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

___________________________

FORM 10-Q

___________________________

Commission file number: 000-29377

Landacorp, Inc.
(Exact name of registrant as specified in its charter)

4151 Ashford Dunwoody Road, Suite 505
Atlanta, Georgia 30319
(Address of principal executive offices including zip code)

(404) 531-9956
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  [X]    NO  [ ].

     Number of shares of Common stock, par value of $0.001, outstanding as of October 30, 2002: 15,734,103.

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Landacorp, Inc.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDACORP, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

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

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LANDACORP, INC.
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)

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

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LANDACORP, INC.
Condensed Consolidated Statement of Cash Flows
(unaudited in thousands)

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

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LANDACORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

     Landacorp, Inc. was established in 1982 and, along with its subsidiaries (collectively referred to herein as the “Company”), provides population health management solutions to healthcare payer and provider organizations. These technology-driven solutions include integrated predictive and interventional disease management programs and services, and comprehensive Internet- and Windows®-based medical management software that can improve health outcomes while helping manage and prevent cost. The Company’s corporate headquarters and sales and marketing offices are located in Atlanta, GA, with operations located in Chico, CA and Raleigh, NC.

     The accompanying unaudited financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The balance sheet at December 31, 2001 is derived from the audited financial statements included in the Form 10-K for the year ended December 31, 2001. However, this Form 10-Q does not include all Form 10-K and other disclosures required by generally accepted accounting principles in the United States for the balance sheet as presented herein. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented.

     The consolidated results of operations presented for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results to be expected for any other interim period or any future year. Certain prior period balances have been reclassified in order to conform with current period presentation.

2. Revenues

     Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services. The revenues and costs for 2001 have been re-categorized into these groups for comparison purposes.

Revenue Recognition

     The Company derives revenue primarily from (i) the licensing and implementation of medical management software systems, (ii) the delivery of post-contract customer support, training and consulting services, and (iii) the delivery of care analytics solutions and care management services. In accordance with Staff Accounting Bulletin (“SAB”) 101, the Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or the services are rendered, (3) the price is fixed and determinable and, (4) collectibility is reasonably assured.

     The Company accounts for their multiple element software systems contracts in accordance with the provision of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2. As the Company provides significant production, modification and/or customization of the software installed, system sales revenues, including training and consulting services essential to the software system, and the associated costs are recognized using the percentage-of-completion method, using labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. Costs and estimated earnings in excess of billings represent revenues that the Company has earned in accordance with its accounting policies but that are not yet billable under the terms of the contracts as of the date of the balance sheet. These balances are generally billable within twelve months. When the current estimates of total contract revenue and contract cost indicate a loss, the Company records a provision for the estimated loss on the contract. Sales of software products of other vendors are recognized upon installation.

     Support services included in the initial licensing agreement and annual support service renewal contracts are deferred and are recognized ratably over the support period. Revenues from training and consulting not considered essential to the functionality of the

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software system are recognized when the Company has delivered the services in accordance with the terms of the service agreements or have no future performance obligations. Amounts billed in advance of revenue recognition are recorded as deferred revenue.

     The Company delivers its care analytics solutions through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. The fair value of the implementation service revenue is recognized as the services are performed and the subscription fee is recognized on monthly basis at the subscription rate. The Company delivers care management services through a per participant annual enrollment fee. Payment is generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled.

     From time to time, the Company may enter into care analytics and care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met.

3. Net loss per share

     Loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if their effect is dilutive. Potential common shares include common stock subject to repurchase and incremental common shares issuable upon the exercise of stock options. The potential common shares, which are excluded from the determination of diluted net loss per share as the effect of such shares is anti-dilutive were 3,501,000 and 4,027,000 at September 30, 2002 and 2001, respectively.

4. Common Stock

     In March 2001, the Company increased the number of its authorized shares of Common Stock from 15,000,000 to 50,000,000.

5. Recent Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We have not yet determined the effects that SFAS No. 143 will have on our financial position, results of operations or cash flows but we do not anticipate any material adverse impact.

     In June of 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In FAS 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. FAS 146 also establishes that fair value is the objective for the initial measurement of the liability. FAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002.

6. Goodwill and Other Intangible Assets

     Goodwill

     We adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, we reclassified $462,000 of intangible assets to goodwill and discontinued periodic amortization of goodwill. Goodwill will be assessed annually for impairment

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by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. We have performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002.

     During the three months ended September 30, 2001 and the nine months ended September 30, 2001, we recorded $162,000 and $508,000 in amortization of goodwill, respectively. The impact of amortization of goodwill on net loss for the three and nine months ended September 30, 2001 is shown on the following table (in thousands, except per share data):

Other Intangible assets

     Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Our intangible assets consists primarily of existing technology and customer base. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of FAS 142 on January 1, 2002. Amortization of intangible assets was $134,000 and $768,000 for the three and nine months ending September 30, 2002, respectively. The table below summarizes the activity by intangible asset (in thousands). See Note 7 regarding the impairment charge.

7. Asset Impairment Charge

     On May 9, 2001 we announced an impairment charge in the first quarter 2001 on intangible assets acquired in connection with the acquisition of the Portland, Oregon-based Interactive Media Group (IMG) in the amount of $704,000. In May 2001, management determined that the operations of IMG should be discontinued due to the slowdown in the web design and consulting industry. On May 8, 2001, the Board of Directors approved a plan to immediately discontinue IMG’s operations.

     During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Analytics/Care Management reporting unit. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Analytics/Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis which indicated an impairment in its Care Analytics/Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten

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years utilizing a discount rate and terminal value commensurate with other Disease Management companies, and companies of similar size to Landacorp. The assumptions used in this analysis represent management’s estimate of future results.

     The analysis resulted in an impairment charge during the three months ended June 30, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

8. Restructuring and Acquisition Related Costs

     During 2001, the Company announced its plan to cease operations of its Portland, Oregon-based Interactive Media Group (IMG). Additionally, the company had a reduction in work force of approximately 30%, or 76 employees. Restructuring and acquisition related charges in 2001 were $1,301,000 relating to severance costs, the closing of the IMG operations and additional lease obligations related to unoccupied office space that the Company had committed to, as well as a charge of $268,000 related to an agreement with certain shareholders and option holders in connection with the acquisition of PatientCentrix.

     The restructuring accrual is based on certain estimates and judgments related to contractual obligations and related costs. Potential restructuring accruals related to lease contractual obligations could be materially affected by factors such as our ability to secure subleases, the credit-worthiness of subleases and our success at negotiating early termination agreements with lessors. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, we may need to establish an additional restructuring accrual or reverse accrual amounts accordingly.

     The major components of the restructuring and acquisition related costs in 2001 and the remaining accrual at September 30, 2002 are as follows (in thousands):

9. Agreement with Certain Shareholders and Option Holders

     On March 13, 2002, the Company resolved a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the Earn Out payment due under the PatientCentrix merger agreement. During the first quarter of 2002, as part of the resolution, we paid the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the Earn Out payment. This amount was recorded in the fourth quarter of 2001 as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and Merger Agreement, we agreed to reduce to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This amount was recorded in the fourth quarter of 2001 as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003.

10. Subsequent Events

     On October 9, 2002, the Company announced the early termination of its agreement with Lifeguard, Inc. (“Lifeguard”) due to the takeover of the Lifeguard HMO by the State of California’s Department of Managed Healthcare (DMHC). At this time, the Company amended its agreement with Lifeguard to provide for the early termination of the agreement and to eliminate the Company’s obligation to reimburse any fees paid to the Company by Lifeguard. As a result, the Company expects to recognize revenue during the

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fourth quarter of 2002 of approximately $622,000 that was deferred due to the performance guarantee under the original contract, which was amended on July 31, 2002. As of September 30, 2002, the Company had recognized revenue of approximately $343,000 under this contract.

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

     Note Regarding Forward-Looking Statements: This quarterly report contains forward looking statements for purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Examples of such forward looking statements include statements about our anticipated expenses, impairment, restructuring and other charges and accruals, revenues and financial results and business performance for fiscal 2002 and during the next 12 months, our strategy with respect to strategic partners, our plans to support Maxsys I, the effects of SFAS No. 143 on our financial position, anticipated growth in the market for population health management services and increased penetration of our related product offerings and statements regarding estimates of our future results relating to impairment charges. Actual results may differ materially from those projected in such forward-looking statements due to various known and unknown risks and uncertainties, including the risk that we may fail to close on certain pending customer contracts during the next 12 months, our dependence on a limited number of products with limited market acceptance, the risk that the market for population health management services does not develop as anticipated, and the risk that we are unable to successfully integrate the products and service offerings of our recent acquisitions and successfully capitalize on anticipated synergies and growth opportunities. For further information regarding these and the other risks related to Landacorp’s business, see “Factors that may Affect our Future Results” set forth below, as well as Landacorp’s prior filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2001.

Overview

     Landacorp provides technology-driven population health management solutions to healthcare payer and delivery organizations. Our innovative predictive modeling and interventional disease management programs are integrated with Internet- and Windows®-based medical management software to deliver comprehensive solutions that can help our clients manage their at-risk populations in ways that prevent and reduce cost, while improving outcomes. Combined, our products and services comprise a unique set of capabilities that support the continuum of patient care, from medical management to predictive modeling to disease intervention.

     Landacorp’s disease management products and services—our predictive modeling and interventional capabilities—help our customers identify and intervene with their members at risk for a chronic or potentially high predicted expenditure outcomes associated with chronic health conditions like asthma, diabetes and heart disease. These member-focused solutions assist our clients in managing the health of these members through educational and self-management materials or through referral to nurse case managers. Landacorp’s medical management software solutions help health plans and hospitals manage the cost and care of their patients by documenting treatment, ensuring that care guidelines and government compliance requirements are met, and by automating the workflow and processes surrounding care coordination activities. These applications streamline administrative and business processes and enable real-time interaction among various healthcare participants. As of September 30, 2002, 28 payers who claim to have a combined membership of approximately 59 million participants were using our payer solutions, and approximately 139 hospital providers were using our provider solutions. We have historically derived revenues from the installation and licensing of our maxMC and Maxsys solutions, sublicensing third-party software applications as part of system implementations and delivery of post-contract customer support, training and consulting services. We are currently focusing our primary development, sales and marketing efforts on our DSSeries, Managing for Tomorrow, maxMC, e-maxMC, and Maxsys II products. Although we do not anticipate future system sales or enhancements of Maxsys I, we continue to provide maintenance services to, and receive maintenance fees from, customers who purchased this product in the past. We plan to continue to support Maxsys I for the foreseeable future as a service to such customers and pursuant to ongoing contractual obligations.

     We recognize system sales revenues and associated costs using the percentage-of-completion method for fixed-fee contracts, with labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. Revenues on time and materials based contracts are recognized as services are delivered. We recognize revenues from sublicensing of third-party software upon installation of such software. We recognize revenues from support services ratably over the support period. We recognize revenues from training and consulting as such services are delivered.

     The Company delivers care analytics services through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. The fair value of the implementation service revenue is recognized as the services are performed and the subscription fee

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is recognized on a monthly basis at the subscription rate. The Company delivers care management services through a per participant annual enrollment fee. Payment is generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled.

     From time to time, the Company may enter into care analytics and care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met.

     To accelerate the implementation of elements of our strategy, we intend to target and pursue strategic acquisitions and relationships, such as marketing alliances with vendors of complementary products and services and partnerships with Internet providers of healthcare content, disease management and health-related e-commerce services. Investigating or entering into any such strategic relationships could lead to additional expenditures.

Critical Accounting Policies

     “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reported periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, restructuring costs, and goodwill and other intangible assets.

     Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

     The Company has identified the policies below as critical to our business operations and the understanding of our results of operations.

     Revenue recognition. The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. Revenues consist of software license and implementation fees, related maintenance and software service fees, and care analytics and disease management services. Deferred revenue consists of maintenance billings and annual enrollment fees due in advance of service periods. From time to time, the Company may enter into care analytics and care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. The Company’s revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” and AICPA Statement of Position No. 97-2 “Software Revenue Recognition”. The Company follows specific and detailed guidelines in measuring revenue; however certain estimates and judgments made by management affect the application of the revenue policy. These estimates include the estimated contract hours and time to complete for percentage of completion accounting, and the effort-based measures used in services accounting. Changes in conditions or new contract terms could cause management to determine these estimates and judgments must be revised. Such changes or revisions could adversely affect the revenue recognition for any reporting period.

     Bad debt. Management analyzes accounts receivable balances, historical bad debts, customer concentrations, customer credit worthiness, current economic trends, and changes in our customer payment terms and trends when evaluating the adequacy of the allowance for bad debt. Significant management judgment and estimates must be made and used in connection with establishing the allowance for bad debt in any accounting period. The accounts receivable balance was $5.4 million, net of allowance for bad debt of $276,000 as of September 30, 2002. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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     Goodwill. We adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, we discontinued periodic amortization of goodwill of approximately $650,000 annually. Goodwill will be assessed annually for impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. We have performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002. The projections used to test for impairment of goodwill were based on management’s estimate of future results. The Company will test its goodwill for impairment on an annual basis. Such tests will be based on revised estimates, and may result in future impairments to goodwill.

     Long Lived Assets. We adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” on January 1, 2002. SFAS No. 144 requires long-lived assets to be measured at the lower of carrying amount or fair value less the cost to sell.

     During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Analytics/Care Management reporting unit. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Analytics/Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis which indicated an impairment in its Care Analytics/Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten years utilizing a discount rate and terminal value commensurate with other Disease Management companies, and companies of similar size to Landacorp. The assumptions used in this analysis represent management’s estimate of future results.

     The analysis resulted in an impairment charge during the three months ended June 30, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

     Restructuring costs. The restructuring accrual is based on certain estimates and judgments related to contractual obligations and related costs. Potential restructuring accruals related to lease contractual obligations could be materially affected by factors such as our ability to secure subleases, the credit-worthiness of subleases and our success at negotiating early termination agreements with lessors. In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods, we may need to establish an additional restructuring accrual or reverse accrual amounts accordingly.

