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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number: 000-22052

PROXYMED, INC.

(954) 473-1001
(Registrant’s telephone number)

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. x Yes o No

Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). x Yes o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock, $.001 Par Value
6,782,938 Shares as of August 11, 2003

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PART 1 — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

PROXYMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)

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

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PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)

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

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PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)

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

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)

(1) Summary of Significant Accounting Policies

	(a)		Basis of Presentation — The accompanying unaudited consolidated financial statements of ProxyMed, Inc. (“ProxyMed”) and subsidiaries (collectively with ProxyMed, the “Company”) and the notes thereto have been prepared in accordance with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods.
			On December 31, 2002, ProxyMed acquired all of the capital stock of MedUnite, Inc. (“MedUnite”), a privately-held company providing healthcare claims processing services founded by seven of the nation’s largest health insurers, for $10,000,000 in cash and $13,400,000 in 4% convertible debt. The operations of MedUnite are reflected with those of the Company for the three and six months ended June 30, 2003.
			The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. The unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 as filed with the SEC on April 15, 2003.
	(b)		Revenue Recognition — Electronic transaction processing fee revenue is recorded in the period the service is rendered. Certain transaction fee revenue is subject to revenue sharing pursuant to agreements with resellers, vendors or gateway partners and are recorded as gross revenues. Revenue from sales of inventory and manufactured goods is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is probable. Revenue from certain up-front fees is amortized ratably over the expected life of the customer. Revenue from hardware leases and maintenance fees is recognized ratably over the applicable period.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

	(c)		Net loss per share — Basic net loss per share of common stock is computed by dividing net loss applicable to common shareholders by the weighted average shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution from the exercise or conversion of securities into common stock; however, stock options and warrants totaling 1,828,334 shares and 1,664,934 shares at June 30, 2003 and 2002, respectively, as well as common shares issuable on conversion of Series C preferred stock (13,333 and 20,000 shares, if converted on June 30, 2003 and 2002, respectively), were excluded from the calculation of diluted loss per share for the three and six months ended June 30, 2003 and 2002 and for the six months ended June 30, 2002, respectively, because their effects would have been antidilutive. Additionally, 597,036 stock options and warrants outstanding at June 30, 2002 were excluded from the calculation of diluted net income per share for the three months ended June 30, 2002 because the exercise price of these options and warrants was greater than the average market price of the Company’s common stock during the period.
			The following sets forth the computation of basic and diluted net income (loss) per share for the three and six months ended June 30, 2003 and 2002:

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

	(d)		Stock-based compensation — In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002.
			ProxyMed continues to apply Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock option plans and has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS No. 148. The Company measures compensation expense related to the grant of stock options and stock-based awards to employees (including independent directors) whereby compensation expense, if any, is generally based on the difference between the exercise price of an option, or the amount paid for an award, and the market price or fair value of the underlying common stock at the date of the award or at the measurement date for variable awards. Stock-based compensation arrangements involving non-employees are accounted for based on the fair value of the option or award pursuant to SFAS No. 123.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

Under SFAS No. 123, compensation cost for the Company’s stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Had the Company adopted SFAS No. 123 in accounting for its stock option plans, the Company’s consolidated net loss and net loss per share for the three and six months ended June 30, 2003 and 2002 would have been adjusted to the pro forma amounts indicated as follows:

(e)

New Accounting Pronouncements — In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except for certain provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. The Company does not believe that the implementation SFAS No. 149 will have a material effect on the Company’s consolidated financial statements and related disclosures.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 specifies that instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: (1) mandatory redeemable financial instruments; (2) obligations to repurchase the issuer’s equity shares by transferring assets and (3) certain obligations to issue a variable number of shares. SFAS No. 150 defines a freestanding financial instrument as a financial instrument that (1) is entered into separately and apart from any of the entity’s other financial instruments or equity transactions or (2) is entered into in conjunction with some other transaction and can be legally detached and exercised on a separate basis. For all financial instruments entered into or modified after May 31, 2003, SFAS No. 150 is effective immediately. For all other instruments of public companies, SFAS No. 150 goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after June 15, 2003, entities should record the transition to SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. The Company does not expect the adoption of SFAS No. 150 to have a material impact on its financial statements.

(2) Investment in Warrant

     In June 2003, the Company entered into a joint marketing and distribution agreement with PlanVista Corporation (“PlanVista”), a provider of medical cost containment and business process outsourcing solutions to the medical insurance and managed care industries, to provide the Company’s electronic healthcare transaction processing services and PlanVista’s network access and repricing service product as an integrated package to existing and prospective payer customers. As part of the agreement, PlanVista granted the Company a warrant to purchase 15% of the number of outstanding shares of PlanVista common stock on a fully-diluted basis as of the time of exercise for $1.95 per share. Any shares acquired upon exercise are not registered. The warrant is exercisable immediately and expires in December 2003 (the “Initial Warrant Term”); however, the exercise period for the warrant may be extended for up to two additional ninety-day periods (respectively, the “First Renewal Term” and the “Second Renewal Term” and collectively with the “Initial Warrant Term”, the “Warrant Term”), if certain revenue-based thresholds are met.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

     The initial value of the warrant of $547,000 (calculated using a Black Scholes model) along with additional amounts already paid to and amounts still to be received by the Company under the agreement are being amortized as a reduction of cost of sales over 36 months. As long as the warrant is still outstanding, the value of the warrant is evaluated at the end of each calendar quarter (each a “Measurement Date”). On June 30, 2003, the value of the warrant increased by $752,000 to approximately $1.3 million as a result of an increase in the market value of PlanVista stock. The warrant value increase is reflected as other income in the statement of operations. The warrant is stated at its fair value and any shares of common stock that may be acquired by exercising this warrant will be accounted for as “available for sale” securities.

     At any future Measurement Date, there may be additional income or expense depending on the value of the warrant at that time. If during the Warrant Term the warrant is never exercised, then the Company will have to record an impairment charge equal to warrant’s remaining value, if any, carried on the books during the Warrant Term. However, should the Initial Warrant Term renew in accordance with its terms, the Company will have to amortize, at the time of the threshold is met, any additional value of the warrant as a reduction of cost of sales over the remaining original amortization period.

(3) Inventory

     Inventory consists of the following at June 30, 2003:

(4) Goodwill and Other Intangible Assets

(a)

Goodwill — The changes in the carrying amounts of goodwill for the six months ended June 30, 2003 by operating segment are as follows:

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

(b)

Other Intangible Assets — The carrying amounts of other intangible assets as of June 30, 2003 and December 31, 2002, by category, are as follows:

		Amortization expense of other intangible assets was $648,000 and $135,000 and $1,394,000 and $283,000 for the three months and six months ended June 30, 2003 and 2002, respectively.
		As of June 30, 2003, estimated future amortization expense of other intangible assets is as follows: $1,933,000 for the remaining quarters of 2003, $2,763,000 in 2004, $2,642,000 in 2005, $2,476,000 in 2006, $2,265,000 in 2007, and $1,785,000 in 2008.

(4) Debt Obligations

     In February 2003, the Company financed $422,000 and $306,000 for certain liability insurance policies over 7 months at 4.76% and 24 months at 5.25% to third-parties, respectively. The note for $422,000 is unsecured while the note for $306,000 is collateralized by a letter of credit in the amount of $325,000 (supported with restricted cash) at June 30, 2003.

     In March 2003, the Company restructured $3,368,000 in accounts payable and accrued expenses acquired from MedUnite and outstanding at December 31, 2002 to one vendor by paying $750,000 in cash and financing the balance of $2,618,000 with an unsecured note payable over 36 months at 8% commencing March 2003.

     In April 2003, the Company financed a net total of $1,990,000 ($2,797,000 in accounts payable and accrued expenses offset by $807,000 in accounts receivable) existing at December 31, 2002 from MedUnite to a former owner of MedUnite by issuing an unsecured note payable over 24 months at 6%.

     In June 2003, the Company financed $125,000 of liability insurance policy premium with another unsecured note, payable over 9 months at 5.4% to a third-party.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

(5) Equity Transactions

	(a)		Series C Preferred Conversion Offer — On December 13, 2001, the Company offered to convert its then outstanding Series C Preferred into shares of common stock at a reduced conversion price (the “Conversion Offer”). For a period of sixty days ending February 11, 2002, the holders of the Series C Preferred shares were able convert such shares at a reduced conversion price of $13.05 per share instead of the original conversion price of $15.00. At the conclusion of the Conversion Offer on February 11, 2002, holders of 98.5% of the outstanding Series C Preferred had converted their shares into a total of 1,538,636 common shares. A deemed dividend charge of $612,000 was recorded in the first quarter of 2002 for conversions consummated after the 2001 year end.
	(b)		Stock Options — During the six months ended June 30, 2003, the Company granted a total of 57,000 stock options at exercise prices between $7.50 and $12.65 per share to employees. Such options were granted pursuant to the Company’s approved stock option plans and are for a ten-year term and vest equally over three years from the date of grant.
			In April 2003, the six outside directors of ProxyMed were each granted 10,000 stock options at an exercise price of $7.28 per share. Such options were granted pursuant to the Company’s approved stock option plans and are for a ten-year term and vest equally over three years from the date of grant. Additionally, in May 2003, the Company’s outside directors were granted a total of 30,000 and 15,000 options at an exercise price of $10.63 to compensate the directors upon re-election to the board and participation in sub-committees, respectively, pursuant to guidelines adopted by the Company’s Board of Directors in May 2002. Option grants for the re-election to the board vest equally over a three-year period. Options for participation in sub-committees vest in full after five years but a portion may be accelerated to vest after each sub-committee meeting attended.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

(c)

Warrants — In conjunction with a joint marketing agreement entered into between the Company and a subsidiary of First Data Corporation (“FDC”), an electronic commerce and payment services company, in July 2003, the Company issued to FDC a warrant agreement under which FDC may be entitled to purchase up to 600,000 of the Company’s common stock at $16.50 per share. The ability of FDC to exercise under the warrant agreement is dependent upon the Company achieving certain revenue-based thresholds under such joint marketing agreement over a three and one-half year period. Additionally, in connection with this agreement, four entities affiliated with General Atlantic Partners (“GAP”), current investors in the Company, received an aggregate of 243,882 warrants, as a result of pre-emptive rights relating to their investment in the Company in April 2002. The GAP warrant agreements are subject to the same terms and conditions as those issued to FDC and are exercisable only if FDC’s right to exercise under its warrant agreement is perfected.

(6) Segment Information

     ProxyMed operates in two reportable segments that are separately managed: Transaction Services (formerly known as Electronic healthcare transaction processing) and Laboratory Communication Solutions. Transaction Services includes transaction and value-added services principally between physicians and insurance companies (Payer Services) and physicians and pharmacies (Prescription Services); and Laboratory Communication Solutions includes the sale, lease and service of communication devices principally to laboratories and the contract manufacturing of printed circuit boards (Laboratory Services). Inter-segment sales are not material, and there were no foreign sales for any periods presented.

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

(7) Income Taxes

     As of June 30, 2003, the Company had a net deferred tax asset of approximately $66.1 million, which 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 if, during future periods, management believes the Company will generate sufficient taxable income to realize the net deferred tax asset.

(8) Leases

     In June 2003, the Company paid $750,000 to the leasing company as a result of terminating MedUnite’s facility lease in San Diego, California effective June 30, 2003. As part of the consideration, the landlord was given the furniture at the facility with a value of approximately $153,000. The Company incurred other costs of $69,000 in connection with the termination of the lease. As a replacement for this facility, the Company subleased office space in the same geographic area at a monthly rent of $6,000 per month through September 2004.

(9) Related Party Transactions

     In June 2003, the Company amended the promissory note executed in June 2000 by Mr. Blue, the Company’s former chairman of the board and chief executive officer. The amendment extended the maturity date of the promissory for an additional twelve months to December 31, 2004 and also allowed Mr. Blue to offset any principal owed with certain amounts payable to Mr. Blue by the Company as a result of a finder’s fee arrangement with the Company. Additionally, the Company received a prepayment of interest from Mr. Blue in the amount of $15,000 that will be applied to any interest charges.

     As discussed in Note 2, the Company entered into a joint distribution and marketing agreement with PlanVista in June 2003. PlanVista is a publicly-held company and is controlled by an affiliate of Commonwealth Associates, whose principal, Michael Falk, is a director of both the Company and PlanVista. Additionally, two senior executives of the Company have immaterial ownership interests in PlanVista.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     ProxyMed is an electronic healthcare transaction processing services company providing connectivity services and related value-added products to physician offices, payers, medical laboratories, pharmacies, and other healthcare providers. Our electronic transaction processing services support a broad range of both financial and clinical transactions. To facilitate these services, we operate ProxyNet, our secure, proprietary national electronic information network, which provides physicians and other healthcare providers with direct connectivity to one of the industry’s largest group of payers, the largest group of clinical laboratories, and the largest group of chain and independent pharmacies. Our products and services are currently provided from our main operating facilities located in Fort Lauderdale, Florida; New Albany, Indiana; Santa Ana, California; Norcross, Georgia; and Sioux Falls, South Dakota. We also operate our clinical network and portions of our financial and real-time production computer networks from a secure co-location site in Atlanta, Georgia.

     We remain committed to our strategy, which is focused on leveraging our leading position as an independent back-end connectivity provider to small physician offices. Through strategic relationships and partnerships with front-end solutions providers, our goal is to drive more healthcare transactions through ProxyNet while remaining neutral in the battle for the physician’s desktop. Additionally, since we have an existing customer base of physicians and other healthcare providers, we expect that there will be opportunities to increase revenues by cross-selling our existing products and services to these current customers, as well as revenue opportunities from the development of new services from our development efforts, including Internet-based transaction services, and from opportunities afforded by HIPAA as it relates to privacy, security and education. We remain committed to developing additional capabilities and value-added products and services, and to expanding our back-end connectivity network. In conjunction with this philosophy, we have recently introduced ProxyMed.net, our new web portal for providers, and “Phoenix”, our new HIPAA-compliant transaction processing platform. We have also added new services offerings for our payer customers through agreements with PlanVista Corporation (“PlanVista”) for claims re-pricing services and First Data Corporation (“FDC”) for a jointly marketed suite of services being offered under the brand name “FirstProxy”.

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     On December 31, 2002, we acquired all of the outstanding stock of MedUnite, Inc. (“MedUnite”) for $10,000,000 in cash and an aggregate of $13,400,000 principal amount of 4% convertible promissory notes. In addition, we incurred $8,321,000 in transaction and exit related costs. Interest on the convertible notes is payable in cash on a quarterly basis. The convertible promissory notes are payable in full on December 31, 2008 and are convertible into an aggregate of 731,322 shares of our common stock if the founders of MedUnite achieve certain revenue-based triggers over the next three and one-half year period. The shares of our common stock issuable upon conversion of the convertible notes will be registered by us promptly after a stockholder achieves a conversion trigger event. If and when these notes become convertible, we will record a beneficial conversion charge in our operations to the extent that the fair market value of the common stock is in excess of the conversion price. The operations of MedUnite are reflected with those of the Company for the three and six months ended June 30, 2003.

Results of Operations

  Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002.

     Net Revenues. Consolidated net revenues for the three months ended June 30, 2003 increased by $5,074,000, or 40%, to $17,701,000 from consolidated net revenues of $12,627,000 for the three months ended June 30, 2002. Net revenues classified by our reportable segments are as follows:

     Net revenues in our Transaction Services segment (formerly known as “Electronic healthcare transaction processing”) increased by 125% over the 2002 period. This increase is primarily due to the acquisition of MedUnite, which contributed $4,517,000, or 38%, of the segment revenues. Excluding MedUnite, revenue growth from our existing transaction business increased by 40% between periods primarily due continued success in the cross-selling of our services to existing customers, and new customer sales, including additional revenues through our newer vendor partners.

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     Total healthcare transactions processed during the three months ended June 30, 2003 were 55,983,100 (including 21,024,900 transactions from MedUnite), up 97% from the 28.5 million transaction processed in the three months ended June 30, 2002. Excluding MedUnite, core transaction growth between the periods was 41%. While our encounter volume dropped between the periods, the net increases were generally the result of new sales including transactions generated by newer vendor partners that resulted in greater claim and patient statement processing transactions. A summary of the number of transactions we processed for the periods presented is as follows:

     “Core” transactions represent all transactions except for encounters. “Encounters” are an administrative reporting transaction for payers but do not generate revenue for the provider who must submit them. Accordingly, rather than submitting on a routine basis, most providers choose to periodically “catch up” on their submissions, creating monthly and quarterly swings in both the number of encounters we process and what percentage of our transaction mix they represent. Since encounters are at a significantly lower price point than claims, these swings make it difficult to easily analyze our quarter-over-quarter growth in our core business. In addition, we do not expect our encounter volume to grow on an annual basis, as payers are not expanding the capitated service model that is the foundation of encounters. Therefore, we believe that breaking out encounters shows more clearly our growth in core transactions, which is the growth engine for our Transaction Services segment.

     For the 2003 period, approximately 68% of our revenues came from our Transaction Services segment compared to 42% from this segment for the 2002 period. For the remainder of 2003 and beyond, it is anticipated that our greatest growth will come from this segment.

     The Laboratory Communication Solutions segment’s net revenues decreased by 22% from the 2002 period. The expected slow-down in the first quarter of 2003 has carried over into the second quarter. In addition to lower contract manufacturing revenues from a sluggish economy, we have seen a slowdown in sale of our communication devices at our smaller labs and hospital labs in the second quarter of 2003. We believe this was a result of the April 15th HIPAA privacy deadline adversely affecting new deployments as these labs focused on internal operations. In addition, there was one large communication device order that shifted from the late second quarter into the third quarter. We anticipate that a strengthening economy and a resumption of normal ordering from the larger national labs who have been focused on consolidating a number of acquired labs will help to improve revenue for this segment over the balance of the year.

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     Cost of sales. Consolidated cost of sales decreased as a percentage of net revenues to 42% for the three months ended June 30, 2003 from 46% for the three months ended June 30, 2002. Cost of sales classified by our reportable segments is as follows:

     Cost of sales in our Transaction Services segment consists of transaction fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, revenue sharing arrangements with our business partners, third-party database licenses, and certain travel expenses. Cost of sales as a percentage of revenues decreased to 36% in the 2003 period compared to 39% in the same period last year primarily due to a change in the mix of transaction types from higher cost patient statements to lower cost claims and real-time transactions (such as eligibility).

     Cost of sales in the Laboratory Communication Solutions segment includes hardware, third-party software, and consumable materials. Cost of sales as a percentage of revenues increased to 55% in the 2003 period compared to 51% in the same period last year primarily due to a change in the mix from lower cost leases to higher cost contract manufacturing.

     Selling, General and Administrative Expenses. Consolidated SG&A increased for the three months ended June 30, 2003 by $3,919,000, or 66%, to $9,860,000 from consolidated SG&A of $5,941,000 for the three months ended June 30, 2002. Consolidated SG&A expenses as a percentage of consolidated revenues increased to 56% for the 2003 period compared to 47% in the same period last year. SG&A expenses classified by our reportable segments are as follows:

     Transaction Services’ SG&A expenses for the three months June 30, 2003 increased 130% over the same period last year primarily due to the incremental expenses incurred in the operations of MedUnite. Excluding MedUnite, SG&A expenses in this segment increased by 9% due to costs related to our HIPAA compliance efforts, implementation staffing and sales/marketing programs implemented since the first quarter of last year.

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     While we incurred significant SG&A costs related to the MedUnite operations in the first quarter of 2003, we have been successful at significantly reducing the monthly operating expenses in the second quarter of 2003. We have been successful in eliminating or renegotiating substantial telecommunication expenses and eliminating duplicative contact management, human resources and customer relationship management systems as the basis of these reductions. With our continued focus on expenses in the third quarter, we expect to achieve positive cash flow in our MedUnite operations before the fourth quarter of 2003.

     Laboratory Communication Solutions’ SG&A expenses for the three months ended June 30, 2003 decreased by 8% over the same period last year primarily due to cost cutting measures implemented in the fourth quarter of 2002. Segment SG&A expenses as a percentage of segment net revenues increased to 37% for the 2003 period compared to 31% for the same period last year due to lower revenues in the 2003 period.

     Corporate SG&A expenses increased 31% for the three months ended June 30, 2003 compared to the same period last year primarily due to increased insurance premiums, professional fees and personnel costs.

     Depreciation and Amortization. Consolidated depreciation and amortization increased by $761,000 to $1,344,000 for the three months ended June 30, 2003 from $583,000 for the same period last year. This increase was primarily due to $465,000 for the amortization of intangible assets acquired in the MedUnite acquisition. Amortization of intangible assets related to the acquisition of MedUnite and additional capitalized software development is expected to increase for the remainder of 2003 as we place these platforms into production and commence the amortization of the assets. Depreciation and amortization classified by our reportable segments is as follows:

     Operating Income (Loss). As a result of the foregoing, consolidated operating loss for the three months ended June 30, 2003 was $913,000 compared to operating income of $318,000 for the same period last year. Operating income (loss) classified by our reportable segments is as follows:

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     Interest, net. Consolidated net interest expense for the three months ended June 30, 2003 was $195,000 compared to net interest income of $128,000 for the same period last year. This increase in expense is primarily due to interest related to our convertible debt issued to the former owners of MedUnite and the financing of certain liabilities of MedUnite during the 2003 period and lower interest income earned on a smaller investment base at lower interest rates.

     Other Income. In conjunction with our distribution and marketing agreement with PlanVista for claims re-pricing services signed in June 2003, we received a warrant to purchase up to 15% of PlanVista. At the end of June 2003, the value of this warrant increased by $752,000.

     Net Income (Loss). As a result of the foregoing, consolidated net loss for the three months ended June 30, 2003 was $356,000 compared to net income of $446,000 for the same period last year.

  Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002.

     Net Revenues. Consolidated net revenues for the six months ended June 30, 2003 increased by $11,001,000, or 46%, to $35,131,000 from consolidated net revenues of $24,130,000 for the six months ended June 30, 2002. Net revenues classified by our reportable segments are as follows: