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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  FORM 10-KSB

              Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934


                  For the Fiscal Year Ended December 31, 2000

                        Commission File Number 000-16288

                                  HALIS, INC.
            --------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

          Georgia                                               58-1366235
--------------------------------------------------------------------------------
(State or other jurisdiction of                                (IRS Employer
incorporation or organization)                              Identification No.)

                            1100 Johnson Ferry Road
                                   Suite 670
                             Atlanta, Georgia 30342
                                 (404) 364-1871
--------------------------------------------------------------------------------
                    (Address of principal executive offices,
         including zip code, and telephone number, including area code)

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

Securities registered pursuant to section 12(g) of the Act: Common Stock, $.01
par value

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 in response to
Item 405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of Registrant's knowledge, in a definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [__]

     Revenues for the fiscal year ended December 31, 2000: $4,051,434
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     The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant (approximately 41,965,164 shares) on March 31,
2001 was approximately $839,303. The aggregate market value was computed by
reference to the average of the bid and asked prices of the Common Stock the
Nasdaq Bulletin Board on March 31, 2001. For the purposes of this response,
officers, directors and holders of 5% or more of the Registrant's Common Stock
are considered to be affiliates of the Registrant at that date.

     The number of shares outstanding of the Registrant's Common Stock as of
March 31, 2001 was 61,132,037 shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

None

Transitional Small Business Disclosure Format (check one):
               Yes  ________  No  X


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

Halis, Inc.("Halis" or the "Company") based in Atlanta, Georgia, is a systems
developer of information technology and provider of related services focusing on
the healthcare industry. Halis also provides third party administrative services
for healthcare plans of large and small companies throughout the United States.
Halis' offices are located in Atlanta, Georgia and Chicago, Illinois.

     On June 29, 2000, the Company entered into a definitive merger agreement
with HealthWatch, Inc. ("HealthWatch") to merge into a wholly-owned Georgia
subsidiary of HealthWatch. See "Item 1: Description of Business-Recent
Developments."  HealthWatch is a publicly traded company on the Nasdaq SmallCap
Market (Nasdaq: Heal) with offices in Atlanta, Georgia and San Diego,
California.  HealthWatch is incorporated in the State of Minnesota and also
provides information technology services for the healthcare industry.  As of the
date of this filing, Halis anticipates that the merger will close sometime
during the second calendar quarter of 2001.  However, there can be no assurances
that the companies will be able to comply with the specified conditions
precedent to closing contained in the merger agreement.

     The corporate offices for our Company are located at 1100 Johnson Ferry
Road, Suite 670, Atlanta, Georgia 30342.  Our company's telephone number is 404-
364-1871.  For more information on our Company, you should contact Investor
Relations at the above address.

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 The HES System

  Halis' system architects have years of experience building large advanced
software systems for the healthcare and other industries. In late 1996, Halis
focused its attention on a new healthcare software system that it believed would
revolutionize the way that a healthcare organization operates. Historically, a
healthcare organization's system needs have been met with old legacy systems
that are not designed to manage all of the needs of a healthcare organization in
its interaction with patients or other users of their services. Even systems
that could handle more than one function often were unable to do so in an
integrated manner so that information would be shared between functions. By way
of example, a single patient visit results in scheduling, registration, medical
records update, billing, claims processing, etc. In order to handle these types
of transactions, a typical system would be made up of many modules or programs
that are interfaced together. This results in an inefficient system made up of
millions of lines of code with repetitive processing and manual intervention
occurring at various points in the process. In order to install a system of this
type at multiple locations, it is necessary to individualize each installation,
a process that can be very time consuming and costly. The Halis design team
understood the inefficiencies of the current products available and used in the
healthcare industry and set out to develop the next generation of integrated
healthcare software that would not be limited by the constraints encountered by
other healthcare systems.

  As a result, Halis acquired a core healthcare information system and went on
to developed the HES System, a comprehensive advanced integrated system capable
of being used by all the main participants in the healthcare process: consumers,
payors, physician practices, hospitals, laboratories, pharmacies, home health
providers and long-term care facilities. To accomplish this, Halis' developers
modeled the healthcare industry to determine what information is necessary for
the various healthcare participants and the manner in which such information is
collected. By doing so, Halis was able to identify information that is common to
all participants and/or functions, thus avoiding duplication of effort. The
design of the HES System avoids the pitfalls of having to write and maintain
millions of lines of code, and then initiate the process of ``interfacing'' them
together at each installation. The HES System is integrated by design not
"interfaced" and is contained in one system which includes over 50 different
applications. The HES System contains a computerized medical record which is
capable of tracking a patient's entire medical history. This feature is a useful
feature for providers with multiple locations because it eliminates the need to
transfer paper files between locations, offices or users. Multiple locations can
share identical data in a common database that is available to all users, or,
depending on security and confidentiality concerns, data can be shared by a
select number of locations or users. The HES System is capable of managing a
healthcare enterprise's resources, patients, finances and contracts all in one
program. This gives the HES System great flexibility in meeting the needs of
even the most complex healthcare delivery systems.

  The technical innovation that enables the HES System to be so powerful, yet
simple to install and maintain, is the software utility known as "MERAD" that
Halis licenses from HealthWatch. MERAD enables the HES System to store
programming code as data scripts or digital packets in a database thereby
removing 80% of the repetitive processing that conventional programming is
required to perform. For example, a patient address would be stored as one data
script that could

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be accessed by any of the 50 applications in the HES System without the need for
repetitive processing or duplicative data entry.

  Because MERAD is completely Internet enabled, including Intranet and Extranet
subsets, the HES System can be downloaded over the Internet and installed in
minutes to numerous locations simultaneously. This means that the HES System is
not only easier to maintain and support, but because it was built for use on the
Internet, it allows for installation and support and services to be performed
over the Internet. The HES System can also allow consumer interaction with the
healthcare providers via the Internet.

  The HES System integrates all of the major functions needed by clinics,
hospitals, physician practices, payors, long-term care facilities, laboratories,
pharmacies and home health providers, which represents eight of the major
markets in the healthcare industry. Halis is currently building out the specific
features required by each of these eight markets. Presently, the current version
of the HES System is complete for clinics, physician and management practices.

  The HES System is currently targeted to healthcare industry participants such
as physician practices, outpatient clinics and hospitals that generally have 100
users or more because the HES System is able to provide significant efficiencies
for such entities due to the large number of transactions that must be
processed. Halis expects to capitalize on the healthcare industry's demand for
more software variety, updates, convenience, lower pricing and better support
services.

 Health Insurance Services

  In addition to Halis' information technology business, it operates a health
insurance services and claims processing business through its wholly-owned
subsidiary, American Benefit Administrative Services, Inc.

  American Benefit Administrative Services' offices are located in Naperville,
Illinois, a suburb of Chicago, and was founded in 1979. Halis acquired American
Benefit Administrative Services in 1997. As of December 31, 2000, American
Benefit Administrative Services had 39 employees.

  American Benefit Administrative Services markets and administers employee
benefit plans nationwide for major insurance companies and large self-funded
employers. Services provided include benefit plan consulting and plan document
preparation, claims administration, billing and financial services, and COBRA
and flexible spending account administration.

  American Benefit Administrative Services earns compensation and fees based on
both a percent of premium paid by the employer for plan coverage or a capitated
rate per employee/per month enrolled in the plan serviced. For the fiscal year
ended December 31, 2000, American Benefit Administrative Services had total
revenues of $3,862,105.

  Halis's principal executive offices are located at 1100 Johnson Ferry Road,
Suite 670,

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 Atlanta, Georgia 30342, and its telephone number at that address is
(404) 364-1871. Its American Benefit Administrative Services subsidiary is
located in Chicago, Illinois.


  HealthWatch/Halis Relationship

  Since fiscal year 1998, Halis' relationship with HealthWatch has expanded,
with HealthWatch now owning approximately 25% of Halis' outstanding common
stock. HealthWatch owns the MERAD technology which is licensed to Halis under a
perpetual license agreement. Under the terms of the perpetual license agreement,
in return for use of MERAD, Halis is obligated to pay HealthWatch a royalty
equal to 10% of the gross revenues generated by Halis from the sell of products
and services that incorporate the MERAD technology. In addition, Halis and
HealthWatch operate under a business collaboration agreement which provides,
among other things, for revenue sharing from sales of each company's products
based on a 60/40 split (i.e., the selling company would receive 60% of the sales
price received and the company that owns the technology would receive 40% of the
sales price received). Furthermore, HealthWatch is obligated to pay Halis a
collaboration fee of $50,000 per month, which is applied as a credit against any
revenue sharing amount that is due to Halis. Halis is obligated to provide
support to HealthWatch for the Halis software products, provide reasonable
product enhancement as part of product release updates and cooperate with
HealthWatch in regard to product enhancement requests. HealthWatch may terminate
the $50,000 monthly collaboration fee payable to Halis on or after October 1,
2001, under certain terms and conditions. The business collaboration agreement
terminates on September 20, 2005 and provides for automatic one-year extensions
unless terminated with a ninety-day notice by either party. During the first
quarter of fiscal year 1999, Halis' board of directors decided that in order to
conserve its resources, and to operate more efficiently, Halis would focus its
attention on the support and services of the HES System and its claims
processing capabilities, and would rely upon HealthWatch to market and sell the
HES System to new customers. HealthWatch recently relocated its corporate
offices to Atlanta and it and Halis share office space in Atlanta and
administrative support under a cost sharing arrangement.

  In addition to the business collaboration agreement and cost sharing
arrangement, HealthWatch and Halis have common senior management in that Paul W.
Harrison is the Chairman, CEO and President of both companies. Mr. Harrison
receives separate compensation from each company and other costs and expenses of
Mr. Harrison are allocated to each company based on time spent unless the costs
are incurred specifically for one company.

  Industry Background

     The healthcare industry is undergoing change at an unprecedented rate.
Hospitals are buying physician practices; individual practices are combining
their efforts and forming independent practice associations; physician practice
management companies are either buying or managing groups of practices and
clinics; and insurance companies are entering many of these same markets.

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     The implications of these changes are numerous, but one of the key factors
to the success of each of these organizations is the availability of information
throughout the organization, beginning at the point of service. It is estimated
that as many as 90 manual steps are required to service a patient and process a
claim generated by an office visit. This process is often fraught with errors.
The physician often does not know all of the patient's history, and if and how
much he or she will be paid for the performance of a given service due to the
complexities in the benefit plans and management contracts under which the
practice operates.

     As a result of the new healthcare environment, we expect significant
increases in spending on healthcare technology and related services over the
next several years. According to some reports, the industry has historically
spent approximately two to three percent of its revenues on information
technology and services, compared to six to ten percent of revenues for
companies in other information intensive industries. Management believes that
over the next several years, spending on healthcare technology and related
services will approach the levels experienced by other industries. We believe
that this trend, combined with the overall growth of the healthcare industry,
will yield significant opportunities for companies who deliver information
technology products and services to the healthcare industry.

     Healthcare delivery costs have increased dramatically in recent years. The
growing influence of managed care has resulted in increasing pressure on
participants in the healthcare system to contain costs. Accordingly, healthcare
systems are migrating toward more managed care reimbursement, including
discounted fee for service and capitation. Under capitation, providers are paid
a predetermined fee per individual to provide all healthcare services, thereby
assuming the potential financial risks of escalating healthcare costs.

     To deliver care in a more cost-effective manner, providers are forming
integrated healthcare delivery networks that may include acute-care hospitals,
physicians offices, outpatient clinics, home healthcare providers and long-term
care facilities. The success of these comprehensive delivery networks is
dependent upon, among other things, effectively managing and delivering
information to care givers and managers across multiple points of care.

     Traditionally, the hospital information systems market has been the largest
segment of healthcare information services. According to industry analysts, the
healthcare industry spent approximately $10 billion for products and services to
support automated information systems in 1995, and the market is expected to
reach $28 billion by the year 2000.

     The current market of healthcare and related businesses in the United
States is estimated to be more than $1 trillion. International markets provide
even greater opportunity. Management believes the immediate domestic market
potential for the Company's software products and technology services is a
universe of approximately 3.4 million businesses representing more than $15
billion in annual revenue.

     In addition to this expanding market opportunity, the demand for healthcare
information systems is also increasing as hospitals and other providers come
under increased pressure to

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quantify and control their costs. As a result, many providers are spending more
on systems to enable them to access such information. According to the 1996
Annual HIMSS/HP Leadership Survey, an industry survey conducted by Hewlett
Packard at the Healthcare Information and Management Systems Society Conference,
63% of the respondents stated that their information system investments will
increase at a rate of 20% or more, and 24% indicated budget growth of over 50%.

     Healthcare information systems are evolving to meet the needs of a changing
marketplace. Initially these systems were financially oriented, focusing on the
ability to capture charges and generate patient bills. However, as reimbursement
has shifted more towards risk sharing and capitation, providers and payers are
seeking to better manage risk by controlling costs, demonstrating quality,
measuring outcomes and influencing utilization. Each of these goals requires the
collection, analysis and interpretation of clinical and financial information
related to the delivery of healthcare services.

     We believe that the availability of a complete, timely and cost-effective
patient focused information system is essential to controlling costs, while
providing high quality patient care. Sources of patient information usually
include a number of different sites; therefore, current and historical paper
records must be made available by computer to all points-of-care. All
participants in the delivery network need information systems that can capture
data at the point-of-care, communicate data across the continuum of care and
process and store the large volumes of data necessary for the development of a
computer-based patient record.

     Information technology in healthcare has historically had a "bottoms up"
approach. Software applications such as billing, admissions, claims processing,
patient registration, medical records, contract management and  others were
developed individually using rigid programming techniques. Over time, many of
these systems were "interfaced" to each other in order to provide a more
complete solution. The piecing together of these disparate applications,
however, has caused significant problems in the development, maintenance and
enhancement of these systems. Each time a change is made to one application, the
other applications, normally written by different programers, must be changed to
maintain the "interface."  This process results in longer lead times and higher
costs to acquire, maintain and upgrade systems.

     It is not uncommon for a hospital to have more than 10 different
application systems (up to 50 in larger hospitals) installed to perform the
functions of admissions, billing, patient registration, insurance processing,
internal reporting, laboratory information, pharmacy records, contract
management and eligibility. A typical single software application (including
integration testing and conversion) can cost in excess of $200,000. Annual
software support for multiple applications can run as much as $600,000 or more,
and changes to the software programs create additional charges to the hospital.
Physician practices face the same situation on a smaller scale, spending up to
$20,000 or more for initial software license fees, plus support and
customization.

     There are estimated to be approximately 120 million combinations of
computer instructions required to support today's healthcare industry with
enterprise-wide application

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solutions. Using traditional "hard coding" of computer instructions, these
systems cannot be maintained in a cost effective manner. Therefore, most systems
in the market today have difficulty producing the total solution that the
changing healthcare environment demands. Traditional programming techniques do
not offer a quality, cost effective path to the future for today's customers.


  Company Strategy

     The Company is currently focused on the point-of-service system business in
the healthcare industry (e.g., physician practices, MSO's and other managed care
organizations and clinics). As resources become available, the Company plans to
expand into the other segments of the healthcare industry. Management believes
that the Company is well positioned to produce and support the Company's
products, due to the flexibility of the Company's technology and the fact that
the Company has no "legacy" systems to maintain, enhance or otherwise invest in.
Management believes that the flexibility of the HES will allow the Company to
keep up with user demand for updates due to health plan changes, management
contract revisions, new services and products and changes in managed care plans
and practices. Additionally,  over time, with sufficient dedication of
resources, the Company will be able to deliver integrated software to virtually
every healthcare market segment including medical practices, home health
agencies, hospitals, clinics, long-term care facilities, labs, pharmacies and
payors. The HES can become the standard platform allowing all of these providers
to transfer data among themselves.

     The Company's strategy is to offer its customers a complete solution to
their healthcare information needs. Halis will use its technological advantages
to produce and sell lower cost application software, and will provide healthcare
information outsourcing and consulting services to augment its software
products. In addition, the Company should be able to deliver a turnkey solution
to healthcare organizations through its ability to implement customized computer
hardware, communication networks and other systems integration services.

     The Company will offer the HES through (1) a customer-managed and operated
model that can be downloaded from the Internet and managed by the customer's in-
house IT personnel and (2) an outsourced model that is offered over the
Internet from the Company's facilities.  The Company intends to market its
products through the use of a Web site, selected magazine advertising and high-
profile trade shows to build brand awareness.  The HES may also be downloaded
from the Internet to be used by potential customers on a trial basis.

     The Company believes that it will have an advantage over its competitors
because its products are expected to be effective in keeping pace with the
ongoing market changes in healthcare. Management believes that many competitors
currently have fragmented inflexible healthcare software that will not meet the
changing needs of today's healthcare companies.

     The Company will manage its operations from its corporate headquarters in
Atlanta, Georgia and strategically located regional offices focused on sales and
service in different

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geographical areas. Halis will endeavor to keep its corporate overhead costs
low, while maintaining sufficient staff to implement the business plan and
manage corporate activities, such as strategic planning, mergers and
acquisitions, accounting, treasury, research and development and risk
management.

     There can be no assurance that the Company will be successful in
implementing its strategic plan or that shareholder value will be enhanced if
such plan is implemented. See "Risk Factors Affecting Future Performance."

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                   RISK FACTORS AFFECTING FUTURE PERFORMANCE

     You should carefully consider the following risks in your evaluation of
Halis.  The risks and uncertainties below are not the only ones we face.
Additional risks and uncertainties may also adversely impact and impair our
business.   If any of the following risks actually occur, our business, results
of operations or financial condition would likely suffer.  In such case, the
trading price of our Common Stock  could decline.

  We Have a History of Losses, Expect Future Losses and Cannot Assure You That
We Will Achieve Profitability.

     We have generated extremely limited revenues with our information
technology business.  Our revenue and income potential are unproven and our
business model is constantly evolving.  We have limited experience addressing
challenges frequently encountered by early-stage companies in the software and
related services industry.  You should evaluate our business in light of the
risks and difficulties frequently encountered by early stage companies engaged
in such commerce.  These risks include:

      .  lack of sufficient capital;
      .  uncertain market acceptance of our products and services;
      .  our ability to develop and upgrade our infrastructure, including
         internal controls, transaction processing capacity, data storage and
         retrieval systems and web site;
      .  our ability to respond to competition;
      .  our need to manage changing operations;
      .  our reliance upon general economic conditions; and
      .  our dependence upon and need to hire key personnel.

     We may not be successful in addressing these risks, and our business
strategy may not be successful.  As a result of our limited operating history in
the healthcare information technology industry and the competitive nature of the
markets in which we compete, our historical financial data is of limited value
in anticipating future performance.

     We have not achieved profitability and we cannot be certain that we will
realize sufficient revenue to achieve profitability.  Halis has incurred net
losses of $776,963, $1,444,827, and  $3,148,799 in the fiscal years ended
December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, Halis
had an accumulated deficit of $38,838,966. We plan to increase our operating
expenses to expand our sales and marketing operations, broaden our customer
support capabilities and continue to build our operational infrastructure. If
growth in our revenues does not outpace the increase in these expenses, we may
not achieve or sustain profitability.

  Our Business Will Suffer if Healthcare Providers Do Not Accept the Internet

     We are planning for a large segment of our customers to outsource our
solutions by accessing the applications and services through a shared center and
private Internet channel.  We

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cannot guarantee that participants in the healthcare industry and in particular,
physicians, will accept an Internet outsourced solution as a replacement for
traditional sources of these services. Market acceptance of our outsourced
solution will depend upon continued growth in the use of the Internet generally
and, in particular, as a source of services for the healthcare industry. The
acceptance of the Internet for storing, managing and processing information by
healthcare professionals will require a broad acceptance of new methods of
conducting business and exchanging information. Our future financial success
will depend upon our ability to attract and retain healthcare providers as
customers. Our failure to achieve market acceptance would have a material
adverse effect on our business, results of operations and financial condition.

  We Rely on a Limited Number of Products and are Dependent on Market Acceptance
of Such Products

     We have a limited number of customers who are currently using our products
and achieving market acceptance for our products will require substantial
marketing efforts and expenditures to inform potential customers of the
distinctive characteristics and benefits of these products.  Since we have
limited financial and other resources to undertake extensive independent
marketing activities, there can be no assurance we will be able to market our
products successfully.

  We Hope to Grow Rapidly, and the Failure to Manage our Growth Could Adversely
Affect Our Business

     As we continue to increase the scope of our operations, we may not have an
effective planning and management process in place to implement our business
plan successfully.  This growth may strain our management systems and resources.
We anticipate the need to continue to improve our financial and managerial
controls and our reporting systems.  In addition, we will need to expand, train
and manage our growing work force.  Our business, results of operations and
financial condition will be materially and adversely affected if we are unable
to manage and integrate our expanding operations effectively.

  We Need to Expand our Sales and Customer Support Infrastructure

     Our ability to expand our business will depend in part on recruiting and
training additional direct sales and customer support personnel.  Competition
for qualified personnel in these areas is intense.  We may not be able to
successfully expand our direct sales force, which would limit our ability to
expand our customer base.  We may be unable to hire highly trained customer
support personnel, which would make it difficult for us to meet customer
demands.  As a result, any difficulties we may have in expanding our sales and
marketing or customer support organizations

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will have a negative impact on our ability to successfully capitalize on any
acquisitions we may complete.

  Risks Relating to the Proposed Merger

     Halis and  HealthWatch may not achieve the benefits they expect from the
merger which may have a material adverse effect on the combined company's
business, financial condition and operating results and/or could result in loss
of key personnel.

     We will need to overcome significant issues in order to realize any
benefits or synergies from the merger, including the timely, efficient and
successful execution of a number of post-merger events. Key events include:

      .  integrating the operations of the two companies;
      .  retaining and assimilating the key personnel of each company;
      .  retaining the existing customers and strategic partners of each
         company;
      .  developing new services and products that utilize the assets of both
         companies; and
      .  maintaining uniform standards, controls, procedures and policies.

     The successful execution of these post-merger events will involve
considerable risk and may not be successful. These risks include:

      .  the potential disruption of the combined company's ongoing business and
         distraction of its management;
      .  ability to convert customers of businesses we acquire to on-line
         systems;
      .  ability to consummate acquisitions;
      .  the impairment of relationships with employees and customers as a
         result of any integration of new management personnel; and
      .  potential unknown liabilities associated with the acquired business.

     The combined company may not succeed in addressing these risks or any other
problems encountered in connection with the merger.

     Although the Halis and  HealthWatch Boards of Directors have each
determined that the merger is in the best interests of the stockholders of Halis
and HealthWatch, respectively, the integration of the two companies will involve
special risks. There may be challenges in retaining the customers of the
combined business. Moreover, challenges may be presented in assimilating and
retaining personnel. In addition, the integration of the operations and systems
of the two companies and the realization of potential operating synergies may
prove difficult, and may cause management's attention to be diverted from other
business concerns. These and other difficulties associated with the merger may
lead to potential adverse short term effects on operating results.

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  Changing United States Healthcare Environment

     In recent years, the healthcare industry has changed significantly in an
effort to reduce costs. These changes include increased use of managed care,
cuts in Medicare, consolidation of pharmaceutical and medical/surgical supply
distributors and the development of large, sophisticated purchasing groups. We
expect the healthcare industry to continue to change significantly in the
future. Some of these changes may have a material adverse effect on our results
of operations, such as a reduction in governmental support of healthcare
services or adverse changes in legislation or regulations governing the delivery
or pricing of healthcare services or mandated benefits.

  Going Concern

     We will require additional debt or equity capital to sustain operations and
continue our business development efforts.  In addition, due to the limited
resources available to us during the fiscal year ended December 31, 2000, we
were unable to deploy our intended business strategy to any measurable degree.
Our auditors have given us a going concern opinion for the last three years
indicating that there is a substantial doubt about our ability to continue as a
going concern.

  Regulation of Privacy Issues

     The Federal Trade Commission and state governmental bodies have been
investigating the confidentiality and privacy policies and practices of
healthcare Internet companies and Internet companies in general, and may impose
regulations.  In addition, proposed privacy standards for the handling of
individually identifiable health information that is transmitted or stored
electronically were issued by the Department of Health and Human Services on
November 3, 1999 and it will be necessary for our platform and for the
applications that we provide to be in compliance with the final regulations.
Finally, industry groups are also proposing various privacy and ethics standards
in an effort to maintain self-regulation.  We will likely incur additional
expenses regarding privacy practices and policies.  Any such policies and
practices, whether self-imposed or imposed by government regulation, could
affect the way in which we are allowed to conduct our business, especially those
aspects that involve the collection, use and access to personal information and
medical records, and could have a material adverse effect on our business,
results of operations and financial condition.

  The Healthcare Industry is Subject to Extensive Government Regulation

     Participants in the healthcare industry are subject to extensive and
frequently changing regulation at the federal, state and local levels.  Some of
the laws and regulations relate to payment and other relationships with third
party billing and collection agents, as well as regulating computer software
intended for use in the healthcare setting. The impact of regulatory
developments in the healthcare industry is complex and difficult to predict.  We
cannot assure you that we will not be materially adversely affected by existing
or new regulatory requirements or interpretations.  These requirements or
interpretations could also limit the effectiveness of the

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use of the Internet for the methods of healthcare e-commerce we are developing
or even prohibit the sale of a subject product or service. Healthcare service
providers, payors and plans are also subject to a wide variety of laws and
regulations that could affect the nature and scope of their relationships with
us. Laws regulating health insurance, health maintenance organizations and
similar organizations, as well as employee benefit plans, cover a broad array of
subjects, including confidentiality, financial relationships with vendors,
mandated benefits, grievance and appeal procedures and others. State and federal
laws have also implemented so-called "fraud and abuse" rules that specifically
restrict or prohibit certain types of financial relationships between us or our
customers and healthcare service providers, including physicians and pharmacies.
Laws governing healthcare providers, payors and plans are often not uniform
between states, and could require us to undertake the expense and difficulty of
tailoring our business procedures, information systems or financial
relationships in order for our customers to be in compliance with applicable
laws and regulations. Compliance with such laws could also interfere with the
scope of our services, or make them less cost-effective for our customers.

  There is no Assurance that a Public Market for our Common Stock Will Continue
to Develop

     There has only been a limited public market for our Common Stock.  We
cannot predict the extent to which investor interest in our Common Stock will
lead to the development of a trading market or how liquid that market might
become.  Our Common Stock is quoted on the Nasdaq OTC Bulletin Board.  You may
expect trading volume to be low in such a market.  Consequently, the activity of
only a few shares may affect the market and may result in wide swings in price
and in volume.

  We do not Intend to Pay Future Cash Dividends

     We currently do not anticipate paying cash dividends on our Common Stock at
any time in the near future.  Any decision to pay dividends will depend upon our
profitability at the time, cash available and other factors.  We may never pay
cash dividends or distributions on our Common Stock.

  Dependence on Current Management

     As of March 31, 2001, our executive officers, directors and 5% shareholders
together beneficially owned approximately 36% of our outstanding Common Stock.
These shareholders, if they vote together, will retain substantial control over
matters requiring approval by our shareholders, such as the election of
directors and approval of significant corporate transactions.  This
concentration of ownership might also have the effect of delaying or preventing
a change in control.

     As of March 31, 2001, Paul Harrison, CEO and Chairman of the Board of
Directors of the Company, exercises voting control over approximately 8,322,349
shares of the outstanding Common Stock of the Company, including options and
warrants (excluding shares owned by

                                    Page 14
<PAGE>

HealthWatch). Additionally, Mr. Harrison, as the designer of our technology and
the HES System, is critical to the ongoing development of products utilizing our
technology.

                                    Page 15
<PAGE>

Competition from Third Parties Could Reduce or Eliminate Demand for our Products
and Services

     The market for Internet services is highly competitive, and we expect that
competition will intensify in the future. We may not be able to compete
successfully against our current or future competitors and, accordingly, we
cannot be certain that we will be able to expand the number of our customers and
end users, or retain our current customers or third-party service providers.
Many of our current and potential competitors have longer operating histories
and may be in a better position to produce and market their services due to
their greater financial, technical, marketing and other resources, as well as
their significantly greater name recognition and larger installed bases of
customers.

     Newly Introduced Products May Contain Undetected or Unresolved Defects

          Any new or enhanced products we introduce may contain undetected or
unresolved software or hardware defects when they are first introduced or as new
versions are released. In the past, we have discovered errors in our products
and it is possible that design defects will occur in new products. These defects
could result in a loss of sales and additional costs, as well as damage to our
reputation and the loss of relationships with our customers.

     Failure to Attract and Retain Experienced Personnel and Senior Management
Could Harm Our Ability to Grow

          We believe that our future success will depend in large part upon our
continued ability to identify, hire, retain and motivate highly skilled
employees, who are in great demand. In particular, we believe that we must
expand our research and development, marketing, sales and customer support
capabilities in order to effectively serve the evolving needs of our present and
future customers. Competition for these employees is intense and we may not be
able to hire additional qualified personnel in a timely manner and on reasonable
terms. In addition, our success depends on the continuing contributions of our
senior management and technical personnel, all of whom would be difficult to
replace. The loss of any one of them could adversely affect our ability to
execute our business strategy.  None of our employees are currently bound by an
employment agreement and we do not have "key person" life insurance policies
covering any of our employees.

     Our Limited Ability to Protect our Proprietary Technology may Adversely
Affect our Ability to Compete, and We may be Found to Infringe Proprietary
Rights of Others, Which Could Harm our Business

          Our future success and ability to compete depends in part upon our
proprietary technology. None of our technology is currently patented. Instead,
we rely on a combination of contractual rights and copyright, trademark and
trade secret laws to establish and protect our proprietary technology. We
generally enter into confidentiality agreements with our employees, consultants,
resellers, customers and potential customers, limit access to and distribution
of our

                                    Page 16
<PAGE>

source code, and further limit the disclosure and use of other proprietary
information. We cannot assure that the steps taken by us in this regard will be
adequate to prevent misappropriation of our technology or that our competitors
will not independently develop technologies that are substantially equivalent or
superior to our technology. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain or use our
products or technology. Monitoring unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.

          We are also subject to the risk of claims and litigation alleging
infringement of the intellectual property rights of others. Third parties may
assert infringement claims in the future with respect to our current or future
products. Any assertion, regardless of its merit, could require us to pay
damages or settlement amounts and could require us to develop non-infringing
technology or pay for a license for the technology that is the subject of the
asserted infringement. Any litigation or potential litigation could result in
product delays, increased costs or both. In addition, the cost of litigation and
the resulting distraction of our management resources could adversely affect our
results of operations. We also cannot assure that any licenses for technology
necessary for our business will be available or that, if available, these
licenses can be obtained on commercially reasonable terms.

     Fluctuations in Quarterly Performance

          Our revenues will be derived primarily from the sale of software
systems and related services in the healthcare industry, the market for which is
still developing.  Accordingly, our quarterly results of operations are
difficult to predict, and delays in the closing of sales near the end of the
quarter could cause quarterly revenues and to a greater degree, operating and
net income to fall substantially short of anticipated levels. Our total revenues
and net income levels could also be adversely affected by cancellations or
delays of orders, interruptions or delays in the supply of key components,
changes in customer base or product mix, seasonal patterns of capital spending
by customers, delays in purchase decisions due to new product announcements by
us or our competitors, increased competition and reductions in average selling
prices.


                              RECENT DEVELOPMENTS

Proposed HealthWatch Merger

     On June 29, 2000, our Company executed a definitive merger agreement with
HealthWatch to merge into a wholly-owned Georgia subsidiary of HealthWatch.
HealthWatch currently owns approximately 25% of the outstanding Common Stock  of
Halis, and Halis and HealthWatch currently operate under a Business
Collaboration Agreement for the HES and MERAD technologies and a cost sharing
arrangement for corporate office space and administrative resources.

                                    Page 17
<PAGE>

     Under the terms of the merger agreement, Halis would merge into a new
wholly-owned subsidiary of HealthWatch. As a result of the merger, Halis
shareholders would receive one share of HealthWatch common stock for every
twenty shares of Halis common stock they owned, resulting in an exchange ratio
of .050.

     The closing of the proposed merger will be conditioned upon the following:

      .  appropriate approvals of the Halis and HealthWatch stockholders;
      .  the transaction closing before April 30, 2001; and
      .  obtaining governmental and regulatory approval.

Customers

     The Company's customers include numerous healthcare industry participants
located throughout the United States, including healthcare consumers, provider
groups and managed care organizations.

Competition

     The Company believes that the principal competitive factors in the
healthcare information systems market are: the breadth and quality of system and
product offerings, the proprietary nature of methodologies and technical
resources, price, customer service and the effectiveness of marketing and sales
efforts. In addition, the Company believes that the speed with which information
technology companies anticipate and respond to the evolving healthcare industry
structure is also an important competitive factor. The Company believes that,
with adequate capital, it will be able to compete favorably with respect to each
of these factors.

                                    Page 18
<PAGE>

     The market for healthcare information products and services is intensely
competitive. Competitors vary in size and in the scope and breadth of products
and services offered. In addition, the Company competes with different companies
in each of its target markets. Many of the Company's competitors have
significantly greater financial, technical, product development and marketing
resources than the Company.

     The Company's potential competitors include specialty healthcare
information companies, physician practice management companies, third party
claims administrators, healthcare information systems and software vendors and
large data processing and information companies. Many of these competitors have
substantial installed customer bases in the healthcare industry, as well as the
ability to fund significant product development and acquisition efforts.

Proprietary Rights

     The Company's success and ability to compete are dependent in part upon its
proprietary technology, including its software source code. To protect its
proprietary technology, the Company relies on a combination of trade secret,
nondisclosure and copyright law, which may afford only limited protection. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. Although the Company relies on the limited
protection afforded by such intellectual property laws, it also believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable maintenance are essential to establishing and maintaining a
technological leadership position. The Company generally enters into
confidentiality or license agreements with its employees, consultants and
customers and generally controls access to and distribution of its software,
documentation and other proprietary information. Although the Company restricts
the use by the customer of the Company's, there can be no assurance that
unauthorized use of the Company's technology will not occur.

     Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy aspects of
the Company's products, or obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.

     Certain technology used in conjunction with the Company's products is
licensed from third parties, generally on a non-exclusive basis. These licenses
usually require the Company to pay royalties and fulfill confidentiality
obligations. The termination of any such licenses, or the failure of the third-
party licensors to adequately maintain or update their products, could result in
delay in the Company's ability to ship certain products while it seeks to
implement technology

                                    Page 19
<PAGE>

offered by alternative sources. Any required replacement licenses could prove
costly. Also, any such delay, to the extent it becomes extended or occurs at or
near the end of a fiscal quarter, could result in a material adverse effect on
the Company's results of operations. While it may be necessary or desirable in
the future to obtain other licenses relating to one or more of the Company's
products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms if at all.

     In the future, the Company may receive notices claiming that it is
infringing on the proprietary rights of third parties, and there can be no
assurance that the Company will not become the subject of infringement claims or
legal proceedings by third parties with respect to current or future products.
In addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Any such claim could be time
consuming, result in costly litigation, cause product shipment delays or force
the Company to enter into royalty or license agreements rather than dispute the
merits of such claims. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require the expenditure of significant resources to develop non-
infringing technology, require disputed rights to be licensed from others or
require the Company to cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. To the extent the Company desires or is
required to obtain licenses to patents or proprietary rights of others, there
can be no assurance that any such licenses will be made available on terms
acceptable to the Company, if at all. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes that software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend, prosecute or resolve.

EMPLOYEES

     As of March 31, 2001, the Company had 45 full-time employees. The Company
also utilizes contract personnel supplied by HealthWatch and others for support
services, installations of Company's systems  and programming. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company considers its employee relations to be good.

FORWARD-LOOKING STATEMENTS

     This Form 10-KSB contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. These statements include the plans and objectives
of the Company for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. The Company's plans and objectives are based on the assumption
that the Company's entry into the healthcare industry will be successful, that
competitive conditions

                                    Page 20
<PAGE>

within the healthcare industry will not change materially or adversely, and that
there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, as
well as future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the forward-
looking statements included herein are reasonable, the inclusion of such
information should not be regarded as a representation by the Company, or any
other person, that the objectives and plans of the Company will be achieved.
See-"Risk Factors Affecting Future Performance."

ITEM 2. DESCRIPTION OF PROPERTY.

     Halis' corporate headquarters are located at 1100 Johnson Ferry Road, Suite
670, Atlanta, Georgia. Halis shares this office space with HealthWatch under a
cost sharing arrangement in which the rent and facilities costs are allocated to
each company based on usage. Additionally, the Company leases approximately
11,000 sq. feet of space in Chicago, Illinois, where its American Benefit
Administrative Services subsidiary is located, at a monthly rental of $18,541,
which will escalate to $23,000 per month by the year 2003.


ITEM 3. LEGAL PROCEEDINGS.


(A)  Penelope Sellers v. Halis, Inc., Larry Fisher and Paul W. Harrison,
     ------------------------------------------------------------------
     State Court of the State of Georgia, County of Fulton
     Civil Action File No. 97VS1294SD

  On July 18, 1997, Halis was sued by Penelope Sellers, in an action seeking
actual damages against Halis in the amount of $480,534.70, unspecified attorneys
fees and punitive damages of not less than $1,000,000. Ms. Sellers contends that
a finder's fee agreement between her and Halis from August 1995, under which she
was to receive a commission equal to 10% of the amount of any equity investments
in Halis or software licensing fees paid to Halis, in respect of transactions
introduced to Halis by her, entitles her to an amount in excess of the
approximately $19,350 which she has been paid to date under that agreement. That
amount represents 10% of the investment made by the principals of Aubis, LLC
("Aubis") in a private placement of convertible notes (in which private
placement other investors besides the Aubis principals participated) and 10% of
the amounts received by Halis from the sale of Fisher Restaurant Management
Systems by Aubis.

  Ms. Sellers claims that the entirety of the convertible notes offering
described above (in which an aggregate of $1,470,000 was raised by Halis) would
not have been successful but for her introduction of the Aubis principals to
Halis. As a result, Ms. Sellers has made a claim for 10% of all amounts raised
in the notes offering. Ms. Sellers has also made a claim, based on the same
rationale, to 10% of all capital funding raised by Halis (up to the $500,000
maximum

                                    Page 21
<PAGE>

compensation), including the proceeds of a private placement which raised gross
proceeds of approximately $2.0 million. Finally, Ms. Sellers has made a claim
for 10% of the value of Aubis and Halis Systems, Inc.

  Discovery has been completed. Defendants filed a motion for partial summary
judgment, which was granted, the effect of which is to eliminate Larry Fisher
and Paul W. Harrison on claims asserted against them for tortious interference
with contractual relations. Halis continues to vigorously defend this lawsuit.

  There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's complaint, or that the final resolution of this
matter will not have a material adverse effect on Halis' financial condition or
results of operation.


(B) Advanced Custom Computer Solutions, Inc., Wayne W. Surman and Charlotte
    -----------------------------------------------------------------------
    Surman v. Fisher Business Systems, Inc., Halis, Inc., Larry Fisher, Paul W.
    ---------------------------------------------------------------------------
    Harrison and Nathan I. Lipson,
    -----------------------------

  State Court of the State of Georgia, County of Fulton
  Civil Action File No. 97VS0123082.

  In February 1997, Advanced Custom Computer Solutions, Inc. ("ACCS"), Wayne
W. Surman and Charlotte Surman sued Halis alleging, among other things, breach
of contract in connection with the termination by Halis of a merger agreement
with ACCS, which Halis advised ACCS was terminated in November 1996 due to the
impossibility of ACCS's fulfilling certain conditions to closing therein. In
addition, the complaint alleges that the defendants made false and misleading
statements to the plaintiffs for the purpose of inducing plaintiffs to lend
money to Halis, and that Halis, or individuals related to it, tortuously
interfered with the business relationships of ACCS, and fraudulently induced
ACCS management to permit Halis management to take over and "systematically
destroy" the ongoing business of ACCS. The Surman's are the principals of ACCS
and claim personal damages against Halis on certain of the claims, and claim a
right to at least 150,000 shares of Halis common stock, the exact amount to be
determined at trial, based on a claim of a breach of an alleged oral contract to
pay them shares of Halis stock as compensation for soliciting investors (the
"Oral Contract Claim"). The Surman's further claim that Halis fraudulently
induced them to solicit investors for Halis (the "Investor Solicitation
Claim"). The complaint sought damages in the amount of at least $2.0 million
(the exact amount of such damages to be proved at trial), additional damages to
be determined by the jury at trial and punitive damages. Halis answered, denying
the allegations of liability in the complaint, and Halis vigorously defended the
lawsuit. On November 19, 1998, the trial court granted summary judgment in favor
of Halis on all but two counts of the plaintiff's complaint, as amended. The two
counts remaining include the Oral Contract Claim and Investor Solicitation
Claim. The plaintiffs have appealed to the Georgia Court of Appeals from the
order granting partial summary judgment to Halis on all other claims, and Halis
has cross-appealed the portions of the order denying summary judgment on the two
surviving counts. The Georgia Court of Appeals has affirmed the trial court's
granting of summary judgment in favor of Halis on seven of the nine count in the
complaint, and affirming the denial of Halis' cross appeal

                                    Page 22
<PAGE>

denying summary judgment on the two surviving counts.

  Plaintiff's filed a petition for certiorari to the Georgia Supreme Court
regarding the decision of the Georgia Court of Appeals. The Georgia Supreme
Court, on September 8, 2000, denied that petition for certiorari.

  There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's petition for certiorari, or that the final resolution
of this matter will not have a material adverse effect on Halis' financial
condition or results of operation.

(C)  Carrera-Maximus, Inc. (previously known as Carrera Consulting Group) v.
     -----------------------------------------------------------------------
     Halis, Inc.,  and Does 1 to 30, inclusive,
     ------------------------------------------
     Superior Court of the State of California, County of Sacramento Case No.
     00-AS-01605

  Halis was served with this Complaint on April 1, 2000. The Complaint asserts
counts for the following:

  Breach of contract seeking return of professional service fees Carrera-
Maximus, Inc. paid of $425,638, product support fees in the amount of $55,601
and license fees in the amount of $56,750.

  Halis intends to vigorously defend this case. Halis has filed an answer
asserting various defenses and denying liability, and has asserted a
counterclaim for breach of contract for unpaid fees and unreimbursed expenses.
This suit is currently in the discovery phase.

  There can be no assurance, however, that Halis will be successful in its
defense of the plaintiff's complaint, or that the final resolution of this
matter will not have a material adverse effect on Halis' financial condition or
results of operation.


(D)  Motivational Marketing, Inc. vs. Joseph Neely, Halis Services, Inc. and CWA
     ---------------------------------------------------------------------------
     Systems & Solutions, Inc.
     -------------------------
     State Court of the State of Georgia, County of Fulton Case No. 00-VS-
     009208E

  On September 8, 2000, Plaintiff filed its Complaint in the State Court of
Fulton County seeking damages against Halis Services, Inc., a wholly-owned
subsidiary of Halis, alleging breach of contract for failure to pay commissions
due in an amount in excess of $138,000, and damages for fraud in the inducement
in an amount of not less than $100,000, plus unspecified punitive damages and
attorney's fees. The contract referenced in Plaintiff's complaint was an
agreement between Plaintiff and TG Marketing, Inc., a company acquired by Halis
in May of 1997 ("TGM"), for telemarketing services whereby Plaintiff was
supposed to receive commissions from TGM in consideration for referrals of
clients to TGM. Halis Services, Inc. denies the allegations of the complaint and
intends to vigorously defend this case. Discovery has

                                    Page 23
<PAGE>

not yet begun.

  There can be no assurance, however, that Halis Services, Inc. will be
successful in its defense of the complaint or that the final resolution of this
matter will not have a material adverse effect on Halis, Inc.'s financial
condition or results of operation.


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

     No matters were submitted for a vote of our Shareholders during the fourth
quarter of the fiscal year ended December 31, 2000.


                                    PART II

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

     On October 30, 1992, the Company's Common Stock  ceased quotation on the
Nasdaq SmallCap Market. Price information on the Company's Common Stock  is now
available on the OTC Bulletin Board. The trading symbol for the Common Stock  is
"HLIS."

     As of March 31, 2001, there were approximately 1,600 holders of record of
the Company's Common Stock.

     The following table sets for the high and the low closing bid price of the
Company's Common Stock on the OTC Bulletin Board, as reported by Nasdaq for the
periods indicated:
<TABLE>
<CAPTION>
                      1999           2000
                   High   Low    High    Low
                   ----   ---    ----    ---
<S>               <C>    <C>    <C>     <C>
First Quarter     $0.30  $0.08  $ 0.55  $0.09
Second Quarter     0.30   0.13    0.22   0.06
Third Quarter      0.19   0.11    0.09   0.05
Fourth Quarter     0.16   0.05    0.06   0.02
</TABLE>

     The quotations given in the above table reflect inter-dealer prices,
without retail mark-up, mark down or commission, and may not represent actual
transactions. The Company has not paid any dividends and does not expect to do
so in the foreseeable future. Although the payment of dividends rests with the
discretion of the Board of Directors, the Company intends to employ its
earnings, if any, to finance its ongoing operations and to further develop its
business.

Recent Sales of Securities

                                    Page 24
<PAGE>

NEED 2000 SALES

     During fiscal 1999, the Company raised additional cash to meet its
operating needs through several private placements of its Common Stock and
warrants to purchase additional Common Stock at a latter date.  In total, the
Company received cash in the amount of $247,500 in consideration for the
issuance of approximately 2,800,000 shares of its Common Stock  and warrants to
purchase an additional 722,500 shares of Common Stock  at exercise prices
ranging from $0.05 to $0.105 per share.

     In addition, the Company issued approximately 1,090,000 shares of its
Common Stock  in consideration for consulting services received by the Company
valued at approximately $110,500.  During February 1999, the Company issued
1,500,000 shares of its Common Stock  to Paul Harrison in settlement of the
salary due to Mr. Harrison under his employment contract for fiscal year 1998.
Finally, in January 1999, the holders of 6% notes converted $157,741 of such
notes into 1,824,645 shares of Common Stock.

     During January 1998, the Company received additional funds from the sale of
4% Convertible Debentures and certain warrants pursuant to a claim of exemption
under rules 901 and 903 of Regulation S promulgated by the Securities Act of
1933, as amended. The debentures and warrants were issued to non-U.S. Persons
with the assistance of GEM Advisors, Inc. acting as a placement agent. The
debentures were convertible into the Company's Common Stock at a fixed
conversion price of $0.61 per share or a variable conversion price (65% of the
bid price average for the 10 trading days preceding the day prior to the
conversion date). The Company also issued the debenture holders 100,000 warrants
with an exercise price of $0.60 per share. The consideration received by the
Company for the debentures was $100,000 in cash less certain expenses, including
9% of the aggregate proceeds to GEM Advisors, Inc., and were used for the
Company's working capital needs.

     In the first quarter of fiscal 1998, the holders of all of the $300,000 of
the 4% Convertible Debentures ($200,000 was received in December 1997, $100,000
was received in January 1998) elected to convert their investment into the
Company's Common Stock. As a result, the Company issued an aggregate of
1,267,497 shares of Common Stock in full satisfaction of principal and accrued
interest owed to the holders.

     In response to the decline in price of the Company's Common Stock, the
Company offered the holders of $500,000 of the Company's 7% Convertible
Promissory Notes due January 15, 1998 (which was the amount of these notes
remaining outstanding), 125,000 additional shares of Common Stock to encourage
them to execute their conversion option prior to January 15, 1998. Holders of
$210,000 of the Notes accepted the offer as of January 15, 1998, resulting in
the Company issuing 52,500 additional shares of Common Stock. The additional
shares had the effect of increasing the ratio of shares issued to debt retired
from 1:1 to 1.25:1. On January 15, 1998, the maturity date of the Notes,
$190,000 was retired and $100,000 was converted into newly issued 10%
Convertible Notes. As an equitable adjustment believed by the Board of Directors
to be in the Company's best interest and for fair consideration in light of all
the facts

                                    Page 25
<PAGE>

and circumstances, the holders of $1,006,000 of the Notes that had exercised
their conversion option on or before September 30, 1997 were issued 251,500
additional shares on January 20, 1998.

     The 10% Convertible Notes are convertible into the Company's Common Stock
at a variable conversion price equal to 80% of the average closing bid price for
the 10 trading days preceding the day prior to the conversion date. During the
three months ended March 31, 1998, the holders of $50,000 of the 10% Convertible
Debentures elected to convert their investment into the Company's Common Stock.
As a result, the Company issued an aggregate of 163,506 shares of Common Stock
in full satisfaction of principal and accrued interest owed to such holders.

     On January 15, 1998, the Company also issued 358,000 additional shares of
Common Stock to purchasers who had previously purchased Common Stock in a
private placement completed in September 1997. These shares were issued in
exchange for a waiver of rescission rights and as an equitable adjustment to
such private placement based on careful consideration by the Company's Board of
Directors of all the facts and circumstances.

     Through a private placement of 6% Convertible Debentures during 1998, the
Company raised $1,530,200. The holders of the 6% Convertible Debentures elected
to convert their investment into the Company's Common Stock immediately, and the
Company issued an aggregate of 10,515,311 shares of Common Stock in full
satisfaction of principal and accrued interest owed to such holders. The funds
raised in this private placement were utilized for the working capital needs of
the Company.

     On September 1, 1998, Paul Harrison, the Chairman, President and CEO of the
Company, exercised 500,000 stock options resulting in $65,000 being received by
the Company. On November 19, 1998, Mr. Harrison exercised an additional 384,615
stock options resulting in an additional $50,000 being received by the Company.
On December 22, 1998, Mr. Harrison exercised an additional 115,385 stock options
resulting in an additional $15,000 being received by the Company. All of the
stock options were exercised at a price of $0.13 per share.

     Except as otherwise set forth above, the issuance of securities described
above were made in reliance on the exemption from registration provided by
Section 3(b) and/or 4(2) of the Securities Act of 1933 as transactions by an
issuer not involving a public offering. All of the securities were acquired by
the recipients thereof for investment and with no view toward the resale or
distribution thereof. In each instance, the offers and sales were made without
any public solicitation, the certificates bear restrictive legends and
appropriate stop transfer instructions have been or will be given to the
transfer agent. Except as described above, no underwriter was involved in the
transaction and no commissions were paid.

     The Company will require additional capital or other financing to finance
its operations and continued growth. There can be no assurance that the Company
will be able to obtain such financing if and when needed, or that if obtained,
it will be sufficient or on terms and conditions

                                    Page 26
<PAGE>

acceptable to the Company.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.


  Forward Looking Statements

  The following discussion of Halis' financial condition and results of
operations contains forward looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities and Exchange Act of
1934, which are intended to be covered by the safe harbors created thereby.
These statements include the plans and objectives of Halis for future
operations. The forward looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Halis' plans and
objectives are based on the assumption that Halis' entry into the healthcare
industry will be successful, that competitive conditions within the healthcare
industry will not change materially or adversely and that there will be no
material adverse change in Halis' operations or business. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, as well as future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond Halis' control. Although Halis believes that the
assumptions underlying the forward looking statements included herein are
reasonable, the inclusion of such information should not be regarded as a
representation by Halis, or any other person, that the objectives and plans of
Halis will be achieved.


  General

  This discussion and analysis of financial condition and results of operations
as of December 31, 2000 and for the years ended December 31, 2000 and 1999
should be read in conjunction with the sections of Halis' financial statements
and related notes included elsewhere in this Form 10-KSB.


  Financial Condition

 Comparison of December 31, 2000 Versus December 31, 1999

  Total assets as of December 31, 2000 were $1,637,939, a decrease of $148,247
from total assets of $1,786,186 at December 31, 1999. The decrease is primarily
attributable to decreases in accounts receivable and the market value of the
Company's investment in HealthWatch of $14,991 and $39,583, respectively, and
depreciation and amortization of $597,700. The decreases were offset by a
$67,567 increase in cash, which is the residual from the sale of 5,000,000
shares of common stock to HealthWatch for a total purchase price of $1,000,000,
and increases in property and equipment, capitalized software development costs
and other current

                                    Page 27
<PAGE>

assets of $63,185, $58,150 and $28,329, respectively.

  Current liabilities decreased by $707,182 from $2,460,847 at December 31, 1999
to $1,753,663 at December 31, 2000. The decrease is primarily attributable to
reducing accounts payable and accrued expenses and accrued payroll and payroll
taxes by $990,721 and $195,049, respectively, and a decrease in notes payable-
bank and increase in notes payable-related party of $70,512 and $235,000,
respectively. Accounts payable and accrued expenses were reduced partially by
the reversal of approximately $235,000 of aged accounts payable and accrued
liabilities to selling, general and administrative expense, which management
believes Halis will no longer be required to settle. These decreases were offset
by an increase in Due to HealthWatch, Inc. of $291,976.

  Stockholders' equity increased from a deficit of $883,221 at December 31, 1999
to a deficit of $258,235 at December 31, 2000, an increase of $624,985. This
increase is attributable to the sale of 5,000,000 shares of Halis common stock
to HealthWatch for $1,000,000, the sale of 1,000,000 shares of Halis common
stock for $70,000 in a private placement, the issuance of 400,000 shares of
Halis common stock for current services valued at $26,000, and the issuance of
1,187,500 shares of Halis common stock to Paul W. Harrison, Halis' Chairman and
CEO, in payment of $80,000 of accrued salary and a $15,000 loan. The increases
are offset by a decrease in the market value of the Company's investment in
HealthWatch common stock of $29,167 and a net loss for the period of $776,963.

  As a result of numerous factors, including but not limited to, Halis' working
capital deficit, and because Halis has sustained losses from operations since
inception, Halis' independent public accountants have included a paragraph in
their audit report accompanying Halis' financial statements for fiscal years
2000 and 1999 regarding the substantial doubt about Halis' ability to continue
as a going concern. Until such time as Halis' healthcare software is accepted in
the marketplace and generates revenues sufficient to support the operations of
Halis, operations will be financed, in large part, from outside sources. In
order to satisfy its working capital deficit, and remove the threat to the
continuation of the business, Halis has restructured its business to outsource
the sales and marketing function to HealthWatch pursuant to the business
collaboration agreement, so that it can focus on the development side of the
business. Furthermore, Halis is seeking a merger candidate which has the
financial resources necessary to continue the marketing and development of the
HES System.


 Fiscal Year Ended December 31, 2000 and 1999

  Revenues which consist of sales and services, decreased 20% from $5,082,493
for the year ended December 31, 1999 to $4,051,434 for the year ended December
31, 2000. This decrease is primarily the result of significantly decreased
consulting fees of $886,204 and HES system revenues of $787,277. Due to cash
resource limitations, Halis made the decision in late 1999 to no longer
aggressively pursue its consulting business. The decreases are partially offset
by increased revenues at Halis' American Benefit Administrative Services
subsidiary totaling $642,451.

                                    Page 28
<PAGE>

  Cost of goods sold decreased 99% from $848,173 for fiscal 1999 to $12,280 for
fiscal 2000 primarily due to the decrease of $774,472 related to the consulting
business, none of which was attributable to the discontinued business. Cost of
sales associated with consulting revenue was $782,672 in 1999 and $11,200 in
2000. Cost of sales on non-consulting revenue was $65,501 in 1999 and $1,080 in
2000. Cost of goods sold decreased by a much larger percentage than revenue due
to the very low margins obtained on consulting revenue.

  Selling, general and administrative expenses decreased 2% from $4,056,539 for
fiscal 1999 to $3,960,447 for fiscal 2000. The decrease is primarily due to the
reduction of corporate overhead of $516,071, offset by an increase of $89,543 in
consulting and professional fees associated with the Company's change in
business focus and increased overhead resulting from growth at the Company's
American Benefit Administrative Services subsidiary totaling $247,480. Included
in the selling, general and administrative expenses for fiscal 2000 are
reversals of aged accounts payable and accrued liabilities of approximately
$235,000. The decision to make the reversals was made after a detailed review of
Halis' outstanding liabilities, in which management discovered numerous
liabilities not believed to be valid debts of Halis due to their age, most two-
to-three years old, and the lack of any contact whatsoever with the vendor.

  Amortization and depreciation decreased $22,437 (4%) from $620,137 for fiscal
1999 to $597,700 for fiscal 2000 primarily due to the additional write down of
unamortized goodwill associated with the acquisitions of Compass Group, Inc.
during fiscal 1998, and the dispositions of PRN and the Homa Practice during
fiscal 1998.

  Gain on extinguishment of accounts payable of $137,424, net of income taxes of
$92,000, represents the difference between amounts paid related to aged payables
and the original invoiced amounts. Halis negotiated reductions in balances on
certain outstanding aged payables.

  Halis' net loss of $776,963 for fiscal 2000, includes a gain on asset
dispositions of $35,000 and a gain on extinguishment of accounts payable of
$137,424, net of income taxes of $92,000. Halis' earnings before interest,
taxes, depreciation and amortization ("EBITDA") for 2000 was increased by
$54,095, or 31%, from a $173,470 loss to a $119,375 loss. EBITDA is generally
used as an indicator of the net cash flow that is being produced from operations
and the amount of cash flow that will be available to pay the debts of the
company, including taxes. Because EBITDA is a generic term that is used in may
different contexts, the method in which we calculated EBITDA may not necessarily
be consistent with the method used by other companies.

  Liquidity and Capital Resources

  During the year ended December 31, 2000, operating activities consumed
$959,567 of cash as compared to $221,189 for the same period for the prior year.
The primary reasons for the increase is the Company's aggressive approach to
settling liabilities with past due vendors and paying down its accounts payable
and accrued liabilities. Halis was able to do this through the use of cash
provided by HealthWatch both in the form of loans totaling $469,289 and
$1,070,000 in proceeds from the purchase of common stock. Halis reduced its
accounts payable and accrued

                                    Page 29
<PAGE>

expenses by $1,190,687, of which $578,788 was either settled or paid in cash,
including approximately $235,000 of aged accounts payable and accrued
liabilities which were reversed, and $80,000 which was converted to Halis common
stock.

  During fiscal 2000, Halis recorded a net loss of $776,963. The net loss was
primarily the result of the beneficial conversion adjustment of $250,000 and
$597,700 in depreciation and amortization, none of which affect liquidity or
cash. Halis' operating activities used $959,567 in cash during fiscal 2000, an
increase of $738,378 (334%) from $221,189 during fiscal 1999. This increase is
primarily due to a significant reduction in accounts payable and accrued
expenses which reflects Company's aggressive approach to settling past due
liabilities with vendors.

  Investing activities used $134,606 during fiscal 2000, an increase of $58,444
(77%) from the $76,162 used in fiscal 2000. The increase is primarily due to
cash paid for the purchase of property and equipment, capitalized software
development and capitalized license fees during fiscal 2000.

  Financing activities provided $1,408,638 during fiscal 2000, an increase of
$1,150,267 (445%) from $258,371 for fiscal 1999. The increase is primarily due
to the issuance of common stock and proceeds received from notes payable.

  No provision has been made in the financial statements for any settlements or
judgments relating to outstanding legal maters. In the event of a material
judgment or settlement resulting from Halis' outstanding legal matters, Halis
would experience an adverse effect on its liquidity. Additionally, the majority
of the agreements entered into through December 31, 1999 for the HES System have
been for pilot sites, and future sales are contingent upon the users
satisfaction with the product. In the event that the pilot testing identifies
substantive modifications to the product which are mandatory for marketplace
feasibility, additional development costs and/or delays in launching the product
could have a material adverse effect on liquidity. Furthermore, Halis does not
currently have any outstanding commitments for capital expenditures due to its
limited financial resources. Should additional capital expenditures become
necessary, Halis would have to seek additional capital to finance such
expenditures. There can be no assurances that such capital would be available to
Halis, or that it would be on terms acceptable to management.

  Halis continues to monitor its cash situation very closely. Due to the down-
sizing of Halis, its cash needs are not as acute as they were during 1998 and
1999. However, if Halis is unable to increase sales of its HES System or
consummate the merger with HealthWatch, Halis may not be able to continue to
generate sufficient positive cash flow to meet its obligations without seeking
additional capital. Halis' immediate cash needs have been partially provided for
due to HealthWatch executing its financing option, which provided $1 million
paid in cash for 5,000,000 shares of Halis' common stock. Management does not
believe that Halis has liquid assets sufficient to meet its operating needs for
more than the next six-to-twelve months. As discussed above, if Halis is unable
to reach profitability, it will be forced to seek additional capital necessary
to meet its operating needs, which may not be available on terms acceptable to
management, if at all.

                                    Page 30
<PAGE>

  ITEM 7. FINANCIAL STATEMENTS.

     The following financial statements and report of the Company's independent
auditors are attached at the end of this report:

     Report of Independent Auditors - Tauber & Balser, P.C.

     Consolidated Balance Sheet - December 31, 2000

       Consolidated Statements of Operations For The Years Ended December 31,
     2000 and December 31, 1999

       Consolidated Statements of Cash Flows For The Years Ended December 31,
     2000 and December 31, 1999

       Consolidated Statements of Stockholders' Equity (Deficit) For The Years
     Ended December 31, 2000 and December 31, 1999

     Notes to Consolidated Financial Statements


  ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     On February 1, 1999, the Company dismissed its independent auditors, Arthur
Anderson, LLP and on the same date authorized the engagement of Tauber & Balser,
P.C. as its independent auditors for the fiscal year ended December 31, 1998.
Tauber & Balser, P.C. was formally engaged by the Company on February 1, 1999 to
audit the Company's financial statements for the fiscal year ended December 31,
1998 and reissue the Company's 1997 report previously issued by Arthur Andersen,
LLP. Each of these actions was approved by the Board of Directors of the
Company.

     Arthur Andersen, LLP audited the financial statements for the Company for
the fiscal year ended December 31, 1997. The report of Arthur Andersen LLP on
the financial statements of the Company for the fiscal year ended December 31,
1997 contained an additional paragraph which emphasized that there was
substantial doubt about the ability of the Company to continue as a going
concern. Except as set forth in the preceding sentence, the report of Arthur
Andersen, LLP did not contain any adverse opinion or a disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope or accounting
principles.

     Except as described herein, in connection with the audit of the fiscal year
ended December 31, 1997 and for the unaudited interim period through February 1,
1999, there were no

                                    Page 31
<PAGE>

disagreements with Arthur Andersen, LLP on any matter of accounting principle or
practice, financial statement disclosure, or audit procedure or scope which
disagreement, if not resolved to the satisfaction of Arthur Andersen, LLP, would
have caused it to make reference to the subject matter of the disagreement in
its report.

     Further, during the fiscal year ended December 31, 1997 and the unaudited
interim period through February 1, 1999, neither the Company or any of its
representatives sought the advice of Tauber & Balser, P.C. regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on the Company's
financial statements, which advice was an important factor in the Company's
decision to engage Tauber & Balser, P.C. as its independent auditors.

     In connection with the audit of the fiscal year ended December 31, 1997
Arthur Andersen, LLP did not advise the Company that (i) the internal controls
necessary for the Company to develop reliable financial statements did not
exist; (ii) that information had come to its attention that led it to no longer
be able to rely on management's representations, or that made it unwilling to be
associated with the financial statements prepared by management; (iii) that
there existed a need to expand significantly the scope of its audit, or that
information had come to the attention of Arthur Andersen, LLP that if further
investigated may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements) or (b) cause Arthur
Andersen, LLP to be unwilling to rely on management's representations or be
associated with the Company's financial statements, and due to the dismissal of
Arthur Andersen, LLP, did not so expand the scope of its audit or conduct such
further investigation; or (iv) that information had come to the attention of
Arthur Andersen, LLP that it concluded materially impacts the fairness or
reliability of either (a) a previously issued audit report or the underlying
financial statements or (b) the financial statements issued or to be issued
covering the fiscal period subsequent to the date of the most recent financial
statements covered by an audit report (including information that, unless
resolved to the satisfaction of Arthur Andersen, LLP, would prevent it from
rendering an unqualified audit report on those financial statements), and due to
the dismissal of Arthur Andersen LLP, the issue has not been resolved to the
satisfaction of Arthur Andersen, LLP prior to its dismissal.

                                    PART III
  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

     The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>

           Name                  Age       Position with the Company
-------------------------------  ---  ------------------------------------
<S>                              <C>  <C>

Paul W. Harrison                  44  Chairman of the Board of Directors,
                                      President and Chief Executive Officer

Dr. Joel R. Greenspan             51  Director

</TABLE>


                                    Page 32
<PAGE>


     PAUL W. HARRISON, has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since November 1996 and was elected
President of the Company in June 1997. He is also Chairman and CEO of
HealthWatch; which owns approximately 20% of Halis. Previously, Mr. Harrison was
the CEO of Paul Harrison Enterprises, Inc. ("PHE"), an information technology
management company, from February 1995 until it was merged into HealthWatch in
October 1998. Prior to PHE, Mr. Harrison was an executive with HBO & Company,
which is now McKesson HBOC (NYSE:MCK), from June 1993 until December 1994. Prior
to HBOC, Mr. Harrison served as CEO of SOTRISS from 1981 to 1989. SOTRISS was an
information technology company that was sold to a publicly-traded Fortune 500
company in 1989. Mr. Harrison's education includes a Bachelors Degree from
Georgia State University. He is a Chartered Financial Consultant, a Chartered
Life Underwriter and a Fellow of the Life Management Institute.

     DR. JOEL GREENSPAN, age 51, was elected as a director of the Company on
February 1, 1999 to fill a vacancy on the Board. Dr. Greenspan is recently
retired from the Centers for Disease Control after 23 years with the
organization, where he held the positions of Assistant Director for Planning,
Communications, and External Relations and Chief, Surveillance and Information
Systems, both for the Division of Sexually Transmitted Diseases Prevention.

     The executive officers of the Company are appointed by the Board of
Directors and hold office at the pleasure of the Board. Executive officers
devote their full time to the affairs of the Company. There are no family
relationships between any director or executive officer and any other director
or executive officer of the Company.

                                    Page 33
<PAGE>

  Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the fiscal year
ended December 31, 1999, the Company is aware of the following reports that were
filed with the commission by officers, directors and 10% stockholders of the
Company after their respective due dates: Paul W. Harrison (annual statement of
beneficial ownership), Joel Greenspan (annual statement of beneficial ownership;
statement of changes in beneficial ownership for transactions in February and
December 1999) and Kathleen Wilhoit (annual statement of beneficial ownership;
statement of changes in beneficial ownership for transactions in December 1999).
Based upon its review of copies of filings received by it, the Company believes
that since January 1, 1999, all other Section 16(a) filing requirements
applicable to its directors, officers and 10% stockholders were complied with.

     Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has a policy
requiring all Section 16 reporting persons to report monthly to the Company as
to whether any transactions in the Company's Common Stock occurred during the
previous month.

  ITEM 10. EXECUTIVE COMPENSATION

  Summary Compensation Table

     The following table sets forth certain summary information concerning
compensation paid, accrued or deferred by the Company for the fiscal years ended
December 31, 2000, 1999 and 1998 to or on behalf of the Company's Chief
Executive Officer and the other executive officer of the Company whose total
annual salary and bonus exceeded $100,000 during the fiscal year ended December
31, 2000 (hereinafter referred to as the "Named Executive Officers").
<TABLE>
<CAPTION>

ANNUAL COMPENSATION


    NAME AND                   FISCAL                             OTHER
PRINCIPAL POSITION              YEAR    SALARY      BONUS   COMPENSATION (1)
------------------             ------   ------     -------  ----------------
<S>                             <C>   <C>           <C>
Paul W. Harrison                2000  $137,500      $ -0-
 Chairman of the Board and      1999  $107,070(2)   $ -0-
 Chief Executive Officer        1998  $280,000(3)   $ -0-
---------------------
</TABLE>

                                    Page 34
<PAGE>

(1)  The Company pays for certain other perquisites. The aggregate amounts of
     these benefits do not exceed the lesser of $50,000 or 10% of the total
     annual salary and bonus during the past fiscal year for the Named Executive
     Officers.

(2)  Mr. Harrison agreed to reduce his salary to $107,070 with $27,070 paid in
     cash and accepted 1,187,500 shares of Common Stock  with a market value of
     $80,000 in lieu of cash payments due to the Company's limited operating
     capital.  Mr. Harrison also received options to purchase 540,000 shares of
     Common Stock  at an exercise price of $0.05 per share.

(3)  Mr. Harrison's employment agreement provides for a base salary of $280,000
     for fiscal year 1998, however, only $25,000 was paid to Mr. Harrison as of
     year-end, with the balance of $255,000 being deferred. On February 1, 1999,
     Mr. Harrison agreed to accept 1,500,000 shares of Common Stock  of the
     Company in lieu of his 1998 base salary that was deferred. The shares of
     stock had a market value, based upon the close of trading on January 29,
     1999, of $210,000 (calculated at $0.14 per share). Mr. Harrison agreed to
     waive the remaining $45,000 of deferred compensation owed to him for his
     fiscal 1998 base salary.


Director's Fees

     The Company does not presently pay any fees to directors, but does
reimburse directors for reasonable out-of-pocket expenses incurred in connection
with attendance of meetings of the Board of Directors.

Employment Agreements

     Effective November 18, 1996, the Company entered into an Employment
Agreement with Paul W. Harrison, pursuant to which Mr. Harrison serves as
Chairman of the Board and Chief Executive Officer of the Company. The Employment
Agreement is for a term of three years, expiring on December 31, 1999, and
provides for an annual base salary of $200,000 (to be increased upon the
attainment of certain annual revenue targets) plus incentive bonus payments. As
a result of achieving the targets in his employment agreement, Mr. Harrison's
base salary was increased to $280,000 commencing January 1, 1998. In addition,
the Employment Agreement provides for Mr. Harrison to receive options to
purchase shares of Common Stock of the Company in the discretion of the Board of
Directors. The Employment Agreement provides for certain severance payments to
be paid to Mr. Harrison in the event of a change in control of the Company or a
significant change in Mr. Harrison's operational duties. In the event of a
change in control, Mr. Harrison will be entitled to terminate his employment
with the Company and to receive three times the sum of his annual base salary
and the cost for one year of all additional benefits provided to Mr. Harrison
under the Employment Agreement. In addition, in the event

                                    Page 35
<PAGE>

Mr. Harrison terminates his employment under certain stated conditions or is
terminated by the Company without cause, he will receive the greater of one
year's annual base salary or an amount equal to the base salary which would
otherwise be payable to Mr. Harrison for the remaining term of his Employment
Agreement. Any such severance payment may, at the option of the Company, be paid
to Mr. Harrison in equal monthly installments or in a lump sum at a discounted
present value. The Employment Agreement contains non-compete and non-
solicitation provisions, effective through the actual date of termination of the
Employment Agreement and for a period of two years thereafter.

     During fiscal year 1999, due to the cash needs of the Company, the Company
and Mr. Harrison agreed to the deferral of the majority of Mr. Harrison's 1999
base salary. Mr. Harrison received only $27,070 of his base salary during fiscal
year 1999. Mr. Harrison and the Company agreed to the satisfaction of the base
salary owed to him by the issuance to him of 1,187,500 shares of the Company's
Common Stock  (the fair market value of which was $80,000).

     Mr. Harrison's employment contract with the Company expired on December 31,
1999.  As of March 31, 2001, the Company and Mr. Harrison had not renewed his
employment contract and the Company is currently in negotiations for terms of a
new employment agreement with Mr. Harrison.


Stock Options

     On November 18, 1996, the Company's shareholders adopted the 1996 Stock
Option Plan (the "Plan") for employees who are contributing significantly to the
business of the Company or its subsidiaries, as determined by the Company's
Board of Directors or the committee administering the Plan. The Plan currently
provides for the grant of incentive and non-qualified stock options to purchase
up to 8,000,000 shares of Common Stock at the discretion of the Board of
Directors of the Company or a committee designated by the Board of Directors to
administer the Plan. The option exercise price of incentive stock options must
be at least 100% (110% in the case of a holder of 10% or more of the Common
Stock) of the fair market value of the stock on the date the option is granted
and the options are exercisable by the holder thereof in full at any time prior
to their expiration in accordance with the terms of the Plan. Incentive stock
options granted pursuant to the Plan will expire on or before (1) the date which
is the tenth anniversary of the date the option is granted, or (2) the date
which is the fifth anniversary of the date the option is granted in the event
that the option is granted to a key employee who owns more than 10% of the total
combined voting power of all classes of stock of the Company or any subsidiary
of the Company. Options granted under the Plan typically vest over a period of
four years.

     In consideration of services rendered by Paul Harrison to the Company in
anticipation of the consummation of the mergers with AHS, ASI and HSI, the
Company on June 7, 1996 granted to Mr. Harrison an option to purchase 1,400,000
shares of Common Stock, which options became exercisable upon consummation of
the HSI merger. The options terminate on June 7, 2006 and are exercisable at a
price of $1.125 per share (which represents the fair market

                                    Page 36
<PAGE>

value of the Common Stock on the date of grant). During 1998, the exercise price
was reduced to $0.13 per share (the market price at the date of reduction).

     On December 6, 1996, the Company granted options to purchase up to
3,350,000 shares of Common Stock to Mr. Harrison, exercisable at a price of
$2.00 per share.  Of this amount, options to purchase 3,000,000 shares of Common
Stock granted to Mr. Harrison were subsequently terminated during 1997 without
being exercised. The remaining stock options granted to Mr. Harrison are
exercisable immediately. In February 1998, 650,000 and 350,000 options
exercisable  at $0.25 per share were granted to Mr. Harrison in consideration of
deferral of salary and additional compensation, respectively. In August 1998,
all of these options were repriced to $0.13 per share.

     As of March 31, 2001, options to purchase 11,650,290 shares of Common Stock
of the Company were outstanding.

Stock Option Grants

     There were no stock options or stock purchaser rights granted by Halis
during the fiscal year ended December 31, 2000.

Stock Option Exercises and Outstanding Options

     The following table contains information, with respect to (i) the number of
stock options exercised during the last fiscal year, and the values realized in
respect thereof, by the Named Executive Officers, and (ii) the number stock
options and the value of said stock options held by the named executive officers
as of December 31, 2000.

<TABLE>
<CAPTION>


                                                                                                        Value of Unexercised
                                                                            Number of Unexercised           In-the-Money
                                                                             Options at 12/31/00         Options at 12/31/00
                                 Shares Acquired on     Value Realized          Exercisable/                 Exercisable/
             Name                    Exercise(#)             ($)               Unexercisable            Unexercisable(1)(2)($)

<S>                              <C>                    <C>                 <C>                         <C>
Paul W. Harrison                        0                    0                   4,644,000/0                     $0/0
Joel Greenspan                          0                    0                     150,000/0                     $0/0
</TABLE>
------------------

(1) The market price of the Company's Common Stock  on December 31, 2000 was
    $0.0156.

(2) Dollar values calculated by determining the difference between the fair
    market value of the Company's Common Stock at December 31, 2000 ($0.0156)
    and the exercise price of such options.

                                    Page 37
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The following table sets forth information regarding the beneficial ownership
of the Company Common Stock of the Company, as of December 31, 2000, by (i)
those persons or entities known by management of the Company to own beneficially
more than 5% of the Company Common Stock, (ii) each of the directors and
executive officers  of the Company, and (iii) all directors and executive
officers of the Company as a group. Unless otherwise indicated in the footnotes
to the table, the persons or entities listed below have sole voting and
investment power with respect to the shares of the Company's Common Stock shown
as beneficially owned by them.
<TABLE>
<CAPTION>

                                        SHARES OF
                                       COMMON STOCK
     NAME                              BENEFICIALLY    PERCENT
OF BENEFICIAL OWNER                      OWNED  (1)    OF CLASS
-------------------                    -------------   --------
<S>                                    <C>             <C>

  Paul W. Harrison (2)                   23,398,504      35.6%
  Joel Greenspan (3)                        470,000       0.8%
  Directors and executive officers
   as a group (3 persons)(4)             24,419,873      36.1%
---------------------
</TABLE>

(1) "Beneficial Ownership" includes shares for which an individual directly or
indirectly, has or shares voting or investment power or both and also includes
options that are exercisable within sixty days of the date of this report. All
of the listed persons have sole voting and investment power over the shares
listed opposite their names unless otherwise indicated in the notes below.
Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934. The
percentages are based upon 67,561,222 shares, representing 61,132,222 shares
outstanding as of December 31, 2000, plus 5,244,000 which is the number of
shares subject to presently exercisable options or convertible securities held
by the noted parties, as indicated in the following notes.

(2)  The amount reflected above includes (i) 4,644,000 shares subject to
presently exercisable stock options, (ii)15,763,655 shares owned by HealthWatch,
Inc., which Mr. Harrison has the power to vote by virtue of his Position as the
President of such entity, but of which Mr. Harrison disclaims beneficial
ownership and (iii) 2,990,849 shares owned by Mr. Harrison directly.

(3)  Includes 150,000 shares subject to presently exercisable stock options.

(4)  Includes 5,244,000 shares subject to presently exercisable stock options.

                                    Page 38
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  Halis has a note receivable due from Philip Spicer, President of its American
Benefit Administrative Services subsidiary and a stockholder of Halis, in the
amount of $623,377 as of December 31, 2000. The note accrues interest at 5% per
annum and is due October 31, 2001. The note may be repaid using Halis common
stock if certain conditions are met, including but not limited to, Halis common
stock achieving a traded market price of at least $3 per share for a specified
period of time. During fiscal year ended December 31, 1999, Halis recorded an
allowance for the total outstanding balance on the Spicer note and discontinued
accruing interest effective as of December 31, 1999.

  Paul W. Harrison, the Chairman, President and Chief Executive Officer of the
Company, is also the Chairman, President and Chief Executive Officer of
HealthWatch.  Mr. Harrison is also a Shareholder of both companies.

  From August 20, 1997 through September 22, 1997, the Company purchased an
aggregate of 4,166 shares of HealthWatch Preferred Stock for $125,000. The
HealthWatch Preferred Stock purchased by the Company was converted into 16,667
(adjusted for reverse stock-splits) shares of HealthWatch Common Stock,
representing approximately one percent (1%) of the total shares of HealthWatch
Common Stock  outstanding at March 6, 2000. The Company is not obligated and
does not have the present intent to purchase additional shares of the capital
stock of HealthWatch.

  The purpose of the acquisition by the Company of the HealthWatch Preferred
Stock was: (i) to take an initial step in connection with the possible
acquisition by the Company of HealthWatch; and (ii) to provide HealthWatch with
working capital. The Company and HealthWatch entered into a non-binding letter
of intent, dated August 8, 1997 (the "Letter of Intent"), providing for the
merger of HealthWatch with the Company. A second letter of intent was entered on
July 14, 1998 (the "Second LOI") which superseded the Letter of Intent. Under
the Second LOI, the Company and HealthWatch again agreed to merge the two
companies.

  Pursuant to the Second LOI, HealthWatch agreed to loan the Company up to a
total of $250,000 pursuant to a 6% debenture maturing in February 2000. During
the fiscal year ended December 31, 1998, HealthWatch had advanced $100,000 to
the Company under the debenture. Subsequently, the Company advanced an
additional $57,740 to Halis. On January 29, 1999, HealthWatch exercised its
conversion rights in the debenture, and converted the outstanding amounts due to
HealthWatch into 1,824,645 shares of the Company's Common Stock . HealthWatch
now holds 15,763,655 shares of the Company's Common Stock  (approximately 25%)
and is the Company's single largest shareholder.

                                    Page 39
<PAGE>

  Due to the market volatility of the two companies stock, and accounting issues
that would be raised as a result of the merger that may have had an adverse
effect on HealthWatch, the companies agreed to delay the consummation of the
merger.

  On June 29, 2000, the companies again agreed to merge by entering into a
definitive merger agreement.  Under the terms of the merger agreement, the
companies agreed that Halis would be merged with and into a wholly-owned
subsidiary of HealthWatch.  Halis shareholders will receive one share of
HealthWatch common stock for every twenty shares of Halis Common Stock owned,
thus resulting in an exchange ration of 0.050

Business Collaboration Agreement

  In October 1997, HealthWatch and Halis entered into a business collaboration
agreement. Under the business collaboration agreement, HealthWatch has granted
Halis a non-exclusive license to HealthWatch's information technology software
in exchange for a ten percent (10%) commission on sales of products or services
incorporating such software. Additionally, Halis has granted HealthWatch a non-
exclusive license to market the HES System or other Halis products in exchange
for a ten percent (10%) commission on all revenues received from sales or
services relating to such products. In September 2000, the business
collaboration agreement was amended to provide, among other things, for revenue
sharing based on a 60/40 split (i.e., the selling company would receive 60% of
the sales price and the company that owns the technology would receive 40% of
the sales price). Furthermore, HealthWatch is obligated to pay Halis a
collaboration fee of $50,000 per month beginning in September 2000, which shall
be applied as a credit against any revenue sharing amount that is due to Halis.
Halis is obligated to provide support to HealthWatch for the Halis software
products, provide reasonable product enhancement as part of product release
updates and cooperate with HealthWatch in regard to product enhancement
requests. HealthWatch may terminate the $50,000 monthly collaboration fee
payable to Halis on or after October 1, 2001, under certain terms and
conditions.

  In addition, Halis and HealthWatch have each agreed to use their best efforts
to utilize the services of the other company whenever and wherever reasonably
possible when contracting with third parties to provide services to or in
connection with the sale, delivery and installation of products and/or services.
Halis and HealthWatch have also agreed to use their best efforts to share
facilities in order to permit one company to obtain an initial and temporary
location in a market in which the requesting company desires to establish a
presence. Any such facilities are to be provided subject to the reimbursement of
the providing company's reasonable costs incurred in connection with the
providing of such facilities. Currently, Halis and HealthWatch share office
space and administrative support for the corporate headquarters of both
companies, which is located at 1100 Johnson Ferry Road, Suite 670, Atlanta,
Georgia, 30342.

  The term of the business collaboration agreement was initially for a period of
one year, but provides for automatic one-year renewals unless terminated by one
of the parties by giving sixty-day written notice to the other party. The
September 2000 amendment extended the term through September 2005. HealthWatch
paid Halis approximately $49,500 and $55,473 in fiscal years 2000 and 1999,
respectively, under the business collaboration agreement. HealthWatch believes

                                    Page 40
<PAGE>

that the terms of the business collaboration agreement, as amended, are at the
fair market value and were no less favorable than it could have obtained from
unaffiliated third parties.

  As a result of the merger of PHE into MERAD Software, Inc., the MERAD
technology is now owned by HealthWatch. Halis is obligated to pay HealthWatch
10% of the gross revenues generated by Halis from products and services
utilizing the MERAD technology under a perpetual license agreement. During
fiscal 2000 and 1999, HealthWatch earned $21,935 and $66,087, respectively, in
royalties from Halis, none of which had been paid to HealthWatch as of year-end.

  HealthWatch and Halis currently share office space and have a cost sharing
arrangement relating to key personnel under an arrangement that required
HealthWatch to pay Halis a calculated amount each month based upon a reasonable
cost basis of services provided. Pursuant to this arrangement, until the end of
1999, Halis maintained a principal office in Atlanta and HealthWatch shared
those facilities. Throughout that period, HealthWatch made payments to Halis,
calculated based on the percent of the facilities used by each party over total
cost, including phone and utilities, and including an immaterial amount for
shared personnel. From July 1 through December 31, 1999, HealthWatch paid Halis
$8,250 a month for use of office space and personnel. This amount does not
include salary for Mr. Harrison in his capacity as an executive officer of each
organization, which is paid separately by each organization for the work
performed for such company. Beginning January 1, 2000, HealthWatch is now the
primary lessor of the principal office facilities in Atlanta. Halis is now
sharing these facilities under a similar arrangement. To date, no monthly
payment amount has been determined; however, the parties intend to negotiate a
payment by Halis to HealthWatch that will be designed to reflect the relative
usage of each party of the facilities and personnel.

  On April 29, 2000, HealthWatch exercised a financing option to purchase
5,000,000 shares of Halis common stock for a total purchase price of $1,000,000
in a private placement. This transaction increased HealthWatch's ownership of
Halis common stock to 15,763,655 shares, or approximately 25% of Halis'
outstanding common stock

  In October 2000, Halis borrowed $250,000 from HealthWatch under an unsecured
note payable. The note accrues interest at 10% and is due on demand. The note is
convertible, at the option of HealthWatch, into 12,500,000 shares of the Halis
common stock, or $.02 per share.

  Halis believed that all related party transactions described above between
Halis, HealthWatch, PHE and Paul W. Harrison, were on terms no less favorable
than could have been otherwise obtained from unrelated third parties.

                                    Page 41
<PAGE>

                                    PART IV

  ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

  (a)  Exhibits.

  The following exhibits are filed with or incorporated by reference into this
  report.

  3.1   Certificate of Incorporation, as amended (incorporated by reference to
        Exhibit 3.1 of the Company's Registration Statement on Form S-2 (No.
        333-45783) filed February 6, 1998).

  3.2   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2
        (No. 333-45783) filed February 6, 1998 of the Company's Registration
        Statement on Form S-2 (No. 333-34215) filed August 29, 1997).

  4.1   Form of Common Stock Certificate (incorporated by reference to Exhibit
        4.1 of the Company's Registration Statement on Form S-18, Reg. No. 33-
        14114-A, filed May 7, 1987, as amended ("Form S-18")).

  10.1  Employment Agreement dated November 18, 1996, as amended on January 3,
        1997, by and between the Registrant Halis and Paul W. Harrison
        (incorporated by reference to Exhibit 10.1 of the Company's Annual
        Report on Form 10-KSB for the year ended December 31, 1996).

  10.4  Warrant Agreement, dated November 19, 1996, by and between the
        Registrant and SunTrust Bank, Atlanta (incorporated by reference to the
        Company's Annual Report on Form 10-KSB for the year ended December 31,
        1996).

  10.5  Form of Employee Trade Secret Agreement (incorporated by reference to
        Exhibit 10.19 of the Company's Form S-18).

  10.6  License Agreement, dated November 18, 1996, by and between Paul Harrison
        Enterprises, Inc. and the Registrant (incorporated by reference to
        Exhibit 10.6 of the Company's Annual Report on Form 10-KSB for the year
        ended December 31, 1996).

  10.15 401(k) Plan of Registrant adopted January 1, 1991 (incorporated by
        reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K).

  10.16 Stock Purchase Agreement, dated as of March 29, 1996 and amended as of
        September 27, 1996, between Fisher Business Systems, Inc., Halis,
        L.L.C., Paul W. Harrison and James Askew (incorporated by reference to
        Exhibit 2.2 to the Company's Current Report on Form 8-K dated November
        19,1996).

                                    Page 42
<PAGE>

  10.17.1 1996 Stock Option Plan of the Company (incorporated by reference to
          Exhibit 10.20   of the Company's Annual Report on Form 10-KSB for the
          year ended January 31,  1996).

  10.17.2 Amendment No. 1 to 1996 Stock Option Plan (incorporated by reference
          to Exhibit 10.19.1 of the Company's Registration Statement on Form S-2
          (Registration No. 333-45783), filed February 6, 1998).

  10.17.3 Amendment No. 2 to 1996 Stock Option Plan (incorporated by reference
          to Exhibit 10.19.2 of the Company's Registration Statement on Form S-2
          (Registration No. 333-45783), filed February 6, 1998).

  10.18   Letter of Intent dated March 8, 2000 by and between Registrant and
          HealthWatch, Inc. (incorporated by reference to the Company's Annual
          Report on Form 10-KSB for the year ended December 31, 1999).

  10.19   Agreement and Plan of Merger by and among registrant, HealthWatch
          Merger Sub, Inc. and HealthWatch, Inc. (incorporated by reference to
          the Company's Quarterly Report on Form 10-QSB for the quarter ended
          June 30, 2000).

  10.20  Amended and Restated Financing Option by and among Registrant and
         HealthWatch, Inc. (incorporated by reference to the Company's Quarterly
         Report on Form 10-QSB for the quarter ended June 30, 2000).

  10.21  Amendment to the Agreement and Plan of Merger by and among Halis, Inc.,
         HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated as of
         September 29, 2000 (Filed herewith).

  10.22  Amendment to the Agreement and Plan of Merger by and among Halis, Inc.,
         HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated as of January
         31, 2001 (Filed herewith).

  10.23  Amendment to the Agreement and Plan of Merger by and among Halis, Inc.,
         HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated as of February
         16, 2001 (Filed herewith).

  10.24  Amendment to the Agreement and Plan of Merger by and among Halis, Inc.,
         HealthWatch Merger Sub, Inc. and HealthWatch, Inc. dated as of March
         29, 2001 (Filed herewith).

  23.1   Consent of Tauber & Balser, P.C.


         (2)  Reports on Form 8-K.

       The following reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended December 31, 1999:

                                    Page 43
<PAGE>

        None.

                                    Page 44
<PAGE>

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        HALIS, INC.

                                 By:    /s/ Paul W. Harrison
                                        --------------------
                                        Paul W. Harrison
                                        Chief Executive Officer

                                 Date:  April 26, 2001

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

        Signature                       Title                     Date
        ---------                       -----                     ----
<S>                          <C>                               <C>

  /s/ Paul W. Harrison       Chairman of the Board, President  April 26, 2001
      Paul W. Harrison       and Chief Executive Officer

  /s/ Dr. Joel Greenspan     Director                          April 26, 2001
      Dr. Joel Greenspan
</TABLE>

                                    Page 45
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                              FINANCIAL STATEMENTS

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Stockholders' Deficit........................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Halis, Inc.

   We have audited the accompanying consolidated balance sheet of Halis, Inc.
and Subsidiaries as of December 31, 2000, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halis, Inc.
and Subsidiaries as of December 31, 2000, and the results of their operations
and their cash flows for the years ended December 31, 2000 and 1999 in
conformity with generally accepted accounting principles.

   The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note B to the financial statements, the Company's recurring losses from
operations and limited capital resources raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/s/ Tauber & Balser, P.C.
Atlanta, Georgia
March 1, 2001


                                      F-2
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                               December 31, 2000

<TABLE>
<CAPTION>
                             ASSETS
<S>                                                               <C>
CURRENT ASSETS
  Cash........................................................... $    327,968
  Restricted cash................................................       36,308
  Accounts receivable............................................      242,397
  Other current assets...........................................      102,487
                                                                  ------------
    TOTAL CURRENT ASSETS.........................................      709,160
                                                                  ------------
PROPERTY AND EQUIPMENT
  Computers and software.........................................      477,522
  Vehicle........................................................       36,588
  Office furniture and equipment.................................       75,844
  Leasehold improvements.........................................       29,770
                                                                  ------------
                                                                       619,724
  Less accumulated depreciation..................................      328,618
                                                                  ------------
    PROPERTY AND EQUIPMENT, NET..................................      291,106
                                                                  ------------
OTHER ASSETS
  Deposits.......................................................      102,840
  Goodwill, net of accumulated amortization of $1,547,105........      467,308
  Capitalized software development costs.........................       58,150
  Investment.....................................................        9,375
                                                                  ------------
    TOTAL OTHER ASSETS...........................................      637,673
                                                                  ------------
      TOTAL ASSETS............................................... $  1,637,939
                                                                  ============

              LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
  Accounts payable and accrued expenses.......................... $    777,130
  Deferred revenue and customer deposits.........................       52,508
  Accrued payroll and payroll taxes..............................       67,549
  Due to related party...........................................      291,976
  Note payable to a bank.........................................      248,379
  Note payable--related party....................................      250,000
  Obligations under capital leases--current portion..............       66,121
                                                                  ------------
      TOTAL CURRENT LIABILITIES..................................    1,753,663
                                                                  ------------
LONG-TERM DEBT
  Obligations under capital leases, net of current portion.......      142,511
                                                                  ------------
STOCKHOLDERS' DEFICIT
  Preferred stock, $.10 par value; 5,000,000 shares authorized;
   none issued...................................................          --
  Common stock, $.01 par value; 100,000,000 shares authorized;
   61,132,037 shares issued and outstanding......................      611,320
  Additional paid-in capital.....................................   38,085,036
  Accumulated other comprehensive loss, unrealized loss on
   investment....................................................     (115,625)
  Accumulated deficit............................................  (38,838,966)
                                                                  ------------
    TOTAL STOCKHOLDERS' DEFICIT..................................     (258,235)
                                                                  ------------
      TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................ $  1,637,939
                                                                  ============
</TABLE>

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

                                      F-3
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 For the Years Ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                          2000         1999
                                                       -----------  -----------
<S>                                                    <C>          <C>
REVENUES.............................................  $ 4,051,434  $ 5,082,493
                                                       -----------  -----------
COST AND EXPENSES
  Cost of goods sold.................................       12,280      848,173
  Selling, general and administrative................    3,960,447    4,056,539
  Depreciation and amortization......................      597,700      620,137
  Research and development...........................      184,562      287,254
  Write down of intangibles .........................          --        63,996
                                                       -----------  -----------
    TOTAL COST AND EXPENSES .........................    4,754,989    5,876,099
                                                       -----------  -----------
OPERATING LOSS ......................................     (703,555)    (793,606)
                                                       -----------  -----------
OTHER INCOME (EXPENSE)
  Provision for losses on notes receivable--related
   party.............................................          --      (623,377)
  Gain on sale of property and equipment.............       35,000          --
  Interest expense...................................     (337,832)     (63,119)
  Interest income....................................          --        27,131
  Other income.......................................          --         8,144
                                                       -----------  -----------
                                                          (302,832)    (651,221)
                                                       -----------  -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM......   (1,006,387)  (1,444,827)
INCOME TAX BENEFIT...................................       92,000          --
                                                       -----------  -----------
LOSS BEFORE EXTRAORDINARY ITEM.......................     (914,387)  (1,444,827)
EXTRAORDINARY ITEM--GAIN ON EXTINGUISHMENT OF
 ACCOUNTS PAYABLE (NET OF INCOME TAXES OF $92,000)...      137,424          --
                                                       -----------  -----------
NET LOSS.............................................  $  (776,963) $(1,444,827)
                                                       ===========  ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE
  Loss before extraordinary item.....................  $      (.01) $      (.03)
  Extraordinary item.................................          --           --
                                                       -----------  -----------
  Net loss...........................................  $      (.01) $      (.03)
                                                       ===========  ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.   59,147,006   51,266,751
                                                       ===========  ===========
</TABLE>

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

                                      F-4
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                         2000         1999
                                                      -----------  -----------
<S>                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net loss............................................ $  (776,963) $(1,444,827)
                                                      -----------  -----------
 Adjustments:
  Depreciation and amortization:
   Property and equipment............................     145,329      115,772
   Goodwill..........................................     402,883      402,883
   Other.............................................      49,488      101,482
  Gain on sale of property and equipment.............     (35,000)         --
  Gain on extinguishment of accounts payable.........    (229,424)         --
  Write down of intangibles..........................         --        63,996
  Interest related to beneficial conversion feature
   on convertible debt...............................     250,000          --
  Interest accrued on note receivable--related party.         --       (27,085)
  Provision for losses on note receivable............         --       623,377
  Issuance of common stock for services..............      26,000       15,400
  Changes in:
   Restricted cash...................................     594,570     (180,648)
   Accounts receivable...............................      14,991      105,543
   Other current assets..............................     (28,329)      (3,287)
   Deposits..........................................      (3,590)      70,137
   Accounts payable and accrued expenses.............  (1,190,687)      58,556
   Accrued payroll and payroll taxes.................    (195,049)      (1,736)
   Deferred revenue and customer deposits............      16,214     (120,752)
                                                      -----------  -----------
    Total adjustments................................    (182,604)   1,223,638
                                                      -----------  -----------
      Net cash used by operating activities..........    (959,567)    (221,189)
                                                      -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from sale of property and equipment........      35,000          --
 Purchase of property and equipment..................     (63,185)     (76,162)
 Purchase of capitalized software development costs..     (58,150)         --
 Purchase of capitalized license fees................     (48,271)         --
                                                      -----------  -----------
      Net cash used by investing activities..........    (134,606)     (76,162)
                                                      -----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Proceeds from issuance of common stock..............   1,070,000      250,000
 Principal payments on obligations under capital
  leases.............................................     (60,139)     (42,216)
 Net increase in due to related party................     219,289       47,722
 Principal payments on note payable to a bank........     (70,512)     (56,635)
 Net proceeds from notes payable--related parties ...     250,000       59,500
                                                      -----------  -----------
      Net cash provided by financing activities......   1,408,638      258,371
                                                      -----------  -----------
NET INCREASE (DECREASE) IN CASH......................     314,465      (38,980)
CASH, BEGINNING OF YEAR..............................      13,503       52,483
                                                      -----------  -----------
CASH, END OF YEAR.................................... $   327,968  $    13,503
                                                      ===========  ===========
</TABLE>

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

                                      F-5
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                 For the Years Ended December 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                        Accumulated
                             Common Stock                  Additional      Other                       Total
                          ------------------- Common Stock   Paid-In   Comprehensive Accumulated   Stockholders'
                            Shares    Amount  to be Issued   Capital       Loss        Deficit        Deficit
                          ---------- -------- ------------ ----------- ------------- ------------  -------------
<S>                       <C>        <C>      <C>          <C>         <C>           <C>           <C>
Balances, December 31,
 1998...................  46,259,763 $462,597   $    --    $36,066,439   $ (88,542)  $(36,617,176)  $  (176,682)
Comprehensive loss:
 Net loss...............         --       --         --            --          --      (1,444,827)   (1,444,827)
 Change in unrealized
  loss on investment....         --       --         --            --       12,500            --         12,500
                                                                                                    -----------
Total comprehensive
 loss...................                                                                             (1,432,327)
                                                                                                    -----------
Issuance of common
 stock..................   2,066,667   20,667        --        189,333         --             --        210,000
Common stock issued to
 consultants............   1,059,055   10,591        --         97,457         --             --        108,048
Common stock issued for
 conversion of
 convertible debt to
 equity.................   1,824,645   18,246        --        139,494         --             --        157,740
Common stock issued to
 an employee in lieu of
 accrued compensation...   1,500,000   15,000        --        195,000         --             --        210,000
Common stock to be
 issued.................         --       --      40,000           --          --             --         40,000
                          ---------- --------   --------   -----------   ---------   ------------   -----------
Balances, December 31,
 1999...................  52,710,130  527,101     40,000    36,687,723     (76,042)   (38,062,003)     (883,221)
Comprehensive loss:
 Net loss...............         --       --         --            --          --        (776,963)     (776,963)
 Change in unrealized
  loss on investment....         --       --         --            --      (39,583)           --        (39,583)
                                                                                                    -----------
Total comprehensive
 loss...................                                                                               (816,546)
                                                                                                    -----------
Issuance of common
 stock..................   6,834,407   68,344    (40,000)    1,042,188         --             --      1,070,532
Common stock issued to
 consultants and a
 director...............     400,000    4,000        --         22,000         --             --         26,000
Common stock issued to
 an employee in lieu of
 accrued compensation
 and for repayment of
 note payable...........   1,187,500   11,875        --         83,125         --             --         95,000
Beneficial conversion
 feature related to
 convertible debt to
 related party..........         --       --         --        250,000         --             --        250,000
                          ---------- --------   --------   -----------   ---------   ------------   -----------
Balances, December 31,
 2000...................  61,132,037 $611,320   $    --    $38,085,036   $(115,625)  $(38,838,966)  $  (258,235)
                          ========== ========   ========   ===========   =========   ============   ===========
</TABLE>


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

                                      F-6
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 2000 and 1999

NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Description and Basis of Presentation

   Halis, Inc. ("Halis") and Subsidiaries (collectively, the "Company")
develops and supplies healthcare software systems and provides claims
processing services to managed healthcare markets, medical practices, and
related point of service markets to customers located throughout the United
States. The Company also provides value added computer services, network
solutions, and connectivity solutions and systems integration principally to
Atlanta area businesses. Additionally, the Company provides services support,
including onsite hardware maintenance, as well as network support programs. It
grants credit to its customers without requiring collateral.

 Principles of Consolidation

   The consolidated financial statements include the accounts of Halis, Inc.
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

 Revenue Recognition

   Revenue consists primarily of third party claims processing fees, consulting
services, software licensing fees, sales of related computer hardware, and post
contract customer support and maintenance. For 2000 and 1999, third party
claims processing fees accounted for approximately 96% and 66%, respectively,
of the Company's sales. Revenues are recognized as follows:

<TABLE>
 <C>                             <S>
 Claims Processing               Monthly as services are performed. Fees are
                                 computed based on a percent of premium or a
                                 fee per participant.

 Consulting Services             When services are performed.

 Installation                    When installation is complete.

 Training and Education          Upon completion of training or education
                                 session.

 Software Licensing Revenue      After shipment of the product and fulfillment
                                 of acceptance terms, provided no significant
                                 obligations remain and collection of
                                 resulting receivable is deemed probable.

 Contract Support                Ratably over the life of the contract from
                                 the effective date.

 Hardware                        Upon shipment of computer equipment to the
                                 customer, provided no significant obligations
                                 remain and collection of resulting receivable
                                 is deemed probable.
</TABLE>

 Restricted Cash

   The Company, through its third party claims administration subsidiary,
received prepayments for the payment of premiums and claims to be paid on
behalf of its customers. As of December 31, 2000, the Company had $36,308 of
such prepayments, and related deferred revenue and customer deposits of
$36,308.

 Cash--Agency Accounts

   The Company, through its third party claims administration subsidiary,
maintains custody of cash funds on behalf of some of its customers for the
payment of insurance premiums to carriers and medical claims for covered
individuals. The Company has custody of the funds but no legal right to them.
Therefore, the cash balances and related liabilities are not reflected in the
Company's balance sheet. At December 31, 2000, the Company maintained custody
of approximately $1.1 million of customer funds.


                                      F-7
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


 Property and Equipment

   Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets,
generally five to seven years.

 Goodwill

   Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over a period of five
years. The Company assesses the recoverability of its goodwill whenever adverse
events or changes in circumstances or business climate indicate that expected
future cash flows (undiscounted and without interest charges) in individual
business units may not be sufficient to support the recorded asset. An
impairment is recognized by reducing the carrying value of the goodwill based
on the expected discounted cash flows of the business unit.

 Software Development Costs

   In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," research and development costs incurred prior to the
attainment of technological and marketing feasibility of products are charged
to operations. Thereafter, the Company capitalizes the direct costs and
allocated overhead incurred in the development of products until the point of
market release of such products, wherein costs incurred are again charged to
operations.

   Capitalized costs are amortized over a period of five years on a straight-
line basis, and amortization commences when the product is available for market
release. In December 1999, due to the Company's plan to no longer sell its
existing "windows" based software product and to convert to an "internet"
driven software product in 2000, the Company reviewed the recoverability of
software development costs and determined that the remaining unamortized
software development costs of $63,996 was not recoverable and should be written
off. During 2000, the Company capitalized development costs incurred in the
development of its Internet software product. Amortization of these costs will
commence in 2001 when the product is available for market release.

 Other Intangible

   Other intangible consisted of license fees in the amount of $118,771 paid to
a non-related company for the right to use its software technology in the
development of the Company's software product and was amortized over a period
of two years on the straight-line basis. At December 31, 2000 and 1999,
accumulated amortization was $118,771 and $69,283, respectively.

 Investment

   The investment is in a marketable equity security of a related company,
HealthWatch, Inc., which is classified as available-for-sale, and is carried at
market value (see Note I). The purchase cost and fair value of the investment
at December 31, 2000 was $125,000 and $9,375, respectively. The related
unrealized holding loss of $115,625 is reported as a separate component of
stockholders' deficit at December 31, 2000.

 Income Taxes

   Deferred income tax assets and liabilities are recognized for the estimated
tax effects of temporary differences between the financial reporting and tax
reporting bases of assets and liabilities and for loss carryforwards based on
enacted tax laws and rates. A valuation allowance is used to eliminate deferred
income tax assets to the amount that is more likely than not to be utilized.

                                      F-8
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


 Net Loss Per Share

   The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
basic earnings per share and diluted earnings per share presentation. The two
calculations differ as a result of potential common shares included in diluted
earnings per share, but excluded in basic earnings per share. As the Company
experienced net losses for the income statement periods presented, potential
common shares have an antidilutive effect and are excluded for purposes of
calculating diluted earnings per share. The number of shares which have an
antidilutive effect on diluted earnings per share was 26,233,347 and 13,488,067
in 2000 and 1999, respectively.

 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 certain assets, liabilities,
revenues, expenses and contingent assets and liabilities. Significant estimates
included in these financial statements relate to useful lives of certain
assets, legal contingencies, and recoverability of long-term assets such as
capitalized software development costs and goodwill. Actual amounts could
differ from those estimates. Any adjustments applied to estimated amounts are
recognized in the year in which such adjustments are determined.

 Fair Value of Financial Instruments

   The carrying amounts reflected in the consolidated balance sheet for cash
and accounts receivable approximate their fair values due to the short
maturities of those instruments. Available-for-sale marketable securities are
recorded at fair value in the consolidated balance sheet. Management believes
it is not practicable to estimate the fair value of its liability financial
instruments because of the uncertainty related to its ability to continue as a
going concern and its current liquidity difficulties.

 Reclassifications

   Certain reclassifications have been made to the 1999 consolidated financial
statements to conform to the 2000 consolidated financial statement
presentation.

NOTE B--REALIZATION OF ASSETS AND SATISFACTION OF LIABILITIES

   The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. However, the Company incurred a net loss of
$776,963 and $1,444,827 for the years ended December 31, 2000 and 1999,
respectively, and had a working capital deficiency of $1,044,503 and an equity
deficiency of $258,235 at December 31, 2000. The Company has sustained
continuous losses from operations. The Company has used, rather than provided,
cash in its operating activities during the years ended December 31, 2000 and
1999 and has deferred payment of certain accounts payable and accrued expenses.
Given these results, additional capital and improved operations will be needed
to sustain the Company's operations.

   Management's plans in this regard include merging with HealthWatch, Inc.
("HealthWatch"), a related company which owns approximately 25% of Halis (see
Note I). The Company expects the merger to improve its liquidity by having
access to HealthWatch's cash reserves and increasing the Company's ability to
raise additional growth capital. In addition, the Company is upgrading its HES
software product to an Internet version. This upgrade will restructure the
software into several healthcare software products under a common

                                      F-9
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999

architecture, which the Company believes will improve market acceptance. The
Company also plans to expand its business model to include e-commerce services
that will supplement its software sales and value-added business services. The
e-commerce business will focus on technology-based transactions that are paid
for on a monthly or per-transaction basis. This revenue model is expected to
generate recurring, more predictable revenues that can be leveraged to work
towards a positive cash flow. Additionally, the Company will continue its
efforts to raise the additional capital required to fund planned 2001
activities.

   In view of the matters described, there is substantial doubt about the
Company's ability to continue as a going concern. The recoverability of the
recorded assets and satisfaction of the liabilities reflected in the
accompanying balance sheet is dependent upon continued operation of the
Company, which is in turn dependent upon the Company's ability to meet its
financing requirements on a continuing basis and to succeed in its future
operations. There can be no assurance that management will be successful in
implementing its plans. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

NOTE C--NOTE PAYABLE TO A BANK

   The Company has a 10.5% note payable to a bank in the amount of $248,379 as
of December 31, 2000. The note is payable in monthly installments of $8,045,
including interest, with a balloon payment of all unpaid principal and interest
due on October 27, 2001. The note was assumed in connection with the disposal
of a subsidiary of the Company. Certain assets of the former subsidiary act as
collateral for the loan. The Company has guaranteed payment of the loan.

NOTE D--RELATED PARTY NOTES AND ADVANCES

   The Company has an unsecured note receivable due from a stockholder of
$623,377. The note accrues interest at 5% per annum and is due October 31,
2001. The stockholder may repay the note using Halis common stock if certain
conditions are met, including but not limited to the Company's common stock
achieving a traded market price of at least $3 per share for a specified period
of time. In December 1999, the Company reviewed the collectability of this note
and determined that its collection was doubtful. The entire amount of the note
was reserved at December 31, 1999 and the Company ceased accruing interest on
the note.

   At December 31, 1999, the Company had an unsecured note payable to a
stockholder and director of the Company in the amount of $15,000. This note was
non-interest bearing and due on demand. The note was paid in full in February
2000 with the issuance of 187,500 shares of the Company's common stock.

   In Octo ber 2000, the Company borrowed $250,000 from HealthWatch under an
unsecured note payable. The note accrues interest at 10% and is due on demand.
The note is convertible, at the option of HealthWatch, into 12,500,000 shares
of the Company's common stock, or $.02 per share. This convertible note
includes a beneficial conversion feature of $250,000, which represents the
aggregate fair value at the issue date of the Halis common stock into which the
note is convertible over the proceeds received from the issuance of the note
payable. This beneficial conversion feature has been included in interest
expense and additional paid-in capital in 2000 since the note was convertible
at the date of issue.

   At December 31, 2000, the Company owed HealthWatch a total of $291,976,
which consisted of license fees related to a proprietary technology asset owned
by MERAD Software, Inc. (see Note I) and net advances received by the Company
for working capital purposes. These advances are payable on demand and are non-
interest bearing.

                                     F-10
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


NOTE E--COMMITMENTS AND CONTINGENCIES

 Leases

   The Company leases office space under several operating lease agreements
expiring in 2005. Rent expense for the office space and equipment classified as
operating leases totaled $666,864 and $536,547 for the years ended December 31,
2000 and 1999, respectively. At December 31, 2000, future minimum lease
payments under non-cancelable operating leases having remaining terms in excess
of one year are as follows:

<TABLE>
   <S>                                                                <C>
   2001.............................................................. $  599,410
   2002..............................................................    607,994
   2003..............................................................    492,134
   2004..............................................................     27,657
   2005..............................................................     15,270
                                                                      ----------
                                                                      $1,742,465
                                                                      ==========
</TABLE>

   Beginning January 2000, the Company subleased one of its office facilities
under a four-year operating lease expiring December 2003. Rental income from
this sublease in 2000 was $193,392. Minimum future subrental income anticipated
under this agreement is as follows:

<TABLE>
   <S>                                                                  <C>
   2001................................................................ $222,372
   2002................................................................  226,630
   2003................................................................  231,104
                                                                        --------
                                                                        $680,106
                                                                        ========
</TABLE>

   During 1998, the Company acquired equipment totaling $44,650 under a five-
year capital lease. During 1999, the Company acquired computers and software
and a vehicle totaling $266,943 under capital leases ranging from three to five
years. Amortization of these capital leases included in depreciation expense
totaled $94,156 and $78,200 for the years ended December 31, 2000 and 1999,
respectively. Accumulated depreciation amounted to $174,589 and $80,436 as of
December 31, 2000 and 1999, respectively.

   Future payments under these leases at December 31, 2000 are as follows:

<TABLE>
   <S>                                                                 <C>
   2001............................................................... $ 82,635
   2002...............................................................   78,775
   2003...............................................................   71,572
   2004...............................................................   10,341
                                                                       --------
   Total minimum lease payments.......................................  243,323
   Amount representing interest.......................................  (34,691)
                                                                       --------
   Present value of minimum lease payments............................ $208,632
                                                                       ========
</TABLE>

 Litigation

   In February 1997, a complaint styled Advanced Custom Computer Solutions,
Inc. ("ACCS"), Wayne W. Surman and Charlotte Surman v. Fisher Business Systems,
Inc., Halis, Inc., Larry Fisher, Paul W. Harrison, and Nathan I. Lipson was
filed in the State Court of Fulton County, Georgia. The complaint alleges,
among other things, breach of contract in connection with the termination by
the Company of its merger agreement with

                                     F-11
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999

ACCS, which the Company advised ACCS was terminated in November 1996 due to the
impossibility of ACCS's fulfilling certain conditions to closing therein. In
addition, the complaint alleges that the defendants made false and misleading
statements to the plaintiffs for the purpose of inducing plaintiffs to lend
money to the Company. The Surmans are the principals of ACCS and claim personal
damages against the Company on certain of the claims, and claim a right to at
least 150,000 shares of the Company's common stock, the exact amount to be
determined at trial, based on a claim of a breach of an alleged oral contract
to pay them shares of the Company's common stock as compensation for soliciting
investors (the "Oral Contract Claim"). The Surmans further claim that the
Company fraudulently induced them to solicit investors for the Company (the
"Investor Solicitation Claim").

   The complaint seeks damages in the amount of at least $2 million (the exact
amount of such damages to be proved at trial), additional damages to be
determined by the jury at trial and punitive damages. The Company answered,
denying the allegations of liability in the complaint, and the Company
vigorously defended the lawsuit. On November 19, 1998, the trial court granted
summary judgment in favor of the Company on all but two counts of the
plaintiff's complaint, as amended. The two counts remaining include the Oral
Contract Claim and Investor Solicitation Claim. The plaintiffs have appealed to
the Georgia Court of Appeals from the order granting partial summary judgment
to the Company on all other claims, and the Company has cross-appealed the
portions of the order denying summary judgment on the two surviving counts. The
Georgia Court of Appeals has affirmed the trial court's granting of summary
judgment in favor of the Company on seven of the nine counts in the complaint
and affirming the denial of the Company's cross appeal denying summary judgment
on the two surviving counts. The plaintiffs filed a petition for certiorari to
the Georgia Supreme Court regarding the decision of the Georgia Court of
Appeals. The Georgia Supreme Court, on September 8, 2000, denied that petition.
There can be no assurance, however, that the Company will be successful in its
defense or that the final resolution of this matter will not have a material
adverse effect on the financial condition or results of operation of the
Company.

   On July 18, 1997, the Company was sued by Penelope Sellers in an action
seeking actual damages against the Company in the amount of $480,535,
unspecified attorneys fees, and punitive damages of not less than $1,000,000.
Ms. Sellers contends that a Finder's Fee Agreement between her and the Company
in August 1995, under which she was to receive a commission equal to 10% of the
amount of any equity investments in the Company or software licensing fees paid
to the Company in respect to transactions introduced to the Company by her,
entitles her to an amount in excess of the approximately $19,350 which she has
been paid to date under that agreement.

   That amount represents 10% of the investment made by the principals of
AUBIS, LLC ("AUBIS") in a private placement of convertible notes (in which
private placement other investors besides the AUBIS principals participated)
and 10% of the amounts received by the Company from the sale of Fisher
Restaurant Management Systems by AUBIS.

   Ms. Sellers claims that the entirety of the convertible notes offering
described above (in which an aggregate of $1,470,000 was raised by the Company)
would not have been successful but for her introduction of the AUBIS principals
to the Company. As a result, Ms. Sellers has made a claim for 10% of all
amounts raised in the notes offering. Ms. Sellers has also made a claim, based
on the same rationale, to 10% of all capital funding raised by the Company (up
to the $500,000 maximum compensation), including the proceeds of a private
placement which raised gross proceeds of approximately $2 million. Finally, Ms.
Sellers has made a claim for 10% of the value of AUBIS and Halis Systems, Inc.
Discovery has been completed. The defendants filed a motion for partial summary
judgment, which was granted, effectively eliminating Larry Fisher and Paul
Harrison on claims asserted against them for tortuous interference with
contractual relations. The Company continues to vigorously defend this lawsuit.
There can be no assurance, however, that the Company will be

                                     F-12
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999

successful in its defense or that the resolution of this matter will not have a
material adverse effect on the financial condition or results of operation of
the Company.

   On April 1, 2000, the Company was served a complaint by Carrera-Maximus,
Inc. (previously known as Carrera Consulting Group). The complaint alleges
breach of contract in connection with certain professional service fees,
product support fees, and license fees paid to the Company under a contract
between the two parties. Carrera-Maximus, Inc. is seeking the return of fees in
the total amount of approximately $538,000. The Company denies the allegations
of liability in the complaint and intends to vigorously defend this case. The
Company has filed an answer asserting various defenses and denying liability
and has asserted a counterclaim for breach of contract for unpaid fees and
unreimbursed expenses. This suit is currently in the discovery phase. There can
be no assurance, however, that the Company will be successful in its defense or
that the resolution of this matter will not have a material adverse effect on
the financial condition or results of operation of the Company.

   On September 8, 2000, a subsidiary of the Company was served a complaint by
Motivational Marketing, Inc. The complaint alleges breach of contract for
failure to pay commissions and the plaintiff is seeking an amount in excess of
$138,000 for commissions, and damages for fraud in the inducement in an amount
of not less than $100,000, plus unspecified punitive damages and attorney fees.
The contract referenced in the complaint was an agreement between the plaintiff
and TG Marketing, Inc. ("TGM"), a company acquired by Halis in May 1997, for
telemarketing services whereby the plaintiff was supposed to receive
commissions from TGM in consideration for referrals of clients to TGM. The
Company denies the allegations of the complaint and intends to vigorously
defend this case. This suit is in the discovery phase. There can be no
assurance, however, that the Company will be successful in its defense of the
complaint or that the final resolution of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.

   The Company is also party to litigation that it believes to be immaterial
with respect to amount and is not disclosed herein. No provision has been made
in these financial statements regarding these items due to the uncertainty of
their ultimate resolution.

NOTE F--INCOME TAXES

   Significant components of the Company's deferred income tax assets as of
December 31, 2000 are as follows:

   Deferred tax assets:
<TABLE>
   <S>                                                              <C>
     Net operating loss carryforwards.............................. $ 6,752,511
     Other, net....................................................     378,379
                                                                    -----------
   Net deferred tax asset..........................................   7,130,890
   Valuation allowance.............................................  (7,130,890)
                                                                    -----------
   Net deferred tax asset reported................................. $       --
                                                                    ===========
</TABLE>

   The valuation allowance at December 31, 1999 amounted to $6,877,994.

   The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:

<TABLE>
<CAPTION>
                                                                 2000    1999
                                                                 -----   -----
   <S>                                                           <C>     <C>
   Federal income tax rate...................................... (34.0)% (34.0)%
   Effect of valuation allowance on deferred tax assets.........  34.0    34.0
   State income tax, net of Federal benefit.....................   0.0     0.0
                                                                 -----   -----
   Effective income tax rate....................................   0.0%    0.0%
                                                                 =====   =====
</TABLE>


                                     F-13
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999

   At December 31, 2000, the Company had available for carryforward a net
operating loss of approximately $17.8 million. Approximately $9 million of the
net operating loss relates to losses prior to 1997, and as a result of an
ownership change on November 19, 1996, and in accordance with Section 382 of
the Internal Revenue Code, the loss carryforward is limited to approximately
$841,000 for each year thereafter. The net operating losses expire between the
years 2001 and 2020. Future recognition of these carryforwards will be
reflected when it is more likely than not that they will be utilized.

   Net operating loss carryforwards expiring in the next five years are
approximately as follows:

<TABLE>
   <S>                                                                <C>
   2001.............................................................. $  246,000
   2002..............................................................  1,225,000
   2003..............................................................  1,571,000
   2004..............................................................    782,000
   2005..............................................................        --
</TABLE>

NOTE G--STOCK OPTION PLANS

   During 1996, the Company adopted the 1996 Stock Option Plan which provided
for the issuance of both qualified and non-qualified stock options to employees
and non-employee directors pursuant to Section 422 of the Internal Revenue
Code. The number of shares reserved for the plan was 3,000,000. On December 5,
1997 the shareholders of the Company approved an amendment to increase the
number of shares available for grant from 3,000,000 shares to 8,000,000 shares.
Additional non-qualified options may be granted outside of the plan upon
approval of the Board of Directors.

   Options issued to participants are granted with an exercise price of the
mean between the high "bid" and low "ask" price (average market price) as of
the close of business on the date of grant, and are exercisable up to ten years
from the date of grant. Incentive stock options issued to persons who directly
or indirectly own more than ten percent of the outstanding stock of the Company
shall have an exercise price of 110 percent of the average market price on the
date of grant and are exercisable up to five years from the date of grant.

   The Company's previous incentive stock option plan, the 1986 Incentive Stock
Option Plan, expired on January 29, 1996. The 1988 Non-qualified Stock Option
Plan was terminated by the Company on April 24, 1996. Activity related to these
plans is as follows:

<TABLE>
<CAPTION>
                           1986 &    Weighted   1996     Weighted Outside of  Weighted
                         1988 Plans: Average    Plan:    Average    Plans:    Average
                          Number of  Exercise Number of  Exercise Number of   Exercise
                           Options    Price    Options    Price    Options     Price
                         ----------- -------- ---------  -------- ----------  --------
<S>                      <C>         <C>      <C>        <C>      <C>         <C>
Outstanding at December
 31, 1998...............   71,940     $ 0.28  1,751,250   $0.25    8,645,090   $0.20
  Granted...............      --         --         --      --     2,378,700   $0.08
  Expired...............     (220)    $11.88        --      --           --      --
  Cancelled.............      --         --    (385,250)  $0.13     (717,000)  $0.13
                           ------             ---------           ----------
Outstanding at December
 31, 1999...............   71,720     $ 0.24  1,366,000   $0.20   10,306,790   $0.16
  Expired...............     (220)    $10.63        --      --           --      --
  Cancelled.............      --         --     (94,000)  $0.13          --      --
                           ------             ---------           ----------
Outstanding at December
 31, 2000...............   71,500     $ 0.21  1,272,000   $0.20   10,306,790   $0.16
                           ======             =========           ==========
Options exercisable at
 December 31, 2000......   71,500     $ 0.21    974,975   $0.22   10,248,290   $0.16
                           ======             =========           ==========
</TABLE>


                                     F-14
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999

   Exercise prices for options outstanding as of December 31, 2000 under the
1986 and 1988 Plans range from $0.13 to $3.44 per share. The weighted average
remaining life of these options was approximately two years.

   Exercise prices for options outstanding as of December 31, 2000 granted
under the 1996 Plan ranged from $0.13 to $2.00 per share. The weighted average
remaining life of these options was approximately seven years.

   Exercise prices for options outstanding as of December 31, 2000 granted
outside of the Plans ranged from $0.05 to $2.12 per share. The weighted average
remaining life of these options was approximately seven years.

   The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options rather than
Statement of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). In accordance with APB
25, since the exercise price of the underlying stock options equaled the fair
market value on the date of grant, no compensation expense was recognized.

   Pro forma information regarding net loss and loss per share is required by
SFAS 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. During
2000, no options were granted by the Company. The fair value of options granted
in 1999 was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:

<TABLE>
   <S>                                                                <C>
   Risk-free interest rate........................................... 4.55-5.67%
   Dividend yield....................................................       0.0%
   Expected volatility...............................................    147.60%
   Weighted average expected life....................................   4 years
   Forfeiture rate...................................................       5.0%
</TABLE>

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss and loss per share if compensation expense had been
recognized for the options issued would have been as follows:

<TABLE>
<CAPTION>
                                                          2000        1999
                                                        ---------  -----------
   <S>                                                  <C>        <C>
   Net loss--as reported............................... $(776,963) $(1,444,827)
   Net loss--pro forma................................. $(878,851) $(1,472,727)
   Reported loss per share--basic & diluted............ $    (.01) $      (.03)
   Pro forma loss per share--basic & diluted........... $    (.01) $      (.03)
   Weighted average fair value of options granted
    during the year....................................       n/a  $       .01
</TABLE>

NOTE H--STOCK WARRANTS

   The Company has issued stock warrants in conjunction with the issuance of
common stock. Activity related to stock warrants was as follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                                        Exercise
                                                              Warrants   Price
                                                              --------- --------
   <S>                                                        <C>       <C>
   Outstanding at December 31, 1998.......................... 1,276,760  $1.73
     Granted................................................. 1,161,822  $0.29
                                                              ---------
   Outstanding at December 31, 1999 and 2000................. 2,438,582  $1.05
                                                              =========
</TABLE>

                                     F-15
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


   At December 31, 2000 the Company had warrants outstanding as follows:

<TABLE>
<CAPTION>
     Common Shares Exercise Price
     Under Warrant   Per Share       Range of Expiration Dates
     ------------- --------------    -------------------------
     <C>           <C>            <S>
        437,500        $ .05               December 2004
        535,000        $ .11                 June 2004
        237,982        $1.35      September 2002 - December 2002
      1,228,100        $1.75      November 2001 - September 2002
      ---------
      2,438,582
      =========
</TABLE>

NOTE I--RELATED PARTY TRANSACTIONS

   On November 18, 1996, the Company entered into a license agreement for a
proprietary technology asset ("MERAD") from Paul Harrison Enterprises, Inc.
("PHE"), which was controlled by the Chairman and Chief Executive Officer of
the Company. Mr. Harrison served as the President of PHE and at the time
beneficially owned approximately 40% of this company. PHE was acquired by
HealthWatch, Inc. on October 2, 1998. The Company is obligated to pay a license
fee equal to 10% of the gross revenues generated from MERAD and any derivations
thereof by the Company or any of its affiliates to PHE (after the merger now
known as MERAD Software, Inc.). During 2000 and 1999, $1,080 and $62,518,
respectively, of license fees were incurred under this agreement. At December
31, 2000 and 1999, $88,563 and $87,483, respectively, was payable to MERAD
Software, Inc. under this agreement and was included in due to related party.

   During 2000, 1,187,500 shares of the Company's common stock were issued to
an officer of the Company for payment of accrued compensation of $80,000 and a
note payable of $15,000.

   During 2000, 200,000 shares of the Company's common stock valued at $10,000
was issued to a director for consulting services.

   At December 31, 1999 and 2000, the Company had outstanding the following
qualified and nonqualified stock options granted to officers and directors:

<TABLE>
<CAPTION>
     Common Shares Exercise Price    Range of Expiration
     Under Option    Per Share              Dates
     ------------- --------------    -------------------
     <C>           <C>            <S>
        740,000         $.05            December 2009
      5,666,500         $.13      June 2006--December 2009
      ---------
      6,406,500
      =========
</TABLE>

   Of the total outstanding options granted to officers and directors as
discussed above, options to acquire up to an aggregate of 6,293,250 shares of
common stock are exercisable at December 31, 2000.

   During 1999, the Company granted options to an officer/director of the
Company to purchase 540,000 shares of the Company's common stock at a price of
$.05 per share. These options expire December 2009.

   During 1999, the Company granted options to a director of the Company to
purchase 100,000 shares of the Company's common stock at a price of $.05 per
share. These options expire December 2009.

   During 1999, the Company granted options to a relative of an
officer/director of the Company to purchase 100,000 shares of the Company's
common stock at a price of $.05 per share. These options expire December 2009.


                                     F-16
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


   During 1999, 1,500,000 shares of the Company's common stock were issued to
an officer of the Company for payment of accrued compensation of $210,000.

   During 1999, an outstanding 6% convertible debenture to HealthWatch in the
amount of $157,741 was converted into 1,824,645 shares of the Company's common
stock.

   At December 31, 2000 and 1999, the Company owned 16,667 shares of
HealthWatch common stock.

   Paul W. Harrison, the Chairman and Chief Executive Officer of the Company,
is also the Chairman and Chief Executive Officer of HealthWatch. Mr. Harrison
is also a shareholder of both companies.

   During 2000 and 1999, the Company and HealthWatch operated under a Business
Collaboration Agreement which allowed HealthWatch to act as a reseller of the
Company's software product and provided for the sharing of certain operating
expenses. The Company received from HealthWatch approximately $89,000 and
$105,000 in 2000 and 1999, respectively, under this agreement, for the sharing
of operating expenses, which is included as selling, general and administrative
expenses in the Company's statements of operations.

   In September 2000, the Business Collaboration Agreement was amended to
provide, among other things, for revenue sharing based on a 60/40 split (i.e.,
the selling company would receive 60% of the sales price and the company that
owns the technology would receive 40% of the sales price). Furthermore,
HealthWatch is obligated to pay Halis a collaboration fee of $50,000 per month
beginning in October 2000, which shall be applied as a credit against any
revenue sharing amount that is due to Halis. The Company is obligated to
provide support to HealthWatch for the Halis software products, provide
reasonable product enhancement as part of product release updates, and
cooperate with HealthWatch in regard to product enhancement requests.
HealthWatch may terminate the $50,000 monthly collaboration fee payable to
Halis on or after October 1, 2001, under certain terms and conditions. The
Company received $150,000 from HealthWatch during 2000 under this agreement.
This amount is included in revenues in the Company's statement of operations.

   The Company and HealthWatch entered into a non-binding letter of intent,
dated August 8, 1998 (the "Letter of Intent"), providing for the merger of
HealthWatch with the Company. However, due to the market volatility of the two
companies' stock and accounting issues that would be caused as a result of the
merger that may have an adverse effect on HealthWatch, the companies agreed to
delay the consummation of the merger.

   In March 2000, the Company and HealthWatch signed a binding letter of intent
to merge. In the merger, each share of common stock of the Company outstanding
immediately prior to the effective time of the merger would be converted into
the right to receive one-twentieth (.05) of a share of HealthWatch common stock
(the "Merger Consideration"). In addition, outstanding stock options and stock
warrants of the Company would be converted into options and warrants to
purchase HealthWatch common stock in accordance with the same conversion ratio.

   The Letter of Intent also contains binding provisions providing HealthWatch
with an unconditional right to purchase prior to the closing of the merger, up
to $1,000,000 of the Company's common stock at $.20 per share, and upon any
such financing, HealthWatch shall have a three month option to purchase up to
an additional $5,000,000 of the Company's common stock at $.20 per share. In
May 2000, HealthWatch purchased 5,000,000 shares of the Company's common stock
at $.20 per share.

   On June 29, 2000, the Company and HealthWatch signed a definitive merger
agreement. The proposed merger is expected to close in the first quarter of
2001. The merger is subject to, among other conditions, the approval of the
shareholders of both companies. No assurance can be given that the parties will
be able to satisfy the conditions to the consummation of the merger.


                                     F-17
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


NOTE J--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   Details of non-cash transactions are as follows:

<TABLE>
<CAPTION>
                                                               2000     1999
                                                              ------- --------
   <S>                                                        <C>     <C>
   Capital lease obligations incurred for the acquisition of
    property and equipment................................... $   --  $266,943
                                                              ======= ========
   Debt converted to equity:
     Accrued employee compensation........................... $80,000 $210,000
     Note payable, related party.............................  15,000      --
     6% convertible promissory note, related party...........     --   157,741
     Accounts payable, consultants...........................     --    92,648
                                                              ------- --------
                                                              $95,000 $460,389
                                                              ======= ========
   Capitalized license fees recorded by increasing accounts
    payable.................................................. $   --  $118,771
                                                              ======= ========
   Cash paid for interest.................................... $84,166 $ 61,050
                                                              ======= ========
</TABLE>

NOTE K--INFORMATION CONCERNING BUSINESS SEGMENTS

   The Company's three reportable segments are strategic business units that
offer different products and services to customers located throughout the
United States. These segments are American Benefit Administrative Services
("ABAS"), Healthcare Enterprise System ("HES"), and Halis Consulting Services
("HCS"). ABAS provides third party claims processing services for healthcare
plans of varying size companies. HES supplies healthcare software systems to
various segments of the medical industry. HCS performs software consulting
services and support to companies in varying industries. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies.

   Segment information for 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                           Corporate
                            ABAS        HES       HCS     Unallocated    Totals
                         ----------  ---------  --------  -----------  -----------
<S>                      <C>         <C>        <C>       <C>          <C>
2000
Revenues from external
 customers.............. $3,862,105  $  25,309  $ 14,020  $   150,000  $ 4,051,434
Segment income (loss)...   (111,863)  (302,092)      649     (363,657)    (776,963)
Interest income
 (expense), net.........    (26,525)       --       (292)    (311,015)    (337,832)
Total assets............  1,277,121     73,593    58,328      228,897    1,637,939
Capital expenditures....     39,402     14,333       --         9,450       63,185
Depreciation and
 amortization...........    518,199      3,996     1,800       73,705      597,700
Gain on extinguishment
 of
 accounts payable.......        --         --        --       229,424      229,424

1999
Revenues from external
 customers..............  3,371,496    798,077   912,920          --     5,082,493
Segment income (loss)...   (934,117)   415,615   189,809   (1,116,134)  (1,444,827)
Interest income
 (expense), net.........     (1,867)       --        --       (34,121)     (35,988)
Total assets............  1,402,261     45,787    67,101      271,037    1,786,186
Capital expenditures....    335,450        --        --         7,655      343,105
Depreciation and
 amortization...........    497,939        936     1,780      119,482      620,137
Provision for losses on
 note
 receivable--related
 party..................   (623,377)       --        --           --      (623,377)
</TABLE>


                                     F-18
<PAGE>

                          HALIS, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                           December 31, 2000 and 1999


NOTE L--FOURTH QUARTER ADJUSTMENTS

   Significant adjustments made in the fourth quarter of 2000 are as follows:

<TABLE>
     <S>                                                                <C>
     Record interest expense related to beneficial conversion
      feature on convertible debt...................................... $250,000
                                                                        ========
</TABLE>


                                     F-19