653)
------- -------
Net deferred tax asset.................................... $ -- $ --
======= =======
</TABLE>

The Company's deferred tax assets represent unrecognized future tax
benefit. A valuation allowance has been established for the entire tax benefit,
and no benefit for income taxes has been recognized in the accompanying
statement of operations as the realization of the potential assets is not more
likely than not.

The benefit for income taxes differs from the amount computed by applying
the U.S. federal income tax rate of 34% to loss before income taxes as follows
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Federal income tax benefit at 34%................... $ 494 $(2,856) $(1,388)
State income tax, net of federal benefit............ 135 (381) (166)
Effect of conversion to taxable status.............. 600 -- --
Change in valuation allowance....................... -- 2,136 1,517
Other............................................... (29) 23 37
------ ------- -------
Income tax expense (benefit)........................ $1,200 $(1,078) $ --
====== ======= =======
</TABLE>

F-19
<PAGE> 103
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES

The Company leases equipment and office space under various long-term
non-cancelable operating leases that expire in 2002. The following is a schedule
by year of future minimum lease payments under operating leases, at December 31,
1998 (in thousands):

<TABLE>
<S> <C>
1999..................................... $ 542
2000..................................... 106
2001..................................... 100
2002..................................... 100
-----
848
Less: sublease income.................... (169)
-----
$ 679
=====
</TABLE>

Total rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $288,000, $356,000 and $438,000, respectively.

In December 1998, the Company purchased an exclusive license for certain
software to be resold. This arrangement requires the Company to pay a royalty of
17.5% of all of its sales of the software. In the event the Company does not
satisfy specified minimum sales levels through June 30, 2000, the Company may
forfeit the exclusive rights to resell this software.

The Company has entered into another arrangement with a customer that
provides for a 10% royalty payment to the customer in the event the Company
resells the proprietary module developed for this customer.

9. SUBSEQUENT EVENTS

In July 1999, the board of directors amended all existing stock option
agreements under the Plan. The amendment provided that all options are
immediately exercisable. However, any shares acquired upon exercise are subject
to repurchase by XCare.net over a reverse vesting period that entitles the
optionee to exactly the same vesting schedule as the original grant. The
repurchase price is equal to the exercise price of the options.

During the nine months ended September 30, 1999, the Company issued stock
options to certain employees under the Plan with exercise prices below the
deemed fair value of the Company's common stock at the date of grant. The
Company has recorded unearned stock compensation for the difference between the
exercise price of the stock options and the deemed fair value of the Company's
common stock at the date of grant. This unearned stock compensation will be
amortized to expense over the period during which the options or common stock
subject to repurchase vest, generally four years, using an accelerated method as
described in Financial Accounting Standards Board Interpretation No. 28. As of
September 30, 1999, the Company has recorded unearned compensation related to
these options in the amount of $2,400,000, of which $112,000 has been amortized
to expense during the nine months ended September 30, 1999. Subsequent to
September 30, 1999, the Company granted additional options, certain of which had
exercise prices below the deemed fair value of the Company's common stock at the
date of grant and will record unearned compensation of approximately $233,000 in
the fourth quarter of 1999 to be amortized over the period of vesting.

Additionally, during September 1999, the Company granted an option to a
non-employee for 20,000 common shares with a strike price of $2.70 which vests
over twelve months or upon occurrence of an IPO, if earlier. The Company expects
to record a charge related to this option during the vesting

F-20
<PAGE> 104
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

period or at the time of closing the IPO. As of September 30, 1999, the Company
has recorded unearned compensation of $96,000 which will be amortized during the
aforementioned vest period and is subject to variable stock option accounting.

In September 1999, the board of directors increased the number of common
shares reserved for issuance under the Plan to 2,200,000.

In October 1999, the board of directors adopted an employee stock purchase
plan (the "Employee Stock Purchase Plan,") subject to shareholder approval which
will become effective immediately on the effective date of the IPO. A total of
500,000 shares of common stock have been reserved for issuance under the
Employee Stock Purchase Plan. The Employee Stock Purchase Plan permits eligible
employees to purchase common stock totaling up to 20% of an employee's
compensation through payroll deductions. The Employee Stock Purchase Plan for
U.S. employees is intended to qualify under Section 423 of the Internal Revenue
Code and contains consecutive overlapping twelve-month offering periods. Each
offering period includes two six month purchase periods. The price of common
stock to be purchased will be 85% of the lower of the fair market value of the
common stock either at the beginning of the offering period or at the end of
that purchase period.

In October 1999, the board of directors adopted the Director Option Plan,
subject to shareholder approval, which will become effective immediately on the
effective date of the IPO. A total of 250,000 shares of common stock have been
reserved for issuance under the Director Option Plan. Members of the board of
directors who are not employees of XCare.net are eligible to participate in the
Director Option Plan. The Director Option Plan provides for an automatic initial
grant of an option to purchase 25,000 shares of common stock (the "Initial
Grant") upon the later of the effective date of the Director Option Plan or the
date a person first becomes a non-employee director. After the Initial Grant, a
non-employee director will automatically be granted options to purchase 10,000
shares of common stock ("Subsequent Grant") each year on the date of XCare.net's
annual stockholder's meeting, if such director has served as a member of the
board for at least six months. The term of such options is ten years, provided
that they will terminate three months following the date the director ceases to
be a director of XCare.net or twelve months if the termination is due to death
or disability. Each Initial Grant will vest as to 25% of the shares on each
anniversary date of the date of grant and each Subsequent Grant will vest as to
100% of the shares on the anniversary date of the date of grant.

In October 1999, the board of directors approved an amendment to the
Company's certificate of incorporation, subject to shareholder approval,
whereby, after the IPO, the board of directors will have the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the designations, powers, preferences,
privileges, which may be greater than the rights of the common stock.

In October 1999, the board of directors approved an amendment to the
Company's certificate of incorporation, subject to shareholder approval, to
increase the number of authorized common shares to 100,000,000, as adjusted for
the pending one-for-ten reverse stock split.

During the fourth quarter ended December 31, 1999, the Company entered into
a professional services agreement with an entity whose managing member is a
general partner of one of the holders of the Company's preferred stock. The
Company recognized $453,000 in revenue under such agreement during the fourth
quarter ended December 31, 1999, and accounts receivable from this entity was
$453,000 at December 31, 1999.

The Company effected a one-for-ten reverse stock split of its common stock
in January 2000. All references in the financial statements to shares, share
prices, and per share amounts have been adjusted retroactively for all periods
presented to reflect the stock split.

F-21
<PAGE> 105
XCARE.NET, INC.

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

In January 2000, in order to settle a dispute, the board of directors
agreed to revise the exercise price of a warrant to purchase 12,250 shares of
common stock from $31.46 per share to $3.146 per share. As a result the Company
expects to record a charge of $132,000 during the first quarter of 2000.

F-22
<PAGE> 106

"MEET THE MANAGEMENT" PRESENTATION FOR
XCARE.NET

Prospective investors will be able to log on to a Web site maintained by
E*OFFERING Corp. at www.eoffering.com, where a prospectus is available for
review. Within designated sections of the prospectus, including the Underwriting
Section of the prospectus, an embedded hyperlink Iclick here for "Meet the
Management" PresentationJ will provide exclusive access to the "Meet the
Management" Presentation. This presentation highlights selected information
contained elsewhere in the prospectus. This presentation does not contain all of
the information that you should consider before investing in our common stock.
You should read the entire prospectus carefully, including the "Risk Factors"
and our financial statements and notes to those financial statements, before
making an investment decision.

Visual 1: Disclaimer

Imagery: Company logo.

Visual Text: The "Meet the Management" Presentation is part of our
prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.

Script: (Lorine Sweeney) The "Meet the Management" Presentation is part of
our prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.

Visual 2: Introduction

Imagery: See Description of Artwork on page 110 of the Registration
Statement for a description of the image located on the inside front cover of
the prospectus.

Script: (Lorine Sweeney) Welcome to the "Meet the Management" Presentation
for XCare.net. I'm Lorine Sweeney, President and CEO. I would like to introduce
you to Peter Cheesbrough, our Chief Financial Officer. We would like to talk to
you about XCare.net, an electronic commerce service provider for health care
businesses. At XCare.net, we have developed an Internet-based technology
platform using extensible mark-up language, or XML, that processes health care
transactions and provides related services for payers, providers and other
health care industry participants. We process transactions such as eligibility
checking, claims submission, referral processing, physician credentialing and
appointment scheduling.

Visual 3: Health Care: Market Opportunities

Imagery: Border and Company logo. There is a horizontal bar chart depicting
growth in U.S. health care expenditures.

Visual Text: Title: Health Care: Market Opportunity. Subheading: "Total
U.S. Health Care Expenditures." Footnote at the bottom with the caption,
"Source: U.S. Health Care Finance Administration."

Script: (Lorine Sweeney) (see "Business--Overview--Health Care Market
Overview"): The U.S. Health Care Finance Administration estimates that health
care expenditures currently represent $1.2 trillion, or 14% of the U.S. economy,
and that these expenditures will increase to $2.0 trillion by 2007 due both to
rising health care costs and an aging population. Health care claims, which
totaled approximately 4.4 billion in 1998, generally are processed through
antiquated computer systems via paper, fax or phone. These systems can be
inefficient and lead to unnecessary and duplicative costs.

A-1
<PAGE> 107

Visual 4: Health Care: Industry Participants

Imagery: Border and Company logo. See Description of Artwork on page 109
of the Registration Statement for a description of the image located on page 35
of the prospectus.

Visual Text: Title: Health Care: Industry Participants.

Script: (Lorine Sweeney) (see "Business -- Overview -- Health Care Market
Overview"): The health care industry is currently one of the most complex
markets due to the numerous interrelationships among health care participants.
The payment for and delivery of health care requires that consistent, accurate
information be shared confidentially among health care participants across a
large and fragmented industry. For instance, individuals compare medical plans,
choose physicians and submit claims for reimbursement. Physicians, hospitals and
other providers verify patient eligibility, collect patient histories, order
diagnostic tests and x-rays, render diagnoses and submit claims to payers. And
payers manage referrals, establish medical care protocols and reimbursement
policies and process claims. These health care transactions all are highly
dependent on the collection and communication of information, and each
participant is dependent on the others for portions of that information.

Visual 5: Market Characteristics and Issues

Imagery: Border and Company logo. On the top left there will be a box with
the caption "Market Fragmentation" with bulleted text underneath.

Visual Text: Title: Health Care: Market Characteristics and Issues. Within
the "Market Fragmentation" box, bullets will read:

- Geographic fragmentation

- Technological fragmentation

Script: (Lorine Sweeney) (see "Business -- Overview -- Market
Characteristics"): The health care market is highly fragmented with wide
geographic dispersion, a larger number of participants and significant
differences in technology infrastructure. Because health care is delivered
locally, there are hundreds of thousands of market participants in different
locations. In addition, current technology infrastructure in health care is
characterized by numerous incompatible and, in many cases, antiquated computer
systems.

Visual 6: Market Characteristics and Issues (con't)

Visual Text: Title: Health Care: Market Characteristics and Issues. Within
the "Market Fragmentation" box, bullets will read:

- Geographic fragmentation

- Technological fragmentation

Within the "Complex Processes" box, bullets will read:

- Transition to managed care

- Intensive data management

- No standard data format or business rules

- Complexity of procurement, purchasing and payment processes

- Increasing government regulation

A-2
<PAGE> 108

Script: (Lorine Sweeney) (see "Business -- Overview -- Market
Characteristics"): Furthermore, health care is delivered in a marketplace which
has become increasingly complex. As managed care has become more prevalent and
the number of payers has increased, provider reimbursement and general
administration has become increasingly burdensome. Adding to the complexity are
the data-intensive nature of health care transactions, the lack of standard data
formats, the complicated procurement process and the pervasiveness of government
regulation.

Visual 7: Market Characteristics and Issues (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. On the top left there will be a box with the caption "Market
Fragmentation" with bulleted text underneath. On the bottom left there will be a
box with the caption "Complex Processes" with bulleted text underneath. An arrow
connecting the two boxes on the left side of the slide will point to the right
side of the slide, which will have a box with the caption "Inefficiencies" with
bulleted text underneath.

Visual Text: Title: Health Care: Market Characteristics and Issues. Within
the "Market Fragmentation" box, bullets will read:

- Geographic fragmentation

- Technological fragmentation

Within the "Complex Processes" box, bullets will read:

- Transition to managed care

- Intensive data management

- No standard data format or business rules

- Complexity of procurement, purchasing and payment processes

- Increasing government regulation

Within the "Inefficiencies" box, bullets will read:

- Inability to manage and exchange data

- Lack of real-time and secure communication

- Rising costs

Script: (Lorine Sweeney) (see "Business -- Overview -- Current Health Care
Market Issues" and "-- Health Care Market Overview"): As a result of the
fragmentation and complexity of the health care market, participants are unable
to cost-effectively manage, communicate and exchange information in real-time.
This fragmentation and complexity has resulted in increasing dissatisfaction
among health care participants. We believe that the provision of new,
Internet-based, business-to-business information exchange and electronic
commerce services that effectively address processing inefficiencies is one of
the significant market opportunities in health care today.

Visual 8: XCare.net Solution

Imagery: Border and Company logo. See Description of Artwork on page 110
of the Registration Statement for a description of the image located on the
inside front cover of the prospectus labeled "Solution Model."

Visual Text: Title: XCare.net Solution.

Script: (Lorine Sweeney) (see "Summary" and "Business -- Our Solution"):
Utilizing our proprietary technology platform, which we call the XCare.net
platform, we design and develop custom health care Web sites, known as portals.
Through these portals we link health care providers, payers and other industry
participants into an Internet exchange to create a community. We use the
XCare.net platform to deliver a broad range of applications, services and
electronic product offerings that

A-3
<PAGE> 109

streamline and automate high-volume, data-intensive transactions and processes.
This automation reduces the need for information exchange by telephone,
facsimile or mail and redundant manual data entry into multiple computer
systems. Our portal applications are designed to improve workflow efficiencies,
reduce administrative costs and enhance efficiency of the health care delivery
and payment system. Our approach to the market is based on the following:

Visual 9: XCare.net Solution (con't)

Imagery: Border and Company logo. One arrow on the left of the page
pointing to the right.

Visual Text: Title: XCare.net Solution. To the right of the arrow will
appear the caption "Use of new standard for information exchange".

Script: (Lorine Sweeney) (see "Business -- Our Solution"): The XCare.net
platform and associated applications and services are based on extensible
mark-up language, or XML. Extensible mark-up language provides a document
structure that allows complex data from multiple sources to be dynamically
processed and displayed to users in personalized ways. We will review extensible
mark-up language in greater detail when we discuss technology on slide 18. We
believe that these capabilities are particularly applicable to the health care
industry because extensible mark-up language can process data trapped in
pre-existing computer systems, allow for automation of health care processes and
integrate a wide array of health care data including audio, video and text.

Visual 10: XCare.net Solution (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. Two arrows on the left of the page pointing to the right.

Script: (Lorine Sweeney) (see "Business -- Our Solution"): We have
developed a step by step approach to assist our customers in designing a health
care Internet strategy, creating a customized portal and hosting their Internet
offerings and transactions in a secure and reliable data operations
infrastructure. The XCare.net platform is designed to provide a comprehensive
set of applications, services and product offerings while preserving previous
technology investments by integrating diverse multimedia content, including data
and information from large, existing and usually incompatible computer systems.

Visual 11: XCare.net Solution (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. Three arrows on the left of the page pointing to the right.

Visual Text: Title: XCare.net Solution. To the right of the first arrow
will appear the caption "Use of new standard for information exchange". To the
right of the second arrow will appear the caption "Ability to develop
comprehensive customer strategies". To the right of the third arrow will appear
the caption "Solution Channels" that provide value to other health care industry
participants.

Script: (Lorine Sweeney) (see "Business -- Our Solution"): We use our
XCare.net platform as the central element for a network of business
relationships among health care industry participants who use our technology,
thus creating collaborative electronic communities for the exchange of
healthcare data, products and services. We call these communities our Solution
Channels, and use them to distribute our applications, services and product
offerings. In addition, our Solution Channels are designed to provide a means
for our customers, vendors, distributors, co-marketers and others to offer their
own related products and services to each other, as well as to their own
customers.

A-4
<PAGE> 110

Visual 12: XCare.net Strategy

Imagery: Border and Company logo. XCare.net logo along with the word
"Strategy" in center of page. A circle filled with a text heading will be
connected to the logo as a spoke.

Visual Text: Title: XCare.net Strategy. The surrounding circle will include
the following caption:

- Cross-sell applications, services and electronic commerce product
offerings in our Solution Channels

Script: (Lorine Sweeney) (see "Business -- Strategy"): Our strategy to grow
the Company focuses on the following initiatives. First, our Solution Channels
distribution model is designed to promote new applications, services and
electronic commerce product offerings that are either internally developed or
obtained through our growing number of customer and vendor relationships. This
cross-selling approach is designed to simplify the sales process, and may
shorten our sales cycle and reduce our cost of sales.

Visual 13: XCare.net Strategy (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. XCare.net logo along with the word "Strategy" in center of page.
Two circles filled with text headings will be connected to the logo as spokes.

Visual Text: Title: XCare.net Strategy. Each of the two surrounding circles
will include one of the following captions:

- Cross-sell applications, services and electronic commerce product
offerings in our Solution Channels

- Penetrate target market segments

Script: (Lorine Sweeney) (see "Business -- Strategy"): We will continue to
target the more than 12,000 entities in the payer/third-party administrator,
at-risk provider and health care supplier market segments. These potential
customers have the influence to drive change in health care processes, and have
the incentive to lower their operating costs by adopting new process improvement
technologies such as the Internet.

Visual 14: XCare.net Strategy (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. XCare.net logo along with the word "Strategy" in center of page.
Three circles filled with text headings will be connected to the logo as spokes.

Visual Text: Title: XCare.net Strategy. Each of the three surrounding
circles will include one of the following captions:

- Cross-sell applications, services and electronic commerce product
offerings in our Solution Channels

- Penetrate target market segments

- Develop new applications, services and product offerings

Script: (Lorine Sweeney) (see "Business -- Strategy"): We will continue to
develop a variety of applications, services and product offerings to address
operational inefficiencies in the health care industry. As Internet strategies
in the health care and other industries evolve and new relationships between
organizations are formed, we intend to continue to identify new development
opportunities.

A-5
<PAGE> 111

Visual 15: XCare.net Strategy (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. XCare.net logo along with the word "Strategy" in center of page.
Four circles filled with text headings will be connected to the logo as spokes.

Visual Text: Title: XCare.net Strategy. Each of the four surrounding
circles will include one of the following captions:

- Cross-sell applications, services and electronic commerce product
offerings in our Solution Channels

- Penetrate target market segments

- Develop new applications, services and product offerings

- Leverage existing applications, services and product offerings

Script: (Lorine Sweeney) (see "Business -- Strategy"): We seek to identify
key functions that are critical to particular industry participants and develop
solutions supporting these functions. We intend to regularly review existing
applications, services and product offerings to extend their functionality,
transaction capabilities and features as customer needs dictate.

Visual 16: XCare.net Strategy (con't)

Imagery: Border and Company logo. The slide imagery will "lay over" the
previous slide. XCare.net logo along with the word "Strategy" in center of page.
Five circles filled with text headings will be connected to the logo as spokes.

Visual Text: Title: XCare.net Strategy. Each of the five surrounding
circles will include one of the following captions:

- Cross-sell applications, services and electronic commerce product
offerings in our Solution Channels

- Penetrate target market segments

- Develop new applications, services and product offerings

- Leverage existing applications, services and product offerings

- Form customer, vendor, distributor and co-marketing relationships with
leading health care participants

Script: (Lorine Sweeney) (see "Business -- Strategy"): We are aggressively
pursuing relationships with leaders in key health care industry segments to
increase our portfolio of applications, services and product offerings, to
increase the scope of our XCare.net community of users and to provide
specialized industry expertise for new solutions. These relationships are
intended to accelerate market awareness and demand for our applications,
services and product offerings.

A-6
<PAGE> 112

Visual 17: Applications, Services and Product Offerings

Imagery: Border and Company logo. Three vertical rectangles with the
titles "Applications," "Services" and "Product Offerings."

Visual Text: Title: Applications, Services and Product Offerings. Includes
three rectangles for Applications, Services and Product Offerings. Each
rectangle will include captions listing the following names of the Company's
applications, services and product offerings. Footnote will read, "* We are
currently marketing these applications and product offerings but have not yet
recognized revenue from sales."
- --------------------------------------------------------------------------------

APPLICATIONS
eXtensible CARE System
eXtensible CARE Transactions
MatchNet Staffing & Scheduling*
Physician Credentialing*
Electronic Medical Record*
Medication and Medical
Assessment Inquiry Systems*
Physician Practice Management*
Provider and Payer Profiling and
Report Cards*
Document Management*
Decision Support System*
Remote Patient Monitoring*
SERVICES
eHealth Development Discipline
Custom Portal Integration & Hosting
Third-Party Administration/
Management Service Organization
Outsourcing Services
eHealth Operations Management
PRODUCT OFFERINGS
MDPay Accelerator*
Online Drug Store*
Medical Supply Product*

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

Script: (Lorine Sweeney) (see "Business -- Applications, Services and
Product Offerings"): We provide a range of applications, services and product
offerings that support the management of health care data and facilitate health
care business connectivity, information exchange and electronic commerce among
health care industry participants. Our applications, services and product
offerings, which may incorporate licensed components, are designed to enable our
customers to preserve investments in existing computer systems while integrating
new Internet-based products and services. For example, the eXtensible CARE
Transactions application facilitates submission, adjudication, remittance and
verification transactions for a variety of managed care functions such as
claims, capitation, authorizations, referrals, eligibility, enrollment and
benefits. The eHealth Operations Management service provides a secure, 24 hours
a day, seven days a week environment for Internet hosting of transactions and
multi-media content. And, the Online Drug Store facilitates the purchase of
brand-name pharmaceutical and personal health care products, as well as access
to decision making resources.

Visual 18: Technology

Imagery: Border and Company logo. See Description of Artwork on page 109
of the Registration Statement for a description of the image located on page 40
of the prospectus.

Visual Text: Title: Technology

Script: (Lorine Sweeney) (see "Summary" and "Business -- Technology"): Our
XCare.net platform is based on an extensible mark-up language, or XML-based
infrastructure in conjunction with the Topic Navigation Mapping standard. The
enhanced capabilities of this platform are designed to meet the demands of
health care industry participants. We expect extensible mark-up language to be a
predominant protocol for exchanging multimedia data for information exchange and
electronic commerce in the future. Unlike the current Internet standard,
hypertext mark-up language, or HTML, extensible mark-up language in combination
with the Topic Navigation Mapping standard allows a higher degree of flexibility
for customized data exchange between health care participants. Extensible
mark-up language enables us to attach meaning to a piece of data. For example,
information in numerical format acquires meaning once it is defined as
representing a healthcare plan number, a social security number, birth date or a
zip code. Topic Navigation Mapping provides a standard format for indexing and
structuring the

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<PAGE> 113

extensible mark-up language formatted content. We call the resulting indices and
structures Topic Maps. We take advantage of the benefits of both extensible
mark-up language and Topic Navigation Mapping technologies to process data
previously trapped in usually incompatible computer systems, allow for
automation of health care processes and integrate a wide variety of health care
data including data in audio, video and text form. We use a set form of software
applications, known as brokering components, to find, integrate and present
relevant, customized information to individual users.

Visual 19: Customers

Imagery: Border and Company logo. Three vertical rectangles with the titles
"Health Care Providers", "Health Care Payers" and "Health Care Suppliers."

Visual Text: Title: Customers. Rectangles include captions listing the
following customers:

<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
HEALTH CARE PROVIDERS HEALTH CARE PAYERS HEALTH CARE SUPPLIERS
- ----------------------------------------------------------------------------------------------------------------
- - American Medical Pathways, Inc., a - Advica Health Resources - ADIS International Ltd
subsidiary of American Medical - Community Health Electronic - Clinical Solutions LLC
Response Clearing House - Expert Practice Inc.
- - Breathnet LLC - Employers Mutual, Inc., a wholly - NotifyMD, Inc.
- - Delta Health Systems owned subsidiary of Florida - Nursefinders, Inc.
- - Methodist Care, Inc. Physicians Insurance Company,
- - Quest Diagnostics Incorporated and Brokerage Services, Inc., a
- - University of Southern division of Employers Mutual, Inc.
California -- Doheny Eye Institute - Provider Services, Incorporated
</TABLE>

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

Script: (Lorine Sweeney) (see "Business -- Customers" and "-- Our
Solution"): The following is a representative list of our customers that have
purchased applications or services. Customers and vendors can utilize our
Solution Channels as distribution channels for existing as well as new products
and services that allow them to generate new sources of incremental revenue. For
example, we package our eXtensible CARE applications system with medical
management and third party administration services provided by Employers Mutual,
Inc. These transactions are then distributed to members of the XCare.net
community such as American Medical Pathways, Inc., a subsidiary of American
Medical Response, Inc.

Visual 20: Competition

Imagery: Border and Company logo. Page with three arrows on the left of the
page pointing to the right.

Visual Text: Title: Competition. Subheading: "Potential competitors fall
primarily into three categories." To the right of the first arrow will appear
the caption, "Health care Internet companies." To the right of the second arrow
will appear the caption, "Traditional health care information system vendors."
To the right of the third arrow will appear the caption, "Traditional managed
care information system and outsourcing vendors."

Script: (Lorine Sweeney) (see "Business -- Competition"): Potential
competitors fall primarily into three categories. First, health care Internet
companies focused on providing connectivity and transactions within
business-to-business and business-to-consumer frameworks. Second, traditional
health care information system vendors who seek to extend the services of their
core products using Internet-based technology. And third, traditional managed
care information system and outsourcing vendors who are focusing on extending
the services of their core products to the Internet.

And with that, I will turn it over to Peter for an overview of our
financial results. Peter . . .

Visual 21: Financial Summary

Imagery: Border and Company logo. Selected Quarterly Results of Operations
(March 31, 1998 -- September 30, 1999). See table on page 30 of the Registration
Statement.

Visual Text: Title: Financial Summary. "Quarterly Results of Operations"
table.

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Script: (Peter Cheesbrough) (See "Summary -- Recent Results,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "-- Quarterly Results of Operations"):

We commenced operations in March 1989, but we did not begin to focus on
Internet-based health care solutions until mid-1998. We have historically
derived a significant portion of revenue from sales of mainframe and
client-server software for managed health care systems and from providing
services to health care organizations seeking to outsource administrative
functions. We intend to derive an increasing portion of our future revenue from
our Internet-based applications, services and product offerings. Accordingly, we
believe that our historical financial results are not necessarily indicative of
our future financial performance.

The following table sets forth unaudited statement of operations data for
each of the seven quarters ended September 30, 1999. This information has been
derived from our unaudited financial statements. These unaudited quarterly
results should be read in conjunction with the financial statements and notes
thereto appearing elsewhere in the prospectus.

During the quarter ended December 31, 1998, general and administrative
expense increased in absolute dollars and as a percentage of revenue due to an
approximate $360,000 loss on disposal of fixed assets. During the quarter ended
March 31, 1999, sales and marketing and general administrative expense declined
in both dollars and as a percentage of revenue due to substantial reductions of
personnel costs. During the quarter ended September 30, 1999 we increased
general and administrative personnel by 68%, and recruiting and relocation costs
increased by $192,000 reflecting costs associated with recruiting new employees.

In closing, although we have not yet completed the audit for the year ended
December 31, 1999, our results of operations for the three months ended December
31, 1999 are expected to reflect approximately $2.0 million of revenue
(unaudited), an increase of 146% from $813,000 (unaudited) for the three months
ended September 30, 1999.
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Lorine . . .

Visual 22: End of Presentation

Imagery: See Description of Artwork on page 110 of the Registration
Statement for a description of the image located on the inside front cover of
the prospectus.

Script: (Lorine Sweeney): We hope that this presentation was helpful in
understanding the business model of XCare.net and the strategy that our
management team intends to execute. We encourage you to refer back to the
prospectus for additional support and disclosure as well as to look at the "Risk
Factors" in detail. Again, thank you for your interest in XCare.net.

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