PER SE TECHNOLOGIES INC - 10-Q Quarterly Report

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

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-19480

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

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

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

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

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

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

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

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

PER-SE TECHNOLOGIES, INC.

FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2004

1

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

2

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to consolidated financial statements.

3

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to consolidated financial statements.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements (interim
financial statements) include the accounts of Per-Se Technologies, Inc. and its
subsidiaries ("Per-Se" or the "Company"). Intercompany accounts and transactions
have been eliminated.

These interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") for interim financial information, the rules and regulations of the
Securities and Exchange Commission for interim financial statements and
accounting policies consistent, in all material respects, with those applied in
preparing the Company's audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003, filed with the Securities and Exchange Commission on May 13, 2004 ("2003
Form 10-K"). These interim financial statements are unaudited but reflect all
adjustments (consisting of normal recurring adjustments) management considers
necessary for a fair presentation of the Company's financial position, operating
results and cash flows for the interim periods presented. The information
included in this report should be read in conjunction with the 2003 Form 10-K.

The consolidated financial statements of the Company have been presented to
reflect the former operations of the Hospital Services division's Patient1
clinical product line ("Patient1") and Business1-PFM patient accounting product
line ("Business1") as discontinued operations. Patient1 was sold effective July
28, 2003, and Business1 was sold effective January 31, 2004. Additionally, the
activity related to the Company's former Medaphis Services Corporation ("MSC")
and Impact Innovations Group ("Impact") businesses, which were sold in 1998 and
1999, respectively, are also reflected as discontinued operations for all
periods presented (refer to Note 7 for additional information).

NOTE 2 -- STOCK-BASED COMPENSATION PLANS

At March 31, 2004, the Company has four stock-based compensation plans. The
Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). No stock-based compensation cost is reflected in the
Company's Statements of Operations, as all options granted under those plans had
an exercise price equal to the market value of the underlying Common Stock on
the date of grant. The following table illustrates the effect on net income and
net income per share if the Company had applied the fair value recognition
provisions of Statement of Financial

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), to this stock-based compensation.

NOTE 3 -- ADDITIONAL PROCEDURES

As a result of allegations of improprieties made during 2003 and 2004, the
Company's external auditors advised the Company and the Audit Committee of the
Board of Directors that additional procedures should be performed related to the
allegations. These additional procedures, which caused the March 31, 2004 Form
10-Q and 2003 Form 10-K filing delays, were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit
("SAS No. 99"), which became effective for periods beginning on or after
December 15, 2002. Due to the volume and, in some cases, vague nature of many of
the allegations, the scope of the additional procedures was broad and extensive.

The Company recorded operating costs related to the additional procedures
totaling approximately $3.9 million during the three months ended March 31,
2004, and included these costs in Other expenses in the Company's Consolidated
Statements of Operations.

NOTE 4 -- REVENUE RECOGNITION

During the three months ended March 31, 2004, the Physician Services
division signed an agreement ("the Agreement") with a customer to provide
physician practice management services. Under the Agreement, Physician Services
and the customer agreed to certain performance goals, or targeted increases in
the net collections of the customer. The performance goals will be measured on a
quarterly and annual basis through February 28, 2009. At each quarter and annual
measurement period, Physician Services will determine if the targeted increase
for that period has been achieved.

If the Physician Services division does not achieve the targeted increase
for a quarterly measurement period, revenue will be deferred in an amount equal
to the amount by which Physician Services missed the target. Under the
Agreement, this amount cannot exceed the amount of revenue generated in the
quarterly measurement period. If Physician Services has achieved the target for
the measurement period, no revenue deferral would be required and Physician
Services will record revenue as a percentage of the customer's net collections
pursuant to its standard revenue recognition practice.

6

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

If the Physician Services division does not achieve the targeted increase
for an annual measurement period, Physician Services will be required to pay the
customer for the amount of the cumulative quarterly shortfalls at the end of the
annual measurement period. Conversely, if Physician Services has overachieved on
the targeted increase, 100% of the overachievement can be used to reduce any
such guarantee in subsequent periods if the targeted increase is not achieved in
any subsequent period.

NOTE 5 -- EARNINGS PER SHARE

Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of shares of Common Stock outstanding during the
period. Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options and warrants. The following sets forth the
computation of basic and diluted net income per share for the three-months ended
March 31, 2004 and 2003:

Options and warrants to purchase 0.9 million and 4.3 million shares of
Common Stock during the three months ended March 31, 2004 and 2003,
respectively, were excluded from the computation of diluted earnings per share
because the exercise prices of the options and warrants were greater than the
average market price of the common shares, and therefore, the effect would have
been antidilutive.

NOTE 6 -- FOREIGN CURRENCY TRANSLATION AND COMPREHENSIVE INCOME

The functional currency of the Company's operations outside of the United
States is the local country's currency. Consequently, assets and liabilities of
operations outside the United States are translated into dollars using exchange
rates at the end of each reporting period. Revenue and expenses are translated
at the average exchange rates prevailing during the period. Cumulative
translation gains and losses are reported in accumulated other comprehensive
loss. In the three-month periods ended March 31, 2004 and 2003, the only
component of other comprehensive loss was the net foreign currency translation.

NOTE 7 -- DISCONTINUED OPERATIONS AND DIVESTITURES

In June 2003, the Company announced that it agreed to sell Patient1 to
Misys Healthcare Systems, a division of Misys plc ("Misys") for $30 million in
cash. Patient1 was the Company's only clinical product line and its sale allowed
the Company to better focus on optimizing reimbursement and improving
administrative efficiencies
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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

for physician practices and hospitals. The sale was completed on July 28, 2003.
The Company recognized a gain on the sale of Patient1 of approximately $10.4
million, net of taxes of approximately $0.5 million, subject to closing
adjustments, in 2003. Net proceeds on the sale of Patient1 were approximately
$27.9 million, subject to closing adjustments. The Company and Misys entered
into binding arbitration regarding the final closing adjustments and on May 21,
2004, the arbitrator awarded the Company approximately $4.3 million plus
interest of approximately $0.1 million, which is expected to be received on June
1, 2004.

In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 allowed the Company
to focus resources on solutions that provide meaningful, strategic returns for
the Company, its customers and its shareholders. Pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"),
the Company wrote down the net assets of Business1 to fair market value less
costs to sell and incurred an $8.5 million expense during 2003. The Company
completed the sale of Business1 effective January 31, 2004, to a privately held
company for $0.6 million, which will be received in three payments through June
2006. No cash consideration was received at closing.

Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Patient1 and Business1 were formerly
reported as part of the Hospital Services division.

Summarized operating results for the discontinued operations are as
follows:

The major classes of assets and liabilities for the discontinued operations
are as follows:

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

During the three months ended March 31, 2004 and 2003, the Company incurred
expenses of approximately $63,000 and $11,000, respectively, which were
primarily legal costs, associated with MSC and Impact. Pursuant to APB Opinion
No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("APB No. 30"),

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

the consolidated financial statements of the Company are presented to reflect
the activity associated with MSC and Impact as discontinued operations for all
periods presented.

NOTE 8 -- LEGAL MATTERS

PENDING LEGAL MATTERS

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

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

SETTLED LEGAL MATTERS

On May 10, 2004, the Company reached a $20 million settlement with the
Company's former insurance carrier, Certain Underwriters at Lloyd's of London
(collectively "Lloyd's").

The settlement entails a $20 million cash payment that is payable by
Lloyd's 60 days from the settlement date or by July 9, 2004. Lloyd's will, at
their expense, defend, settle or otherwise resolve the two remaining pending
claims under the errors and omissions ("E&O") policies issued to the Company by
Lloyd's. In exchange, Per-Se will provide Lloyd's with a full release of all E&O
and directors and officers and company reimbursement ("D&O") policies. The
California Superior Court will retain jurisdiction to enforce any aspect of the
settlement agreement.

At March 31, 2004, and at the time of settlement, the Company's Lloyd's
receivable was $18.3 million, which includes costs associated with the interim
funding of legal costs and litigation settlements related to E&O claims that
were incurred by the Company in excess of the Lloyd's E&O policies' deductible
that are expected to be recovered from Lloyd's. This $18.3 million balance
includes $13.5 million that was paid during 2002, 2003 and 2004, and additional
obligations to be paid of approximately $4.8 million. The additional obligations
of approximately $4.8 million are scheduled to be paid as follows: $0.6 million
during the first half of 2004, $1.1 million in January 2005 and $3.1 million
upon receipt of the cash settlement from Lloyd's.

NOTE 9 -- LONG-TERM DEBT

On February 20, 1998, the Company issued $175 million of 9 1/2% Senior
Notes due 2005 (the "Notes"). On March 17, 2003, the Company repurchased $15.0
million of the Notes at par plus accrued interest of approximately $0.1 million.
The Company incurred a write-off of approximately $0.2 million of deferred debt
issuance costs associated with the original issuance of the Notes related to
this repurchase, which is included in loss on extinguishment of debt in the
Company's Consolidated Statements of Operations.

On August 12, 2003, the Company commenced a cash tender offer for its
then-outstanding $160 million of Notes (the "Tender Offer"). On September 11,
2003, the Company repurchased $143.6 million of the Notes that were tendered at
the redemption price of 102.625% of the principal amount, as required under the
Indenture governing the Notes, and paid accrued interest of approximately $1.0
million. The remaining $16.4 million of the Notes were retired on September 18,
2003, through a call initiated by the Company on August 12, 2003, at the

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

redemption price of 102.375% of the principal amount plus accrued interest of
approximately $10,000 (the "Call").

On April 16, 2001, the Company entered into a $50 million credit facility
(the "2001 Credit Facility"). The Company did not incur any borrowings under the
2001 Credit Facility, and on September 11, 2003, the Company terminated the 2001
Credit Facility.

On September 11, 2003, concurrent with termination of the 2001 Credit
Facility, the Company entered into a $175 million Credit Agreement (the "Credit
Agreement"). The Credit Agreement consists of a $125 million Term Loan B (the
"Term Loan B") and a $50 million revolving credit facility (the "Revolving
Credit Facility"). The Company had approximately $118.8 million outstanding
under the Term Loan B as of March 31, 2004, under a LIBOR-based interest
contract, bearing interest at 5.36%. The Company has made all required principal
payments through March 31, 2004. The Company has had no borrowings outstanding
under the Revolving Credit Facility since its inception.

All obligations under the Credit Agreement are fully and unconditionally
guaranteed, on a senior secured basis, jointly and severally by all of the
Company's present and future domestic and material foreign subsidiaries (the
"Subsidiary Guarantors"). The financial statements of the Subsidiary Guarantors
have not been presented as all subsidiaries, except for certain minor foreign
subsidiaries, have provided guarantees and the parent company does not have any
significant operations or assets, separate from its investment in those
subsidiaries. Any non-guarantor subsidiaries are minor individually and in the
aggregate to the Company's consolidated financial statements.

Under the Credit Agreement, the Company has certain reporting requirements
for the submission of its financial statements to the Lenders, as defined in the
Credit Agreement. On April 30, 2004, the Company was granted an extension of the
May 15, 2004, submission deadline for its results for the period ended March 31,
2004. The Company has until the extended deadline of May 28, 2004, to submit its
first quarter 2004 financial statements to the Lenders.

The Credit Agreement contains financial and other restrictive covenants,
including, without limitation, those restricting additional indebtedness, lien
creation, dividend payments, asset sales and stock offerings, and those
requiring a minimum net worth, maximum leverage and minimum fixed charge
coverage, each as defined in the Credit Agreement. The Company was in compliance
with all applicable covenants as of March 31, 2004.

The initial term of the Revolving Credit Facility is three years. The
Company and the Lenders can mutually agree to extend this term by up to two
years. The Company intends to use the Revolving Credit Facility, as needed, for
future investments in its operations, including capital expenditures, strategic
acquisitions, to secure its letters of credit, as needed, and other general
corporate purposes.

NOTE 10 -- INCOME TAXES

Income tax expense, which was primarily related to state and local income
taxes, was approximately $0.2 million and $0.3 million for the three months
ended March 31, 2004 and 2003, respectively. The Company's estimated federal
income tax expense for the three months ended March 31, 2004, is offset by the
release of an equal amount of the Company's valuation allowance. As of March 31,
2004, the Company's remaining net deferred tax asset was fully offset by a
valuation allowance. Realization of the net deferred tax asset is dependent upon
the Company generating sufficient taxable income prior to the expiration of the
federal net operating loss carryforwards. The Company will adjust this valuation
reserve accordingly if, during future periods, management believes the Company
will generate sufficient taxable income to realize the net deferred tax asset.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

NOTE 11 -- RESTRUCTURING EXPENSES

The amount of lease termination costs associated with a 1995 restructuring
applied against the reserve in the three months ended March 31, 2004, is as
follows:

During the three months ended March 31, 2004, the Company incurred
approximately $47,000 of restructuring expenses related to the realignment of
the Company into the Physician Services and Hospital Services divisions.

NOTE 12 -- SEGMENT REPORTING

The Company's reportable segments are operating units that offer different
services and products. Per-Se provides its services and products through its two
operating divisions: Physician Services and Hospital Services.

The Physician Services division provides Connective Healthcare services and
solutions that manage the revenue cycle for physician groups. The division is
the largest and only national provider of business management outsourced
services that supplant all or most of the administrative functions of a
physician group. The target market is primarily hospital-affiliated physician
groups in the specialties of radiology, anesthesiology, emergency medicine and
pathology as well as physician groups practicing in the academic setting and
other large physician groups. The division recognizes revenue primarily on a
contingency fee basis, which aligns the division's interests with the interests
of the physician groups it services. The division also sells a physician
practice management ("PPM") solution that is delivered via an ASP model. The
division's revenue model is almost entirely recurring in nature. The outsourced
services business recognizes revenue as a percentage of the cash collected on
behalf of the physician group and the PPM solution collects a monthly usage fee
from the physician practices using the system. The business of the Physician
Services division is conducted by PST Services, Inc. a Georgia corporation d/b/a
"Per-Se Technologies," which is a wholly owned subsidiary of the Company.

The Hospital Services division provides Connective Healthcare solutions
that increase revenue and decrease expenses for hospitals, with a focus on
revenue cycle management and resource management. The division's revenue cycle
management solutions enable a hospital's central billing office to improve its
revenue cycle. The division has one of the largest electronic clearinghouses in
the medical industry, which provides an important infrastructure to support its
revenue cycle offering. The division also provides resource management solutions
that enable hospitals efficiently to manage resources, such as personnel and the
operating room, to reduce costs and improve their bottom line. The division
recognizes revenue on both a per-transaction basis for many of its revenue cycle
management solutions as well as on a percentage-of-completion basis or upon
software shipment for its software solutions in the revenue cycle and resource
management areas. The division has a high proportion of recurring revenue due to
its transaction-based business and the maintenance revenue from its substantial
installed base for the resource management software solutions. The business of
the Hospital Services division is conducted by the following wholly owned
subsidiaries of the Company: Per-Se Transaction Services, Inc., an Ohio
corporation; Patient Account Management Services, Inc., an Ohio corporation; PST
Products, LLC, a California limited liability company; and Knowledgeable
Healthcare Solutions, Inc., an Alabama corporation. All of these subsidiaries do
business under the name "Per-Se Technologies."

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

The Hospital Services segment revenue includes intersegment revenue for
services provided to the Physician Services segment, which are shown as
eliminations to reconcile to total consolidated revenue.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

The Company's segment information from continuing operations is as follows:

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

13

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

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

GENERAL

Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, provides integrated
business management outsourcing services, Internet-enabled connectivity and
administrative software for the healthcare industry. Per-Se delivers its
services and products through its two operating divisions: Physician Services
and Hospital Services.

On July 1, 2003, the Company realigned its operations to better focus on
its core healthcare constituents -- physician practices and hospitals. The
Company created the Hospital Services division by combining the offerings of the
former e-Health Solutions and Application Software divisions, with the exception
of the Company's ASP-based physician practice management solution, which was
transferred to the Physician Services division.

The Physician Services division provides business management outsourcing
services to the hospital-affiliated physician practice market, physicians in
academic settings and other large physician practices. Services include clinical
data collection, data input, medical coding, billing, contract management, cash
collections and accounts receivable management. These services are designed to
assist healthcare providers with the business management functions associated
with the delivery of healthcare services, allowing physicians to focus on
providing quality patient care. These services also assist physicians in
improving cash flows and reducing administrative costs and burdens. The
division's offerings have historically focused on the back-end processes
required to ensure physicians are properly reimbursed for care delivery. The
addition of the ASP-based physician practice management solution, named
MedAxxis, as part of the realignment not only provides operational leverage but
also enables the Company to offer front-end solutions for both hospital- and
office-based physician groups. These large physician groups require both
front-office functionality for scheduling and back-end services for accounts
receivable management. By combining front-office and back-end solutions and
services, the Company will be able to sell its solutions and services to a new
segment of the physician market.

To better serve the hospital marketplace, the Company has formed the
Hospital Services division through the combination of the former e-Health
Solutions and Application Software divisions. The products of both groups focus
on optimizing the revenue cycle and improving administrative efficiencies for
hospitals. Combining these offerings allows the Company to better leverage its
solutions and provides an organizational structure through which to broaden the
Company's offerings to hospitals. Solutions include electronic claims
processing, referral submissions, eligibility verification and other electronic
and paper transaction processing as well as patient and staff scheduling
systems.

Per-Se markets its products and services to constituents of the healthcare
industry, primarily to hospital-affiliated physician practices and hospitals.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2004, AS COMPARED TO THREE MONTHS ENDED MARCH 31,
2003

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

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Revenue for the Physician Services division increased approximately 2% in
the three months ended March 31, 2004, as compared to the same period in 2003.
The revenue increase is due to the implementation of net new business sold
during the first quarter of 2004 as well as in prior periods. Net new business
sold includes the annualized revenue value of new contracts signed in a period,
less the annualized revenue value of terminated business in that same period.
Revenue also increased due to one additional business day in the first quarter
of 2004 compared to the prior year period. Net backlog at March 31, 2004, was
approximately $5 million, compared to the negative backlog of approximately $2
million at December 31, 2003. The increase in net backlog is a result of the
record level of net new business sold during the three months ended March 31,
2004. Net backlog represents the annualized revenue related to new contracts
signed with the business still to be implemented, less the annualized revenue
related to existing contracts where discontinuance notification has been
received and the customer has yet to be phased out. The Company focuses on
maintaining a positive net backlog and believes it is a useful indicator of
future revenue growth.

Revenue for the Hospital Services division increased approximately 7% for
the three months ended March 31, 2004, as compared to the same period in 2003.
Revenue growth in the division is related to an increase in software maintenance
revenue attributable to previously unbilled maintenance for certain software
customers that is being recognized upon receipt of payment. Medical transaction
volume increased approximately 6% for the period over the same period of 2003.
Revenue growth does not necessarily correlate directly to transaction volume due
to the mix of products sold by the division. The Company believes transaction
volume is a useful indicator of future revenue growth as business is implemented
into the division's recurring revenue model.

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

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

Physician Services' segment operating income decreased approximately 19% in
the three months ended March 31, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 9.4% in the three months ended
March 31, 2004, versus approximately 11.8% in the same period in 2003. Margins
for the current year period were impacted by the implementation of the record
level of net new business sold during the quarter of approximately $12 million.
Historically, new business is progressively implemented over a period of six to
nine months before it reaches its annualized revenue run-rate and full
profitability.

Hospital Services' segment operating income increased approximately 27% in
the three months ended March 31, 2004, compared to the same period in 2003,
resulting in operating margins of approximately 23.4% versus approximately 19.7%
in the prior year period. The operating margin improvement is attributable to
the previously unbilled maintenance revenue for certain software customers that
is being recognized upon receipt of payment.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Corporate overhead expenses increased approximately $4.0 million in the
three months ended March 31, 2004, compared to the same period in 2003. The
increase is attributable primarily to expenses incurred to perform the
additional procedures discussed below.

Other Expenses. As a result of allegations of improprieties made during
2003 and 2004, the Company's external auditors advised the Company and the Audit
Committee of the Board of Directors that additional procedures should be
performed related to the allegations. These additional procedures, which caused
the March 31, 2004 Form 10-Q and 2003 Form 10-K filing delays, were required due
to Statement of Auditing Standards No. 99, Consideration of Fraud in a Financial
Statement Audit, ("SAS No. 99"), which became effective for periods beginning on
or after December 15, 2002. Due to the volume and, in some cases, vague nature
of many of the allegations, the scope of the additional procedures was broad and
extensive.

The Company recorded operating costs related to the additional procedures
totaling approximately $3.9 million during the three months ended March 31,
2004, and included these costs in Other expenses in the Company's Consolidated
Statements of Operations.

Additionally, during the three months ended March 31, 2004, the Company
incurred approximately $47,000 of restructuring expenses related to the
realignment of the Company into the Physician Services and Hospital Services
divisions.

Interest. Interest expense was approximately $2.1 million for the three
months ended March 31, 2004, as compared to $4.5 million for the same period in
2003. The decrease is attributable to the retirement of $50 million of long-term
debt in the first nine months of 2003, the payment of $3.1 million of long-term
debt during the fourth quarter of 2003 and entering into a new Credit Agreement
in September 2003 at substantially lower interest rates. Interest income was
$0.1 million for the three-month periods ended March 31, 2004 and 2003.

Loss on Extinguishment of Debt. During the three months ended March 31,
2003, in connection with the retirement of $15 million of the Company's
then-outstanding 9 1/2% Senior Notes due 2005 ("Notes"), the Company incurred a
write-off of approximately $0.2 million of deferred debt issuance costs
associated with the original issuance of the Notes.

Income Taxes. Income tax expense, which was primarily related to state and
local income taxes, was approximately $0.2 million and $0.3 million for the
three months ended March 31, 2004 and 2003, respectively. The Company's
estimated federal income tax expense for the three months ended March 31, 2004,
is offset by the release of an equal amount of the Company's valuation
allowance. As of March 31, 2004, the Company's net deferred tax asset was fully
offset by a valuation allowance. Realization of the net deferred tax asset is
dependent upon the Company generating sufficient taxable income prior to the
expiration of the federal net operating loss carryforwards. The Company will
adjust this valuation reserve accordingly if, during future periods, management
believes the Company will generate sufficient taxable income to realize the net
deferred tax asset.

Discontinued Operations. In June 2003, the Company announced that it
agreed to sell Patient1 to Misys Healthcare Systems, a division of Misys plc
("Misys") for $30 million in cash. Patient1 was the Company's only clinical
product line and its sale allowed the Company to better focus on optimizing
reimbursement and improving administrative efficiencies for physician practices
and hospitals. The sale was completed on July 28, 2003. The Company recognized a
gain on the sale of Patient1 of approximately $10.4 million, net of taxes of
approximately $0.5 million, subject to closing adjustments, in 2003. Net
proceeds on the sale of Patient1 were approximately $27.9 million, subject to
closing adjustments. The Company and Misys entered into binding arbitration
regarding the final closing adjustments and on May 21, 2004, the arbitrator
awarded the Company approximately $4.3 million plus interest of approximately
$0.1 million, which is expected to be received on June 1, 2004.

In September 2003, the Company initiated a process to sell Business1. As
with the sale of Patient1, the discontinuance of Business1 allowed the Company
to focus resources on solutions that provide meaningful,
16

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

strategic returns for the Company, its customers and its shareholders. Pursuant
to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS No. 144"), the Company wrote down the net assets of Business1 to fair
market value less costs to sell and incurred an $8.5 million expense. The
Company completed the sale of Business1 effective January 31, 2004, to a
privately held company for $0.6 million, which will be received in three
payments through June 2006. No cash consideration was received at closing.

Pursuant to SFAS No. 144, the consolidated financial statements of the
Company have been presented to reflect Patient1 and Business1 as discontinued
operations for all periods presented. Patient1 and Business1 were formerly
reported as part of the Hospital Services division.

Summarized operating results for the discontinued operations are as
follows:

The major classes of assets and liabilities for the discontinued operations
are as follows:

Unrestricted cash and cash equivalents include all highly liquid
investments with an initial maturity of no more than three months at the date of
purchase.

During the three months ended March 31, 2004, the Company used
approximately $0.7 million in cash for continuing operations, which includes
cash generated from normal operations offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $2.4
million (refer to "Note 3 -- Additional Procedures" in the Company's Notes to
Consolidated Financial Statements for more information), the payment of
approximately $3.4 million in expenses and legal settlements related to the
matter with Lloyd's of London (refer to "Note 8 -- Legal Matters" in the
Company's Notes to Consolidated Financial Statements for more information) and
quarterly interest payments of approximately $1.7 million.

During the three months ended March 31, 2003, the Company used
approximately $5.2 million in cash for continuing operations, which includes
cash used for normal operations offset by semi-annual interest payments of
approximately $8.3 million and the payment of approximately $2.8 million in
expenses and legal settlements related to the matter with Lloyd's of London
(refer to "Note 8 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information).

During the three months ended March 31, 2004, the Company used
approximately $3.0 million in cash from investing activities from continuing
operations primarily for capital expenditures and investment in software
development costs.

During the three months ended March 31, 2003, the Company used
approximately $1.8 million in cash from investing activities from continuing
operations primarily for capital expenditures and software development costs.

During the three months ended March 31, 2004, the Company used
approximately $0.6 million in cash from financing activities. The Company used
$3.1 million for repayment of the Company's long-term debt in accordance with
the mandatory amortization schedule, which was offset by proceeds from the
exercise of stock options of $2.5 million.

During the three months ended March 31, 2003, the Company used
approximately $14.9 million in cash from financing activities primarily related
to the acceptance of the Company's offer to repurchase $15 million of the
Company's then-outstanding 9 1/2% Senior Notes due 2005.

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

The level of the Company's indebtedness could adversely impact the
Company's ability to obtain additional financing. A substantial portion of the
Company's cash flow from operations could be dedicated to the payment of
principal and interest on its indebtedness.

18

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

On May 10, 2004 the Company reached a $20 million settlement in its
litigation with Lloyd's.

During the course of litigation the Company was required to fund the legal
costs and any litigation settlements related to E&O claims covered by the
Lloyd's E&O policies. The negative impact of these items on the Company's cash
flow for the three months ended March 31, 2004, was approximately $3.4 million,
which consisted of approximately $0.6 million related to the cost of pursuing
the litigation against Lloyd's and approximately $2.8 million related to the
funding of legal costs and litigation settlements covered by the Lloyd's E&O
policies. The negative impact of these items on the Company's cash flow for the
three months ended March 31, 2003, was approximately $2.8 million, which
consisted of approximately $1.3 million related to insurance premium increases
for new insurance coverage and the cost of pursuing the litigation against
Lloyd's and approximately $1.5 million related to the funding of legal costs and
litigation settlements covered by the Lloyd's E&O policies. As of March 31,
2004, and as of the settlement date, the Company had incurred approximately
$18.3 million of costs related to claims under Lloyd's policies that are
classified as Lloyd's receivable in the Company's Consolidated Balance Sheet. As
of March 31, 2004, approximately $13.5 million of these costs have been paid by
the Company. The Company expects to record a gain of approximately $1.7 million
on settlement when the cash is received.

For the three months ended March 31, 2004 and 2003, the Company incurred
approximately $0.7 million and $1.3 million, respectively, of expenses related
to the cost of pursuing the litigation against Lloyd's in each period and, in
2003, significantly increased insurance premiums. These costs have been
reflected in the Company's Corporate segment. In the Consolidated Statements of
Operations these costs are included in other operating expenses.

As mentioned previously, the cost to perform the additional procedures
associated with preparing the year-end 2003 financial statements was
approximately $3.9 million, of which approximately $2.4 million was paid for the
quarter ended March 31, 2004. These operating costs are reflected in Other
expenses in the Company's Consolidated Statements of Operations. As the
additional procedures were completed during early May 2004, the Company
anticipates incurring additional expense of $2.0 to $3.0 million in the second
quarter of 2004.

With the exception of the Lloyd's receivable and payments made for the
additional procedures associated with the 2003 year-end audit, the Company has
not experienced material changes in the underlying components of cash generated
from continuing operations. The Company believes that existing cash and the cash
provided by operations will provide sufficient capital to fund its working
capital requirements, contractual obligations, investing and financing needs and
any costs associated with its litigation with Lloyd's.

On September 11, 2003, the Company entered into the Credit Agreement,
including the Revolving Credit Facility. Under the Credit Agreement, the Company
has the option of entering into LIBOR based loans or Base Rate loans, each as
defined in the Credit Agreement. LIBOR based loans under the Revolving Credit
Facility bear interest at LIBOR plus amounts ranging from 3.0% to 3.5% based on
the Company's leverage ratio, as defined in the Credit Agreement. Base Rate
loans under the Revolving Credit Facility bear interest at the Base Rate plus
amounts ranging from 1.50% to 2.00% based on the Company's leverage ratio, as
defined in the Credit Agreement. In addition, the Company pays a quarterly
commitment fee on the unused portion of the Revolving Credit Facility of 0.50%
per annum. The Company has not incurred any borrowing under the Revolving Credit
Facility and does not expect to incur any borrowings thereunder to fund its
working capital or ordinary investing needs.

Under the Credit Agreement, the Company has certain reporting requirements
for the submission of its financial statements to the Lenders, as defined in the
Credit Agreement. On April 30, 2004, the Company was granted an extension of the
May 15, 2004, submission deadline for its results for the period ended March 31,
2004. The Company has until the extended deadline of May 28, 2004, to submit its
first quarter 2004 financial statements to the Lenders.

19

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

FORWARD-LOOKING STATEMENTS

Certain statements included in the Notes to Consolidated Financial
Statements, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this report including but not limited to
certain statements set forth under the captions "Note 7 -- Discontinued
Operations and Divestitures," "Note 8 -- Legal Matters," "Note 9 -- Long-Term
Debt," "Note 10 -- Income Taxes," "Results of Operations" and "Liquidity and
Capital Resources," are "forward-looking statements" within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Forward-looking statements include the Company's expectations with respect to
meritorious defenses to the claims and other issues asserted in pending legal
matters, the effect of industry and regulatory changes on the Company's customer
base, the impact of revenue backlog on future revenue, gain on sale and net
proceeds related to the Patient1 product line divestiture, fair market value
less costs to sell of Business1, overall profitability and the availability of
capital. Although the Company believes that the statements it has made are based
on reasonable assumptions, they are based on current information and beliefs
and, accordingly, the Company can give no assurance that its expectations will
be achieved. In addition, these statements are subject to factors that could
cause actual results to differ materially from those suggested by the
forward-looking statements. These factors include, but are not limited to,
factors identified below under the caption "Factors That May Affect Future
Results of Operations, Financial Condition or Business" and "Quantitative and
Qualitative Disclosures about Market Risk." The Company disclaims any
responsibility to update any forward-looking statements.

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

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

MATERIAL WEAKNESS IN INTERNAL CONTROLS AND PROCEDURES

As a result of errors that led to the restatements of the Company's
financial statements for the years ended December 31, 2001 and 2002 and the nine
months ended September 30, 2003, the Company's independent auditors determined
that a material weakness related to the Company's internal controls and
procedures exists. The Company's auditors reported to the Company that the
errors that resulted in the restatements reflected in the 2003 Form 10-K, which
generally related to the recording of accruals, were the result of not having
appropriate controls over the estimation process associated with the
establishment of accruals and reserves and the lack of adequate supervision of
accounting personnel. While the Company is taking immediate steps to correct
these items, there can be no assurance that the Company will be able to do so in
a timely manner, which could adversely impact the accuracy and timeliness of
future reports and filings made by the Company pursuant to the Securities
Exchange Act of 1934. In addition, for its 2004 audit, the Company must comply
with Section 404(a) of the Sarbanes-Oxley Act, which requires annual management
assessments of the effectiveness of the Company's internal controls over
financial reporting and a report by the Company's independent certified public
accountants addressing those assessments. In light of the material weakness
identified in connection with the Company's 2003 audit, there can be no
assurance that the Company will be able to comply with Section 404(a) of the
Sarbanes-Oxley Act. While the Company is implementing steps to ensure compliance
with Section 404(a) of the Sarbanes-Oxley Act, failure to achieve such
compliance could have a material adverse effect on the Company's business.

NASDAQ LISTING

On April 1, 2004, the Company received a noncompliance notification from
The Nasdaq Stock Market ("Nasdaq") due to the delay in filing the 2003 Form
10-K. On April 29, 2004, the Company had a hearing on the

20

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

matter before a Nasdaq Listing Qualifications Panel (the "Panel"). The Panel has
not yet issued its decision, but is expected to do so shortly. In addition, the
Company did not timely file its Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 (this Form 10-Q), and on May 18, 2004, the Company received
a noncompliance notification from Nasdaq due to the delay in filing this Form
10-Q. Although the Company believes that it will meet all Nasdaq listing
standards upon the filing of this Form 10-Q and that the Nasdaq delisting
process will thereupon be vacated, there can be no assurance that the delisting
process will be vacated and that the Company's common stock will continue to
trade on the Nasdaq National Market. If the Company's common stock is delisted
from the Nasdaq National Market, it could have an adverse impact on the market
for the Company's common stock.

DEBT

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

Under the $175 million Credit Agreement, the Company has certain reporting
requirements for the submission of its financial statements to the Lenders, as
defined in the Credit Agreement. On April 30, 2004, the Company was granted an
extension of the May 15, 2004, submission deadline for its results for the
period ended March 31, 2004. The Company has until the extended deadline of May
28, 2004, to submit its first quarter 2004 financial statements to the Lenders.
In the event the Company cannot meet the extended deadline, it must request an
additional extension from the Lenders. There is no guarantee that the Lenders
will grant this request or that the Company will not be required to compensate
the Lenders in order to receive an additional extension.

LLOYD'S RECEIVABLE

On May 10, 2004, the Company reached a $20 million settlement with Lloyd's.
The settlement entails a $20 million cash payment that is payable by Lloyd's 60
days from the settlement date or by July 9, 2004. Lloyd's also agreed to assume
responsibility for the two remaining pending claims under the original errors
and omissions ("E&O") policies. In the event the settlement agreement falls
through and the litigation against Lloyd's proceeds, certain claims presently
pending against the Company would not be covered by insurance (refer to "Note
8 -- Legal Matters" in the Company's Notes to Consolidated Financial Statements
for more information). As of March 31, 2004, the Company had incurred
approximately $18.3 million of costs related to claims under Lloyd's that are
classified as Lloyd's receivable in the Company's Consolidated Balance Sheet. As
of March 31, 2004, approximately $13.5 million of these costs had been paid by
the Company. As of March 31, 2004, there are only two active remaining cases
that are covered under the Lloyd's E&O policies. In the event the settlement
agreement falls through and the litigation against Lloyd's proceeds, and if the
Company is then unsuccessful in such litigation, the Company would be required
to record a write-off of the then-current receivable related to Lloyd's. The
write-off would have a minimal cash flow impact as the majority of the claims
have been paid as incurred; however, any remaining claims which have not been
resolved would be uninsured.

OTHER LITIGATION

The Company is involved in litigation arising in the ordinary course of its
business, which may expose it to loss contingencies. These matters include, but
are not limited to, claims brought by former customers with respect to the
operation of our business. The Company has also received written demands from
customers and former customers that have not yet resulted in legal action.

The Company may not be able successfully to resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in

21

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

which the Company may become involved, its insurance coverage, errors and
omissions coverage or otherwise, may not fully cover any damages assessed
against the Company. Although the Company maintains all insurance coverage in
amounts that it believes is sufficient for its business, such coverage may prove
to be inadequate or may become unavailable on acceptable terms, if at all. A
successful claim brought against the Company, which is uninsured or
under-insured, could materially harm its business, results of operations or
financial condition.

COMPETITION WITH PHYSICIAN BUSINESS MANAGEMENT OUTSOURCING SERVICES COMPANIES
AND IN-HOUSE PROVIDERS

The physician business management outsourcing business, especially for
revenue cycle management, is highly competitive. The Company competes with
regional and local physician reimbursement organizations as well as physician
groups that provide their own business management services in house. Successful
competition within this industry is dependent on numerous industry and market
conditions.

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

COMPETITION WITH HOSPITAL REVENUE CYCLE MANAGEMENT VENDORS AND RESOURCE
MANAGEMENT VENDORS

The business of providing services and solutions to hospitals for both
revenue cycle and resource management is also highly competitive. The Company
competes with traditional electronic data interface companies, outsourcing
companies and specialized software vendors with national, regional and local
bases. Some competitors have longer operating histories and greater financial,
technical and marketing resources than that of the Company. The Company's
successful competition within this industry is dependent on numerous industry
and market conditions.

CHANGES IN THE HEALTHCARE INDUSTRY

The markets for the Company's services and solutions are characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The Company's ability to keep pace with changes in the
healthcare industry may be dependent on a variety of factors, including its
ability to enhance existing products and services; introduce new products and
services quickly and cost effectively; achieve market acceptance for new
products and services; and respond to emerging industry standards and other
technological changes.

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

CONSOLIDATION IN THE MARKETPLACE

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

22

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Consolidation of management and billing services through integrated
delivery systems may result in a decrease in demand for the Company's business
management outsourcing services for particular physician practices.

GOVERNMENT REGULATIONS

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

Medical billing and collection activities are governed by numerous federal
and state civil and criminal laws. Federal and state regulators use these laws
to investigate healthcare providers and companies that provide billing and
collection services. In connection with these laws, the Company may be subjected
to federal or state government investigations and possible penalties may be
imposed upon the Company, false claims actions may have to be defended, private
payers may file claims against the Company, and the Company may be excluded from
Medicare, Medicaid or other government-funded healthcare programs.

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

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

The Company relies upon third parties to provide data elements to process
electronic medical claims in a HIPAA-compliant format. While the Company
believes it will be fully and properly prepared to process electronic medical
claims in a HIPAA-compliant format, there can be no assurance that third
parties, including healthcare providers and payers, will likewise be prepared to
supply all the data elements required to process electronic medical claims and
make electronic remittance under HIPAA's standards. If payers reject electronic
medical claims and such claims are processed manually rather than
electronically, there could be a material adverse affect on the Company's
business. The Company has made and expects to continue to make investments in
product enhancements to support customer operations that are regulated by HIPAA.
Responding to HIPAA's impact may require the Company to make investments in new
products or charge higher prices.

Numerous federal and state civil and criminal laws govern the collection,
use, storage and disclosure of health information for the purpose of
safeguarding the privacy and security of such information. Federal or state
governments may impose penalties for noncompliance, both criminal and civil.
Persons who believe their health information has been misused or disclosed
improperly may bring claims and payers who believe instances of noncompliance
with privacy and security standards have occurred may bring administrative
sanctions or remedial actions against offending parties.

23

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

Passage of HIPAA is part of a wider healthcare reform initiative. The
Company expects that the debate on healthcare reform will continue. The Company
also expects that the federal government as well as state governments will pass
laws and issue regulations addressing healthcare issues and reimbursement of
healthcare providers. The Company cannot predict whether the government will
enact new legislation and regulations, and, if enacted, whether such new
developments will affect its business.

STOCK PRICE VOLATILITY

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE SENSITIVITY

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

The Company has the option of entering into loans based on LIBOR or base
rates under the Term Loan B and the Revolving Credit Facility. As such, the
Company could experience fluctuations in the interest rates under the Term Loan
B, and, if the Company were to borrow amounts under the Revolving Credit
Facility, the Company could experience fluctuations in interest rates under the
Revolving Credit Facility. The Company had borrowings totaling $118.8 million
under the Term Loan B at March 31, 2004, and has not incurred any borrowings
under the Revolving Credit Facility.

The Company has a process in place to monitor fluctuations in interest
rates and could hedge against significant forecast changes in interest rates, if
necessary.

EXCHANGE RATE SENSITIVITY

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

ITEM 4. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of March 31, 2004,
and have concluded that these disclosure controls and procedures operate
effectively to support the certifications required of such officers in this
report.

As a result of errors that led to the restatements of the Company's
financial statements for the years ended December 31, 2001 and 2002 and the nine
months ended September 30, 2003, the Company's independent auditors determined
that a material weakness related to the Company's internal controls and
procedures exists. The Company's auditors reported to the Company that the
errors that resulted in the restatements reflected in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the
Securities

24

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

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

and Exchange Commission on May 13, 2004, which generally related to the
recording of accruals, were the result of not having appropriate controls over
the estimation process associated with the establishment of accruals and
reserves and the lack of adequate supervision of accounting personnel. The
Company is taking immediate steps to correct these items, and the Company has
performed work in connection with the preparation of its 2004 interim financial
statements to ensure, to the extent possible, that the information disclosed in
this quarterly report on Form 10-Q is correct. Based in part on this work, the
Company's Chief Executive Officer and the Company's Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information the Company is required to disclose in reports that the
Company files under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported accurately.

The Company expects that, in connection with the efforts to comply in 2004
with Section 404(a) of the Sarbanes-Oxley Act, it will implement changes in
internal controls and procedures and that these changes will be made on an
ongoing basis.

No significant changes were made in the Company's internal controls during
the first quarter of 2004.

A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, are detected. Further, the design of any control system is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Because of these inherent
limitations in a cost-effective system, misstatements due to error or fraud may
occur and not be detected. The Company's management, including the Chief
Executive Officer and the Chief Financial Officer, does not expect that the
Company's disclosure controls and procedures or internal controls over financial
reporting will necessarily prevent all errors and all fraud.

25

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is included in "Note 8 -- Legal
Matters" of Notes to Consolidated Financial Statements in Item 1 of Part I.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

26

(B) Reports on Form 8-K

The Company filed or furnished the following reports on Form 8-K during the
quarter ended March 31, 2004:

27

SIGNATURES

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

PER-SE TECHNOLOGIES, INC.
(Registrant)

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

By: /s/ CARYN D. LESHYNSKI
------------------------------------
Caryn D. Leshynski
Vice President and Treasurer
(Acting Principal Accounting
Officer)

Date: May 27, 2004

28

INDEX TO EXHIBITS