Recent Developments

     On January 31, 2000, we purchased from High Technology Solutions, Inc. assets related to its business of providing Web site services to healthcare payers (this business is also referred to as Interactive Media Group or IMG). The purchase price for the assets was $1,268,000 (including an estimated $18,000 in assumed liabilities) of which we paid $250,000 at the closing.

     On November 2, 2000 we completed the acquisition of PatientCentrix, Inc. (“PatientCentrix”), a leading provider of population management targeting and intervention programs and services. The Company acquired 100% of the shares and assumed all outstanding options of PatientCentrix in return for cash of $5,850,000 paid to the stockholders and option holders, and issuing 1,157,000 shares to the stockholders of PatientCentrix. The price of the shares issued was $1.777 based on the average of the previous 20 trading days prior to the date of the definitive agreement, which was October 31, 2000. We also assumed all the incentive stock options issued by PatientCentrix prior to the acquisition. These now represent options to purchase up to 1,582,532 of Common Stock of Landacorp with an average exercise price of $1.525. The total purchase price of $11,188,000 consisted of $5,850,000 cash, $2,056,000 of our Common Stock (1,157,000 shares), assumed stock options with a fair value of $2,970,000, and other acquisition related expenses of approximately $312,000, consisting primarily of payment for legal and financial advisory services. Of the total purchase price, approximately $191,000 was allocated to the net tangible assets, approximately $961,000 was allocated to unearned compensation related to our right to repurchase 30% of the shares of the Company’s Common Stock and options to purchase our Common Stock issued to employees of PatientCentrix pursuant to the purchase agreement in the event of such employee’s termination under certain circumstances, and the remainder was allocated to intangible assets, including existing technology ($3,600,000), customer base ($640,000), assembled work force ($280,000), and goodwill ($5,516,000).

     Subsequent to the acquisition of PatientCentrix, its majority shareholder, Michael Miele, became an employee and Director of the Company. During 2001, the Company and the majority shareholder entered into a Settlement Agreement and Mutual Release (“Agreement”) whereby the Company and majority shareholder mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship. The majority shareholder released the Company from any and all claims that the termination of employment in and of itself violates the Merger Agreement or interferes with

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or negatively impacts the payment of any Earn Out under the Merger Agreement or achievement of any related milestone event. The agreement requires the Company to make payments to the majority shareholder of approximately $800,000 and to allow the vesting of the majority shareholder’s options, allow the options to be immediately exercisable and release the Company’s repurchase rights with respect to certain shares of common stock. The amount related to this accelerated vesting is approximately $277,000. The Settlement and Mutual Release amount of $1,077,000 has been recorded as goodwill.

     On March 13, 2002, we resolved a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the Earn Out payment due under the PatientCentrix merger agreement. We agreed to pay the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the Earn Out payment. This amount was recorded in the fourth quarter of 2001 as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and Merger Agreement, we agreed to reduce to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This amount was recorded in the fourth quarter of 2001 as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003.

     In May of 2001, the Company announced a reduction in our work force representing approximately 16%, or 40 employees of the Company’s total work force. In August 2001, the Company announced an additional reduction in work force of approximately 18%, or 36 employees.

     During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Analytics/Care Management reporting unit. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Analytics/Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis which indicated an impairment in its Care Analytics/Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten years utilizing a discount rate and terminal value commensurate with other Disease Management companies, and companies of similar size to Landacorp. The assumptions used in this analysis represent management’s estimate of future results.

     The analysis resulted in an impairment charge during the three months ended June 30, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

     As of September 30, 2002 the Company’s office in Montclair, NJ was closed.

     On October 9, 2002, the Company announced the early termination of its agreement with Lifeguard, Inc. (“Lifeguard”) due to the takeover of the Lifeguard HMO by the State of California’s Department of Managed Healthcare (DMHC). At this time, the Company amended its agreement with Lifeguard to provide for the early termination of the agreement and to eliminate the Company’s obligation to reimburse any fees paid to the Company by Lifeguard. As a result, the Company expects to recognize revenue during the fourth quarter of 2002 of approximately $621,000 that was deferred due to the performance guarantee under the original contract, which was amended on July 31, 2002. As of September 30, 2002, the Company had recognized revenue of approximately $343,000 under this contract.

     On October 21, 2002, as part of its continuing efforts to reduce costs, the Company eliminated a total of ten positions, or approximately 6% of its workforce.

     Effective at the opening of trading on November 7, 2002, the Company’s common stock will be traded on the Nasdaq SmallCap Market. The Company’s stock will continue trading under the symbol “LCOR”.

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RESULTS OF OPERATIONS

     The following table presents the statement of operations data as a percentage of total revenues:

Comparison of the three and nine-month periods ended September 30, 2001 and 2002.

     Revenues. Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services. During the three months ended September 30, 2002, two customers accounted for 32% and 11% of revenue. Two customers accounted for 27% and 16% of revenue for the three-month period ended September 30, 2001. During the nine months ended September 30, 2002, two customers accounted for 15% and 20% of revenue. Two customers accounted for 28% and 10% of revenue for the nine-month period ended September 30, 2001.

     Program revenues and maintenance fees have increased by $789,000 or 22.7% from $3,480,000 in the three-month period ended September 30, 2001 to $4,269,000 in the three-month period ended September 30, 2002. Program revenues and maintenance fees have increased by $3,074,000 or 34.6% from $8,889,000 in the nine-month period ended September 30, 2001 to $11,963,000 in the nine-month period ended September 30, 2002. The increase in revenues relates mainly to the increased revenue from our Managing for Tomorrow program.

     System sales and consulting fees increased by $1,053,000 or 274.2% from $384,000 in the three-month period ended September 30, 2001 to $1,437,000 in the three-month period ended September 30, 2002. System sales and consulting fees increased by $805,000 or 27.6% from $2,916,000 in the nine-month period ended September 30, 2001 to $3,721,000 in the nine-month period ended September 30, 2002. These increases in system sales and consulting fees are primarily due to additional revenue in 2002 related to implementations of our medical management software.

     Cost of Program Revenue and Maintenance Fees. Cost of program revenue and maintenance fees consists principally of personnel related costs, product costs, amortization of unearned stock-based compensation, related department overhead, costs of third party software products, and depreciation of equipment. Cost of program revenues and maintenance fees increased by $465,000 or 27.5% from $1,691,000 in the three-month period ended September 30, 2001 to $2,156,000 in the three-month period ended September 30,

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2002, representing 48.6% of program revenues and maintenance fees revenues for the third quarter of 2001 and 50.5% for the third quarter of 2002. Cost of program revenues and maintenance fees increased by $1,271,000 or 24.3% from $5,222,000 in the nine-month period ended September 30, 2001 to $6,493,000 in the nine-month period ended September 30, 2002, representing 58.7% of program revenues and maintenance fees revenues for the nine months ended September 30, 2001 and 54.3% for the same period in 2002. This increase in costs is primarily due to additional direct costs associated with increased revenue from our Managing for Tomorrow program.

