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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 000-29377

Landacorp, Inc.

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

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). YES  o   NO   x

Number of shares of Common stock, par value of $0.001, outstanding as of
October 31, 2003: 16,114,567.

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Landacorp, Inc.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDACORP, INC.

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

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

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LANDACORP, INC.

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

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

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LANDACORP, INC.

Condensed Consolidated Statements of Cash Flows
(unaudited in thousands)

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

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LANDACORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

     Landacorp, Inc. was established in 1982 and, along with its subsidiaries (collectively referred to herein as the “Company”), provides population health management solutions to healthcare payer and delivery organizations that include predictive modeling and chronic condition management programs, and Internet-and Windows®-based medical management software. These solutions are designed to help our customers control and avoid cost, while improving outcomes across the continuum of care. The Company maintains offices in Atlanta, Georgia; Chico, California; and Raleigh, North Carolina and derives substantially all of its revenues from customers in the United States.

     The accompanying unaudited financial statements of the Company have been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The balance sheet at December 31, 2002 is derived from the audited financial statements included in the Form 10-K for the year ended December 31, 2002. However, this Form 10-Q does not include all Form 10-K and other disclosures required by generally accepted accounting principles in the United States for the balance sheet as presented herein. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented.

     The consolidated results of operations presented for the three and nine-month periods ended September 30, 2003 are not necessarily indicative of the results to be expected for any other interim period or any future year. Certain prior period balances have been reclassified in order to conform with current period presentation.

2. Revenues

     Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services.

Revenue Recognition

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

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

     Support services included in the initial licensing agreement and annual support service renewal contracts are deferred and are recognized ratably over the support period. Revenues from training and consulting not considered essential to the functionality of the software system are recognized when the Company has delivered the services in accordance with the terms of the service agreements or have no future performance obligations. Amounts billed in advance of revenue recognition are recorded as deferred revenue.

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     The Company delivers care management program services through a per participant annual enrollment fee and through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. Payments for participants’ annual enrollment fees are generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled. Such obligations include the delivery of health risk assessment surveys, tailored health guides and certain lab test kits.

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

     From time to time, the Company may enter into care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. As of September 30, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,177,000, which is included in deferred revenue.

     Included in the third quarter 2003, is revenue of approximately $296,000 related to achieving certain performance criteria from an ongoing care management contract.

3. Net income (loss) per share

     Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common and potential common shares outstanding. Potential common shares consist of outstanding common shares subject to repurchase by the Company, and common shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Potential common shares are excluded from the computation if their effect is anti-dilutive. The approximate potential common shares, which are excluded from the determination of diluted net income per share as the effect of such shares is anti-dilutive were 722,000 and 1,419,000 for the three and nine months ended September 30, 2003, respectively. The approximate potential common shares, which are excluded from the determination of basic and diluted net loss per share as the effect of such shares is anti-dilutive were 3,501,000 at September 30, 2002.

4. Recent Accounting Pronouncements

     In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is accreted to its present value each period while the cost is depreciated over its useful life. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company adopted this statement effective January 1, 2003 and it did not have a material effect on our financial position, results of operations or cash flows.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. FAS 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. It nullifies the guidance of the Emerging Issues Task Force (EITF) in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. In FAS 146, the Board acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to other parties that meets the definition of a liability. The Company adopted this statement effective January 1, 2003 and did not have a material effect on our financial position, results of operations or cash flows.

     In November 2002, the FASB reached a consensus on EITF Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“the Issue”). The guidance in this Issue is effective for revenue arrangements entered into fiscal periods beginning after June 15, 2003. The Issue addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, the Issue addresses how to determine whether an arrangement involving multiple

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deliverables contains more than one earnings process and, if it does, how to divide the arrangement into separate units of accounting consistent with the identified earnings processes for revenue recognition purposes. The Issue also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company has adopted the Issue, and it did not have a material impact on the results of operations, financial position, or cash flows.

     In November 2002, the FASB issued FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirements of SFAS 5, “Accounting for Contingencies,” relating to guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. The interpretation’s provisions for initial recognition and measurement are required on a prospective basis to guarantees issued or modified after December 31, 2002. We have adopted the disclosure provisions of this interpretation and it did not have a material effect on our financial position, results of operations or cash flows. From time to time, the Company indemnifies certain customers from any claims arising from patent or copyright infringements related to the implementation of its Medical Management software. To date, there have been no such infringements or claims thereof. The Company is also a party to employment agreements with certain executive officers that contain change of control provisions. These agreements are disclosed in our definitive proxy statement for our 2003 Annual Meeting of Stockholders.

5. Goodwill and Other Intangible Assets

     We adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, we reclassified $462,000 of intangible assets to goodwill and discontinued periodic amortization of goodwill. Goodwill will be assessed annually on January 1 for impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. We have performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002. We have completed the test as of January 1, 2003, which also indicated no impairment.

     Intangible assets that have finite useful lives will continue to be amortized over their useful lives. Our intangible assets consist principally of existing technology and customer base, and all are considered to have finite lives. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of SFAS 142 on January 1, 2002.

(in thousands)

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6. Restructuring and Acquisition Related Charges

     In May 2001, the Company announced a reduction in work force representing approximately 16% of the Company’s total work force which consisted of 40 employees from various areas of the Company. Also in May 2001, the Company announced its plan to cease operations of its Portland, Oregon-based Interactive Media Group (IMG). On August 8, 2001, the Company announced an additional reduction in work force of approximately 18%, or 36 employees. For the year ended December 31, 2001, restructuring and acquisition related charges consisted of $1,301,000 relating to severance costs, the closing of the IMG operations and additional lease obligations related to unoccupied office space that the Company had committed to, as well as a charge of $268,000 related to re-pricing of stock options granted in connection with the acquisition of PatientCentrix. In December 2002, the Company recorded a restructuring charge of $106,000 related to additional estimated real estate lease obligations on office space that was vacated as a result of the reductions in force announced by the Company in May 2001.

     The following is a rollforward of the restructuring accrual:

7. Asset Impairment Charge

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

     The analysis resulted in an impairment charge during the year ended December 31, 2002 of $3,300,000, which consisted of a write-down of $850,000 and $2,450,000 to property, plant & equipment and its definite-lived intangible assets, respectively. The Company will continue to monitor its performance against the projections used in this analysis, which could result in future impairments.

8. Agreement with Certain Shareholders and Option Holders

     On March 13, 2002, the Company settled a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the Earn Out payment due under the PatientCentrix merger agreement. We agreed to pay the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the Earn Out payment. This amount has been recorded as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and Merger Agreement, we

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agreed to reduce to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This amount has been recorded as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003. Our board of directors determined that Mr. Miele should remain on our board of directors, and Mr. Miele was re-elected at our 2003 annual meeting of stockholders. Effective on October 27, 2003, Mr. Miele resigned from our board of directors.

9. Stock-Based Compensation

     The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), which states that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company’s common stock on the grant date. In the event that stock options are granted at a price lower than the fair market value at that date, the difference between the fair market value of the Company’s common stock and the exercise price of the stock option is recorded as unearned compensation. Unearned compensation is amortized to compensation expense over the vesting period of the stock option. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as it relates to stock options granted to employees, which requires pro forma net losses be disclosed based on the fair value of the options granted at the date of the grant. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

     Fair Value Disclosures

     The Company calculated the fair value of each option on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions:

     Had compensation cost for the Company’s stock-based compensation plans been determined as prescribed by SFAS No. 123, the Company’s net pro forma income (loss) would have been as follows:

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

     Note Regarding Forward-Looking Statements: This report contains certain forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. Examples of such forward-looking statements include projections of our future results of operations, including consecutive quarter over quarter revenues during the remainder of 2003, or of our financial condition and plans to hire additional personnel; our market opportunities; deployment, capabilities and uses of our products and services; advantages and advancements that may be enabled by our products; product development and product innovations; developments in the healthcare and population health management industries; expansion of our intellectual property portfolio; growth in our research and development, sales, marketing and general administrative expenses; and anticipated trends in our business. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including, but not limited to, Landacorp’s dependence on a limited number of products with limited market acceptance and other risk factors that are discussed in this Form 10-Q and the Company’s other filings with the SEC, including its Form 10-K for the year ended December 31, 2002. Such statements reflect the judgment of the Company as of the date of this report on Form 10-Q with respect to future events, the outcome of which is subject to certain risks, including the risk factors set forth below, which may have a significant impact on the Company’s business, operating results or financial condition. Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Landacorp undertakes no obligation to update forward looking statements.

Overview

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

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

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

     During the quarter ended September 30, 2003, 57% and 43% of revenue was generated from care management services and medical management software, respectively.

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

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     The Company delivers care management programs and services through a per participant annual enrollment fee and through a subscription-based fee structure that provides for implementation services at a fixed hourly rate and a subsequent monthly subscription fee based upon the number of members maintained by the payer organization. Payments for participants’ annual enrollment fees are generally received at the beginning of the enrollment period. Revenue is recognized on an effort-based measure over the enrollment period as the services are provided and the obligations to the participants are fulfilled. Such obligations include the delivery of health risk assessment surveys, tailored health guides and certain lab test kits.

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

     From time to time, the Company may enter into care analytics and care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. As of September 30, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,177,000, which is included in deferred revenue.

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

Critical Accounting Policies

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

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

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

     Revenue recognition. The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. Revenues consist of software license and implementation fees, related maintenance and software service fees, and certain revenue derived from our care management programs. Deferred revenue consists of maintenance billings and annual enrollment fees due in advance of service periods. From time to time, the Company may enter into care management contracts that guarantee certain cost savings or other performance measures to the customer. Certain amounts are refundable to the customer if such savings or performance criteria are not achieved. Under such contracts, the Company defers revenue equal to either the maximum potential amount of fees that are refundable, or such amount that is determined by management to be reasonable based on historical performance under the contract. Such revenue will not be recognized until the performance criteria have been met. The Company’s revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, AICPA Statement of Position No. 97 — 2 “Software Revenue Recognition” and EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. The Company follows specific and detailed guidelines in measuring revenue; however certain estimates and judgments affect the application of the revenue policy. These estimates include the estimated contract hours and time to complete for percentage of completion accounting, and the effort-based measures used in services accounting. Changes in conditions or new contract terms could cause management to determine these estimates and judgments must be revised. Such changes or revisions could adversely affect the revenue recognition for any reporting period.

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     Bad debt. Management analyzes accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in our customer payment terms and trends when evaluating the adequacy of the allowance for bad debt. Significant management judgment and estimates must be made and used in connection with establishing the allowance for bad debt in any accounting period. The accounts receivable balance was $3.7 million, net of allowance for bad debt of $0.3 million as of September 30, 2003. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for bad debt may be required.

     Goodwill. The Company adopted SFAS 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, the Company discontinued periodic amortization of goodwill of approximately $650,000 annually. Goodwill will be assessed annually on January 1 for impairment by applying a fair-value-based test. Additionally, the standard requires a transitional impairment test during the period of adoption. The Company has performed the transitional impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002. The Company has completed the test as of January 1, 2003, which also indicated no impairment. The projections used to test for impairment of goodwill were based on management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in impairment charges.

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

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

Recent Developments

     On November 2, 2000 we completed the acquisition of PatientCentrix, Inc. (“PatientCentrix”), a leading provider of predictive modeling and targeting. The Company acquired 100% of the shares and assumed all outstanding options of PatientCentrix in return for cash of $5,850,000 paid to the stockholders and option holders, and issuing 1,157,000 shares to the stockholders of PatientCentrix. The price of the shares issued was $1.777 based on the average of the previous 20 trading days prior to the date of the definitive agreement, which was October 31, 2000. We also assumed all the incentive stock options issued by PatientCentrix prior to the acquisition, representing options to purchase up to 1,582,532 of Common Stock of Landacorp with an average exercise price of $1.525. The total purchase price of $11,188,000 consisted of $5,850,000 cash, $2,056,000 of our Common Stock (1,157,000 shares), assumed stock options with a fair value of $2,970,000, and other acquisition related expenses of approximately $312,000, consisting primarily of payment for legal and financial advisory services. Of the total purchase price, approximately $191,000 was allocated to the net tangible assets, approximately $961,000 was allocated to unearned compensation related to our right to repurchase 30% of the shares of the Company’s Common Stock and options to purchase our Common Stock issued to employees of PatientCentrix pursuant to the purchase agreement in the event of such employee’s termination under certain circumstances, and the remainder was allocated to intangible assets, including existing technology ($3,600,000), customer base ($640,000), assembled work force ($280,000), and goodwill ($5,516,000). Additionally, up to $6 million in additional cash could be paid to the shareholders and option holders of PatientCentrix, under the earn out provision of the purchase agreement. As discussed in the following paragraphs, the Company reached various settlements with shareholders of PatientCentrix during 2001 affecting this provision. Accordingly, approximately $1,477,000 has been recorded to goodwill as additional purchase price, resulting in a cumulative aggregate purchase price of $12,665,000.

     Subsequent to the acquisition of PatientCentrix, its majority shareholder, Michael Miele, became an employee and Director of the Company. During 2001, the Company and the majority shareholder entered into a Settlement Agreement and Mutual Release whereby the Company and majority shareholder mutually agreed to terminate the employment relationship and to release each other from any claims arising from or related to the employment relationship. The majority shareholder released the Company from any and all claims

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that the termination of employment in and of itself violates the merger agreement or interferes with or negatively impacts the payment of any earn out under the merger agreement or achievement of any related milestone event. The agreement requires the Company to make payments to the majority shareholder of approximately $800,000 and to allow the vesting of the majority shareholder’s options and allow the options to be immediately exercisable. The amount related to this accelerated vesting is approximately $277,000. The Settlement and Mutual Release amount of $1,077,000 has been recorded as goodwill.

On March 13, 2002, we settled a disagreement with former shareholders and option holders of PatientCentrix regarding the amount of the earn out payment due under the PatientCentrix merger agreement. We agreed to pay the former shareholders and option holders of PatientCentrix an aggregate $400,000 in respect of the earn out payment. This amount has been recorded as an adjustment to goodwill. As further consideration for the release of all disagreements related to the merger and the merger agreement, we agreed to reduce, to $0.39 per share, the exercise price of stock options held by Michael Miele, the major shareholder of PatientCentrix. This re-pricing has been recorded as an acquisition related charge in the amount of $268,000. We also agreed to appoint Mr. Miele to our board of directors until March 2003. Mr. Miele was nominated and elected as a director at our 2003 annual meeting of stockholders. On October 27, 2003, Michael Miele resigned from our board of directors.

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

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

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

     On October 9, 2002, the Company announced the early termination of its agreement with Lifeguard, Inc. due to the takeover of the Lifeguard HMO by the State of California’s Department of Managed Healthcare. At that time, the Company amended its agreement with Lifeguard to provide for the early termination of the agreement and to eliminate the Company’s obligation to reimburse any fees paid to the Company by Lifeguard.

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

     Effective at the opening of trading on November 7, 2002, the Company’s common stock began trading on the NASDAQ SmallCap Market. The Company’s common stock continues to trade under the symbol “LCOR”.

     On February 17, 2003, Thomas Stephenson, resigned as Chairman of our board of directors and Eugene Santa Cattarina was appointed Chairman. Mr. Stephenson continues to be a director of the Company.

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RESULTS OF OPERATIONS

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

Comparison of the three and nine-month periods ended September 30, 2003 and 2002.

     Revenues. Program revenues and maintenance fees represent repeat and recurring revenue streams, such as per member per month licensing and servicing revenues, per participant per year fees and support charges for maintaining software. System sales and consulting fees represent one-off or non-recurring and non-repeat revenue, such as sales of perpetual licenses, implementation and ad-hoc consulting or training services. During the three months ended September 30, 2003, four customers accounted for 21%, 14%, 12%, and 11% of revenue. Two customers accounted for 32% and 11% of revenue for the three-month period ended September 30, 2002. During the nine months ended September 30, 2003, four customers accounted for 21%, 17%, 16% and 14% of revenue. Two customers accounted for 15% and 20% of revenue for the nine-month period ended September 30, 2002.

     Program revenues and maintenance fees have increased by $699,000 or 16% from $4,269,000 for the three-month period ended September 30, 2002 to $4,968,000 in the three-month period ended September 30, 2003. The increase in revenues relates largely to a change in mix of enrollments resulting in more favorable pricing in our care management programs, as well as approximately $296,000 related to meeting the requirements of a performance guarantee under an ongoing care management contract. Program revenues and maintenance fees have increased by $2,357,000 or 20% from $11,963,000 in the nine-month period ended September 30, 2002 to $14,320,000 in the nine-month period ended September 30, 2003. The increase in revenues relates to a change in mix of enrollments resulting in more favorable pricing in our care management programs including a major program launched toward the end of the first quarter of 2003 with favorable pricing, as well as approximately $1,066,000 related to meeting the requirements of a performance guarantee under an ongoing care management contract.

     System sales and consulting fees increased by $440,000 or 28% from $1,581,000 in the three-month period ended September 30, 2002 to $2,021,000 in the three-month period ended September 30, 2003. This increase is primarily due to additional revenue in 2003 related to implementations of our medical management software. System sales and consulting fees increased by $1,704,000 or 43% from $3,977,000 in the nine-month period ended September 30, 2002 to $5,681,000 in the nine-month period ended September 30, 2003. The increase in system sales and consulting fees are primarily due to additional revenue in 2003 related to several new

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implementations of our medical management software at major health payer organizations and additional revenue of approximately $227,000 related to the revision of the estimated time to complete a fixed-price medical management software contract.

     Based on existing and anticipated customer contracts, management does not believe that consecutive quarter over quarter increases in revenue will continue for the remainder of 2003.

     Cost of Program Revenue and Maintenance Fees. Cost of Program Revenue and Maintenance Fees consists principally of personnel related costs, product costs, amortization of unearned stock-based compensation, related department overhead, costs of third party software products, and depreciation of equipment. Cost of program revenues and maintenance fees decreased by $314,000 or 15% from $2,156,000 in the three-month period ended September 30, 2002 to $1,842,000 in the three-month period ended September 30, 2003, representing 50.5% of program revenues and maintenance fees revenues for the third quarter of 2002 and 37.1% for the third quarter of 2003. Cost of program revenues and maintenance fees decreased by $1,593,000 or 25% from $6,493,000 in the nine-month period ended September 30, 2002 to $4,900,000 in the nine-month period ended September 30, 2003, representing 54.3% of program revenues and maintenance fees revenues for the nine months ended September 30, 2002 and 34.2% for the same period in 2003. This decrease in costs for the three and nine month periods ended September 30, 2003, is primarily due to cost reductions associated with the closing of our Montclair, New Jersey office in September of 2002 and cost reductions related to the termination of our contract with Lifeguard in October of 2002.

     Cost of System Sales and Consulting Fees. Cost of system sales and consulting fees consist principally of costs incurred in the implementation of our software products, and other consulting and training personnel costs. The cost of system sales and consulting fees includes personnel costs, amortization of unearned stock-based compensation, travel expenditures, related departmental overhead, amortization of capitalized software development costs, costs of third party software products, and depreciation on equipment. During the quarter ended September 30, 2003 these costs were $510,000 or 25.2% of system sales and consulting fees, compared to costs of $785,000 representing 49.7% of system sales and consulting fees during the quarter ended September 30, 2002. Cost of system sales and consulting fees decreased by $275,000 or 35% from the quarter ended September 30, 2002 to the same period for 2003. During the nine-month period ended September 30, 2003 these costs were $1,698,000 or 29.9% of system sales and consulting fees, compared to costs of $2,123,000 representing 53.4% of system sales and consulting fees during the nine-month period ended September 30, 2002. Cost of system sales and consulting fees decreased by $425,000 or 20% from the nine-month period ended September 30, 2002 to the same period for 2003. This cost decrease for the three months ended September 30, 2003 was due to reduced personnel costs , travel costs and a decrease in royalty payments in 2003. The decrease during the nine months ended September 30, 2003 was due to reduced personnel costs, travel costs and royalties, offset by additional purchases of third-party software for resale to the Company’s customers during the first quarter of 2003.

     Sales and Marketing. Sales and marketing expenses consist principally of compensation for our sales and marketing personnel, amortization of unearned stock-based compensation, advertising, trade show and other promotional costs, and departmental overhead. Sales and marketing expenses during the quarter ended September 30, 2003 were $1,085,000 representing 15.5% of total revenues, compared to $1,216,000, representing 20.8% of total revenues during the corresponding quarter of 2002. Sales and marketing expenses decreased by $131,000 or 11% from the second quarter of 2002. Sales and marketing expenses during the nine-month period ended September 30, 2003 amounted to $2,978,000 representing 14.9% of total revenues, in comparison with $3,771,000 representing 23.7% of total revenues during the corresponding period of 2002. Sales and marketing expenses decreased by $793,000, or 21% from the nine-months ended September 30, 2002. This is primarily due to decreased personnel associated costs during both the three and nine- month periods ended September 30, 2003.

     Research and Development. Research and development expenses consist of personnel costs, amortization of unearned stock-based compensation, related departmental overhead and depreciation on equipment. Research and development expenses totaled $1,217,000 or 17.4% of total revenues during the quarter ended September 30, 2003, a decrease of $253,000 or 17% compared to expenses totaling $1,470,000 representing 25.1% of total revenues during the quarter ended September 30, 2002. Research and development expenses totaled $3,517,000 or 17.6% of total revenues in the nine-months ended September 30, 2003, a decrease of $667,000 or 16% compared to expenses totaling $4,184,000 representing 26.2% of total revenues in the nine-months ended September 30, 2002. During both the three and nine-month periods ended September 30, 2003, this is primarily due to cost reductions associated with the closing of our Montclair, New Jersey office in September of 2002 and decrease in costs of outside contractors.

     General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, amortization of unearned stock-based compensation, allocated occupancy and departmental overhead and bad debt. General and administrative expenses increased by $114,000 or 10% from $1,175,000, representing 20.1% of total revenues, in the third quarter of 2002 to $1,289,000, representing 18.4% of total revenues, in the third quarter of 2003. General and administrative

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expenses decreased by $445,000 or 10% from $4,425,000, representing 27.8% of total revenues, in the nine-months ended September 30, 2002 to $3,980,000, representing 19.9% of total revenues, in the nine-months ended September 30, 2003. The increase during the three-month period ended September 30,2003 is largely related to higher bonus, legal and accounting, and outside contractor expenses. The decrease during both the nine-month period ended September 30, 2003 is largely related to the closing of Montclair, New Jersey office and general cost cutting measures throughout 2002 and 2003.

     Amortization of Intangible Assets. Amortization expense totaled $134,000 for the three-month periods ended September 30, 2002 and 2003. Amortization expense was 2.3% and 1.9% of revenues in the third quarter of 2002 and 2003, respectively. Amortization expense decreased by $368,000 or 48% from $769,000 or 4.8% of revenues in the nine-months ended September 30, 2002 to $401,000 or 2.0% of revenues in the nine-months ended September 30, 2003. The decrease in amortization of intangible assets during both the three and nine-month periods ended September 30, 2003 is due to the intangible asset impairment charge of $2,450,000 recorded in the second quarter of 2002.

     Stock-Based Compensation. Amortization of unearned stock compensation (income) during the quarters ended September 30, 2003 and 2002 was ($13,000) and $54,000, respectively. Amortization of unearned stock compensation during the nine-month periods ended September 30, 2003 and 2002 was $130,000 and $326,000, respectively. These amounts have been allocated to cost of revenues and operating expenses. Included in these amounts is stock compensation expense (income) of approximately ($17,000) and $93,000 in the three-month and nine-month periods ended September 30, 2003 for the modification of a fixed stock option grant.

     Interest and Other Income and Interest Expense. Interest and other income consists primarily of earnings on our cash and cash equivalents. Interest and other income amounted to $28,000 for the third quarter of 2002 and $29,000 for the third quarter of 2003, and $118,000 for the nine-months ended September 30, 2002 and $78,000 for the nine-months ended September 30, 2003. The increase in interest and other income in the third quarter 2003 of $1,000 or 4% is primarily due to increased cash on hand. The decrease of $40,000 or 34% in the nine-months ended September 30, 2003 is due to the decrease in interest rates. Interest expense of $11,000 during the third quarter of 2003 and $6,000 for the third quarter of 2002, and $24,000 during the nine-months ended September 30, 2003 and $26,000 for the nine-months ended September 30, 2002 arises from financing certain fixed assets through capital leases and debt.

     Provision for Income Tax. Based on various Federal tax regulations that do not allow the full application of net operating loss carry-forwards against net income, we have recorded an income tax provision of $33,000 during the three months ended September 30, 2003 and $53,000 during the nine months ended September 30, 2003.

Liquidity and Capital Resources

     Since inception, we have financed our operations through net cash generated from operating activities, and sales of common and preferred stock. As of September 30, 2003, we had $11.5 million in cash and cash equivalents, which includes approximately $529,000 used to secure certain letters of credit and notes payable. We also had $6.1 million in working capital with outstanding capital lease obligations and notes payable totaling approximately $529,000.

     Net cash provided by (used in) operating activities was $1,804,000 and ($3,049,000) during the nine months ended September 30, 2003 and 2002, respectively. Net cash provided by operating activities in the nine months ended September 30, 2003 reflects net income before non-cash charges for depreciation and amortization, stock-based compensation, an increase in accounts payable and deferred revenue, offset by an increase in net accounts receivable and other assets, and decreases in accrued expenses and restructuring accrual. The increase in accounts receivable during the nine-month period ended September 30, 2003 is primarily due to increased billings in 2003. The decrease in accrued expenses during the nine months ended September 30, 2003 was primarily due to a decrease in accrued payroll due to timing and a decrease in other general accruals. The increase in deferred revenue was primarily due to pre-payments from certain medical management software customers as well as increased billings in our Care Management programs, which is earned over several months.. Net cash used to fund operating activities in the nine months ended September 30, 2002 reflects net losses before non-cash charges for depreciation and amortization of intangible assets, stock-based compensation, asset impairment charge, an increase in accounts payable and deferred revenues, offset by an increase in net accounts receivable and other assets, and a decrease in the restructuring accrual and accrued expenses.

     During the nine months ended September 30, 2003 and 2002, net cash used in investing activities was $601,000 and $678,000, respectively. Investing activities consist primarily of purchases of computer equipment, software, office furniture and leasehold improvements.

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     Net cash provided by financing activities was $276,000 for the nine months ended September 30, 2003. Net cash used in financing activities was $83,000 for the nine months ended September 30, 2002. Net cash provided by financing activities for the nine months ended September 30, 2003 resulted from proceeds from long-term debt offset somewhat by payments on capital lease obligations. Net cash used in financing activities for the nine months ended September 30, 2002 resulted from the payments on certain capital lease obligations.

     We may utilize existing cash to fund strategic transactions or investments in other businesses, technologies or product lines. We believe that cash generated by revenues, available cash and cash equivalents will be sufficient to meet our working capital, operating expense and capital expenditure requirements for at least the next twelve months. Thereafter, we may require additional funds to support our working capital and operating expense requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings, although there can be no assurance that such funding will be available on terms acceptable to us.

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FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

We Have a Long History of Losses and May Not Sustain or Increase Profitability

     We have been in business since 1982 and we have incurred significant losses since that time. We may continue to incur losses on an annual or quarterly basis in the future. As of September 30, 2003, our accumulated deficit was $42.2 million. Even though we have achieved profitability during the past four quarters, due to competition and the evolving nature of the disease management, medical management, healthcare information technology and Internet markets, we could fail to sustain or increase profitability on a quarterly or annual basis.

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

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

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