PER SE TECHNOLOGIES INC - 10-Q Quarterly Report

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

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-19480

PER-SE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 58-1651222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2840 MT. WILKINSON PARKWAY 30339
ATLANTA, GEORGIA (Zip code)
(Address of principal executive offices)

(770) 444-5300
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares of stock outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

1

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)

See notes to consolidated financial statements.

2

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

3

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

See notes to consolidated financial statements.

4

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Per-Se Technologies, Inc. ("Per-Se" or the "Company") are presented in
accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X.
For further information, the reader of this Form 10-Q may wish to refer to the
audited consolidated financial statements of the Company for the fiscal year
ended December 31, 2002, included in the Company's Annual Report on Form 10-K,
filed on March 27, 2003, with the Securities and Exchange Commission.

The unaudited condensed financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results for the
interim period, have been included.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and accompanying notes. Actual results could differ from those
estimates.

The consolidated financial statements of the Company have been presented to
reflect the operations of the Application Software division's Patient1 clinical
product line ("Patient1"), which was sold on July 28, 2003, and the activity
related to the Medaphis Services Corporation ("MSC") and Impact Innovations
Group ("Impact") businesses, which were sold in 1998 and 1999, respectively, as
discontinued operations for all periods presented (refer to Note 8 for
additional information).

NOTE 2 -- STOCK-BASED COMPENSATION PLANS

At June 30, 2003, the Company has four stock-based compensation plans. The
Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). No stock-based compensation cost is reflected in the
Company's Statement of Operations, as all options granted under those plans had
an exercise price equal to the market value of the underlying Common Stock on
the date of grant. The following table illustrates the effect on net income and
net income per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), to stock-based
compensation.

5

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 3 -- EARNINGS PER SHARE

Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options and warrants. The following sets forth the
computation of basic and diluted net income per share for the three-month and
six-month periods ended June 30, 2003 and 2002 (in thousands, except per share
data):

Options and warrants to purchase 3.6 and 4.0 million shares of Common Stock
outstanding during the three and six months ended June 30, 2003, respectively,
were excluded from the computation of diluted earnings per share because the
exercise prices of the options and warrants were greater than the average market
price of the common shares, and therefore, the effect would have been
antidilutive.

Options and warrants to purchase 2.9 million shares of Common Stock
outstanding during the three and six months ended June 30, 2002 were excluded
from the computation of diluted earnings per share because the exercise prices
of the options and warrants were greater than the average market price of the
common shares, and therefore, the effect would have been antidilutive.

During 1998, in connection with the settlement of a putative class action
lawsuit, the Company issued warrants to purchase 1,769,841 shares of Common
Stock. These warrants expired on July 8, 2003.

NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENTS

In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN No.
45"). The Interpretation requires that a guarantor recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee. The Interpretation also requires additional disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees it has issued. FIN No. 45 does not have
a material effect on our condensed consolidated financial statements for the six
months ended June 30, 2003. Certain of the Company's sales agreements contain
infringement indemnity provisions that are covered by FIN No. 45. Under these
sales agreements, the Company agrees to defend and indemnify a customer in
connection with infringement claims made by third parties with respect to the
customer's authorized use of the Company's products and services. The indemnity
obligations contained in sales agreements generally have no specified expiration
date and generally limit the award to the amount of fees paid. The Company has
not previously

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

incurred costs to settle claims or pay awards under these indemnification
obligations. As a result, the Company's estimated fair value of these
obligations is nominal. Accordingly, the Company has not recorded a liability
for these agreements as of June 30, 2003.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which clarifies the consolidation accounting guidance of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entities to finance their activities without additional subordinated financial
support from other parties. Such entities are known as variable interest
entities ("VIE"). Controlling financial interests of a VIE are identified by the
exposure of a party to the VIE to a majority of either the expected losses or
residual rewards of the VIE, or both. Such parties are primary beneficiaries of
the VIE and FIN No. 46 requires that the primary beneficiary of a VIE
consolidate the VIE. FIN No. 46 also requires new disclosures for significant
relationships with VIE's, whether or not consolidation accounting is either used
or anticipated. The Company currently does not have any relationships with a
VIE.

NOTE 5 -- RESTRICTED CASH

At June 30, 2003, restricted cash primarily represents restrictions on the
Company's cash as security for letters of credit.

NOTE 6 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME (LOSS)

The functional currency of the Company's operations outside of the United
States is the local country's currency. Consequently, assets and liabilities of
operations outside the United States are translated into dollars using exchange
rates at the end of each reporting period. Revenue and expenses are translated
at the average exchange rates prevailing during the period. Cumulative
translation gains and losses are reported in accumulated other comprehensive
income (loss). In the three-month and six-month periods ended June 30, 2003 and
2002, the only component of other comprehensive loss was the net foreign
currency translation:

NOTE 7 -- ACQUISITIONS

On February 9, 2000, the Company acquired the outstanding capital stock of
Knowledgeable Healthcare Solutions, Inc. ("KHS") for consideration of $3.1
million, consisting of $1.1 million cash and approximately 236,000 shares, or
$2.0 million, at the acquisition date, of the Company's Common Stock. In
addition, the purchase agreement provided for a purchase price adjustment of up
to $6.0 million, which was recorded in December 2000, payable in cash and the
Company's Common Stock, should KHS meet certain operational targets over the
three years from the date of acquisition.

The KHS acquisition was recorded using the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed based on their estimated fair market value at the date
of acquisition. Approximately $8.9 million of the purchase price was allocated
to goodwill and, prior to the Company's adoption of SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"), on January 1, 2002, was being
amortized using the straight-line method over five years. In April 2001, KHS met
certain of its purchase agreement operational targets and the Company paid
approximately $0.1 million (25% through the issuance of the Company's Common
Stock) of the $6.0 million purchase price adjustment. In February 2003, the
Company determined that KHS would not meet its

7

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

remaining purchase agreement operational targets and reduced the purchase price
allocation to goodwill by approximately $5.9 million. This adjustment is
reflected in the Company's December 31, 2002, Consolidated Balance Sheet. The
operating results of KHS are included in the Company's Consolidated Statements
of Operations from the date of acquisition in the e-Health Solutions segment.