     Cost of System Sales and Consulting Fees. Cost of system sales and consulting fees consist principally of costs incurred in the implementation of our software products, and other consulting and training personnel costs. The cost of system sales and consulting fees includes personnel costs, amortization of unearned stock-based compensation, non-reimbursed travel expenditures, related department overhead, amortization of capitalized software development costs, costs of third party software products, and depreciation on equipment. During the quarter ended September 30, 2002 these costs were $641,000 or 44.6% of system sales and consulting fees, compared to costs of $568,000 representing 147.9% of system sales and consulting fees during the quarter ended September 30, 2001. Cost of system sales and consulting fees increased by $73,000 or 12.9% from the quarter ended September 30, 2001 to the same period for 2002. This cost increase was mostly due to an increase in costs associated with the additional system sales and consulting fees revenue in 2002 related to implementations of our medical management software. During the nine-month period ended September 30, 2002 these costs were $1,867,000 or 50.2% of system sales and consulting fees, compared to costs of $2,460,000 representing 84.4% of system sales and consulting fees during the nine-month period ended September 30, 2001. Cost of system sales and consulting fees decreased by $593,000 or 24.1% from the nine-month period ended September 30, 2001 to the same period for 2002. This cost decrease was mostly due to the reduction in workforce during 2001 and the elimination of our web consulting business during July of 2001, each as discussed above in the Recent Developments section.

     Sales and Marketing. Sales and marketing expenses consist principally of compensation for our sales and marketing personnel, amortization of unearned stock-based compensation, advertising, trade show and other promotional costs, and departmental overhead. Sales and marketing expenses during the quarter ended September 30, 2002 amounted to $1,216,000 representing 21.3% of total revenues, in comparison with $1,115,000 representing 28.9% of total revenues during the corresponding quarter of 2001. Sales and marketing expenses increased by $101,000 or 9.1% from the third quarter of 2001. This increase is mostly related to the growth in our Managing for Tomorrow program. Sales and marketing expenses during the nine-month period ended September 30, 2002 amounted to $3,771,000 representing 24.0% of total revenues, in comparison with $4,621,000 representing 39.1% of total revenues during the corresponding period of 2001. Sales and marketing expenses decreased by $850,000 or 18.4% from the nine-months ended September 30, 2001. This is primarily due to the 2001 reductions in workforce, as discussed in the Recent Developments section above.

     Research and Development. Research and development expenses consist of personnel costs, amortization of unearned stock-based compensation, related department overhead and depreciation on equipment. Research and development expenses totaled $1,470,000 or 25.8% of total revenues during the quarter ended September 30, 2002, an increase of $154,000 or 11.7% compared to expenses totaling $1,316,000 representing 34.1% of total revenues during the quarter ended September 30, 2001. This increase is mostly due to costs associated with the increase in revenue from our Managing for Tomorrow program. Research and development expenses totaled $4,184,000 or 26.7% of total revenues in the nine-months ended September 30, 2002, a decrease of $1,010,000 or 19.4% compared to expenses totaling $5,194,000 representing 44.0% of total revenues in the nine-months ended September 30, 2001. This is primarily due to the 2001 reductions in workforce discussed in the Recent Developments section above.

     General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, amortization of unearned stock-based compensation, allocated occupancy and overhead costs and bad debt. General and administrative expenses decreased by $784,000 or 40.0% from $1,959,000, representing 50.7% of total revenues, in the third quarter of 2001 to $1,175,000, representing 20.6% of total revenues, in the third quarter of 2002. General and administrative expenses decreased by $2,069,000 or 31.9% from $6,494,000, representing 55.0% of total revenues, in the nine-months ended September 30, 2001 to $4,425,000, representing 28.2% of total revenues, in the nine-months ended September 30, 2002. Approximately $700,000 of this decrease is related to a specific net increase in first quarter 2001 to our bad debt reserve for the outstanding balance of a customer that was having difficulty in meeting their payment obligations. The remaining decrease was due to general cost cutting measures since 2001.

     Amortization of Intangible Assets. Amortization expense decreased by $373,000 or 73.6% from $507,000 or 13.1% of revenues in the third quarter of 2001 to $134,000 or 2.3% of revenues in the third quarter 2002. Amortization expense decreased by $784,000 or 50.5% from $1,553,000 or 13.2% of revenues in the nine-months ended September 30, 2001 to $769,000 or 4.9% of revenues in the nine-months ended September 30, 2002. Included in the third quarter of 2001 is $162,000 of goodwill amortization. Effective January

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1, 2002, the Company no longer amortizes goodwill and will test goodwill for impairment in accordance with the provisions of SFAS No. 142.

     Asset Impairment Charge. On May 9, 2001 we announced an impairment charge in the first quarter 2001 on intangible assets acquired in connection with the acquisition of the Portland, Oregon-based Interactive Media Group (IMG). The charge was $704,000. In May 2001, management determined that the operations of IMG should be discontinued due to the slowdown in the web design and consulting industry. On May 8, 2001, the Board of Directors approved a plan to immediately discontinue IMG’s operations. The employees of IMG are included in the reduction in workforce described above in the Recent Developments section.

     During the second quarter of 2002, primarily due to a decline in demand for services in the Company’s Care Analytics/Care Management reporting unit, management determined that it was necessary to test for an impairment of long-lived assets. This test was performed in accordance with the provisions of FAS 144, which was adopted by the Company on January 1, 2002. As a result of this test and the subsequent analysis of the fair value of its Care Analytics/Care Management reporting unit, Landacorp recorded an impairment to its long-lived assets in the amount of $3,300,000 during the second quarter of 2002. As discussed in the Factors that May Affect our Future Results section below, the analysis performed to determine the amount of impairment was based on management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in additional impairment charges.

     Restructuring charges. Restructuring charges of $231,000 and $960,000 were recorded in the three and nine-month periods ended September 30, 2001, respectively. The costs included in the restructuring charges relate to severance costs and the closing of the IMG operations. In May 2001, the Company announced a reduction in work force representing approximately 16%, or 40 employees of the Company’s total work force.

     Stock-Based Compensation. Amortization of unearned stock compensation during the quarters ended September 30, 2002 and 2001 were $54,000 and $267,000, respectively. Amortization of unearned stock compensation during the nine-month periods ended September 30, 2002 and 2001 were $326,000 and $1,087,000, respectively. These amounts have been allocated to cost of sales and operating expenses.

     Interest and Other Income and Interest Expense. Interest and other income consist primarily of earnings on our cash and cash equivalents. Interest and other income amounted to $125,000 for the third quarter of 2001 and $28,000 for the third quarter of 2002, and $603,000 for the nine-months ended September 30, 2001 and $118,000 for the nine-months ended September 30, 2002. The decrease in interest and other income in the third quarter 2002 of $97,000 or 77.6% and the decrease of $485,000 or 80.4% in the nine-months ended September 30, 2002 are due to the decrease in cash from September 30, 2001 to September 30, 2002. Interest expense of $6,000 during the third quarter of 2002 and $5,000 for the third quarter of 2001, and $26,000 during the nine-months ended September 30, 2002 and $18,000 for the nine-months ended September 30, 2001 arises from financing certain fixed assets through capital leases.

     Provision for Income Tax. We recorded no current provision or benefit for federal or state income taxes for the first three quarters of 2001 or 2002, as the Company has incurred net operating losses and has no carry-back potential.

Liquidity and Capital Resources

     Since inception, we have financed our operations through net cash generated from operating activities, and sales of our common stock and preferred stock, as well as debt financing. During February 2000, we completed our initial public offering through which we raised net proceeds of approximately $35 million. As of September 30, 2002, we had $8.5 million in cash and cash equivalents and $1.3 million in working capital with outstanding capital lease obligations totaling $212,000.

     Net cash used in operating activities was $3,043,000 and $8,278,000 during the nine months ended September 30, 2002 and 2001, respectively. Net cash used to fund operating activities in the first nine months of 2002 reflects net losses before non-cash charges for depreciation and amortization, stock-based compensation, asset impairment charge and increases in accounts payable, and deferred revenue, offset by an increase in net accounts receivable and other assets and a decrease in accrued expenses and the restructuring accrual. Net cash used to fund operating activities in the first nine months of 2001 reflects net losses before non-cash charges for depreciation and amortization of intangible assets, provision for doubtful accounts, stock-based compensation, loss on sale of equipment and asset impairment charge, a decrease in net accounts receivable and an increase in deferred revenue, offset by an increase in other current assets and decreases in accounts payable and accrued expenses.

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     During the nine months ended September 30, 2002 and 2001, net cash used in investing activities was $678,000 and $698,000, respectively. Investing activities during the nine months ended 2002 and 2001 consisted primarily of purchases of computer equipment, software, office furniture and leasehold improvements, as well as capitalized software development costs during the nine months ended September 30, 2001.

     Net cash used in financing activities was $89,000 for the nine months ended September 30, 2002. Net cash provided by financing activities was $167,000 in the nine months ended September 30, 2001. Net cash used in financing activities for the nine months ended September 30, 2002 resulted from payments under capital lease obligations, collections on notes receivable from officers and proceeds from issuances of common stock. Net cash provided by financing activities for the nine months ended September 30, 2001 resulted from the proceeds from the exercise of common stock options and collections on notes receivable from officers, less certain finance lease payments.

     We anticipate that operating expenses and planned capital expenditures will constitute a material use of our cash resources for the foreseeable future. In addition, we may utilize cash resources to fund acquisitions or investments in other businesses, technologies or product lines. We believe that available cash and cash equivalents and the net proceeds from the sale of the common stock in our initial public offering will be sufficient to meet our working capital and operating expense requirements for the next twelve months. Thereafter, we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings, although there can be no assurance that such funding will be available on terms acceptable to us. However, if we are not able to sign one or more of the customer contracts presently in negotiations, we will need to seek a strategic partner or raise additional funds within the next twelve months.

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FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

We Have a Long History of Losses and May Never Become Profitable.

     We have been in business since 1982 and we have incurred significant losses since that time. We expect to continue to incur losses on an annual basis for the foreseeable future. As of September 30, 2002, our accumulated deficit was $46 million. We expect to incur increased levels of product development, sales and marketing and administrative expenses and, as a result, we will need to increase our revenue significantly to achieve future profitability. Although our revenue has grown in recent quarters, we may not be able to sustain this growth and we may not realize sufficient revenue to achieve profitability. Further, even if we achieve profitability, due to competition and the evolving nature of the disease management, medical management, healthcare information technology and Internet markets, we could fail to sustain or increase profitability on a quarterly or annual basis.

We Have a History of Quarterly and Annual Fluctuations in Our Revenue and Operating Results, and Expect These Fluctuations to Continue, Which May Result in Volatility in Our Stock Price.

     Our quarterly and annual revenue and operating results have varied significantly in the past and will likely vary significantly in the future due to a number of factors, many of which we cannot control. The factors that may cause our quarterly revenue and operating results to fluctuate include:

	•		fluctuations in demand for our population health management products and related services;
	•		the ability of customers to provide us with the names of qualified members to enroll in our Managing for Tomorrow member-driven disease management program;
	•		the timing of customer orders and product implementations, particularly orders from large customers involving substantial software implementation;
	•		the length of our sales cycle, which varies and is unpredictable;
	•		the length of our software implementation process varies and often depends on matters outside of our control such as the customer’s ability to commit its resources to the implementation process;
	•		our ability to develop, introduce, implement and support new products and product enhancements;
	•		the rate of adoption of our population health management solutions, which often require our customers to change some aspects of the way in which they have traditionally conducted business;
	•		announcements and new product introductions by our competitors and deferrals of customer orders in anticipation of new products, services or product enhancements introduced by us or our competitors; and
	•		changes in the prices at which we can sell our population health management solutions.

     Accordingly, you should not rely on the results of any past periods as an indication of our future performance. In some future periods, our operating results may not meet expectations of public market analysts or investors. If this occurs, our stock price may decline.

Our Business will Suffer if our Population Health Management Solutions Do Not Achieve Widespread Market Acceptance Among Healthcare Payer Organizations.

     Achieving our growth objectives depends on our population health management solutions achieving widespread market acceptance among healthcare payer organizations. This is difficult to determine at this time. We commercially released our maxMC medical management software in 1997 and acquired the DSSeries and Managing for Tomorrow predictive modeling and interventional disease management products and services in the fourth quarter of 2000. Our solutions currently have limited market acceptance with only 28 payer customers currently using them. Our maxMC medical management software product has achieved some degree of market acceptance as we have implemented or are in the process of implementing it at 12 client sites. Realizing market acceptance for our

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disease management solutions will require ongoing enhancement of their features and functionalities, and improved sales and marketing efforts. If we do not gain significant market share for all of our population health management solutions before our competitors introduce alternative products with features similar to ours, our operating results will suffer. Operating results will also suffer if our pricing strategies are not economically viable or acceptable to our customers.

The Healthcare Industry May Not Accept Our Population Health Management Solutions.

     To be successful, we must attract as customers a significant number of healthcare payer organizations, and continue to attract hospitals and healthcare delivery organizations. We cannot determine the extent to which the payer market will accept either our disease management or medical management solutions as substitutes for traditional methods of intervening with members with chronic health conditions or processing healthcare information and managing patient care. To date, many healthcare industry participants have been slow to adopt new disease management methodologies and medical management technology solutions. We believe that the complex nature of healthcare processes and communications among healthcare industry participants, as well as concerns about confidentiality of patient information, may hinder the development and acceptance of our population health management solutions.

     In addition, customers that are already engaged in disease management programs or have implemented information systems in which they have made significant commitments may refuse to adopt our solutions if they perceive that our solutions will not complement their existing investments. As a result, the conversion from traditional methods of disease management and communication to electronic information exchange may not occur as rapidly as we expect it will. Even if these conversions do occur as rapidly as expected, payers and providers may use solutions, products and services offered by others.

Because We Offer a Limited Number of Products and Operate Exclusively in the Population Health Management Solutions Market, We Are Particularly Susceptible to Competition, Product Obsolescence and Market Downturns.

     We depend on a limited number of products and we operate exclusively in the disease management and medical management solutions markets. Prior to our acquisitions of predictive modeling and interventional disease management products, we derived substantially all of our revenue from the sale and associated support of Maxsys II (and its predecessor Maxsys I), a medical management software solution marketed to hospitals and healthcare delivery organizations. We anticipate that we will continue to generate revenue from the continued sales and support of that solution, in addition to our maxMC and e-maxMC solutions, However, we believe that for the foreseeable future increasingly more of our revenue will be attributable to the sales and support of our DSSeries and Managing for Tomorrow disease management solutions marketed to health plans, employer groups and other payers. Dependence on this limited product line makes us particularly susceptible to the successful introduction of, or changes in market preferences for, competing products. In addition, operating exclusively in the market for population management solutions make us particularly susceptible to downturns in that market that may be unrelated to the quality or competitiveness of our solutions.

We Currently Depend on a Limited Number of Key Customers and the Loss of Any of Them, or Any Future Customer on Whom We May Depend For a Significant Portion of Our Sales, Could Significantly Reduce Our Revenues and Negatively Impact Our Results of Operations, Our Stock Price and Our Future Viability.

     We currently serve a limited number of customers, two of whom accounted for 32% and 11%, respectively, of our revenues for the three-month period ended September 30, 2002. Moreover, because we focus our sales efforts on a small group of potential customers in the health management solutions market we anticipate our operating results will continue to depend on sales to a small number of key customers for the foreseeable future. The loss of, or a reduction in sales to, any of our current customers or our failure to sell our products and services to additional customers would significantly reduce our future revenues and negatively impact our results of operations, our stock price and our future viability.

If We Do Not Hire and Retain Additional Sales, Marketing and Implementation Personnel We May Not Succeed in Implementing Our Growth Strategy and Achieving Our Target Revenue Growth.

     Our future growth depends to a significant extent on our ability to hire additional sales, marketing and implementation personnel in response to any increase in our customer base. Competition for these people is intense. We have experienced difficulty in hiring qualified sales and marketing professionals, as well as database administrators, and we may not be successful in attracting and retaining such individuals in part due to our recent reductions in force. If we do not hire additional qualified sales and marketing personnel, we may not succeed in implementing our growth strategy and our targeted revenue growth may not be achieved. In

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addition, even if our sales increase, our market penetration and revenue growth will be limited if we are unable to hire additional personnel to implement the medical management solutions we sell.

     We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. Many of our employees have only recently joined us, and we may experience high turnover rates in some categories of personnel. If we do not assimilate new employees in a timely and cost-effective manner, the productivity of those employees will be low, and as a result our operating results may decrease.

     In addition, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. Competitors or other companies may make such claims against us in the future as we seek to hire qualified personnel. Any claim of this nature could result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.

Our Future Success Depends in Significant Part Upon the Continued Service of Our Management Team.

     We have recently experienced significant changes in our senior management, which may be disruptive to our business and may result in the departure of employees and/or customers. Our management team has a great deal of experience in the software, medical management software and healthcare information technology industries in general and in the market for population health management solutions, in particular. While management is relatively inexperienced in the disease management industry, which is a relatively new market, they are uniquely qualified to manage our business and would be difficult to replace. These employees may voluntarily terminate their employment with us at any time. The search for a replacement for any of our key personnel could be time consuming, and could distract our management team from the day-to-day operations of our business. This could delay the implementation of our growth strategy and negatively impact our ability to achieve targeted revenue growth. In addition, we do not maintain key person life insurance on our key personnel.

     We do not believe that the departure of Eugene Cattarina, our President and Chief Executive Officer, will have a material adverse effect on our business and results of operations. Our current President and Chief Executive Officer, Eugene Miller, assumed these positions in January 2002.

The Length and Complexity of Our Sales Cycle and Product Implementation Period May Cause Us to Expend Substantial Time, Effort and Funds Without Receiving Related Revenue.

     We do not control many of the factors that influence our customers’ buying decisions and the implementation of our population health management solutions. The sales and implementation process for our solutions is lengthy, particularly for our medical management software products, and involves a significant technical evaluation and requires our customers to commit considerable time and money. The sale and implementation of our solutions are subject to delays due to healthcare payers’ and providers’ internal budgets and procedures for approving large capital expenditures and deploying new technologies and methodologies within their organizations. The sales cycle for our solutions is unpredictable and has generally ranged from six to twenty-four months from initial contact to contract signing. The time it takes to implement our medical management software solutions is also difficult to predict and has typically ranged from six to fifteen months from contract execution to the commencement of live operation. During the sales cycle and the implementation period, we may expend substantial time, effort and money preparing contract proposals, negotiating the contract and implementing the solution without receiving any related revenue.

Our Disease Management Solutions Depend on Accurate Member Data Provided by the Client, Which Must Be Received on a Timely Basis in Order for Us to Fulfill Our Obligations.

     Landacorp’s disease management solutions rely on claims data such as medical claims, prescription data, member contact information, UR data and lab data for the client to identify and target for intervention members at risk. The inability of a customer to provide this information on a timely basis, or the delivery of inaccurate or incorrect data could have an impact on our ability to fulfill customer obligations and deliver guaranteed savings and, therefore, achieve revenue expectations from particular contracts.

Our Managing for Tomorrow Disease Management Programs Rely on Complex, Proprietary Technology, the Malfunctioning of Which Could Delay or Impede the Realization of Revenue.

     Our Managing for Tomorrow programs rely on the engagement in the program of members targeted by a health plan or other payer organization. In order to fulfill our customer obligations, we rely on an automated system that uses sophisticated technologies and data

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management processes to contact, profile, stratify and intervene with these members with customized self-management materials. Additionally, this system automates workflow, and monitors and reports on results of the program. Our telecommunications hardware and a significant portion of our data and systems reside at an offsite data center owned by a co-location and managed hosting service. The co-location and managed hosting industry is experiencing a severe economic downturn, which could effect our co-location and managed hosting service provider. If our service provider were to curtail or close its business our access to our telecommunications hardware, systems and data could be interrupted until we can make co-location arrangements with a new service provider. Any such interruption or other malfunctions, system downtime or software errors could impede our ability to realize anticipated revenue, lead to an increase in our costs, adversely effect our relationship with our customers, and potentially expose us to liability.

We enter into Disease Management contracts that provide guaranteed levels of performance to our customers, and we may be required to refund to customers a significant portion of the subscription fees paid to us if we fail to achieve the guaranteed performance criteria.

     From time to time, the Company may enter into Disease Management contracts pursuant to which we guarantee certain minimum levels of cost savings or other performance measures to the customer. Under such contracts, we often agree to reimburse all or a portion of the subscription fees paid to us by the customer if we fail to achieve such minimum cost savings. Due to the large number of variables, many of which are not within our control, that could impact the realization of such minimum cost savings, there can be no assurance that we will achieve such savings. If we do not achieve the necessary cost savings we may be obligated to reimburse significant portions of the subscription fees paid to us by customers, we will not recognize the revenue associated with such fees and our business and reputation may be harmed. As of September 30, 2002, we had four contracts that contain some level of performance guarantee.

Our Medical Management Solutions are Complex and May Contain Undetected Software Errors, Which Could Lead to an Increase in Our Costs or a Reduction in Our Revenues.

     Complex software products such as our medical management solutions frequently contain undetected errors when first introduced or as new versions are released. We have, from time to time, found errors in our software products, and in the future we may find further errors. In addition, we combine our solutions with software and hardware products from other vendors. As a result, we may experience difficulty in identifying the source of an error. The occurrence of hardware and software errors, whether caused by our solutions or another vendor’s products, could:

	•		impair market acceptance of our products;
	•		cause sales of our solutions to decrease and our revenues to decline;
	•		cause us to incur significant warranty and repair costs;
	•		divert the attention of our technical personnel away from product development efforts; and
	•		cause significant customer relations problems.

Because Our Population Health Management Solutions Rely on Technology That We Own, Our Business Will Suffer if We Fail to Protect Our Intellectual Property Rights to That Technology Against Infringement by Competitors.

     To protect our intellectual property rights, we rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our solutions is difficult and the steps we have taken may not prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If we fail to protect our intellectual property from infringement, other companies may use our intellectual property to offer competitive products at lower prices. If we fail to compete effectively against these companies we could lose customers and sales of our solutions and our revenue could decline.

Efforts to Protect Our Intellectual Property or Our Alleged Misuse of the Intellectual Property of Others May Cause Us to Become Involved in Costly and Lengthy Litigation.

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     Although we are not currently involved in any intellectual property litigation, we may be a party to litigation in the future either to protect our intellectual property or as a result of an alleged infringement by us of the intellectual property of others. These claims and any resulting litigation could subject us to significant liability or invalidate our ownership rights in the technology used in our solutions. Litigation, regardless of the merits of the claim or outcome, could consume a great deal of our time and money and would divert management time and attention away from our core business. Any potential intellectual property litigation could also force us to do one or more of the following:

	•		stop using the challenged intellectual property or selling our products or services that incorporate it;
	•		obtain a license to use the challenged intellectual property or to sell products or services that incorporate it, which could be costly or unavailable; and
	•		redesign those products or services that are based on or incorporate the challenged intellectual property, which could be costly and time consuming or could adversely affect the functionality and market acceptance of our products.

     If we must take any of the foregoing actions, we may be unable to manufacture and sell our solutions, which would substantially reduce our revenue.

We Face Significant Competition From, Among Others, Disease Management Vendors, Medical Management Software Vendors, Internet Companies and Consulting Groups Focused on the Healthcare Industry.

     We face intense market competition for our population health management solutions. Many of our competitors have greater financial, technical, product development, marketing and other resources than we have. Because these organizations may be better known and have more customers than us, we may not compete successfully against them. The principal companies we compete against in the disease management market include American Healthways, CorSolutions, Lifemasters and Matria Healthcare. Our principal competitors in the medical management software payer market include HPR (a subsidiary of McKesson HBOC), MEDecision, and others. In the healthcare delivery segment of the medical management software market, we compete against MIDS (a division of Affiliated Computer Systems, Inc.), SoftMed Systems and others. We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries.

Rapidly Changing Technology May Impair Our Ability to Develop and Market Our Population Health Management Solutions.

     Because our business relies on technology, it is susceptible to:

	•		rapid technological change;
	•		changing customer needs;
	•		frequent new product introductions; and
	•		evolving industry standards.

     In particular, the Internet is evolving rapidly and the technology used in Internet related products changes rapidly. As the Internet, computer and software industries continue to experience rapid technological change, we must quickly modify our solutions to adapt to such changes. The demands of operating in such an environment may delay or prevent our development and introduction of new solutions and additional functions for our existing solutions that must continue to meet changing market demands and keep pace with evolving industry standards. Moreover, competitors may develop products superior to our solutions, which could make our products obsolete.

Our Customers May Encounter System Delays, Failures or Loss of Data When Using Our Internet-Based Medical Management Solution and Internet Capabilities of Our Disease Management Products and Services as a Result of Disruptions or Other Problems With Internet Services and Internet Access Provided by Third Parties.

     System delays, failures or loss of data experienced by our customers could harm our business. The success of our Internet-based medical management solutions and disease management capabilities depend on the efficient operation of Internet connections among

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our payer customers and their members and associated providers, and with Landacorp. These connections, in turn, depend on the efficient operation of Internet service providers, Internet connections and Web browsers. In the past, Internet users have occasionally experienced difficulties with Internet connections and services due to system failures. Any disruption in Internet access provided by third parties could delay or disrupt the performance of our Internet-based solutions, and consequently, make them less acceptable to payers. Furthermore, we will depend on our customers’ hardware suppliers for prompt delivery, installation and service of the equipment that runs our applications.

Security Breaches and Security Concerns About Internet Transmissions May Cause Customers to Refuse to Purchase or Discontinue the Use of Our Population Health Management Solutions.

     Our customers will retain confidential customer and patient information using our solutions. An experienced computer user who is able to access our customers’ computer systems could gain access to confidential patient and company information. Therefore, our products must remain secure and the market must perceive them as secure. The occurrence of security breaches could cause customers to refuse to purchase or discontinue use of our solutions. Protecting against such security breaches or alleviating problems caused by security breaches may require us to expend significant capital and other resources. In addition, upgrading our systems to incorporate more advanced encryption and authentication technology as it becomes available may cause us to spend significant resources and encounter costly delays. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the market for our Internet-based population health management solutions.

We Operate in an Industry Subject to Changing Regulatory Influences, Which Could Limit the Usefulness of Our Solutions or Require Us to Make Expensive and Time-Consuming Modifications to Our Products.

     During the past several years, federal, state and local governments have increased their regulation of the U.S. healthcare industry and have proposed numerous healthcare industry reforms. These reforms may increase governmental involvement in healthcare, continue to reduce reimbursement rates and otherwise change the operating environment for our customers.

     Our customers may react to these proposals and the uncertainty surrounding the proposals by curtailing or deferring investments, including those for our medical management solutions.

     Existing state and federal laws regulate the confidentiality of healthcare information and the circumstances under which such records may be released. Congress is considering further legislation and the Department of Health and Human Services has proposed regulations that would further regulate the confidentiality of healthcare information. In addition, the Department of Health and Human Services has proposed regulations setting forth security standards for all health plans, clearinghouses and providers to follow with respect to healthcare information that is electronically transmitted, processed or stored. While these laws and regulations may not apply to us directly, our products must comply with existing and future laws and regulations in order to achieve market acceptance. Such compliance may be difficult and expensive or even impossible to achieve. These laws or regulations could restrict the ability of our customers to obtain, use or disseminate patient information, which in turn could limit the usefulness of our medical management solutions causing a decrease in our sales.

     Because of the Internet’s popularity and increasing use, new laws and regulations with respect to the Internet are becoming prevalent. Such new laws and regulations could limit the effectiveness and market acceptance of our Internet-based solutions or could cause us to have to modify our solutions, which could be expensive and time consuming.

Our Population Health Management Solutions Will Have to Contain HIPAA-Compliant Features and Functionality to Remain Marketable.

     These new regulations are proposed and may be modified prior to becoming final. Our products may require modification in the future. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations our business will suffer.

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Consolidation in the Healthcare Industry Could Lead to Large Integrated Healthcare Delivery Systems Who May Use Their Enhanced Market Power to Force Price Reductions for Our Population Health Management Solutions and Related Services.

Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. Our operating results may suffer if we reduce our prices without achieving corresponding reductions in our expenses.

     We May Encounter Acquisition-Related Risks Such as Becoming Responsible for Unexpected Liabilities of Acquired Businesses and Difficulties Integrating Employees and Operations of Acquired Businesses.

     We expect to review opportunities to acquire other businesses or technologies. In connection with acquisitions, we could:

	•		issue stock that would dilute our stockholders’ percentage ownership;
	•		incur debt; or
	•		assume liabilities.

     Acquisitions could involve numerous risks, including:

	•		problems integrating the purchased operations, technologies or products;
	•		unanticipated costs or unexpected liabilities;
	•		diversion of our management’s attention from our core business;
	•		interference with existing business relationships with suppliers and customers;
	•		risks associated with entering markets in which we have no or limited prior experience; and
	•		potential loss of key employees of purchased organizations.

     We may not be able to successfully integrate any businesses, products, technologies or personnel that we might purchase in the future.

Our Principal Stockholders Have Significant Voting Power, Which May Limit Our Stockholder’s Ability to Influence the Outcome of Director Elections and Other Stockholder Matters.

     Our executive officers and directors and their affiliates beneficially own, in the aggregate, approximately 48% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us.

Due to Our Limited Funds, We May Be Unable to Develop or Enhance Our Population Health Management Solutions, Take Advantage of Future Opportunities or Respond to Competitive Pressures or Unanticipated Events.

     Our funds are limited. They consist of the net proceeds of our initial public offering, together with other cash and cash equivalents and limited anticipated cash flow from operations. We believe that these funds will be sufficient to meet our capital and operating expense requirements for the next twelve months. Thereafter, we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings if such funding is available on terms acceptable to us. However, if we are not able to sign one or more of the contracts presently in negotiations, we will need to seek a strategic partner or raise additional funds within the next twelve months. If

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we cannot raise capital on acceptable terms and when needed, we may not have the resources to develop new products or enhance existing products, take advantage of future opportunities or respond to competitive pressures or unanticipated events.

We have experienced over $4 million in impairments of our fixed and intangible assets since the first quarter of 2001, and our assets may continue to become additionally impaired in the future.

     During the first quarter of 2001, we recorded an impairment of intangible assets in the amount of $704,000 in connection with the shutting down of our web consulting business.

     During the second quarter of 2002, primarily due to a decline in demand for services in the Company’s Disease Management reporting unit, management determined that it was necessary to test for an impairment of long-lived assets. As a result of this test and the subsequent analysis of the fair value of its Disease Management reporting unit, Landacorp recorded an impairment to its long-lived assets in the amount of $3,300,000 during the second quarter of 2002. In accordance with the provisions of SFAS 144 and 142, we will continue to evaluate the fair value of our reporting units and the recoverability of the assets contained therein.

     The impairments recorded during the quarter ended March 31, 2001 and the quarter ended June 30, 2002 were based on assumptions that reflected management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in additional impairment charges.

Our Stock Price Has Been Highly Volatile, and Your Investment Could Suffer a Decline in Value.

     The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

	•		actual or anticipated variations in quarterly operating results;
	•		failure to achieve, or changes in, financial estimates by securities analysts;
	•		announcements of new products or services or technological innovations by us or our competitors;
	•		conditions or trends in the healthcare industry;
	•		announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		additions or departures of key personnel and/or members of our board of directors;
	•		increases and decreases in our customer base;
	•		litigation or threats of litigation;
	•		regulatory developments or changes in regulatory guidance;
	•		sales of our common stock; and
	•		developments regarding our patents or other intellectual property or that of our competitors.

     In addition, the stock market in general, and the NASDAQ National Market and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of healthcare services and software companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources.

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There May Not be an Active, Liquid Trading Market For Our Common Stock. As of the Opening of Trading on November 7, 2002, Our Common Stock Has Traded on the NASDAQ Stock Market’s SmallCap Market.

     There is no guarantee that an active trading market for our Common Stock will be maintained on the NASDAQ SmallCap Market. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

     We are currently trading below $1 per share, the minimum bid price per share required for continued listing on the NASDAQ SmallCap Market. In addition, the NASDAQ recently proposed certain rule changes which, if adopted in their current form, may require us to make significant changes to the membership of our board of directors and audit committee. If our stock continues to trade below the minimum bid price per share, or if we were to be unable to comply with any new rules within the time frame prescribed by the NASDAQ, we could be delisted from trading on such market, and thereafter trading in our common stock, if any, would be conducted through the over-the-counter market or on the Electronic Bulletin Board of the National Association of Securities Dealers, Inc.

Sales of Large Numbers of Shares of Our Common Stock Could Cause Our Stock Price to Decline.

     The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. All of the shares sold in our initial public offering are now freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our affiliates, as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are restricted securities as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act, to the extent permitted by Rule 144 or other exemptions under the Securities Act. In November 2000, we issued an aggregate 2,740,000 additional restricted shares of common stock to former shareholders of PatientCentrix. In addition, we assumed options to purchase 492,502 shares of our common stock to former shareholders and option holders of PatientCentrix

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

     The primary objective of our investment activities is to preserve principal, while maximizing yields and avoiding a significant increase in risk. To achieve this objective, we invest in highly liquid and high-quality money market accounts that invest in debt securities. Our investment in debt securities is subject to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, we invest in money market accounts that invest only in short-term securities that maintain an average maturity of less than one year and debt securities that also have an average maturity of less than one year. As a result, we do not believe we are subject to significant market risk.

Item 4.  Company Disclosure Controls and Procedures

     As of September 30, 2002, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Management, including the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2002. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

     The Company is not a party to any material legal proceedings.

Item 2.  Changes in Securities

     None.

Item 3.  Defaults in Senior Securities

     None.

Item 4.  Submission of Matters to a Vote of Security Holders

     None.

Item 5.  Other Information

     None.

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits.

(b)  Reports on Form 8-K

	We filed a Current Report on Form 8-K with the SEC dated July 31, 2002, reporting that we entered into the First Amended and Restated Services and Systems Agreement (the “Amended Agreement”) with Lifeguard, Inc., a private not-for-profit heath plan, and its affiliate Lifeguard Insurance Co. (Collectively, “Lifeguard”).

We filed a Current Report on Form 8-K with the SEC dated October 15, 2002 reporting that we entered into the Second Amended and Restated Services and Systems Agreement with Lifeguard (the “Second Amended Agreement”). The Second Amended Agreement amends and restates the original November 2001 Services and System Agreement, which was first amended on July 31, 2002. The Second Amended Agreement provides, among other things, that the Amended Agreement will terminate on November 30, 2002 and no fees paid to Landacorp will be reimbursable to Lifeguard. Among certain other changes, the Company and Lifeguard have agreed to delete from the Amended Agreement certain provisions relating to The Company’s obligations to reimburse Lifeguard for certain fees and to indemnify Lifeguard and its affiliates for certain liabilities.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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SARBANES-OXLEY SECTION 302(A) CERTIFICATION

I, Eugene Miller, President and Chief Executive Officer of Landacorp, Inc. certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Landacorp, Inc;

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

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

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

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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

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SARBANES-OXLEY SECTION 302(A) CERTIFICATION

I, Mark Rapoport, Chief Operating Officer and Chief Financial Officer of Landacorp, Inc. certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Landacorp, Inc;

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

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

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

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and