Form 10-K

(Mark One)

or

Commission file number: 000-29377

Landacorp, Inc.

Eugene J. Miller
President and Chief Executive Officer 4151 Ashford Dunwoody Road, Suite 505
Atlanta, Georgia 30319
(404) 531-9956

(Address, including zip code, or registrant’s principal executive offices and telephone number, including area code)

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

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

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

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

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

     The aggregate market value of the voting and non-voting common stock held by persons other than those who may be deemed affiliates of the Company as of June 30, 2003, was $13,766,858. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of the Registrant’s Common Stock outstanding as of March 22, 2004 was 16,182,445

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, are incorporated by reference to Part III of this Form 10-K Report.

LANDACORP, INC.
2003 ANNUAL REPORT ON FORM 10-K

INDEX

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PART I

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

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

Item 1. Business

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.

     Landacorp was incorporated on April 27, 1982 as Landa Management Systems Corporation, a California corporation. We reincorporated as Landacorp, Inc., a Delaware corporation, on December 3, 1999. In October of 2000, we acquired ProMedex, Inc., which provides our Managing for Tomorrow^® member-driven chronic condition management products. In November 2000, we

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acquired PatientCentrix, Inc., which provides our care analytics, predictive modeling and targeting solutions. These capabilities comprise our care management solutions.

     Landacorp offers four solutions to healthcare payers. maxMC™ and e-maxMC, its web-enabling application, are our medical management software products for this market. Our Managing for Tomorrow programs are a unique, high-tech/light-touch approach to chronic condition management that is designed to improve member self-management skills. These skills are essential to reducing modifiable risks associated with chronic diseases, pregnancy, smoking, weight management, and general wellness. Our care analytics solutions provide disease management predictive modeling and interventional targeting workflow software. As of December 31, 2003, 20 payer organizations that claim to have a combined membership of approximately 37 million participants were using our products, all of which are being implemented or are operational and in use among our client base.

     Our solutions benefit payers by:

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

     Members benefit from:

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

     Maxsys II^TM is our medical management software product for hospital and healthcare delivery systems. As of December 31, 2003, approximately 125 hospitals were using Maxsys II or its predecessor, Maxsys I, which we no longer market, but continue to support with a maintenance program.

     Our solutions benefit hospitals and healthcare delivery organizations providers by:

•		automating and streamlining administrative and business processes and clinical procedures and transactions to enhance operational efficiencies;
•		reducing payment denials and claims appeals by payers;
•		increasing quality and consistency of care;

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•		improving the efficiency of incident reporting and reducing the risk of legal liability;
•		assisting with accreditation and administration of compliance programs; and
•		aggregating data for trend analysis and decision support.

   Products

     Landacorp’s population health management solutions are identified under two solutions groups: Care Management and Medical Management Software. For the year ended December 31, 2003, these product groups accounted for 57% and 43% of revenue, respectively. See Note 14 to the financial statements for further information on our operating segments.

   Care Management

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

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

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

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

     Landacorp provides Managing for Tomorrow programs for the following health conditions: asthma, cardiac disease, congestive heart failure, diabetes, pregnancy risk management, weight management, hypertension and smoking cessation. Through these programs, participants can achieve an improved quality of life from better self-management skills and treatment compliance; improved healthcare access; early detection and preventive care options. The Managing for Tomorrow programs and services do not require additional staffing, software or hardware, and are fully compatible with existing internal programs. Additionally, they include tools for risk prioritization, personal guides for member self-management, goal setting, incentives and re-evaluations.

     Health plans can realize the following benefits from these programs:

•		Reduced direct cost of care for many chronic conditions;
•		Improved patient and clinical compliance and outcomes;

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•		Improved multiple Health Plan Employer Data and Information Set (HEDIS®) scores while providing outcomes monitoring;
•		Enhanced formulary compliance through education and provider feedback;
•		Strengthened relationships with members;
•		Market differentiation;
•		Enhanced branding; and
•		Additional revenue opportunities.

     Program sponsors, such as employers, can benefit from:

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

     Participants can benefit from:

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

   Medical Management Software

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

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

     For payer organizations, our maxMC product automates and simplifies many of the administrative and care-planning activities associated with administering healthcare plans to large member populations. maxMC places the member at the hub of all activities to facilitate complex processes, including eligibility, authorizations, and tracking of plans. As a result, payers can more efficiently administer their plans and support the delivery of a high quality, cost-effective continuum of care to their members.

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

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

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

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

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

     e-maxMC is our web-enabling medical management application for payers. e-maxMC, introduces providers and members into payers’ internal medical management systems by combining the immediate and broad-based connectivity of the Internet with the medical management functions of our maxMC solution. e-maxMC enables providers and members to access a payer’s secure medical management information and proprietary business processes, allowing them to engage in real-time via Internet-based transactions such as clinically-based authorizations, referrals and health risk assessments.

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

•		Referral Advice. Online notification to payers of referrals to specialists and others by primary care physicians.
•		Treatment Requests and Communications. Affords primary care physicians and specialists a medium for conducting online eligibility checks, requests for care, clinical criteria analysis and benefits checks, in each case, in accordance with individual payers’ requirements.

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•		Assignment of Care. Online capability for primary care physicians to assign care management to appropriate specialists.
•		Cross-coverage. Online notification by one primary care physician that another primary care physician will provide coverage for a specific period of time.
•		Case and Disease Management Program Enrollment. Online requests that patients be considered for enrollment in a particular case or disease management program.
•		Inpatient Admission. Online notification by an inpatient facility that a member has been admitted.
•		Health Risk Assessment. Online completion of health risk assessments by primary care physicians and specialists.

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

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

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

•		Case/Utilization Management. This function helps ensure that patients receive appropriate levels of care and minimizes expenses associated with inappropriate and unduly lengthy hospital stays. It enables providers to reduce inefficient use of human resources and reduce denials of reimbursement by payers resulting from failure to follow payer guidelines. Our provider customers achieve these outcomes through the automation of the initial evaluation and on-going review of patient care in order to monitor compliance with clinical guidelines, including guidelines provided by the provider customer and industry standard clinical guidelines, such as InterQual and Milliman & Robertson Care Guidelines.
•		Quality Management. This function helps identify deficiencies in patient care or provider performance and alerts process improvement personnel in order to promote early intervention. It allows a provider organization’s staff to monitor and evaluate care processes, treatments, operative procedures and outcomes. It also permits quality managers to better monitor high-cost, high-risk procedures and to enforce quality initiatives by providing variance reporting, process monitoring and centralized data.
•		Risk Management. This function helps to reduce financial losses by automating and supporting timely and thorough investigations, interventions, communication and education regarding potential and actual claims. This function enables a provider organization’s risk management staff to be notified instantly as incidents are reported by personnel anywhere within the organization. The function also supports efficient management, tracking and analysis of potential and asserted claims by patient/episode, staff members, physicians, allied health professionals and visitors.
•		Infection Control. This function facilitates effective management of epidemiology and analysis of treatment protocols based on the National Nosocomial Infections Study model, which reports the national standards for epidemiological studies. The function eliminates redundant manual data entry by extracting pertinent data from other sources in a provider organization’s information technology system and from data collected by case and quality management staff.
•		Credentialing. This function supports the tracking of provider (i.e.; physician) credentials by automating the maintenance and review of care provider information such as continuing medical education credits, medical board certifications and records of disciplinary and other adverse actions. It also facilitates the exchange of data with the National Practitioner Data bank and other governmental bodies.

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       Services

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

     Care management:

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

     Medical Management software:

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

   Customers

     Landacorp targets payer organizations with membership ranging from 50,000 to several million covered lives. We currently serve 20 payer organizations that claim to have a combined membership of approximately 37 million participants. Our top healthcare payer customers are Aetna, Highmark (Blue Cross Blue Shield of Western Pennsylvania), WellPoint, Blue Cross Blue Shield of North Carolina, Blue Cross and Blue Shield of South Carolina, Great West (part of Great West Life Assurance Company), Blue Cross and Blue Shield of Illinois, United Healthcare, Independence Blue Cross and Blue Shield, and Renal Management Systems (a subsidiary of Baxter International Inc.). Highmark, Blue Cross and Blue Shield of North Carolina, Wellpoint, Independence Blue Cross and Blue Shield and Renal Management Systems are currently using our maxMC solution. Renal Management utilizes maxMC’s disease management functionality, which was implemented using a central database and twenty-two remote satellite operations throughout the United States. Blue Cross and Blue Shield of North Carolina is also using our e-maxMC Web-enabling solution. Aetna, Blue Cross and Blue Shield of South Carolina, Blue Cross and Blue Shield of Illinois, United Healthcare and Great West utilize our care management solutions.

     During 2003, Great West, United Healthcare, Blue Cross and Blue Shield of South Carolina, and Independence Blue Cross and Blue Shield accounted for 21%, 15%, 15%, and 11% of our revenue, respectively. The loss of, or a reduction in sales to, any of our

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current customers or our failure to sell our products and services to additional customers would significantly reduce our future revenues and negatively impact our results of operations, our stock price and our future viability. In December 2003, the Company announced that Great West has elected not to renew its disease management programs. The contract with Great West expires in May 2004.

     We target hospitals and healthcare delivery organizations with licensed beds ranging from several thousand to as few as 250. We currently serve approximately 125 such organizations. Among our leading provider customers are Rush Presbyterian-St. Luke’s Medical Center, University of Texas M. D. Anderson Cancer Center, BJC Health System, Atlantic Health System, Baptist Healthcare Systems, Inc., and New York and Presbyterian Healthcare System. Many of our hospital provider customers continue to use Maxsys I, the predecessor of Maxsys II, which we no longer market, but continue to support with a maintenance program.

   Technology

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

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

     Total research and development expenditures, including expenditures for our IT Operations in Care Management, for 2001, 2002 and 2003 were $6,361,000, $5,351,000, and $4,780,000, respectively.

   Competition

     The market for our population health management solutions is highly competitive and is characterized by rapidly changing technology, evolving user needs and the frequent introduction of new products and services. Our care management products compete against disease management companies including American Healthways, CorSolutions, Lifemasters and Matria Healthcare. Our principal competitors in the medical management software payer market are HPR (a subsidiary of McKesson HBOC), MEDecision, TriZetto, and others. In the medical management software healthcare delivery market, we compete against MIDS (a division of Affiliated Computer Systems, Inc.), SoftMed Systems and others.

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

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Intellectual Property and Proprietary Rights

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

  Government Regulation

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

     Since both our provider customers and payer customers must comply with HIPAA, its associated regulations and all other applicable healthcare laws and regulations, Landacorp is taking the appropriate steps to ensure that our products and business practices are HIPAA-ready. Accordingly, in order for our medical management solutions to be marketable, they must contain features and functionality that allow our customers to comply with these laws and regulations, and we have established an ongoing program to ready our products and our employees to comply with HIPAA’s final security rules. We believe our products currently allow our customers to comply with existing laws and regulations. However, because new regulations are yet to come and because the proposed regulations may be modified prior to becoming final, our products may require modification in the future. Such modifications will become part of our standard maintenance releases and upgrades. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations our business will suffer.

     In addition, laws governing healthcare payers and providers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.

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

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

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

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

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

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

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

  Employees

     As of December 31, 2003, we employed 150 employees.

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

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

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

Item 2. Properties

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

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Item 3. Legal Proceedings

On March 1, 2004, the Company and SHPS Holdings, Inc. (SHPS) announced that they have signed a definitive agreement to merge a wholly owned subsidiary of SHPS with the Company (the “Merger”). The Company’s shareholders will receive $3.09 per share in cash, and the Company will become a wholly owned subsidiary of SHPS Holdings, Inc. and its affiliates. The transaction is valued at approximately $56 million. On March 3, 2004, a putative class action complaint was filed on behalf of the stockholders of the Company in the Superior Court of Fulton County, Georgia against the Company and certain current and former members of the Company’s Board of Directors in connection with the Merger between the Company and a wholly owned subsidiary of SHPS Holdings, Inc. (“SHPS”). The complaint alleges, among other things, that the Company’s directors breached their fiduciary duties in connection with approving the Merger. The complaint seeks declaratory relief and injunctive relief with respect to the Merger, including an injunction preventing consummation of the Merger. The complaint also seeks unspecified compensatory damages, punitive damages, and fees and costs. A notice of voluntary dismissal without prejudice was filed with the court on March 26, 2004.

     Additionally, from time to time, we are involved in legal proceedings incidental to the conduct of our business. The outcome of these claims cannot be predicted with certainty. We do not believe that the legal matters to which we are currently a party are likely to have a material adverse effect on our results of operation or financial condition.

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

     None.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

     As of March 23, 2004, there were approximately 170 registered holders of our common stock. Our common stock is currently listed for quotation on the NASDAQ Stock Market’s SmallCap Market System under the symbol “LCOR”. From our Initial Public Offering in February 2000 until November 2002, the Company’s common stock was listed on the NASDAQ National Market System. The following table sets forth for the period indicated, the high and low prices of our common stock as quoted in the NASDAQ Stock Market’s National Market System for periods prior to the fourth quarter of 2002, and as quoted in the NASDAQ Stock Market’s SmallCap Market System thereafter:

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

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  Equity Compensation Plan Information

     The following table provides information as of December 31, 2003 with respect to the shares of the Company’s Common Stock that may be issued under the Company’s existing equity compensation plans.

(1)

As of December 31, 2003, 26,000 shares were subject to outstanding options under the 1984 Incentive Stock Option Plan, 127,000 shares were subject to outstanding options under the 1995 Equity Incentive Plan, 2,520,056 shares were subject to outstanding options under the 1998 Equity Incentive Plan and 295,125 shares were subject to outstanding options under the Capitated Disease Management Services, Inc. Stock Compensation Program, which was assumed in connection with the acquisition of PatientCentrix.

(2)

Consists of shares available for future issuance under the 1998 Equity Incentive Plan and the 1999 Employee Stock Purchase Plan. As of December 31, 2003, an aggregate of 470,375 shares of Common Stock were available for issuance under the 1999 Employee Stock Purchase Plan and 1,937,339 shares of Common Stock were available for issuance under the 1998 Equity Incentive Plan.

Item 6. Selected Financial Data

SELECTED FINANCIAL DATA
(In thousands, except per share data)

     You should read the following selected financial data in conjunction with our financial statements and their related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. We derived the following statement of operations data for the years ended December 31, 2001, 2002 and 2003, and the balance sheet data as of December 31, 2001, 2002 and 2003, from the audited financial statements included at the end of this report. We derived the following statement of operations data for the year ended December 31, 1999 and 2000 and the balance sheet data as of December 31, 1999, 2000 and 2001 from audited financial statements not included elsewhere in this report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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. As of December 31, 2003, 20 payers who claim to have a combined membership of approximately 37 million participants were using our payer solutions, and approximately 125 hospital providers were using our provider solutions. We have historically derived revenues from the installation and licensing of our maxMC and Maxsys solutions, sublicensing third-party software applications as part of system implementations and delivery of post-contract customer support, training and consulting services. We are currently focusing our primary development, sales and marketing efforts on our Care Management and Medical Management solutions. Although we do not anticipate future system sales or enhancements of Maxsys I medical management software product, we continue to provide maintenance services to, and receive maintenance fees from, customers who purchased this

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product in the past. We plan to continue to support Maxsys I for the foreseeable future as a service to such customers and pursuant to ongoing contractual obligations.

     During the year ended December 31, 2003, 57% and 43% of revenue was generated from care management services and medical management software, respectively. See Note 14 to the financial statements for further information on our operating segments.

     The market for our population health management solutions is highly competitive and is characterized by rapidly changing technology, evolving user needs and the frequent introduction of new products and services. Our care management products compete against disease management companies including American Healthways, CorSolutions, Lifemasters and Matria Healthcare. Our principal competitors in the medical management software payer market are HPR (a subsidiary of McKesson HBOC), MEDecision, TriZetto, and others. In the medical management software healthcare delivery market, we compete against MIDS (a division of Affiliated Computer Systems, Inc.), SoftMed Systems and others.

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

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

     The Company delivers care 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 typically defers revenue equal to the maximum potential amount of fees that are refundable. Such revenue will not be recognized until the performance criteria have been met. As of December 31, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,329,000, which is included in deferred revenue.

     To accelerate the implementation of elements of our business, 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.

     On March 1, 2004, the Company and SHPS Holdings, Inc. (SHPS) announced that they have signed a definitive agreement to merge a wholly owned subsidiary of SHPS with the Company. The Company’s shareholders will receive $3.09 per share in cash, and the Company will become a wholly owned subsidiary of SHPS Holdings, Inc. and its affiliates. The transaction is valued at approximately $56 million. The merger is conditioned upon the approval by the Company’s shareholders and regulatory approval, as well as other customary conditions. Directors and executive officers of the Company, and its affiliates, who own approximately 40.7% of the Company’s shares outstanding have agreed to vote these shares in favor of the merger. It is anticipated that the transaction will close in the second quarter of 2004.

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Critical Accounting Policies

     “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are based upon the Company’s consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). The preparation of these financial statements requires management to make extensive 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, and goodwill and other intangible assets.

     Management bases its estimates and judgments primarily on historical experience and also considers other various 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 typically defers revenue equal to the maximum potential amount of fees that are refundable until such time as the performance criteria are met and collectibility is reasonably assured. Such revenue will not be recognized until the performance criteria have been met. As of December 31, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,329,000, which is included in deferred revenue.

     The Company’s revenue recognition policies are consistent with the guidance in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements”, and AICPA Statement of Position No. 97 — 2 “Software Revenue Recognition”. The Company follows specific and detailed guidelines in measuring revenue; however certain estimates and judgments affect the application of the revenue policy. These estimates include the estimated contract hours and time to complete for percentage of completion accounting, and the effort-based measures used in services accounting. Changes in conditions or new contract terms could cause management to determine these estimates and judgments must be revised. Such changes or revisions could adversely affect the revenue recognition for any reporting period.

     Bad debt. Management analyzes accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends, and changes in our customer payment terms and trends when evaluating the adequacy of the allowance for bad debt. Significant management judgment and estimates must be made and used in connection with establishing the allowance for bad debt in any accounting period. The accounts receivable balance was $2.4 million, net of allowance for bad debt of $0.3 million as of December 31, 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 No. 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 impairment test, which indicated that there is no impairment to goodwill as of January 1, 2002 and 2003. The Company has completed the test as of January 1, 2004, 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

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impairment charge of $2,450,000 on our intangible assets. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of SFAS No. 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. As of December 31, 2003 the amounts included in our restructuring accrual were related to obligations on office space that was leased in 2000, but never occupied primarily due to the reduction in work force in May 2001. Since that time, we have subleased the space for the remainder of the lease period, which expires in 2007.

Recent Developments

     On January 31, 2000, we purchased from High Technology Solutions, Inc. assets related to its business of providing Web site services to healthcare payers (this business is also referred to as Interactive Media Group or IMG). The purchase price for the assets was $1,268,000 (including an estimated $18,000 in assumed liabilities) of which we paid $250,000 at the closing. We paid the remaining balance in April 2000. The acquired assets included equipment, know how, trademarks and other intangible rights used by High Technology Solutions, Inc. in the operation of its business of providing Web site services to healthcare payers, as well as contracts, none of which were material to our business. In connection with the acquisition we hired a number of former employees of High Technology Solutions, Inc. The purchase price was allocated to the various tangible and intangible assets acquired. The acquired intangible assets were amortized over their estimated useful lives of twenty-four to thirty-nine months. In May 2001, management determined the need to cease operations of IMG due to the slowdown in the web design and consulting industry. The IMG operations were shut down on July 9, 2001. We recorded an impairment charge of $704,000 related to the remaining intangible assets from this acquisition.

     On 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 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.

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     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.

     In May 2001, the Company announced a reduction in work force representing approximately 16%, or 40 employees, of the Company’s total work force. On August 8, 2001, the Company announced an additional reduction in work force of approximately 18%, or 36 employees.

     During the second quarter of 2002, the Company experienced a decline in demand for services in its Care Management reporting unit, previously referred to as Care Analytics/Care Management. Management determined this to be a triggering event pursuant to the provisions of SFAS No. 144. Consequently, management evaluated the recoverability of its long-lived assets in relation to the Care Management reporting unit. The analysis was first performed on an undiscounted cash flow basis, which indicated an impairment in its Care Management reporting unit. The impairment was then calculated using projections of discounted cash flows over ten years utilizing a discount rate and terminal value commensurate with other Disease 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. No charge was necessary in 2003.

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

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

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

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

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

     On December 9, 2003, the Company announced that Great-West Healthcare, a division of Great-West Life & Annuity Insurance Company, elected not to renew its disease management programs with the Company. The contract with Great-West Healthcare to provide these programs expires in May 2004.

     On March 1, 2004, the Company and SHPS Holdings, Inc. (SHPS) announced that they have signed a definitive agreement to merge a wholly owned subsidiary of SHPS with the Company. The Company’s shareholders will receive $3.09 per share in cash, and the Company will become a wholly owned subsidiary of SHPS Holdings, Inc. and its affiliates. The transaction is valued at approximately $56 million. The merger is conditioned upon the approval by the Company’s shareholders and regulatory approval, as well as other customary conditions. Directors and executive officers of the Company, and its affiliates, who own approximately 40.7% of the Company’s shares outstanding have agreed to vote these shares in favor of the merger. It is anticipated that the transaction will close in the second quarter of 2004.

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Results of Operations

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

   Comparison of Years Ended December 31, 2001, 2002 and 2003

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

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

     Revenues. Program 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 year ended December 31, 2003, Great West, United Healthcare, Blue Cross and Blue Shield of South Carolina, Independence Blue Cross and Blue Shield accounted for 21%, 15%, 15%, and 11% of revenue. Two customers accounted for 21% and 15% of revenue for the year ended December 31, 2002. During the year ended December 31, 2001, two customers accounted for 28% and 11% of revenue for the year ended December 31, 2001.

     Program revenues and maintenance fees increased by $5,542,000 or 45% to $17,915,000 in 2002 and increased by $1,507,000 or 8% to $19,422,000 in 2003. The increase in program revenues and maintenance fees from 2001 to 2002 was a result of 22% increased enrollment in our Managing for Tomorrow program, approximately $1,100,000 of incremental maintenance revenue for our medical management software, as well as approximately $1,100,000 of revenue recognized from the Lifeguard contract, which was terminated in 2002. The increase in program revenues and maintenance fees from 2002 to 2003 was a result of 6% increased enrollment in our Managing for Tomorrow program and a change in the mix of enrollments resulting to more favorable pricing in our care management program. Additionally, approximately $1,300,000 of revenue was recognized in 2003 related to meeting the requirements of a

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performance guarantee under an ongoing care management contract. This increase was partially offset by a decrease in maintenance revenue for our medical management software of $400,000 in 2003. In December 2003, the Company announced that Great West has elected not to renew its disease management programs. The contract with Great West expires in May 2004.

     System sales and consulting fees increased by $1,892,000 or 53% to $5,482,000 in 2002 and increased by $2,541,000 or 46% to $8,023,000 in 2003. The increase in revenues between 2001 and 2002 resulted primarily from additional sales of our maxMC product to several major health plans during 2002. The increase in revenues between 2002 and 2003 resulted primarily from several new 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. Included in revenue for the year ended December 31, 2003 and the three-month period ended December 31, 2003 is approximately $600,000 of revenue recognized in connection with the settlement of a medical management software contract which will result in no expected software implementation revenue from this client in the next fiscal year.

     Cost of Revenues. Cost of program revenue and maintenance fees consists principally of personnel related costs, product costs, amortization of unearned stock-based compensation, related department overhead, costs of third party software products, and depreciation of equipment. Cost of program revenue and maintenance fees increased by $1,636,000 or 25% from $6,521,000, representing 53% of program service and maintenance revenues, in 2001 to $8,157,000, representing 46% of program service and maintenance revenues, in 2002 and decreased by $1,551,000 or 19% to $6,606,000 representing 34% of program service and maintenance revenues, in 2003. The cost increase from 2001 to 2002 resulted from increased enrollments in our Managing for Tomorrow program. The cost decrease from 2002 to 2003 resulted primarily from 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. The increase in gross margin on program revenue and maintenance fees from 47% in 2001 to 54% in 2002 is primarily due to approximately $1,100,000 of incremental software maintenance revenue with minimal associated cost, as well as general cost control during 2002. The increase in gross margin on program revenue and maintenance fees from 54% in 2002 to 66% in 2003 is due to a move towards higher gross margin care management contracts as well as the cost reductions previously mentioned.

     Cost of system sales and consulting fees consists principally of costs incurred in the implementation of our software products, and other consulting and training personnel costs. The cost of system sales and consulting fees includes personnel costs, amortization of unearned stock-based compensation, travel expenditures, related department overhead, amortization of capitalized software development costs, costs of third party software products, and depreciation on equipment. Cost of system sales and consulting fees decreased by $274,000 or 9% from $3,013,000, representing 84% of system sales and consulting fees, in 2001 to $2,739,000, representing 50% of system sales and consulting fees, in 2002 and decreased by $474,000 or 17% to $2,265,000 representing 28% of system sales and consulting fees, in 2003. The decrease from 2001 to 2002 in the cost of system sales and consulting fees was primarily due to reduced personnel related expenses due to the 2001 reductions in force discussed in the Recent Developments section. The decrease from 2002 to 2003 in the cost of system sales and consulting fees was primarily due to decreased personnel costs, travel costs, and royalties, offset by additional purchases of third-party software for resale to the Company’s customers. The increase in the gross margin on system sales and consulting fees from 16% during 2001 to 50% in 2002 resulted primarily from the headcount reductions in 2001 as well as increased sales of our medical management software products during 2002. The increase in gross margin to 72% in 2003 resulted primarily from increased system sales and consulting fees and decreased costs.

     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 decreased by $988,000 or 17% from $5,665,000, representing 36% of total revenues, in 2001 to $4,677,000, representing 20% of total revenues, in 2002 and decreased by $574,000 or 12% to $4,103,000, representing 15% of total revenues, in 2003. The decrease from 2001 to 2002 was due to the 2001 personnel reductions as well as general cost-cutting measures in this area throughout 2002, including reduced personnel costs and reduced advertising expenditures. The decrease from 2002 to 2003 was due to decreased personnel associated costs in 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 decreased by $1,010,000 or 16% from $6,361,000, representing 40% of total revenues, in 2001 to $5,351,000, representing 23% of total revenues, in 2002 and decreased by $571,000 or 11% to $4,780,000, representing 17% of total revenues, in 2003. The decrease from 2001 to 2002 was related to the reductions in force discussed in the Recent Developments section. The decrease from 2002 to 2003 was related to costs associated with the closing of our Montclair, New Jersey office in September of 2002 and decrease in outside contractors related to general information technology consulting.

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     General and Administrative. General and administrative expenses consist of compensation for personnel, fees for outside professional services, amortization of unearned stock-based compensation, allocated occupancy, departmental overhead, and bad debts. General and administrative expenses decreased by $1,847,000 or 24% from $7,862,000, representing 49% of total revenues, in 2001 to $6,015,000, representing 26% of total revenues, in 2002 and decreased by $586,000 or 10% to $5,429,000 representing 20% of total revenues, in 2003. The decrease from 2001 to 2002 was due to decreased stock compensation, the 2001 personnel reductions as well as general cost-cutting measures in this area throughout 2002. The decrease from 2002 to 2003 was due to the closing of the Montclair, New Jersey office and general cost cutting measures throughout 2003.

     Amortization of intangible assets. Intangible assets that have finite useful lives are amortized over their useful lives. Our intangible assets consist primarily of existing technology and customer base. Our acquired workforce intangible asset was reclassified to goodwill upon the adoption of SFAS No. 142 on January 1, 2002. Amortization of intangible assets decreased by $1,131,000 from $2,033,000 in 2001 to $902,000 in 2002. This decrease is primarily due to decreased goodwill amortization of approximately $670,000 pursuant to the adoption of FAS No. 142, the asset impairment charge of $2,450,000 recorded in the second quarter of 2002, as well as the reclassification of acquired workforce to goodwill. Amortization of intangible assets decreased by $367,000 from $902,000 in 2002 to $535,000 in 2003. This decrease is primarily due to the intangible asset impairment charge of $2,450,000 recorded in the second quarter of 2002.

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

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

     During the second quarter of 2002, primarily due to a decline in demand for services in the Company’s Care Management reporting unit, previously referred to as the Care Analytics/Care Management reporting unit, management determined that it was necessary to test for an impairment of long-lived assets. This test was performed in accordance with the provisions of SFAS No. 144, which was adopted by the Company on January 1, 2002. As a result of this test and the subsequent analysis of the fair value of its Care Management reporting unit, Landacorp recorded an impairment to its long-lived assets in the amount of $3,300,000 during the second quarter of 2002. As discussed in the Factors that May Affect our Future Results section, the analysis performed to determine the amount of impairment was based on management’s estimate of future results. However, such estimates may need to be revised in future periods, which could result in additional impairment charges.

     Stock-Based Compensation. In connection with certain stock option grants and common stock issuances during the two years ended December 31, 1999 and 2000, the Company recognized unearned compensation totaling $1,610,000 and $1,521,000, respectively. In 2001 and 2002, the company reduced existing unearned compensation by $718,000 and $144,000, respectively, related to terminations of employees. The 2000 amount of $1,521,000 is net of a credit of $112,000 relating to employees who were terminated during the year. These costs are being amortized over the vesting periods or as the Company’s repurchase rights lapse. Amortization expense recognized during the years ended December 31, 2001, 2002 and 2003, totaled $1,467,000, $280,000 and $139,000 respectively, and has been allocated to cost of revenues and operating expenses. The Company recorded stock compensation expense of approximately $87,000, $160,000, and $103,000 in 2001 and 2002, and 2003, respectively, for the modification of fixed stock option grants.

     Interest and Other Income and Interest Expense. Interest and other income consist primarily of earnings on our cash and cash equivalents. Interest and other income amounted to $677,000, $150,000 and $106,000 for the years ended December 31, 2001, 2002, and 2003, respectively. Interest income decreased during 2001 and 2002 as a portion of the proceeds from our initial public offering was utilized to finance our operations. Interest expense increased by $8,000 or 31% to $34,000 in 2002, and increased by $1,000 or

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3% to $35,000 in 2003 due to notes payable obligations as a result of purchasing certain software for our disease management operations.

     Income Taxes. No provision or benefit for federal or state income taxes has been recorded for the years ended December 31, 2001 and 2002 as the Company has incurred net operating losses and has no carryback potential. Based on a number of factors, including the lack of a history of profits and net operating loss carryforward limitations due to changes in ownership, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets such that a valuation allowance has been provided. Based on various Federal tax regulations that do not allow the full application of net operating loss carry-forwards against net income for the purposes of calculating the alternative minimum tax, the Company has recorded an income tax provision of $136,000 during the year ended December 31, 2003 to provide for alternative minimum tax and state taxes.

     As of December 31, 2003, the Company had net operating loss carryforwards of approximately $23,000,000 available to reduce future taxable income. These losses expire at various times beginning in 2004. As a result of substantial changes in the Company’s stock ownership, an ownership change within the meaning of Internal Revenue Code Section 382 occurred in February 1998 which resulted in a limitation on the amount of net operating loss carryforwards that can be used in future years. The right to use all net operating loss carryforwards available prior to stock ownership change in February 1998 has been earned prior to the tax year ended December 31, 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 December 31, 2003, we had $14.9 million in cash and cash equivalents, which includes approximately $0.5 million used to secure certain letters of credit and notes payable. We also had $7.3 million in working capital with outstanding capital lease obligations and notes payable totaling approximately $0.5 million.

     Net cash used in operating activities was $1.5 million in 2002 compared to net cash provided by operating activities of $5.5 million in 2003. Net cash used to fund operating activities in 2002 reflects net loss before non-cash charges for depreciation and amortization, amortization of unearned stock-based compensation, asset impairment charge and other stock-based compensation; an increase in accounts payable, an increase in deferred revenue, offset by an increase in accounts receivable, an increase in other assets and a decrease in accrued expenses. The increase in accounts receivable during 2002 is directly related to increased revenue and billings during 2002. The increase in other assets during 2002 is related to property and equipment that was purchased in 2002, but not placed in service until 2003. The increase in deferred revenue of $953,000 was due to a 22% increase in enrollments in our Managing for Tomorrow program, including several significant billings towards the end of 2002, which contributed to the increase in accounts receivable mentioned above. Net cash provided by operating activities in 2003 reflects net income before non-cash charges for depreciation and amortization, stock-based compensation, and non-cash interest; an increase in accounts payable, an increase in deferred revenue, an decrease in other current assets, offset by an increase in accounts receivable, and a decrease in accrued expenses. The increase in accounts receivable during 2003 is directly related to increased revenue and billings during 2003. The increase in deferred revenue of $62,000 was due to an increase in enrollments in our Managing for Tomorrow program, including several significant billings towards the end of 2003, which contributed to the increase in accounts receivable mentioned above.

     Net cash used in investing activities was $0.8 million in 2002 and $0.9 million in 2003. Investing activities in 2002 and 2003 consisted primarily of cash paid for property and equipment.

     Net cash used in financing activities was $20,000 in 2002 and net cash provided by financing activities was $0.3 million in 2003. Net cash used in financing activities in 2002 resulted from payments on capital lease obligations, offset by the sale of common stock and repayments of notes receivable from officers. Net cash provided by financing activities in 2003 resulted from proceeds issued in connection with long-term debt and the sale of common stock offset by payments on capital lease obligations and long-term debt.

     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. During the next twelve months, we anticipate that the primary source of cash receipts will be revenue from customers and that the primary uses of cash will be for operating expenses, capital expenditures, payments on long term debt and capital lease obligations, as well as other working capital related payments.

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   Contractual Obligations

     The following is a summary of short-term and long-term contractual obligations:

   Related Party Transactions

     The Company is currently holding full recourse notes receivable from directors and officers totaling approximately $170,000, which includes a note receivable from a Director, Eugene Santa Cattarina, in the amount of $96,666. The notes receivable proceeds of the notes were used to purchase shares of the Company’s Common Stock. The notes accrue interest at 6% per annum, are collateralized by all shares of the Company’s Common Stock purchased by these individuals and are due and payable in 2006, or immediately in the event of termination of employment.

  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 any 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". SFAS No. 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 SFAS No. 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 any 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 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

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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 any 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.

     On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement establishes accounting and reporting standards for derivative instruments including derivatives embedded in other contracts and for hedging activities. This statement amends SFAS No. 133 for the following: 1) implementation issues previous cleared by FASB and the Derivatives Implementation Group process, 2) clarification of the definition of a derivative and, 3) clarification of the definition of expected cash flows. This Statement is effective for contracts entered into or modified after June 30, 2003. We adopted SFAS No. 149 on June 30, 2003. The Company had no derivative instruments including derivatives embedded in other contracts or hedging activities during the year ended December 31, 2003. We will apply SFAS No. 149 in future periods if the Company enters into derivative instruments including derivatives embedded in other contracts or hedging activities.

     On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. This Statement represents a significant change in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. This Statement is effective for all financial instruments created or modified after May 31, 2003, and for other instruments as of September 1, 2003. The Company has no financial instruments that have characteristics of both liabilities and equity as of December 31, 2003.

     In December 2003, the FASB issued FASB Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities — an interpretation of ARB 51.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities, which possess certain characteristics. The Interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. This Interpretation applies to public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. We will apply the consolidation requirement of FIN 46R in future periods if we should own any interest in any variable interest entity.

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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 December 31, 2003, our accumulated deficit was $41.1 million. Even though we have achieved profitability during the past five 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.

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

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

     Achieving our growth objectives depends on our population health management solutions achieving widespread market acceptance among healthcare payer organizations. This is difficult to determine at this time. We commercially released our maxMC medical management software in 1997 and acquired the predictive modeling applications and services, and chronic condition management programs in the fourth quarter of 2000. Our solutions currently have limited market acceptance with only 20 payer customers currently using them. Our maxMC medical management software product has achieved a modest degree of market acceptance as we have implemented or are in the process of implementing it at 11 client sites. Realizing market acceptance for our care management solutions will require ongoing enhancement of their features and functionalities, and improved sales and marketing efforts. If we do not gain significant market share for all of our population health management solutions before our competitors introduce alternative

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products with features similar to ours, our operating results will suffer. Operating results will also suffer if our pricing strategies are not economically viable or acceptable to our customers.

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

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

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

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

     We depend on a limited number of products and we operate exclusively in the disease management and medical management solutions markets. Prior to our acquisitions of predictive modeling and chronic condition management products, we derived substantially all of our revenue from the sale and associated support of Maxsys II (and its predecessor Maxsys I) and maxMC, a medical management software solution marketed to hospitals, healthcare delivery organizations and health insurance companies. We anticipate that we will continue to generate revenue from the continued sales and support of medical management software solutions. With the acquisitions of Care Management solutions, we have increased our product offering, but it is still limited. Dependence on this limited product line makes us particularly susceptible to the successful introduction of, or changes in market preferences for, competing products. In addition, operating exclusively in the market for population management solutions make us particularly susceptible to downturns in that market that may be unrelated to the quality or competitiveness of our solutions.

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

     We currently serve a limited number of customers, four of whom accounted for 21%, 15%, 15%, and 11%, respectively, of our revenues for the year ended December 31, 2003. Moreover, because we focus our sales efforts on a small group of potential customers in the healthcare industry we anticipate our operating results will continue to depend on sales to a small number of key customers for the foreseeable future. The loss of, or a reduction in sales to, any of our current customers or our failure to sell our products and services to additional customers would significantly reduce our future revenues and negatively impact our results of operations, our stock price and our future viability. In December 2003, the Company announced that Great West has elected not to renew its disease management programs. The contract with Great West, which accounted for 21% of our revenue in 2003, expires in May 2004.

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

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

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

     Our future growth depends to a significant extent on our ability to hire additional sales, marketing and implementation personnel. Competition for these people is intense. We have experienced difficulty in hiring qualified sales and marketing professionals, as well as database administrators, and we may not be successful in attracting and retaining such individuals. If we do not hire additional qualified sales and marketing personnel, we may not succeed in implementing our growth strategy and our targeted revenue growth may not be achieved. In addition, even if our sales increase, our market penetration and revenue growth will be limited if we are unable to hire additional personnel to implement the medical management solutions we sell.

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

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

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

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

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

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

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

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

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

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

We Enter into Chronic Condition Management Contracts that Provide Guaranteed Levels of Performance to Our Customers, and We May be Required to Refund to Customers a Significant Portion of the Subscription Fees Paid to Us if We Fail to Achieve the Guaranteed Performance Criteria.

     From time to time, the Company may enter into chronic condition management contracts pursuant to which we guarantee certain minimum levels of cost savings or other performance measures to the customer. Under such contracts, we often agree to reimburse all or a portion of the enrollment fees paid to us by the customer if we fail to achieve such minimum cost savings. Due to the large number of variables, many of which are not within our control, that could impact the realization of such minimum cost savings, there can be no assurance that we will achieve such savings. If we do not achieve the necessary cost savings we may be obligated to reimburse significant portions of the enrollment fees paid to us by customers, we will not be able to recognize the revenue associated with such fees and our business and reputation may be harmed. As of December 31, 2003, we had three contracts that contain some level of performance guarantee. As of December 31, 2003 we had deferred revenue of approximately $1,329,000 related to performance guarantees.

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

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

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

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

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

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intellectual property from infringement, other companies may use our intellectual property to offer competitive products at lower prices. If we fail to compete effectively against these companies we could lose customers and sales of our solutions and our revenue could decline.

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

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

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

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

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

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

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

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

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

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

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

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

Security Breaches and Security Concerns Relating to Disclosure of Confidential Patient and Customer Information May Result in Liability to the Company and Cause Customers to Refuse to Purchase or Discontinue the Use of Our Population Health Management Solutions.

     In the course of providing our solutions, we and our customers maintain confidential information about patients and members, including their names and addresses, social security numbers and certain details about their health. An experienced computer user who is able to access our or our customers’ computer systems could gain access to confidential patient and member information. Therefore, our solutions must remain secure and the market must perceive them as secure. The occurrence of security breaches could cause customers to refuse to purchase or discontinue use of our solutions. Protecting against such security breaches or alleviating problems caused by security breaches may require us to expend significant capital and other resources. In addition, upgrading our systems to incorporate more advanced encryption and authentication technology as it becomes available may cause us to spend significant resources and encounter costly delays. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the market for our Internet-based population health management solutions.

     In July of 2003, a laptop computer containing the names, social security numbers and certain health information of approximately 30,000 members of two of our health plan customers was stolen during a burglary at our headquarters. Although the information is password protected, it is possible that an experienced computer user could access the information and use it, or give it to others who might use it, for identity theft or other unlawful activities. If the information were misused in this manner we could be liable for damages incurred by the effected members, and our existing and future customers could determine that our solutions are not secure and cease to use them. In either event, our results of operation and financial condition could be materially and adversely impacted.

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

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

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

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

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

     Recently, the Federal Trade Commission (FTC) enacted rules pertaining to telemarketing activities that affect our call center used in our disease management programs. We do not believe we are restricted under the “Do Not Call” provisions of the FTC rules but will be required to comply with other FTC rules related to our telemarketing activities. We intend to comply with the new regulations in connection with our disease management programs. Lack of compliance could result in significant monetary penalties as well as lost revenue if our call center activities are restricted.

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

     The requirements of HIPAA are continuously being modified. Therefore, our products may require modification in the future. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations our business will suffer.

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

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

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

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

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

     Acquisitions could involve numerous risks, including:

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

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

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We have entered into an agreement to merge the Company into a subsidiary of SHPS, Inc. If the merger is not consummated our business may be harmed.

     On March 1, 2004, the Company and SHPS Holdings, Inc. (SHPS) announced that they have signed a definitive agreement to merge a wholly owned subsidiary of SHPS with the Company. The Company’s shareholders will receive $3.09 per share in cash, and the Company will become a wholly owned subsidiary of SHPS Holdings, Inc. and its affiliates. The transaction is valued at approximately $56 million. The merger is conditioned upon the approval by the Company’s shareholders and regulatory approval, as well as other customary conditions. Directors and executive officers of the Company, and its affiliates, who own approximately 40.7% of the Company’s shares outstanding have agreed to vote these shares in favor of the merger.

     In the event the merger is not consummated, you will continue to own shares of our common stock, and our business may be harmed. Specifically, we believe that the fact that we are seeking to sell our business may interfere with our ability to sign new customer contracts. In addition, under certain circumstances we could be required to pay SHPS a termination fee of up to $2 million and/or reimburse SHPS’ expenses incurred in connection with the proposed merger.

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

     Our executive officers and directors and their affiliates beneficially own, in the aggregate, approximately 41% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us.

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

     Our funds are limited. They consist of existing cash reserves and limited anticipated cash flow from operations. We believe that these funds will be sufficient to meet our capital and operating expense requirements for at least the next twelve months. Thereafter, we may require additional funds to support our working capital, operating expense and capital expenditure requirements or for other purposes and may seek to raise such additional funds through public or private debt or equity financings if such funding is available on terms acceptable to us. If we cannot raise capital on acceptable terms and when needed, we may not have the resources to develop new products or enhance existing products, take advantage of future opportunities or respond to competitive pressures or unanticipated events.

We Have Experienced Over $4 Million in Impairments of Our Fixed and Intangible Assets Since the First Quarter Of 2001, And Our Assets May Continue to Become Additionally Impaired in The Future.

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

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

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

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

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

•

actual or anticipated variations in quarterly operating results;

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•		failure to achieve, or changes in, financial estimates by securities analysts;
•		announcements of new products or services or technological innovations by us or our competitors;
•		conditions or trends in the healthcare industry;
•		announcements by us of significant strategic transactions or capital commitments;
•		additions or departures of key personnel;
•		sales of our common stock; and
•		developments regarding our intellectual property or that of our competitors.

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

There May Not be an Active, Liquid Trading Market For Our Common Stock.

     As of the opening of trading on November 7, 2002, our common stock has traded on the NASDAQ Stock Market’s SmallCap Market. There is no guarantee that an active trading market for our Common Stock will be maintained on the NASDAQ SmallCap Market. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active.

     If we were to be unable to comply with NASDAQ’s continued listing criteria and other requirements within the time frame prescribed, we could be delisted from trading on such market, and thereafter trading in our common stock, if any, would likely be conducted through the over-the-counter market or on the Electronic Bulletin Board of the National Association of Securities Dealers, Inc.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

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Item 8. Financial Statements and Supplementary Data

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REPORT OF INDEPENDENT AUDITORS

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

     In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Landacorp, Inc. and its subsidiaries at December 31, 2002 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Atlanta, Georgia
February 11, 2004, except as to Note 16 for which the date is March 26, 2004

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

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

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

37

LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

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

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LANDACORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

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LANDACORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

     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.

  Reincorporation

     In December 1999, the Company reincorporated in the State of Delaware. As a result of the reincorporation, the Company changed its name from Landa Management Systems Corporation to Landacorp, Inc., and is authorized to issue 15,000,000 shares (increased to 50,000,000 shares in 2001) of $0.001 par value Common Stock and 8,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof.

2. Summary of Significant Accounting Policies

  Basis of Presentation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

  Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation of accounts receivable and the allowance for doubtful accounts, useful lives of intangible assets, carrying value of goodwill and other intangible assets, the estimate of percentage of completion revenue related to medical management software contracts, and restructuring charges. Actual results could differ from those estimates.

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of deposits in money market funds. Included in Cash and Cash equivalents is approximately $492,000 used to secure certain Letters of Credit and notes payable.

  Reclassifications

     Prior year financial results have been reclassified to conform to current year presentations.

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  Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the asset, generally three to seven years, or the lease term, if shorter. Depreciable lives are as follows:

     Gains and losses on disposals are included in income at amounts equal to the difference between the net book value of the disposed assets and the proceeds received upon disposal, if any.

  Goodwill and other intangible assets

     The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002. As such, goodwill is no longer amortized. 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. We calculate amortization of our other intangible assets using the straight-line method over the estimate lives of the intangible assets as follows:

  Impairment of long-lived assets

     In accordance with SFAS No.142, “Goodwill and Other Intangible Assets,” goodwill is reviewed for impairment on an annual basis on January 1. Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that more likely than not reduce the fair value of the goodwill below its carrying value. Goodwill is impaired when its carrying value exceeds its fair value. Based upon our review in fiscal 2003, we have not deemed our goodwill to be impaired. The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and accordingly, other long-lived assets, which include other intangible assets, will be reviewed for impairment when factors indicate that a potential impairment may have occurred. Impairment occurs when the carrying amount of an asset exceeds its undiscounted cash flow recoverability. Impairment is then measured by comparing the carrying amount of the asset to its fair value, and we recognize an impairment loss equal to the excess above the fair value. After an impairment loss is recognized, the adjusted carrying amount of the asset becomes the new accounting basis.

  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 solutions. In accordance with Staff Accounting Bulletin (“SAB”) 104, 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 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

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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.

     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 typically defers revenue equal to the maximum potential amount of fees that are refundable until such time as the performance criteria are met and collectibility is reasonably assured. Such revenue will not be recognized until the performance criteria have been met. As of December 31, 2003 the Company had outstanding performance guarantees on three contracts, for a maximum total of approximately $1,329,000, which is included in deferred revenue.

     Included in revenue for the years ended December 31, 2002 and 2003 is $300,000 and $1,300,000, respectively, related to achieving certain performance criteria from an ongoing care management contract. Included in revenue for the year ended December 31, 2003 is $0.6 million in connection with the settlement of a medical management software contract. Additionally, included in revenue for the year ended December 31, 2002 is $600,000 related to the Company’s termination of its agreement with Lifeguard, which was announced in October of 2002 and $800,000 related to achieving the requirements of performance guarantees under contracts which were terminated in the fourth quarter of 2002.

     The license agreements for our software products include limited express warranties. The warranty provides that the product, when properly installed and operated on the prerequisite equipment in conjunction with properly maintained prerequisite software and data sets and unmodified except for certain support services and so long as the customer has properly implemented all available minor versions, will perform substantially in accordance with our related documentation for the period of the software support term. The warranty also provides that the software does not contain any virus that would erase data or programming or otherwise cause the software to become inoperable or incapable of being used in accordance with its documentation. With respect to the aforementioned warranties, the customer’s sole remedy is to require the Company to exercise its best efforts to repair or replace the nonconforming portion of the software. In addition, the warranty provides that the operation of the software is consistent with all then-effective requirements of all federal law and regulation pertaining to individually identifiable health information. In the event that requirements under such federal laws or regulations affecting the operation of the software change, the Company agrees to make its best efforts to make the next available software version consistent with the changes. In the event that the Company fails to make the software consistent with such changes, the customer has the option to terminate the software license agreement at any time during the ninety days following the release of the latest software version. Historically, the Company has not received any warranty claims related to its products, and the Company has no reason to believe that it will receive any material claims in the future.

  Shipping and Handling Costs

     The Company’s shipping and handling costs are included in cost of sales for all periods presented.

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  Concentration of Credit Risk

     Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. We maintain substantially all cash and cash equivalent balances with one major financial institution located in the United States and have not experienced any losses on these deposits. Our revenues are derived from software licensing and service transactions with customers in the United States. We perform ongoing credit evaluations of our customers, and we generally do not require collateral of our customers and we maintain an allowance for probable credit losses based upon our historical experience.

     Included in the following table are concentrations of credit risk with respect to certain customers:

*

These customers did not account for more than 10% of revenue or gross accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts in the given period.

  Software Development Costs

     In accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” the Company capitalizes certain software development costs from the date the technological feasibility of the product is established, using the working model approach, through the date the product is available for general release to customers. During 2002 and 2003, the Company expensed all software development costs as incurred because the development costs between the time of technological feasibility until general availability were minimal. Research and development costs, which include personnel costs, outside contractor fees, amortization of unearned stock-based compensation, related departmental overhead, and depreciation on equipment, incurred prior to the establishment of technological feasibility of our software products are expensed as incurred. Capitalized costs are amortized on a product-by-product basis, based on the greater amount computed by using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) straight-line amortization over the estimated product life. Net realizable value is determined based upon the estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing of that product. No write-downs of software development costs occurred during the years ended December 31, 2001, 2002, or 2003. We include amortization of computer software costs in cost of revenue in the statement of operations. Amortization of computer software costs was $20,000, $24,000, and $25,000 in fiscal 2001, 2002, and 2003, respectively. Unamortized computer software costs were $25,000 and $0 as of December 31, 2002 and 2003, respectively.

  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

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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 loss would have been as follows:

     Stock-based Compensation expense recognized during the years ended December 31, 2001, 2002, and 2003, totaled $1,467,000, $440,000 and $139,000, respectively, and has been allocated to operating expenses as follows:

     In connection with certain stock option grants and common stock issuances during the year ended December 31, 2000, the Company recognized unearned compensation totaling $1,521,000, net of $112,000 related to terminated employees, which is being amortized over the vesting periods or as the Company’s repurchase rights lapse, as applicable, using the multiple option approach prescribed by FASB Interpretation No. 44. In 2001 and 2002, the company reduced existing unearned compensation by $718,000 and

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$144,000, respectively, related to terminations of employees. The company recorded stock compensation expense of $87,000, $160,000, and $103,000 in 2001, 2002, and 2003, respectively, for the modification of fixed stock option grants.

  Advertising Expense

     Advertising costs are expensed as incurred and totaled $417,000, $96,000 and $37,000 during the years ended December 31, 2001, 2002, and 2003, respectively.

  Reimbursable Out-of-Pocket Expenses

     Effective January 1, 2002, the Company adopted Emerging Issues Task Force, or EITF, Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of Pocket Expenses Incurred”. EITF Issue No. 01-14 requires reimbursements received for out-of-pocket expenses to be reported as revenue in the consolidated statement of operations. Prior to adoption of EITF Issue No. 01-14, the Company recorded revenue and operating expenses net of reimbursable expenses. The Company’s financial results of operations for prior periods have been reclassified to conform to the new presentation. In accordance with EITF Issue No. 01-14, reimbursable expenses of approximately $176,000, $327,000, and $365,000 for the years ended December 31, 2001, 2002, and 2003, respectively, are now reflected as revenue and cost of revenue. This change had no effect on gross profit, operating loss, or net loss for any period presented.

  Income Taxes

     Income taxes are accounted for using an asset and liability method, as prescribed by SFAS No. 109, “Accounting for Income Taxes”, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The Company provides a valuation allowance for deferred tax assets when we believe it is more likely than not that we will not realize all or a portion of the assets.

  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 excluded from the determination of basic and diluted net income (loss) per share as their effect is anti-dilutive, are as follows:

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The following table presents the calculations of basic and diluted net income (loss) per common share or common share equivalent: