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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number: 000-29377

Landacorp, Inc.

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of Act).     Yes o          No þ

      The aggregate market value of the voting and non-voting common stock held by persons other than those who may be deemed affiliates of the Company as of March 20, 2003, was $4,862,809. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

      The number of shares of the Registrant’s Common Stock outstanding as of March 20, 2003 was 15,964,593.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s Proxy Statement for its 2003 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference to Part III of this Form 10-K Report.

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LANDACORP, INC.

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PART I

       This report contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. Examples of such forward-looking statements include projections of our future results of operations or of our financial condition and plans to hire additional personnel; our market opportunities; deployment, capabilities and uses of our products and services; advantages and advancements that may be enabled by our products; product development and product innovations; developments in the healthcare and population health management industries; expansion of our intellectual property portfolio; growth in our research and development, sales, marketing and general administrative expenses; and anticipated trends in our business. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, Landacorp’s dependence on a limited number of products with limited market acceptance and other risk factors that are discussed in this Form 10-K and the Company’s other filings with the SEC. Such statements reflect the judgment of the Company as of the date of this annual report on Form 10-K with respect to future events, the outcome of which is subject to certain risks, including the risk factors set forth below, which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Landacorp undertakes no obligation to update forward looking statements.

      Landacorp, Maxsys II, maxMC, and Managing for Tomorrow are trademarks or registered trademarks of Landacorp, Inc. All other trademarks are the property of their respective owners.

Item 1.     Business

      Landacorp provides population health management solutions to healthcare payer and delivery organizations. Our innovative predictive modeling and chronic condition management programs work together with our Internet-and Windows®-based medical management software to deliver comprehensive solutions that can help our clients better manage their at-risk patient populations. This can result in prevented and reduced cost, while improving health outcomes. Combined, our products and services comprise a unique set of capabilities that support our customers across the continuum of patient care.

      Landacorp’s care management solutions — our predictive modeling and chronic condition management capabilities — help health plans and other payers identify and intervene with members who have health conditions like asthma, diabetes and heart disease and are at risk for potentially high predicted expenditure outcomes associated with their condition. These member-focused solutions help our clients manage the health of these members through the delivery of consistent and appropriate educational information and self-management materials, or through referral to the customer’s nurse case managers. Taken together, Landacorp’s care management solutions allow customers to integrate targeting capabilities with a wide range of multi-disease intervention solutions to reach identified at-risk members. These programs also support our clients’ branding and marketing efforts by helping them build stronger, more binding relationships with their members through the communication tools and methodologies used to deliver information.

      Landacorp’s medical management software solutions help healthcare payers, and hospitals and healthcare delivery systems manage the cost and care of their patients by documenting treatment, ensuring that clinical guidelines and government compliance requirements are met, and by automating the workflow and processes surrounding care coordination activities. These applications use customer-defined business process rules to streamline administrative and business processes; facilitate interaction among various healthcare participants; and minimize inefficient paper-, fax- and phone-based communications. Our software solutions utilize an n-tiered system architecture that enables them to complement existing information systems, as well as other Internet-based products, with a rich set of functions. They are flexible and secure, and can be deployed across

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      Landacorp was incorporated on April 27, 1982 as Landa Management Systems Corporation, a California corporation. We reincorporated as Landacorp, Inc., a Delaware corporation, on December 3, 1999. In October of 2000, we acquired ProMedex, Inc., which provides our Managing for Tomorrow® member-driven chronic condition management products. In November 2000, we acquired PatientCentrix, Inc., which provides our care analytics, predictive modeling and targeting solutions. These capabilities comprise our care management solutions.

      Landacorp offers four solutions to healthcare payers. maxMC™ and e-maxMC, its web-enabling application, are our medical management software products for this market. Our Managing for Tomorrow programs are a unique, high-tech/light-touch approach to chronic condition management that is designed to improve member self-management skills. These skills are essential to reducing modifiable risks associated with chronic diseases, pregnancy, smoking, weight management, and general wellness. Our care analytics solutions provide disease management predictive modeling and interventional targeting workflow software. As of December 31, 2002, 18 payer organizations that claim to have a combined membership of approximately 48 million participants were using our products, all of which are being implemented or are operational and in use among our client base.

      Our solutions benefit payers by:

	•	analyzing data to identify and target health plan members with chronic conditions who are at risk for an acute-care episode;
	•	providing interventional software to support the health plan in engaging with members to modify their behavior prior to a costly acute-care episode;
	•	providing intervention services to members with chronic diseases;
	•	providing members with health kits and educational information relevant to their disease type and disease states;
	•	providing general wellness programs such as smoking cessation and weight management;
	•	aggregating member data for trend analysis and decision support;
	•	automating and streamlining administrative and business processes, and clinical procedures and transactions to enhance operational efficiencies;
	•	increasing adherence to clinical guidelines to reduce delivery of inappropriate care;
	•	enhancing member satisfaction and supporting their marketing, branding and service efforts by providing consumer, member, or patient access to products, services and educational materials via the use of multiple media; and
	•	providing additional revenue opportunities.

Members benefit from:

	•	increased access to health information content;
	•	empowerment and self-care, including participation in case management, disease management and wellness programs; and
	•	improved information flow such as referral tracking, claims status inquiries and personal information updating.

      Maxsys II™ is our medical management software product for hospital and healthcare delivery systems. As of December 31, 2002, approximately 139 hospitals were using Maxsys II or its predecessor, Maxsys I, which we no longer market, but continue to support with a maintenance program.

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      Our solutions benefit hospitals and healthcare delivery organizations providers by:

	•	automating and streamlining administrative and business processes and clinical procedures and transactions to enhance operational efficiencies;
	•	reducing payment denials and claims appeals by payers;
	•	increasing quality and consistency of care;
	•	improving the efficiency of incident reporting and reducing the risk of legal liability;
	•	assisting with accreditation and administration of compliance programs; and
	•	aggregating data for trend analysis and decision support.

      Landacorp’s population health management solutions are identified under two solutions groups: Care Management and Medical Management Software. For the year ended December 31, 2002, these product groups accounted for 59.1% and 40.9% of revenue, respectively.

      Our Care Management solutions are comprised of our Care Analytics predictive modeling and targeting capabilities and our Managing for Tomorrow chronic condition management programs.

      Landacorp’s Care Analytics capabilities provide data compilation, warehousing and analysis solutions that help payer organizations identify and intervene with their potentially high-cost members. These solutions have been designed to help improve the efficiency and results of health and disease management programs by helping reduce healthcare costs through early identification and intervention with high-risk members. This is achieved by identifying the potentially high-cost sub-set of a health plan’s members and facilitating interventions with them before serious health problems occur. As a result, health plans can save significant medical management expense, while helping prevent members from experiencing acute, adverse health episodes that may require hospitalizations.

      These predictive modeling and database building applications provide a full-service solution for targeted and proactive ambulatory care management needs. They support large-scale implementation of patient-centric healthcare management by managing and analyzing a variety of sources of claims data (e.g., medical claims, prescription data, membership, UR data and lab data) to facilitate rapid claims warehousing, and patient-centric and provider profiling for over 20 disease states. Patients are stratified according to their degree of risk, allowing an organization to appropriately deploy resources and programs.

      Our Managing for Tomorrow programs empower consumers to become active participants in managing their health. This is achieved by connecting patients, providers and health plans to improve self-management skills that are essential to reducing modifiable risks associated with chronic diseases, pregnancy, smoking, weight management, and general wellness. Managing for Tomorrow is a Landacorp-developed approach to health management that uses technologies including the Internet, advanced telephony, and conventional media to contact, profile, stratify and intervene with a health plan’s members. Based on their responses to a health risk assessment, a customized, informative health guide is created for each respondent and is provided along with lab test kits (if appropriate). Program participants use these tools to help self-manage their condition and to enhance their relationship with their physician. Participants who require intervention from a registered nurse are electronically transferred to the health plan’s case management department for follow-up. These care managers can then work with the participant utilizing Landacorp’s Web-based case management tool. Outcomes measurement and reporting are built into all programs. All intervention programs include communications tools to facilitate providers and patients working together.

      Landacorp provides Managing for Tomorrow programs for the following health conditions: asthma, cardiac disease, congestive heart failure, diabetes, pregnancy risk management, weight management, hypertension and smoking cessation. Through these programs, participants can achieve an improved quality of life

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      Health plans can realize the following benefits from these programs:

	•	Reduced direct cost of care for many chronic conditions;
	•	Improved patient and clinical compliance and outcomes;
	•	Improved multiple Health Plan Employer Data and Information Set (HEDIS®) scores while providing outcomes monitoring;
	•	Enhanced formulary compliance through education and provider feedback;
	•	Strengthened relationships with members;
	•	Market differentiation;
	•	Enhanced branding; and
	•	Additional revenue opportunities.

      Program sponsors, such as employers, can benefit from:

	•	Reduced healthcare costs;
	•	Reduced absence from work;
	•	Improved productivity; and
	•	Improved employee morale.

      Participants can benefit from:

	•	Improved knowledge of their condition;
	•	Improved self-management skills;
	•	Regular monitoring of their condition;
	•	Improved quality of life and sense of well-being; and
	•	Strengthened relationships with their healthcare provider.

      Landacorp is currently one of only a few companies with the expertise to provide medical management software to both healthcare delivery and payer organizations. Our Maxsys II, maxMC and e-maxMC software products and applications help hospitals and health plans deliver high quality patient care while managing cost by documenting treatment, ensuring that care guidelines and government compliance requirements are met, and by automating the workflow and processes surrounding care coordination activities.

      Maxsys II was developed to help hospitals and integrated delivery systems automate the critical business functions required in today’s healthcare delivery environment, as well as help minimize many of the risks associated with providing patient care. Maxsys II achieves this through an integrated suite of quality and resource management modules, workflow and process improvement applications, and decision support capabilities that manage and coordinate the care process both with payers and within a healthcare delivery organization.

      For payer organizations, our maxMC product automates and simplifies many of the administrative and care-planning activities associated with administering healthcare plans to large member populations. maxMC

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      With e-maxMC, Landacorp provides Web-enabling companion software to maxMC that allows health plans and provider organizations to interact over the web to achieve more timely and cost-effective medical management. Authorized users can interact with a hosting payer organization for a variety of applications using web browsers and industry-standard protocols.

      The flexible and open design of our medical management software solutions enables us to configure them to address our customers’ evolving needs and specific clinical, administrative and business requirements. Among their key features are:

	•	Rules Based Processing Capabilities. Our workflow engine utilizes a series of customized “if . . . then . . .” associations to trigger actions based upon changes in the state of any data within the database (e.g., automatically notifying a case manager if a high-risk authorization is requested).
	•	Clinical Guidelines Integrated into Workflow Applications. Our solutions incorporate industry standard clinical guidelines and specific medical management criteria provided by our customers into automated authorization, case management and disease management workflow processes.
	•	Interfacing Capabilities. We have built more than 250 interfaces, which enable efficient integration of our medical management solutions with other data systems. An interface is a method for transferring data from one system to another and a point at which a user can automatically launch a third-party program from within a given data system.
	•	Trend Analysis and Decision Support Tools. Our solutions enable healthcare personnel to view data in graphical formats to identify trends and spend more time resolving issues rather than identifying them.

      maxMC is Landacorp’s core medical management solution for payers. maxMC integrates a payer’s internal medical management guidelines and clinical, administrative and business processes with specific information about a payer’s members. Key functions of this product include:

	•	Care Coordination Center. This function verifies membership and benefits eligibility and incorporates industry standard clinical guidelines, including InterQual® and Milliman & Robertson Care Guidelines, and criteria provided by the payer into the treatment decision process to ensure consistent decisions about care across member populations. Medical management staff may intervene early to maximize the member’s benefits and alternatives for care, while ensuring coordination of services from home through acute and outpatient care. Completed decisions may then be promptly and directly exported to the claim adjudication system.
	•	Case and Disease Management. This function supports both case management and disease management programs using a combination of clinical disease assessment protocols selected by the client. The client can apply these protocols to determine appropriate levels of care, perform short- and long-term care planning and minimize costly unnecessary procedures. The client can deploy health assessments to identify members requiring case or disease management, care planning or healthcare education.
	•	Credentialing. This function assists with maintenance and review of healthcare provider credentials by automating the maintenance and review of physician and other care provider information, such as continuing medical education credits, medical board certifications and records of disciplinary and other adverse actions. Using this function, a payer can efficiently send requests for data to the National Practitioner Data Bank and other governmental bodies, and receive and incorporate that data in its systems for use in regulatory compliance and other decision-making.

      e-maxMC is our web-enabling medical management application for payers. e-maxMC, introduces providers and members into payers’ internal medical management systems by combining the immediate and broad-based connectivity of the Internet with the medical management functions of our maxMC solution.

