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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Fiscal Year Ended December 31, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Transition Period from  to
 001-14665
COMMISSION FILE NUMBER
 CLAIMSNET.COM INC.
  Delaware
    
    75-2649230(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)14860 Montfort Dr., Suite 250Dallas, Texas
    
    75254(Address of principal
executive offices)
    
    (Zip Code)
    o
 þ o
 þ
 o þ
  o
    o þ




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESSITEM 2. DESCRIPTION OF PROPERTYITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 7. FINANCIAL STATEMENTSITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 8A. CONTROLS AND PROCEDURESITEM 8B. OTHER INFORMATIONPART IIIITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTITEM 10. EXECUTIVE COMPENSATIONITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESNote dated November 2, 2005Certification of Don CrosbieCertification of Laura M. BrayCertification Pursuant to Section 906 of Don CrosbieCertification Pursuant to Section 906 of Laura M. Bray    Table of Contents  
   
     
    
    the ability to easily configure the system to meet the specific needs of our clients, both in the format and content of
data being exchanged;
 
    
    the ability to accept input from a variety of sources (direct output from a providers practice management system, EDI
files from clearinghouses and trading partners, and data conversion from scanned paper forms), pre-process the data,
improve the data or reject the transaction according to client-specific business rules, and deliver the data in a
consistent and client-defined format;
 
    
    the ability to create multiple custom Web site formats to be promoted by partners and sponsors without modification of
the server-based processing systems;
 
    
    the ability of healthcare providers utilizing their Web sites to interactively process claims on the Internet and
receive real time edits prior to claim submission; and
 
    
    the minimal software and processing power required for providers to utilize our proprietary software.
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
    
    to utilize our technology to help large healthcare organizations achieve more efficient and less costly administrative
operations;
 
    
    to market our services directly to the payer community and its trading partners;
 
    
    to aggressively pursue and support strategic relationships with companies that will in turn aggressively market our
services to large volume healthcare organizations, including insurers, HMOs, third party administrators, provider
networks, re-pricing organizations, clinics, hospitals, laboratories, physicians and dentists;
 
    
    to provide total claim management services to payer organizations, including Internet claim submission, paper claim
conversion to electronic transactions, and receipt of EDI transmissions;
 
    
    to continue to expand our product offerings to include additional transaction processing solutions, such as HMO
encounter forms, eligibility and referral verifications, claim status inquiries, electronic remittance advices, claim
attachments, and other healthcare administrative services, in order to diversify sources of revenue; and
 
    
    to license our technology for other applications, including stand-alone purposes, Internet systems and private label
use, and for original equipment manufacturers.
 3




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
    
    arrangements entered into in 2000, 2003 and 2004 with
business-to-business healthcare transaction service providers and
application service providers such as Synertech Systems, Inc.,
Plexis Healthcare Systems, A&G Healthcare Services and Eldorado
Computing, Inc. to operate or provide each a co-branded or
private-labeled version of our claims processing application to be
marketed by the other party either directly throughout the United
States or, as part of its own Internet-based service; and
 
    
    an agreement entered into in September 2002 with a major
healthcare clearinghouse to operate a private-labeled version of
our claims processing application for use by certain of their
clients, including those clients acquired from us.
   
    
    core processing software developed by us which provides claims review, claims editing, and a table-based software
coding of claims variables at a payer-specific level;
 
    
    data mapping software that allows us to accept a wide variety of data input formats;
 
    
    data format generating software developed by us that allows us to easily create a wide variety of data output formats;
 
    
    an integrated web-based user interface that can be easily configured to support co-branded and private-labeled
deployment;
 
    
    industry standard website management software; and
 
    
    state-of-the-art commercial security and encryption software.
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
    
    are engaged in electronic claims processing and expect to benefit by using our advanced technology; and
 
    
    serve or are engaged in direct sales and marketing to the healthcare market and desire to expand the products and
services they offer to their clients without incurring substantial costs by using our advanced technology in a
co-branded or private-label arrangement.
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
    
    significantly reduce operating expenses to a point which would be detrimental to business
operations,
    
    curtail research and development activities and marketing efforts,
    
    sell certain business assets or discontinue some or all of our business operations,
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
    
    take other actions which could be detrimental to business prospects and result in charges which
could be material to our operations and financial position, or
    
    cease operations altogether.
    
    
    maintain and increase our strategic partnerships,
 
    
    maintain and increase our customer base,
 
    
    implement and successfully execute our business and marketing strategy,
 
    
    continue to develop and upgrade our technology and transaction-processing systems,
 
    
    continually update and improve our Web site,
 
    
    provide superior customer service,
 
    
    respond to competitive developments,
 
    
    appropriately evaluate merger and acquisition opportunities, and
 
    
    attract, retain, and motivate qualified personnel.
    
    
    our ability to satisfy capital requirements in an investment climate that has been more reluctant generally to invest
in Internet companies,
 
    
    our ability to retain existing customers, attract new customers at a steady rate, and maintain customer satisfaction in
an industry in which significant changes are occurring,
 
    
    our ability to introduce new sites, services and products,
 
    
    our ability to effectively develop and implement plans to potentially reposition our products, services and marketing
efforts,
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
    
    the effect of announcements or introductions of new sites, services, and products by our competitors in a rapidly
evolving industry,
 
    
    price competition or price increases in our industry,
 
    
    the level of use of the Internet and online services and the rate of market acceptance of the Internet and other online
services for the purchase and delivery of health claims processing services,
 
    
    our ability to upgrade and develop our systems and infrastructure in a timely and effective manner,
 
    
    the amount of traffic on our Web site,
 
    
    the incurrence of technical difficulties, system downtime, or Internet brownouts to which we are acutely sensitive
insofar as our medical claims processing service is Internet-based,
 
    
    the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations,
and infrastructure which cannot be predicted with any large degree of accuracy in light of the rapidly evolving nature
of the medical claims processing industry,
 
    
    our ability to comply with existing and added government regulations such as HIPAA, and
 
    
    general economic conditions and economic conditions specific to the Internet, electronic commerce, and the medical
claims processing industry.
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
    
    rapid technological change,
 
    
    changes in user and customer requirements and preferences,
 
    
    changes in federal legislation and regulation,
 
    
    frequent new product and service introductions embodying new technologies, and
 
    
    the emergence of new industry standards and practices that could render our existing Web site and proprietary
technology and systems obsolete.
  
    
    enhance and improve the responsiveness and functionality of our online claims processing services,
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
    
    license leading technologies useful in our business and to enhance our existing services,
 
    
    comply with all applicable regulations regarding our industry and the Internet,
 
    
    develop new services and technology that address the increasingly sophisticated and varied needs of our prospective
or current customers, and
 
    
    respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
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This report contains, and incorporates by reference, forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, regarding our plans and objectives for the
future. Forward looking statements sometimes include words such as anticipate, estimate,
project, forecast, may, intend, should, could, would, expect, believe and words
of similar meaning. These forward-looking statements are based on current expectations that involve
numerous risks and uncertainties. Our plans and objectives are based on a successful execution of
our operational and expansion strategy and are based upon a number of assumptions, including
assumptions relating to the growth in the use of the Internet and that there will be no
unanticipated material adverse change in our operations or business. These assumptions involve
judgments with respect to, among other things, future economic, political, competitive, and market
conditions, and future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions could prove
inaccurate. The forward-looking statements included, or incorporated by reference, in this report
may prove to be inaccurate. In light of the significant uncertainties inherent in these
forward-looking statements, you should not regard these statements as representations by us or any
other person that we will achieve our objectives and plans.
 
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HIGH
    
    
    LOW2004Three months ended March 31, 2004
    
    
    0.490
    
    
    
    0.260Three months ended June 30, 2004
    
    
    0.380
    
    
    
    0.260Three months ended September 30, 2004
    
    
    0.400
    
    
    
    0.160Three months ended December 31, 2004
    
    
    0.300
    
    
    
    0.1502005Three months ended March 31, 2005
    
    
    0.230
    
    
    
    0.120Three months ended June 30, 2005
    
    
    0.200
    
    
    
    0.120Three months ended September 30, 2005
    
    
    0.150
    
    
    
    0.110Three months ended December 31, 2005
    
    
    0.190
    
    
    
    0.100
      17




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
    
    to utilize our state of the art technology to help large healthcare organizations achieve more efficient and less
costly administrative operations;
 
    
    to market our services directly to the payer community and its trading partners;
 
    
    to aggressively pursue and support strategic relationships with companies that will in turn aggressively market our
services to large volume healthcare organizations, including insurers, HMOs, third party administrators, provider
networks, re-pricing organizations, clinics, hospitals, laboratories, physicians and dentists;
 
    
    to provide total claim management services to payer organizations, including Internet claim submission, paper claim
conversion to electronic transactions, and receipt of EDI transmissions;
 
    
    to continue to expand our product offerings to include additional transaction processing solutions, such as HMO
encounter forms, eligibility and referral verifications, claim status inquiries, electronic remittance advices, claim
attachments, and other healthcare administrative services, in order to diversify sources of revenue; and
 
    
    to license our technology for other applications, including stand-alone purposes, Internet systems and private label
use, and for original equipment manufacturers.
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PageReport of Independent Registered Public Accounting Firm
    
    
    24Consolidated Balance Sheet  December 31, 2005
    
    
    25Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004
    
    
    26Consolidated Statements of Changes in Stockholders Deficit
for the Years Ended December 31, 2005 and 2004
    
    
    27Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004
    
    
    28Notes to Consolidated Financial Statements
    
    
    29
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/s/ Whitley Penn
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December 31,2005ASSETSCURRENT ASSETSCash and equivalents
    
    $
    28Accounts receivable, net of allowance for doubtful accounts of $2
    
    
    161Prepaid expenses and other current assets
    
    
    28Total current assets
    
    
    217EQUIPMENT, FIXTURES AND SOFTWAREComputer hardware and software
    
    
    1,078Software development costs
    
    
    2,045Furniture and fixtures
    
    
    31Office equipment
    
    
    25Leasehold improvements
    
    
    353,214Accumulated depreciation and amortization
    
    
    (3,124
    )Total equipment, fixtures and software, net
    
    
    90TOTAL ASSETS
    
    $
    307LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    165Accrued payroll and other current liabilities
    
    
    124Deferred revenues
    
    
    134Notes payable to related parties  short term
    
    
    75Notes payable  short term
    
    
    24Total current liabilities
    
    
    522LONG TERM LIABILITIESConvertible notes payable to related parties  long term
    
    
    300Convertible notes payable  long term
    
    
    200Total long term liabilities
    
    
    500Total liabilities
    
    
    1,022COMMITMENTS AND CONTINGENCIES
    
    
    STOCKHOLDERS DEFICITPreferred stock, $.001 par value; 4,000,000 shares authorized, 720 shares
of Series D (liquidation preference of $180) and 50 shares of Series E
(liquidation preference of $15) issued and outstanding
    
    
    Common stock, $.001 par value; 40,000,000 shares authorized; 25,976,180
shares issued and outstanding
    
    
    26Additional capital
    
    
    43,154Accumulated deficit
    
    
    (43,895
    )Total stockholders deficit
    
    
    (715
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    307
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Year Ended December 31,2005
    
    
    2004REVENUES
    
    $
    1,266
    
    
    $
    1,046COST OF REVENUES
    
    
    778
    
    
    
    663GROSS PROFIT
    
    
    488
    
    
    
    383OPERATING EXPENSES:Selling, general and administrative
    
    
    723
    
    
    
    1,106LOSS FROM OPERATIONS
    
    
    (235
    )
    
    
    (723
    )OTHER INCOME (EXPENSE):Interest expense-related parties
    
    
    (23
    )
    
    
    (17
    )Interest expense-other
    
    
    (21
    )
    
    
    (8
    )Gain on negotiated settlements of liabilities
    
    
    
    
    
    
    91Total other income (expense), net
    
    
    (44
    )
    
    
    66NET LOSS
    
    $
    (279
    )
    
    $
    (657
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.01
    )
    
    $
    (0.03
    )WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING  BASIC AND DILUTED
    
    
    25,812
    
    
    
    24,461
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Number of
    
    
    
    
    
    
    Number ofPreferred
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalShares
    
    
    Preferred
    
    
    Shares
    
    
    Common
    
    
    Additional
    
    
    Accumulated
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Outstanding
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    DeficitBalances at January 1, 2004
    
    
    1
    
    
    
    
    
    
    
    23,201
    
    
    
    23
    
    
    
    42,582
    
    
    
    (42,959
    )
    
    
    (354
    )Issuance of common stock in
payment of notes payable and
accrued interest  related
party
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Warrants exercised for
common stock
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    2
    
    
    
    398
    
    
    
    
    
    
    
    400Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    (657
    )Balances at December 31, 2004
    
    
    1
    
    
    $
    
    
    
    
    25,226
    
    
    $
    25
    
    
    $
    42,985
    
    
    $
    (43,616
    )
    
    $
    (606
    )Sale of common stock
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    1
    
    
    
    99
    
    
    
    
    
    
    
    100Warrants exercised for
common stock
    
    
    
    
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    70Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (279
    )
    
    
    (279
    )Balances at December 31, 2005
    
    
    1
    
    
    $
    
    
    
    
    25,976
    
    
    $
    26
    
    
    $
    43,154
    
    
    $
    (43,895
    )
    
    $
    (715
    )
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Year Ended December 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (279
    )
    
    $
    (657
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation and amortization
    
    
    45
    
    
    
    41Provision for doubtful accounts
    
    
    8
    
    
    
    Gain on
negotiated settlement of liabilities
    
    
    
    
    
    
    (91
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1
    
    
    
    (56
    )Prepaid expenses and other current assets
    
    
    (6
    )
    
    
    34Accounts payable, accrued payroll and other current liabilities
    
    
    48
    
    
    
    41Deferred revenues
    
    
    (44
    )
    
    
    (30
    )Net cash used in operating activities
    
    
    (227
    )
    
    
    (718
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of equipment and leasehold improvements
    
    
    
    
    
    
    (9
    )Capitalized software development costs
    
    
    (63
    )
    
    
    (5
    )Net cash used in investing activities
    
    
    (63
    )
    
    
    (14
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from notes payable
    
    
    12
    
    
    
    200Proceeds from notes payable  related parties
    
    
    157
    
    
    
    220Payments of notes payable
    
    
    (13
    )
    
    
    Payments of notes payable  related parties
    
    
    (76
    )
    
    
    (86
    )Proceeds from issuance of common stock
    
    
    100
    
    
    
    Proceeds from exercise of common stock warrants
    
    
    70
    
    
    
    400Net cash provided by financing activities
    
    
    250
    
    
    
    734NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    
    
    (40
    )
    
    
    2CASH AND EQUIVALENTS, BEGINNING OF YEAR
    
    
    68
    
    
    
    66CASH AND EQUIVALENTS, END OF YEAR
    
    $
    28
    
    
    $
    68SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    6
    
    
    $
    13SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:Payment of notes payable and accrued interest through issuance of
common stock
    
    $
    
    
    
    $
    5
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Year Ended December 31,2005
    
    
    2004Net loss (thousands)As reported
    
    $
    279
    
    
    $
    657Add: Stock-based compensation expense included in net loss
    
    
    
    
    
    
    Deduct: Stock-based compensation expense
determined under the fair value based method
    
    
    506
    
    
    
    236Pro forma
    
    $
    785
    
    
    $
    893Loss per shareAs reported
    
    $
    0.01
    
    
    $
    0.03Pro forma net loss
    
    $
    0.03
    
    
    $
    0.04
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Year Ended December 31,2005
    
    
    2004Benefit computed at federal statutory rate
    
    $
    (95
    )
    
    $
    (223
    )Permanent differences
    
    
    20
    
    
    
    30State income tax benefit, net of federal
tax effect at state statutory rate
    
    
    (8
    )
    
    
    (20
    )Increase in valuation reserve
    
    
    141
    
    
    
    130Change in prior year estimate
    
    
    (58
    )
    
    
    83Other
    
    
    
    
    
    
    $
    
    
    
    $
    
  December 31,2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    15,567
    
    
    $
    15,431Fixed assets
    
    
    10
    
    
    
    Allowance for doubtful accounts
    
    
    1
    
    
    
    2Deferred revenue
    
    
    49
    
    
    
    66Other
    
    
    28
    
    
    
    27Total deferred tax assets
    
    
    15,655
    
    
    
    15,526Valuation allowance for deferred tax assets
    
    
    (15,655
    )
    
    
    (15,514
    )
    
    
    
    12Deferred tax liabilities:Fixed assets
    
    
    
    
    
    
    (12
    )Deferred income tax assets, net of
deferred tax liabilities
    
    $
    
    
    
    $
    
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WEIGHTEDAVERAGENUMBER
    
    
    PER SHARE
    
    
    EXERCISEOF SHARES
    
    
    EXERCISE PRICE
    
    
    PRICEOutstanding options-January 1, 2004
    
    
    699,442
    
    
    $
    0.30-8.00
    
    
    $
    2.04Granted
    
    
    500,000
    
    
    
    0.35
    
    
    
    0.35Expired
    
    
    
    
    
    
    
    
    
    
    Outstanding options-December 31, 2004
    
    
    1,199,442
    
    
    $
    0.30-8.00
    
    
    $
    1.33Granted
    
    
    500,000
    
    
    
    0.13
    
    
    
    0.13Expired
    
    
    (792,666
    )
    
    
    0.13-8.00
    
    
    
    0.79Outstanding options-December 31, 2005
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15Options exercisable-December 31, 2005
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15
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WEIGHTEDNUMBER
    
    
    PER SHARE
    
    
    AVERAGEOF SHARES
    
    
    EXERCISE PRICE
    
    
    EXERCISE PRICEOutstanding warrants- January 1, 2004
    
    
    3,704,943
    
    
    $
    0.15-3.00
    
    
    $
    0.17Granted
    
    
    550,000
    
    
    
    0.29
    
    
    
    0.29Expired
    
    
    (200,000
    )
    
    
    0.15
    
    
    
    0.15Outstanding warrants-December 31, 2004
    
    
    4,054,943
    
    
    $
    0.15-3.00
    
    
    $
    0.19Granted
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (1,430,619
    )
    
    
    0.15-3.00
    
    
    
    0.21Outstanding warrants-December 31, 2005
    
    
    2,624,324
    
    
    $
    0.15-3.00
    
    
    $
    0.18Warrants exercisable-December 31, 2005
    
    
    2,624,624
    
    
    $
    0.15-3.00
    
    
    $
    0.18
    Note payable to a Director. Principal due
on demand; unsecured. Interest payable at 9.5%
    
    $
    30,000Note payable to a 5% shareholder. Principal due
on demand; unsecured. Interest payable at 9.5%
    
    
    35,000Note payable to a 5% shareholder. Principal due August 31,
2006; unsecured. Interest payable at 8%
    
    
    10,000Notes payable  related party
    
    $
    75,000Note payable. Principal due August 31,
2006; unsecured. Interest payable at 8%
    
    $
    24,000Notes payable
    
    $
    24,000
  Convertible note to a 5% shareholder. Principal due
September 22, 2007; unsecured. Interest payable at 7%
    
    $
    50,000Convertible note to a 5% shareholder. Principal due
December 28, 2007; unsecured. Interest payable at 7%
    
    
    150,000Convertible note. Principal due November 2, 2008; unsecured.
Interest payable at 7.5%
    
    
    100,000Convertible notes payable  related party
    
    $
    300,000Convertible note. Principal due September 21, 2007; unsecured.
Interest payable at 7%
    
    $
    50,000Convertible note. Principal due October 4, 2007; unsecured.
Interest payable at 7%
    
    
    50,000Convertible note. Principal due October 5, 2007; unsecured.
Interest payable at 7%
    
    
    100,000Convertible notes payable
    
    $
    200,000
 36




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##### Table of Contents



2006
    
    $
    99,0002007
    
    
    400,0002008
    
    
    100,000Total
    
    $
    599,000
     Year ended December 31,
2006
    
    $
    40,000
        37




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38




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NAME
    
    AGE
    
    POSITIONDon Crosbie
    
    62
    
    President, Chief Executive Officer, Chairman of the Board of Directors and Class I DirectorLaura M. Bray
    
    48
    
    Chief Financial OfficerGary J. Austin
    
    61
    
    Chief Operating OfficerAlfred Dubach
    
    58
    
    Vice Chairman of the Board of Directors and Class I DirectorJohn C. Willems, III
    
    50
    
    Class II DirectorThomas Michel
    
    54
    
    Class II DirectorK. Scott Spurlock
    
    38
    
    Vice President of Development
  1 2
    39




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40




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SECURITIESUNDERLYING401K
    
    
    OPTIONS/NAME AND PRINCIPAL POSITION
    
    YEAR
    
    
    SALARY
    
    
    BONUS
    
    
    MATCH
    
    
    SARS (#) (1)Don Crosbie.
    
    
    2005
    
    
    $
    140,000
    
    
    $
    
    
    
    $
    1,437
    
    
    
    President and Chief Executive Officer
    
    
    2004
    
    
    
    145,385
    
    
    
    
    
    
    
    1,383
    
    
    
    200,0002003
    
    
    
    140,000
    
    
    
    
    
    
    
    
    
    
    
    1,500,000K. Scott Spurlock
    
    
    2005
    
    
    
    126,865
    
    
    
    
    
    
    
    
    
    
    
    Vice President of Development
    
    
    2004
    
    
    
    124,615
    
    
    
    2,500
    
    
    
    
    
    
    
    2003
    
    
    
    120,000
    
    
    
    1,750
    
    
    
    
    
    
    
    400,000
 
 (1)
    
    Includes warrants issued.   NUMBER OF
    
    
    VALUE OFSECURITIES
    
    
    UNEXERCISEDUNDERLYING
    
    
    IN THE MONEYUNEXERCISED
    
    
    OPTIONS/OPTIONS/SARS AT
    
    
    SARS ATSHARES
    
    
    
    
    
    
    DECEMBER 31, 2005 (#)(1)
    
    
    DECEMBER 31, 2005 ($)ACQUIRED
    
    
    VALUEON EXERCISE
    
    
    REALIZED
    
    
    EXERCISABLE/
    
    
    EXERCISABLE/NAME
    
    (#)
    
    
    ($)
    
    
    UNEXERCISABLE
    
    
    UNEXERCISABLEDon Crosbie
    
    
    
    
    
    
    
    
    
    
    1,900,000 / 0
    
    
    $
    323,000/0
 
 (1)
    
    Includes warrants issued.      41




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42




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WEIGHTEDNUMBER
    
    
    PER SHARE
    
    
    AVERAGEOF SHARES
    
    
    EXERCISE PRICE
    
    
    EXERCISE PRICEOutstanding options-January 1, 2004
    
    
    699,442
    
    
    $
    0.30-8.00
    
    
    $
    2.04Granted
    
    
    500,000
    
    
    
    0.35
    
    
    
    0.35Expired
    
    
    
    
    
    
    
    
    
    
    Outstanding options-December 31, 2004
    
    
    1,199,442
    
    
    $
    0.30-8.00
    
    
    $
    2.04Granted
    
    
    500,000
    
    
    
    0.13
    
    
    
    0.13Expired
    
    
    (792,666
    )
    
    
    0.13-8.00
    
    
    
    0.79Outstanding options-December 31, 2005
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15Options exercisable-December 31, 2005
    
    
    906,776
    
    
    $
    0.30-8.00
    
    
    $
    1.15
     WEIGHTEDNUMBER
    
    
    PER SHARE
    
    
    AVERAGEOF SHARES
    
    
    EXERCISE PRICE
    
    
    EXERCISE PRICEOutstanding warrants- January 1, 2004
    
    
    3,704,943
    
    
    $
    0.15-3.00
    
    
    $
    0.17Granted
    
    
    550,000
    
    
    
    0.29
    
    
    
    0.29Expired
    
    
    (200,000
    )
    
    
    0.15
    
    
    
    0.15Outstanding warrants-December 31, 2004
    
    
    4,054,943
    
    
    $
    0.15-3.00
    
    
    $
    0.19Granted
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (1,430,619
    )
    
    
    0.15-3.00
    
    
    
    0.21Outstanding warrants-December 31, 2005
    
    
    2,624,324
    
    
    $
    0.15-0.35
    
    
    $
    0.18Warrants exercisable-December 31, 2005
    
    
    2,624,324
    
    
    $
    0.15-0.35
    
    
    $
    0.18
      43




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44




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
    
    each person who is known by us to be the beneficial owner of more than 5% of the outstanding common stock,
 
    
    each director and each of our named executive officers,
 
    
    all our directors and executive officers as a group, and
 
    
    the number of shares of common stock beneficially owned by each such person and such
group and the percentage of the outstanding shares owned by each such person and such
group.
    SHARES BENEFICIALLY OWNEDAmount andNature of
    
    
    
    
    
    
    Percent ofName and Address of
    
    
    
    Beneficial
    
    
    Percent of
    
    
    VotingBeneficial Owner
    
    Class of Security
    
    Owner
    
    
    Class
    
    
    PowerDon Crosbie (1)
    
    Common Stock
    
    
    1,900,000
    
    
    
    7.3
    
    
    
    5./Gary Austin (2)
    
    Common Stock
    
    
    500,000
    
    
    
    1.9
    
    
    
    1.5Laura Bray (3)
    
    Common Stock
    
    
    150,000
    
    
    
    *
    
    
    
    *John C. Willems, III (5)
    
    Common Stock
    
    
    24,277
    
    
    
    *
    
    
    
    *Thomas Michel (6)
    
    Common Stock
    
    
    1,115,000
    
    
    
    4.3
    
    
    
    3.4Series D Preferred Stock
    
    
    100
    
    
    
    13.9Series E Preferred Stock
    
    
    50
    
    
    
    100.0Alfred Dubach (7)
    
    Common Stock
    
    
    1,220,000
    
    
    
    4.7
    
    
    
    3.7Bo W. Lycke (4) (8)
    
    Common Stock
    
    
    2,581,326
    
    
    
    9.9
    
    
    
    7.84730 Melissa Ln.Dallas, Texas 75229Robert H. Brown, Jr. (4) (9)
    
    Common Stock
    
    
    1,362,354
    
    
    
    5.2
    
    
    
    4.12626 Cole Ave, #400Dallas, Texas 75204McKesson Corporation
    
    Common Stock
    
    
    1,514,285
    
    
    
    5.8
    
    
    
    4.6One Post StreetSan Francisco, CA 94104J. R. Schellenberg (4) (10)
    
    Common Stock
    
    
    1,793,603
    
    
    
    6.9
    
    
    
    5.5Kohlrainstrasse 1
 45




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##### Table of Contents



SHARES BENEFICIALLY OWNEDAmount andNature of
    
    
    
    
    
    
    Percent ofName and Address of
    
    
    
    Beneficial
    
    
    Percent of
    
    
    VotingBeneficial Owner
    
    Class of Security
    
    Owner
    
    
    Class
    
    
    PowerKusnachtSwitzerland CH-8700Elmira United
    
    Common Stock
    
    
    9,350,000
    
    
    
    36.0
    
    
    
    28.4Corporation (11)Swiss Tower  16th FloorPanamaRepublic of PanamaNew York Ventures(12)
    
    Common Stock
    
    
    620,000
    
    
    
    2.4
    
    
    
    1.9c/o BDO Visura
    
    Series D Preferred Stock
    
    
    620
    
    
    
    86.1Entfelderstrasse 1
CH-5001 AarauAll our directors and executive
    
    Common Stock
    
    
    4,909,277
    
    
    
    18.9
    
    
    
    14.9officers as a
    
    Series D Preferred Stock
    
    
    100
    
    
    
    13.9group (6 persons) (13)
    
    Series E Preferred Stock
    
    
    50
    
    
    
    100.0
 
 *
    
    Less than one percent.(1)
    
    Consists of 1,900,000 shares which Mr. Crosbie has the right to acquire upon exercise of
options or warrants.(2)
    
    Consists of 500,000 shares which Mr. Austin has the right to acquire upon exercise of options
or warrants.(3)
    
    Consists of 150,000 shares which Ms. Bray has the right to acquire upon exercise of options
or warrants.(4)
    
    Includes 1,051,603 shares of common stock owned of record by National Financial Corporation
(based upon the latest information reported to or known by us). Messrs. Lycke and Brown own
71.1% and 17.7%, respectively, of the outstanding capital stock of National Financial
Corporation. MNS Enterprises, Inc. manages all activities of National Financial Corporation
pursuant to a Management Agreement. Mr. Schellenberg is the President and a Director of MNS
Enterprises, Inc. Therefore, Messrs. Lycke, Brown and Schellenberg may be deemed to
beneficially own the shares of common stock owned by National Financial Corporation.(5)
    
    Consists of 9,277 shares of common stock owned of record by Mr. Willems and 15,000 shares
which Mr. Willems has the right to acquire upon exercise of options or warrants.(6)
    
    Common Stock consists of 185,000 shares of common stock owned of record by Mr. Michel,
150,000 shares which may be issued to Mr. Michel upon conversion of preferred stock, and
780,000 shares which Mr. Michel has the right to acquire upon exercise of options or warrants.(7)
    
    Consists of 615,000 of common stock owned of record by Mr. Dubach, and 605,000 shares which
Mr. Dubach has the right to acquire upon exercise of options or warrants.(8)
    
    Consists of 1,279,723 shares of common stock owned of record by Mr. Lycke (based upon the
latest information reported to or known by us), 250,000 shares which Mr. Lycke has the right
to acquire upon exercise of options or warrants, and 1,051,603 shares of common stock owned of
record by National Financial Corporation.(9)
    
    Consists of 310,751 shares of common stock owned of record by Mr. Brown (based upon the
latest information reported to or known by us) and 1,051,603 shares of common stock owned of
record by National Financial Corporation.(10)
    
    Consists of 742,000 shares of common stock owned of record by Mr. Schellenberg (based upon
the latest information reported to or known by us) and 1,051,603 shares of common stock owned
of record by National Financial Corporation.(11)
    
    Consists of 9,350,000 shares of common stock owned of record by Elmira United (based upon the
latest information reported to or known by us).(12)
    
    Common Stock consists of 620,000 shares which may be issued to New York Ventures upon
conversion of preferred stock.(13)
    
    Includes an aggregate of 3,950,000 shares which they have a right to acquire upon exercise of
options or warrants. 46




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NUMBER OF
    
    
    WEIGHTED-
    
    
    NUMBER OF SECURITIESSECURITIES TO BE
    
    
    AVERAGE
    
    
    REMAINING AVAILABLEISSUED UPON EXERCISE
    
    
    EXERCISE PRICE
    
    
    FOR FUTURE ISSUANCEOF OUTSTANDING
    
    
    OF OUTSTANDING
    
    
    UNDER EQUITYOPTIONS AND
    
    
    OPTIONS AND
    
    
    COMPENSATIONSWARRANTS
    
    
    WARRANTS
    
    
    PLANS*(a)
    
    
    (b)
    
    
    (c)Equity Compensation
Plans Approved By
Stockholders
    
    
    906,776
    
    
    $
    1.15
    
    
    
    762,454Equity
Compensations Plans
Not Approved By
Stockholders**
    
    
    4,408,324
    
    
    
    0.77
    
    
    
    Total
    
    
    5,315,100
    
    
    $
    0.84
    
    
    
    762,454
 
 *
    
    Excludes securities reflected in column (a).**
    
    Excludes warrants to acquire 3,275,000 shares of common stock at an exercise price of $0.20 per
share which were outstanding at December 31, 2005 pursuant to private equity placements.          47




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48




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##### Table of Contents



3.1(2)
    
    Certificate of Incorporation3.1(a)(2)
    
    Certificate of Amendment to Certificate of Incorporation3.1(b)(4)
    
    Certificate of Designation of Series A Preferred Stock3.1(c)(4)
    
    Certificate of Designation of Series B Preferred Stock3.1(d)(4)
    
    Certificate of Designation of Series C Preferred Stock3.1(e)(4)
    
    Certificate of Designation of Series D Preferred Stock3.1(f)(1)
    
    Certificate of Designation of Series E Preferred Stock3.2(2)
    
    Bylaws, as amended4.1(2)
    
    Form of warrant issued to Cruttenden Roth Inc.4.2(2)
    
    Form of Common Stock Certificate4.3(a)(4)
    
    Form of Warrant issued to Bo W. Lycke dated February 21, 20024.3(b)(4)
    
    Form of Warrant issued to Paul W. Miller dated February 21, 2002*4.3(c)(1)
    
    Form of Warrant issued to Don Crosbie dated October 21, 2002*4.3(d)(7)
    
    Form of Warrant issued to Don Crosbie dated June 3, 2003*4.3(e)(7)
    
    Form of Warrant issued to Paul W. Miller dated June 3, 2003*4.3(f)(7)
    
    Form of Warrant issued to certain employees dated June 3, 2003*4.3(g)(7)
    
    Form of Warrant issued to Thomas Michel dated June 3, 2003*4.3(h)(7)
    
    Form of Warrant issued to Alfred Dubach dated June 3, 2003*4.3(i)(8)
    
    Form of Warrant issued to Thomas Michel dated June 30, 2004.*4.3(j)(8)
    
    Form of Warrant issued to Gary J. Austin dated September 21, 2004.*4.3(k)(8)
    
    Form of Warrant issued to Laura M. Bray dated September 21, 2004.*4.3(l)(8)
    
    Form of Warrant issued to Don Crosbie dated September 21, 2004.*10.2(2)
    
    1997 Stock Option Plan, as amended through October 19, 2000*10.2(a)(3)
    
    Amendment dated October 20, 2000 to 1997 Stock Option Plan*10.3(2)
    
    Form of Indemnification Agreement*10.4(2)
    
    Form of Non-Employee Directors Plan10.5(1)
    
    Note dated June 6, 2002 between Claimsnet.com and J. R. Schellenberg related to
$50,000 loan.10.6(1)
    
    Note dated August 1, 2002 between Claimsnet.com and J. R. Schellenberg related to $10,000 loan.*10.7(1)
    
    Note dated August 1, 2002 between Claimsnet.com and Thomas Michel related to $50,000 loan.10.8(5)
    
    Note dated August 20, 2002 between Claimsnet.com and J. D. Stauffer related to $25,000 loan.10.9(6)
    
    Affiliate and Partner Services and License Agreement dated September 11, 2002,
by and between Claimsnet.com, Inc. and ProxyMed, Inc. 49




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##### Table of Contents



10.10(6)
    
    Form of Preferred Escrow Agreement by and among Claimsnet.com, Inc., ProxyMed,
Inc. and DSI Technology Escrow Services, Inc.10.11(8)
    
    Note dated June 10, 2004 between Claimsnet.com and National Financial Corporation related to
$20,000 loan.10.12(8)
    
    Note dated September 21, 2004 between Claimsnet.com and R.L. Armstrong Limited Partnership related to
$50,000 loan.10.13(8)
    
    Note dated September 22, 2004 between Claimsnet.com and Elmira United Corporation related to
$50,000 loan.10.14(8)
    
    Note dated October 4, 2004 between Claimsnet.com and Douglas R. Urquhart related to $50,000 loan.10.15(8)
    
    Note dated October 5, 2004 between Claimsnet.com and Newman Family Trust related to $100,000 loan.10.16(8)
    
    Note dated December 28, 2004 between Claimsnet.com and Elmira United Corporation related to
$150,000 loan.10.17(8)
    
    Form of Registration Rights Agreement10.18
    
    Note dated November 2, 2005 between Claimsnet.com and National Financial Corporation related to
$100,000 loan.31.1
    
    Certification of Don Crosbie31.2
    
    Certification of Laura M. Bray32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Don Crosbie32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 of Laura M. Bray*
    
    Contract with management or compensatory arrangement.(1)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant with
its Annual Report on Form 10-K, for the Year Ended December 31, 2002 filed on April 1, 2003.(2)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant with
the registration statement on Form S-1 (Registration No. 333-36209).(3)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant with
its Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 16, 2001
and amended on October 3, 2001.(4)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant
with its Annual Report on Form 10-K for the year ended December 31, 2001 filed on April 15,
2002.(5)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant with
its Current Report on Form 8-K dated September 4, 2002.(6)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant its
Current Report on Form 8-K dated September 17, 2002.(7)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant its
Current Report on Form 10-KSB dated March 29, 2004.(8)
    
    Incorporated by reference to the corresponding exhibit filed by the Registrant its
Current Report on Form 10-KSB dated March 16, 2005. 50




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FEE CATEGORY
    
    WHITLEY PENN
    
    
    TIMOTHY CARMODY, CPAAudit Fees (1)
    
    $
    42,800
    
    
    $
    Audit-Related Fees (2)
    
    
    
    
    
    
    Tax Fees (3)
    
    
    
    
    
    
    1,595All Other Fees (4)
    
    
    
    
    
    
    Total
    
    $
    42,800
    
    
    $
    1,595
  FEE CATEGORY
    
    WHITLEY PENN
    
    
    TIMOTHY CARMODY, CPAAudit Fees (1)
    
    $
    39,000
    
    
    $
    Audit-Related Fees (2)
    
    
    
    
    
    
    Tax Fees (3)
    
    
    
    
    
    
    2,875All Other Fees (4)
    
    
    
    
    
    
    Total
    
    $
    39,000
    
    
    $
    2,875
 
 (1)
    
    Audit Fees consist of aggregate fees billed for professional services rendered for the audit
of our annual financial statements and review of the interim financial statements included in
quarterly reports or services that are normally provided by the independent auditor in
connection with statutory and regulatory filings or engagements during the fiscal years ended
December 31, 2005 and December 31, 2004.(2)
    
    Audit-Related Fees consist of aggregate fees billed for assurance and related services that
are reasonably related to the performance of the audit or review of our financial statements
and are not reported under Audit Fees. These fees include review of registration statements
and participation at meetings of the board of directors and audit committee.(3)
    
    Tax Fees consist of aggregate fees billed for professional services for tax compliance, tax
advice and tax planning.(4)
    
    All Other Fees consist of aggregate fees billed for products and services provided by the
independent auditor, other than those disclosed above. These fees include services related to
certain accounting research and assistance with a regulatory matter.   51




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CLAIMSNET.COM INC.(Registrant)By:
    
    /s/ Don CrosbieDon CrosbiePresident and
Chief Executive Officer,
  /s/ Don Crosbie

Don CrosbiePresident,
Chief Executive Officer,Class I Director and
Chairman of the Board/s/ Laura M. Bray

Laura M. BrayChief Financial Officer and Principal Accounting Officer/s/ Alfred Dubach

Alfred DubachClass I Director and
Vice Chairman of the Board/s/ John C. Willems, III

John C. Willems, IIIClass II Director/s/ Thomas Michel

Thomas MichelClass II Director