NOTE 8 -- DISCONTINUED OPERATIONS AND DIVESTITURES

In June 2003, the Company announced that it agreed to sell its Application
Software division's Patient1 clinical product line to Misys Healthcare Systems,
a division of Misys plc ("Misys") for $30 million in cash. The sale of the
Patient1 clinical product line will allow the Company to better focus on
optimizing reimbursement and improving administrative efficiencies for physician
practices and hospitals. The sale was completed on July 28, 2003. The Company
estimates the gain on the sale of Patient1 to be in excess of $11 million,
subject to closing adjustments, that will be recognized during the third
quarter. Additionally, the Company anticipates the net proceeds on the sale of
Patient1 to be in the $26 million to $28 million range, subject to closing
adjustments. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, ("SFAS No. 144"), the consolidated financial statements of
the Company have been presented to reflect Patient1 as discontinued operations
for all periods presented. Summarized operating results for Patient1 are as
follows:

The major classes of assets and liabilities for Patient1 are as follows:

On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment.

During the six months ended June 30, 2003 and 2002, the Company incurred
expenses of approximately $0.2 million and $0.1 million, respectively, which
were primarily legal costs, associated with MSC and Impact.

8

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Pursuant to APB Opinion No. 30, Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions ("APB No. 30"), the
consolidated financial statements of the Company are presented to reflect the
activity associated with MSC and Impact as discontinued operations for all
periods presented.

NOTE 9 -- LEGAL MATTERS

The Company is subject to claims, litigation and official billing inquiries
arising in the ordinary course of its business. These matters include, but are
not limited to, lawsuits brought by former customers with respect to the
operation of the Company's business. The Company has also received written
demands from customers and former customers that have not resulted in legal
action. Within the Company's industry, federal and state civil and criminal laws
govern medical billing and collection activities. These laws provide for various
fines, penalties, multiple damages, assessments and sanctions for violations,
including possible exclusion from federal and state healthcare payer programs.

In February 2002, the Company settled claims for alleged breach of contract
arising out of a 1997 contract for billing services provided by the Physician
Services division to a former client. The Company and its insurance carrier at
the time, Certain Underwriters at Lloyd's of London (collectively "Lloyd's"),
each paid the plaintiff $2.0 million in cash in exchange for a release of all
claims asserted against the Company. Under the terms of its insurance policy
with Lloyd's, the Company is seeking reimbursement from Lloyd's for the $2.0
million it paid in this settlement.

On May 30, 2002, the Company received a letter from Lloyd's purporting to
rescind various managed healthcare professional liability, or errors and
omissions ("E&O") insurance policies and directors and officers and company
reimbursement ("D&O") insurance policies (collectively the "Policies") issued to
the Company by Lloyd's. The E&O policies were for the term of December 31, 1998,
through June 30, 2002, and the D&O policies were for the term of July 1, 2000,
through June 30, 2002. The purported rescission was based on allegations that
the Company had failed to advise Lloyd's about the existence of several lawsuits
that were alleged to be related to the risk covered under the policies.

On May 31, 2002, Lloyd's filed a lawsuit in the Circuit Court for Kent
County, Michigan against the Company seeking rescission of the E&O and D&O
policies based on the allegations in its letter, dated May 30, 2002, or a
declaration that coverage is unavailable for the claim related to the February
2002 settlement under the policies issued by Lloyd's. Lloyd's also claimed
restitution of the $2.0 million paid by Lloyd's on behalf of the Company in that
settlement. On June 5, 2002, the Company filed a lawsuit in the Superior Court
of the State of California for the County of Los Angeles against Lloyd's seeking
damages for breach of contract and breach of obligations of good faith and fair
dealing, including punitive damages. The Company also seeks a declaratory
judgment to enforce the E&O and D&O policies according to their terms.

The lawsuit filed by Lloyd's was dismissed during December 2002 with the
Michigan court citing California as a more suitable forum in which to hear the
litigation. During June 2003, the California Superior Court ordered the Company
and Lloyd's to non-binding mediation to be completed by October 30, 2003. In the
event mediation is not successful, the trial is scheduled to begin February 17,
2004.

The Company believes that the attempt by Lloyd's to rescind the policies is
without merit, and the Company is prosecuting the matter vigorously and
asserting all appropriate claims against Lloyd's.

The Company's insurance coverage for both the E&O and D&O policies was
scheduled to be renewed as of June 30, 2002, and the Company was in the process
of actively pursuing new coverage with insurance carriers, including Lloyd's,
when the attempted rescission notice was received from Lloyd's. Due to the
attempted rescission, the Company expedited its insurance proposal process and
in mid-June 2002, the Company secured insurance coverage with a policy period of
12 months. The Company experienced a significant, above-market increase in
insurance premiums and deductibles with its June 2002 policies as a

9

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

result of the actions of Lloyd's and is seeking reimbursement for a portion of
the increased premium costs and increased deductibles in its lawsuit against
Lloyd's. The Company has expensed approximately $0.9 million and $2.2 million
for the three and six months ended June 30, 2003, respectively, of increased
insurance premiums and the costs of pursuing litigation against Lloyd's. These
costs are reflected in the Company's Consolidated Statements of Operations in
the Corporate segment. For the three and six months ended June 30, 2002, the
Company expensed approximately $0.5 million of these costs. During June 2003,
the Company secured new insurance policies in the ordinary course of business,
at substantially reduced premiums compared to the previous twelve-month
policies.

The Company has not received any D&O insurance claims since 1996. The
Company did receive E&O insurance claims during the term of the Lloyd's E&O
insurance policies in the ordinary course of business. Over the last five years,
the majority of E&O claims received by the Company were resolved with nominal or
no settlement.