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      e-maxMC enables the following Web-based interactions between payers and providers:

	•	Referral Advice. Online notification to payers of referrals to specialists and others by primary care physicians.
	•	Treatment Requests and Communications. Affords primary care physicians and specialists a medium for conducting online eligibility checks, requests for care, clinical criteria analysis and benefits checks, in each case, in accordance with individual payers’ requirements.
	•	Assignment of Care. Online capability for primary care physicians to assign care management to appropriate specialists.
	•	Cross-coverage. Online notification by one primary care physician that another primary care physician will provide coverage for a specific period of time.
	•	Case and Disease Management Program Enrollment. Online requests that patients be considered for enrollment in a particular case or disease management program.
	•	Inpatient Admission. Online notification by an inpatient facility that a member has been admitted.
	•	Health Risk Assessment. Online completion of health risk assessments by primary care physicians and specialists.

      e-maxMC enables the following Web-based interactions between payers and their members:

	•	Information Exchange. Online reviewing and updating of member demographic information and checking of plan benefit and claim status information.
	•	Physician Selection. Online selection of primary care physician in accordance with payer-specific policies from up-to-date lists of in-network physicians.
	•	Health Risk Assessment. Online completion of health risk assessments by members.

      Maxsys II is Landacorp’s medical management solution for hospitals and healthcare delivery organizations. It enables them to improve communications and apply more efficient workflow tools to the healthcare delivery process. Maxsys II is the successor to our Maxsys I product, which we no longer market but continue to support with a maintenance program. Key functions of our Maxsys II solution include:

	•	Case/Utilization Management. This function helps ensure that patients receive appropriate levels of care and minimizes expenses associated with inappropriate and unduly lengthy hospital stays. It enables providers to reduce inefficient use of human resources and reduce denials of reimbursement by payers resulting from failure to follow payer guidelines. Our provider customers achieve these outcomes through the automation of the initial evaluation and on-going review of patient care in order to monitor compliance with clinical guidelines, including guidelines provided by the provider customer and industry standard clinical guidelines, such as InterQual and Milliman & Robertson Care Guidelines.
	•	Quality Management. This function helps identify deficiencies in patient care or provider performance and alerts process improvement personnel in order to promote early intervention. It allows a provider organization’s staff to monitor and evaluate care processes, treatments, operative procedures and outcomes. It also permits quality managers to better monitor high-cost, high-risk procedures and to enforce quality initiatives by providing variance reporting, process monitoring and centralized data.
	•	Risk Management. This function helps to reduce financial losses by automating and supporting timely and thorough investigations, interventions, communication and education regarding potential and actual claims. This function enables a provider organization’s risk management staff to be notified instantly as incidents are reported by personnel anywhere within the organization. The function also

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		supports efficient management, tracking and analysis of potential and asserted claims by patient/episode, staff members, physicians, allied health professionals and visitors.
	•	Infection Control. This function facilitates effective management of epidemiology and analysis of treatment protocols based on the National Nosocomial Infections Study model, which reports the national standards for epidemiological studies. The function eliminates redundant manual data entry by extracting pertinent data from other sources in a provider organization’s information technology system and from data collected by case and quality management staff.
	•	Credentialing. This function supports the tracking of provider (i.e.; physician) credentials by automating the maintenance and review of care provider information such as continuing medical education credits, medical board certifications and records of disciplinary and other adverse actions. It also facilitates the exchange of data with the National Practitioner Data bank and other governmental bodies.

      We offer our payer and provider customers comprehensive implementation and consulting services.

      Care management:

	•	disease management call center design and implementation;
	•	disease management intervention training;
	•	actuarial and other consulting services;
	•	marketing tools and support;
	•	call center support services; and
	•	fulfillment and distribution facilities and services.

      Medical Management software:

	•	project management;
	•	identification of customer-specific system requirements;
	•	consideration of interactions between our solutions and our customer’s information systems and designing appropriate administrative, clinical and business processes;
	•	building proprietary interfaces to other systems and configuring hardware and software to support the customer’s administrative, clinical and business processes;
	•	training customer personnel;
	•	delivery of our software solutions via an application service provider (ASP) model;
	•	designing and implementing branding strategies and sticky applications based on our care management solutions;
	•	determining hardware and software requirements; and
	•	providing general health content, disease management tools and e-commerce capabilities.

      Landacorp targets payer organizations with membership ranging from 50,000 to several million covered lives. We currently serve 18 payer organizations that claim to have a combined membership of approximately 48 million participants. Our top healthcare payer customers are Aetna, Highmark (Blue Cross Blue Shield of Western Pennsylvania), WellPoint, Blue Cross Blue Shield of North Carolina, Blue Cross and Blue Shield of South Carolina, ONE (part of Great West Life Assurance Company), and Renal Management Systems (a

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      During 2002, ONE and Blue Cross and Blue Shield of South Carolina accounted for 21% and 15% of our revenue, respectively. 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.

      We target hospitals and healthcare delivery organizations with licensed beds ranging from several thousand to as few as 250. We currently serve approximately 139 such organizations. Among our leading provider customers are Rush Presbyterian-St. Lukes’s Medical Center, University of Texas M. D. Anderson Cancer Center, BJC Health System, Atlantic Health System, Baptist Healthcare Systems, Inc., and New York and Presbyterian Healthcare System. Many of our hospital provider customers continue to use Maxsys I, the predecessor of Maxsys II, which we no longer market, but continue to support with a maintenance program.

      We believe that our proprietary technology platforms provide us with a competitive advantage. Our products utilize n-tiered and Web architecture systems derived from our proprietary object oriented software foundation. Through the application of middleware platforms or service-oriented applications that include business rules and service functions, our technology supports our population health management solutions by ensuring high availability and scalability. Additionally, the solutions are designed with complementary tool kits that enable powerful customizations and extensions that are specific to each implementation. We currently employ both Oracle® and Microsoft® SQLServer database management systems to support the data storage requirements of our solutions.

      We have developed an open architecture standard, allowing separate functional components to run on several different hardware platforms. Maxsys II and maxMC are based on the leading fourth generation language of PowerBuilder™ and run on standard Intel®-compatible personal computers accessing Oracle databases. Our common object request broker architecture, or CORBA, based rules engine runs on Microsoft Windows™-NT and Windows™ 2000. e-maxMC, which utilizes Java®, Java Servelets, Enterprise Java Beans™ (EJB), and XML for its functionality and either Microsoft’s Internet Explorer™ or Netscape’s Netscape Communicator™ browsers for the provider interface, makes use of any Internet capable system with the application itself being served by leading UNIX® or Microsoft NT platforms. Our data interface engine operates on the leading UNIX or Microsoft NT/2000 platforms. Additional servers may be placed in the system, such as report servers, fax servers or additional web/application servers, in order to ensure scalability and fault tolerance without performance loss. The interaction of all these services, applications, and middleware makes the system truly n-tiered, rather than two-tiered (client/server) or three-tiered (client/application/server). Our Care Analytics predictive modeling and targeting applications have been developed using Visual Basic and runs on the same desktop platforms accessing Microsoft SQLServer databases. Our Managing for Tomorrow program utilizes Oracle databases, Interactive Voice Response and Web-based front-ends with PLSQL to script out the health risk assessment rules.

      Total Research and Development expenditures, including expenditures for our IT Operations in Care Management, for 2000, 2001 and 2002 were $4,214,000, $6,361,000, and $5,351,000, respectively.

      The market for our population health management solutions is highly competitive and is characterized by rapidly changing technology, evolving user needs and the frequent introduction of new products and services. Our care management products compete against disease management companies including American

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      We believe that the absence of vendors capable of providing flexible, stand-alone medical management and care management products and service, as well as an integrated population health management solution to support the continuum of patient care represents a significant market opportunity for Landacorp. We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries. We believe that the principal factors affecting competition in our markets include product functionality, performance, flexibility and features, use of open standards technology, quality of service and support, company reputation, price, scalability and overall cost of ownership.

      We depend upon our proprietary information and technology. We rely primarily on a combination of copyright, trademark and trade secret laws and license agreements to establish and protect our rights in our software products and other proprietary technology. Landacorp requires employees and third-party consultants and contractors to enter into nondisclosure agreements to limit use of, access to, and distribution of, our proprietary information. Nevertheless, our means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully or in the same manner as do the laws of the United States. Also, despite the steps taken by us to protect our proprietary rights, unauthorized third parties may be able to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. Furthermore, others may independently develop technologies similar or superior to our technology, or design around the proprietary rights that we own.

      Participants in the healthcare industry, such as our payer and provider customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of healthcare information such as patient medical records. Legislators at both the state and federal levels have proposed additional legislation relating to the use and disclosure of medical information, and the federal government is likely to enact new federal laws or regulations in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996, HIPAA, the Department of Health and Human Services, DHHS, has proposed regulations setting forth security and privacy standards for all health plans, clearinghouses and providers to follow with respect to an individual’s healthcare information that is electronically transmitted, processed, or stored. In addition, Congress is currently considering various legislative proposals regarding security related to health information.

      Since both our provider customers and payer customers must comply with HIPAA, its associated regulations and all other applicable healthcare laws and regulations, Landacorp is taking the appropriate steps to ensure that our products and business practices are HIPAA-ready. Accordingly, in order for our medical management solutions to be marketable, they must contain features and functionality that allow our customers to comply with these laws and regulations, and we have established an ongoing program to ready our products and our employees to comply with HIPAA’s final security rules. We believe our products currently allow our customers to comply with existing laws and regulations. However, because new regulations are yet to come and because the proposed regulations may be modified prior to becoming final, our products may require modification in the future. Such modifications will become part of our standard maintenance releases and upgrades. 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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      In addition, laws governing healthcare payers and providers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.

      The Internet and its associated technologies are also subject to government regulation. Many existing laws and regulations, when enacted, did not anticipate the methods of Internet-based medical management solutions we offer. We believe, however, that these laws and regulations may nonetheless be applied to us. Current laws and regulations which may affect our Internet-based business relate to the following:

	•	patient medical record information;
	•	the electronic transmission of information between healthcare providers, payers, clearinghouses and other healthcare industry participants;
	•	the use of software applications in the diagnosis, cure, treatment, mitigation or prevention of disease;
	•	health maintenance organizations, insurers, healthcare service providers and/or employee health benefit plans; and
	•	the relationships between or among healthcare providers.

      We expect to conduct our Internet-based business in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, the impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations. These requirements or interpretations could also limit the use of the Internet for our medical management solutions or even prohibit the sale of a particular product or service.

      Because of the Internet’s popularity and increasing use, new laws and regulations with respect to the Internet are becoming more prevalent. Such laws and regulations have covered, or may cover in the future, issues such as:

	•	security, privacy and encryption;
	•	pricing;
	•	taxation;
	•	content;
	•	copyrights and other intellectual property;
	•	contracting and selling over the Internet;
	•	distribution; and
	•	characteristics and quality of services.

      Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our Internet-based applications and services may be affected by additional regulation of the Internet. Any new legislation or regulation regarding the Internet, or the application of existing law and regulations to the Internet, could adversely affect our business. Additionally, while we do not currently operate outside of the United States, the international regulatory environment relating to the Internet market could have an adverse effect on our business, especially if we expand internationally.

