PER SE TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 Identification No.)
Incorporation or Organization)

1145 SANCTUARY PARKWAY, SUITE 200 30004
ALPHARETTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(770) 237-4300

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)

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

Indicate by check mark 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. [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 [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 7, 2005, was approximately $488,217,191 calculated
using the closing price on such date of $16.06. The number of shares outstanding
of the Registrant's common stock (the "Common Stock") as of March 7, 2005, was
30,399,576.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 18, 2005, are incorporated herein by reference in Part III.
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PER-SE TECHNOLOGIES, INC.

FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

INTRODUCTION

Per-Se Technologies, Inc. ("Per-Se" or the "Company"), a corporation
organized in 1985 under the laws of the State of Delaware, is focused on
providing solutions that improve the administrative functions of the healthcare
industry. Specifically, Per-Se provides Connective Healthcare solutions that
help physicians and hospitals achieve their income potential. Connective
Healthcare solutions support and unite healthcare providers, payers and patients
with innovative technology processes that improve and accelerate reimbursement
and reduce the administrative cost of care. The Company serves the healthcare
industry through two divisions: Physician Services and Hospital Services. Refer
to Note 19 of Notes to Consolidated Financial Statements included in Item 8.
Financial Statements and Supplementary Data for financial information regarding
the Company's Physician Services and Hospital Services divisions.

The Physician Services division provides Connective Healthcare solutions
that manage the revenue cycle for physician groups. The division provides a
complete outsourcing service, therefore, allowing physician groups to avoid the
infrastructure investment in their own in-house billing office. The division is
the largest 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.
Services include clinical data collection, data input, medical coding, billing,
contract management, cash collections, accounts receivable management and
extensive reporting of metrics related to the physician practice. These services
help physician groups to be financially successful by improving cash flows and
reducing administrative costs and burdens. Fees for these services are primarily
based on a percentage of net collections on the clients' accounts receivable.
The division recognizes revenue and bills customers when the customers receive
payment on those accounts receivable, which aligns the division's interests with
the interests of the physician groups it services. The division's offerings have
historically focused on the back-end processes required to ensure that
physicians are properly reimbursed for care delivery. The division also offers a
physician practice management ("PPM") solution that is delivered via an
application service provider ("ASP") model and collects a monthly usage fee from
the physician practices using the system. The division's revenue model is 100%
recurring in nature due to the transaction-based nature of its fee revenue in
the outsourced services business and the monthly usage fee in the PPM business.

The Hospital Services division provides Connective Healthcare solutions
that focus on revenue cycle and resource management to improve the financial
health of hospitals. The division has one of the largest electronic
clearinghouses in the medical industry, which provides an important
infrastructure to support its revenue cycle management offerings. The
clearinghouse delivers dedicated electronic and Internet-based
business-to-business solutions that focus on electronic processing of medical
transactions as well as complementary transactions, such as electronic
remittance advices, realtime eligibility verification and high-speed print and
mail services. Other revenue cycle management solutions provide insight into a
hospital's revenue cycle inefficiencies, such as denial management. Denial
management allows hospitals to identify charges denied reimbursement by a payer
and to take corrective actions such as resubmitting for reimbursement. Hospitals
may opt to outsource portions of their revenue cycle management process to the
Company, such as secondary insurance billing. The division also provides
resource management solutions that enable hospitals to efficiently manage
resources to reduce costs and improve their bottom line. The division's staff
scheduling software efficiently plans nurse schedules, accommodating individual
preferences as well as environmental factors, such as acuity levels, and can
schedule all the personnel across the hospital enterprise. The division's
patient scheduling software helps effectively manage a hospital's most expensive
and profitable area, the operating room, as well as schedules patients across
the enterprise. The division primarily recognizes revenue on a per-transaction
basis for its revenue cycle management solutions and primarily recognizes
revenue on a percentage-of-completion basis or upon software shipment for sales
of its resource management software solutions. Approximately 88% of the
division's revenue is recurring

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due to its transaction-based business and the maintenance revenue from its
substantial installed base for the resource management software.

The Company markets its products and services to constituents of the
healthcare industry, primarily to hospital-affiliated physician practices,
physician groups in academic settings, hospitals and integrated delivery
networks ("IDN's").

As stated previously, the Company focuses on the administrative functions
of the healthcare market, with the majority of its business based in the United
States. Healthcare spending in the United States reached an estimated $1.7
trillion or 15.3% of gross domestic product in 2003. It has been estimated that
as much as 31% of annual healthcare spending is for administrative functions.
The Company's solutions help make the reimbursement of healthcare more efficient
and help improve the overall patient care experience by simplifying the revenue
cycle process for physicians and hospitals. The Company's services and solutions
are not capital-intensive for providers, making them a cost-effective solution
as providers focus on their financial health.

During 2003 and 2004, the Company took steps to strengthen its strategic
focus and financial position. Two non-core software product lines for hospitals
were divested -- a clinical information system was divested in July 2003, and a
patient financial management system was divested in January 2004. Both product
lines were enterprise-wide software solutions that required a hospital or IDN to
invest significant capital and time to implement. Both product lines generated
negative cash flow during 2003. In July 2003, the Company reorganized, aligning
its operations around its two key constituents: physicians and hospitals. The
Company incurred approximately $0.8 million in restructuring charges in 2003
related to this reorganization.

In 2003, the Company made improvements to its capital structure. The
Company permanently retired $50 million of its then-outstanding debt of $175
million. At that time the Company refinanced the remaining balance of $125
million at substantially lower interest rates. Subsequently, in June 2004, the
Company refinanced its debt and further reduced its interest rate by issuing
$125 million aggregate principal amount of 3.25% Convertible Subordinated
Debentures due 2024.

RECENT DEVELOPMENTS

As a result of allegations of improprieties made during 2003 and 2004, the
Company's independent registered public accounting firm 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 were
required due to Statement of Auditing Standards No. 99, Consideration of Fraud
in a Financial Statement Audit, ("SAS No. 99") that 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 additional procedures included the review of
certain of the Company's revenues, expenses, assets and liabilities accounts for
the years 2001 through 2003. Certain financial items were identified during the
additional procedures that warranted the Company's further review. The Company
reviewed these items and determined that it was appropriate to restate certain
prior period financial statements. The restatements affected the financial
statements for the years ended December 31, 2002, and 2001 and for the nine
months ended September 30, 2003. The net result of these restatements was an
increase in net income of approximately $2.1 million for the years 2001 and
2002, and for the nine months ended September 30, 2003.

The Company recorded costs related to the additional procedures totaling
approximately $6.3 million during 2004, and included these costs in other
expenses in the Company's Consolidated Statements of Income. In segment
reporting, these expenses are classified in the Corporate segment.

During May 2004, the Company reached a settlement with its former insurance
carrier, certain underwriters at Lloyd's of London (collectively "Lloyd's"). The
Company was in litigation with Lloyd's after its attempt in May 2002 to rescind
certain errors and omissions ("E&O") policies and directors and officers and
company reimbursement ("D&O") policies that it had issued to the Company for the
period

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December 31, 1998, to June 30, 2002. In the settlement, as amended, Lloyd's
agreed to pay the Company $16.2 million in cash by July 9, 2004. Lloyd's also
agreed to defend, settle or otherwise resolve at their expense the two remaining
pending claims under the E&O policies. In exchange, the Company provided Lloyd's
with a full release of all E&O and D&O policies. In July 2004, pursuant to the
settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and recognized a gain of approximately $1.5 million on the settlement in
the year ended December 31, 2004.

On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. As originally issued, the Debentures were convertible into
shares of the Company's Common Stock at an initial conversion rate of 56.0243
shares per $1,000 principal amount (a conversion price of approximately $17.85)
once the Company's Common Stock share price reaches 130% of the conversion
price, or a share price of approximately $23.20. In November 2004, the Company
exercised its irrevocable option to pay the principal of Debentures submitted
for conversion in cash. The Company used the proceeds from issuance of the
Debentures, together with cash on hand, to retire the $118.8 million then
outstanding under the Term Loan B as well as to repurchase, for approximately
$25 million, an aggregate of approximately 2.0 million shares of the Company's
outstanding Common Stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering.

During the fourth quarter of 2004, the Company reviewed the valuation
allowance on its deferred tax asset. The Company has historically had a full
valuation allowance against its deferred tax asset due to the uncertainty
regarding its ability to generate sufficient future taxable income prior to the
expiration of its net operating loss carryforwards ("NOLs"). Upon completion of
its review, the Company determined that it was more likely than not that a
portion of the deferred tax asset would be realized in the foreseeable future.
This determination was based upon its projection of taxable income for 2005 and
2006. As a result, the Company released approximately $28.1 million of the
allowance resulting in a non-cash income tax benefit that was recorded in the
three months ended December 31, 2004. The Company will continue to assess the
potential realization of the remaining deferred tax asset, and will adjust the
valuation reserve in future periods as appropriate.

During the latter part of 2004, the Company initiated a project to enhance
its physician claims clearinghouse functionality. The Company expects that the
improved platform will provide efficiencies and competitive advantages for its
Physician Services division. During 2005, the Company expects to incur
approximately $5 million in capital expenditures and capitalized software
development costs and approximately $2 million in expenses, including
amortization expense of approximately $1 million, related to the physician
claims clearinghouse enhancement. The total cash flow use is expected to be
approximately $6 million during 2005. The enhancement is expected to be
completed by the end of 2005.

On March 9, 2005, the Company announced that the Board has authorized the
repurchase of up to 1 million shares of its outstanding common stock. Under the
share repurchase program, the Company may repurchase shares from time to time at
management's discretion in the open market, by block purchase, in privately
negotiated transactions or as otherwise allowed by securities laws and
regulations. Any shares repurchased will be placed into treasury to be used for
general corporate purposes. The actual number and timing of shares to be
repurchased will depend on market conditions and certain SEC rules. Repurchases
may be discontinued at any time.

DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT

The following description of the Company's business by industry segment
should be read in conjunction with Note 19 of Notes to Consolidated Financial
Statements included in Item 8. Financial Statements and Supplementary Data.

3

BUSINESS MANAGEMENT OUTSOURCED SERVICES FOR PHYSICIANS

Approximately 225,000 U.S.-based hospital-affiliated physicians represent
the Company's target market for business management outsourced services. The
target market consists of large physician groups -- typically 10 or more
physicians depending upon the specialty -- and represents an estimated market
opportunity of approximately $7 billion. The Company estimates that
approximately 20% to 30% of the physicians in the target market currently
outsource their business management needs, with the remainder of physicians
performing these services in house. The Company's Physician Services division is
the largest provider of comprehensive business management outsourcing services
to the U.S. hospital-based physician market, supporting approximately 1,100
groups in 42 states. The business of providing integrated business management
outsourcing services is highly competitive. The division competes with regional
and local billing companies as well as physician groups performing these
services in house. Competition among outsourcing companies is based upon the
relationship with the client or prospective client, the efficiency and
effectiveness of converting medical services to cash while minimizing compliance
risk, the ability to provide proactive practice management services and, to the
extent that service offerings are comparable, price. The Company believes there
is a trend toward outsourcing among physician groups performing these revenue
cycle management services in house due to the complexity of reimbursement
regulations and the financial pressures physician groups face.

ASP-BASED PHYSICIAN PRACTICE MANAGEMENT SYSTEMS

Representing less than 5% of the revenue of the Physician Services
division, the Company's ASP-based PPM solution is targeted at office-based
physicians and physician groups in the United States, and is the largest PPM
solution delivered via ASP in the nation serving approximately 3,000 physicians.
Today, the solution is regionally focused, mostly in the upper Midwest. The PPM
market is highly competitive with large national competitors as well as small
regionally or locally focused competition.

REVENUE CYCLE MANAGEMENT SOLUTIONS FOR HOSPITALS

The market for hospital revenue cycle management solutions ranges from
providing technology tools that allow a hospital's central billing office
("CBO") to more effectively manage its cash flow to full or partial outsourced
solutions. Technology tools include electronic transactions, such as claims
processing, that can be delivered via the Web or through dedicated electronic
data interfaces as well as license-based solutions, such as automated cash
posting solutions, that are deployed at the CBO. The Company's Hospital Services
division has the third largest electronic clearinghouse (based on Company market
research) in the healthcare industry and processes approximately 320 million
transactions for hospitals and physicians on an annual basis. The clearinghouse
supports more than 1,400 governmental and commercial payer connections in 48
states. The Company's revenue cycle management solutions are currently in
approximately 400 hospitals in the United States. Competition in the revenue
cycle management market is based on providing solutions that enable hospitals to
improve their cash flow. Competitors include traditional electronic data
interface companies, Internet healthcare companies, outsourcing companies and
specialized software vendors.

RESOURCE MANAGEMENT SOLUTIONS FOR HOSPITALS

The market for resource management solutions for hospitals focuses on
license-based and Internet solutions to help hospitals efficiently and
effectively manage their costs. The Company's resource management business
focuses on the areas of staff and patient scheduling. The Company provides staff
and patient scheduling solutions to approximately 1,600 hospitals, primarily in
the United States. The Company's Hospital Services division has the
market-leading staff scheduling solution and a market-leading patient scheduling
solution. Competition in this market segment is based on enabling a hospital to
decrease costs by improving the utilization of its personnel and facilities. The
Company competes against national software vendors, specialized software vendors
and Internet healthcare companies.

4

RESULTS BY INDUSTRY SEGMENT

Information relating to the Company's industry segments, including revenue,
segment operating expenses, segment operating income and identifiable assets
attributable to each division for each of the fiscal years ended 2004, 2003 and
2002 and as of December 31, 2004, and 2003, is presented in Note 19 of Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.

HEALTHCARE INDUSTRY

Trends in the United States healthcare industry affect Per-Se's business.
As healthcare expenditures have become a larger percentage of the gross domestic
product, increasing focus has been placed on the administrative costs and
burdens associated with the delivery of care. As a result, payers have sought to
control costs by changing from the traditional fee-for-service reimbursement
model to managed care, fixed fee and capitation arrangements. These
reimbursement models, coupled with extensive regulatory control and government
healthcare fraud and abuse initiatives, have resulted in a significantly more
complex accounting, coding, billing and collection environment. Such industry
changes create a more positive market for solutions that reduce a healthcare
provider's administrative burdens, help ensure compliance in the complex
regulatory environment and minimize medical coding and billing errors, while
improving reimbursement and reducing costs.

Both governmental and private payers continue to restrict payments for
healthcare services, using measures such as payment bundling, medical necessity
edits and post-payment audits. These measures may decrease revenue to the
Company's provider clients and consequently decrease revenue derived by the
Company from such clients, as well as increase the cost of providing services.

The healthcare industry continues to focus on the impact that regulations
governing standards for electronic transactions, privacy and information
security issued under the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") have on operations and information technology systems. HIPAA was
designed to reduce administrative waste in healthcare and protect the privacy
and security of patients' health information. HIPAA regulations identify and
impose standards for all aspects of handling patient health information. These
regulations, which are described in more detail below under the subheading
"Regulation," may require the Company to enhance its internal systems and
software applications sold, but HIPAA may also create an increased demand for
the Company's services and solutions. While the Company has incurred and will
continue to incur costs to comply with HIPAA, management believes these
compliance costs will not have a material impact on the Company's results of
operations.

REGULATION

Per-Se's business is subject to numerous federal and state laws, programs
to combat healthcare fraud and abuse, and increasing restrictions on
reimbursement for healthcare services. Each of the major federal healthcare
payment programs (Medicare, Medicaid and TRICARE) has its own set of complex and
sometimes conflicting regulations. The Balanced Budget Act of 1997 and HIPAA
have mandated additional regulations, and many states have passed legislation
addressing billing and payment for healthcare services.

The federal government is making significant efforts to detect and
eliminate healthcare fraud and abuse, particularly through its enforcement of
the False Claims Act, the Medicare and Medicaid Patient and Program Protection
Act of 1987 and HIPAA, all of which provide the federal government with the
authority to impose both civil and criminal sanctions and penalties for
submission of false claims to governmental payers. The federal government may
impose civil monetary penalties up to $50,000 per offense as well as exclude a
provider from participation in Medicare and other governmental healthcare
programs. In addition, the False Claims Act allows a private party to bring a
"qui tam" or "whistleblower" suit alleging the filing of false or fraudulent
Medicare or Medicaid claims and potentially share in damages and civil penalties
paid to the government. The U.S. Centers for Medicare & Medicaid Services
("CMS") offers rewards for information leading to the recovery of Medicare
funds, and CMS engages private contractors to detect and investigate fraudulent
billing practices.

5

The Company's compliance program, which is modeled after the Office of
Inspector General's Compliance Program Guidance for Third-Party Medical Billing
Companies, is designed and maintained to detect and prevent regulatory
violations. The Company believes its compliance program is effective; however, a
compliance program cannot be expected to provide absolute compliance with the
law. The existence of an effective compliance program may, nevertheless,
mitigate civil and criminal sanctions for certain healthcare-related offenses.

Under HIPAA, the federal government published final rules regarding the
standards for electronic transactions as well as standards for privacy and
security of individually identifiable health information. These rules set new or
higher standards for the healthcare industry in handling healthcare transactions
and information, with penalties for noncompliance.

The HIPAA rules regarding standards for electronic transactions require
healthcare providers, healthcare clearinghouses and health plans that send or
receive healthcare transaction data electronically to use standard data formats.
The compliance deadline for standard electronic transactions was October 16,
2002, which was later extended to October 16, 2003, by filing a compliance
extension plan. In September 2003, CMS issued transitional guidance that allowed
noncompliant electronic transactions after the October 2003 compliance deadline.
The industry continues to work toward compliance. The Company has modified the
operations of its subsidiaries that are engaged in the electronic transmission
of such data substantially to comply with HIPAA's electronic transaction
standards.

The HIPAA rules regarding privacy of patient health information require
organizations that handle such information to establish safeguards regarding
access, use and disclosure, and to restrict how other entities use that
information. The privacy rules had a compliance deadline of April 14, 2003, and
the Company implemented policies and procedures and other processes (e.g.,
Company-wide privacy training) before the deadline. The Company believes that
its operations are in compliance with the privacy rule requirements. Although
the HIPAA privacy rules do not provide a private right of action for
individuals, individuals could bring a privacy action under applicable state law
for misuse or improper disclosure of their health information.

The HIPAA rules regarding the security of medical information became final
on February 20, 2003. Under these rules, health insurers, certain healthcare
providers and healthcare clearinghouses must establish procedures and mechanisms
to protect the confidentiality, integrity and availability of electronic
protected health information. These rules have a compliance deadline of April
20, 2005. Management believes that the costs of compliance with the HIPAA
security rules will not materially impact the Company's results of operations.

EMPLOYEES

The Company currently employs approximately 4,800 full-time and part-time
employees. The Company has no labor union contracts and believes relations with
its employees are satisfactory.

FORWARD-LOOKING STATEMENTS

Certain statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report,
including certain statements set forth under the captions "Recent Developments,"
"Description of Business by Industry Segment," "Healthcare Industry,"
"Regulation," "Employees," "Legal Proceedings," "Market for the Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities," "Recent Accounting Pronouncements," "Overview of Critical
Accounting Policies," "Other," "Results of Operations," "Liquidity and Capital
Resources," "Interest Rate Sensitivity," "Exchange Rate Sensitivity," "Controls
and Procedures," "Summary of Significant Accounting Policies," "Discontinued
Operations," "Long-term Debt," and "Legal Matters" 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, industry growth

6

segments, effect of industry and regulatory changes on the Company's customer
base, the state of employee relations, use of estimates for revenue recognition,
bad debt accruals in reserve for doubtful accounts receivable and other
estimates used for accounting purposes, effect of adoption of recent accounting
pronouncements, timing of arbitration, overall profitability, the availability
of capital and other similar matters. 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 under the caption "Factors That May
Affect Future Results of Operations, Financial Condition or Business" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7. The Company disclaims any responsibility to update any
forward-looking statements.

ITEM 2. PROPERTIES

The Company's principal executive office is leased and is located in
Alpharetta, Georgia. The lease for that office expires in June 2014.

PHYSICIAN SERVICES

Physician Services' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Physician Services operates 71 business offices throughout the United States.
One of the facilities is owned. All of the remaining facilities are leased with
various expiration dates through June 2011.

HOSPITAL SERVICES

Hospital Services' principal office is leased and is located in the
Company's principal executive office. In addition to its principal office,
Hospital Services operates 8 offices in the United States and one in the United
Kingdom. These facilities are leased with various expiration dates through
November 2006.

ITEM 3. LEGAL PROCEEDINGS

The information required by this Item is included in Note 12 of Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data on
page F-23.

7

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

No matters were submitted to security holders for a vote during the fourth
quarter of 2004.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information regarding the executive
officers of the Company:

Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.

Philip M. Pead has served as the Chairman, President and Chief Executive
Officer of the Company since May 2003. He was named President and Chief
Executive Officer in November 2000. He has also been a member of Per-Se's Board
of Directors since November 2000. From August 1999 to November 2000, Mr. Pead
served as Executive Vice President and Chief Operating Officer of the Company.
Mr. Pead joined the Company in April 1997 as a senior executive in the hospital
software business and formed the Company's electronic transaction processing
business segment in 1999. He served as President of the hospital software
business from May 1997 until August 1999. From May 1996 to April 1997, Mr. Pead
was employed by Dun & Bradstreet Software as a senior executive, with
responsibility for international operations.

Chris E. Perkins has served as Executive Vice President and Chief Financial
Officer of the Company since February 2001. From April 2000 to February 2001,
Mr. Perkins served as Senior Vice President of Corporate Development. Prior to
joining Per-Se in April 2000, Mr. Perkins held various executive management
positions with AGCO Corporation. He was appointed as AGCO's Chief Financial
Officer in January 1996, after serving as Vice President of Finance and
Administration for the Europe, Africa and Middle East division, and in various
roles within corporate development. In July 1998, Mr. Perkins was named Vice
President of AGCO's parts division, a $500 million global business unit, for
which he was responsible for all operations. Mr. Perkins also spent seven years
in public accounting with Arthur Andersen LLP.

Philip J. Jordan has served as President of the Hospital Services division
since August 2003. In this position, Mr. Jordan is responsible for the entire
operations of the Hospital Services division. Prior to joining Per-Se in August
2003, Mr. Jordan led Kelvick Ltd., an investment and management consulting

8

company that he founded. Previously, he was Chief Executive Officer of
SmartStream Technologies Ltd., a company specializing in "straight through
processing" solutions for the banking industry. Mr. Jordan also has held
positions at Geac Computers Ltd. overseeing its operations in Europe, Africa,
Middle East and Latin America. He also has held various leadership positions
with software and services companies that include Pilot Executive Software, TECS
Ltd., and Comshare Computers Ltd.

Paul J. Quiner has served as Senior Vice President, General Counsel and
Secretary of the Company since May 2001. Prior to joining the Company, Mr.
Quiner was a private investor from January 2000 to May 2001. He served as Senior
Vice President, Mergers & Acquisitions of Coram Healthcare Corporation from July
1998 to December 1999. Prior to serving in that position, he had six years of
experience in Coram's legal department, including service from March 1995 to
July 1998 as Senior Vice President and General Counsel. Prior to joining Coram,
Mr. Quiner was a partner in the Atlanta/New York/ Washington, D.C. law firm of
Alston & Bird LLP, where he specialized in healthcare, medical malpractice
defense, media and general corporate litigation.

Patrick J. Leonard has served as President, Specialty Services Operations
for the Physician Services division since March 2005. From April 2004 to March
2005, Mr. Leonard served as Senior Vice President, Specialty Services Operations
for the Physician Services division. In these positions, Mr. Leonard is
responsible for the entire operations of the Anesthesia, Emergency Medicine,
Pathology and Radiology specialty businesses. From June 2002 to April 2004, Mr.
Leonard served as the division's Senior Vice President, Radiology Operations,
with responsibility for the entire operations of the Radiology specialty. From
June 2000 to June 2002, Mr. Leonard was responsible for the division's Central
Radiology operation. Prior to June 2002, Mr. Leonard held various operations and
account management positions with Per-Se. Before joining Per-Se in 1994, Mr.
Leonard was employed by Rockwell International as a consultant and spent four
years in public accounting with Deloitte & Touche LLP.

David F. Mason has served as President, Academic and Multi-Specialty
Operations for the Physician Services division since March 2005. From February
2004 to March 2005, Mr. Mason served as Senior Vice President, Academic and
Multi-Specialty Operations for the Physician Services division. In these
positions, Mr. Mason is responsible for the entire operations of the Academic
and Multi-Specialty Group specialty business. From October 2000 to February
2004, Mr. Mason served as Senior Vice President, Account Management for the
Physician Services division. In this position, Mr. Mason was responsible for
client retention and cross-specialty initiatives. Prior to joining Per-Se in
October 2000, Mr. Mason served as the Chief Executive Officer and Executive
Director of Optimum Physician Services, a privately-held physician management
company. Mr. Mason also held various practice management and administration
positions with the Georgetown University Hospital and Georgia's Northside
Hospital systems.

9

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PSTI."

The prices in the table below represent the high and low sales price for
the Common Stock as reported on Nasdaq for the periods presented. Such prices
are based on inter-dealer bid and asked prices without markup, markdown or
commissions and may not represent actual transactions.

The last reported sales price of the Common Stock as reported on Nasdaq on
March 7, 2005, was $16.06 per share. As of March 7, 2005, the Company's Common
Stock was held by 3,338 stockholders of record.

Per-Se has never paid cash dividends on its Common Stock. The Credit
Agreement entered into on September 11, 2003, as amended, contains restrictions
on the Company's ability to pay dividends (see Note 10 of Notes to Consolidated
Financial Statements included in Item 8. Financial Statements and Supplementary
Data for more information).

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about Common Stock that may be issued
under all of the Company's existing compensation plans as of December 31, 2004.

- ---------------

(1) Amended and Restated Per-Se Technologies, Inc. Non-Employee Director Stock
Option Plan (the "Director Stock Option Plan"). The Director Stock Option
Plan, which was approved by the

10

Company's stockholders on May 8, 2003, provides stock options for
non-employees who serve on the Company's Board of Directors.

(2) Second Amended and Restated Per-Se Technologies, Inc. Stock Option Plan, as
amended (the "Executive Stock Option Plan"). The Executive Stock Option
Plan, which was approved by the Company's stockholders on May 4, 2000,
provides options to purchase Common Stock to employees of the Company who
are executive-level employees on the date of grant.

(3) Per-Se Technologies, Inc. Deferred Stock Unit Plan (the "Deferred Stock Unit
Plan"). The Deferred Stock Unit Plan, which was approved by the Company's
stockholders on May 2, 2002, is a deferred compensation plan under which
directors and selected key employees may elect to defer compensation in the
form of deferred stock units that are payable in shares of Common Stock at a
future date. Pursuant to its terms, shares distributed under the Deferred
Stock Unit Plan must be shares that were previously issued and reacquired by
the Company, and are not original issue shares.

(4) Per-Se Technologies, Inc. Non-Qualified Stock Option Plan for Non-Executive
Employees, as amended (the "Non-Executive Stock Option Plan"). The
Non-Executive Stock Option Plan provides options to purchase Common Stock to
employees of the Company who are not executive-level employees on the date
of grant. Options granted under the Non-Executive Stock Option Plan
generally vest over a three to five-year period, and expire 11 years after
the date of grant.

(5) Per-Se Technologies, Inc. Non-Qualified Stock Option Plan for Employees of
Acquired Companies, as amended (the "Acquired Companies Stock Option Plan").
The Acquired Companies Stock Option Plan provides options to purchase Common
Stock to employees of the Company who were immediately prior to an
acquisition employed by the business that was the subject of such
acquisition. Options granted under the Acquired Companies Stock Option Plan
generally vest over a three to five-year period, and expire 11 years after
the date of grant.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial information
for Per-Se for and as of each of the five fiscal years in the period ended
December 31, 2004.

- ---------------

(1) Reflects the release of $28.1 million of the valuation allowance against the
Company's deferred tax asset resulting in an income tax benefit that was
recorded in the fourth quarter of 2004.

(2) Reflects the results from discontinued operations of $3.3 million, $(3.9)
million, $(2.5) million, $0.2 million and $10.1 million for 2004, 2003,
2002, 2001 and 2000, respectively.

(3) Reflects expenses of $3.4 million related to a process improvement project.

(4) Reflects a $37.7 million cumulative effect of accounting change for the
change in accounting for revenue pursuant to Staff Accounting Bulletin
Number 101, Revenue Recognition in Financial Statements, and the
corresponding increase in the Company's deferred tax valuation allowance.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains forward-looking statements about events that
have not yet occurred. All statements, trend analysis and other information
contained below relating to markets, products and trends in revenue, as well as
other statements including words such as "anticipates," "believes" or "expects"
and statements in the future tense are forward-looking statements. These
forward-looking statements are subject to business and economic risks, and
actual events or the Company's actual future results could differ materially
from those set forth in the forward-looking statements due to such risks and
uncertainties. The Company disclaims any responsibility to update any
forward-looking statement. Risks and uncertainties that may affect future
results and performance include, but are not limited to, those discussed under
the heading "Factors That May Affect Future Results of Operations, Financial
Condition or Business" at pages 30 to 33 of this Annual Report on Form 10-K.

PERFORMANCE MEASUREMENTS IMPORTANT TO MANAGEMENT

The Company's management is focused on profitable revenue growth. The
Company's business model is designed such that revenue is generally recurring in
nature and cash flow generation is relatively consistent. Management follows
certain key metrics in monitoring its performance. Such key metrics include, but
are not limited to:

- net new business sold in the Physician Services division (defined by the
Company as the annualized revenue value of new contracts signed in a
period, less the annualized revenue value of terminated business in that
same period);

- net backlog in the Physician Services division (defined by the Company as
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);

- transaction volume in the Hospital Services division;

- new business sold in the Hospital Services division;

- sales pipelines and sales personnel productivity in both divisions;

- EBITDA (a non-Generally Accepted Accounting Principle ("GAAP") measure
defined as earnings before interest, taxes, depreciation and
amortization) and operating margins in both divisions;

- days in accounts receivable in both divisions;

- cash flow generated from operations; and

- free cash flow (a non-GAAP measure defined as net cash provided by
continuing operations less investments in capitalized software
development costs and capital expenditures and represents cash flow
available for activities unrelated to operations, such as debt
reduction).

The financial health of the Company is also dependent upon its capital
structure. Management tracks its debt-to-EBITDA ratio and interest expense
coverage ratio in monitoring the appropriateness of its capital structure.

RECENT ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), Share-Based Payment ("SFAS No. 123(R)"), which is a revision of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"), and amends SFAS No. 95, Statement of
Cash Flows. Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values.

13

SFAS 123(R) must be adopted no later than July 1, 2005. The Company expects
to adopt SFAS No. 123(R) on July 1, 2005. When the Company adopts SFAS No.
123(R), it may elect the modified prospective method or the modified
retrospective method. The Company has not yet determined which method it will
elect upon adoption.

The Company currently accounts for share-based payments to employees using
APB Opinion No. 25 and the intrinsic value method and, as a result, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method could have a significant impact
on the Company's results of operations, although it will have no impact on the
Company's overall cash flow or financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. Had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in Note 1 of Notes to
Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data.

In September 2004, the FASB Emerging Issues Task Force ("EITF") reached a
tentative conclusion on Issue Number 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share ("EITF No. 04-08"). The EITF
concluded that contingently convertible debt instruments should be included in
diluted earnings per share computations regardless of whether the market price
trigger has been met. The effective date is for periods ending after December
15, 2004. In November 2004, the Company exercised its irrevocable option to pay
the principal of its contingently convertible debt, its 3.25% Convertible
Subordinated Debentures due 2024, in cash and therefore, EITF No. 04-08 did not
have any effect on the Company's Consolidated Statements of Income.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Critical accounting policies are those accounting policies that management
believes are both most important to the portrayal of the Company's financial
condition and results, and/or they require management's most difficult,
subjective and/or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.

REVENUE RECOGNITION

The Company's revenue is derived from services and products delivered to
the healthcare industry through its two operating divisions:

Physician Services provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognized approximately 4%, 5% and 5% of its
revenue (or 3%, 3% and 4% of total Company revenue), on a monthly service
fee and per-transaction basis from the physician practice management
("PPM") product line, for the years ended December 31, 2004, 2003 and 2002,
respectively. An unbilled receivable is recorded when revenue is earned,
but the customer has not been invoiced due to the terms of the contract.
The Physician Services division does not rely, to any

14

material extent, on estimates in the recognition of revenue. Revenue is
recognized in accordance with Staff Accounting Bulletin ("SAB") No. 104,
Revenue Recognition ("SAB No. 104").

Hospital Services provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.

Revenue cycle management solutions primarily include services that
allow a hospital's CBO to more effectively manage its cash flow. These
services include electronic and paper transactions, such as claims
processing, which can be delivered via the Web or through dedicated
electronic data interfaces and high-speed print and mail services. Revenue
related to these transactions is billed and recognized when the services
are performed on a per-transaction basis. Contracts are typically multi-
year in length. The division also recognizes revenue related to direct and
indirect payments it receives from payers for the electronic transmission
of transactions to the payers. The division recognizes revenue on these
transactions at the time the electronic transactions are sent. Revenue is
recognized on these transactions in accordance with SAB No. 104.

Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage their resources, such
as personnel and the operating room, to reduce costs and improve their
bottom-line. The resource management software is sold as a one-time license
fee plus implementation services and an annual maintenance fee. Contracts
are typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period.

The division relies on estimates of work to be completed to determine
the amount of revenue to be recognized on each contract. Because estimates
of the extent of completion that differ from actual results could affect
revenue, the division periodically reviews the estimated hours or days to
complete major projects and compares these estimates to budgeted hours or
days to support the revenue recognized on that project. Approximately 8%,
9% and 9% of the division's revenue (or 2%, 2% and 2% of total Company
revenue) was determined using percentage-of-completion accounting for the
years ended December 31, 2004, 2003 and 2002, respectively.

When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant vendor obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. Additionally, an unbilled
receivable is recorded when revenue is earned, but the customer has not
been invoiced due to the terms of the contract. For minor add-on software
license sales where no significant customization remains outstanding, the
fee is fixed, an agreement exists and collectibility is probable, the
division recognizes revenue upon shipment. For software maintenance
payments received in advance, the division defers and recognizes as revenue
these payments ratably over the term of the maintenance agreement, which is
typically one year. Revenue recognized on the percentage-of-completion
basis is done so in accordance with AICPA Statement of Position ("SOP")
81-1, Accounting for Performance of Construction Type and Certain
Production Type Contracts. Revenue recognized upon software shipment is
done so in accordance with Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2").

For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees) revenue from multiple-element arrangements is
recognized using the residual method. Under the

15

residual method, if VSOE of the fair value of the undelivered elements
exists, the Company defers revenue recognition of the fair value of the
undelivered elements. The remaining portion of the arrangement fee is then
recognized either by using the percentage-of-completion method if
significant production, modification or customization is required or upon
delivery, assuming all other conditions for revenue recognition have been
satisfied. VSOE of fair value of maintenance services is based upon the
amount charged for maintenance when purchased separately, which is the
renewal rate. Maintenance services are typically stated separately in an
arrangement. VSOE of fair value of professional services (i.e.
implementation and consulting services not essential to the functionality
of the software) is based upon the price charged when professional services
are sold separately and is based on an hourly rate for professional
services.

AMORTIZATION AND VALUATION OF INTANGIBLES

Amortization of intangible assets includes the amortization of client
lists, developed technology and software development costs. The Company relies
on estimates of the useful lives and net realizable value, as appropriate, of
these assets on which to base its amortization. The Company bases these
estimates on historical experiences, market conditions, expected future revenues
and maintenance costs and the products or services provided. The Company
periodically evaluates whether to revise estimates of the remaining useful lives
of the intangible. Additionally the Company evaluates whether any changes would
render its intangibles impaired or indicate that an asset has a different useful
life. Conditions that may indicate an impairment include an economic downturn or
change in future operations. In the event such a condition exists, the Company
performs an assessment using a variety of methodologies, including cash flow
analysis, estimates of sales proceeds and independent appraisals. Where
applicable, the estimate uses an appropriate interest rate based on appropriate
discount rates.

Goodwill -- Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Services
division in 1995 and the Hospital Services division from 1995 to 2001, over
the fair market value of their identifiable net assets. As a result of the
Company's reorganization in July 2003, the Company transferred the
estimated fair value of the goodwill associated with the PPM assets to the
Physician Services division from the Hospital Services division. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
No. 142"), the Company no longer amortizes goodwill but reviews it annually
for impairment.

Trademarks -- Trademarks represent the value of the trademarks
acquired in the Hospital Services division from 2000 to 2001. The Company
expects the trademarks to contribute to cash flows indefinitely and
therefore deems the trademarks to have indefinite useful lives. In
accordance with SFAS No. 142, the Company no longer amortizes trademarks
but reviews them annually for impairment.

SFAS No. 142 requires companies with goodwill and indefinite lived
intangible assets to complete a periodic review and impairment test of its
goodwill and indefinite lived intangible assets. The Company performed its
periodic review of its goodwill and other indefinite lived intangible
assets for impairment as of December 31, 2004, and did not identify an
asset impairment as a result of the review. The Company's periodic review
of its goodwill and other indefinite lived intangible assets were based
upon a discounted future cash flow analysis that included revenue and cost
estimates, market growth rates and appropriate discount rates. The Company
will continue to test its goodwill and other indefinite lived intangible
assets annually for impairment as of December 31.

Client Lists -- Client lists represent the value of clients acquired
in the Physician Services division from 1992 to 1996 and the Hospital
Services division from 1995 to 2004. The Company amortizes client lists
using the straight-line method over their estimated useful lives, which
range from five to ten years.

Developed Technology -- Developed technology represents the value of
the systems acquired in the Hospital Services division from 2000 to 2001.
The Company amortizes these intangible assets using the straight-line
method over their estimated useful lives of five years.

16

Software Development Costs -- Software development includes costs
incurred in the development or the enhancement of software in the Physician
Services and Hospital Services divisions for resale or internal use.

Software development costs related to external use software are
capitalized upon the establishment of technological feasibility for each
product and capitalization ceases when the product or process is available
for general release to customers. Technological feasibility is established
when all planning, designing, coding and testing activities required to
meet a product's design specifications are complete. The Company amortizes
external use software development costs over the greater of the ratio that
current revenues bear to total and anticipated future revenues for the
applicable product or straight-line method over the estimated economic
lives of the assets, which are generally three to five years. The Company
monitors the net realizable value of all capitalized external use software
development costs to ensure that it can recover the investment through
margins from future sales.

Software development costs related to internal use software are
capitalized after the preliminary project stage is complete, when
management with the relevant authority authorizes and commits to the
funding of the software project, when it is probable that the project will
be completed, and the software will be used to perform the function
intended. Capitalization ceases no later than the point at which the
project is substantially complete and ready for its intended use. The
Company expenses software development costs related to internal use
software as incurred during the planning and post-implementation phases of
development. Internal-use software is amortized on a straight-line basis
over its estimated useful life, generally five years.

GUARANTEES

In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45 requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken by issuing the guarantee. FIN No. 45 also
requires additional disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. FIN No. 45 does not have a material effect on the Company's
consolidated financial statements for the year ended December 31, 2004. Certain
of the Company's sales agreements contain infringement indemnity provisions that
are covered by FIN No. 45. Under these sales agreements, the Company agrees to
defend and indemnify a customer in connection with infringement claims made by
third parties with respect to the customer's authorized use of the Company's
products and services. The indemnity obligations contained in sales agreements
generally have no specified expiration date and generally limit the award to the
amount of fees paid. The Company has not previously incurred costs to settle
claims or pay awards under these indemnification obligations. Also, the Company
maintains membership in a group captive insurance company for its workers
compensation insurance. The member companies agree to jointly insure the group's
liability risks up to a certain threshold. As a member, the Company guarantees
to pay an assessment, if an assessment becomes due, as a result of insured
losses by its members. This guarantee will never exceed a percentage of the
Company's loss funds (an amount that is based on the Company's insured five-year
loss history). Based on the Company's historical experience, the Company does
not anticipate such an assessment, however, the Company has issued letters of
credit to the group captive insurance company. At December 31, 2004 and 2003,
the Company had outstanding letters of credit to the group captive insurance
company amounting to approximately $1.5 million and $0.9 million, respectively.
As a result, the Company's estimated fair value of the infringement indemnity
provision obligations and the captive insurance guarantee is nominal.

LLOYD'S RECEIVABLE

On May 10, 2004, the Company reached a settlement with its former insurance
carrier, certain underwriters at Lloyd's of London (collectively "Lloyd's"). The
Company was in litigation with Lloyd's after its attempt in May 2002 to rescind
certain errors and omissions ("E&O") policies and directors and officers and
company reimbursement ("D&O") policies that it had issued to the Company from
the period

17

December 31, 1998, to June 30, 2002. On July 7, 2004, pursuant to the
settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and recognized a gain of approximately $1.5 million on the settlement in
the year ended December 31, 2004.

OTHER

Additionally, the Company does not have:

-- Material exposure to foreign exchange fluctuations

-- Any derivative financial instruments

-- Any material off-balance sheet arrangements other than its operating
leases disclosed in Notes 10 and 11 of Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data and certain vendor
financing arrangements in the ordinary course of business or

-- Any material related party transactions

GENERAL OVERVIEW

Management believes the key elements for assessing the Company's
performance are the ability to generate stable and improving operating profit
margins on existing business, and to generate similar or better operating profit
margins on new business. An additional element is the ability to generate
positive cash flow from continuing operations. In assessing the Company's
performance, adjustments are made for items the Company considers to be
atypical, such as those noted below, to help ensure the analysis is performed on
a consistent, comparable basis from period to period.

The Company's business is focused on the U.S. healthcare industry,
specifically on the administrative functions of healthcare providers. The
healthcare industry is generally not impacted by wider trends in the U.S.
economy. The Company's revenue may be impacted by payer reimbursement rates for
physicians, but typically the mix of rate increases or decreases for the
different physician specialties the Company supports results in a typically
nominal impact on Physician Services division as well as consolidated results,
as was the case during 2004. The Hospital Services division may be impacted by
the overall hospital-spending environment, but as revenue for the division's
services and products are generated by either transaction-based fees or
supported by the maintenance fees from its substantial installed base, versus
software license and implementation fees, division or consolidated results are
not typically materially impacted. During 2004, the healthcare industry
continued to work towards compliance with the HIPAA standards for electronic
transactions. The Company incurred expenses during 2003 and 2004 as it worked
towards compliance but these expenses did not materially impact operating
income. The Hospital Services division did experience a reduction in the sales
of certain revenue cycle management products as hospitals worked towards
compliance and delayed purchases. However, sales of the remainder of the
division's products compensated for this slow down, resulting in revenue growth
and operating margins that were in line with management's expectations.

Consolidated revenue for the year ended December 31, 2004, increased as
compared to the same period of 2003, but consolidated operating expenses
increased at a higher rate, resulting in a decline in consolidated operating
margin from 10.9% in 2003 to 8.2% in 2004. However, there were several atypical
items that contributed to the increased operating expenses in 2004. In
particular, the Company incurred expenses of approximately $6.3 million in 2004
related to the additional procedures as part of the year-end 2003 audit. The
Company also incurred approximately $1.9 million of expenses related to the
initiative to comply with the requirements of Section 404(a) of the
Sarbanes-Oxley Act, which were not in the 2003 results, as well as approximately
$1.0 million in expenses associated with the relocation of the Company's
corporate office in July 2004. All three of these items were classified in the
Corporate segment. Consolidated operating margins were also negatively impacted
by the deferral and delay of revenue in the Physician Services division.
Specifically, the division deferred approximately $0.8 million in revenue
related to a large contract for which the division has performance targets as
well as the delay of approximately

18

$1.5 million in revenue related to a technical problem in transmitting
electronic claims to payers. The $0.8 million in revenue was deferred in 2004,
and all expenses related to the contract were recorded during 2004. The $1.5
million in revenue was delayed during the fourth quarter, and is expected to be
recognized during the first quarter of 2005. All expenses related to generating
the claims were recorded in the fourth quarter. Partially offsetting these
negative items was a gain of $1.5 million that the Company recognized in the
third quarter of 2004 in conjunction with a settlement with its former insurance
underwriters, Lloyd's of London, which was recorded in the Corporate segment.

The Company has improved its capital structure over the past two years,
evidenced by decreased interest expense. Interest expense decreased
approximately $3.4 million, or 19%, from 2002 to 2003 due to a debt refinancing
undertaken in September 2003, which lowered the Company's interest rate from a
fixed 9.50% to a LIBOR plus 4.25% rate (approximately 5.39% at the time of the
refinancing). Interest expense for 2004 decreased approximately $7.8 million, or
53%, compared to 2003, also due to a reduction in the Company's effective
interest rate. This reduction resulted from the debt refinancing undertaken in
September 2003 combined with another refinancing in June 2004, which further
lowered the Company's interest rate to a fixed 3.25%. The Company incurred
expenses of approximately $6.3 million related to the September 2003 refinancing
and approximately $5.9 million related to the June 2004 refinancing. The Company
believes these refinancings, which improved its borrowing rate, earnings and
cash flow generation, were important steps in effectively managing its capital
structure.

In addition, the business continues to generate positive cash flow from
continuing operations, with an increase of approximately 72% in 2004 as compared
to 2003. This increase included the atypical cash flow items of $16.2 million
cash received on the Lloyd's of London settlement and the $6.3 million cash
spent on the additional procedures. Cash flow from continuing operations was
$28.5 million for the year ended December 31, 2003, which was an increase of 23%
over the Company's performance in 2002.

RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying notes.

YEARS ENDED DECEMBER 31, 2004 AND 2003

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

Revenue for the Physician Services division increased approximately 4% in
2004 compared to 2003. The revenue increase is due to the implementation of net
new business sold during the first six months of 2004 as well as 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. Pricing for the division's services during 2004 was consistent
with the prior year.

For the year ended December 31, 2004, the Company deferred approximately
$0.8 million in revenue related to a large contract signed in 2004. The revenue
deferral was required because the interim measurement periods specified in the
contract do not coincide with the Company's quarterly reporting periods. As a
result, a portion of the fees the Company received under this contract were
subject to an interim performance target for a fiscal quarter ending after
December 31, 2004, and consequently, were not considered fixed and determinable
for revenue recognition purposes at the end of the year. All expenses

19

incurred by the Company related to the contract for the year ended December 31,
2004, were recorded during the year.

During December 2004, the Company experienced a technical problem in its
physician claims clearinghouse that resulted in a delay in transmitting
electronic claims to payers for its Physician Services division. The technical
problem has been resolved. However, the delay in transmitting claims adversely
impacted the timing of reimbursement from payers, and reduced revenue recognized
by the Physician Services division during the quarter ended December 31, 2004,
by approximately $1.5 million. The Company expects to recognize this revenue
during the first quarter of 2005.

The division had a positive net backlog of approximately $5 million as of
December 31, 2004, compared to a negative net backlog of approximately $2
million at December 31, 2003. 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 9% in
2004 compared to 2003. Pricing for the division's products and services in 2004
was consistent with the prior year. Revenue growth in the division was
positively impacted by an increase in resource management revenue of
approximately 8%, which was equally attributable to the implementation of new
business sold as well as previously unbilled maintenance for certain resource
management software customers for which revenue was recognized upon receipt of
payment. Revenue growth was also positively impacted by an increase in revenue
cycle management revenue of approximately 9%. This growth is evidenced by the
medical transaction volume increase of approximately 14% for the period over
2003. The increase in revenue for revenue cycle management services and the
medical transaction volume increase primarily resulted from new business sold
during the second quarter of 2004. Transaction volume growth and revenue growth
can differ due to the mix of services and 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 as
Eliminations to reconcile to total consolidated revenue.

Segment Operating Income. Segment operating income is revenue less cost of
services, selling, general and administrative expenses and other expenses.
Segment operating income, classified by the Company's divisions, is as follows:

Physicians Services' segment operating income decreased 6% in 2004 over
2003, resulting in an operating margin of approximately 10.6% versus
approximately 11.7% in the prior year. Margins for the current year period were
negatively impacted by costs associated with the implementation of approximately
$16 million of net new business sold during the first nine months of 2004,
compared to net new business sold of $5 million in the first nine months of
2003. Because the division recognizes revenue on a percentage of cash
collections, costs are typically incurred in the first three months of
implementing a contract before revenue is recognized. The operating margin for
the current year was negatively impacted by the deferral of approximately $0.8
million of revenue, as well as the delay of approximately $1.5 million of
revenue, as previously mentioned, as all related expenses were recorded during
2004.

Hospital Services' segment operating income increased approximately 3% in
2004 over 2003, and operating margins were approximately 22.0% versus
approximately 23.2% in the prior year. The operating margin decline can be
attributed to a large print and mail customer contract, signed in the second
quarter

20

of 2004, which was profitable for 2004 but below the normal profitability level
for print and mail contracts, which negatively impacted margins by approximately
1.4% in 2004. As part of the transaction in signing the customer, the Company
acquired substantially all of the production assets and personnel of the
customer's hospital and physician patient statement and paper claims print and
mail business. The division will consolidate this operation into its existing
print and mail facility located in Lawrenceville, Georgia during the first half
of 2005, which is expected to improve margins for this contract. The operating
margin decline was partially offset by unbilled maintenance revenue for certain
resource management software customers that was recognized upon receipt of
payment, which positively impacted margins by 1.2% in 2004.

The Company's corporate overhead expenses, which include certain executive
and administrative functions, increased approximately $6.5 million, or
approximately 42% in 2004 over 2003. Corporate overhead expenses included
approximately $6.3 million of expenses related to the additional procedures
performed in 2004, approximately $1.9 million of professional services expense
related to the Company's initiative to comply with the requirements of Section
404(a) of the Sarbanes-Oxley Act, a gain of approximately $1.5 million on the
settlement with Lloyd's of London, a decrease in insurance expense of
approximately $1.4 million, and an expense of approximately $1.0 million related
to the relocation of the Company's principal executive office (refer to Note 2
of Notes to Financial Statements in Item 8. Financial Statements and
Supplementary Data on pages F-14 to F-15 for more information).

Interest. Interest expense was approximately $6.8 million for the twelve
months ended December 31, 2004, as compared to approximately $14.6 million for
the same period in 2003.

In 2003, the Company permanently retired $50 million of its
then-outstanding debt of $175 million. The Company refinanced the remaining
balance of $125 million at substantially lower interest rates. Subsequently, in
June 2004, the Company refinanced its debt and further reduced its interest rate
by issuing $125 million aggregate principal amount of 3.25% Convertible
Subordinated Debentures due 2024. These actions resulted in the reduction of
interest expense of approximately $7.8 million in 2004 as compared to 2003
(refer to Note 10 of Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data on pages F-20 to F-22 for more information).

Loss on Extinguishment of Debt. During the year ended December 31, 2004,
in connection with the retirement of the Company's then-outstanding $118.8
million under the Term Loan B, the Company wrote off approximately $3.5 million
of deferred debt issuance costs associated with the Term Loan B. Additionally,
the Company incurred a prepayment penalty of approximately $2.4 million due to
the early retirement of the Term Loan B.

During the year ended December 31, 2003, the Company incurred a write-off
of approximately $1.6 million of deferred debt issuance costs associated with
the original issuance of the Notes related to their retirement. In addition, the
Company incurred expenses associated with the retirement of the Notes of
approximately $4.7 million.

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 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 costs related to the additional procedures totaling
approximately $6.3 million during the twelve months ended December 31, 2004, and
included these costs in other expenses in the Company's Consolidated Statements
of Income. In segment reporting, these costs are classified in the Corporate
segment.

On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the

21

settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and recognized a gain of approximately $1.5 million on the settlement in
the twelve months ended December 31, 2004. The gain has been reflected in the
Company's Corporate segment. In the Consolidated Statement of Income, the gain
is included in other expenses.

On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable, operating lease
for that office space in February 2004 which will expire in June 2014. While the
new landlord assumed the payments for the lease of the Company's former
corporate office, the Company recorded an expense of approximately $1.0 million
upon its exit of the former office facility. The expense has been reflected in
the Company's Corporate segment. In the Consolidated Statement of Income, the
expense is included in other expenses.

During the year ended December 31, 2003, the Hospital Services and
Corporate divisions incurred approximately $0.5 million and $0.3 million,
respectively, of restructuring expenses related to the July 2003 realignment of
the Company into the Physician Services and Hospital Services divisions
following the Patient1 divestiture.

Income Taxes. Income tax (benefit) expense, which is related to federal,
state, local and foreign income taxes, was a benefit of approximately ($28.1)
million and an expense of $27,000 during the years ended December 31, 2004, and
2003, respectively. The 2003 income tax expense was offset by a benefit for a
federal income tax refund of approximately $0.8 million related to the gain on
the sale of Healthcare Recoveries, Inc. ("HRI"), resulting in a net tax expense
of $27,000.

As of December 31, 2004, and 2003, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset of $167.3
million was required as of December 31, 2003, and a partial valuation allowance
of $137.4 million was required as of December 31, 2004. Realization of the net
deferred tax asset is dependent upon the Company generating sufficient taxable
income prior to the expiration of the federal and state net operating loss
carryforwards. The Company determined during 2004 that it was more likely than
not that a portion of the deferred tax asset would be realized during the
foreseeable future; therefore, the valuation allowance was adjusted accordingly.
The Company recognized a non-cash tax benefit of approximately $28.1 million
during 2004 as a result of the valuation allowance adjustment. At December 31,
2004, the Company had federal net operating loss carryforwards ("NOLs") for
income tax purposes of approximately $393.7 million. The NOLs will expire at
various dates between 2005 and 2024 (refer to Note 16 of Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data on pages F-28
to F-29 for more information regarding NOL expiration dates and respective
amounts).

Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Patient1 clinical product line ("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 improving reimbursement and 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, subject to closing adjustments, in 2003. Net
proceeds on the sale of Patient1 were approximately $27.9 million, subject to
closing adjustments. The Company entered into binding arbitration with Misys
regarding the final closing adjustments and on May 21, 2004, the arbitrator
awarded the Company approximately $4.3 million. On June 1, 2004, the Company
received payment of approximately $4.5 million, which included interest of
approximately $0.2 million.

In September 2003, the Company initiated a process to sell its Business1
patient accounting product line ("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. On February 2, 2004, the Company announced the sale

22

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 or through December 31, 2004.

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. Summarized operating results for the
discontinued operations are as follows:

- ---------------

(1) Patient1 financial information includes activity through the sale date of
July 28, 2003.

On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment. Pursuant to APB 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, the
consolidated financial statements of the Company have been presented to reflect
the activity associated with MSC and Impact as discontinued operations for all
periods presented.

For the year ended December 31, 2002, the Company expensed $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid NCO
$0.3 million, including interest of approximately $0.1 million, on September 16,
2002, and 2004. The Company intends to pay the remaining balance of $0.2
million, plus interest at the then-current prime rate, to NCO, in the third
quarter of 2005.

The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.

During the years ended December 31, 2004, and 2003, the Company incurred
expenses of approximately $14,000 and $0.9 million, respectively, which were
primarily legal costs associated with MSC and Impact. These expenses were
recognized through (loss) income from discontinued operations in the Company's
Consolidated Statements of Income.

23

YEARS ENDED DECEMBER 31, 2003 AND 2002

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

Revenue for the Physician Services division increased approximately 2% in
2003 compared to 2002. Pricing for the division's services was stable compared
to the prior year. Revenue growth can be attributed to the implementation of net
new business sold of approximately $6 million in the first six months of 2003 as
well as net new business sold in prior periods. Net new business is defined as
the annualized revenue value of new contracts signed in a period, less the
annualized revenue value of terminated business in that same period. Due to the
timing of new sales, the division had a negative net backlog of approximately $2
million as of December 31, 2003, compared to a positive net backlog of
approximately $4 million at December 31, 2002. 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 5% in
2003 compared to 2002, despite the phasing out of a large print and mail
customer, which began in the second half of 2002. This customer's business was
not related to medical claims. Pricing for the division's services and products
was stable compared to the prior year. Revenue growth in the division is a
result of an approximately 5% increase in revenue of the division's revenue
cycle management solutions, evidenced by the approximate 15% increase in the
division's medical transaction volume for the year compared to 2002, as well as
a 5% increase in revenue of the division's resource management software
products. 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 as
Eliminations to reconcile to total consolidated revenue.

Segment Operating Income. Segment operating income is revenue less cost of
services, selling, general and administrative expenses and other expenses.
Segment operating income, classified by the Company's divisions, is as follows:

Physicians Services' segment operating income increased 14% in 2003 over
2002, resulting in an operating margin of approximately 11.7% versus
approximately 10.5% in the prior year. The margin expansion can be attributed to
incremental margins achieved on increased revenue as well as a decrease in other
operating expenses of approximately 1.7 percentage points as a percentage of
revenue. The decrease in other operating expenses can be attributed to a
company-wide initiative to limit discretionary spending and general cost control
efforts to maintain or decrease other variable costs. The operating margins were

24

negatively affected by approximately $3.4 million of costs related to the
conversion of the current ASP-based physician practice management solution
clients onto a new, web-based platform.

Hospital Services' segment operating income increased approximately 20% in
2003 over 2002, resulting in operating margins of approximately 23.2% versus
approximately 20.3% in the prior year. The operating margin improvement can be
attributed to the previously mentioned increase in revenue as well as lower
operating expenses due to a company-wide initiative to limit discretionary
spending and general cost control efforts to maintain or decrease other variable
costs. Other operating expenses decreased 1.9 percentage points as a percentage
of revenue.

The Company's corporate overhead expenses, which include certain executive
and administrative functions, increased approximately 4% in 2003 over 2002.
Corporate overhead expenses include approximately $0.3 million of restructuring
expenses in 2003 related to the July 2003 realignment of the Company into the
Physician Services and Hospital Services divisions following the Patient1
divestiture. Corporate overhead expenses included approximately $2.8 million and
$3.0 million in 2003 and 2002, respectively, of increased insurance premiums and
litigation expenses related to the Company's former underwriters, Lloyd's of
London's, attempt to rescind certain insurance policies (refer to Note 12 of
Notes to Financial Statements in Item 8. Financial Statements and Supplementary
Data on page F-23 for more information).

Interest. Interest expense was approximately $14.6 million for the twelve
months ended December 31, 2003, as compared to approximately $18.1 million for
the same period in 2002. During 2003, the Company retired its $175 million
9 1/2% Senior Notes due 2005 (the "Notes") by permanently retiring $50 million
of the Notes and refinancing the remaining $125 million (see Liquidity and
Capital Resources Section). This refinancing resulted in a reduction of
approximately $3.6 million of interest expense due to lower debt levels and a
substantially lower interest rate on the new debt (9.5% versus LIBOR + 4.25% or
5.41% as of December 31, 2003). Interest income decreased to $0.3 million in
2003 from $0.5 million in 2002, due to a decrease in investment rates and lower
cash-on-hand balances.

Loss on Extinguishment of Debt. During the year ended December 31, 2003,
the Company incurred a write-off of approximately $1.6 million of deferred debt
issuance costs associated with the original issuance of the Notes related to
their retirement. In addition, the Company incurred expenses associated with the
retirement of the Notes of approximately $4.7 million.

Restructuring and Other Expenses. During the year ended December 31, 2003,
the Hospital Services and Corporate divisions incurred approximately $0.5
million and $0.3 million, respectively, of restructuring expenses related to the
July 2003 realignment of the Company into the Physician Services and Hospital
Services divisions following the Patient1 divestiture.

Income Taxes. Income tax expense, which is related to state, local and
foreign income taxes, was approximately $0.8 million in the years ended December
31, 2003, and 2002. The 2003 income tax expense was offset by a benefit for a
federal income tax refund of approximately $0.8 million related to the gain on
the sale of Healthcare Recoveries, Inc. ("HRI"), resulting in a net tax expense
of $27,000. A tax law revision identified by the Company permitted the Company
to file for an automatic refund.

As of December 31, 2003, and 2002, the Company reassessed the
recoverability of its deferred tax asset. Based on its analysis, the Company
determined a full valuation allowance against the deferred tax asset of $167.3
million and $212.3 million was required as of December 31, 2003, and December
31, 2002, respectively. 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.

Discontinued Operations. In June 2003, the Company announced that it
agreed to sell its Patient1 clinical product line ("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 improving reimbursement and 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, subject to closing adjustments, in 2003. Net
proceeds on

25

the sale of Patient1 were approximately $27.9 million, subject to closing
adjustments. The Company entered into binding arbitration with Misys regarding
the final closing adjustments, and on May 21, 2004, the arbitrator awarded the
Company approximately $4.3 million. On June 1, 2004, the Company received
payment of approximately $4.5 million, which included interest of approximately
$0.2 million, in 2004.

In September 2003, the Company initiated a process to sell its Business1
patient accounting product line ("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, the Company wrote down the net
assets of Business1 to fair market value less costs to sell and incurred an $8.5
million expense. On February 2, 2004, the Company announced 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. Summarized operating results for the
discontinued operations are as follows:

- ---------------

(1) Patient1 financial information includes activity through the sale date of
July 28, 2003.

Revenue for the Patient1 product line decreased approximately 41% in 2003
compared 2002. The Company recognized revenue using the percentage-of-completion
method of accounting. The 2003 decrease in revenue was related to the short
reporting period due to the sale of the product line in July 2003.

The loss for the Patient1 product line was approximately $1.3 million in
2003, as compared to operating income of approximately $0.4 million in 2002. The
decline was due to lower productivity pending the sale of the product line in
2003.

Revenue for the Business1 product line decreased approximately 81% in 2003
compared to 2002. The Company recognized revenue using the
percentage-of-completion method of accounting, and the decrease over the prior
year period was the result of lower Business1 sales in prior periods in addition
to implementation delays at a major customer.

The loss for the Business1 product line increased approximately $1.7
million in 2003 compared to 2002, due to lower Business1 revenue in the current
period.

On November 30, 1998, the Company completed the sale of its MSC business
segment. In 1999, the Company completed the sale of both divisions of its Impact
business segment. Pursuant to APB No. 30, the consolidated financial statements
of the Company have been presented to reflect the activity associated with MSC
and Impact as discontinued operations for all periods presented.

26

For the year ended December 31, 2002, the Company expensed $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid NCO
$0.3 million on September 16, 2002, and $0.3 million on September 16, 2004. The
Company intends to pay the remaining balance of $0.2 million, plus interest at
the then-current prime rate, to NCO, in the third quarter of 2005.

The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.

During the years ended December 31, 2003, and 2002, the Company incurred
expenses of approximately $0.9 million and $0.3 million, respectively, which
were primarily legal costs associated with MSC and Impact. These expenses were
recognized through (loss) income from discontinued operations in the Company's
Consolidated Statements of Income.

LIQUIDITY AND CAPITAL RESOURCES

The following table is a summary of the Company's cash balances and cash
flows from continuing operations for the years ended December 31, 2004, and 2003
(in thousands):

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.

Restricted cash at December 31, 2004, and December 31, 2003, of
approximately $0.1 million, represents amounts collected on behalf of certain
Physician Services and Hospital Services clients, a portion of which is held in
trust until it is remitted to such clients.

During 2004, the Company generated approximately $48.9 million in cash from
continuing operations which includes cash generated from normal operations as
well as the receipt of the $16.2 million settlement from Lloyd's of London
(refer to "Note 12 -- Legal Matters" in the Company's Notes to Consolidated
Financial Statements for more information), offset by cash payments related to
additional procedures necessary under SAS No. 99 totaling approximately $6.3
million (refer to "Note 2 -- Other Expenses" in the Company's Notes to
Consolidated Financial Statements for more information), the payment of
approximately $5.7 million in expenses and legal settlements related to the
matter with Lloyd's of London and interest payments of approximately $5.7
million.

During 2003, the Company generated approximately $28.5 million in cash from
continuing operations which includes cash generated from normal operations as
well as a release of restricted cash of approximately $4.2 million offset by
interest payments of approximately $18.3 million and the payment of
approximately $7.4 million in financing expenses, and legal settlements related
to Lloyd's of London (refer to "Note 12 -- Legal Matters" in the Company's Notes
to Consolidated Financial Statements for more information).

27

The release of restricted cash is the result of using the Company's
Revolving Credit Facility (refer to "Note 10 -- Long-Term Debt" in the Company's
Notes to Consolidated Financial Statements for more information) rather than
cash as security for the Company's letters of credit. Restricted cash at
December 31, 2003, represents amounts collected on behalf of certain Physician
Services and Hospital Services clients, a portion of which is held in trust
until it is remitted to such clients.

During 2004, cash used for investing activities from continuing operations
was approximately $10.6 million consisting primarily of approximately $13.0
million for capital expenditures and investment in software development costs
and approximately $1.1 million of cash used for an acquisition, partially offset
by approximately $3.7 million of net proceeds related to the final closing
adjustments from the July 2003 sale of Patient1.

During 2003, the Company generated approximately $17.5 million in cash from
investing activities from continuing operations consisting of net proceeds of
$27.9 million from the sale of the Patient1 product line during July 2003 offset
by capital expenditures and software development costs of $10.3 million.

During 2004, the Company used approximately $20.8 million in cash for
financing activities. On June 30, 2004 the Company raised $125 million from the
sale of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
and retired the $118.8 million then outstanding under the Term Loan B
concurrently with the completion of the Convertible Debenture offering. On June
30, 2004, the Company also completed an amendment to the Revolving Credit
Facility to increase its capacity and lower the Company's borrowing rate. The
Revolving Credit Facility's capacity was expanded from $50 million to $75
million and the facility's maturity was extended to three years. The Company
incurred a prepayment penalty on the early retirement of the Term Loan B
totaling $2.4 million in addition to financing costs of approximately $3.5
million related to the Convertible Debenture offering and amendment to the
Revolving Credit Facility. The Company also repurchased, for approximately $25
million, an aggregate of approximately 2.0 million shares of the Company's
outstanding Common Stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. The cost of the
refinancing and purchase of Common Stock is partially offset by proceeds from
the exercise of stock options of approximately $7.4 million.

During 2003, the Company used approximately $54.8 million in cash from
financing activities primarily for repayment of the Company's long-term debt.
The Company used cash on hand as well as the net proceeds from the Patient 1
divestiture to retire $53.1 million of long-term debt during 2003. The Company
refinanced the remaining $125 million in long-term debt during September 2003
and entered into a $175 million Credit Agreement (the "Credit Agreement"). The
Credit Agreement consisted of a $125 million Term Loan B (the "Term Loan B") and
a $50 million revolving credit facility (the "Revolving Credit Facility"). In
conjunction with the refinancing transaction, the Company capitalized
approximately $5.5 million in costs, including legal and other professional fees
related to the Credit Agreement and other costs, which were included in the
Company's other long-term assets on the Consolidated Balance Sheet. The Company
began amortizing these costs over the three and five years periods and included
them in interest expense. In addition, the Company incurred expenses associated
with the retirement of the Notes and the 2001 Credit Facility of approximately
$6.3 million that are included in the Company's loss on extinguishment of debt
for 2003, including the tender offer premium, the call premium and the write-off
of unamortized debt issuance costs associated with the Notes as well as the
unamortized debt issuance costs associated with entering into the 2001 Credit
Facility. Financing cash flows associated with the repayment of long-term debt
in 2003 were offset with approximately $8.0 million of proceeds from employees'
exercise of stock options.

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

The 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.

28

During 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). In the settlement, Lloyd's agreed to pay the Company $20 million in
cash by July 9, 2004. Lloyd's also agreed to defend, settle or otherwise resolve
at their expense the two remaining pending claims covered under the errors and
omissions ("E&O") policies issued to the Company by Lloyd's. In exchange, the
Company provided Lloyd's with a full release of all E&O and directors and
officers and company reimbursement ("D&O") policies. The California Superior
Court retained jurisdiction to enforce any aspect of the settlement agreement.

As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
Lloyd's receivable by $3.8 million. On July 7, 2004, pursuant to the settlement
as amended, Lloyd's paid the Company $16.2 million in cash.

During the course of litigation the Company funded the legal costs and any
litigation settlements related to E&O claims covered by the Lloyd's E&O
policies. These items negatively impacted the Company's cash flow for the year
ended December 31, 2004, approximately $5.7 million, which consisted of
approximately $2.1 million related to the cost of pursuing the litigation
against Lloyd's and approximately $3.6 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 year ended
December 31, 2003, was approximately $7.4 million, which consisted of
approximately $2.1 million related to insurance premium increases for new
insurance coverage and the cost of pursuing the litigation against Lloyd's and
approximately $5.3 million related to the funding of legal costs and litigation
settlements covered by the Lloyd's E&O policies.

With the exception of the cash received from the Company's settlement with
Lloyd's 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 by operating activities 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.

29

CONTRACTUAL OBLIGATIONS

The following table sets forth the Company's contractual obligations as of
December 31, 2004:

- ---------------

(1) The amounts reflected under restructuring reserves and other are amounts
reserved for estimated lease termination costs associated with the Company's
Physician Services division's 1995 restructuring. For more information, see
"Note 6 -- Restructuring Expenses" in the Company's Notes to Consolidated
Financial Statements.

(2) For more information, see "Note 5 -- Discontinued Operations and
Divestitures" in the Company's Notes to Consolidated Financial Statements.

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

As discussed under the caption "Forward-Looking Statements" in Item 1,
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:

IF THE COMPANY FAILS TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, THE
COMPANY MAY NOT BE ABLE TO ACCURATELY REPORT THE COMPANY'S FINANCIAL RESULTS
ON A TIMELY BASIS. AS A RESULT, CURRENT AND POTENTIAL STOCKHOLDERS COULD LOSE
CONFIDENCE IN THE COMPANY'S FINANCIAL REPORTING WHICH WOULD HARM THE COMPANY'S
BUSINESS AND THE TRADING PRICE OF THE COMPANY'S STOCK.

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
existed. The Company's auditors reported to the Company that the errors that
resulted in the restatements 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 has taken steps to improve controls in these areas, the Company cannot
be certain that these steps will ensure that it implements and maintains
adequate controls over financial processes and reporting in the future. Failure
to maintain adequate controls of this type could adversely impact the accuracy
and

30

future timeliness of the Company's financial reports filed pursuant to the
Securities Exchange Act of 1934. If the Company cannot provide reliable and
timely financial reports, its business and operating results could be harmed,
investors could lose confidence in its reported financial information, its
common stock could be delisted from the Nasdaq Stock Market, and the trading
price of its common stock could fall.

THE COMPANY HAS A SIGNIFICANT AMOUNT OF LONG-TERM DEBT AND OBLIGATIONS TO MAKE
PAYMENTS, WHICH COULD LIMIT THE COMPANY'S FUNDS AVAILABLE FOR OTHER
ACTIVITIES.

The Company has approximately $125 million of long-term indebtedness and
$0.6 million in capital lease obligations and, as a result, is required to make
interest and principal payments. 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 the Company's indebtedness, or seek
additional equity capital. The Company's ability to make payments on the
Company's debt obligations will depend on future operating performance, which
may be affected by conditions beyond the Company's control.

THE COMPANY IS REGULARLY INVOLVED IN LITIGATION, WHICH MAY EXPOSE THE COMPANY
TO SIGNIFICANT LIABILITIES.

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 the Company's 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 to successfully resolve such legal matters, or
other legal matters that may arise in the future. In the event of an adverse
outcome with respect to such legal matters or other legal matters in which the
Company may become involved, the Company's insurance coverage 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 the Company's
business, results of operations or financial condition.

THE PHYSICIAN MANAGEMENT OUTSOURCING BUSINESS IS HIGHLY COMPETITIVE AND THE
COMPANY'S INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY
AFFECT THE COMPANY.

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.

THE BUSINESS OF PROVIDING SERVICES AND SOLUTIONS TO HOSPITALS FOR BOTH REVENUE
CYCLE AND RESOURCE MANAGEMENT IS ALSO HIGHLY COMPETITIVE AND THE COMPANY'S
INABILITY TO SUCCESSFULLY COMPETE FOR BUSINESS COULD ADVERSELY AFFECT THE
COMPANY.

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 the Company. The Company's successful
competition within this industry is dependent on numerous industry and market
conditions.

31

THE MARKETS FOR THE COMPANY'S SERVICES AND SOLUTIONS ARE CHARACTERIZED BY
RAPIDLY CHANGING TECHNOLOGY, EVOLVING INDUSTRY STANDARDS AND FREQUENT NEW
PRODUCT INTRODUCTIONS AND THE COMPANY'S INABILITY TO KEEP PACE COULD ADVERSELY
AFFECT THE COMPANY.

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 the
Company's 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 the Company's 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.

THE HEALTHCARE MARKETPLACE IS CHARACTERIZED BY CONSOLIDATION, WHICH MAY RESULT
IN FEWER POTENTIAL CUSTOMERS FOR THE COMPANY'S SERVICES.

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.
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.

THE HEALTHCARE INDUSTRY IS HIGHLY REGULATED, WHICH MAY INCREASE THE COMPANY'S
COSTS OF OPERATION.

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 and the
Medicare Modernization Act of 2003. 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 the Company 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.

32

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 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.

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 the Company's business.

THE TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE VOLATILE AND NEGATIVELY
AFFECT YOUR INVESTMENT.

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 7A. 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, the Company does not expect any
fluctuation in the prevailing interest rates to have a material effect on its
financial statements.

The Company has the option of entering into loans based on LIBOR or on Base
Rates under the Revolving Credit Facility. As such, if the Company were to
borrow amounts under the Revolving Credit

33

Facility, the Company could experience fluctuations in interest rates under the
Revolving Credit Facility. The Company has not incurred any borrowings under the
Revolving Credit Facility since inception.

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 sales 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 transactions
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements appear beginning at page
F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING AND CONCLUSION REGARDING
THE EFFECTIVENESS OF DISCLOSURE 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 registered
public accounting firm determined that a material weakness related to the
Company's internal controls existed. On May 12, 2004, the independent registered
public accounting firm reported to the Company that the errors that resulted in
the restatements 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. Those errors
generally related to the timing of recording accruals for sales commissions,
vacation liabilities, legal expenses, incentive compensation and other
liabilities. The Company took steps during the quarter ended September 30, 2004,
to improve controls in these areas. Of those steps, the following constituted
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting:

- Hired a new Vice President -- Corporate Controller and Principal
Accounting Officer;

- Reorganized the Company's accounting groups so that the divisional
accounting departments now report directly to the Corporate Controller;

- Instituted a formal checklist to help ensure all month-end close
procedures and processes are completed in a timely fashion; and

- Required monthly review and documented approval by appropriate levels of
management for all balance sheet account reconciliations, including
accruals for sales commissions, vacation liabilities, legal expenses,
health insurance and incentive compensation.

Management believes that the actions taken and additional controls
implemented during the quarter ended September 30, 2004, effectively addressed
the material weakness identified by the Company's independent registered public
accounting firm.

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of December 31,
2004. Based in part on the steps taken by the Company in the third quarter of
2004 to improve its internal controls, the Company's Chief Executive Officer and
the Company's Chief Financial Officer have concluded that the Company's
disclosure controls

34

and procedures were effective as of December 31, 2004, to provide reasonable
assurance that information the Company is required to disclose in reports that
the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported accurately. It should be noted that
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 within the
Company have been detected. Furthermore, 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, regardless of how unlikely.
Because of these inherent limitations in a cost-effective control system,
misstatements or omissions due to error or fraud may occur and not be detected.

In connection with efforts to comply with Section 404(a) of the
Sarbanes-Oxley Act in 2004, the Company has implemented additional controls,
policies and procedures during the quarter ended December 31, 2004, and will
continue to enhance its internal control structure, as necessary, on an ongoing
basis. None of the additional controls, policies and procedures implemented
during the quarter ended December 31, 2004, related to Section 404(a) of the
Sarbanes-Oxley Act of 2002 constitute changes in the Company's internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Under the supervision and
with the participation of management, including the Company's Chief Executive
Officer and Chief Financial Officer, the Company has conducted an evaluation of
the effectiveness of its internal control over financial reporting based on the
framework in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon that evaluation,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2004.

Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, has been audited by
Ernst & Young LLP, the independent registered public accounting firm that
audited the financial statements included herein, as stated in their report
which is included herein.

ITEM 9B. OTHER INFORMATION

None.

35

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers that is contained in Part I of this Report pursuant to
General Instruction G of this Form 10-K, is included in the sections entitled
"Board of Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" of the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2005, and is incorporated herein by
reference.

The Registrant has adopted Standards of Conduct, which meet the definition
of a "code of ethics" under Item 406 of the Securities and Exchange Commission's
Regulation S-K, and which are applicable to and binding upon all of the
Registrant's employees (including the principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions) and, as required by the context, directors. Any
waiver of the Standards of Conduct for officers or directors of the Registrant
must be approved by the Board of Directors of the Registrant and must be
publicly disclosed in accordance with Securities and Exchange Commission and
Nasdaq rules. The Standards of Conduct are posted in the corporate governance
area of the investors section of the Registrant's Internet website at
www.per-se.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included in the sections entitled
"Certain Information Regarding Executive Officers," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Stock Price Performance Graph" of the Proxy
Statement for the Annual Meeting of Stockholders to be held on May 18, 2005, and
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this Item is included in the sections entitled
"Director and Executive Officer Common Stock Ownership" and "Principal
Stockholders" of the Proxy Statement for the Annual Meeting of Stockholders to
be held on May 18, 2005, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Set forth below is certain information as of December 31, 2004, regarding
an outstanding loan made in November 2000 pursuant to the employment agreement
between the Company and Philip M. Pead.

- ---------------

(1) The loan is secured by an aggregate of 74,000 shares of Common Stock, and is
payable in full upon the earlier to occur of the termination of Mr. Pead's
employment or the sale of all or any part of those shares.

(2) The terms of the loan provide that any overdue payment shall bear interest
at a rate equal to the rate of interest then imputed by the Internal Revenue
Service plus 4% per annum, or the maximum rate permitted by law, whichever
is lower, but such terms do not otherwise require the payment of interest.

This information is also included in the section entitled "Certain
Relationships and Related Transactions" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 18, 2005.

36

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is included in the section entitled
"Selection of Independent Auditors" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 18, 2005, and is incorporated herein
by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) 1. Financial Statements

Report of Independent Registered Public Accounting Firm;

Consolidated Balance Sheets -- as of December 31, 2004 and 2003;

Consolidated Statements of Income -- years ended December 31, 2004, 2003
and 2002;

Consolidated Statements of Cash Flows -- years ended December 31, 2004,
2003 and 2002;

Consolidated Statements of Stockholders' Equity (Deficit) -- years ended
December 31, 2004, 2003 and 2002; and

Notes to Consolidated Financial Statements.

2. Financial Statement Schedules

Included in Part IV of the report:

Schedule II -- Valuation and Qualifying Accounts -- years ended December
31, 2004, 2003 and 2002;

Schedules, other than Schedule II, are omitted because of the absence of
the conditions under which they are required.

3. Exhibits

The following list of exhibits includes both exhibits submitted with this
Form 10-K as filed with the Commission and those incorporated by reference to
other filings:

The exhibits, which are referenced in the above documents, are hereby
incorporated by reference. Such exhibits have been omitted for purposes of this
filing but will be furnished supplementary to the Commission upon request.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

/s/ RICHARD A. FLYNT
------------------------------------
Richard A. Flynt
Vice President and Corporate
Controller
(Principal Accounting Officer)

Date: March 16, 2005

42

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

March 16, 2005 /s/ PHILIP M. PEAD
------------------------------
Philip M. Pead
Chairman, President, Chief Executive Officer
and Director

March 16, 2005 /s/ CHRIS E. PERKINS
------------------------------
Chris E. Perkins
Executive Vice President and
Chief Financial Officer

March 16, 2005 /s/ RICHARD A. FLYNT
------------------------------
Richard A. Flynt
Vice President and Corporate Controller
(Principal Accounting Officer)

March 16, 2005 /s/ JOHN W. CLAY, JR.
------------------------------
John W. Clay, Jr.
Director

March 16, 2005 /s/ JOHN W. DANAHER, M.D.
------------------------------
John W. Danaher, M.D.
Director

March 16, 2005 /s/ STEPHEN A. GEORGE, M.D.
------------------------------
Stephen A. George, M.D.
Director

March 16, 2005 /s/ DAVID R. HOLBROOKE, M.D.
------------------------------
David R. Holbrooke, M.D.
Director

March 16, 2005 /s/ CRAIG MACNAB
------------------------------
Craig Macnab
Director

March 16, 2005 /s/ DAVID E. MCDOWELL
------------------------------
David E. McDowell
Director

March 16, 2005 /s/ C. CHRISTOPHER TROWER
------------------------------
C. Christopher Trower
Director

March 16, 2005 /s/ JEFFREY W. UBBEN
------------------------------
Jeffrey W. Ubben
Director

43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Per-Se Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Per-Se
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2004. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)2. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Per-Se
Technologies, Inc. and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of Per-Se
Technologies, Inc. and subsidiaries' internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 15, 2005, expressed an
unqualified opinion thereon.

/s/ Ernst & Young LLP

Atlanta, Georgia
March 15, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
Per-Se Technologies, Inc.

We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Per-Se Technologies, Inc. and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Per-Se Technologies, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Per-Se Technologies, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Per-Se Technologies, Inc. and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of income, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 2004, and our report dated March 15, 2005, expressed an unqualified
opinion thereon.

/s/ Ernst & Young LLP

Atlanta, Georgia
March 15, 2005

F-2

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

F-3

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See notes to consolidated financial statements.

F-4

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

F-5

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

See notes to consolidated financial statements.

F-6

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. The consolidated financial statements include the
accounts of Per-Se Technologies, Inc. and its subsidiaries ("Per-Se" or the
"Company"). All intersegment accounts have been eliminated. The Hospital
Services division's revenue includes intersegment revenue for services provided
to the Physician Services division, which has been eliminated in total
consolidated revenue. Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.

The consolidated financial statements of the Company have been presented to
reflect the 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 on July 28, 2003,
and Business1 was sold effective January 31, 2004. Additionally, the activity
related to the 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. For more
information about the Company's discontinued operations, refer to "Note
5 -- Discontinued Operations and Divestitures" in the Company's Notes to
Consolidated Financial Statements.

Recent Accounting Pronouncements. On December 16, 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No.
123(R)"), which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123(R) supersedes Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"), and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.

SFAS No. 123(R) must be adopted by the Company no later than July 1, 2005.
The Company expects to adopt SFAS No. 123(R) on July 1, 2005. When the Company
adopts SFAS No. 123(R), it may elect the modified prospective method or the
modified retrospective method. The Company has not yet determined which method
it will elect upon adoption.

The Company currently accounts for share-based payments to employees using
APB Opinion No. 25 and the intrinsic value method and, as a result, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method will have a significant impact
on the Company's results of operations, although it will have no impact on the
overall cash flow or financial position of the Company. The impact of adoption
of SFAS No. 123(R) cannot be determined at this time because it will depend on
levels of share-based payments granted in the future. Had the Company adopted
SFAS No. 123(R) in prior periods, the impact would have approximated the impact
of SFAS No. 123 as described below under Stock-Based Compensation Plans.

In September 2004, the Emerging Issues Task Force ("EITF") reached a
tentative conclusion on Issue Number 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share ("EITF No. 04-8"). The EITF
concluded that contingently convertible debt instruments should be included in
diluted earnings per share computations regardless of whether the market price
trigger has been met. The effective date of this consensus is for periods ending
after December 15, 2004. In November 2004, the Company exercised its irrevocable
option to pay the principal of its Convertible Subordinated Debentures in cash
and therefore, EITF No. 04-8 did not have any effect on the Company's
Consolidated Statements of Income.

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

F-7

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Bad debt estimates. The Company relies on estimates to determine the
bad debt expense and the adequacy of the reserve for doubtful accounts
receivable. These estimates are based on the historical experience of the
Company and the industry in which it operates. If the financial condition
of the Company's customers deteriorated, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
Company actively reviews its accounts receivable and does not believe
actual results will vary materially from the Company's estimates.

Accrued expenses. The Company relies on estimates to determine the
amounts that are recorded in accrued expenses. Estimates of requirements
for legal services and settlements expected to be incurred in connection
with a loss contingency and to meet regulatory demands within the Company's
business and industry are used to accrue legal expenses. Income tax
accruals are estimated based on historical experience of the Company,
prevailing tax rates and the current business environment. Restructuring
and severance cost accruals are made using estimates of the costs required
to effect the desired change within the Company.

Revenue Recognition. The Company derives revenue from services and
products delivered to the healthcare industry through its two operating
divisions:

Physician Services provides Connective Healthcare solutions that
manage the revenue cycle for physician groups. The division provides
outsourced revenue cycle management services that are targeted at
hospital-affiliated and academic physician practices. Fees for these
services are primarily based on a percentage of net collections on the
Company's clients' accounts receivable. The division recognizes revenue and
bills its customers when the customers receive payment on those accounts
receivable. Contracts are typically multi-year in length and require no
payment from the customer upon contract signing. Since this is an
outsourced service delivered on the Company's proprietary technology, there
are no license or maintenance fees to be paid by the physician group
customers. The division also recognized approximately 4%, 5% and 5% of its
revenue, (or 3%, 3% and 4% of total company revenue), on a monthly service
fee and per-transaction basis from the MedAxxis product line, an
application service provider ("ASP") physician practice management system,
for the years ended December 31, 2004, 2003 and 2002, respectively. The
Physician Services division does not rely, to any material extent, on
estimates in the recognition of this revenue. Revenue is recognized in
accordance with Staff Accounting Bulletin ("SAB") No. 104, Revenue
Recognition ("SAB No. 104").

Hospital Services provides Connective Healthcare solutions that
improve revenue cycle and resource management for hospitals.

Revenue cycle management solutions primarily include services that
allow a hospital's central billing office to more effectively manage its
cash flow. These services include electronic and paper transactions, such
as claims processing, which can be delivered via the Web or through
dedicated electronic data interfaces and high-speed print and mail
services. Revenue related to these transaction services are billed and
recognized when the services are performed on a per transaction basis.
Contracts are typically multi-year in length. The division also recognizes
revenue related to direct and indirect payments it receives from payers for
the electronic transmission of transactions to the payers. The division
recognizes revenue on these transactions at the time the electronic
transactions are sent. Revenue is recognized in accordance with SAB No.
104.

Resource management solutions include staff and patient scheduling
software that enable hospitals to efficiently manage resources, such as
personnel and the operating room, to reduce costs and improve their bottom
line. The resource management software is sold as a one-time license fee

F-8

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

plus implementation services and an annual maintenance fee. Contracts are
typically structured to require a portion of the license fee and
implementation services to be paid periodically throughout the installation
process, including a portion due upon signing. For software contracts that
require the division to make significant production, modification or
customization changes, the division recognizes revenue for the license fee
and implementation services using the percentage-of-completion method over
the implementation period. The Hospital Services division relies on
estimates of work to be completed to determine the amount of revenue to be
recognized related to each contract. Because estimates of the extent of
completion that differ from actual results could affect revenue, the
division periodically reviews the estimated hours or days to complete major
projects and compares these estimates to budgeted hours or days to support
the revenue recognized on that project. Approximately 8%, 9% and 9% of the
division's revenue (or 2%, 2% and 2% of total Company revenue) was
determined using percentage-of-completion accounting for the years ended
December 31, 2004, 2003, and 2002, respectively.

When the division receives payment prior to shipment or fulfillment of
its significant obligations, the Company records such payments as deferred
revenue and recognizes them as revenue upon shipment or fulfillment of
significant obligations. An unbilled receivable is recorded when the
division recognizes revenue on the percentage-of-completion basis prior to
achieving a contracted billing milestone. Additionally, an unbilled
receivable is recorded when revenue is earned, but the customer has not
been invoiced due to the terms of the contract. For minor add-on software
license sales where no significant customization remains outstanding, the
fee is fixed, an agreement exists and collectibility is probable, the
division recognizes revenue upon shipment. For software maintenance
payments received in advance, the division defers and recognizes as revenue
these payments ratably over the term of the maintenance agreement, which is
typically one year. Revenue recognized on the percentage-of-completion
basis is done so in accordance with AICPA Statement of Position ("SOP")
81-1, Accounting for Performance of Construction Type and Certain
Production Type Contracts. Revenue recognized upon software shipment is
done so in accordance with SOP 97-2, Software Revenue Recognition ("SOP
97-2").

For arrangements that include one or more elements, or
multiple-element arrangements, to be delivered at a future date, revenue is
recognized in accordance with SOP 97-2 as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 97-2, as amended, requires the Company to allocate
revenue to each element in a multiple-element arrangement based on the
element's respective vendor-specific objective evidence, or VSOE, of fair
value. Where VSOE does not exist for all delivered elements (typically
software license fees) revenue from multiple-element arrangements is
recognized using the residual method. Under the residual method, if VSOE of
the fair value of the undelivered elements exists, the Company defers
revenue recognition of the fair value of the undelivered elements. The
remaining portion of the arrangement fee is then recognized either by using
the percentage-of-completion method if significant production, modification
or customization is required or upon delivery, assuming all other
conditions for revenue recognition have been satisfied. VSOE of fair value
of maintenance services is based upon the amount charged for maintenance
when purchased separately, which is the renewal rate. Maintenance services
are typically stated separately in an arrangement. VSOE of fair value of
professional services (i.e., implementation and consulting services not
essential to the functionality of the software) is based upon the price
charged when professional services are sold separately and is based on an
hourly rate for professional services.

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

F-9

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Restricted Cash. At December 31, 2004, and 2003, restricted cash primarily
represents amounts collected on behalf of certain Physician Services and
Hospital Services clients, a portion of which is held in trust until it is
remitted to such clients.

Fair Value of Financial Instruments. The carrying amount of all of the
Company's financial instruments approximates fair value. Additionally, the
Company had unused letters of credit in the amount of $2.8 million and $3.2
million at December 31, 2004, and 2003, respectively.

Property and Equipment. Property and equipment, including equipment under
capital leases, are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, generally ten years for furniture and fixtures, three to ten years
for equipment and twenty years for buildings. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease or the
useful life of the asset, whichever period is shorter. The Company recorded
depreciation expense of approximately $7.8 million, $9.4 million and $10.9
million in 2004, 2003 and 2002, respectively.

Goodwill. Goodwill represents the excess of the cost of businesses
acquired and the value of their workforce in the Physician Services division in
1995 and the Hospital Services division from 1995 to 2001 over the fair market
value of their identifiable net assets. The Company performs a periodic review
of its goodwill and other indefinite lived intangible assets for impairment as
of December 31 each year. The Company's initial impairment and periodic review
of its goodwill and other indefinite lived intangible assets were based upon a
discounted future cash flow analysis that included revenue and cost estimates,
market growth rates and appropriate discount rates. As of December 31, 2004, and
2003, the Company did not identify an impairment of goodwill or indefinite-lived
intangible assets as a result of the review.

Trademarks. Trademarks represent the value of the trademarks acquired in
the Hospital Services division from 2000 to 2001. The Company expects the
trademarks to contribute to cash flows indefinitely and therefore deems the
trademarks to have indefinite useful lives.

Client Lists. Client lists represent the value of clients acquired in the
Physician Services division from 1992 to 1996 and the Hospital Services division
from 1995 to 2004. The Company amortizes client lists over their estimated
useful lives, which range from five to ten years.

Developed Technology. Developed technology represents the value of the
systems acquired in the Hospital Services division from 2000 to 2001. The
Company amortizes these intangible assets over their estimated useful lives of
five years.

Software Development Costs. Software development includes costs incurred
in the development or the enhancement of software in the Physician Services and
Hospital Services divisions for resale or internal use.

Software development costs, related to external use software, are
capitalized upon the establishment of technological feasibility for each product
and capitalization ceases when the product or process is available for general
release to customers. Technological feasibility is established when all
planning, designing, coding and testing activities required to meet a product's
design specifications are complete. The Company amortizes external use software
development costs over the greater of the ratio that current revenues bear to
total and anticipated future revenues for the applicable product or the
straight-line method over the estimated economic lives of the assets, which are
generally three to five years. The Company monitors the net realizable value of
all capitalized external use software development costs to ensure that it can
recover its investment through margins from future sales.

Software development costs, related to internal use software, are
capitalized after the preliminary project stage is complete, when management
with the relevant authority authorizes and commits to the funding of the
software project, when it is probable that the project will be completed and
when the

F-10

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

software will be used to perform the function intended. Capitalization ceases no
later than the point at which the project is substantially complete and ready
for its intended use. The Company expenses software development costs, related
to internal use software, as incurred during the planning and post-
implementation phases of development. The Company amortizes internal-use
software on a straight-line basis over its estimated useful life, generally five
years.

Research and Development Costs. The Company expenses research and
development costs as incurred. The Company recorded research and development
costs of approximately $8.3 million, $8.0 million and $10.1 million in 2004,
2003 and 2002, respectively. These amounts are included in Selling, General and
Administrative expenses in the Company's Consolidated Statements of Income.

Advertising Costs. The Company expenses advertising costs as incurred. The
Company recorded advertising costs of approximately $0.7 million, $0.7 million
and $0.3 million in 2004, 2003 and 2002, respectively.

Shipping and Postage Costs. The Company expenses shipping and postage
costs as incurred. These costs are primarily incurred related to providing print
and mail services to customers, which are billed to the customer and included in
revenue. The Company recorded shipping and postage costs of approximately $23.8
million, $19.3 million and $20.5 million in 2004, 2003 and 2002, respectively.
These amounts are included in Cost of Services in the Company's Consolidated
Statements of Income.

Stock-Based Compensation Plans. In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation-Transition and Disclosure("SFAS No.
148"). SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. SFAS No. 148 is effective
for financial statements for fiscal years ending after December 15, 2002 and for
interim periods beginning after December 15, 2002. The annual disclosure
requirements of SFAS No. 148 were adopted by the Company on January 1, 2003. As
previously discussed, SFAS No. 123(R) was issued on December 16, 2004, with an
effective date of no later than July 1, 2005. The Company expects to adopt SFAS
123(R) on July 1, 2005.

F-11

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 2004, the Company has four stock-based compensation plans
described more fully in Note 14. The Company accounts for its stock-based
compensation plans under APB Opinion No. 25. No stock-based compensation cost is
reflected in the Company's Consolidated Statement of Income, 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 SFAS No. 123 to stock-based compensation.

Legal Costs. The Company expenses ordinary legal and administrative fees,
costs and expenses as incurred. Legal and administrative fees, costs, expenses,
damages or settlement losses for specific legal matters that the Company
determines to be probable are accrued at such time when they are reasonably
estimable.

Income Taxes. The Company recognizes deferred income taxes for the tax
consequences of "temporary differences" between financial statement carrying
amounts and the tax bases of existing assets and liabilities. The Company
determines deferred tax assets and liabilities by reference to the tax laws and
changes to such laws. Management includes the consideration of future events in
assessing the likelihood that the Company will realize tax benefits. See Note 16
where the Company discusses the realizability of the deferred tax assets.

F-12

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net Income Per Share. Net income per common share-basic is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Net income per common share-diluted 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 common share (in thousands, except per share data):

Options and warrants to purchase 1.6 and 2.5 million shares of common stock
outstanding during 2004 and 2003, respectively, were excluded from the
computation of diluted earnings per share because the exercise prices were
greater than the average market price of the common shares, and therefore, the
effect would have been antidilutive.

Capital Contribution. The Company recorded an approximately $2 million
capital contribution paid to the Company in November 2002 as a result of
recovering short-swing profits from an outside stockholder in accordance with
Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides
that any profit realized by an insider (defined as an officer, director or
principal stockholder of an issuer) from any purchase and sale, or any sale and
purchase, of an equity security of the issuer within any period of less than six
months are recoverable by the issuer, irrespective of the intention of the
insider in entering into such transaction.

Foreign Currency Translation and Comprehensive (Loss) 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) income.
For the years ended December 31, 2004, 2003 and 2002, the only component of
other comprehensive loss is the net foreign currency translation, which was
($0.1) million, $0.1 million and ($0.1) million, respectively.

Guarantees. In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others ("FIN No. 45"). FIN No. 45
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken by issuing the
guarantee. FIN No. 45 also requires additional disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees it has issued. FIN No. 45 does not have a material
effect on the Company's consolidated financial statements for the year ended
December 31, 2004. Certain of the Company's sales agreements contain
infringement indemnity provisions that are covered by FIN No. 45. Under these
sales agreements, the Company agrees to defend and indemnify a customer in
connection
F-13

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with infringement claims made by third parties with respect to the customer's
authorized use of the Company's products and services. The indemnity obligations
contained in sales agreements generally have no specified expiration date and
generally limit the award to the amount of fees paid. The Company has not
previously incurred costs to settle claims or pay awards under these
indemnification obligations. Also, the Company maintains membership in a group
captive insurance company for its workers compensation insurance. The member
companies agree to jointly insure the group's liability risks up to a certain
threshold. As a member, the Company guarantees to pay an assessment, if an
assessment becomes due, as a result of insured losses by its members. This
guarantee will never exceed a percentage of the Company's loss funds (an amount
that is based on the Company's insured five-year loss history). Based on the
Company's historical experience, the Company does not anticipate such an
assessment, however, the Company has issued letters of credit to the group
captive insurance company. At December 31, 2004 and 2003, the Company had
outstanding letters of credit to the group captive insurance company amounting
to approximately $1.5 million and $0.9 million respectively. As a result, the
Company's estimated fair value of the infringement indemnity provision
obligations and the captive insurance guarantee is nominal.

Related Party Transactions. In November 2000, pursuant to the employment
agreement between the Company and Philip M. Pead, the Company's Chairman of the
Board, Chief Executive Officer, and President, the Company entered into a
promissory note agreement with Mr. Pead for $250,000. This amount is included in
Other assets in the accompanying consolidated balance sheets at December 31,
2004 and 2003. The loan is secured by an aggregate of 74,000 shares of Common
Stock, which Mr. Pead purchased in the open market with the proceeds of the
note, and is payable in full upon the earlier to occur of the termination of Mr.
Pead's employment or the sale of all or any part of those shares. Any overdue
payment on the loan bears interest at a rate equal to the rate of interest then
imputed by the Internal Revenue Service plus 4% per annum, or the maximum rate
permitted by law, whichever is lower. Because the shares were purchased in the
open market by Mr. Pead, and the note only bears interest in the event of an
overdue payment, the Company did not record any compensation expense associated
with this arrangement at inception, and has not recorded any compensation
expense in any subsequent period.

2. OTHER EXPENSES

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 were required due to Statement of
Auditing Standards No. 99, Consideration of Fraud in a Financial Statement
Audit, that 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
additional procedures included the review of certain of the Company's revenues,
expenses, assets and liabilities accounts for the years 2001 through 2003.

The Company recorded costs related to the additional procedures totaling
approximately $6.3 million during the year ended December 31, 2004, and included
these costs in other expenses in the Company's Consolidated Statements of
income. In Note 18, these expenses are classified in the Corporate segment.

GAIN ON SETTLEMENT WITH LLOYD'S

On May 10, 2004, the Company reached a settlement with the Company's former
insurance carrier, Certain Underwriters at Lloyd's of London (collectively
"Lloyd's"). On July 7, 2004, pursuant to the settlement, as amended, Lloyd's
paid the Company $16.2 million in cash. As of the payment date, the Company had
an approximately $14.7 million receivable from Lloyd's and recognized a gain of
approximately $1.5 million on the settlement for the year ended December 31,
2004.

F-14

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EXECUTIVE OFFICE RELOCATION

On July 30, 2004, the Company relocated its principal executive office to
Alpharetta, Georgia. The Company entered into a noncancelable operating lease
for that office space commencing July 1, 2004, which will expire in June 2014.
While the new landlord will assume the payments for the lease of the Company's
former corporate office space, the Company recorded a non-cash expense related
to the lease expense of approximately $1.0 million upon its exit of the former
office facility. Amounts received from the landlord are considered incentives,
which were recorded as a liability and are being amortized over the lease term.

OTHER

In 2003, the Company recorded net expenses of $0.5 million for severance
costs related to the realignment of the Company into the Physician Services and
Hospital Services divisions. Additionally in 2003, the Company incurred
approximately $0.3 million of restructuring expenses related to the realignment
of the Company into the Physician Services and Hospital Services divisions.

3. PHYSICIAN SERVICES AGREEMENT

The Physician Services division signed an agreement ("the Agreement") in
2004 with a customer to provide physician practice management services. Under
the Agreement, Physician Services and the customer agreed to certain performance
goals. The performance goals will be measured on an interim basis through
February 28, 2009. At each interim measurement period, Physician Services will
determine if the performance goals for that period have been achieved.

If Physician Services achieves the performance goal for an interim
measurement period, Physician Services will recognize revenue as a percentage of
the customer's net collections pursuant to its standard revenue recognition
practice. If the Physician Services division does not achieve the performance
goal for an interim measurement period, revenue will not be recognized to the
extent the goal is not achieved.

4. ACQUISITIONS

On May 28, 2004, the Company entered into a five-year contract to provide
print and mail services for a new customer. As part of the transaction, the
Company purchased substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail business for cash consideration of approximately $1.1 million. In
addition, the Company recorded acquisition liabilities of approximately $1.0
million associated with the transaction.

The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has preliminarily allocated the purchase price to
the assets acquired and liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $1.9 million of the purchase
price was allocated to a finite-lived intangible asset with a five-year life.
The remaining $0.2 million of the purchase price was allocated to tangible
assets acquired. The operating results of the acquisition are included in the
Company's Consolidated Statements of Income from the date of acquisition in the
Hospital Services division. The Company has not yet obtained all the information
related to acquisition liabilities required to finalize the purchase price
allocation.

The pro-forma impact of this acquisition was immaterial to the financial
statements of the Company and therefore has not been presented.

On April 27, 2001, the Company acquired all of the assets of Virtual
Information Systems, Inc. ("VIS") for consideration of $7.0 million in cash. The
purchase agreement also provided for a purchase price adjustment of up to $1.5
million payable in cash should VIS meet certain financial targets over the

F-15

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

twelve months following the date of acquisition. As of December 31, 2001, the
Company had recorded the purchase price adjustment of $1.5 million. During the
first quarter of 2002, VIS met the financial targets in the purchase agreement
and accordingly, on May 10, 2002, the payment for the purchase price adjustment
of $1.5 million was made. VIS' core product, Virtual Processing Systems, is an
automated remittance processing solution for hospitals, which ensures accurate
and efficient processing of cash collections and payment of denial management
codes.

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

The Company recorded the KHS acquisition using the purchase method of
accounting and, accordingly, allocated the purchase price to the assets acquired
and the liabilities assumed based on their estimated fair market value at the
date of acquisition. Approximately $8.9 million of the purchase price was
allocated to goodwill and prior to adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, a portion of which was being amortized using the
straight-line method over five years. In February 2003, the Company determined
that KHS would not meet its purchase agreement operational targets and reduced
the purchase price allocation to goodwill by approximately $5.9 million.

5. 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 for physician practices and hospitals. The sale was
completed on July 28, 2003, and 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. 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. On June 1, 2004, the Company received payment of
approximately $4.5 million, which included interest of approximately $0.2
million. The Company recognized an additional gain on sale of approximately $3.8
million, net of taxes of approximately $0.2 million, in 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. 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 or through December 31, 2004.

F-16

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Summarized operating results for the
discontinued operations are as follows:

The assets and liabilities for the discontinued operations at December 31,
2003, were $129,000 and $422,000, respectively. There were no assets and
liabilities for the discontinued operations at December 31, 2004.

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

In October of 2001, the Company received $1.0 million in cash from the
buyer of the government division of Impact when the term of the purchase
agreement escrow expired. This amount was recognized through discontinued
operations. In May of 2001, the Company received an insurance settlement related
to a matter filed against the commercial division of Impact of approximately
$3.0 million, which was recognized through discontinued operations. The Company
continues to pursue claims against a former vendor of this division for damages
incurred in this matter.

For the year ended December 31, 2002, the Company expensed $0.7 million
through discontinued operations to reflect an agreement resolving an
indemnification claim by NCO Group, Inc. ("NCO"), the buyer of the Company's MSC
division. When NCO bought MSC, the Company agreed to indemnify NCO for limited
periods of time in the event NCO incurred certain damages related to MSC. NCO
incurred such damages in connection with an alleged environmental liability of
MSC, and the Company agreed to reimburse NCO for a portion of those damages, in
satisfaction of the Company's indemnification obligation. The Company paid NCO
$0.3 million, including interest of approximately $0.1 million, on September 16,
2002, and 2004. The Company intends to pay the remaining balance of $0.2
million, plus interest at the then-current prime rate, to NCO, in the third
quarter of 2005.

The limited periods of time for which the Company agreed to indemnify NCO
for most types of claims related to MSC have passed without the assertion by NCO
of any other significant claims. These limitations do not apply to a small
number of other types of potential claims to which statutory limitations apply,
such as those involving title to shares, taxes and billing and coding under
Medicare and Medicaid; however, management believes that such other types of
claims are unlikely to occur.

During the years ended December 31, 2004, 2003 and 2002, the Company also
incurred expenses of approximately $14,000, $0.9 million and $0.3 million,
respectively, which were primarily legal costs, associated with MSC and Impact.
Pursuant to SFAS No. 144, the consolidated financial statements of the Company
have been presented to reflect the activity associated with MSC and Impact as
discontinued operations for all periods presented.

The net operating results of these segments have been reported in the
Consolidated Statements of Income as "(Loss) income from discontinued
operations, net of tax -- Other" and the net cash flows have

F-17

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

been reported in the Consolidated Statements of Cash Flows as "Net cash used for
discontinued operations."

6. RESTRUCTURING EXPENSES

In early 1995, the Company initiated a reengineering program focused upon
its billing and accounts receivable management operations (the "Reengineering
Project"). As part of the Physician Services Restructuring Plan, the Company
recorded restructuring reserves in 1995 through 1996. In 1996, the Company
abandoned its Reengineering Project. The Company periodically reevaluates the
adequacy of the reserves established for the Physician Services Restructuring
Plan. In 1997 and 1999 the Company recorded an additional expense of $1.7
million and $0.3 million, respectively, for lease termination costs.

A description of the type and amount of restructuring costs, recorded at
the commitment date and subsequently incurred for the restructurings discussed
above, is as follows:

The terminated leases have various expiration dates through 2011. The
estimated lease termination costs to be incurred within the next 12 months are
classified in Accrued expenses in the Company's Consolidated Balance Sheets. The
estimated lease termination costs to be incurred beyond the next 12 months are
classified in Other obligations in the Company's Consolidated Balance Sheets.

7. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

F-18

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. INTANGIBLE ASSETS

Intangible assets consist of the following:

On May 28, 2004, the Company entered into a five-year contract to provide
print and mail services for a new customer. As part of the transaction, the
Company purchased substantially all of the production assets and personnel of
that customer's hospital and physician patient statement and paper claims print
and mail. The Company recorded the acquisition using the purchase method of
accounting and, accordingly, has preliminarily allocated the purchase price to
the assets acquired and liabilities assumed based on their estimated fair market
value at the date of acquisition. Approximately $1.9 million of the purchase
price was allocated to a finite-lived intangible asset with a five-year life.

Expenditures on capitalized software development costs were approximately
$6.7 million, $4.0 million and $3.4 million in 2004, 2003 and 2002,
respectively. Amortization expense related to the Company's capitalized software
costs totaled $2.6 million, $2.1 million and $2.0 million in 2004, 2003 and
2002, respectively. The unamortized balance of software development costs at
December 31, 2004 and 2003 was $11.2 million and $6.9 million, respectively. The
Company amortizes software development costs using the straight-line method over
the estimated useful lives of the assets, which are generally three to five
years.

The acquisition related intangible asset amortization expense estimated as
of December 31, 2004, for the five years following 2004 and thereafter is as
follows (in thousands):

2005........................................................ $4,352
2006........................................................ 1,196
2007........................................................ 776
2008........................................................ 776
2009........................................................ 559
Thereafter.................................................. 370
------
$8,029
======

F-19

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. ACCRUED EXPENSES

Accrued expenses consist of the following:

10. LONG-TERM DEBT

Long-term debt consists of the following:

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 wrote off 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 Income for the year ended December 31, 2003.

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 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
redemption price of 102.375% of the principal amount plus accrued interest of
approximately $10,000 (the "Call"). The Company wrote-off approximately $1.4
million of deferred issuance costs associated with the original issuance of the
Notes related to their retirement through the Tender Offer and the Call, which
are included in loss on extinguishment of debt in the Company's Consolidated
Statements of Income. In addition, the Company

F-20

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

incurred expenses associated with the retirement of the Notes of approximately
$4.7 million, including the Tender Offer premium and the Call premium which are
also included in loss on extinguishment of debt in the Company's Consolidated
Statements of Operations.

On September 11, 2003, the Company entered into a $175 million Credit
Agreement (the "Credit Agreement"), consisting 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 June 30, 2004, under a LIBOR-based interest contract
bearing interest at 5.36%. The Company has had no borrowings outstanding under
the Revolving Credit Facility since its inception.

On June 30, 2004, the Company issued $125 million aggregate principal
amount of 3.25% Convertible Subordinated Debentures due 2024 (the "Debentures")
to qualified institutional buyers pursuant to Rule 144A of the Securities Act of
1933, as amended. As originally issued, the Debentures were convertible into
shares of the Company's Common Stock at an initial conversion rate of 56.0243
shares per $1,000 principal amount (a conversion price of approximately $17.85)
once the Company's Common Stock share price reaches 130% of the conversion
price, or a share price of approximately $23.20. In November 2004, the Company
exercised its irrevocable option to pay the principal of Debentures submitted
for conversion in cash. The Company will satisfy any amount above the conversion
trigger price of $17.85 through the issuance of Common Stock. The Debentures
mature on June 30, 2024, and are unsecured. Interest on the Debentures is
payable semiannually at the rate of 3.25% per annum on June 30 and December 30
of each year, beginning on December 30, 2004. The Company may redeem the
Debentures either in whole or in part beginning July 6, 2009. The holders may
require the Company to repurchase the Debentures on June 30, 2009, 2014 and 2019
or upon a fundamental change, as defined in the Indenture governing the
Debentures. The Company used the proceeds from issuance of the Debentures,
together with cash on hand, to retire the $118.8 million outstanding under the
Term Loan B, as well as to repurchase, for approximately $25 million, an
aggregate of approximately 2.0 million shares of the Company's outstanding
common stock, at the market price of $12.57 per share, in negotiated
transactions concurrently with the Debentures offering. In addition, the Company
incurred expenses associated with the retirement of the Term Loan B of
approximately $5.9 million, which included the write-off of approximately $3.5
million of deferred debt issuance costs, and which is classified as loss on
extinguishment of debt in the Company's Consolidated Statements of Income.

In connection with the sale of the Debentures, the Company agreed to file
with the SEC, within 90 days after the original issuance of the Debentures, a
shelf registration statement with respect to the resale of the Debentures and
the common stock issuable upon conversion of the Debentures. The Company agreed
to use commercially reasonable efforts to cause the shelf registration statement
to become effective within 210 days after the original issuance of the
Debentures. On September 15, 2004, the Company filed the shelf registration
statement with the SEC. On March 14, 2005, the shelf registration became
effective. Since the Company was unable to cause the shelf registration
statement to become effective within 210 days after original issuance of the
Debentures, the Company is required to pay an additional 0.25% of interest on
the Debentures from January 26, 2005, through the effective date of the shelf
registration statement, March 14, 2005. The Company expects to pay approximately
$42,000 of additional interest to holders of the Debentures for the period from
January 26, 2005 through March 14, 2005.

On June 30, 2004, the Company also amended the Revolving Credit Facility to
increase its capacity from $50 million to $75 million, to extend its maturity to
three years, and to lower the interest rate from LIBOR plus amounts ranging from
3.0% to 3.5% to LIBOR plus amounts ranging from 2.5% to 3.0%. The Company did
not incur any borrowings under the Revolving Credit Facility in connection with
the retirement of the Term Loan B or the share repurchase. The Company intends
to use the Revolving Credit

F-21

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Facility, as needed, for future investments in operations, including capital
expenditures, strategic acquisitions, to secure its letters of credit, as
needed, and other general corporate purposes. The Company has not incurred any
borrowings under the Revolving Credit Facility as of December 31, 2004.

All obligations under the Revolving Credit Facility 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. There are no restrictions on the Subsidiary Guarantors that would
prohibit the transfer of funds or assets to the parent company by dividend or
loan.

The Revolving Credit Facility 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 Revolving Credit Facility. The Company
was in compliance with all applicable covenants as of December 31, 2004.

The Company's policy is to amortize debt issuance costs using the
straight-line method over the life of the debt agreement. Amortization expense
related to debt issuance costs on the Notes, the Revolving Credit Facility,
Credit Agreement and the Debentures for the years ended 2004, 2003, and 2002
were $1.3 million, $1.5 million and $1.4 million, respectively.

The aggregate maturities of long-term debt, including capital leases, are
as follows at December 31, 2004 (in thousands):

2005........................................................ $ 98
2006........................................................ 120
2007........................................................ 124
2008........................................................ 128
2009........................................................ 132
Thereafter.................................................. 125,023
--------
$125,625
========

The Company's capital leases consist principally of leases for equipment.
As of December 31, 2004, the net book value of equipment subject to capital
leases totaled $0.6 million.

11. LEASE COMMITMENTS

The Company leases office space and equipment under noncancelable operating
leases, which expire at various dates through 2011. Rent expense was $14.1
million, $14.4 million and $14.8 million for the years ended December 31, 2004,
2003, and 2002, respectively.

F-22

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):

2005........................................................ $10,849
2006........................................................ 7,530
2007........................................................ 6,085
2008........................................................ 4,257
2009........................................................ 3,762
Thereafter.................................................. 8,407
-------
$40,890
=======

12. 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 settlement with the Company's former
insurance carrier, Lloyd's. In the settlement, Lloyd's agreed to pay the Company
$20 million in cash by July 9, 2004. Lloyd's also agreed to defend, settle or
otherwise resolve, at their expense, the two remaining pending claims covered
under the errors and omissions ("E&O") policies issued to the Company by
Lloyd's. In exchange, the Company provided Lloyd's with a full release of all
E&O and directors and officers and company reimbursement ("D&O") policies. The
California Superior Court retained jurisdiction to enforce any aspect of the
settlement agreement.

As of the settlement date, the Company had an $18.3 million receivable from
Lloyd's, of which approximately $4.9 million represented additional amounts to
be paid by the Company under prior E&O settlements covered by Lloyd's. Effective
on May 12, 2004, as a result of negotiations among the Company, Lloyd's, and a
party to a prior E&O settlement with the Company, the Lloyd's settlement was
amended to reduce by $3.8 million the additional amounts to be paid by the
Company under the prior E&O settlements covered by Lloyd's. This amendment
reduced the amount of cash payable by Lloyd's to the Company in the settlement
from $20 million to $16.2 million, and reduced the amount of the Company's
receivable from Lloyd's by $3.8 million. On July 7, 2004, pursuant to the
settlement, as amended, Lloyd's paid the Company $16.2 million in cash. As of
the payment date, the Company had an approximately $14.7 million receivable from
Lloyd's and recognized a gain of approximately $1.5 million on the settlement in
the year ended December 31, 2004.

F-23

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. STOCKHOLDERS' RIGHTS PLAN

On January 21, 1999, the Board approved a stockholders' rights agreement
(the "Rights Agreement"). Pursuant to the Rights Agreement, the Company declared
a dividend of one right for each outstanding share of Common Stock to
stockholders of record at the close of business on February 16, 1999. Each right
entitles the registered holder to purchase from the Company a unit (a "Unit")
consisting of one one-hundredth of a share of Series A Junior Participating
Preferred Stock, without par value, at a purchase price of $75 per Unit.

Initially, the rights are deemed to be attached to certificates
representing all outstanding shares of Common Stock, and they are not
represented by separate rights certificates. Subject to certain exceptions
specified in the Rights Agreement, the rights will separate from the Common
Stock and become exercisable upon the earlier to occur of (i) 10 business days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding Common Stock or (ii) 10 business days following
the commencement of a tender offer for the Common Stock.

In the event that a person becomes an Acquiring Person, except pursuant to
an offer for all outstanding shares of Common Stock that the independent
directors of the Company determine to be fair and otherwise in the best
interests of the Company and its stockholders (after receiving advice from one
or more investment banking firms), each holder of a right will thereafter have
the right to receive, upon exercise, Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a value equal to two
times the exercise price of the right (i.e., $150 per Unit).

Until a right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the rights become
exercisable for Common Stock (or other consideration) of the Company, or for
common stock of the acquiring company, or in the event of the redemption of the
rights as set forth above. As of December 31, 2004 and 2003, no rights have
become exercisable under this agreement.

On May 4, 2000, the Company amended the Rights Agreement to provide that
the meaning of the term "Acquiring Person" shall not include Basil P. Regan and
Regan Partners, L.P. (collectively, "Regan Fund Management"), so long as Regan
Fund Management does not become the beneficial owner of 20% or more of the
outstanding shares of Common Stock. Effective March 6, 2002, the Company amended
the Rights Agreement to rescind the May 4, 2000, amendment, thereby making Regan
Fund Management subject to the 15% beneficial ownership threshold described
above. On March 10, 2003, the Company amended the Rights Agreement to provide
that the term "Acquiring Person" shall not include ValueAct Capital Partners,
L.P. ("ValueAct Partners"), ValueAct Capital Partners II, L.P. ("ValueAct
Partners II"), ValueAct Capital International, Ltd. ("ValueAct International"),
VA Partners, L.L.C. ("VA Partners"), Jeffrey W. Ubben, George F. Hamel, Jr., and
Peter H. Kamin (ValueAct Partners, ValueAct Partners II, ValueAct International,
VA Partners and Messrs. Ubben, Hamel and Kamin, and their affiliates,
collectively, ("ValueAct"), so long as ValueAct does not become the Beneficial
Owner of 20% or more of the then outstanding shares of Common Stock. As of
December 31, 2004, and 2003, ValueAct was the beneficial owner of approximately
17.7% and 17.1%, respectively, of the outstanding shares of Common Stock.

On February 18, 2005, the Company amended the Rights Agreement to remove
Section 23(c) thereof (the "slow hand" provision) in its entirety. Section 23(c)
previously provided that if, within 180 days of a public announcement by a third
party of an intent or proposal to engage in an acquisition of or business
combination with the Company or otherwise to become an Acquiring Person there
was an

F-24

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

election of directors resulting in a majority of the Board being comprised of
persons who were not nominated by the Board in office immediately prior to such
election, then following the effectiveness of such election, the rights could
not be redeemed for a period of 180 days unless (1) the rights were otherwise
then redeemable absent the provisions of paragraph 23(c) and (2) the Board
fulfilled certain specified procedural obligations.

This amendment also amended and restated Section 29 of the Rights Agreement
to create a three-year independent director evaluation ("TIDE") Committee,
consisting of independent members of the Board, that will review and evaluate
the Rights Agreement at least once every three years to consider whether the
maintenance of the Rights Agreement continues to be in the best interest of the
Company, its stockholders and other relevant constituencies of the Company. The
TIDE Committee may also review and evaluate the Rights Agreement if (1) any
person has made an acquisition proposal to the Company or its stockholders, or
taken any other action that could cause such person to become an Acquiring
Person, and (2) a majority of the members of the TIDE Committee deems such
review and evaluation appropriate after giving due regard to all relevant
circumstances.

14. COMMON STOCK OPTIONS AND STOCK AWARDS

The Company has several stock option plans including a Non-Qualified Stock
Option Plan, a Non-Qualified Stock Option Plan for Employees of Acquired
Companies and a Non-Qualified Stock Option Plan for Non-Executive Employees.
Options expire ten to eleven years after the date of grant and generally vest
over a three-to-five year period. The total number of options available for
future grant under these stock option plans was approximately 0.8 million at
December 31, 2004.

The Company also has a Non-Qualified Non-Employee Director Stock Option
Plan (the "Director Plan") for non-employees who serve on the Company's Board of
Directors. The Director Plan provides for an initial grant of 10,000 options at
a strike price equal to the average of the fair market values for the five
trading days prior to the date of the grant. Additionally, each non-employee
director receives an annual grant of 10,000 options at each subsequent annual
meeting in which the non-employee director is a member of the Board of
Directors. All options granted under the Director Plan originally vested over a
five-year period and expired eleven years from the date of grant. On April 1,
1999, the Director Plan was amended so that all future options granted under the
Director Plan fully vest as of the date of grant but are not exercisable until
one year after the date of grant. As of December 31, 2004, the Company had
148,543 options available for future grant under this plan.

In June of 1999, in connection with the settlement with the former
shareholders of Medical Management Sciences, Inc., the Company issued warrants
to purchase 166,667 shares of Common Stock. These warrants expired unexercised
on June 25, 2004.

F-25

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Activity related to all stock option plans is summarized as follows (shares
in thousands):

The following table summarizes information about stock options outstanding
and exercisable at December 31, 2004 (shares in thousands):

The Company accounts for its stock-based compensation plans under APB No.
25. As a result, the Company has not recognized compensation expense for stock
options granted to employees with an exercise price equal to the quoted market
price of the Common Stock on the date of grant and that vest based solely on
continuation of employment by the recipient of the option award. The Company
adopted SFAS No. 123 for disclosure purposes in 1996. For SFAS No. 123 purposes,
the Company estimates the

F-26

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fair value of each option grant as of the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions:

Per-Se has never paid cash dividends on its Common Stock. The Credit
Agreement entered into on September 11, 2003, as amended, contains restrictions
on the Company's ability to declare or pay cash dividends on its Common Stock.

15. DEFERRED STOCK UNIT PLAN

Effective October 1, 2001, and approved by the stockholders at the annual
meeting held on May 2, 2002, the Board of Directors adopted the Per-Se
Technologies, Inc. Deferred Stock Unit Plan (the "Plan"). The purpose of the
Plan is to further align the interests of the Company's non-employee directors
and a select group of key employees of the Company (and its affiliates) with the
interests of stockholders by encouraging additional ownership of the Common
Stock. The Plan also provides the participants with an opportunity to defer
taxation of income in consideration of the valuable services that they provide
to the Company. Non-employee directors of the Company are automatically eligible
to participate in the Plan. The Compensation Committee of the Board of Directors
may select key employees of the Company from time to time as eligible
participants. Currently, seven non-employee directors and six executives
(including two employee directors) are eligible to participate in the Plan.

Pursuant to the Plan, a non-employee director may elect to defer up to 100%
of his Board and committee meeting fees and his annual retainer each year.
Eligible employees may elect each year to defer up to 50% of their annual
incentive bonus and receive an enhancement bonus equal to $0.25 for each dollar
of compensation deferred. The Compensation Committee may also from time to time
in its sole discretion designate such other enhancement bonus contributions as
it deems appropriate. The cash amount of such deferrals and, in the case of
employee participants, the enhancement bonuses will be converted to stock units,
by dividing the amount to be deferred, plus any enhancement bonus, by the fair
market value of the Common Stock on the date the amounts are credited to the
participant's account.

Participants are always fully vested in the stock units converted from
deferrals of compensation. However, stock units that are converted from an
enhancement bonus credited to an employee participant, and any related dividend
equivalent stock units, will vest at the rate of 20% each year over a period of
five years from the date of deferral of the related compensation. If a
participant's employment is terminated for "cause" (as defined in the Plan) or
if he or she resigns without "good reason" (as defined in the Plan) before the
enhancement bonus stock units are vested, he or she will forfeit any such
unvested stock units.

For the years ended December 31, 2004 and 2003, the Plan purchased a total
of 19,925 shares and 31,842 shares, respectively, of the Company's Common Stock
at a total cost of approximately $0.3 million and $0.3 million, respectively. In
accordance with EITF Issue No. 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested, and
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, these
amounts and the Company's obligation are reflected as treasury stock and
deferred compensation obligation, respectively, in the financial statements.

F-27

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. INCOME TAXES

Income tax (benefit) expense attributable to continuing operations
comprises the following:

A reconciliation between the amount determined by applying the federal
statutory rate to income before income taxes and income tax (benefit) expense is
as follows:

F-28

PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards. The components of deferred taxes at December 31, 2004 and 2003,
are as follows:

At December 31, 2004, the Company had federal net operating loss
carryforwards ("NOLs") for income tax purposes of approximately $393.7 million,
which consist of $347.9 million of consolidated NOLs and $45.8 million of
separate return limitation year NOLs. The NOLs will expire at various dates from
2005 through 2024 as follows:

The Company has historically had a full valuation allowance against its
deferred tax asset due to the uncertainty regarding its ability to generate
sufficient future taxable income prior to the expiration of its NOLs. In the
fourth quarter of 2004, the Company reassessed the valuation allowance
previously established and determined that it was more likely than not that a
portion of the deferred tax asset would be realized in the foreseeable future.
This determination was based upon the Company's projection of taxable income for
2005 and 2006. As a result, the Company released a portion of the allowance
resulting in an income tax benefit of $28.1 million for 2004. The Company will
continue to assess the potential realization of the remaining deferred tax
asset, and will adjust the valuation allowance in future periods, as
appropriate.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. EMPLOYEE BENEFIT PLANS

The Company has various defined contribution plans whereby employees
meeting certain eligibility requirements can make specified contributions to the
plans. The Company matches a percentage of the employee contributions. The
Company's contribution expense was $2.1 million, $1.8 million and $1.6 million
for the years ended December 31, 2004, 2003 and 2002, respectively.

18. CASH FLOW INFORMATION

Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:

19. 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 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 outsourced services business recognizes revenue as a percentage of the
physician group's cash collections for the services performed. Since this is an
outsourced service delivered on the Company's proprietary technology, license
fees or maintenance fees are not required to be paid by the division's
hospital-affiliated physician groups. The division also sells a physician
practice management ("PPM") solution that is delivered via an ASP model. The PPM
solution collects a monthly usage fee from the office-based physician practices
using the system. The division's revenue model is 100% recurring in nature due
to the transaction-based nature of its fee revenue in the outsourced services
business and the monthly usage fee in the PPM business. 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
designed to 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 clearinghouses in the
medical industry, which provides an important infrastructure to support its
revenue cycle offering. The division also provides resource

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 primarily recognizes revenue on a per-transaction basis for
its revenue cycle management solutions and primarily recognizes revenue on a
percentage-of-completion basis or upon software shipment for sales of its
resource management software solutions. Approximately 88% of the division's
revenue is recurring 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 income. Segment operating income is revenue less cost of services,
selling, general and administrative expenses and other expenses.

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.

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 -- (CONTINUED)

- ---------------

(1) Identifiable assets in the Physician Services and Hospital Services
divisions include approximately $8,936 and $23,613 of goodwill,
respectively, for all periods presented.

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PER-SE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

- ---------------

(1) Reflects the release of $28.1 million of the valuation allowance against the
Company's deferred tax asset resulting in an income tax benefit that was
recorded in the fourth quarter of 2004.

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PER-SE TECHNOLOGIES, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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