Pending the outcome of the litigation with Lloyd's and as is consistent
with standard practices under E&O policies, the Company will continue to
vigorously defend and will be required to fund the legal costs and any
litigation settlements related to E&O claims covered by the Lloyd's E&O
policies. The Company expects to recover these costs from Lloyd's in accordance
with the obligations of Lloyd's under the E&O policies and, as such, has
recorded and will continue to record the amounts as Other Current Assets on the
Company's Consolidated Balance Sheets.

At June 30, 2003, the Company's Other Current Assets include $7.7 million
associated with the interim funding of legal costs and litigation settlements
related to E&O claims that were incurred by the Company in excess of the Lloyd's
E&O policies' deductible that are expected to be recovered from Lloyd's. This
$7.7 million balance includes $7.6 million paid through June 30, 2003, and
additional obligations to be paid of approximately $0.1 million.

The Company believes that it has meritorious defenses to the Lloyd's claims
and that a favorable outcome is probable. The Company's insurance is on a
"claims-made" basis, which means insurance coverage is in place based on the
date the claim is made, not the date(s) the services were provided and/or the
products were sold. In the event that the Company is unsuccessful in the
litigation with Lloyd's, certain claims presently pending against the Company
would become the sole responsibility of the Company. Although the Company
believes it will be successful in its litigation with Lloyd's, if it is not and
uninsured claims do exist, such claims, including the $7.7 million balance in
Other Current Assets related to the interim funding of legal costs and
litigation settlements, could have a material adverse effect on the Company's
financial condition and results of operations. Regardless of the outcome of the
litigation with Lloyd's, the Company's current insurance coverage will not be
affected.

The Company believes that it has meritorious defenses to the claims and
other issues asserted in pending legal matters; however, there can be no
assurance that such matters or any future legal matters will not have an adverse
effect on the Company. Amounts of awards or losses, if any, in pending legal
matters have not been reflected in the financial statements unless probable and
reasonably estimable.

NOTE 10 -- LONG-TERM DEBT (ALSO SEE NOTE 14 -- SUBSEQUENT EVENTS)

Under the Indenture governing the $175 million of 9 1/2% Senior Notes due
2005 (the "Notes"), of which $160 million are outstanding, the balance of net
proceeds, as defined by the Indenture governing the Notes, from the sale of any
assets having a fair value in excess of $1.0 million must be invested in the
Company's business within 360 days of receipt of proceeds related to the sale or
they become "excess proceeds." If the aggregate of excess proceeds is greater
than $10.0 million, the Company is required to offer to repurchase the Notes at
par with such excess proceeds.

10

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

In February 2000, the Company acquired KHS. A portion of the purchase price
was deferred based on KHS's performance during the three years following the
acquisition date. The Company recorded a liability for the unpaid purchase price
based on KHS's performance estimates (see Note 7 -- Acquisitions for further
discussion on KHS's total purchase price).

In February 2003, the Company determined that KHS would not meet the
post-acquisition operational targets set in the KHS purchase agreement, and the
Company reduced the portion of the KHS purchase price allocated to goodwill by
approximately $5.9 million. This adjustment is reflected in the Company's
December 31, 2002, Consolidated Balance Sheet. Because of this adjustment,
excess proceeds (as defined by the Indenture) exceeded $10.0 million. On
February 13, 2003, the Company initiated an offer to purchase up to $15 million
of the Notes at par plus accrued interest, including $13.2 million to satisfy
the requirements under the Indenture for the reinvestment of excess proceeds.
The Company's offer to repurchase the Notes was accepted in full, and on March
17, 2003, the Company repurchased $15 million of the Notes at par plus accrued
interest of approximately $0.1 million, reducing the Notes outstanding to $160
million. The Company used a portion of its available cash to fund the
repurchase. In addition, the Company incurred a write-off of approximately $0.2
million during the three months ended March 31, 2003, of deferred debt issuance
costs associated with the original issuance of the Notes. As of June 30, 2003,
the Company's balance of net proceeds and excess proceeds (as defined by the
Indenture governing the Notes) was zero.

The Company entered into a $50 million credit facility (the "Credit
Facility") on April 6, 2001. Availability under the Credit Facility is
determined by a borrowing base calculated based on eligible billed accounts
receivable of the Company's Physician Services and e-Health Solutions divisions,
as defined in the Credit Facility. The Company has the option of entering into
LIBOR based loans or index-rate loans, each as defined in the Credit Facility.
LIBOR based loans bear interest at LIBOR plus amounts ranging from 1.85% to
2.65% based on the Company's leverage ratio, as defined in the Credit Facility.
Index rate loans bear interest at rates approximating Prime plus amounts ranging
from 0.35% to 1.15% based on the Company's leverage ratio, as defined in the
Credit Facility. In addition, the Company pays a quarterly commitment fee on the
unused portion of the Credit Facility of 0.375% per annum.

The Credit Facility contains financial, collateral and other restrictive
covenants, including, without limitation, those restricting additional
indebtedness, lien creation, dividend payments, asset sales, stock offerings,
capital expenditures, and the prepayment of the Notes; those requiring a minimum
EBITDA (as defined) maintenance, fixed charge coverage and cash velocity; and
limiting days sales outstanding in billed accounts receivable, each as defined
in the Credit Facility. The Company was in compliance with all applicable
covenants as of June 30, 2003.

The initial term of the Credit Facility is 42 months, expiring on October
6, 2004. The Company and the Lender can mutually agree to extend this term by 18
months if certain conditions have been met. The Company intends to use the
Credit Facility, as needed, for future investments in its operations, including
capital expenditures, strategic acquisitions and other general corporate
purposes. The Company has not incurred any borrowings under the Credit Facility
as of June 30, 2003.

NOTE 11 -- INCOME TAXES

Income tax expense, which was primarily related to state and local income
taxes, was $0.4 million and $0.7 million for the three and six month periods
ended June 30, 2003, respectively, as compared to income tax expense of $0.2
million and $0.4 million for the same periods in 2002. The Company's estimated
federal income tax expense for the three and six month periods ended June 30,
2003, is offset by the release of an equal amount of the Company's valuation
allowance. As of June 30, 2003, the Company's remaining net deferred tax asset
was fully offset by a valuation allowance. Realization of the net deferred tax
asset is dependent upon the Company generating sufficient taxable income prior
to the expiration of the federal net operating loss carryforwards. The Company
will adjust this valuation reserve accordingly if, during future
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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

periods, management believes the Company will generate sufficient taxable income
to realize the net deferred tax asset.

NOTE 12 -- RESTRUCTURING EXPENSES

The amount of lease termination costs associated with the 1995
restructuring applied against the reserve in the six months ended June 30, 2003
is as follows:

NOTE 13 -- SEGMENT REPORTING (ALSO SEE NOTE 14 -- SUBSEQUENT EVENTS)

The Company's reportable segments are operating units that offer different
services and products to the healthcare market. Per-Se provides its services and
products through its three operating divisions: Physician Services, e-Health
Solutions and Application Software.

The Physician Services segment provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services include accounts
receivable management, clinical data collection, data input, medical coding,
billing, contract management and cash collections. These services are designed
to assist healthcare providers with the business management functions associated
with the delivery of healthcare services, allowing physicians to focus on
providing quality patient care. These services also assist physicians in
improving cash flows and reducing administrative costs and burdens. The business
of the Physician Services division is conducted by PST Services, Inc. a Georgia
corporation doing business as "Per-Se Technologies," which is a wholly owned
subsidiary of the Company.

The e-Health Solutions segment provides healthcare providers and payers
with connectivity and business intelligence solutions that help reduce
administrative costs and enhance revenue cycle management. Solutions include
electronic claims processing, referral submissions, eligibility verification and
other electronic and paper transaction processing. In addition, e-Health
Solutions offers physician practice management software as an application
service provider ("ASP") to physician practices and managed care solutions to
payers in ASP, turnkey or outsourced formats. The business of the e-Health
Solutions division is conducted by the following four wholly owned subsidiaries
of the Company: Per-Se Transaction Services, Inc., an Indiana corporation;
Health Data Services, Inc., an Ohio corporation; Patient Account Management
Services, Inc., an Ohio corporation; and Knowledgeable Healthcare Solutions,
Inc., an Alabama corporation. All of these subsidiaries do business under the
name "Per-Se Technologies."

The Application Software segment provides enterprise-wide financial and
administrative software to acute care healthcare organizations, including
patient financial management software and patient and staff scheduling systems.
These applications enable healthcare organizations to optimize the quality of
care delivered and the profitability of business operations. The business of the
Application Software division is conducted by PST Products, LLC, a California
limited liability company doing business as "Per-Se Technologies," which is
wholly owned by the Company.

The Company evaluates each segment's performance based on its segment
operating profit. Segment operating profit is revenue less segment operating
expenses, which include salaries and wages expense, other operating expenses,
depreciation and amortization.

The e-Health Solutions segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
Eliminations to reconcile to total consolidated revenue.

12

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Information concerning the Company's reportable operating segments is as
follows:

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

NOTE 14 -- SUBSEQUENT EVENTS

The Company has realigned its operations to better focus on its core
healthcare constituents -- physician practices and hospitals. As part of the
realignment, the Company's ASP-based physician practice management solution,
named MedAxxis, which has historically been included in the e-Health Solutions
division, will be part of the Physician Services division. This combination
provides operational leverage and enables the Company to offer front-end
solutions for both hospital-based and office-based physician groups. These large
physician groups require both front-office functionality for scheduling and
back-end services for accounts receivable management. By combining front-office
and back-end solutions and services, the Company will be able to sell its
solutions and services to a new segment of the physician market.

To better serve the hospital marketplace, the Company has formed the
Hospital Services division through the combination of the e-Health Solutions and
Application Software divisions. The products of both groups focus on optimizing
the revenue cycle and improving administrative efficiencies for hospitals.
Combining these offerings allows the Company to better leverage its solutions
and provides an organizational structure through which to broaden the Company's
offerings to hospitals.

The Company's business segment realignment is effective July 1, 2003, and
therefore the business segment results for the six months ended and as of June
30, 2003, have been presented using the Company's former business segments. In
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, beginning July 1, 2003, the Company will present business
segment results in the Physician Services and Hospital Services business
segments, as described above, and all prior periods presented will be
retroactively adjusted for the realignment.

Additionally, on August 4, 2003, the Company signed a commitment letter
with leading financial institutions for a term loan facility and a revolving
credit facility. The Company expects to finalize the terms of the refinancing
and retire the Notes near the end of the third quarter.

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is a provider of
integrated business management outsourcing services, Internet-enabled
connectivity and application software for the healthcare industry. Per-Se
delivers its services and products through its three operating divisions:
Physician Services, e-Health Solutions and Application Software.

The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services focus on revenue
cycle management and include accounts receivable management, clinical data
collection, data input, medical coding, billing, contract management and cash
collections. These services are designed to assist healthcare providers with the
business management functions associated with the delivery of healthcare
services, allowing physicians to focus on providing quality patient care. These
services also assist physicians in improving cash flows and reducing
administrative costs and burdens.

The e-Health Solutions division provides connectivity and revenue cycle
management solutions to healthcare providers and payers, which help reduce
administrative costs and enhance cash flows. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing. In addition, e-Health Solutions offers
physician practice management software as an application service provider
("ASP") to physician practices and offers managed care solutions to payers in
ASP, turnkey or outsourced formats.

The Application Software division provides enterprise-wide financial and
administrative software to acute care healthcare organizations, including
patient financial management software and patient and staff scheduling systems.
These applications enable healthcare organizations to optimize the quality of
care delivered and the profitability of business operations. (see Note
8 -- Discontinued Operations and Divestitures in the Company's Notes to
Consolidated Financial Statements).

Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices, hospitals and
integrated healthcare delivery networks ("IDNs").

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2003, AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2002

Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:

Revenue for the Physician Services division increased approximately 5% in
the three months ended June 30, 2003, as compared to the same period in 2002.
The revenue increase is due to the implementation of new business sold in prior
periods as well as growth in the existing client base. Net backlog at June 30,
2003, was approximately $5 million, compared to approximately $3 million at
March 31, 2003. Net backlog represents the annualized revenue related to new
contracts signed with the business still to be implemented, less the annualized
revenue related to existing contracts where discontinuance notification has been
received

15

and the customer has yet to be phased out. The Company focuses on maintaining a
positive net backlog and believes it is a useful indicator of future revenue
growth.

Revenue for the e-Health Solutions division increased approximately 2% for
the three months ended June 30, 2003, as compared to the same period in 2002
despite the phasing out of a large print and mail customer, which began in the
second half of 2002. This customer's business was not related to medical claims.
Revenue growth in the division was a combination of increased medical
transaction processing, decreased non-medical transaction processing, as
mentioned above, and decreased physician practice management revenue.
Improvement in the medical transaction processing business was driven by an
increase in medical transaction volume of approximately 15% in the three months
ended June 30, 2003, over the prior year period. Physician practice management
revenue was negatively impacted by the process of converting the customers of
the ASP-based physician practice management solution onto a new platform.
Revenue for this product line decreased slightly from the prior year period due
to the conversion effort.

Revenue for the Application Software division increased 1% for the three
months ended June 30, 2003, as compared to the same period in 2002. The increase
is attributable to a combination of higher staff scheduling and patient
scheduling systems revenue and lower patient financial management revenue.

The e-Health Solutions division revenue includes intersegment revenue for
services provided to the Physician Services division, which is shown in
Eliminations to reconcile to total consolidated revenue.

Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expense, other operating
expenses, depreciation and amortization. Segment operating profit, classified by
the Company's divisions, is as follows:

Physician Services' segment operating profit increased approximately 49% in
the three months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 13.4% in the three months ended
June 30, 2003, versus approximately 9.4% in the same period in 2002. The margin
expansion is attributable to the incremental margins achieved on increased
revenue in addition to labor and cost savings from productivity initiatives
completed in 2002.

e-Health Solutions' segment operating profit decreased approximately 47% in
the three months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of 7.0% versus approximately 13.7% in the prior
year period. A significant portion of the margin decrease is attributable to
approximately $0.9 million of costs related to the conversion of the current
ASP-based physician practice management solution clients onto a new platform.
Anticipated infrastructure investments, as well as the addition of staff in the
latter part of 2002 and early 2003, particularly in the sales and marketing
area, to support the division's growth and product initiatives, also negatively
impacted margins in the three months ended June 30, 2003, compared to the same
period in 2002.

Application Software's segment operating profit increased approximately 39%
in the three months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 29.7% in the three months ended
June 30, 2002, versus approximately 21.6% in the same period in 2002. The
increase is attributable to management's continued cost containment efforts.

16

Corporate overhead expenses increased approximately $0.7 million in the
three months ended June 30, 2003, compared to the same period in 2002. The
increase is attributable to insurance premiums and legal expenses of
approximately $0.9 million for the three months ended June 30, 2003, as compared
to $0.5 million in 2002, related to the attempt by Lloyd's to rescind certain
insurance policies (refer to "Note 9 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information).

Interest. Interest expense was approximately $4.2 million for the three
months ended June 30, 2003, as compared to $4.6 million for the same period in
2002. The decrease is attributable to a reduction in debt outstanding resulting
from the repurchase of $15 million of the Company's $175 million 9 1/2% Senior
Notes due 2005 (the "Notes") on March 17, 2003. Interest income was $0.1 million
for each of the three-month periods ended June 30, 2003 and 2002.

Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.4 million for the three months ended June 30, 2003,
as compared to income tax expense of $0.2 million for the same period 2002. The
Company's estimated federal income tax expense for the three months ended June
30, 2003, is offset by the release of an equal amount of the Company's valuation
allowance. As of June 30, 2003, the Company's net deferred tax asset was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.

Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Application Software division's Patient1 clinical product
line ("Patient1") to Misys Healthcare Systems, a division of Misys plc ("Misys")
for $30 million in cash. The sale of Patient1 will allow the Company to better
focus on optimizing reimbursement and improving administrative efficiencies for
physician practices and hospitals. The sale was completed on July 28, 2003.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, ("SFAS No.
144"), the consolidated financial statements of the Company have been presented
to reflect Patient1 as discontinued operations for all periods presented.
Summarized operating results for Patient1 are as follows:

Revenue for the Patient1 product line increased approximately 2% in the
three months ended June 30, 2003, as compared to the same period in 2002.
Revenue is recognized using the percentage-of-completion method of accounting,
and the increase over the prior year period is the result of system
implementations that were sold in prior periods.

Operating income for the Patient1 product line decreased approximately $0.8
million in the three months ended June 30, 2003, as compared to the same period
in 2002, due to costs associated with an international contract for which
revenue will be recognized in future periods when cash is received.

17

SIX MONTHS ENDED JUNE 30, 2003, AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
2002

Revenue. Revenue classified by the Company's reportable segments
("divisions") is as follows:

Revenue for the Physician Services division increased approximately 4% in
the six months ended June 30, 2003, as compared to the same period in 2002. The
revenue increase is due to the implementation of new business sold in prior
periods as well as growth in the existing client base. Net backlog at June 30,
2003, was approximately $5 million, compared to approximately $1 million at June
30, 2002. Net backlog represents the annualized revenue related to new contracts
signed with the business still to be implemented, less the annualized revenue
related to existing contracts where discontinuance notification has been
received and the customer has yet to be phased out. The Company focuses on
maintaining a positive net backlog and believes it is a useful indicator of
future revenue growth.

Revenue for the e-Health Solutions division increased approximately 5% for
the six months ended June 30, 2003, as compared to the same period in 2002
despite the phasing out of a large print and mail customer, which began in the
second half of 2002. This customer's business was not related to medical claims.
Revenue growth in the division was a combination of increased medical
transaction processing, decreased non-medical transaction processing, as
mentioned above, and decreased physician practice management revenue.
Improvement in the medical transaction processing business was driven by an
increase in medical transaction volume of approximately 10% in the six months
ended June 30, 2003, over the prior year year. Physician practice management
revenue was negatively impacted by the process of converting the customers of
the ASP-based physician practice management solution onto a new platform.
Revenue for this product line decreased slightly from the prior year period due
to the conversion effort.

Revenue for the Application Software division decreased approximately 5%
for the six months ended June 30, 2003, as compared to the same period in 2002.
The decrease is attributable to a combination of lower patient financial
management revenue and increased patient scheduling systems revenue.

Segment Operating Profit. Segment operating profit is revenue less segment
operating expenses, which include salaries and wages expense, other operating
expenses, depreciation and amortization. Segment operating profit, classified by
the Company's divisions, is as follows:

Physician Services' segment operating profit increased approximately 54% in
the six months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 12.9% in the six months ended
June 30, 2003, versus approximately 8.8% in the same period in 2002. The margin

18

expansion is attributable to the incremental margins achieved on increased
revenue in addition to labor and cost savings from productivity initiatives
completed in 2002.

e-Health Solutions' segment operating profit decreased approximately 44% in
the six months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of 7.5% versus 13.9% in the prior year period. A
significant portion of the margin decrease is attributable to approximately $1.5
million of costs related to the conversion of the current ASP-based physician
practice management solution clients onto a new platform. Anticipated
infrastructure investments as well as the addition of staff in the latter part
of 2002 and early 2003, particularly in the sales and marketing area, to support
the division's growth and product initiatives, also negatively impacted margins
in the six months ended June 30, 2003, compared to the same period in 2002.

Application Software's segment operating profit increased approximately 2%
in the six months ended June 30, 2003, compared to the same period in 2002,
resulting in operating margins of approximately 26.7% in the six months ended
June 30, 2003, versus approximately 25.0% in the same period in 2002. The
increase is attributable to management's continued cost containment measures.

Corporate overhead expenses increased approximately $1.5 million in the six
months ended June 30, 2003, compared to the same period in 2002. The increase is
attributable to insurance premiums and legal expenses of approximately $2.2
million in 2003, as compared to $0.5 million in 2002, related to the attempt by
Lloyd's to rescind certain insurance policies (refer to "Note 9 -- Legal
Matters" in the Company's Notes to Consolidated Financial Statements for more
information).

Interest. Interest expense was approximately $9.0 million for the six
months ended June 30, 2003, as compared to $9.2 million for the same period in
2002. The decrease is attributable to a reduction in debt outstanding resulting
from the repurchase of $15 million of the Company's Notes on March 17, 2003,
offset by approximately $0.2 million related to the accelerated amortization of
the Company's deferred debt issuance costs in connection with the repurchase of
the Notes. Interest income was $0.2 million for each of the six-month periods
ended June 30, 2003 and 2002.

Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was $0.7 million for the six-months ended June 30, 2003, as
compared to income tax expense of $0.4 million for the same period 2002. The
Company's estimated federal income tax expense for the six months ended June 30,
2003, is offset by the release of an equal amount of the Company's valuation
allowance. As of June 30, 2003, the Company's net deferred tax asset was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.

Discontinued Operations. Summarized operating results of Patient1 are as
follows:

Revenue for the Patient1 product line increased approximately 8% in the six
months ended June 30, 2003, as compared to the same period in 2002. Revenue is
recognized using the percentage-of-completion method of accounting and the
increase over the prior year period is the result of system implementations that
were sold in prior periods.

19

Operating income for the Patient1 product line decreased approximately $0.6
million in the six months ended June 30, 2003, as compared to the same period in
2002, due to costs associated with an international contract for which revenue
will be recognized in future periods when cash is received.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2003, the Company had working capital of $31.9 million
compared to $27.9 million at December 31, 2002. The increase in working capital
is primarily related to an increase in accounts receivable of $3.3 million as a
result of growth in the Company's operations. Restricted cash totaled $4.4
million as of June 30, 2003, and $4.3 million as of December 31, 2002.
Restricted cash primarily represents restrictions on the Company's cash as
security for letters of credit. Unrestricted cash and cash equivalents totaled
$30.5 million at June 30, 2003, a decrease of $16.2 million compared to December
31, 2002, due to the retirement of $15 million of the Notes at par plus accrued
interest of approximately $0.1 million on March 17, 2003.

Cash provided by continuing operations was $9.2 million in the six months
ended June 30, 2003, compared to cash provided by continuing operations in the
six months ended June 30, 2002, of $3.8 million. The improvement is attributable
to the improvement in the Company's net income and working capital.

The Company used $7.0 million in cash for investing activities during the
six months ended June 30, 2003, compared to cash used for investing activities
of $9.6 million during the same period in 2002. The decrease in cash used for
investing activities was related to a decrease of capital spending of $1.1
million during the six months ended June 30, 2003, and $1.5 million paid for
acquisitions in the six months ended June 30, 2002.

The Company used $13.9 million in cash for financing activities during the
six months ended June 30, 2003, compared to cash provided by financing
activities of $0.6 million during the same period in 2002. The increase in cash
used for financing activities was primarily related to the Company's repurchase
of $15 million of the Notes at par plus accrued interest.

For more information about the Company's long-term debt, refer to "Note
10 -- Long-Term Debt" in the Company's Notes to Consolidated Financial
Statements.

The Company is in litigation with Certain Underwriters at Lloyd's of London
("Lloyd's") following an attempt by Lloyd's to rescind certain of the Company's
insurance policies (refer to "Note 9 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). For the six months
ended June 30, 2003, the Company incurred approximately $2.2 million of expense
related to above-market insurance premium increases for its new insurance
coverage and the cost of pursuing litigation against Lloyd's. Accordingly, these
costs have been reflected in the Company's Consolidated Statements of Operations
in the Corporate segment.

In addition, pending the outcome of the litigation with Lloyd's, the
Company continues to fund the legal costs and any litigation settlements
associated with claims covered by the Lloyd's Errors and Omissions ("E&O")
policies. The Company expects to recover these costs from Lloyd's and has
reflected these amounts as Other Current Assets on the Company's Consolidated
Balance Sheets.

The negative impact of these items on the Company's 2003 full year cash
flow is projected to be approximately $6.5 million to $8 million, which consists
of approximately $3.5 million to $4.0 million related to insurance premium
increases for new insurance coverage and the cost of pursuing litigation against
Lloyd's and approximately $3 million to $4 million related to the funding of
legal costs and litigation settlements covered by the Lloyd's E&O policies. As
of June 30, 2003, the negative impact on 2003 cash flow was approximately $3.9
million, which consisted of approximately $1.6 million related to insurance
premium increases for new insurance coverage and the cost of pursuing litigation
against Lloyd's and $2.3 million related to the funding of legal costs and
litigation settlements covered by the Lloyd's E&O policies.

The Company has begun the process to refinance its Notes. On August 4,
2003, the Company signed a commitment letter with leading financial institutions
for a term loan facility and a revolving credit facility. The

20

Company will use the estimated net proceeds of approximately $26 million to $28
million, subject to closing adjustments, from its Patient1 product line
divestiture to retire a portion of the Notes and anticipates using bank debt to
refinance the remaining outstanding Notes. The Company anticipates completing
the refinancing and retirement of the Notes near the end of the third quarter.

21

FORWARD-LOOKING STATEMENTS

Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 8 -- Discontinued
Operations and Divestitures," "Note 9 -- Legal Matters," "Note 10 -- Long-Term
Debt," "Note 11 -- Income Taxes," "Note 14 -- Subsequent Events," "Results of
Operations" and "Liquidity and Capital Resources," are "forward-looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include the Company's expectations with
respect to meritorious defenses to the claims and other issues asserted in
pending legal matters, the effect of industry and regulatory changes on the
Company's customer base, the impact of revenue backlog on future revenue,
closing of Patient1 product line divestiture, gain on sale and anticipated net
proceeds related to the Patient1 product line divestiture, overall profitability
and the availability of capital. Although the Company believes that the
statements it has made are based on reasonable assumptions, they are based on
current information and beliefs and, accordingly, the Company can give no
assurance that its expectations will be achieved. In addition, these statements
are subject to factors that could cause actual results to differ materially from
those suggested by the forward-looking statements. These factors include, but
are not limited to, factors identified below under the caption "Factors That May
Affect Future Results of Operations, Financial Condition or Business" and
"Quantitative and Qualitative Disclosures about Market Risk." The Company
disclaims any responsibility to update any forward-looking statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
BUSINESS

Per-Se provides the following risk factor disclosures in connection with
its continuing efforts to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include, but are not limited to, the following:

Competition with Business Management Outsourcing Services Companies and
In-house Providers

The business management outsourcing services business, especially
surrounding the areas of billings and collections, is highly competitive. The
Company competes with regional physician reimbursement organizations and
physician groups that provide their own business management services. Successful
competition within this industry depends on numerous industry and market
conditions.

Potential industry and market changes that could adversely affect the
Company's ability to compete for business management outsourcing services
include an increase in the number of competitors providing comparable services
and new alliances between healthcare providers and third-party payers in which
the third-party payers employ healthcare providers.

Competition with Information Technology Companies

The business of providing application software, information technology,
consulting services and connectivity services is also highly competitive. The
Company competes with national and regional companies in this regard. Some
competitors have longer operating histories and greater financial, technical and
marketing resources than that of the Company. The Company's successful
competition within this industry depends on numerous industry and market
conditions.

Major Client Projects

The Company's Application Software division engages in projects designed to
reengineer customer operations through the strategic use of client/server and
other advanced technologies in conjunction with the implementation of software.
Failure to meet customers' expectations with respect to a major project could
have the following consequences: damage the Company's reputation and standing in
this marketplace; impair
22

its ability to attract new client/server information technology business; and
inhibit its ability to collect for services performed on a project.

Changes in the Healthcare Industry

The markets for the Company's software and e-Health products and services
as well as its business management outsourcing services are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may depend on many factors, including its ability to enhance
existing products and services; introduce new products and services quickly and
cost effectively; achieve market acceptance for new products and services; and
respond to emerging industry standards and other technological changes.

Competitors may develop competitive products that could adversely affect
the Company's operating results. It is possible that the Company will be
unsuccessful in refining, enhancing and developing its software, e-Health and
billing systems going forward. The costs associated with refining, enhancing and
developing these systems may increase significantly in the future. Existing
software and technology may become obsolete as a result of ongoing technological
developments in the marketplace.

Consolidation in the Marketplace

In general, consolidation initiatives in the healthcare marketplace may
result in fewer potential customers for the Company's services. Some of these
initiatives include employer initiatives, such as creating purchasing
cooperatives (GPOs); provider initiatives, such as risk-sharing among healthcare
providers and managed care companies through capitated contracts; and
integration among hospitals and physicians into comprehensive delivery systems.

Government Regulations

The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. Federal and state legislatures
have periodically considered programs, such as the Balanced Budget Act of 1997,
to reform or amend the U.S. healthcare system and to change healthcare financing
and reimbursement systems. These programs may increase government involvement in
healthcare, lower reimbursement rates or otherwise change the healthcare
industry environment. Current or future government regulations or healthcare
reform measures may affect the Company's business. Healthcare industry
participants may respond by reducing their investments or postponing investment
decisions, including investments in the Company's products and services.

Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws and regulations. Federal and state agencies
investigate healthcare providers and companies that provide billing and
collection services, which thus may subject the Company to federal or state
government investigations or sanctions and penalties. The Company may have to
defend against false claims actions and private payer claims and the Company may
be excluded from participation in federal and/or state payer programs.

In the past, the Company has been the subject of federal investigations,
and it may become the subject of false claims litigation or additional
investigations relating to its billing and collection activities. Any such
proceeding or investigation could have a material adverse effect on the
Company's business.

Under the Health Information Portability and Accountability Act of 1996
("HIPAA"), final rules have been published regarding standards for electronic
transactions as well as standards for privacy and security of individually
identifiable health information. HIPAA establishes new or higher standards for
handling healthcare transactions and information and provides penalties for
noncompliance. The Company has incurred and will continue to incur costs to
comply with these rules. Although management believes that future compliance
costs will not have a material impact on the Company's results of operations,
compliance with HIPAA may be more costly than anticipated. Failure to comply
with such rules may subject the Company to civil and criminal penalties.

23

The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse affect on the Company's
business.

Currently in the area of privacy and security of health information,
numerous federal and state civil and criminal laws govern the collection, use,
storage and disclosure of health information. Federal or state agencies may
impose civil and criminal penalties for noncompliance. Persons who believe their
health information has been misused or disclosed improperly may bring claims,
and payers who believe privacy and security standards have been violated may
report violations to federal or state agencies who may impose sanctions or civil
or criminal penalties against offending parties.

Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that healthcare reform will continue to be widely debated. The
Company also expects that the federal government as well as state governments
will continue to pass laws and issue regulations addressing healthcare issues
and reimbursement of healthcare providers. The Company cannot predict whether
new legislation and regulations will be enacted and, if enacted, whether such
new developments will affect its business. However, the Company has invested and
expects to continue to invest in product enhancements to support customer
operations regulated by HIPAA. Responding to HIPAA's impact may require the
Company to invest in new products or charge higher prices.

Debt

The Company has a significant amount of long-term indebtedness and, as a
result, has obligations to make interest payments on that debt. If unable to
make the required debt payments, the Company could be required to reduce or
delay capital expenditures, sell certain assets, restructure or refinance its
indebtedness, or seek additional equity capital. The Company's ability to make
payments on its debt obligations will depend on future operating performance,
which may be affected by certain conditions that may be beyond the Company's
control.

Litigation

The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of its business. The Company has also received written demands from
customers and former customers that have not resulted in legal action. Although
no claims have been brought against the Company to date regarding injuries
related to the use of these products, such claims may be made in the future.

The Company may not be able successfully to resolve such legal matters, or
other legal matters, that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, its insurance coverage, product liability coverage
or otherwise, may not fully cover any damages assessed against the Company.
Although the Company maintains all insurance coverage in amounts that it
believes is sufficient for its business, such coverage may prove to be
inadequate or may become unavailable on acceptable terms, if at all. In the
event that the Company is unsuccessful in its ongoing litigation with Lloyd's,
certain claims presently pending against the Company would not be covered by
insurance (refer to "Note 9 -- Legal Matters" in the Company's Notes to
Consolidated Financial Statements for more information). As of June 30, 2003,
the Company had incurred approximately $7.7 million of costs related to claims
under Lloyd's that are reported as Other Current Assets on the Company's
Consolidated Balance Sheets. As of June 30, 2003, approximately $7.6 million of
these costs had been paid. If the Company is unsuccessful in its ongoing
litigation with Lloyd's, the Company would be required to record a write-off of
the then-current receivable related to Lloyd's. The write-off would have a

24

minimal cash flow impact as the majority of the claims have been paid as
incurred. A successful claim brought against the Company, which is uninsured or
under-insured, could materially harm its business, results of operations or
financial condition.

Stock Price Volatility

The trading price of the Company's Common Stock may be volatile. The market
for the Company's Common Stock may experience significant price and volume
fluctuations in response to a number of factors including actual or anticipated
quarterly variations in operating results, changes in expectations of future
financial performance or changes in estimates of securities analysts, government
regulatory action, healthcare reform measures, client relationship developments,
litigation developments and other factors, many of which are beyond the
Company's control. Furthermore, the stock market in general and the market for
software, healthcare and high technology companies in particular, has
experienced volatility that often has been unrelated to the operating
performance of particular companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of actual operating performance.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

The Company invests excess cash in commercial paper, money market funds and
other highly liquid short-term investments. Due to the limited amounts of these
investments and their short-term nature, any fluctuation in the prevailing
interest rates is not expected to have a material effect on the Company's
financial statements.

The Company has the option of entering into loans based on LIBOR or index
rates under the Credit Facility. If the Company were to borrow amounts under the
Credit Facility, the Company could experience fluctuations in the interest
rates. The Company has not incurred any borrowings under the Credit Facility.

EXCHANGE RATE SENSITIVITY

The majority of the Company's revenue and expenses are denominated in U.S.
dollars. As a result, the Company has not experienced any significant foreign
exchange gains or losses to date. The Company conducts only limited business
denominated in foreign currencies and does not expect material foreign exchange
gains or losses in the future. The Company does not engage in any foreign
exchange hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of June 30, 2003,
and have concluded that these disclosure controls and procedures operate
effectively to support the certifications required of such officers in this
report.

There were no significant changes in internal controls or in other factors
that could significantly affect the Company's internal controls subsequent to
the date of the most recent evaluation of these internal controls.

25

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is included in "Note 9 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its Annual Meeting of Stockholders on May 8, 2003. The
following directors were elected at such meeting:

A proposal to approve the Amended and Restated Per-Se Technologies, Inc.
Non-Employee Director Stock Option Plan also was voted upon at the Annual
Meeting of Stockholders and was approved by the stockholders. Votes cast were
25,782,493 for; 1,496,040 against; and 9,519 abstained.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

(B) Reports on Form 8-K

The Company filed the following reports on Form 8-K during the quarter
ended June 30, 2003:

27

SIGNATURES

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

PER-SE TECHNOLOGIES, INC.
(Registrant)

By: /s/ CHRIS E. PERKINS
------------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer

By: /s/ MARY C. CHISHOLM
------------------------------------
Mary C. Chisholm
Vice President and Controller
(Principal Accounting Officer)

Date: August 8, 2003

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INDEX TO EXHIBITS