      The growth of the Internet, coupled with publicity regarding Internet fraud, may also lead to the enactment of more stringent consumer protection laws. These laws may impose additional burdens on our business. The enactment of any additional laws or regulations in this area may impede the growth of the Internet, which could decrease our potential revenues or otherwise cause our business to suffer.

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      As of December 31, 2002, we employed 153 employees.

      Our success depends on our continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense in the information technology industry, particularly for talented software developers, service consultants, and sales and marketing personnel. We may not be able to attract and retain qualified personnel in the future.

      We employ an internal direct sales force. We have eight employees directly involved in the sales effort.

      Our employees are not members of any labor union. We consider our relations with our employees to be good.

      The Company maintains offices in Atlanta, Georgia, Chico, California and Raleigh, North Carolina. We have under leases approximately 61,000 square feet of office space, of which approximately 53,000 is currently utilized. We anticipate that our current facilities are adequate for our current needs.

      Landacorp is not currently involved in any material litigation.

      None.

PART II

      As of February 28, 2003, there were approximately 181 registered holders of our common stock. Our common stock is currently listed for quotation on the NASDAQ Stock Market’s SmallCap Market System under the symbol “LCOR”. From our Initial Public Offering in February 2000 until November 2002, the Company’s common stock was listed on the NASDAQ National Market System. The following table sets forth for the period indicated, the high and low prices of our common stock as quoted in the NASDAQ Stock Market’s National Market System for periods prior to the fourth quarter of 2002, and as quoted in the NASDAQ Stock Market’s SmallCap Market System thereafter:

      We have not paid any dividends since our inception and do not intend to pay any dividends on our capital stock in the foreseeable future.

      The information required by Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K.

      During the year ended December 31, 2001, we issued and sold approximately 124,000 unregistered shares of common stock pursuant to exercise of options that we assumed in connection with the acquisition of PatientCentrix.

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Equity Compensation Plan Information

      The following table provides information as of December 31, 2002 with respect to the shares of the Company’s Common Stock that may be issued under the Company’s existing equity compensation plans.

(1)	Consists of shares available for future issuance under the 1998 Equity Incentive Plan and the 1999 Employee Stock Purchase Plan. As of December 31, 2002, an aggregate of 477,630 shares of Common Stock were available for issuance under the 1999 Employee Stock Purchase Plan and 1,868,900 shares of Common Stock were available for issuance under the 1998 Equity Incentive Plan.

SELECTED FINANCIAL DATA

      You should read the following selected financial data in conjunction with our financial statements and their related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. We derived the following statement of operations data for the years ended December 31, 2000, 2001 and 2002, and the balance sheet data as of December 31, 2000, 2001 and 2002, from the audited financial statements included at the end of this report. We derived the following statement of operations data for the year ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 from audited financial statements not included elsewhere in this report.

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Overview

      Landacorp provides population health management solutions to healthcare payer and delivery organizations. Our innovative predictive modeling and chronic condition management programs work together with our Internet-and Windows®-based medical management software to deliver comprehensive solutions that can help our clients better manage their at-risk patient populations. This can result in prevented and reduced cost, while improving health outcomes. Combined, our products and services comprise a unique set of capabilities that support our customers across the continuum of patient care.

      Landacorp’s care management solutions — our predictive modeling and chronic condition management capabilities — help health plans and other payers identify and intervene with members who have health conditions like asthma, diabetes and heart disease and are at risk for potentially high predicted expenditure outcomes associated with their condition. These member-focused solutions help our clients manage the health of these members through the delivery of consistent and appropriate educational information and self-management materials, or through referral to the customer’s nurse case managers. Landacorp’s medical management software solutions help healthcare payers, and hospitals and healthcare delivery systems manage the cost and care of their patients by documenting treatment, ensuring that clinical guidelines and government compliance requirements are met, and by automating the workflow and processes surrounding care coordination activities. These applications use customer-defined business process rules to streamline administrative and business processes; facilitate interaction among various healthcare participants. As of December 31, 2002, 18 payers who claim to have a combined membership of approximately 48 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 Care Management and Medical Management solutions. Although we do not anticipate future system sales or enhancements of Maxsys I medical management software product, 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.

      Traditionally, we have recognized software sales revenues and associated costs using the percentage-of-completion method, with labor hours incurred relative to total estimated contract hours as the measure of progress towards completion. 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 Management program services through a per participant annual enrollment fee and 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. Payments for participants’ annual enrollment fees are generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the

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      Other miscellaneous revenue is recognized as services are provided and obligations to the customer are fulfilled.

      To accelerate the implementation of elements of our business, we may 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 management programs. 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 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 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 $2.8 million, net of allowance for bad debt of $0.3 million as of December 31, 2002. If the financial condition of the Company’s customers were to

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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 on January 1 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.

      Other Intangible Assets. Other intangible assets are amortized on a straight-line basis over the useful life of the asset, which is the period the asset is expected to contribute directly or indirectly to future cash flows. Other intangibles include customer relationships and acquired technology. The lives established for our intangible assets are based on many factors, and are subject to change because of the nature of our operations. We periodically evaluate the recoverability of intangible assets and take into account events or circumstances that warrant revised estimates of useful lives or indicate that an impairment exists. During the second quarter of 2002, we recorded an impairment charge of $2,450,000 on our intangible assets. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of FAS 142 on January 1, 2002.

      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 additional restructuring accruals 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. We paid the remaining balance in April 2000. The acquired assets included equipment, know how, trademarks and other intangible rights used by High Technology Solutions, Inc. in the operation of its business of providing Web site services to healthcare payers, as well as contracts, none of which were material to our business. In connection with the acquisition we hired a number of former employees of High Technology Solutions, Inc.

      The purchase price was allocated to the various tangible and intangible assets acquired. The acquired intangible assets were amortized over their estimated useful lives of twenty-four to thirty-nine months. In May 2001, management determined the need to cease operations of IMG due to the slowdown in the web design and consulting industry. The IMG operations were shut down on July 9, 2001. We recorded an impairment charge of $704,000 related to the remaining intangible assets from this acquisition.

