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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number 0-13591                                                                 

HEALTHAXIS INC.

5215 N. O’Connor Blvd., 800 Central Tower, Irving, Texas 75039
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (972) 443-5000

Former name, former address and former fiscal year, if changed since last report: N/A

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 53,565,815 shares of common stock, par value $.10, outstanding as of August 4, 2003.

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Healthaxis Inc.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Healthaxis Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

(In thousands except share and per share data) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations

(In thousands, except share and per share data) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands except share and per share data)
June 30, 2003

Note A — Description of business and basis of presentation

Unaudited Financial Information

     The unaudited condensed consolidated financial statements have been prepared by Healthaxis Inc. and its subsidiaries (“Healthaxis” or the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments consisting of normal recurring entries, which, in the opinion of the Company, are necessary to present fairly the results for the interim periods. The interim financial statements do not include all disclosures provided in fiscal year end financial statements prepared in accordance with accounting principles generally accepted in the United States, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. Results of operations for the six-month period ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

General

     Healthaxis is a technology and business process services firm committed to providing innovative and configurable web-based connectivity and applications solutions for health benefit distribution and administration. These solutions, which are comprised of software products and related services, are designed to assist health insurance payers, government agencies, third party administrators and health and welfare plans in providing enhanced services to members, employees, employers and providers through the application of Healthaxis’ flexible technology to legacy systems, either on a fully integrated or on an Application Service Provider (“ASP”) basis. These technology solutions are complimented by Healthaxis’ Business Process Outsourcing (“BPO”) services, including mailroom, scan, data capture, and claims pre-adjudication services. These services are offered to its technology clients and on a stand-alone basis.

     Healthaxis is a Pennsylvania corporation organized in 1982. Healthaxis’ common stock trades on the Nasdaq SmallCap Market under the symbol “HAXS.” The operations of Healthaxis during 2001 were conducted primarily through its subsidiary, Healthaxis.com, Inc. In the fourth quarter of 2001 the Company reorganized and formed a new subsidiary, Healthaxis, Ltd., through which all operations are now conducted. Unless otherwise indicated, or the context otherwise requires, all references in this document to the “Company” or “Healthaxis” include Healthaxis Inc. and all of its subsidiaries.

Reclassifications of prior period amounts

     Certain prior period amounts have been reclassified to conform with the 2003 presentation or in accordance with applicable accounting requirements.

Loss Per Share

     Basic loss per share is computed only on the weighted average number of common shares outstanding during the respective periods. Diluted loss per share is computed to show the dilutive effect, if any, of stock options and warrants using the treasury stock method based on the average market price of the stock during the respective periods. The effect of including the stock options, warrants and shares issuable upon conversion of the

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Company’s convertible preferred stock into the computation of diluted earnings per share would be anti-dilutive. Accordingly, these items have not been included in the computation.

Stock-Based Compensation

     The Company selected an accounting policy which requires only the excess of the market value of its common stock over the exercise price of options granted to be recorded as compensation expense (intrinsic method). Pro forma information regarding net loss is required as if the Company had accounted for its employee stock options under the fair value method. Pro forma net loss applicable to the option granted is not likely to be representative of the effects on reported net loss for future years. The fair value for these options is estimated at the date of grant using a Black-Scholes option pricing model. Stock compensation determined under the intrinsic method is recognized over the vesting period using the straight-line method.

     Had compensation cost for the Company’s stock option grants been determined based on the fair value at the date of grants in accordance with the provisions of SFAS 123, the Company’s net loss and net loss per common share would have been increased to the following pro forma amounts:

Note B — Recently Adopted Accounting Pronouncements

     In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). For most companies, SFAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4. Upon adoption, any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of Opinion 30 for such classification will be reclassified to conform with the provisions of SFAS 145. The provisions of this statement related to the rescission of SFAS 4 shall be applied in fiscal years beginning after May 15, 2002. The Company adopted the provisions of this statement effective January 1, 2003, and anticipates the reclassification of extraordinary gains reported in prior periods to be included in the gain or loss from operations.

     Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than at the date of commitment to an exit or disposal plan. SFAS 146 is effective for exit and disposal activities that are initiated after December 29, 2002. The adoption of SFAS 146 is not expected to have a significant impact on the financial position or results of operations of the Company.

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     On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a significant impact on the financial position or results of operations of the Company.

Note C — Significant Customer Concentrations

     For the three months and the six months ended June 30, 2003, four customers (including UICI) accounted for $2,963 (54%) and $5,870 (55%), respectively, of the Company’s total revenues. At June 30, 2003, one customer accounted for $1,045 of the Company’s accounts receivable.

Note D — Contracts in Progress

     The Company uses contract accounting for certain contracts where significant software modification is performed or where services are performed that are essential to the functionality of the delivered software. Generally, contracts that include significant software modification are accounted for using the percentage of completion method. Contracts with significant customer acceptance provisions are recognized using the completed contract method upon achieving customer acceptance of the completed project. During the six months ended June 30, 2003, the Company had one contract in progress under each method.

     The Company has accounted for activities under a government related contract on the percentage of completion method. Due to the relative uncertainty of the profit margin to be achieved from the contract, the Company has used a zero margin approach for recording revenues for this contract. As of June 30, 2003, costs, earnings and billings to date on the contract are as follows:

     The Company has accounted for activities under a second government related contract under the completed contract method. As of June 30, 2003, costs and billings to date on the contract are as follows:

     Net unbilled receivables and billings on uncompleted contracts in excess of costs totaling $467 are presented as costs in excess of billings.

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Note E — Other Liabilities

     Other liabilities totaled $1,387 and $1,085 at June 30, 2003, and December 31, 2002, respectively and consists of contingent tax liabilities. In June 2003, the Company received a tax refund in the amount of $324 that was recorded as a liability pending final resolution of the matter.

Note F — Related Party Transactions

     The Company conducts business with a major shareholder, UICI. At June 30, 2003, UICI owned approximately 46% of the Company’s outstanding common stock and owns warrants to purchase 222,396 shares of the Company’s common stock at prices ranging from $3.01 to $12.00 per share. UICI also owns 1,424 shares of the Company’s Series A convertible preferred stock that are convertible into 542,477 common shares.

     For the three months ended June 30, 2003 and 2002, UICI and its subsidiaries and affiliates accounted for $487 (9%) and $404 (9%), respectively, of the Company’s revenues from continuing operations. For the six months ended June 30, 2003 and 2002, UICI and its subsidiaries and affiliates accounted for $942 (9%), and $1,247 (13%), respectively, of the Company’s revenues from continuing operations. As of June 30, 2003, Healthaxis had accounts receivable due from UICI and its subsidiaries and affiliates totaling $137.

     The Company previously provided services to a number of UICI subsidiaries and affiliates pursuant to the UICI Information Technology Services Agreement. In June 2002, the Company and UICI terminated this agreement. Notwithstanding this termination, the Company continues to provide products and services to UICI.

     Revenues from UICI related to discontinued operations totaled $3,578, and $8,078, for the three months and the six months ended June 30, 2002, respectively (See Note H).

Note G — Cumulative Effect of Accounting Change

     Effective January 1, 2002, the Company adopted Statements of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002), annually thereafter and upon the occurrence of any event that indicates potential impairments. In the second quarter of 2002, the Company completed a transitional goodwill impairment test. This test resulted in an impairment charge totaling $6,674. The impairment charge is shown as a cumulative effect of an accounting change as of January 1, 2002.

Note H — Discontinued Operations

     On June 11, 2002, the Company entered into an agreement with UICI terminating the amended Information Technology Services Agreement (the “Agreement”) between the two parties. The Agreement was originally entered into on January 3, 2000 in conjunction with the merger of Healthaxis.com, Inc and Insurdata Incorporated. Under the terms of the termination agreement, UICI made a one-time cash payment to Healthaxis in the amount of $6,500 and tendered 500,000 shares of Healthaxis common stock back to the Company. In return, approximately 165 Healthaxis employees that were previously dedicated to providing services to UICI under the Agreement were transferred to and became employees of UICI on June 15, 2002. Due to the related party nature of the transaction, the Company recorded the net proceeds, $6,359, as a contribution of capital from a significant shareholder. A loss on disposal of discontinued operations in the amount of $3,564 was recorded as a result of the termination. The loss consisted of impairment charges for goodwill and customer base totaling $484 and $3,080, respectively. The impairment charges result from a write off of the entire amount of goodwill and customer base attributable to the Agreement.

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     The Company previously reported the revenues and expenses associated with the Agreement as those from the UICI Outsourcing segment. As a result of the termination of the Agreement, the Company’s financial statements have been prepared with the UICI Outsourcing segment results of operations presented as discontinued operations. All historical financial statements presented have been restated to conform to this presentation.

     The operating results of the discontinued UICI Outsourcing segment for the three and the six months ended June 30, 2002 are as follows:

Note I — Segment Reporting

     As of January 1, 2003, the Company’s operating segments were:

	•		Technology & Operations - provides web-enabled systems for enrollment, administration and processing of health insurance claims on an ASP basis, connectivity platforms and solutions for self service (broker, employer, employee and providers), large group enrollment and small group enrollment, sale/distribution and post-sale administration of group and individual insurance policies including health, life and dental insurance.
	•		BPO Services Group - provides electronic data capture, imaging, storage and retrieval of health insurance claims, attachments and other correspondence, and claims pre-adjudication services.

     Prior to 2003, the Company maintained three operating business segments. On January 1, 2003, two of the Company’s three business units (formerly known as Web Connectivity Products and Benefit Administration and Claims Processing Systems) were consolidated into one reporting unit named Technology & Operations. Additional segment reporting changes include a change in the classification of sales and marketing expenses and a change in the classification of other operating expenses. Sales and marketing is included as a component of Corporate Overhead, not allocated to the reporting units as in the past. Certain operating expenses that were previously allocated to all reporting units are now included solely in Technology & Operations. These costs are associated with operating the Healthaxis Customer Care unit and other customer security and infrastructure issues. All segment information has been restated for prior periods to conform with this new presentation.

     Each business segment generally sells its products and services to the same constituent users, generally located in the United States, namely healthcare payers, which include insurance payers, government agencies, third party administrators and health and welfare plans.

     All revenue is specifically associated with a separate business unit and therefore there are no reconciling items. Earnings before interest, income tax, depreciation and amortization (“EBITDA”), as defined, is the primary

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liquidity measurement used by management to make decisions regarding the segments. EBITDA, as defined by the Company, also excludes restructuring and impairment, severance and non-cash stock based compensation charges (“EBITDA As Defined”). However, EBITDA As Defined is not a measure defined in generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to operating income as determined in accordance with GAAP. EBITDA As Defined does not consider depreciation and amortization of software and equipment, which could be significant with increased capital expenditures. Management does not consider these expenses significant for purposes of evaluating separate business unit liquidity. Management believes that the EBITDA As Defined measurement is useful in monitoring basic cash flow generated and used in the Company’s core operating activities, and in monitoring the effects of changes made by management in the Company’s operations across different time periods. This factor alone is insufficient to measure all of the Company’s operating characteristics and is used in conjunction with GAAP operating income to measure total operating performance. EBITDA As Defined may not be comparable to similarly titled measures reported by other companies. Corporate overhead includes executive management, accounting, legal, human resources, sales, marketing, and other expenses. Operating income does not include any cost allocations for corporate overhead. Assets are not allocated to business units for internal reporting purposes and are therefore not included in the segment information below.

The Company’s financial results by business segment are as follows:

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A reconciliation of EBITDA As Defined to the most directly comparable GAAP financial measure, Operating loss, is as follows:

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Forward-Looking Statements

     All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning the Company’s financial position and liquidity, results of operations, prospects for future growth, and other matters are forward-looking statements. These statements may be identified with words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, and constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include the risks and uncertainties identified in Healthaxis documents filed with, or furnished to, the Securities and Exchange Commission, including without limitation those identified under the caption “Business — Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2002. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-looking statements.

Overview

     Healthaxis is a technology and business process services firm committed to providing innovative and configurable web-based connectivity and applications solutions for health benefit distribution and administration. These solutions, which are comprised of software products and related services, are designed to assist health insurance payers, government agencies, third party administrators (“TPA”) and health and welfare plans in providing enhanced services to members, employees, employers and providers through the application of Healthaxis’ flexible technology to legacy systems, either on a fully integrated or on an Application Service Provider (“ASP”) basis. These technology solutions are complimented by Healthaxis’ Business Process Outsourcing (“BPO”) services, including mailroom, scan, data capture, and claims pre-adjudication services. These services are offered to its technology clients and on a stand-alone basis. Healthaxis believes that its solutions enable a client to improve their productivity and reduce their administrative costs, enhance their customer service, grow their revenues and improve their profitability.

     Revenue Model. Healthaxis derives revenue from a number of sources. Set forth below is a description of our revenues generated by each of our suite of products and solutions.

     Revenues generated by our benefits administration and claims processing systems are either transaction based or derived from providing professional services. These revenues are included in our Technology & Operations business segment. Transaction revenue is a combination of a per-employee-per-month fee for the use of our proprietary applications and a per document fee for the printing and mailing of system output (benefit checks, explanations of benefits and letters). The transaction revenue is based on an ASP model, where we host the hardware and software and perform some print and mail services on behalf of clients. Professional services revenue is generated from direct billing for our staff time. These billings are generally derived from converting a client’s existing system, client training and tailoring custom solutions for a client. Professional services generally are billed on a flat rate per hour. In some cases, a project may be done for a fixed price.

     Revenues generated by our web connectivity (WebAxis) products are derived from licensing our proprietary software products and providing professional services. These revenues are included in our Technology & Operations business segment. The licensing revenue is a combination of per-member-per-month fees and fixed price license fees. Depending upon the contract terms, the fixed price license fees are recognized over a period of

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time, or as one-time license fee agreements upon the delivery of the product. Professional service revenue is generated from direct billing for our staff time. These billings generally are associated with customer support. Contracts generally include an up-front payment intended to recoup the start-up costs incurred in setting up a new client. Such fees, along with the associated costs, are generally deferred and recognized over the life of the transaction-based contract.

     Revenues included in our BPO Services business segment are transaction based. Fees for mail handling, scanning and converting insurance claims from paper to electronic format, and image storage and retrieval, are priced on a per-document or a per-image basis. Such revenue is recognized in the month the services are performed. Contracts generally include an up-front payment intended to recoup the start-up costs incurred in setting up a new client. Such fees are generally deferred and recognized over the life of the transaction-based contract.

     Significant Projects. Our revenue for the remainder of 2003 will be affected by the timing of the acceptance of the web-based administration platform we have been developing for the State of Washington and for the State of Georgia. These contracts are relatively large. Although we receive cash for work stages completed on the State of Georgia contract, we will only recognize revenue and profits from the contract when the contractual obligations are completed and accepted. Revenues from the State of Washington contract are recognized under the percentage of completion method, but we have deferred the recognition of any profits from the contract until the contract is complete. In both cases, it now appears that our customers’ schedules may result in delays in acceptance. We believed earlier in this year that both of these contracts would be completed by December 31, 2003. However, these delays could push revenue and profit recognition on these contracts into 2004.

     November 2002 Cost Reduction Initiative. On November 12, 2002, we began a cost reduction initiative designed to more closely align expenses with revenues and to enhance the Company’s operating performance. The cost reduction initiative consisted of both a reduction in the Company’s labor force and an across-the-board reduction in salary levels, as well as planned reductions in certain operating and overhead expenses. The reduction in labor force was effective in mid-November and the reduction in salary levels was effective January 1, 2003.

     Management believes that the cost reduction initiative serves not only the Company’s financial goals, but is also consistent with its strategic business goals. Healthaxis has spent significant resources in the past two years developing certain products and functionality. That development effort is now substantially complete and the level of human resources necessary to sustain the effort is no longer required. In addition, the Company now outsources portions of its software development work to Satyam Computer Services Ltd., a leading global consulting and IT services company based in India. The Company will now focus on selling these capabilities to new customers, as well as using them to strengthen relationships with existing customers. In addition, the Company has, in recent periods, sharpened its focus on more specific target markets with more specific product offerings, the effect of which has been to reduce its human resource requirements. Hence, management believes that its reduced labor force will be able to effectively serve its existing customer base, while also focusing on new market opportunities.

     Potential Sub-lease of Office Space in Irving, TX. Healthaxis occupies office space in Irving, Texas under agreements that will expire in December 2005. We are currently in discussions with an unrelated third party regarding a potential sub-lease of space subject to the smaller of the two lease agreements (our 7th floor space). The potential sub-lease would also expire in December 2005. The amount remaining to be paid by Healthaxis, under the original lease for the 7th floor space, exceeds the expected amount to be received from the potential sub-lease. We continue to occupy and use the space that would become subject to the potential sub-lease. We currently anticipate that a sub-lease agreement could be entered into in the third quarter of 2003. In connection with this event, we would record an expense related to the difference between the amounts received under the sublease and the amounts paid under our original lease agreement. Currently, we estimate that the amount of the charge will not exceed $225,000.

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     Allowance for Doubtful Accounts. During the second quarter of 2003, we wrote-off accounts receivable balances in the amount of $206,000 relating to two former customers. Both of these accounts had been fully reserved in prior periods. At June 30, 2003, our allowance for doubtful accounts totaled $37,000. We believe that this reserve is adequate to ensure that accounts receivable are fairly stated.

Results of Operations
(Tables in Thousands)

Three months ended June 30, 2003 compared to three months ended June 30, 2002

     Revenues

Technology & Operations

Our Technology & Operations revenue for the second quarter of 2003 increased 22% from the second quarter of 2002. Revenue from the State of Washington contract, which is non-recurring, increased $515,000. Work related to the State of Washington contract started in June 2002. As anticipated, one of our existing customers terminated its use of our claims system in 2003, resulting in a decrease in revenue totaling $407,000. We added another significant claims customer replacing $271,000 of the loss.

Revenue for the three months ended June 30, 2003 includes new revenue from two existing customers in the amount of $324,000 related to print and distribution services. Prior to 2003, we did not perform print and distribution services for these customers. This added revenue is the direct result of our outsourcing of these services to a third party beginning in the fourth quarter of 2002.

BPO Services (formerly known as Imaging Services Group) BPO Services revenues increased 12% from the second quarter of 2002. In January 2003, we added additional work from an existing customer totaling $149,000. This increase was partially offset as a result of the loss of a smaller customer due to bankruptcy totaling $59,000.

     Cost of revenues includes all expenses directly associated with the production of revenue, and consists primarily of salaries and related benefits, rent, amortization and depreciation, system expenses such as maintenance and repair, as well as other related consumables.

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Technology & Operations

Cost of revenues for Technology & Operations decreased 12% from the second quarter of 2002. As a percentage of Technology & Operations revenue, costs decreased from 126% in the 2002 period to 91% in the 2003 period. The decrease is the result of an overall reduction in personnel costs, offset by reduced capitalization and increased costs attributable to print and distribution outsourcing. In November 2002, we implemented a cost reduction initiative that reduced our employee headcount significantly. Across-the-board salary reductions also went into effect, on a company-wide basis, January 1, 2003. As a result, personnel expenses were down $898,000 from the second quarter of 2002. However, some employees were re-assigned to expensable projects from capitalizable development projects, which served to offset the expense savings by $350,000. Subcontractor expenses increased $465,000 as a result of amounts paid to Satyam in connection with our government related projects. During the fourth quarter of 2002, we began the process of outsourcing our print and distribution capabilities to a third party, which increased our costs of revenues in the second quarter of 2003 by approximately $435,000. These additional costs are in lieu of costs previously associated with in-house employees and other operating expenses. The three months ended June 30, 2002 also includes impairment charges related to software and equipment in the amount of $715,000 that are non-recurring.

BPO Services (formerly known as Imaging Services Group)

The cost of revenue for BPO Services decreased 18% from the second quarter of 2002, primarily as a result of an employee headcount reduction in the Imaging Support group from twelve to eight. This reduction was part of the November 2002 staff reduction. Across-the-board salary reductions also went into effect, on a company-wide basis, on January 1, 2003. Personnel cost reductions from this BPO Services group accounted for $58,000 of the cost decrease from 2002. The second quarter of 2002 also includes a bad debt charge in the amount of $50,000 that did not recur in the second quarter of 2003.

     Sales and marketing expenses consist primarily of employee salaries and related benefits, as well as promotional costs such as direct mailing campaigns, trade shows and media advertising.

Five of our nine sales and marketing employees were terminated in November 2002. This reduction, combined with the 2003 salary reductions, accounts for a decrease in personnel costs in the amount of $262,000 from the second quarter of 2002.

     General and administrative expenses include executive management, accounting, legal and human resources compensation and related benefits, as well as expenditures for applicable overhead costs.

The number of corporate employees dropped from nineteen at March 31, 2002 to twelve at June 30, 2003. This reduction, combined with the 2003 salary reductions accounts for approximately $233,000 of the cost decrease from the second quarter of 2002. Non-cash stock based compensation expense decreased $88,000 due to the gradual decrease of expense resulting from the remeasurement of stock options at the time of the 2001 Healthaxis merger.

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     Research and development expenses are primarily the salary and related benefits of personnel engaged directly in the development of new products and the enhancement of existing products, prior to the establishment of technological feasibility.

We have significantly reduced our research and development activities in 2003. Due to the November 2002 staff reduction, emphasis has been put on the completion of existing development products, and the maintenance of existing customer accounts.

     Amortization of intangibles includes the amortization of developed software and customer base acquired in the January 2001 Healthaxis merger. The amount is essentially unchanged from 2002.

     Interest and other income, net for the second quarter of 2002 includes a non-recurring write down of our investment in Digital Insurance in the amount of $227,000. Excluding this write down, interest income and other income, net decreased $47,000 largely as a result of lower notes receivable balances in 2003.

     Interest expense decreased as a result of the exchange of our convertible debentures for Series A Convertible Preferred Stock on July 31, 2002.

     Discontinued operations relates to the disposed UICI Outsourcing business unit. These operations were discontinued in connection with the June 2002 termination of the UICI Information Technology Services Agreement.

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Six months ended June 30, 2003 compared to six months ended June 30, 2002

     Revenues