      On October 27, 2000 we completed the acquisition of assets and liabilities of the ProMedex business from PMX Holdings, Inc. (“ProMedex”), a leading provider of chronic condition management programs and services. The total purchase price of $4,632,000, consisted of $585,000 cash, $516,000 of the Company’s common stock (250,000 shares), other acquisition related expenses of approximately $319,000, consisting primarily of payment for legal and financial advisory services and the assumption of liabilities of $3,212,000. The purchase price was allocated to intangible assets, including existing technology ($1,600,000), customer base ($510,000), assembled work force ($430,000), and goodwill ($2,092,000).

      On November 2, 2000 we completed the acquisition of PatientCentrix, Inc. (“PatientCentrix”), a leading provider of predictive modeling and targeting. 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

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      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 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 and allow the options to be immediately exercisable. 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 settled 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 has been recorded as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and the 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 re-pricing has been recorded 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. Our board of directors has determined that Mr. Miele should remain on our board of directors and stand for re-election at our 2003 annual meeting of stockholders.

      In May 2001, the Company announced a reduction in work force representing approximately 16%, or 40 employees of the Company’s total work force. On August 8, 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 Management reporting unit, previously referred to as Care Analytics/Care Management. 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 Management reporting unit. The analysis was first performed on an undiscounted cash flow basis, which indicated an impairment in its 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

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      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. due to the takeover of the Lifeguard HMO by the State of California’s Department of Managed Healthcare. At that 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.

      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 began trading on the NASDAQ SmallCap Market. The Company’s common stock continues to trade under the symbol “LCOR”.

      On February 17, 2003, Thomas Stephenson, resigned as Chairman of our board of directors and Eugene Santa Cattarina was appointed Chairman. Mr. Stephenson continues to be a director of the company and will stand for re-election at our 2003 annual meeting of stockholders.

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Results of Operations

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

      In 2001, we reclassified our revenue into two distinct revenue streams. 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 all periods presented herein have been reclassified into these groups for comparison purposes.

      Refer to the Company’s Financial Statements and accompanying notes, contained in Item 8, for additional financial information.

      Revenues. Program revenue and maintenance revenues increased by $8,356,000 or 208% to $12,373,000 in 2001 and increased by $5,542,000 or 45% to $17,915,000 in 2002. The increase from 2000 to 2001 was a result of the acquisitions of PatientCentrix and ProMedex in the fourth quarter of 2000. The increase in program services revenue from 2001 to 2002 was a result of 22% increased enrollment in our Managing for Tomorrow program, approximately $1,100,000 of incremental maintenance revenue for our medical management software, as well as approximately $1,100,000 of revenue recognized from the Lifeguard contract, which was terminated in 2002.

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      System sales and consulting fees decreased by $6,153,000 or 63% to $3,590,000 in 2001 and increased by $1,892,000 or 53% to $5,482,000 in 2002. The decrease in revenues between 2000 and 2001 resulted from a decline in the volume of maxMC and Maxsys II contracts, offset by additional revenue from operating the Interactive Media Group from February 2000. The increase in revenues between 2001 and 2002 resulted primarily from additional sales of our maxMC product to several major health plans during 2002.

      Cost of Revenues. 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 Revenue and Maintenance Fees increased by $5,737,000 or 732% from $784,000, representing 20% of program service and maintenance revenues, in 2000 to $6,521,000, representing 53% of program service and maintenance revenues, in 2001 and by $1,636,000 or 25% to $8,157,000 representing 46% of program service and maintenance revenues, in 2002. This cost increase from 2000 to 2001 resulted from the acquisitions of PatientCentrix and Promedex in the fourth quarter of 2000. The cost increase from 2001 to 2002 resulted from increased enrollments in our Managing for Tomorrow program. The decrease in gross margin on Program Revenue and Maintenance Fees from 80% in 2000 to 47% in 2001 is attributed to an increase in direct costs associated with the delivery of our Managing for Tomorrow programs. The increase in gross margin on Program Revenue and Maintenance Fees from 47% in 2001 to 54% in 2002 is primarily due to approximately $1,100,000 of incremental software maintenance revenue with minimal associated cost, as well as other efficiencies realized during 2002.

      Cost of system sales and consulting fees consists 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, reimbursed and non-reimbursed travel expenditures, related department overhead, amortization of capitalized software development costs, costs of third party software products, and depreciation on equipment. Cost of system sales and consulting fees decreased by $1,967,000 or 39% from $4,980,000, representing 51% of system sales and consulting fees, in 2000 to $3,013,000, representing 84% of system sales and consulting fees, in 2001 and decreased by $274,000 or 9% to $2,739,000 representing 50% of system sales and consulting fees, in 2002. The decrease from 2000 to 2001 in the cost of system sales and consulting fees was primarily due to reduced personnel-related expenses due to the 2001 reductions in force discussed in the Recent Developments section. The decrease from 2001 to 2002 in the cost of system sales and consulting fees was primarily due to reduced personnel related expenses due to the 2001 reductions in force discussed in the Recent Developments section. The decrease in the gross margin on system sales and consulting fees from 49% during 2000 to 16% in 2001 resulted primarily from reduced sales of our medical management software products. The increase in gross margin to 50% in 2002 resulted primarily from the headcount reductions in 2001 as well as increased sales of our medical management software products during 2002.

      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 promotions, costs, and department overhead. Sales and marketing expenses decreased by $238,000 or 4% from $5,903,000, representing 43% of total revenues, in 2000 to $5,665,000, representing 36% of total revenues, in 2001 and decreased by $988,000 or 17% to $4,677,000, representing 20% of total revenues, in 2002. The decrease from 2000 to 2001 was primarily due to reduced personnel-related expenses due to the 2001 reductions mentioned in the Recent Developments section. The decrease from 2001 to 2002 was due to the 2001 personnel reductions as well as general cost-cutting measures in this area throughout 2002, including reduced personnel costs and reduced advertising expenditures.

      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 increased by $2,147,000 or 51% from $4,214,000, representing 31% of total revenues, in 2000 to $6,361,000, representing 40% of total revenues, in 2001 and decreased by $1,010,000 or 16% to $5,351,000, representing 23% of total revenues, in 2002. The increase from 2000 to 2001 was primarily due to increases in salaries, benefits and other personnel-related expenses and stock-based compensation expense arising from both of our acquisitions of PatientCentrix and Promedex described above

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      General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, amortization of unearned stock-based compensation, occupancy and overhead costs. General and administrative expenses increased by $2,346,000 or 43% from $5,516,000, representing 40% of total revenues, in 2000 to $7,862,000, representing 49% of total revenues, in 2001 and decreased by $1,848,000 or 23% to $6,015,000 representing 26% of total revenues, in 2002. The increase in 2001 was primarily due to: additional employees arising from the recent acquisitions; higher professional service fees, stock-based compensation expenses, further discussed in the Stock-Based Expenses section below, and additional office space assumed with our recent acquisitions. Additionally, approximately $407,000 of the increase in 2001 related to a specific net increase in our bad debt reserve for the outstanding balance of a customer that was having difficulty in meeting their payment obligations. The decrease from 2001 to 2002 was due to decreased stock compensation, the 2001 personnel reductions as well as general cost-cutting measures in this area throughout 2002.

      Amortization of intangible assets. Intangible assets that have finite useful lives are amortized over their useful lives. Our intangible assets consist 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 increased by $1,402,000 from $631,000 in 2000 to $2,033,000 in 2001. This increase is due to the acquisitions of Promedex and PatientCentrix in the fourth quarter of 2000. Amortization decreased $1,131,000 from $2,033,000 to $902,000 in 2002. This is primarily due to decreased goodwill amortization of approximately $670,000 pursuant to the adoption of FAS 142, the asset impairment charge of $2,450,000 recorded in the second quarter of 2002, as well as the reclassification of acquired workforce to goodwill.

      Restructuring charges. In May 2001, the Company announced a reduction in work force representing approximately 16%, or 40 employees of the Company’s total work force. Also in May 2001, the Company announced its plan to cease operations of its Portland, Oregon-based Interactive Media Group (IMG). On August 8, 2001, the Company announced an additional reduction in work force of approximately 18%, or 36 employees. Restructuring charges of $1,301,000 and $106,000 were recorded in 2001 and 2002, respectively. The costs included in the 2001 restructuring charges relate to severance costs and the closing of the IMG operations and additional lease obligations related to unoccupied office space that the Company had committed to. The charge in 2002 was related to additional estimated real estate lease obligations on office space that was vacated as a result of the reductions in force announced by the Company in May 2001.

      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 ceased due to the slowdown in the Web design and consulting industry. On May 8, 2001, the Board of Directors approved a plan to immediately cease 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 Management reporting unit, previously referred to as the 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 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.

      Stock-Based Compensation. In connection with certain stock option grants and common stock issuances during the two years ended December 31, 1999 and 2000, the Company recognized unearned

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      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 $1,765,000, $677,000 and $151,000 for the years ended December 31, 2000, 2001 and 2002, respectively. Interest income decreased during 2001 and 2002 as a portion of the proceeds from our initial public offering were utilized to finance our operations. Interest expense decreased by $28,000 or 52% to $26,000 in 2001, and increased by $8,000 or 31% to $34,000 in 2002 due to additional capital lease obligations.

      Income Taxes. No provision or benefit for federal or state income taxes has been recorded for the years ended December 31, 2000, 2001 and 2002, as the Company has incurred net operating losses and has no carryback potential. Based on a number of factors, including the lack of a history of profits and net operating loss carryforward limitations due to changes in ownership, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets such that a valuation allowance has been provided.

      At December 31, 2002, the Company had net operating loss carryforwards of approximately $28,800,000 available to reduce future taxable income. These losses expire at various times beginning in 2003. As a result of substantial changes in the Company’s stock ownership, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in February 1998 which resulted in a limitation on the amount of net operating loss carryforwards that can be used in future years. The amount of the limitation has not yet been calculated. As a result of substantial changes in the Company’s stock ownership subsequent to February 1998, an ownership change may have occurred during 2000 which would result in a limitation on the amount of net operating loss carryforwards that can be used in future years. The amount of the limitation, if any, has not yet been calculated.

      Since inception, we have financed our operations through net cash generated from operating activities, and private sales of common and preferred stock. During February 2000, we completed our initial public offering through which we raised net proceeds of approximately $35 million. As of December 31, 2002, we had $10.0 million in cash and cash equivalents and $2.9 million in working capital with capital lease obligations totaling $0.3 million.

      Net cash used in operating activities was $8.4 million in 2001 compared to net cash used in operating activities of $1.5 million in 2002. Net cash used to fund operating activities in 2001 reflects net loss before non-cash charges for depreciation and amortization, provision for doubtful accounts, amortization of unearned stock-based compensation, asset impairment charge, loss on sale of property and equipment, and other stock-based compensation, a decrease in accounts receivable, a decrease in other assets, and an increase in deferred revenue, offset by a decrease in accounts payable and accrued expenses. The decrease in accounts receivable is primarily due to several prepayments from customers received toward the end of 2001 as well as reduced billings for system sales and consulting during 2001. The increase in deferred revenue of $2,001,000 was due to the acquisition of Promedex as well as the prepayments in the fourth quarter of 2001. The fees for chronic condition management programs are received at the time of enrollment and revenue is deferred because the obligations to the customer are fulfilled over a period of one year. The decrease in accounts payable and accrued expenses during 2001 is primarily due to the early payment of certain accrued expenses at the end of 2001. Net cash used to fund operating activities in 2002 reflects net loss before non-cash charges for depreciation and amortization, amortization of unearned stock-based compensation, asset impairment charge and other stock-based compensation; an increase in accounts payable, an increase in deferred revenue, offset

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      Net cash used in investing activities was $1.2 million in 2001 and $0.8 million in 2002. Investing activities in 2001 consisted primarily of cash paid for computer equipment, office furniture and leasehold improvements, and additions to capitalized software development costs. Investing activities in 2002 consisted primarily of cash paid for property and equipment.

      Net cash generated from financing activities was $144,000 in 2001 and net cash used in financing activities was $20,000 in 2002. Net cash generated from financing activities in 2001 resulted from proceeds from the sale of common stock, net of payments on capital lease obligations. Net cash used in financing activities in 2002 resulted from payments on capital lease obligations, offset by the sale of common stock and repayments of notes receivable from officers.

      In February 1999, we obtained a line of credit (LOC Agreement) that allows maximum borrowings of $2.0 million. The Company was allowed to designate up to $300,000 of the maximum borrowings as a term note to finance purchases. At December 31, 1999, we had no outstanding borrowings under the LOC Agreement and $240,000 on the term note. In October 2000, the Company fully paid the outstanding balance on the term note.

      In January 2001, we amended and restated the LOC Agreement by eliminating the term loan provision and certain covenant requirements. Advances on the LOC Agreement are collateralized by substantially all of our assets, accrue interest at prime plus 0.5%, and are due January 2002. At December 31, 2001, there were no outstanding borrowings under the LOC Agreement. In February 2002, we cancelled the LOC agreement.

      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 strategic transactions or investments in other businesses, technologies or product lines. We believe that available cash and cash equivalents and the remaining 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 may need to seek a strategic partner or raise additional funds, subsequent to December 31, 2003.

      The Company is currently holding full recourse notes receivable from directors and officers totaling approximately $163,000, which includes a note receivable from a Director, Eugene Santa Cattarina, in the amount of $96,666. The notes accrue interest at 6% per annum, are collateralized by all shares of the Company’s Common Stock purchased by these individuals and are due and payable in 2006, or immediately in the event of termination of employment.

      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

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      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. We will adopt this statement effective January 1, 2003 and we do not believe this will have a material affect on our financial position, results of operations or cash flows.

      In November 2002, the FASB reached a consensus on EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“the Issue”). The guidance in this Issue is effective for revenue arrangements entered into fiscal years beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. We currently follow the appropriate pronouncement as discussed in “Revenue Recognition” and anticipate the Issue to have no significant impact on the results of our operations, financial position, or cash flows.

      In November 2002, the FASB issued FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirements of SFAS 5, “Accounting for Contingencies,” relating to guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. The interpretation’s provisions for initial recognition and measurement are required on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of both interim and annual periods that ended after December 15, 2002. We have adopted the disclosure provisions of this interpretation, however, we have not yet determined the effects that this interpretation will have on our financial position, results of operations or cash flows. The Company guarantees performance to certain customers from time to time. These guarantees could include cost savings or other measures such as participant retention in our Managing for Tomorrow program. As of December 31, 2002, the Company had outstanding guarantees of approximately $1,008,000, which is included in deferred revenue.

      In December 2002, the FASB issued SFAS 148, “Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment to SFAS 123.” SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual disclosure. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The new interim disclosure provisions are effective for the first interim period beginning after December 15, 2002.

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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 December 31, 2002, our accumulated deficit was $44.8 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 chronic condition 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 predictive modeling applications and services, and chronic condition management programs in the fourth quarter of 2000. Our solutions currently have limited market acceptance with only 18 payer customers currently using them. Our maxMC medical management software product has achieved a modest 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 care management solutions will require ongoing enhancement of their

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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 care 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 chronic condition management products, we derived substantially all of our revenue from the sale and associated support of Maxsys II (and its predecessor Maxsys I), MaxMC, a medical management software solution marketed to hospitals, healthcare delivery organizations and health insurance companies. We anticipate that we will continue to generate revenue from the continued sales and support of medical management software solutions. With the acquisitions of Care Management solutions, we have increased our product offering, but it is still limited. 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 15% and 21%, respectively, of our revenues for the twelve-month period ended December 31, 2002. Moreover, because we focus our sales efforts on a small group of potential customers in the healthcare industry 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.

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We Are Exposed to the Credit Risk of Some of Our Customers.

      Due to the current slowdown in the economy, the credit risks relating to our customers have increased. Although we have programs in place to monitor and mitigate the associated risk, there can be no assurance that such programs will be effective in reducing our credit risks. We have experienced losses due to customers failing to meet their obligations. Although these losses have not been significant, future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial conditions.

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. 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. 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 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 our 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.

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

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Our Care 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.

      Our care 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 Chronic Condition 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 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 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 Chronic Condition 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 chronic condition 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 enrollment 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 enrollment 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 December 31, 2002, we had two contracts that contain some level of performance guarantee. As of December 31, 2002 we had deferred revenue of approximately $1,008,000 related to performance guarantees.

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

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	•	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.

      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

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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 Chronic Condition 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 chronic condition management capabilities depend on the efficient operation of Internet connections among our payer customers and their members and associated providers, and with us. 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.

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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.

Consolidation in the Healthcare Industry Could Lead to Large Integrated Healthcare Delivery Systems That 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 may 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

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	•	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 may need to seek a strategic partner or raise additional funds subsequent to December 31, 2003. If 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 cessation of operations of our web consulting business.

      During the second quarter of 2002, primarily due to a decline in demand for services in the Company’s Care 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 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. 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.

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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 strategic transactions or capital commitments;
	•	additions or departures of key personnel;
	•	sales of our common stock; and
	•	developments regarding our intellectual property or that of our competitors.

      In addition, the stock market in general, and the NASDAQ SmallCap 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.

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 not in compliance with the minimum requirements 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 the continued listing criteria or other requirements 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.

      The primary objective of our investment activities is to preserve principal while, at the same time, maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high-quality money market accounts that invest in debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to adverse shifts in interest rates, we invest in money market accounts that are highly liquid. As a result, we do not believe we are subject to significant rate risk.

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Item 8.     Financial Statements

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Landacorp, Inc.

      In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Landacorp, Inc. and its subsidiaries at December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 2 and Note 7, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” as of January 1, 2002.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY