SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the Fiscal Year Ended December 31, 2002

                                       OR

[ ]  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.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                      Delaware                            75-2649230
           -------------------------------            -------------------
           (State or other jurisdiction of             (I.R.S. Employer
            incorporation or organization)            Identification No.)


     12801 N. Central Expressway, Suite 1515 Dallas, Texas        75243
     -----------------------------------------------------      ----------
          (Address of principal executive offices)              (Zip Code)


Registrant's telephone number, including area code: 972-458-1701

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained, to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]

     The aggregate  market value of the Common Stock of the registrants  held by
non-affiliates  of the  registrant,  based on the closing sales price on the OTC
Bulletin Board stock market on March 20, 2003 was $2,000,897.

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock,  as of the latest  practicable  date.  Common Stock,  $.001 par
value, 15,391,514 shares outstanding as of March 28, 2003.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None.

<PAGE>

                                     PART I


THIS  REPORT  CONTAINS  FORWARD-LOOKING  INFORMATION  THAT  INVOLVES  RISKS  AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THE  FORWARD-LOOKING  INFORMATION.  FACTORS  THAT MAY CAUSE SUCH  DIFFERENCES
INCLUDE,  BUT ARE NOT  LIMITED  TO,  THOSE  DISCUSSED  ELSEWHERE  IN THIS REPORT
INCLUDING OUR ABILITY TO SECURE ADDITIONAL FUNDING,  SUCCESSFULLY  IMPLEMENT OUR
REVISED  BUSINESS  STRATEGY,  DEVELOP AND  MAINTAIN  STRATEGIC  PARTNERSHIPS  OR
ALLIANCES,  INCREASE OUR  CUSTOMER  BASE,  FURTHER  DEVELOP OUR  TECHNOLOGY  AND
TRANSACTION  PROCESSING SYSTEM, RESPOND TO COMPETITIVE  DEVELOPMENTS,  OR COMPLY
WITH  GOVERNMENT  REGULATIONS.  ANY  FORWARD-LOOKING  STATEMENT  THAT WE MAKE IS
INTENDED  TO SPEAK ONLY AS OF THE DATE ON WHICH WE MADE THE  STATEMENT.  WE WILL
NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES THAT
OCCUR  AFTER  THE  DATE  ON  WHICH  THE  STATEMENT  IS  MADE.  THESE  RISKS  AND
UNCERTAINTIES,  AMONG OTHERS,  MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
FROM  THOSE  DESCRIBED  IN  FORWARD-LOOKING  STATEMENTS  MADE IN THIS  REPORT OR
PRESENTED ELSEWHERE BY MANAGEMENT FROM TIME TO TIME.


ITEM 1. BUSINESS

We  are  an  electronic  commerce  company  engaged  in  healthcare  transaction
processing for the medical and dental  industries by means of the Internet.  Our
proprietary software, which was developed over the last eight years, enables the
efficient  communication  of data between  healthcare  payers and their provider
networks and trading partners (claim clearinghouses, third party administrators,
preferred  provider  organizations,   health  maintenance  organizations,  claim
re-pricing  organizations,   independent  physician  associations,  and  managed
service   organizations),   for  the   purpose  of   conducting   administrative
transactions required to effect financial reimbursement for healthcare services.
Our system improves both the ease of data exchange as well as the quality of the
data being  exchanged,  allowing the users to realize an increase in  electronic
transaction  and cost  improvements  from better  data.  We  accomplish  this by
allowing  healthcare  providers,  EDI vendors,  and trading partners to download
healthcare claims interactively on the Internet and electronically  transmit the
claims to us for pre-processing.  Our software provides real-time editing of the
claims data for compliance  with the format and content  requirements  of payers
and converts the claims to satisfy payers' specific processing requirements.  We
then  electronically  transmit  pre-processed  claims  directly or indirectly to
medical  and dental  payers.  In  addition,  our  software  provides  for secure
encryption of all claims data  transmitted in compliance with the regulations of
the United States Centers for Medicare and Medicaid Services (formerly HCFA).

We formerly focused our business  primarily toward  healthcare  providers,  both
from a marketing perspective and from a system functionality perspective. During
2002,  we shifted our  business  strategy to focus on the payer market and their
trading  partners.  We effected this transition by selling our  provider-focused
client base to a  clearinghouse  partner and we  simultaneously  entered into an
agreement  to provide the  acquirer  with a limited  license to our  proprietary
software.  The license  allows the providers to continue to use our  proprietary
system and also provides a recurring revenue stream to us. Our role changed from
being  a  full-service  clearinghouse  for  each  of the  providers  to one of a
technology and support services supplier to the acquirer.

We believe that the  following  are  significant  advantages  of our  electronic
transaction pre-processing services:

o    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;
o    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;
o    the ability to create  multiple  custom Web site  formats to be promoted by
     partners and sponsors without  modification of the server-based  processing
     systems;
o    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
o    the minimal software and processing power required for providers to utilize
     our proprietary software.

We believe that the services  offered by our  competitors are generally based on
legacy mainframe technology, proprietary networks, and proprietary file formats,
which limit the ability of those competitors to offer interactive Internet-based
processing services on an economical basis.


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<PAGE>

We generate non-recurring revenue from initial setup fees and from project-based
fees  and  we  generate  recurring  revenue  primarily  from  support  fees  and
transaction-based  fees. We use the services of certain  partners and vendors to
assist with the  conversion of scanned paper forms,  the printing of paper forms
from electronic data, and the delivery of certain electronic transactions.

ELECTRONIC CLAIMS PROCESSING MARKET

The healthcare electronic claims processing market, including dental claims, has
been  estimated  by  Faulkner  &  Gray's  Health  Data  Directory,  an  industry
publication, to include over 4.7 billion healthcare claim and HMO encounter form
or claim  submissions  in 1999  (the  most  recent  data  available),  of which,
approximately  1.7 billion  claims were  submitted on paper  forms.  Health Data
Management  estimates  that  electronic  claims  processing  was used to process
approximately 43% of all medical outpatient claims and 17% of all dental claims.

The number of non-electronic  paper transactions in the HMO market is increasing
rapidly and we believe that HMO  encounters are another  underserved  segment of
the  outpatient  claims  processing   market.   Currently  there  is  no  formal
transmission  document standard.  However, a national standard electronic format
is being mandated to facilitate the processing of encounter forms.  Accordingly,
we believe that the opportunity  exists for us to utilize our claims  processing
system for the HMO market.

Healthcare claims are traditionally  processed by clearinghouses using a similar
operating structure to that which exists in the credit card industry. A merchant
that accepts a credit card for payment does not send payment  requests  directly
to  the  bank  that  issued  the  card,  but  sends  the  payment  request  to a
clearinghouse.   The  payment  request  is  processed  and  transmitted  to  the
appropriate bank. Healthcare claim clearinghouses  accept, sort, process,  edit,
and then forward the claims to the appropriate payers,  either electronically or
on paper.  Many of the major  healthcare  clearinghouses  operate in a mainframe
computer environment.  Furthermore, traditional clearinghouses process claims in
off-line batches and return edit results to the submitters in a subsequent batch
transmission.  This operating configuration is both expensive and time consuming
due to the source code changes required to continuously process claims correctly
to meet payer requirements.  In contrast,  our healthcare transaction processing
software  system on the  Internet is designed  to operate in a  real-time,  open
client-server configuration.  This operating alternative offers the provider and
payer  a  method  of   communicating   directly  in  a  rapid,   accurate,   and
cost-effective manner.

The  Health  Insurance  Portability  and  Accountability  Act of 1996  ("HIPAA")
includes  a  section  on  administrative   simplification   requiring   improved
efficiency in health care delivery by standardizing electronic data interchange,
and protection of  confidentiality  and security of health data through  setting
and enforcing standards. More specifically,  HIPAA calls for (a) standardization
of electronic  patient  health,  administrative  and financial  data, (b) unique
health  identifiers  for  individuals,  employers,  health plans and health care
providers,  and  (c)  security  standards  protecting  the  confidentiality  and
integrity of  "individually  identifiable  health  information".  All healthcare
organizations  are  effected,  including  health care  providers,  health plans,
employers,  public health authorities,  life insurers,  clearinghouses,  billing
agencies, information systems vendors, service organizations,  and universities.
HIPAA calls for severe  civil and  criminal  penalties  for  noncompliance.  The
provisions relating to standards for electronic  transactions,  including health
claims and equivalent managed care encounter information, must be implemented by
October 2003 for  clearinghouse  and large payer  organizations.  The provisions
must be  implemented  by all entities no later than October 2004. The provisions
relating to standards  for privacy must be  implemented  by April 2003 for large
organizations and April 2004 for small organizations. The provisions relating to
security must be  implemented  by April 2005 for large  organizations  and April
2006 for small  organizations.  The deadlines  for  standards  related to unique
identifiers have not yet been established.

We believe  that the  convergence  of HIPAA  mandates and the  proliferation  of
internet technology will cause sweeping changes in the health care industry.  At
a minimum,  it will cause all payers to implement secure electronic  transaction
processing  capabilities  for a full menu of  administrative  transactions.  The
universal  availability of data exchange  between  healthcare  organizations  is
expected to generate  growth in the  healthcare  EDI  industry.  If the industry
evolves toward direct payer  submission of claims or real-time  adjudication  of
claims, we believe our software will be able to offer efficient access to payers
and healthcare providers in a HIPAA-compliant format.

BUSINESS STRATEGY

Our recently modified business strategy is as follows:

o    to  utilize  our  state  of the art  technology  to help  large  healthcare
     organizations   achieve  more  efficient  and  less  costly  administrative
     operations;
o    to market our  services  directly  to the payer  community  and its trading
     partners;


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<PAGE>

o    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;
o    to  provide  total  claim  management  services  to  payer   organizations,
     including  internet claim submission,  paper claim conversion to electronic
     transactions, and receipt of EDI transmissions;
o    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
o    to license our technology  for other  applications,  including  stand-alone
     purposes,  Internet  systems  and  private  label  use,  and  for  original
     equipment manufacturers.

There can be no assurance  that any of our business  strategies  will succeed or
that any of our business objectives will be met with any success.

On April 18, 2000, we, through our wholly-owned subsidiary,  HealthExchange.com,
Inc., a Delaware  corporation  ("HECOM"),  acquired  from VHx Company,  a Nevada
corporation   ("VHx"),   selected   properties   and  assets,   including   it's
HealthExchange.com  name and trademark,  and in-process research and development
(together,  "HealthExchange").  Several  factors  have caused us to  discontinue
development  of the  HealthExchange(TM)  products,  including  lack of  existing
customer commitment to continued product development, lack of market acceptance,
future cash requirements to continue product development,  and the cost of sales
and marketing efforts to create a market niche.

On September  11,  2002,  we sold for net  proceeds of $640,000  certain  assets
consisting  primarily  of customer  contracts  (the  "Assigned  Contracts")  and
related revenue streams  thereunder to ProxyMed,  Inc. At the same time, we also
entered into an Affiliate and Partner Services and License Agreement pursuant to
which (i) we and  ProxyMed  have agreed to provide  certain  administrative  and
support  services  for each other in  connection  with each  other's  customers,
including without limitation the customers under the Assigned Contracts, (ii) we
agreed to assist  ProxyMed in  establishing  a "hot-site"  which will permit our
software   application  to  run  on  ProxyMed's  hardware  platform  to  service
ProxyMed's  customers,  and (iii) we granted ProxyMed a limited,  non-exclusive,
5-year  license  to use  our  software  application  at its  "hot-site".  We are
entitled  to  receive  fees  for  our  services  and  the  use of  our  software
applications  until the occurrence of certain  bankruptcy and liquidation events
with respect to us as set forth in such agreement.

MARKETING EFFORTS

We began in October  2002 to build a direct  sales  organization  and launched a
marketing campaign to communicate our service capabilities and value proposition
to our target market,  primarily  small and mid-sized  payers.  The direct sales
organization currently consists of three representatives,  only one of which has
been employed by us for more than two weeks.

Additionally, we have entered into several relationships with strategic partners
for  the  marketing  of our  services  and  use of our  proprietary  technology,
including:

o    arrangements  entered  into  in 2000  and  2001  with  business-to-business
     healthcare  transaction service providers and application service providers
     such as Synertech Systems, Inc. and Quality Care Solutions, 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
o    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.

RECENT DEVELOPMENTS

In January,  February  and March 2003,  we  completed  the private  placement of
950,000  shares of common stock to  accredited  investors at $0.20 per share for
net proceeds of $189,000.  In  connection  with the private  placement,  we also
issued warrants to purchase an aggregate of 950,000 shares of common stock.  The
warrants  contain an exercise  price of $0.20 per share and expire  December 31,
2007.

HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY

Our  healthcare  transaction  processing  software  is designed  for  processing
in-patient and outpatient healthcare claims. The software is modular,  providing
valuable flexibility, and generally consists of the following components:



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<PAGE>

o    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;
o    data mapping software that allows us to accept a wide variety of data input
     formats;
o    data format  generating  software  developed by us that allows us to easily
     create a wide variety of data output formats;
o    an integrated  web-based user  interface  that can be easily  configured to
     support co-branded and private-labeled deployment;
o    industry standard website management software; and
o    state-of-the-art commercial security and encryption software.

The expensive and  time-consuming  hard-coding  routines required by traditional
systems have been replaced by a user-friendly  system that is table-based.  This
permits  payer-specific  edits to meet the  requirements  of payers  and  avoids
expensive  onsite  software  changes.   Our  personnel  input  new  edits.  Once
healthcare  providers or trading  partners  connect to our secure  website,  our
software edits claims on-line  automatically,  using a database  containing more
than 22,000 edit variables.  In the event that a particular  payer cannot accept
submission of claims electronically, we either print and mail hard copies of the
claims to these payers and charge the provider  for this  additional  service or
allow the provider to print and mail the claims.

Our healthcare transaction processing software is a Web-based system, based upon
a client-server  computing model,  and includes a variety of different  software
applications.  Individual  applications  work together to provide the extraction
and  encryption  of  claims  from a  submitting  system to our  Internet  claims
processing server,  where editing and formatting occurs in a secure environment.
Our system then delivers the claims to the payer gateway. The different software
applications have been purchased, licensed, or developed by us.

Our website user interface is structured into three sections: "PUBLIC INTERNET,"
"CLIENT  EXTRANET," and "PRIVATE  INTRANET."  The PUBLIC  INTERNET site provides
company background,  product demonstrations,  and customer enrollment forms. The
CLIENT EXTRANET provides a secure individual  customer area for private customer
communication and encrypted claims  transmission.  The United States Centers for
Medicare and Medicaid Services (formerly HCFA) has defined security requirements
for Internet communications  including healthcare data. We operate in compliance
with these  requirements.  The PRIVATE  INTRANET  site is designed  for internal
communications, website operating reports, customer support, and reporting.

Our personnel  access IBM, or the client's  hosted  environment,  remotely via a
secure Virtual Private Network (VPN) for technical operations support.  Examples
of  the  type  of  support  provided  include  migrating  Web  site  changes  to
production, database administration, and Claims Processing Engine monitoring and
management.

With  the  exception  of the  commercial  software,  such  as that  provided  by
Microsoft,  we have either identified  back-up sources for all the software used
or, in the event of a  business  failure  by the  licensing  vendor,  we own the
source code.

TRAINING AND HARDWARE REQUIREMENTS

The training for the various  products and services offered by us is included in
the initial  setup fee.  User  manuals and  reference  information  is available
online through our client extranet to the provider,  seven days a week, 24 hours
a day. The tutorial and other training documents are always available at our Web
home page, the location of which is http://www.claimsnet.com.

No significant  hardware investment by the customer is required in order to take
advantage of our services.  The system requires the provider to use a 28,800 bps
or better  asynchronous  modem and a PC with  Windows  3.11 or higher  operating
system installed. An Internet Service Provider,  such as AT&T Worldnet,  America
Online  or  Earthlink,  offers  local  telecommunication  to the  Internet.  Our
customers are responsible  for obtaining and  maintaining  the Internet  Service
Provider connection.

INTERNET/INTRANET

The processing configuration used by us requires no electronic claims processing
software  to reside at the level of the  healthcare  provider.  All  editing and
formatting  takes place at our Internet  application  server site.  All software
updates and all format  changes are available  instantly to all  customers.  Our
healthcare   transaction  processing  software  has  the  effect  of  turning  a
provider's  old or outdated  hardware into a terminal  capable of operating in a
32-bit Windows environment.



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<PAGE>

Our  processing  does not take place on the Internet,  but rather in an extranet
configuration.  The  main  advantage  of this  approach  is to  assure  that the
communication between our servers and a user takes place in a highly controlled,
secure, and encrypted environment.

The  dual  encryption  utilized  by  us  occurs  at  the  browser  software  and
application  server  level.  All  processing  and data storage  occurs  behind a
firewall, providing secure and controlled access to all data.

CUSTOMERS

We view our  customers as (1) the payers  accepting  claims,  (2) the  strategic
partners and affiliates  with which we jointly  operate,  and (3) the healthcare
providers submitting claims.  Revenues received from three customers represented
a  significant  portion  of our total  revenues  during  the last  three  years.
Revenues  received  from one  customer  and  clearinghouse  partner who acquired
certain of our business  assets in September 2002  represented 23% and 9% of our
revenues for 2002 and 2001,  respectively,  and revenues  received  from another
customer  represented 9% of our 2002 revenues.  Revenues  received from McKesson
represented 27% and 47% of 2001 and 2000 revenues, respectively.

We enter into agreements with our clients.  Generally,  such agreements  protect
our  intellectual  property  rights  and  define  the  financial  terms  of  our
relationship.  We require each  healthcare  provider using our services to enter
into a standard license agreement via our website. We also enter into agreements
with the  commercial  medical and dental  payers or  clearinghouses  to which we
submit processed claims. Generally, such agreements provide for transaction fees
to be received by us for certain  payers and  transaction  fees to be paid by us
for other payers.

In a Development and Services  Agreement with McKesson,  originally entered into
in October 1999 and amended and  replaced by a new  agreement on April 12, 2001,
we granted  McKesson a  multi-year,  non-exclusive,  private  label  license for
certain of our proprietary  technology and agreed to manage McKesson's operation
of the system on a fully outsourced basis in the way we determine to be the most
efficient.

Under the April 2001 agreement,  McKesson  acquired  1,514,285  shares of common
stock at a cost of $2,650,000 and paid us $200,000;  and a three year warrant to
purchase  819,184  shares of our common stock at $7.00 per share,  granted under
the October 1999  agreement,  was cancelled.  The April 2001  agreement  granted
McKesson additional license rights for co-branding the services to third parties
and  for  an  expanded  set  of  transactions.  McKesson  will  continue  to pay
transaction fees for all transactions  processed under the license, but will not
pay  additional  license fees and  subscription  fees that were  included in the
October 1999 agreement. McKesson has not been using the license since May 2002.

In September 2000 we entered into an agreement with Synertech  Systems,  Inc., a
premier  application  service  provider and  administrative  outsourcer  for the
healthcare  industry,  to provide  Synertech and its customers,  primarily payer
organizations, with co-branded versions of our claims processing application.

Under an arrangement  entered into in September  2000 with  ProxyMed,  a leading
provider of business-to-business  healthcare transaction services, we operated a
co-branded  version of our claims  processing  application  for  ProxyMed.  This
arrangement  also  provides  for us to use  ProxyMed's  extensive  direct  payer
connections to submit certain claims to selected payers.

On September 11, 2002, we sold certain assets  consisting  primarily of customer
contracts (the "Assigned  Contracts") and related revenue streams  thereunder to
ProxyMed,  Inc. At the same time,  we also entered into an Affiliate and Partner
Services and License Agreement pursuant to which (i) we and ProxyMed have agreed
to  provide  certain  administrative  and  support  services  for each  other in
connection  with  each  other's  customers,  including  without  limitation  the
customers  under the Assigned  Contracts,  (ii) we agreed to assist  ProxyMed in
establishing a "hot-site"  which will permit our software  application to run on
ProxyMed's  hardware  platform  to service  ProxyMed's  customers,  and (iii) we
granted  ProxyMed a limited,  non-exclusive,  5-year license to use our software
application  at  its  "hot-site".  We are  entitled  to  receive  fees  for  our
liquidation events set forth in such agreement in respect of us.

In February 2001 we agreed with Quality Care Solutions,  Inc.  (QCSI), a leading
provider of  enterprise-wide  solutions for healthcare payer  organizations,  to
provide a co-branded version of our claims processing application to QCSI and be
able to submit claims directly to the QCSI system.

MARKETING

We are pursuing a two fold marketing and sales strategy.


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1. Creating strategic partnerships with organizations that:

o    are engaged in electronic  claims processing and expect to benefit by using
     our advanced technology; and
o    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.

We have established  several valuable  strategic  relationships and are actively
seeking additional partners for alliances and joint ventures,  including managed
care  companies,   Internet  service  and  information  providers,   traditional
healthcare information systems providers,  clearinghouses,  payer organizations,
and  consulting  firms,  each  seeking  solutions  to  the  costly  handling  of
healthcare claims and other administrative transactions.

We also believe that there are  opportunities  for joint  marketing  with banks,
insurance  companies,  laboratories,  and  pharmaceutical  companies that desire
online interfacing with healthcare providers.

We believe  that our  strategic  alliance  marketing  strategy  will allow us to
capture a share of the claims  processing  market  without a costly direct sales
and marketing  effort as the healthcare  industry adopts new technology,  either
because  of  greater  efficiencies  or due to  required  compliance  with  HIPAA
mandates and other  regulatory  initiatives.  If such a  transition  takes place
gradually,  we expect to  benefit by  conserving  expenses,  or if it  escalates
dramatically due to HIPAA compliance  deadlines or for other reasons,  we expect
to benefit by having a broad distribution network.

There can be no assurance that we will secure any additional  alliances or joint
venture  relations,   or  if  we  do,  that  such  alliances  or  joint  venture
relationships will be profitable.

2. We also  maintain a direct sales force,  currently  three  persons,  and have
launched an  aggressive,  yet  cost-effective  direct sales campaign to the PPO,
HMO, TPA and Medical  Insurance carrier  marketplace.  We continue to review and
assess sales and marketing  policies to enable us to accelerate  revenue growth.
However, there can be no assurance that such efforts will be successful.

COMPETITION

Several large  companies  such as WebMD,  McKesson,  National Data  Corporation,
PerSe  Technologies,  and ProxyMed  dominate the claims  processing  industry in
which we  operate.  Each of these  companies  operates  a regional  or  national
clearinghouse of medical and dental claims. In most cases,  these companies have
large existing  capital and software  investments and focus on large  healthcare
providers,   such  as  hospitals  and  large   clinics,   or  act  as  wholesale
clearinghouses for smaller electronic claims processing companies.  We estimate,
based on  information  from various  trade  journals,  that in addition to these
large  competitors,  there  are  approximately  300 or  more  small  independent
electronic claims processing companies and clearinghouses which operate as local
sub-clearinghouses for the processing of medical and dental claims.

A number of  additional  companies,  several  of which  have  greater  financial
resources and marketing capabilities than us, have announced that they intend to
enter the claims processing  industry.  Some of these companies have indicated a
desire to primarily serve the payer community and some are primarily  focused on
the provider community.

All of these  companies are considered  competitors,  however,  several of these
companies  are already our  strategic  partners for  co-branded or private label
solutions using our technology.

We believe that the flexibility,  configurability, and operational efficiency of
our claims processing  system will allow us to compete  effectively in the payer
market and to partner  with  clearinghouses  and other  vendors in the  provider
market. We anticipate that competition will increase in the processing of claims
on the Internet.  No assurance can be given that we will successfully compete in
any market in which we conduct or may conduct operations.

EMPLOYEES

As of December 31, 2002, we had a total of 11 full-time  employees,  of whom two
were  executive  officers,  six were technical and service  personnel,  two were
sales and marketing personnel, and one was administrative personnel. None of our
employees is  represented  by a labor  organization.  Most of our employees have
been granted  incentive stock options and we believe that our relations with our
employees are satisfactory.


                                       7
<PAGE>

RISK FACTORS

IN ADDITION TO THE OTHER  INFORMATION  IN THIS  REPORT,  THE  FOLLOWING  FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING OUR BUSINESS AND PROSPECTS.

CONDITIONS EXIST WHICH CAUSE SUBSTANTIAL DOUBT ABOUT OR ABILITY TO CONTINUE AS A
GOING CONCERN.

The Report of our independent auditors with respect to our financial state as of
December 31, 2002 and the year then ended has been qualified with respect to our
ability to continue as a going concern.

Management  believes that available cash  resources,  together with  anticipated
revenues  from  operations  and the  proceeds  of recently  completed  financing
activities and funding commitments will not be sufficient to satisfy our capital
requirements  through April 30, 2003.  Necessary  additional  capital may not be
available on a timely basis or on acceptable  terms,  if at all. In any of these
events,  we may be unable to implement  current  plans for expansion or to repay
debt  obligations as they become due. If sufficient  capital cannot be obtained,
we may be forced to  significantly  reduce  operating  expenses to a point which
would be detrimental to business  operations,  curtail  research and development
activities,  sell  certain  business  assets or  discontinue  some or all of our
business  operations,  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. In the event that any future
financing is effected, to the extent it includes equity securities,  the holders
of the common stock and preferred stock may experience  additional dilution.  In
the event of a cessation of  operations,  there may not be sufficient  assets to
fully satisfy all creditors,  in which case the holders of equity securities may
be unable to recoup any of their investment.

WE HAVE A HISTORY OF NET LOSSES, LIMITED REVENUES, ANTICIPATE FURTHER LOSSES AND
HAVE A WORKING CAPITAL DEFICIT

We have incurred net losses since inception and expect to continue to operate at
a loss for the foreseeable  future. For the years ended December 31, 1998, 1999,
2000,  2001 and 2002,  we  incurred  net losses of  $(4,663,000),  $(8,858,000),
$(17,695,000),  $(5,194,000) and $(2,927,000)  respectively.  As of December 31,
1998,  1999,  2000,  2001  and  2002,  we  had  working  capital  (deficits)  of
$(1,089,000),    $6,113,000,    $(1,348,000),    $(535,000)   and   $(1,238,000)
respectively.   We  generated  revenues  of  $155,000,   $414,000,   $1,602,000,
$1,336,000 and $1,104,000  for the years ended  December 31, 1998,  1999,  2000,
2001 and 2002,  respectively.  See  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations--In General."

THREE  CUSTOMERS  GENERATED A  SIGNIFICANT  SHARE OF OUR REVENUES AND WE ENTERED
INTO  AGREEMENTS IN 2001 AND 2002 WHICH WILL HAVE A NEGATIVE  IMPACT ON OUR NEAR
TERM REVENUES

Revenues received from three customers  represented a significant portion of our
total revenues during the last three years.  Revenues received from one customer
and  clearinghouse  partner  who  acquired  certain  of our  business  assets in
September  2002  represented  23% and 9% of our  revenues  for  2002  and  2001,
respectively,  and revenues  from another  customer  represented  9% of our 2002
revenues.  Revenues  received from McKesson  represented 27% and 47% of 2001 and
2000 revenues, respectively.

In April 2001, we entered into a new agreement with McKesson that  supersedes an
agreement under which the majority of the revenues from the customer was earned.
The new agreement eliminates further payments for software development, software
license,  and dedicated support services,  which accounted for nearly all of the
revenues from this customer  recognized  during 2000 and 2001. The new agreement
has had a material  effect in 2002 and will have a  material  effect on our near
term  financial  results.  The nature of all future cash payments to be received
pursuant to the new agreement are dependent on the volume of services provided.

In September  2002,  we sold  certain  assets  consisting  primarily of customer
contracts (the "Assigned  Contracts") and the related revenue streams thereunder
, which  generated  76%, 71% and 57% of our total  revenues  for 2002,  2001 and
2000,  respectively,  to a customer and clearinghouse partner. At the same time,
we also  entered  into an  agreement  with the  acquirer  granting it a limited,
non-exclusive license to use our software to service certain of their customers,
including  the  Assigned  Contracts.  We are  entitled to receive fees under the
agreement;  however,  it is  unlikely  that  the  fees  will  generate  revenues
equivalent to the Assigned  Contracts in the near term.  The  transaction  will,
therefore, have a material effect on our near term financial results.



                                       8
<PAGE>

WE CANNOT  PREDICT  OUR  FUTURE  CAPITAL  NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING

We believe that our available cash resources, together with anticipated revenues
from operations and the proceeds of recently completed financing  activities and
funding  commitments will not be sufficient to satisfy our capital  requirements
through April 30, 2003.  Necessary  additional capital may not be available on a
timely basis or on acceptable  terms, if at all. In any of these events,  we may
be unable to implement  current plans for expansion or to repay debt obligations
as they become due. If sufficient  capital cannot be obtained,  we may be forced
to:

o  significantly reduce operating expenses to a point which would be detrimental
   to business operations,

o  curtail research and development activities and marketing efforts,

o  sell  certain  business  assets or  discontinue  some or all of our  business
   operations,

o  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

o  cease operations altogether.

In the  event  that  any  future  financing  should  take  the  form  of  equity
securities,  the holders of the common stock and preferred  stock may experience
additional dilution. In the event of a cessation of operations, there may not be
sufficient  assets to fully satisfy all creditors,  in which case the holders of
equity securities may be unable to recoup any of their investment.

BECAUSE WE HAVE BEEN IN BUSINESS FOR A LIMITED PERIOD OF TIME,  THERE IS LIMITED
INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS

We have a limited  operating history upon which you may base an evaluation of us
and determine our prospects for achieving our intended business  objectives.  We
are prone to all of the risks inherent to the  establishment of any new business
venture.  Organized in April 1996, we were a development  stage company  through
March 31,  1997.  From March 1997 until  September  2002,  we operated as a full
service clearinghouse serving primarily healthcare providers. In September 2002,
we sold our healthcare provider  clearinghouse  service contracts to a strategic
partner to generate cash,  simplify our  operations,  and focus our attention on
the payer market.  We endeavored to diversify our business during the year ended
December 31, 2000,  through an asset  acquisition,  which due to delay in market
readiness resulted in a large  non-recurring  loss. We have recently changed our
sales and marketing strategy.  Consequently,  you should consider the likelihood
of our future success to be highly speculative in light of our limited operating
history, our limited resources and problems,  expenses, risks, and complications
frequently  encountered by similarly  situated  companies in the early stages of
development, particularly companies in new and rapidly evolving markets, such as
electronic commerce. To address these risks, we must, among other things:

o    maintain and increase our strategic partnerships,

o    maintain and increase our customer base,

o    implement and successfully execute our business and marketing strategy,

o    continue to develop and upgrade our technology  and  transaction-processing
     systems,

o    continually update and improve our Web site,

o    provide superior customer service,

o    respond to competitive developments,

o    appropriately evaluate merger and acquisition opportunities, and

o    attract, retain, and motivate qualified personnel.



                                       9
<PAGE>

We may not be  successful  in  addressing  all or some of these  risks,  and our
failure  to do so  could  have  a  material  adverse  effect  on  our  business,
prospects, financial condition, and results of operations.

WE EXPECT TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS
DUE TO A VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OUR CONTROL

We are a relatively young company in the rapidly evolving and highly competitive
internet-based  medical  claims  processing  industry.  Our  ability  to achieve
operating results in this industry will depend on several factors, including:

o    our ability to satisfy capital  requirements in an investment  climate that
     has been more reluctant generally to invest in "Internet" companies,

o    our ability to retain existing customers, attract new customers at a steady
     rate, and maintain  customer  satisfaction in an industry in which there is
     as of  yet  no  uniformly  accepted  standard  or  methodology  for  claims
     processing,

o    our ability to introduce new sites, service and products,

o    our ability to  effectively  develop  and  implement  plans to  potentially
     reposition our products, services and marketing efforts,

o    the effect of announcements or  introductions of new sites,  services,  and
     products by our competitors in a rapidly evolving industry,

o    price competition or price increases in our industry,

o    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 of
     health claims processing services,

o    our ability to upgrade and  develop  our  systems and  infrastructure  in a
     timely and effective manner,

o    the amount of traffic on our Web site,

o    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,

o    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,

o    our ability to comply with existing and added government regulation such as
     HIPAA  or  privacy   regulations   relating  to  the  Internet  or  patient
     information, and

o    general  economic  conditions  and  economic  conditions  specific  to  the
     Internet, electronic commerce, and the medical claims processing industry.


If we are  unable to handle or  satisfactorily  respond  to these  factors,  our
operating  results may fall below the  expectations  of securities  analysts and
investors.  In this event,  the market price of our common stock would likely be
materially adversely affected.

OUR MARKETING  STRATEGY HAS NOT BEEN  SUFFICIENTLY  TESTED AND MAY NOT RESULT IN
SUCCESS

We have  recently  modified our marketing  strategy  from heavy  reliance on the
development and maintenance of strategic  relationships with companies that will
aggressively  market  electronic  claims  processing  and our other  services to
payers and  healthcare  providers to a two-fold  approach  that also  includes a
direct sales and marketing  campaign to the PPO, HMO, TDA and Medical  Insurance
Carrier  marketplace.  To penetrate our market we will have to exert significant
efforts and devote material  resources to create awareness of and demand for our
products and services.  No assurance  can be given that our  strategic  partners
will devote  significant  efforts and resources to, and be successful  in, these
marketing  services or that they will result in material  sales of our  products
and  services.  No  representation  can be made  that our  strategy  will  prove
successful or that we will have adequate  resources to support direct  marketing
of our products and services. Our failure to develop our marketing capabilities,
successfully  market  our  products  or  services,  or  recover  the cost of our
services  will  have a  material  adverse  effect  on our  business,  prospects,
financial condition, and results of operations.



                                       10
<PAGE>

IF WE ARE  UNABLE  TO  UPGRADE  OUR  SYSTEMS,  WE MAY BE UNABLE  TO  PROCESS  AN
INCREASED VOLUME OF CLAIMS OR MAINTAIN COMPLIANCE WITH REGULATORY REQUIREMENTS

A key  element of our  strategy  is to generate a high volume of traffic on, and
use of, our Web site. We are currently  processing  less than 10 million medical
claims per year in an industry that processes  approximately  4.7 billion claims
annually.  If the  volume  of  traffic  on our Web site or the  number of claims
submitted  by  customers  substantially  increases,  we will have to expand  and
further  upgrade  our  technology,   claims  processing  systems,   and  network
infrastructure  to  accommodate  these  increases or our systems may suffer from
unanticipated system disruptions,  slower response times,  degradation in levels
of customer service, impaired quality and speed of claims processing, and delays
in reporting accurate financial  information.  We operate in an industry that is
undergoing  change  due to  increasing  regulatory  requirements,  some of which
require us to upgrade our systems.  We may be unable to effectively  upgrade and
expand our claims processing system or to integrate smoothly any newly developed
or  purchased  modules with our  existing  systems,  which could have a material
adverse effect on our business,  prospects,  financial condition, and results of
operations.

The  Health  Insurance  Portability  and  Accountability  Act of 1996  ("HIPAA")
contains provisions which require us to modify our software application to be in
compliance.  The required  modifications may prove to be very costly and disrupt
our ability to allocate resources to other business activities. If we are unable
to complete  the  required  modifications  prior to  compliance  deadlines,  our
ability to operate in the healthcare industry would be severely restricted.

BECAUSE WE DEPEND UPON ONLY TWO SITES FOR OUR COMPUTER SYSTEMS WE ARE VULNERABLE
TO THE EFFECTS OF NATURAL DISASTERS, COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS

Our ability to successfully  receive and process claims and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and  communications  hardware  systems.  Our  proprietary  software
serving the majority of our customers  currently  resides solely on our servers,
most of which are currently  located in a monitored  server  facility in Dallas,
TX. Our systems and  operations  are in a secured  facility with  hospital-grade
electrical  power,  redundant  telecommunications  connections  to the  Internet
backbone,   uninterruptible   power  supplies,   and  generator   back-up  power
facilities.  Further,  we maintain  redundant systems at a separate facility for
backup and disaster recovery.  Despite such safeguards,  we remain vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
break-ins,  earthquake,  terrorist attacks,  and similar events. Our proprietary
software serving our largest customer currently resides solely on the customer's
servers,  in which  case we are  reliant  on the  customer  to  ensure a secure,
efficient and uninterrupted  operation of computer and communication systems. In
addition,  we do not,  and  may not in the  future,  carry  sufficient  business
interruption  insurance to compensate us for losses that may occur.  Despite our
implementation  of network  security  measures,  our servers are  vulnerable  to
computer viruses,  physical or electronic  break-ins,  and similar  disruptions,
which could lead to  interruptions,  delays,  loss of data,  or the inability to
accept and process customer claims.  The occurrence of any of these events could
have a material adverse effect on our business, prospects,  financial condition,
and results of operations.

WE RELY ON INTERNALLY  DEVELOPED  ADMINISTRATIVE  SYSTEMS THAT ARE  INEFFICIENT,
WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE

Some of the  systems  and  processes  used by our  business  office  to  prepare
information for financial,  accounting, billing, and reporting, are inefficient,
inadequate,  and require a significant amount of manual effort. For example, our
systems require  cumbersome  data  manipulation  using  spreadsheets in order to
prepare information for both billing and client reporting  purposes.  The manual
effort is both costly and negatively  affects the timeliness of these processes.
These inefficiencies may place us at a competitive disadvantage when compared to
competitors  with more efficient  systems.  We intend to continue to upgrade and
expand our administrative systems and to integrate newly-developed and purchased
modules  with our  existing  systems in order to improve the  efficiency  of our
reporting methods, although we are unable to predict whether these upgrades will
improve our competitive position.

WE HAVE LIMITED SENIOR MANAGEMENT  RESOURCES,  AND WE NEED TO ATTRACT AND RETAIN
HIGHLY SKILLED PERSONNEL; WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR
LIMITED RESOURCES

Our senior management currently consists of Don Crosbie, our President and Chief
Executive  Officer,  and Paul  Miller,  our  Chief  Financial  Officer.  We have
undergone a number of staffing  reductions since June 2000,  requiring remaining
employees  to  handle  an   increasingly   large  and  more  diverse  amount  of
responsibility.  Any  expansion  of  our  business  would  place  a  significant
additional  strain  on  our  limited  managerial,   operational,  and  financial
resources.  We will be required to expand our operational and financial  systems
significantly and to expand, train, and manage our work force in order to manage
the  expansion  of our  operations.  Our  failure  to  fully  integrate  our new
employees  into our  operations  could  have a  material  adverse  effect on our
business, prospects, financial condition, and results of operations. Our ability
to attract and retain highly skilled personnel is critical to our operations and
expansion.  We  face  competition  for  these  types  of  personnel  from  other
technology  companies  and more  established  organizations,  many of which have
significantly  larger operations and greater  financial,  marketing,  human, and
other  resources  than we  have.  We may not be  successful  in  attracting  and
retaining  qualified  personnel on a timely basis,  on competitive  terms, or at
all. If we are not successful in attracting and retaining these  personnel,  our
business,  prospects,  financial  condition,  and results of operations  will be
materially adversely affected.


                                       11
<PAGE>

BECAUSE OF THEIR  SPECIALIZED  KNOWLEDGE OF OUR  PROPRIETARY  TECHNOLOGY AND THE
MEDICAL CLAIMS  PROCESSING  INDUSTRY,  WE DEPEND UPON OUR SENIOR  MANAGEMENT AND
CERTAIN KEY PERSONNEL; THE LOSS OR UNAVAILABILITY OF ANY OF THEM COULD PUT US AT
A COMPETITIVE  DISADVANTAGE;  OUR LIMITED  RESOURCES WILL  ADVERSELY  AFFECT OUR
ABILITY TO HIRE ADDITIONAL MANAGEMENT PERSONNEL

We  currently  depend upon the efforts and  abilities  of our senior  executives
currently  comprising of Don Crosbie, our President and Chief Executive Officer,
Paul Miller,  our Chief Financial  Officer and two other key personnel,  each of
whom has a distinctive body of knowledge regarding electronic claims submissions
and  related  technologies,  the  medical  claims  processing  industry  and our
services.  We may be unable to retain and motivate  remaining  personnel  for an
extended   period  of  time  in  this   environment.   The  additional  loss  or
unavailability  of the services of any senior  management  or such key personnel
for any significant  period of time could have a material  adverse effect on our
business, prospects, financial condition, and results of operations. We have not
obtained key-person life insurance on any of our senior executives. In addition,
we do not have employment  agreements  with any of our senior  executives or key
personnel.

WE MAY BE UNABLE TO  PROTECT  OUR  INTELLECTUAL  PROPERTY  RIGHTS  AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

The Company's business is based in large part upon the proprietary nature of its
services and technologies.  Accordingly, our ability to compete effectively will
depend on our ability to maintain the  proprietary  nature of these services and
technologies, including our proprietary software and the proprietary software of
others with which we have entered into software licensing agreements. We hold no
patents  and  rely  on a  combination  of  trade  secrets  and  copyright  laws,
nondisclosure,  and other  contractual  agreements  and  technical  measures  to
protect our rights in our technological  know-how and proprietary  services.  In
addition, we have been advised that trademark and service mark protection of our
corporate name is not available. We depend upon confidentiality  agreements with
our officers, directors, employees,  consultants, and subcontractors to maintain
the  proprietary  nature of our  technology.  These  measures  may not afford us
sufficient or complete protection, and others may independently develop know-how
and services similar to ours, otherwise avoid our confidentiality agreements, or
produce  patents and copyrights that would  materially and adversely  affect our
business, prospects,  financial condition, and results of operations. We believe
that our services  are not subject to any  infringement  actions  based upon the
patents or copyrights of any third parties; however, our know-how and technology
may in the future be found to  infringe  upon the  rights of others.  Others may
assert  infringement  claims  against  us, and if we should be found to infringe
upon their  patents or  copyrights,  or otherwise  impermissibly  utilize  their
intellectual  property,  our ability to continue to use our technology  could be
materially restricted or prohibited. If this event occurs, we may be required to
obtain  licenses  from the holders of their  intellectual  property,  enter into
royalty  agreements,  or  redesign  our  products  so as  not to  utilize  their
intellectual  property,  each of which may prove to be uneconomical or otherwise
impossible.  Licenses or royalty agreements required in order for us to use this
technology  may not be available  on terms  acceptable  to us, or at all.  These
claims could result in litigation,  which could materially  adversely affect our
business, prospects, financial condition, and results of operations.

BECAUSE WE ARE NOT CURRENTLY  PAYING CASH DIVIDENDS,  INVESTORS MAY HAVE TO SELL
CLAIMSNET.COM SHARES IN ORDER TO REALIZE THEIR INVESTMENT

Whether we pay cash  dividends  in the future will be at the  discretion  of our
board of directors and will be dependent upon our financial  condition,  results
of  operations,  capital  requirements,  and any other factors that the board of
directors decides is relevant.  In view of our losses and substantial  financial
requirements,  we will not be in a position to pay cash dividends at any time in
the  reasonable  future.  Holders of our common  stock may have to sell all or a
part of their shares in order to realize their investment.



                                       12
<PAGE>

SOME  PROVISIONS OF OUR CERTIFICATE OF  INCORPORATION  AND BY-LAWS MAY DETER OUR
ACQUISITION

A number of provisions of our amended  certificate of incorporation and Delaware
law  may  be  deemed  to  have  an  anti-takeover  effect.  Our  certificate  of
incorporation  and by-laws  provide  that our board of directors is divided into
two  classes  serving  staggered  two-year  terms,  resulting  in  approximately
one-half of the directors  being elected each year and contain other  provisions
relating to voting and the removal of the officers and directors.  Further,  our
by-laws contain provisions which regulate the introduction of business at annual
meetings of our stockholders by other than the board of directors.  In addition,
we are subject to the  anti-takeover  provisions  of Section 203 of the Delaware
General  Corporation  Law. In general,  this statute  prohibits a publicly  held
Delaware  corporation  from  engaging  in  a  "business   combination"  with  an
"interested  stockholder"  for a period  of three  years  after  the date of the
transaction  in which the person  became an interested  stockholder,  unless the
business combination is approved in a prescribed manner.

In addition, our certificate of incorporation,  as amended, authorizes our board
of directors to issue up to 4,000,000  shares of preferred  stock,  which may be
issued in one or more series,  the terms of which may be  determined at the time
of issuance by the board of directors,  without further action by  stockholders,
and may  include  voting  rights  (including  the  right to vote as a series  on
particular  matters),  preferences as to dividends and liquidation,  conversion,
and redemption rights, and sinking fund provisions.

ISSUANCE OF NEW SERIES OF  PREFERRED  STOCK COULD  MATERIALLY  ADVERSELY  AFFECT
HOLDERS OF COMMON STOCK AND ANY EXPANSION OR SALES OPPORTUNITIES

We may be  required  to issue a new  series of  preferred  stock  for  continued
funding of operations.  The issuance of any new series of preferred  stock could
materially  adversely affect the rights of holders of shares of our common stock
and,  therefore,  could  reduce  the value of the  common  stock.  In  addition,
specific  rights granted to holders of preferred stock could be used to restrict
our ability to merge with, or sell our assets to, a third party.  The ability of
the  board of  directors  to issue  preferred  stock  could  have the  effect of
rendering more difficult, delaying, discouraging,  preventing, or rendering more
costly an acquisition of us or a change in control of us, thereby preserving our
control by the current stockholders.

INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS

The electronic  submission of healthcare claims and other electronic  healthcare
transaction  processing  services by means of our proprietary  software involves
the transmission and analysis of confidential and proprietary information of the
patient, the healthcare  provider,  or both, as well as our own confidential and
proprietary  information.  The compromise of our security or misappropriation of
proprietary  information  could have a material  adverse effect on our business,
prospects, financial condition, and results of operations. We rely on encryption
and  authentication  technology  licensed  from other  companies  to provide the
security and authentication  necessary to effect secure Internet transmission of
confidential  information,  such as medical  information.  Advances  in computer
capabilities,  new discoveries in the field of cryptography,  or other events or
developments  may result in a compromise or breach of the technology  used by us
to protect  customer  transaction  data.  Anyone who is able to  circumvent  our
security  measures  could  misappropriate   proprietary   information  or  cause
interruptions  in our  operations.  We may be  required  to  expend  significant
capital and other resources to protect against security  breaches or to minimize
problems caused by security breaches. Concerns over the security of the Internet
and other  online  transactions  and the  privacy of users may also  inhibit the
growth of the Internet and other online services generally,  and the Web site in
particular,  especially as a means of conducting commercial transactions. To the
extent that our  activities or the  activities of others involve the storage and
transmission of proprietary information,  such as diagnostic and treatment data,
security breaches could damage our reputation and expose us to a risk of loss or
litigation  and  possible  liability.  Our  security  measures  may not  prevent
security  breaches.  Our failure to prevent these  security  breaches may have a
material adverse effect on our business,  prospects,  financial  condition,  and
results of operations.

WE WILL  ONLY BE  ABLE TO  EXECUTE  OUR  BUSINESS  PLAN IF  ELECTRONIC  COMMERCE
CONTINUES TO GROW GENERALLY AND SPECIFICALLY IN THE HEALTH CARE INDUSTRY

Our future revenues and any future profits are substantially  dependent upon the
widespread  acceptance  and use of the Internet and other online  services as an
effective  medium of commerce by submitters of medical  claims.  Rapid growth in
the use of, and interest  in, the  Internet,  the Web, and online  services is a
recent  phenomenon,  and may not  continue  on a  lasting  basis.  In  addition,
customers  may not adopt,  and  continue to use,  the  Internet and other online
services as a medium of  commerce.  Demand and market  acceptance  for  recently
introduced  services and products  over the Internet are subject to a high level
of uncertainty,  and few services and products have generated profits. For us to
be  successful,  the  healthcare  community  must  accept and use novel and cost
efficient ways of conducting business and exchanging information.


                                       13
<PAGE>

In addition,  the public in general,  and the healthcare industry in particular,
may not accept the  Internet and other  online  services as a viable  commercial
marketplace  for  a  number  of  reasons,   including   potentially   inadequate
development of the necessary network  infrastructure  or delayed  development of
enabling  technologies  and  performance  improvements.  To the extent  that the
Internet and other online "business to business" services continue to experience
significant  growth in the number of users,  their frequency of use, or in their
bandwidth requirements,  the infrastructure for the Internet and online services
may be unable to support the demands placed upon them. In addition, the Internet
or other  online  services  could  lose  their  viability  due to  delays in the
development  or  adoption  of new  standards  and  protocols  required to handle
increased  levels  of  Internet  activity,  or  due  to  increased  governmental
regulation.  Changes in, or  insufficient  availability  of,  telecommunications
services to support the Internet or other online  services  also could result in
slower  response  times and  adversely  affect  usage of the  Internet and other
online services generally and our product and services in particular.  If use of
the Internet and other online  services  does not continue to grow or grows more
slowly than we expect, if the  infrastructure  for the Internet and other online
services  does not  effectively  support  the growth  that may occur,  or if the
Internet  and  other  online   services  do  not  become  a  viable   commercial
marketplace,  our  business,  prospects,  financial  condition,  and  results of
operations could be materially adversely affected.

WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET,  ELECTRONIC COMMERCE,  AND CUSTOMER
DEMANDS CONTINUE TO EVOLVE

The Internet and the medical claims processing industry are characterized by:

o    rapid technological change,

o    changes in user and customer requirements and preferences,

o    changes in federal legislation and regulation,

o    frequent new product and service introductions  embodying new technologies,
     and

o    the emergence of new industry standards and practices that could render our
     existing Web site and proprietary technology and systems obsolete.


Our success will depend, in part, on our ability to:

o    enhance and  improve the  responsiveness  and  functionality  of our online
     claims processing services,

o    license  leading  technologies  useful in our  business  and to enhance our
     existing services,

o    comply with all  applicable  regulations  regarding  our  industry  and the
     Internet,

o    develop  new  services  and  technology   that  address  the   increasingly
     sophisticated and varied needs of our prospective or current customers, and

o    respond to  technological  advances and  emerging  industry  standards  and
     practices on a cost-effective and timely basis.


The  development of our Web site and other  proprietary  technology will involve
significant   technical  and  business  risks  and  require  material  financial
commitment.  We may not be able  to  adapt  successfully  to such  demands.  Our
failure to respond in a timely manner to changing market  conditions or customer
requirements  could have a material  adverse effect on our business,  prospects,
financial condition, and results of operations.

WE HAVE NOT COMPETED AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY

Based on total assets and annual  revenues for the fiscal year ended in 2002, we
are significantly smaller than the majority of our national competitors. We have
not successfully  competed and may not in the future successfully compete in any
market in which we co   nduct or may conduct operations.


                                       14
<PAGE>

REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS

We are not currently subject to direct regulation by any government agency other
than laws or  regulations  applicable  to  electronic  commerce,  but we process
information  which,  by law,  must  remain  confidential.  The U.S.  Centers for
Medicare and Medicaid Services (formerly HCFA) has defined security requirements
for  Internet  communications  including  healthcare  data.  We must  operate in
compliance  in  all  material  respects  with  these  requirements.  Due  to the
increasing  popularity  and  use of the  Internet  and  other  online  services,
federal,  state, and local governments may adopt laws and regulations,  or amend
existing  laws and  regulations,  with  respect to the  Internet or other online
services  covering issues such as user privacy,  pricing,  content,  copyrights,
distribution,   and  characteristics  and  quality  of  products  and  services.
Furthermore,  the growth and  development of the market for electronic  commerce
may  prompt  calls  for  more  stringent  consumer  protection  laws  to  impose
additional burdens on companies  conducting business online. The adoption of any
additional  laws or regulations may decrease the growth of the Internet or other
online services,  which could, in turn, decrease the demand for our services and
increase our cost of doing business, or otherwise have a material adverse effect
on our business,  prospects,  financial  condition,  and results of  operations.
Moreover,   the  relevant   governmental   authorities  have  not  resolved  the
applicability  to the  Internet and other  online  services of existing  laws in
various  jurisdictions  governing issues such as property ownership and personal
privacy,  and it may take time to resolve  these  issues  definitively.  Any new
legislation  or  regulation,  the  application  of  laws  and  regulations  from
jurisdictions  whose  laws  do  not  currently  apply  to our  business,  or the
application  of existing laws and  regulations  to the Internet and other online
services  could  have a  material  adverse  effect on our  business,  prospects,
financial condition, and results of operations.

THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE

The market  price of our  common  stock has  experienced,  and may  continue  to
experience,  significant volatility. Our operating results,  announcements by us
or our competitors  regarding  acquisitions or  dispositions,  new procedures or
technology,  changes in general  conditions in the economy,  and general  market
conditions  have  caused and could in the future  cause the market  price of our
common stock to fluctuate  substantially.  The equity markets have, on occasion,
experienced  significant  price and volume  fluctuations  that have affected the
market prices for many companies'  common stock and have often been unrelated to
the operating performance of these companies.

OUR COMMON STOCK TRADES ON THE OTC BULLETIN  BOARD;  OUR COMMON STOCK IS SUBJECT
TO "PENNY STOCK" RULES

Since the opening of trading on March 6, 2002, our common stock has been trading
in the over-the-counter  market on the OTC Bulletin Board ("OTCBB")  established
for securities that do not meet the Nasdaq SmallCap Market listing  requirements
or in what are  commonly  referred  to as the "pink  sheets."  As a  result,  an
investor  may find it more  difficult  to  dispose  of,  or to  obtain  accurate
quotations as to the price of, our shares.

As a result and the fact that our common stock trades below $5.00 per share, our
common stock is subject to the penny stock rules,  which impose additional sales
practice  requirements on  broker-dealers  who sell these  securities to persons
other  than  established   customers  as  defined  under  applicable  rules  and
institutional accredited investors. For transactions covered by these rules, the
broker-dealer  must make a special  suitability  determination for the purchase,
and must have received the purchaser's  written consent to the transaction prior
to sale. As a result, delisting could materially adversely affect the ability of
broker-dealers  to sell our common  stock and the ability of  purchasers  of our
stock to sell their shares in the secondary market.

FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE

The market  price of our common  stock  could  decline as a result of sales of a
large number of shares of our common stock in the market, or the perception that
these sales could occur. These sales also might make it more difficult for us to
sell  equity  securities  in the  future  at a time and at a price  that we deem
appropriate.

CAUTIONARY NOTES REGARDING THE FORWARD-LOOKING STATEMENTS

This report contains, and incorporates by reference,  forward-looking statements
regarding  our  plans  and  objectives  for the  future.  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  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.


                                       15
<PAGE>

ITEM 2. PROPERTIES

We currently lease 6,061 square feet of office space at a rent of  approximately
$9,400 per month, at 12801 North Central Expressway,  Suite 1515, Dallas,  Texas
75243.  The  lease  expires  June  30,  2003.  We  believe  that,  in the  event
alternative  or  larger  offices  are  required,  such  space  is  available  at
competitive rates. For our servers, we currently utilize IBM Internet Solutions,
including  a  nationwide  DS-3  backbone,  a  substantial  dedicated  Web server
management  facility,  and a 24 hour per day, 7 day per week Network  Operations
Center at a cost of  approximately  $22,200 per month  pursuant to an  agreement
expiring on July 31, 2005. Both our office lease and managed  hosting  agreement
are under review for potential cost reduction.


ITEM 3. LEGAL PROCEEDINGS

We are not currently party to any litigation proceedings.


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

None.




                                       16
<PAGE>


                                     PART II


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

PRICE RANGE OF COMMON STOCK

The Common Stock of Claimsnet.com traded on the Nasdaq SmallCap Market under the
symbol "CLAI" and on the Boston Stock  Exchange  under the trading  symbol "CLA"
for the  period  from  April 6,  1999 to  March 5,  2002.  The  Common  Stock of
Claimsnet.com  has traded on the OTC Bulletin  Board under the symbol  "CLAI.OB"
and on the Boston Stock  Exchange under the trading symbol "CLAI" since March 6,
2002.  The following  table sets forth,  for the fiscal periods  indicated,  the
quarterly  high and low per share sales  prices,  as reported by Nasdaq  through
March 5,  2002  and the high and low bid  prices  as  reported  by the  National
Association of Securities Dealer,  Inc. Electronic Bulletin Board for the period
from March 6, 2002 through December 31, 2002:

                                                         HIGH       LOW
                                                        ------     ------
        2001
        Three months ended March 31, 2001               $2.313     $1.063
        Three months ended June 30, 2001                 2.820      1.313
        Three months ended September 30, 2001            3.290      1.250
        Three months ended December 31, 2001             1.750      0.350

        2002
        January 1, 2002 to March 5, 2002                $0.980     $0.290
        March 6, 2002 to March 31, 2002                  0.420      0.200
        Three months ended June 30, 2002                 0.410      0.150
        Three months ended September 30, 2002            0.300      0.050
        Three months ended December 31, 2002             0.250      0.050

The high bid for the Common  Stock on the OTCBB on March 20,  2003 was $0.13 per
share.  As of December 31,  2002,  there were 83 holders of record of the Common
Stock.

DIVIDEND POLICY

We have not paid any cash  dividends  on our Common  Stock  and,  in view of net
losses and our operating  requirements,  do not intend to pay cash  dividends in
the foreseeable future. If we achieve profitability,  we intend to retain future
earnings,  if any, for  reinvestment  in the  development  and  expansion of our
business.  Any credit  agreements,  which we may enter  into with  institutional
lenders,  may  restrict  our  ability  to pay  dividends.  Any  preferred  stock
shareholders may receive  preferential  rights in the distribution of dividends,
if any. Whether we pay cash dividends in the future will be at the discretion of
our Board of  Directors  and will be  dependent  upon our  financial  condition,
results of  operations,  capital  requirements,  and any other  factors that the
Board of Directors determines to be relevant.

RECENT SALES OF UNREGISTERED SECURITIES

In January,  February  and March 2003,  we  completed  the private  placement of
950,000  shares of common stock to  accredited  investors at $0.20 per share for
net proceeds of $189,000.  In  connection  with the private  placement,  we also
issued warrants to purchase an aggregate of 950,000 shares of common stock.  The
warrants  contain an exercise  price of $0.20 per share and expire  December 31,
2007.  The  private  placement  included  100,000  shares of common  stock  plus
warrants to acquire an additional  100,000  shares of common stock  purchased by
National Financial  Corporation and 500,000 shares of common stock plus warrants
to acquire an  additional  500,000  shares of common  stock  purchased by Elmira
United, a 5% shareholder.

From June through December 2002, we completed the private placement of 3,675,000
shares  of  common  stock to  accredited  investors  at $0.20  per share for net
proceeds of $735,000.  In connection with the private placement,  we also issued
warrants to purchase an  aggregate  of  3,675,000  shares of common  stock.  The
warrants  contain an exercise  price of $0.20 per share and expire  between June
and December 2007. The private  placement  included  1,750,000  shares of common
stock plus  warrants to acquire an additional  1,750,000  shares of common stock
purchased by Elmira United.



                                       17
<PAGE>

In June 2002,  we accepted  non-revocable  equity  investments  in the aggregate
amount of $50,000 from four members of the Board of Directors on terms to be set
by a committee of disinterested directors, such terms to be no more favorable to
the  Directors  than those which would have been  negotiated at arms length with
unaffiliated third parties.  Funds received were recorded as a current liability
until the equity  investment  terms were finalized.  In October 2002, based upon
the determination of the committee of disinterested  directors, we completed the
private  placement by issuing to the four  Directors at a rate of $300 per share
an aggregate of 167 shares of Series E Preferred Stock, convertible into 166,667
shares of common stock.

In May 2002, we completed the sale of 3,304 shares of Series D Preferred  Stock,
convertible  into 3,304,000  shares of common stock, to accredited  investors at
$250 per share for net proceeds of $826,000.  The private placement included 100
shares of Series D Preferred Stock purchased by Mr. Michel, 565 shares of Series
D Preferred  Stock  purchased by Mr. Dubach,  1,600 shares of Series D Preferred
Stock purchased by Elmira United,  a 5% stockholder,  and 620 shares of Series D
Preferred Stock purchased by New York Venture Corp., an entity for which Jeffrey
Black, a Director of the Company,  was the corporate secretary.  Messrs.  Michel
and Black were elected Directors of the Company in February 2002.

In December 2001, we issued to accredited  investors for a net  consideration of
$462,000, at the rate of $0.70 per common share, 660,000 shares of common stock,
including 440,000 shares resulting from the conversion of 440 shares of Series C
Preferred Stock with an aggregate  stated value of $308,000 at the rate of $0.70
of stated value of Series C Preferred Stock for each share of common stock.

In June 2001,  we issued  16,000 shares of common stock with a fair market value
of  $41,600  to  New  York  Capital  AG in  connection  with  an  agreement  for
professional services to be rendered in 2001.

In April 2001,  McKesson acquired  1,514,285 shares of common stock at $1.75 per
share for net proceeds of $2,650,000 and the  cancellation of the stock purchase
warrant  originally  issued to McKesson in 1999 to  purchase  819,184  shares of
common  stock.  No  registration  rights were granted to McKesson for the shares
acquired.

In March 2001, we sold 400,000 shares of common stock to an accredited  investor
for $1.75 per share for net proceeds of $596,000,  and in connection  therewith,
in April 2001, we issued immediately exercisable two year warrants at a price of
$1.75 per share to purchase 40,000 shares of common stock to financial  advisors
who assisted us in the negotiation and structuring of the sale.

Except as  otherwise  indicated,  in each of the security  issuances  referenced
above,  we  provided  certain  rights to  register  resale of the  shares at our
expense  under  the  Securities  Act of 1933 (the  "Act");  none of the sales of
securities involved the use of an underwriter or the payment of any commissions,
and the proceeds  were used for general  corporate  purposes.  The  certificates
evidencing the common stock issued in each of the transactions  referenced above
were appropriately legended.

The offer and sale of the securities in each of the foregoing  transactions were
exempt from registration under the Act by virtue of Section 4(2) thereof and the
rules promulgated thereunder. Each of the offerees and investors in such private
placements  provided  representations  to us that the investor is an "accredited
investors,"   as  defined  in  Rule  501  under  the  Act  (some  were  existing
stockholders  at the time of such  transaction).  Each investor was afforded the
right to conduct a complete due diligence  review of us and the  opportunity  to
ask questions of, and receive answers from, our management.



                                       18
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA

The  following  selected  financial  data  are  derived  from  our  consolidated
financial  statements.  The financial  statements as of, and for the years ended
December  31, 1998 and 2002 have been  audited by KBA Group LLP  (formerly  King
Griffin & Adamson P.C),  independent  auditors.  The financial statements as of,
and for the years ended  December 31,  2001,  2000 and 1999 have been audited by
Ernst & Young LLP, independent auditors.

The  following  selected  financial  data  should  be read in  conjunction  with
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and our  consolidated  financial  statements  and the related notes
appearing elsewhere in this form 10-K.

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                            --------------------------------------------------------------------------------
                                                2002             2001             2000             1999             1998
                                            ------------     ------------     ------------     ------------     ------------
<S>                                         <C>              <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:

Revenues                                    $  1,104,000     $  1,336,000     $  1,602,000     $    414,000     $    155,000
                                            ------------     ------------     ------------     ------------     ------------
Total operating expenses                       4,651,000        6,573,000       19,432,000        8,485,000        4,510,000
                                            ------------     ------------     ------------     ------------     ------------
Interest (expense) - affiliate                   (13,000)          (6,000)          (6,000)        (142,000)        (314,000)
Interest (expense) - bridge debt                    --               --               --           (967,000)            --
Interest (expense) - other                        (7,000)          (6,000)            --               --               --
Interest income                                     --             55,000          141,000          322,000            6,000
Gain on sale of business assets                  640,000             --               --               --               --
                                            ------------     ------------     ------------     ------------     ------------
Net loss                                    $ (2,927,000)    $ (5,194,000)    $(17,695,000)    $ (8,858,000)    $ (4,663,000)
                                            ============     ============     ============     ============     ============
Loss per weighted average common
  share outstanding (basic and diluted)     $       (.24)    $       (.52)    $      (2.16)    $      (1.52)    $      (1.41)
                                            ============     ============     ============     ============     ============
Weighted average common shares
 outstanding (basic and diluted)              12,241,000        9,999,000        8,174,000        5,811,000        3,309,000
                                            ============     ============     ============     ============     ============


                                                                               December 31,
                                              ----------------------------------------------------------------------------
 BALANCE SHEET DATA:                              2002            2001            2000            1999            1998
 -------------------                          -------------   -------------   -------------   -------------   ------------
 Current assets                               $     382,000   $     837,000   $   1,562,000   $   7,124,000   $    105,000
 Total assets                                       521,000       1,457,000       3,076,000       9,034,000      1,653,000
 Working capital (deficit)                       (1,238,000)       (535,000)     (1,348,000)      6,113,000     (1,089,000)
 Long-term debt                                      35,000               -               -               -      4,323,000
 Accumulated deficit                            (42,424,000)    (39,497,000)    (34,303,000)    (16,608,000)    (7,750,000)
 Stockholders' equity (deficit)                  (1,134,000)         85,000         166,000       7,971,000     (3,864,000)


</TABLE>


                                       19
<PAGE>

<TABLE>
<CAPTION>

QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------
                                                                      Quarters
                                   ---------------------------------------------------------------------------
                                      First          Second           Third          Fourth           Total
                                   -----------     -----------     -----------     -----------     -----------
<S>                                <C>             <C>             <C>             <C>             <C>
FISCAL 2002
Revenues                           $   315,000     $   338,000     $   285,000     $   166,000     $ 1,104,000
Gross loss                            (245,000)       (125,000)       (161,000)        (98,000)       (629,000)
Net loss                            (1,102,000)       (740,000)        (22,000)     (1,063,000)     (2,927,000)
Basic loss per common share              (0.10)          (0.07)          (0.00)          (0.08)          (0.24)

FISCAL 2001
Revenues                           $   532,000     $   263,000     $   242,000     $   299,000     $ 1,336,000
Gross loss                            (378,000)       (302,000)       (382,000)       (207,000)     (1,269,000)
Net loss                            (1,316,000)     (1,406,000)     (1,345,000)     (1,127,000)     (5,194,000)
Basic loss per common share              (0.15)          (0.14)          (0.13)          (0.10)          (0.52)

</TABLE>




                                       20
<PAGE>


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

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING INFORMATION
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE  ANTICIPATED  BY THE  FORWARD-LOOKING  INFORMATION.  FACTORS THAT MAY
CAUSE  SUCH  DIFFERENCES  INCLUDE,  BUT  ARE NOT  LIMITED  TO,  AVAILABILITY  OF
FINANCIAL RESOURCES FOR LONG TERM NEEDS,  PRODUCT DEMAND,  MARKET ACCEPTANCE AND
OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT.  THIS MANAGEMENT'S  DISCUSSION
AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN
CONJUNCTION  WITH OUR  CONSOLIDATED  FINANCIAL  STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS REPORT.

IN GENERAL

As of December 31, 2002, we had a working capital  deficit of  $(1,238,000)  and
stockholders'  deficit of $(1,134,000).  We generated revenues of $1,104,000 for
the year ended  December 31, 2002,  $1,336,000  for the year ended  December 31,
2001,and  $1,602,000  for the year ended December 31, 2000. We have incurred net
losses  since  inception  and had an  accumulated  deficit of  $(42,424,000)  at
December  31,  2002.  We  expect  to  continue  to  operate  at a loss  for  the
foreseeable  future.  There  can be no  assurance  that  we  will  ever  achieve
profitability.  In addition,  during the year ended  December 31, 2002, net cash
used in operating activities was $2,422,000.

We have only been in  operation  since 1996,  and have  operated  under  several
different business  strategies.  As a result, the relationships  between revenue
and  cost  of  revenue,  and  operating  expenses  reflected  in  the  financial
information  included in this report may not represent future expected financial
relationships.  Much of the cost of revenue and operating  expenses reflected in
our consolidated  financial statements are associated with people costs, and not
directly  related to transaction  volumes.  Our expenses  decreased for the year
ended  December  31, 2002 due to  staffing  and other cost  reductions.  Further
expense reductions were effected at the beginning of 2003. In 2002 we recognized
a significant gain on sale of certain business  assets.  Our operating  expenses
for  the  year  ended  December  31,  2001  included  a  significant   one-time,
non-recurring  expense  due to write off of  unamortized  development  costs and
warrants,  net of  revenues  from  amendment  of the  Development  and  Services
Agreement with McKesson.  Our operating expenses for the year ended December 31,
2000 included  significant costs associated with the asset acquisition of HECOM.
Accordingly,  we believe  that, at our current  stage of  operations,  period to
period comparisons of results of operations are not meaningful.

PRIVATE PLACEMENTS, OPTIONS AND WARRANTS

During 2002,  we completed the private  placement of 3,675,000  shares of common
stock to  accredited  investors at $0.20 per share for net proceeds of $735,000.
In connection with the private placement, we also issued warrants to purchase an
aggregate of 3,675,000  shares of common stock. The warrants contain an exercise
price of $0.20 per share and expire between June and December 2007.

In October 2002, we hired a new president and chief executive officer and issued
him  warrants to acquire an  aggregate of 200,000  shares of common  stock.  The
warrants  contain an exercise price of $0.20 per share,  expire in October 2007,
and vest 50% in October 2003 and fully in October 2004.

In October 2002, we issued warrants to acquire an aggregate of 500,000 shares of
common stock to a non-employee in connection with an agreement for  professional
services to be  rendered.  The warrants  contain an exercise  price of $0.20 per
share,  were fully vested on the date of grant,  expire in September  2007,  and
become  exercisable  50% in  September  2003 and fully in  September  2004.  The
warrants  were  valued at $0.08 per share based on the  Black-Scholes  valuation
method (using the following  assumptions:  life of five years, risk free rate of
2.68%, no dividends  during the term, and a volatility of .752).  The expense is
being recognized ratably over the term of the service agreement, October 1, 2002
through December 31, 2004.

In June 2002,  we accepted  non-revocable  equity  investments  in the aggregate
amount of $50,000 from four members of the Board of Directors on terms to be set
by a committee of  disinterested  directors,  such terms to be no more favorable
than those which  would have been  negotiated  at arms length with  unaffiliated
third  parties.  Funds received were recorded as a current  liability  until the
equity  investment  terms  were  finalized.  In  October  2002,  based  upon the
determination  of the  committee of  disinterested  directors,  we completed the
private  placement by the issuance to the four  Directors of an aggregate of 167
shares of  Series E  Preferred  Stock at the rate of $300 per share  convertible
into an aggregate of 166,667 shares of common stock.



                                       21
<PAGE>

In June 2002,  we issued  warrants to acquire an aggregate  of 50,000  shares of
common stock to a non-employee in connection with an agreement for  professional
services to be  rendered.  The warrants  contain an exercise  price of $0.30 per
share and, as  originally  issued,  were  scheduled to expire in June 2003.  The
warrants  were  valued at $0.07 per share based on the  Black-Scholes  valuation
method (using the  following  assumptions:  life of one year,  risk free rate of
2.12%, no dividends  during the term, and a volatility of .566). The expense was
recognized ratably over the service  agreement,  June 1, 2002 through August 31,
2002. In October 2002, we entered into a new professional  service agreement for
the period  October 1, 2002  through  December 31, 2002 and agreed to cancel the
original  warrant and issue a replacement  warrant under similar  terms,  except
that the  expiration  date of the warrants  was  extended to June 2007.  The new
warrants  were  valued at $0.07 per share based on the  Black-Scholes  valuation
method (using the following  assumptions:  life of five years, risk free rate of
2.68%, no dividends  during the term, and a volatility of .752). The expense was
recognized ratably over the service agreement,  October 1, 2002 through December
31, 2002.

In May 2002, we completed the sale of 3,304 shares of Series D Preferred  Stock,
convertible  into 3,304,000  shares of common stock, to accredited  investors at
$250 per share for net proceeds of $826,000.

In May 2002,  upon  election of a new  non-employee  director  to the board,  we
granted ten year options  exercisable for 5,000 shares of common stock under the
Non-Employee  Directors  Plan.  The option  exercise  price of $.30 was the fair
market value of a share of the outstanding  common stock on the date the options
were  granted.  The options  vest to the extent of 50% one year from the date of
grant and will vest fully on the second anniversary of the date of grant.

In February 2002, upon election of two new non-employee  directors to the board,
we granted ten year options  exercisable for 10,000 shares of common stock under
the Non-Employee  Directors Plan. The option exercise price of $.35 was the fair
market value of a share of the outstanding  common stock on the date the options
were  granted.  The options  vest to the extent of 50% one year from the date of
grant and will vest fully on the second anniversary of the date of grant.

In February 2002, we granted employees the remaining options to purchase 328,842
shares of common stock under our 1997 Stock Option Plan and warrants to purchase
an additional  253,203  shares of common stock in exchange for voluntary  salary
reductions.  The options and warrants  contained an exercise of $0.35 per share,
the market price on the date of grant,  expire on the tenth  anniversary  of the
grant,  and vest 25 % immediately  on the date of grant and an additional 25% on
each third month anniversary of the date of grant.

In January 2002, we granted  employees  options under our 1997 Stock Option Plan
to purchase an aggregate of 456,000 shares of common stock.  The options contain
an exercise of $0.60 per share, the market price on the date of grant, expire on
the tenth  anniversary  of the  grant,  and vest 100 % one year from the date of
grant.

See Item 5, Recent Sale of  Unregistered  Securities,  for information as to the
sale in 2001 for  aggregate  net  proceeds  and  services  of  $3,749,600  of an
aggregate  of  2,150,285  shares  of  common  stock  and 440  shares of Series C
Preferred Stock which  subsequently  converted into 440,000 additional shares of
common stock.

In December  2001,  upon  completion  of our annual  meeting,  ten year  options
exercisable for an aggregate of 25,000 shares of common stock were granted under
the  Directors'  Plan.  The option  exercise  price of $0.50 was the fair market
value of a share of the  outstanding  common  stock on the date the options were
granted.  The options  become vested to the extent of 50% one year from the date
of grant and fully on the second anniversary of the date of grant.

In April 2001, ten year options exercisable for an aggregate of 25,000 shares of
common  stock were granted to  employees  under the 1997 Stock Option Plan.  The
option  exercise  price of $1.75  was the  fair  market  value of a share of the
outstanding  common  stock on the date the  options  were  granted.  The options
become  vested to the extent of 50% one year from the date of grant and fully on
the second anniversary of the date of grant.

In January 2001, ten year options exercisable for an aggregate of 385,500 shares
of common stock were granted to employees  under the 1997 Stock Option Plan. The
option  exercise  price of $1.25  was the  fair  market  value of a share of the
outstanding  common  stock on the date the  options  were  granted.  The options
become fully vested on the first anniversary of the date of grant.

In October  2000,  upon  completion  of our  annual  meeting,  ten year  options
exercisable for an aggregate of 25,000 shares of common stock were granted under
the  Directors'  Plan.  The option  exercise price of $2.375 was the fair market
value of a share of the  outstanding  common  stock on the date the options were
granted.  The options  become vested to the extent of 50% one year from the date
of grant and fully on the second anniversary of the date of grant.


                                       22
<PAGE>

In August  2000,  we completed a private  placement of 270,000  shares of common
stock at $3.50 per share for net  proceeds  of  $927,000  to various  accredited
investors. In connection with the financing, we also issued one year warrants to
purchase  270,000  shares of common  stock at a price of $4.60 per share and two
year warrants to purchase 270,000 shares of common stock at a price of $5.60 per
share.

In June 2000, we sold 1,000,000 shares of common stock to an accredited investor
at $3.00 per share yielding net proceeds of $2,982,000.

In June 2000, we granted certain employees ten year warrants to purchase 178,250
shares of common  stock at a price of $3.00 per share,  the market  price on the
date of grant. The warrants became fully exercisable in June 2001.

In May 2000,  we sold at a price of $3.00 per  share,  100,000  shares of common
stock to American Medical  Finance,  Inc., the owner of record of 381,603 shares
of common stock prior to the  transaction.  Bo W. Lycke,  former Chairman of the
Board,  President and Chief Executive  Officer of the Company,  Robert H. Brown,
Jr., a former Director of the Company,  and Ward L. Bensen, a former Director of
the Company, control 71.1%, 17.7%, and 11.2%,  respectively,  of the outstanding
common stock of American Medical Finance, Inc. They held the foregoing positions
with the Company at the time of the transaction.

In April 2000,  we issued  1,200,000  shares of common stock  (placed in escrow)
valued at $6,376,000  to acquire  certain  assets from VHx Company.  In December
2000,  pursuant  to  provisions  of the asset  purchase  agreement,  we released
312,000  shares to VHx and withdrew from the escrow and returned to our treasury
888,000  shares at a value of  $1,415,000,  and we issued an additional  244,000
shares  valued at $389,000  from  treasury  stock to JDH, a major  creditor,  in
satisfaction  of debt owed by VHx Company.  In December  2001 we  cancelled  the
shares held in treasury.

None of the above sales of  securities  involved the use of an  underwriter  and
except as indicated no commissions  were paid in connection with the sale of any
securities.  Except for the  issuance  of options  under the  referred to option
plan,  the  certificates  evidencing  the  common  stock  issued  in each of the
transactions referenced above were appropriately legended.

The  offer and sale of the  securities  in each of the  transactions  referenced
above was exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) thereof and the rules promulgated thereunder.  Each of the offerees
and investors in such private placements provided representations to us that the
offeree or investor is an  "accredited  investor,"  as defined in Rule 501 under
the  Act,  as  well  as  highly   sophisticated  (some  of  whom  were  existing
stockholders of us at the time of such  transaction.)  The shares subject to the
options have been registered under the Act.

PLAN OF OPERATIONS

Our recently modified business strategy is as follows:

o    to  utilize  our  state  of the art  technology  to help  large  healthcare
     organizations   achieve  more  efficient  and  less  costly  administrative
     operations;
o    to market our  services  directly  to the payer  community  and its trading
     partners;
o    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;
o    to  provide  total  claim  management  services  to  payer   organizations,
     including  internet claim submission,  paper claim conversion to electronic
     transactions, and receipt of EDI transmissions;
o    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
o    to license our technology  for other  applications,  including  stand-alone
     purposes,  Internet  systems  and  private  label  use,  and  for  original
     equipment manufacturers.

We anticipate that our primary source of revenues will be revenue paid by payers
and vendors for private-label or co-branded licenses and services. Historically,
our primary  source of revenues was fees paid by users for insurance  claims and
patient  statement  services,  and fees  from  medical  and  dental  payers  for
processing claims electronically. We expect most of our revenues to be recurring
in nature.


                                       23
<PAGE>

Our  principal  costs to operate are  anticipated  to be technical  and customer
support, sales and marketing,  research and development,  acquisition of capital
equipment,  and general and  administrative  expenses.  We intend to continue to
develop  and  upgrade  our  technology  and  transaction-processing  systems and
continually  update and  improve our website to  incorporate  new  technologies,
protocols, and industry standards.  Selling, general and administrative expenses
include all corporate  and  administrative  functions  that serve to support our
current and future  operations and provide an  infrastructure  to support future
growth.  Major items in this category include  management and staff salaries and
benefits, travel, professional fees, network administration, business insurance,
and rent.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

We enter into services  agreements  with our customers to provide  access to our
hosted software platform for processing of customer transactions, including base
level  support.  The  customers are not entitled to ownership of our software at
any time during or at the end of the  agreements.  The end users of our software
application  access our hosted software platform or privately hosted versions of
our software  application via the internet with no additional  software required
to be located on the customer's systems.  Customers pay transaction fees and pay
time and  materials  charges for support  above the base level and one  customer
paid monthly  hosting fees for dedicated  servers and databases  until March 31,
2001.  Customer  agreements also may (i) provide for development fees related to
private labeling of our software  platform (i.e. access to our servers through a
web site which is in the name of and/or has the look and feel of the  customer's
other web sites) and some  customization of the offering and business rules, and
(ii) have  periodic  license  fees.  We account  for our service  agreements  by
combining the contractual  revenues from  development,  license and support fees
and  recognizing  the revenue  ratably over the estimated  period covered by the
development  and  license.  We  do  not  segment  these  services  and  use  the
contractual allocation to recognize revenue because we do not have objective and
reliable evidence of fair value to allocate the arrangement consideration to the
deliverables in the  arrangement.  We recognize  service fees for  transactions,
above base support and monthly hosting as the services are performed.

SOFTWARE FOR SALE OR LICENSE

We begin  capitalizing  costs  incurred in  developing  a software  product once
technological  feasibility  of the  product  has  been  determined.  Capitalized
computer software costs include direct labor,  labor-related costs and interest.
The  software  is  amortized  over its  expected  useful  life of 3 years or the
contract term, as appropriate.

Management   periodically   evaluates   the   recoverability,   valuation,   and
amortization  of  capitalized  software costs to be sold,  leased,  or otherwise
marketed. As part of this review, management considers the expected undiscounted
future  net cash  flows.  If they are less than the  stated  value,  capitalized
software costs will be written down to fair value.


                                       24
<PAGE>


RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001

REVENUES

Revenues  decreased 17% to $1,104,000 in 2002 from $1,336,000 in 2001.  Revenues
of $0 and $288,000, respectively,  during 2002 and 2001 were related to software
license  and  support  revenue  under  the  McKesson  Development  and  Services
Agreement.  Revenues of $270,000  and  $105,000,  respectively,  during 2002 and
2001,  were generated by our significant  payer and vendor clients.  Revenues of
$834,000 and $943,000,  respectively during 2002 and 2001, were generated by our
Internet-based  healthcare  provider clients,  the majority of which revenue was
sold  in  September  2002.   Certain  of  our  revenues  are  generated  by  our
internet-based  healthcare  provider clients but received from our clearinghouse
partners.  Revenues  received  from one customer and  clearinghouse  partner who
acquired certain of our business assets in September 2002 represented 23% and 9%
of our revenues for 2002 and 2001,  respectively,  and  revenues  received  from
another  customer  represented  9%  and  1%  of  our  2002  and  2001  revenues,
respectively.  Revenues  received  from McKesson  represented  6% and 27% of our
revenues for 2002 and 2001, respectively.

COST OF REVENUES

Cost of revenues were  $1,733,000  in 2002 compared to $2,605,000  for the prior
year.  The  four  recurring  components  of cost of  revenues  are  data  center
expenses,   third  party  transaction  processing  expenses,   customer  support
operation  expenses and  amortization  of software.  Data center  expenses  were
$340,000 for the year ended  December 31, 2002  compared with $336,000 for 2001,
an increase of 1%. Third party transaction  processing expenses were $355,000 in
2002 compared to $540,000 in 2001, representing a 34% decrease. Customer support
operations expense decreased by 38% to $786,000 in 2002 from $1,130,000 in 2001.
The  decreases  in third party  transaction  processing  expenses  and  customer
support  operations  expense were  primarily  attributable  to the assignment of
contracts with a majority of our healthcare  provider clients in September 2002.
Amortization of software and development  project  amortization  was $250,000 in
2002 compared to $283,000 in 2001,  representing  a 12% decrease.  This decrease
reflects completion of software development  amortization in 2002. Additionally,
software  development  costs of  $316,000  associated  with  the  1999  McKesson
Development  and  Services  agreement  required a one-time  write off to cost of
revenues upon renegotiation of the contract during 2001.

RESEARCH AND DEVELOPMENT

Research and development  expenses were $252,000 in 2002, compared with $772,000
in 2001,  representing a decrease of 67%. Research and development  expenses are
comprised of personnel costs and related  expenses.  Development  efforts during
2002  were   concentrated  on  enhancements  to  assure  compliance  with  HIPPA
requirements.  Development  efforts in 2002 of  $344,000  were  capitalized.  In
December   2002,  we  terminated  the  ongoing  HIPAA   remediation   in-process
development  project  in  order  to  pursue  a more  cost-effective  development
alternative  in  light  of  our  change  in  business  strategy.  Therefore,  we
recognized a charge for in-process  development  impairment expense of $344,000.
No costs were capitalized for development efforts during 2001.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and administrative  expenses were $2,322,000 in 2002, compared
with  $3,196,000 in 2001, a decrease of 27%. The $874,000  decrease is primarily
related to reduction in personnel expenses.

INTEREST (INCOME) EXPENSE

Interest  expense was $20,000 for 2002 compared with $12,000 for 2001.  Included
in the 2002 expense was $13,000 related to interest on short-term  notes payable
to related parties.  Included in the 2001 expense was $6,000 related to interest
on short-term notes payable related parties.  Interest expense of $4,000 in 2002
related to other notes payable.  Interest of $3,000 and $6,000  respectively was
paid to vendors in 2002 and 2001 for financing fees.  Interest income of $55,000
was provided in 2001 from investment of cash and equivalents.

GAIN ON SALE OF BUSINESS ASSETS

In 2002  we sold  certain  business  assets  consisting  primarily  of  customer
contracts and the related  revenue  streams  thereunder and recognized a gain of
$640,000 on the sale.


                                       25
<PAGE>

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000

REVENUES

Revenues  decreased 17% to $1,336,000 in 2001 from $1,602,000 in 2000.  Revenues
of $288,000  and  $681,000,  respectively,  during 2001 and 2000 were related to
software license and support revenue under the McKesson Development and Services
Agreement. Revenues of $105,000 and $0, respectively,  during 2001 and 2000 were
generated by our significant payer and vendor clients.  Revenues of $943,000 and
$921,000,   respectively   during  2001  and  2000,   were   generated   by  our
Internet-based   healthcare   provider   clients.    Increased   revenues   from
internet-based  clients are  attributable  to volume and  pricing  improvements.
Revenues from then-recurring  revenue sources for 2001, which represented 64% of
total  revenues,  were  comprised of $704,000  from  transaction-based  fees and
$149,000 from subscription fees. Revenues from non-recurring sources, other than
revenue  related to the McKesson  Development  and Services  Agreement,  totaled
$195,000 and were related to setup,  support, and other fees. Revenues under the
McKesson  Development and Services Agreement  accounted for approximately 22% of
2001 revenues versus 43% of 2000 revenues.

Transactions  processed by us increased 19% to 6,303,000 in 2001 from  5,283,000
in 2000. All of the increase was  attributable  to internal growth in the number
of accounts and healthcare providers subscribing to our services.  Additionally,
92% of all transactions were for physician and dental claim submission  services
and 8% were from patient statement  processing.  We had 503 accounts  processing
transactions for 4,393 providers at December 31, 2001 compared with 399 accounts
and 3,696 providers at December 31, 2000, representing increases of 26% and 19%,
respectively.

Transaction-based revenue averaged $.11 per transaction and $.12 per transaction
for the years ended  December 31, 2001 and 2000,  respectively,  representing  a
decrease  of 8%,  primarily  due to  fluctuations  in  the  mix of  transactions
processed.  Average revenue per claim transaction  remained constant at $.09 for
5,789,000 and 4,656,000 claims processed in 2001 and 2000, respectively. Patient
statement  volumes  decreased  to 503,000 in 2001 from 626,000 in 2000 while the
average revenue per statement  transaction increased to $.39 in 2001 compared to
$.34 in 2000. Eligibility  transactions increased to 11,000 in 2001 with average
revenue  of $.47 per  transaction  from  1,000 in 2000  when  revenues  were not
generally recognized on a transaction basis.

COST OF REVENUES

Cost of revenues were  $2,605,000  in 2001 compared to $3,274,000  for the prior
year.  The  four  recurring  components  of cost of  revenues  are  data  center
expenses,   third  party  transaction  processing  expenses,   customer  support
operation  expenses and  amortization  of software.  Data center  expenses  were
$336,000 for the year ended December 31, 2001 compared with $394,000 for 2000, a
decrease of 15%.  Renegotiation of the McKesson contract eliminated  contractual
requirements  for  segregated  data center  services.  Third  party  transaction
processing  expenses  were  $540,000  in 2001  compared  to  $498,000  in  2000,
representing an 8% increase  compared to the 19% increase in total  transactions
processed. Customer support operations expense decreased by 38% to $1,130,000 in
2001 from $1,832,000 in 2000,  while the number of accounts and providers served
at the end of each year increased by 26% and 19%, respectively. The decreases in
customer  support  operations  expense were primarily  attributable to decreased
staffing.  Amortization of software and  development  project  amortization  was
$283,000 in 2001 compared to $550,000 in 2000, representing a 49% decrease. This
decrease  reflects  completion  of software  development  amortization  in 2001.
Additionally,  software  development costs of $316,000  associated with the 1999
McKesson  Development  and Services  agreement  required a one-time write off to
cost of revenues upon renegotiation of the contract during 2001.

RESEARCH AND DEVELOPMENT

Research  and  development   expenses  were  $772,000  in  2001,  compared  with
$2,019,000 in 2000,  representing  a decrease of 62%.  Research and  development
expenses  are  comprised of personnel  costs and related  expenses.  Development
efforts during 2001 were  concentrated on web site  improvements  and continuous
incremental   enhancements  to  assure   compliance  with  HIPPA   requirements.
Development  efforts in 2000 were  concentrated  on  development of the McKesson
project  started  during 1999 and additional  development of  HealthExchange(TM)
products  which were  postponed for release before  reaching  marketability.  No
costs were capitalized for development efforts during either 2001 or 2000.

PURCHASED  RESEARCH AND DEVELOPMENT  AND WRITE-OFF OF PURCHASED  INTANGIBLES AND
OTHER ASSETS

On April 18, 2000, the Company executed an asset purchase  agreement (the "Asset
Purchase Agreement") with VHx Company ("VHx") to acquire selected properties and
assets of VHx,  including  the  HealthExchange.com  name and  HealthExchange.com
trademarks,  related  to all  efforts of VHx to develop  products  and  services
designed to use  Internet  technology  to  facilitate  and  improve  interaction
between physicians, health plans, employers and their members.


                                       26
<PAGE>

The Company  allocated the purchase price to the various  assets  acquired using
standard  valuation  methodologies,  projecting  cash flows  over the  estimated
useful lives of the assets, net of additional  investment needs, and considering
the stage of completion of software  development  projects.  The initial results
valued  the  intangible   assets  at  $3,700,000  after  charges  to  in-process
technology of $6,154,000, recorded in the quarter ended June 30, 2000.

One of the  significant  assets  acquired,  an agreement  with John Deere Health
("JDH") for development of an Enterprise Care  Management  System,  required the
parties to  negotiate  mutually  agreeable  business  terms for  delivery of the
system  after  acceptance  of beta  testing.  The Company and JDH were unable to
reach such an agreement.

In  November  and  December  2000,  as a result of the  inability  to  negotiate
mutually agreeable business terms with JDH, an industry  consolidation of system
vendors,  sluggish  sales in the  payer  market,  and  dramatic  changes  in the
financial  markets,  the Company  substantially  lowered its estimates of future
revenues  less costs of  completing  the product.  The Company  reevaluated  the
HealthExchange  asset  purchase  using  the  same  valuation  methodologies  and
determined that there had been a total  impairment of the assets  acquired.  The
Company ceased further  development of the  HealthExchange(TM)  products and all
marketing efforts. As a result of the revised valuation,  the Company recognized
charges of $2,276,000 for the write-off of the unamortized  balance of purchased
intangibles and other assets.

AMORTIZATION OF INTANGIBLES

Amortization of intangible assets of $412,000 was recorded in 2000 on trademarks
and  non-compete   agreements  acquired  in  the  April  18,  2000  purchase  of
HealthExchange assets. There was no such expense recognized in 2001.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,  general and administrative  expenses were $3,196,000 in 2001, compared
with $5,297,000 in 2000, a decrease of 40%. The $2,101,000  decrease  includes a
$773,000 decrease for general and administrative expenses,  primarily related to
reduction in the work force and  discontinuation  of HealthExchange  operations.
Additionally,  decreases in work force created reductions of $1,093,000 in sales
and  marketing  expenses and $275,000 in technology  infrastructure  and support
expenses.  Offsetting the expense decreases was a one-time charge of $40,000 for
write off of warrants, net of development revenues, associated with the McKesson
contract renegotiation.

INTEREST (INCOME) EXPENSE

Interest expense was $12,000 for 2001 compared with $6,000 for 2000. Included in
the 2001 expense was $6,000  related to interest on short-term  notes payable to
American  Medical  Finance,  a related  party.  Interest  of $6,000  was paid to
vendors for financing fees. Interest income of $55,000 and $141,000 was provided
in 2001 and 2000, respectively, from investment of cash and equivalents.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended  December 31, 2002 net cash used in operating  activities  of
$2,422,000  was  primarily  attributable  to an  operating  loss of  $2,888,000,
adjusted for a gain on sale of business  assets of $640,000 and warrants  issued
for services of $36,000,  offset in part by depreciation  of $474,000,  a charge
for  in-process  development  impairment  expense  of  $344,000  and a change in
working capital of $252,000.

For the year ended  December 31, 2001 net cash used in operating  activities  of
$4,243,000  was primarily  attributable  to an operating  loss of $5,194,000 and
change  in  working  capital  of  $217,000,  offset in part by  depreciation  of
$599,000,  non-cash  amortizations and write offs of $470,000,  and common stock
issued for services of $99,000.

Net cash provided by investing activities was $281,000 in 2002,  attributable to
proceeds of $643,000 from the sale of assets,  offset by $3,000 for the purchase
of property and  equipment  and $344,000 for  capitalized  software  development
costs.

Net cash used by investing  activities  was $38,000 in 2001 compared to net cash
provided  by  investing  activities  in 2000 of  $380,000  and net cash  used in
investing  activities  in  1999 of  $5,493,000.  For  2001,  cash  was  provided
represented  the proceeds of $11,000 from the sale of equipment and fixtures and
cash used was due to the purchase of $49,000 of equipment and furniture.

Net cash provided by financing  activities in 2002 was $1,763,000 as a result of
the  private  placement  of common  and  preferred  stocks for net  proceeds  of
$1,610,000 and proceeds of $610,000 from debt financing, offset by $457,000 used
to repay debt.

Net cash used by  investing  activities  was  $38,000 in 2001,  attributable  to
$49,000  for the  purchase  of  property  and  equipment,  offset by proceeds of
$11,000 from the sale of property and equipment.


                                       27
<PAGE>

Net cash provided by financing  activities in 2001 was $3,680,000 as a result of
private placements of shares of common stock. A one-year loan in March 2001 from
American Medical Finance,  Inc.,  affiliated with certain officers and directors
of the Company, in the amount of $400,000 bearing interest at 9.5% per annum was
repaid in May 2001.

Management  believes that available cash  resources,  together with  anticipated
revenues  from  operations  and the  proceeds  of recently  completed  financing
activities and funding commitments will not be sufficient to satisfy our capital
requirements  through April 30, 2003.  Necessary  additional  capital may not be
available on a timely basis or on acceptable  terms,  if at all. In any of these
events,  we may be unable to implement  current  plans for expansion or to repay
debt  obligations as they become due. If sufficient  capital cannot be obtained,
we may be forced to  significantly  reduce  operating  expenses to a point which
would be detrimental to business  operations,  curtail  research and development
activities,  sell  certain  business  assets or  discontinue  some or all of our
business  operations,  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. In the event that any future
financing is effected, to the extent it includes equity securities,  the holders
of the common stock and preferred stock may experience  additional dilution.  In
the event of a cessation of  operations,  there may not be sufficient  assets to
fully satisfy all creditors,  in which case the holders of equity securities may
be unable to recoup any of their investment.

In January,  February  and March 2003,  we  completed  the private  placement of
950,000  shares of common stock to  accredited  investors at $0.20 per share for
net proceeds of $189,000.  In  connection  with the private  placement,  we also
issued warrants to purchase an aggregate of 950,000 shares of common stock.  The
warrants  contain an exercise  price of $0.20 per share and expire  December 31,
2007.




                                       28
<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Below is an index of financial statements.  The financial statements required by
this item begin at page F-1 hereof.

                                                                         Page
                                                                         ----
 Independent Auditors' Report of KBA Group LLP                            F-1
 Independent Auditors' Report of Ernst & Young, LLP                       F-2
 Consolidated Balance Sheets - December 31, 2002 and 2001                 F-3
 Consolidated Statements of Operations for the Years Ended
      December 31, 2002, 2001 and 2000                                    F-4
 Consolidated Statements of Changes in Stockholders' Equity (Deficit)
      for the Years Ended December 31, 2002, 2001 and 2000                F-5
 Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2002, 2001 and 2000                                    F-6
 Notes to Consolidated Financial Statements                               F-8




                                       29
<PAGE>



                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Claimsnet.com, Inc.

     We  have   audited  the   accompanying   consolidated   balance   sheet  of
Claimsnet.com,  Inc. and  subsidiaries  as of December 31, 2002, and the related
consolidated statements of operations,  stockholders' deficit and cash flows for
the year then ended.  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 audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Claimsnet.com,  inc. and subsidiaries at December 31, 2002, and the consolidated
results of their  operations  and their cash flows for the year then  ended,  in
conformity with accounting  principles  generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.

     The accompanying  financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial statements, the Company has generated losses since inception, incurred
negative  cash flows from  operations,  and has a negative  capital  position at
December 31,2002. Additionally,  management does not believe that available cash
resources,  anticipated  revenues from  operations  or proceeds  from  financing
activities and funding  commitments  will be sufficient to satisfy the Company's
near term capital  requirements.  These conditions raise substantial doubt about
the Company's ability to continue as a going concern. These financial statements
do not include any  adjustments  to reflect the possible  future  effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.


KBA Group LLP
Dallas, Texas
March 17, 2003


                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Claimsnet.com, Inc.

     We  have   audited  the   accompanying   consolidated   balance   sheet  of
Claimsnet.com,  Inc. and  subsidiaries  as of December 31, 2001, and the related
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 2001. Our audit
also included the financial  statement schedule listed at 15(b). These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and financial statement schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Claimsnet.com,  inc. and subsidiaries at December 31, 2001, and the consolidated
results  of their  operations  and their cash flows for each of the two years in
the period ended  December 31, 2001, in conformity  with  accounting  principles
generally  accepted in the United  States.  Also,  in our  opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

     The accompanying  financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note A, the
Company has generated  losses since  inception and incurred  negative cash flows
from operations,  and management does not believe that available cash resources,
anticipated  revenues from operations or proceeds from financing  activities and
funding  commitments  will  be  sufficient  to  satisfy  the  Company's  capital
requirements through December 31, 2002. These conditions raise substantial doubt
about the  Company's  ability to continue as a going  concern.  These  financial
statements do not include any adjustments to reflect the possible future effects
on  the   recoverability  and  classification  of  assets  or  the  amounts  and
classification  of  liabilities  that  may  result  from  the  outcome  of  this
uncertainty.


                                                         Ernst & Young LLP

Dallas, Texas
February 15, 2002,
except for Note A as to which the date is
March 29, 2002


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In Thousands, Except Share Data)

                                                                           December 31,
                                                                      ---------------------
                                                                        2002         2001
                                                                      --------     --------
<S>                                                                   <C>          <C>
                                     ASSETS
CURRENT ASSETS
   Cash and equivalents                                               $    153     $    531
   Accounts receivable, net of allowance for doubtful accounts
      of $33 and $35 in 2002 and 2001, respectively                        150          198
   Prepaid expenses and other current assets                                79          108
                                                                      --------     --------
         Total current assets                                              382          837

EQUIPMENT, FIXTURES AND SOFTWARE
   Computer hardware and software                                        1,685        1,822
   Software development costs                                            1,922        1,922
   Furniture and fixtures                                                  108          150
   Office equipment                                                         25           25
                                                                      --------     --------
                                                                         3,740        3,919
   Accumulated depreciation and amortization                            (3,601)      (3,299)
                                                                      --------     --------
         Total equipment, fixtures and software                            139          620
                                                                      --------     --------
TOTAL ASSETS                                                          $    521     $  1,457
                                                                      ========     ========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
   Notes payable to related parties - short term                           118         --
   Accounts payable                                                        486          298
   Accrued severance                                                       241           90
   Accrued acquisition costs                                               500          500
   Accrued payroll and other current liabilities                           228          467
   Deferred revenues                                                        47           17
                                                                      --------     --------
         Total current liabilities                                       1,620        1,372

LONG TERM LIABILITIES
   Notes payable to related parties - long term                             10         --
   Notes payable - long term                                                25         --
                                                                      --------     --------
         Total long term liabilities                                        35         --
                                                                      --------     --------
         Total liabilities                                               1,655        1,372

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
   Preferred stock, $.001 par value; 4,000,000 shares
     authorized, 3,471 and no shares issued and
     outstanding at December 31, 2002 and 2001,
     respectively (liquidation preference of $876)                        --           --
   Common stock, $.001 par value; 40,000,000 shares
     authorized; 14,816,000 shares and 11,141,000 shares
     issued and outstanding as of December 31, 2002 and
     2001, respectively                                                     15           11
   Additional capital                                                   41,275       39,571
   Accumulated deficit                                                 (42,424)     (39,497)
                                                                      --------     --------
         Total stockholders' equity (deficit)                           (1,134)          85
                                                                      --------     --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                  $    521     $  1,457
                                                                      ========     ========

</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In Thousands, Except Per Share Data)


                                                               Year Ended December 31,
                                                          ----------------------------------
                                                            2002         2001         2000
                                                          --------     --------     --------
<S>                                                       <C>          <C>          <C>
REVENUES                                                  $  1,104     $  1,336     $  1,602

Cost of revenues                                             1,733        2,605        3,274
                                                          --------     --------     --------
Gross loss                                                    (629)      (1,269)      (1,672)
                                                          --------     --------     --------
OPERATING EXPENSES:
   Research and development                                    252          772        2,019
   Purchased research and development, write-off
     of purchased intangibles and other assets and
     impairment of in-process software development             344         --          8,430
   Amortization of intangibles                                --           --            412
   Selling, general and administrative                       2,322        3,196        5,297
                                                          --------     --------     --------
LOSS FROM OPERATIONS                                        (3,547)      (5,237)     (17,830)
                                                          --------     --------     --------
OTHER INCOME (EXPENSE)
   Interest expense-related parties                            (13)          (6)          (6)
   Interest expense-other                                       (7)          (6)        --
   Interest income                                            --             55          141
   Gain on sale of business assets                             640         --           --
                                                          --------     --------     --------
         Total other income (expense)                          620           43          135
                                                          --------     --------     --------

NET LOSS                                                  $ (2,927)    $ (5,194)    $(17,695)
                                                          ========     ========     ========

NET LOSS PER SHARE - BASIC AND DILUTED                    $  (0.24)    $  (0.52)    $  (2.16)
                                                          ========     ========     ========
WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING (Basic and diluted)                          12,241        9,999        8,174
                                                          ========     ========     ========
</TABLE>

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


                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                         STOCKHOLDERS' EQUITY (DEFICIT)
                                 (In Thousands)


                           Number of             Number of                                                       Total
                           Preferred              Common                       Deferred                      Stockholders'
                            Shares    Preferred   Shares    Common  Additional  Sales   Accumulated Treasury    Equity
                          Outstanding   Stock   Outstanding Stock    Capital   Discount   Deficit    Stock     (Deficit)
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------
<S>                       <C>         <C>       <C>         <C>     <C>        <C>      <C>         <C>      <C>
Balances at January
1, 2000                         --         --        6,625  $   7   $  26,220  $(1,648) $  (16,608)     --   $      7,971

Sale of common stock            --         --        1,370      1       4,226     --          --        --          4,227

Issuance of common
stock for asset purchase        --         --        1,200      1       6,374     --          --        --          6,375

Return to treasury of
stock issued for asset
purchase                        --         --        (888)    --        --        --          --     (1,415)      (1,415)

Issuance from treasury
of common stock for
settlement of acquired
obligation                      --         --          244    --        --        --          --         389          389

Amortization of
deferred sales
discount                        --         --         --      --        --          314       --        --            314

Net loss                        --         --         --      --        --        --       (17,695)     --       (17,695)
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------
Balances at December
31, 2000                        --         --        8,551      9      36,820   (1,334)    (34,303)  (1,026)          166
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------

Sale of preferred
stock converted into
common stock                    --         --          660      1         462     --          --        --            463

Sale of common stock            --         --        1,914      1       3,216     --          --        --          3,217

Issuance of common
stock for services              --         --           16    --           42     --          --        --             42

Issuance of warrants
for services                    --         --         --      --           57     --          --        --             57

Cancellation of
treasury stock                  --         --         --      --      (1,026)     --          --       1,026        --

Write off unamortized
portion of deferred
sales discount                  --         --         --      --        --        1,334       --        --          1,334

Net loss                        --         --         --      --        --        --        (5,194)     --        (5,194)
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------
Balances at December
31, 2001                        --         --       11,141     11      39,571     --       (39,497)     --             85
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------

Sale of preferred
stock                              3       --         --      --          875     --          --        --            875

Sale of common stock            --         --        3,675      4         731     --          --        --            735

Issuance of warrants
and options for
services                        --         --         --      --           98     --          --        --             98

Net loss                        --         --         --      --        --        --        (2,927)     --        (2,927)
                          ----------- --------- ----------- ------  ---------- -------- ----------- -------- ------------

Balances at December
31, 2002                           3  $    --       14,816  $  15   $  41,275  $  --    $  (42,424) $   --   $    (1,134)
                          =========== ========= =========== ======  ========== ======== =========== ======== ============
</TABLE>

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





                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (In Thousands)

                                                                         Year Ended December 31,
                                                                    ----------------------------------
                                                                      2002         2001         2000
                                                                    --------     --------     --------
<S>                                                                 <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                         $ (2,927)    $ (5,194)    $(17,695)
   Adjustments to reconcile net loss to net cash
         used by operating activities:
     Depreciation and amortization                                       474          599          855
     Common stock and warrants issued for services                        98           99         --
     Provision for doubtful accounts                                       9           19           27
     Amortization of intangibles                                        --           --            412
     Purchased research and development and write off of
         purchased intangibles                                          --           --          8,415
     Write off deferred development costs and warrants,
         net of project revenue                                          344          356         --
     Gain on sale of business assets                                    (640)        --           --
     Loss on sale and write-off of property and equipment                 22           16           15
     Amortization of deferred sales discount                            --             79          313
   Changes in operating assets and liabilities, net of
       acquisitions:
     Accounts receivable                                                  39           90         (236)
     Prepaid expenses and other current assets                            29           15           51
     Accounts payable and accrued expenses                               (51)         (57)        (130)
     Accrued severance                                                   151         (273)         363
     Deferred revenues                                                    30            8        1,114
                                                                    --------     --------     --------
         Net cash used in operating activities                        (2,422)      (4,243)      (6,496)
                                                                    --------     --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of marketable securities                          --           --          3,832
   Purchase of intangible assets and research and development           --           --         (2,978)
   Employee loan                                                        --           --             25
   Purchase of property and equipment                                    (18)         (49)        (499)
   Proceeds from sale of business assets                                 640         --           --
   Proceeds from sale of property and equipment                            3           11         --
   Capitalized cost of internal software development                    (344)        --           --
                                                                    --------     --------     --------
         Net cash (used in) provided by investing activities             281          (38)         380
                                                                    --------     --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase in notes                                                      25         --           --
   Increase in notes - related parties                                   585          400         --
   Payments of notes - related parties                                  (457)        (400)        --
   Proceeds from issuance of common and preferred stock                1,610        3,680        4,227
                                                                    --------     --------     --------
         Net cash provided by financing activities                     1,763        3,680        4,227
                                                                    --------     --------     --------
NET DECREASE IN CASH AND EQUIVALENTS                                    (378)        (601)      (1,889)
CASH AND EQUIVALENTS, BEGINNING OF YEAR                                  531        1,132        3,021
                                                                    --------     --------     --------
CASH AND EQUIVALENTS, END OF YEAR                                   $    153     $    531     $  1,132
                                                                    ========     ========     ========
</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>
                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                                 (In Thousands)



                                                            Year Ended December 31,
                                                        -------------------------------
                                                         2002        2001        2000
                                                        -------     -------     -------
<S>                                                     <C>         <C>         <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NON CASH TRANSACTIONS:

Issuance of common stock for intangible assets
   and research and development                         $  --       $  --       $ 6,375
                                                        =======     =======     =======

Return to treasury of stock issued for asset
   purchase                                             $  --       $  --       $(1,415)
                                                        =======     =======     =======
Issuance of common stock for settlement of
   acquired obligation                                  $  --       $  --       $   389
                                                        =======     =======     =======

Cash paid for interest                                  $     9     $    12     $     6
                                                        =======     =======     =======
</TABLE>

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


                                      F-7
<PAGE>


                       CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE A--ORGANIZATION, BACKGROUND AND LIQUIDITY

Claimsnet.com inc.  ("Claimsnet.com" or the "Company") is a Delaware corporation
originally  formed in April  1996.  The  Company  owns,  operates  and  licenses
software used for processing medical insurance claims on the internet.

The Company  completed an initial  public  offering in April 1999, for 2,875,000
shares  of  common  stock  at  $8.00  per  share  including  the   underwriter's
overallotment of 375,000 shares.

During 2000, the Company made private  placements of 1,370,000  shares of common
stock at prices  between $3.00 and $3.50 per share.  In April 2000,  the Company
formed  a wholly  owned  subsidiary,  HealthExchange.com  (HECOM),  to  purchase
certain  research and development  and other assets from VHx Company.  (See Note
D).

During  2001,  the Company  sold  1,514,000  shares of common  stock to McKesson
Corporation ("McKesson") at $1.75 per share, sold 620,000 shares of common stock
to other investors at prices between $0.70 and $1.75,  sold 440 shares of Series
C Preferred Stock to accredited  investors at $700 per share which  subsequently
converted  into 440,000  shares of common  stock,  and issued  16,000  shares of
common stock in exchange for professional  services rendered. In March 2001, the
Company  entered  into a  twelve-month  loan  agreement  with  American  Medical
Finance,  Inc., a related party, in the amount of $400,000  bearing  interest at
9.5% per annum which was repaid in April 2001.

During  2002,  the  Company  sold  3,304  shares  of Series D  Preferred  Stock,
convertible  into 3,304,000  shares of common stock, to accredited  investors at
$250 per share,  sold 167 shares of Series E Preferred  Stock,  convertible into
166,667  shares of common stock,  to directors of the Company at $300 per share,
and sold  3,675,000  shares of common stock to accredited  investors at $.20 per
share.  During 2002, the Company  borrowed an aggregate of $475,000  pursuant to
six separate unsecured short-term loan agreements with National Financial Corp.,
a related  party,  and repaid an aggregate of $457,000 plus accrued  interest at
9.5% thereon.  The Company also borrowed $50,000 from an accredited investor and
$50,000 from a director of the Company  pursuant to unsecured  short-term  notes
bearing interest at 9.5% and $35,000 from two accredited  investors  pursuant to
unsecured  long-term  notes  bearing  interest at 8.0%. In September  2002,  the
Company sold certain  assets that  generated the majority of its  then-recurring
revenues. (See Note C).

The Company has generated  losses since inception and has had negative cash flow
from operations. Through 2002, the Company generated minimal revenues and relied
on an initial public offering,  private equity  placements,  unsecured debt, the
sale of certain assets,  and funding from a related party to fund its operations
and  development  activities.  In January,  February and March 2003, the Company
sold 950,000 shares of common stock for net proceeds of $189,000.  The Company's
business  strategy and  organization  has been modified on several  occasions to
improve near-term financial performance.

Management  believes that available cash  resources,  together with  anticipated
revenues  from  operations  and the  proceeds  of recently  completed  financing
activities  and  funding  commitments  will not be  sufficient  to  satisfy  the
Company's  capital  requirements  through April 30, 2003.  Necessary  additional
capital may not be  available on a timely basis or on  acceptable  terms,  if at
all. In any of these  events,  the Company  may be unable to  implement  current
plans  for  expansion  or to repay  debt  obligations  as they  become  due.  If
sufficient   capital   cannot  be  obtained,   the  Company  may  be  forced  to
significantly reduce operating expenses to a point which would be detrimental to
business operations,  curtail research and development activities, sell business
assets or discontinue some or all of its business operations, take other actions
which could be  detrimental  to business  prospects  and result in charges which
could be material to the Company's  operations and financial position,  or cease
operations  altogether.  In the event that any future financing is effected,  to
the extent it includes  equity  securities,  the holders of the common stock and
preferred stock may experience  additional dilution. In the event of a cessation
of  operations,  there  may  not be  sufficient  assets  to  fully  satisfy  all
creditors,  in which  case the  holders  of equity  securities  may be unable to
recoup any of their investment.



                                      F-8
<PAGE>
                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000


NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The  accompanying  consolidated  financial  statements  include the  accounts of
Claimsnet.com  and its  subsidiaries.  All  material  intercompany  accounts and
transactions have been eliminated in consolidation.

CASH EQUIVALENTS

Cash equivalents include time deposits,  certificates of deposits and all highly
liquid debt  instruments  with original  maturities of three months or less when
purchased.

REVENUE RECOGNITION

The Company enters into services agreements with its customers to provide access
to its software application for processing of customer  transactions,  including
base level  support.  The Company  operates  the  software  application  for all
customers and the customers are not entitled to delivery of the

Company's  software  at any time  during  or at the end of the  agreements.  The
customers  either  host the  application  on their own  servers  or  access  the
Company's hosted software  platform via the internet.  Customers pay transaction
fees and pay time and  materials  charges  for  support  above  the base  level.
Customer agreements also may (i) provide for development fees related to private
labeling  of the  Company's  software  platform  (i.e.  access to the  Company's
servers  through a web site which is in the name of and/or has the look and feel
of the customer's  other web sites) and some  customization  of the offering and
business rules,  and (ii) have periodic  license fees. The Company  accounts for
its service  agreements by combining the contractual  revenues from development,
license and support fees and  recognizing the revenue ratably over the estimated
period  covered by the  development  and  license.  The Company does not segment
these services and use the contractual  allocation to recognize  revenue because
it does not have  objective and reliable  evidence of fair value to allocate the
arrangement  consideration to the  deliverables in the arrangement.  The Company
recognizes service fees for transactions, above base support and monthly hosting
as the services are performed.

SOFTWARE FOR SALE OR LICENSE

The Company begins  capitalizing costs incurred in developing a software product
once  technological  feasibility  of the product has been  determined.  Software
development  costs  capitalized  at December 31, 2002 and 2001 were  $1,922,000.
Capitalized  computer software costs include direct labor,  labor-related  costs
and interest. The software is amortized over its expected useful life of 3 years
or the contractual term, as appropriate. Amortization was completed in year 2001
for all  capitalized  software  development.  Amortization  expense  related  to
internally  developed  software  totaled $20,000 and $292,000 for 2001 and 2000,
respectively.

In  December  2002,  the  Company   terminated  the  ongoing  HIPAA  remediation
in-process  development  project  in  order  to  pursue  a  more  cost-effective
development alternative in light of our change in business strategy.  Therefore,
in December  2002, the Company  recognized a charge for  in-process  development
impairment expense of $344,000.

Management   periodically   evaluates   the   recoverability,   valuation,   and
amortization  of  capitalized  software costs to be sold,  leased,  or otherwise
marketed. As part of this review, management considers the expected undiscounted
future  net cash  flows.  If they are less than the  stated  value,  capitalized
software costs will be written down to fair value.

EQUIPMENT, FIXTURES AND INTERNAL USE SOFTWARE

Equipment and fixtures are stated at cost.  Depreciation  is provided  using the
straight-line  method over the estimated useful lives of the depreciable  assets
which range from three to seven years.  Maintenance  and repairs are expensed as
incurred. Significant replacements and betterments are capitalized. Depreciation
expense  related to  equipment  and  fixtures  totaled  $224,000,  $297,000  and
$304,000 in 2002, 2001 and 2000, respectively.


                                      F-9
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company  applies  Statement of Position 98-1,  "Accounting  for the Costs of
Computer  Software   Developed  or  Obtained  for  Internal  Use."  No  internal
development  costs were  capitalized  in 2002,  2001 or 2000.  The  software  is
amortized  over its expected  useful life of three years.  Amortization  expense
related to costs of software  developed  or obtained  for  internal  use totaled
$250,000, $282,000 and $258,000 in 2002, 2001 and 2000.

INTANGIBLE ASSETS

The purchase price of HECOM assets  acquired from VHx Company in April 2000 (see
Note D) was allocated to intangible  assets and research and  development  based
upon projected cash flows over the estimated useful lives of the assets,  net of
additional investment needs, and considering the stage of completion of software
development  projects.  Intangible  assets  included  trademarks and non-compete
agreements.  Initial results of the valuation  valued  intangibles at $3,700,000
and amortization  commenced using straight-line  method of depreciation,  with a
four year expected life.  Amortization of $412,000 was recorded in 2000 prior to
total  impairment.  Subsequent  re-valuations,  due to contractual and strategic
revisions resulted in a charge for the full impairment of intangibles in 2000.

INCOME TAXES

Deferred  income taxes are provided for the tax effects of  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax  purposes.  Valuation  reserves are provided
for the deferred tax assets when, based on available evidence, it is more likely
than not  that  some  portion  or all of the  deferred  tax  assets  will not be
realized.

LOSS PER SHARE

Basic  net loss per  share is  computed  by  dividing  net loss by the  weighted
average number of common shares outstanding for the period. Diluted net loss per
share is computed by dividing net loss by the weighted  average number of common
shares and dilutive common stock equivalents  outstanding for the period. Common
stock  equivalents,   representing  convertible  Preferred  Stock,  options  and
warrants  totaling  approximately  9,537,000 shares at December 31, 2002 are not
included in the diluted loss per share as they would be  antidilutive.  As such,
diluted and basic loss per share are the same.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards No. 130,  "Reporting  Comprehensive  Income"
("SFAS  130").  SFAS 130  requires  that total  comprehensive  income  (loss) be
disclosed   with  equal   prominence  as  net  income   (loss).   The  Company's
comprehensive net loss is equal to its net loss for all periods presented.

STOCK-BASED COMPENSATION

The Company  accounts for employee stock options in accordance  with  Accounting
Principles  Board  Opinion No. 25 ("APB 25"),  "Accounting  for Stock  Issued to
Employees". Under APB 25, the Company recognizes no compensation expense related
to employee  stock options when options are granted with exercise  prices at the
estimated  fair value of the stock on the date of grant,  as  determined  by the
Board of Directors.  The Company provides the supplemental  disclosures required
by Statement of Financial Accounting Standard No. 123 ("SFAS 123"),  "Accounting
for  Stock-Based  Compensation,"  which assumes the  recognition of compensation
expense  based on the fair  value of  options  on the grant  date.  The  Company
follows the  provisions  of SFAS 123 and Emerging  Issues Task Force No.  96-18,
"Accounting for Equity  Instruments  That Are Issued to Other Than Employees for
Acquiring  or  in  Connection  with  Selling  Goods  or  Services,"  for  equity
instruments granted to non-employees.


                                      F-10
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In  December  2002,  the FASB  issued  SFAS  148,  "Accounting  for  Stock-Based
Compensation - Transition and  Disclosure,"  which amends SFAS 123,  "Accounting
for  Stock-Based   Compensation."  SFAS  148  provides  alternative  methods  of
transition  for a voluntary  change to the fair value based method of accounting
for  stock-based  employee  compensation.  In  addition,  SFAS  148  amends  the
disclosure  requirements of SFAS 123 to require more prominent and more frequent
disclosures   in  financial   statements   about  the  effects  of   stock-based
compensation.  SFAS 148 is effective for fiscal years ending after  December 15,
2002. The adoption of SFAS 148 did not impact the Company's  financial  position
or operations.

SFAS 123 requires the disclosure of pro forma net loss and net loss per share as
if the Company  applied the fair value method.  The Company's  calculations  for
employee  grants  were made  using a  Black-Scholes  model  using the  following
assumptions:  expected  life,  five to ten  years;  risk free  rate of 2.5%;  no
dividends  during the expected term; and a volatility of 2.8 for 2002,  expected
life,  four  years;  risk free rate of 3.51% to 7.0%;  no  dividends  during the
expected term; and a volatility of 0.8 to 1.4 for 2001, and expected life,  four
years;  risk free rate of 5.65% to 7.0%; no dividends  during the expected term;
and a volatility of 0.8 to 1.355 for 2000.

If the computed values of all the Company's stock based awards were amortized to
expense over the vesting  period of the awards as specified  under SFAS 123, net
loss would have been:

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                                      2002       2001        2000
                                                     -------    -------     -------
<S>                                                  <C>        <C>         <C>
 Net Loss (thousands)
     As reported                                     $ 2,927    $ 5,194     $17,695
     Add: Stock-based compensation expense
     determined under the fair value based method        368         91         469
     Pro forma                                         3,295      5,285      18,164

 Loss per share
     As reported                                     $  0.24    $  0.52     $  2.16
     Pro forma                                       $  0.25    $  0.53     $  2.22
</TABLE>

SEGMENT REPORTING

The Company  operated  during all periods in a single  segment when applying the
management approach defined in Statement of Financial  Accounting  Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information".

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Revenues from three customers represented a significant portion of the Company's
total revenues during the last three years.  Revenues received from one customer
and clearinghouse  partner who acquired certain of the Company's business assets
in  September  2002  represented  23% and 9% of our  revenues for 2002 and 2001,
respectively, and revenues received from another customer represented 9% and 1%,
respectively,  of our 2002 and 2001  revenues.  Revenues  received from McKesson
represented  27% and 47% of 2001 and 2000  revenues,  respectively.  The Company
does not  generally  require  collateral.  Management  provides an allowance for
doubtful accounts which reflects its estimate of uncollectible receivables.

USE OF ESTIMATES AND ASSUMPTIONS

Management uses estimates and assumptions in preparing  financial  statements in
accordance with generally accepted  accounting  principles.  Those estimates and
assumptions  affect  the  reported  amounts  of  assets  and  liabilities,   the
disclosure of contingent  assets and  liabilities,  and the reported  amounts of
revenues and expenses. On an ongoing basis,  management evaluates its estimates,
including  those  related  to  customer  programs  and  incentives,  bad  debts,
investments,  intangible  assets,  financing  operations,  and contingencies and
litigation.  Estimates are based on historical  experience  and on various other
assumptions  that are believed to be  reasonable  under the  circumstances,  the
results of which form the basis for making  judgments  about the carrying values
of assets and  liabilities  that are not readily  apparent  from other  sources.
Actual results could vary from the estimates that were used.


                                      F-11
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising  costs are  expensed  as  incurred.  Advertising  costs of  $20,000,
$44,000 and $230,000 were incurred for the years ended  December 31, 2002,  2001
and 2000, respectively.

RECLASSIFICATION

Certain 2000 amounts  have been  reclassified  to conform with the 2002 and 2001
presentation.

NOTE C--SALE OF ASSETS

On September 11, 2002 the Company sold certain  assets  consisting  primarily of
customer  contracts  (the  "Assigned  Contracts")  and related  revenue  streams
thereunder  to  ProxyMed,   Inc.   ("Purchaser")  in  a  negotiated  arms-length
transaction for a purchase price consideration of $700,000. The Company received
cash consideration of $690,000,  net of contractual expenses,  recognized a gain
of $640,000 on the sale, and recorded $50,000 as deferred revenue.

The Company and Purchaser  also entered into an Affiliate  and Partner  Services
and  License  Agreement  dated  September  11,  2002,  pursuant to which (i) the
Company and Purchaser have agreed to provide certain  administrative and support
services for each other in  connection  with each other's  customers,  including
without  limitation  the customers  under the Assigned  Contracts,  in each case
pursuant to an agreed upon fee  schedule,  (ii) the Company has agreed to assist
Purchaser in establishing a "hot-site"  which will permit  Purchaser to run from
its own  hardware  platform,  the  Company's  software  application  to  service
Purchaser's  customers,  and (iii) the  Company  granted  Purchaser  a  limited,
non-exclusive,  5-year license to use the Company's software  application at its
"hot-site".  The Company is entitled to receive fees for its services and use of
the Company's  software  application  unless and until the occurrence of certain
bankruptcy and liquidation  events set forth in such agreement in respect of the
Company.  In addition to the  transaction  fees, the Company will also recognize
the $50,000 of deferred revenue ratably over the term of the agreement.

The Company and Purchaser  also entered into a Preferred  Escrow  Agreement with
DSI  Technology  Escrow  Services,  Inc.,  pursuant  to which  the  Company  has
deposited into escrow its  proprietary  claims  processing  software and related
materials  for  potential  release to  Purchaser  for use pursuant to a limited,
non-exclusive  license upon the occurrence of certain bankruptcy and liquidation
events.

NOTE D--HEALTHEXCHANGE ASSET ACQUISITION

On April  18,  2000,  Claimsnet.com,  through  its  newly  formed,  wholly-owned
subsidiary, HealthExchange.com, Inc., a Delaware corporation ("HECOM"), executed
an asset purchase agreement (the "Asset Purchase Agreement") with VHx Company, a
Nevada  corporation  ("VHx"),  whereby HECOM  acquired  selected  properties and
assets of VHx,  including  the  HealthExchange.com  name and  HealthExchange.com
trademarks,  related  to all  efforts of VHx to develop  products  and  services
designed to use  Internet  technology  to  facilitate  and  improve  interaction
between  physicians,  health plans,  employers and their members in exchange for
(i) 1,200,000 shares of common stock, par value $.001 per share, which were held
in  escrow,  (ii)  the  assumption  of  certain   liabilities,   and  (iii)  the
cancellation  of a $2 million  advance owed by VHx to the Company.  In addition,
the Company issued additional consideration comprised of 13,767 shares of Series
A 8% Convertible  Redeemable Preferred Stock, stated value of $725.60 per share,
and 13,767 shares of Series B 8% Convertible  Redeemable Preferred Stock, stated
value of $725.60 per share (the Preferred Stock).

The Preferred Stock was contingent upon the completion of specified  milestones,
described  below, by March 31, 2001. The Preferred Stock was cancelled since the
milestones were not satisfied.

One of the  significant  assets  acquired,  an agreement  with John Deere Health
("JDH") for development of an Enterprise Care  Management  System,  required the
parties to  negotiate  mutually  agreeable  business  terms for  delivery of the
system  after  acceptance  of beta  testing.  The Company and JDH were unable to
reach such an agreement.  Additionally,  the asset purchase agreement  contained
provisions related to the satisfaction of pre-existing financial obligations due
to JDH by VHx  within 180 days of the  acquisition  and also  contained  certain
provisions in the event that such obligations were not satisfied by VHx. VHx was
unable to satisfy  the JDH  obligations  within the 180 days.  As a result,  the
Company


                                      F-12
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE D--HEALTHEXCHANGE ASSET ACQUISITION (CONTINUED)

exercised  its rights  pursuant to the asset  purchase  agreement  and reclaimed
888,000 of the 1,200,000 million shares of common stock into treasury stock. The
fair market value of the common shares returned to the Company was $1,415,000 as
of the date of the agreement.  Contemporaneously,  the Company,  HECOM,  and JDH
reached an agreement in December 2000 by which the parties  agreed to cancel all
pre-existing  agreements  and JDH agreed to forgive  all unpaid  obligations  in
exchange for 244,000  shares of  Claimsnet.com  common stock which was valued at
$389,000  at the  date  of the  agreement.  The  remaining  treasury  stock  was
cancelled in 2001.

The Company  allocated the purchase price to the various  assets  acquired using
standard  valuation  methodologies,  projecting  cash flows  over the  estimated
useful lives of the assets, net of additional  investment needs, and considering
the stage of completion of software  development  projects.  A blended state and
federal  effective  tax rate of 40% was  applied to the cash  flows.  These cash
flows were discounted to their present value using discount rates between 60 and
70 percent,  reflective of  development  products at similar  risk.  The initial
results valued the intangible  assets at $3,700,000  after charges to in-process
technology of $6,154,000, which was recorded in the quarter ended June 30, 2000.

In November  2000, as a result of revised  expectations  due to the inability to
negotiate mutually  agreeable  business terms with JDH, the Company  reevaluated
the  HealthExchange  asset purchase using the same valuation  methodologies  and
determined that there had been an impairment of the assets acquired. The revised
valuation valued the intangible assets acquired at $400,000.

In December 2000, in recognition of the sluggish growth in potential  customers,
and future  cash  requirements  to  continue  product  development,  the Company
decided to postpone further development of the  HealthExchange(TM)  products and
terminate the Atlanta  facility.  The residual  value of  intangible  assets was
written off.

As a result of the revised  valuation  of  intangible  assets  acquired  and the
revised  agreement and return of escrowed shares  described  above,  the Company
recognized charges of $3,288,000 for impairment of assets, $15,000 for write off
of fixed assets and a reduction to purchased research and development expense of
$1,026,000 in 2000. Amortization of $412,000 related to the acquisition has been
recognized during the twelve months ended December 31, 2000.

The Company and JDH also entered into a separate business  agreement whereby the
Company  continued  to provide  limited  services to JDH and its clients at fair
market value through the third quarter of 2001.

The following  table  reflects the impact of HECOM upon the Company's  year 2000
operations:

    Revenue                                               $    58,000
                                                          -----------

    Cost of sales                                              21,000
    Research and development                                  944,000
    Purchased research and development and write-off
                 of intangible assets                       8,430,000
    Amortization of intangibles                               412,000
    Selling, general and administrative                       900,000
                                                          -----------
    Total operating expenses                               10,707,000
                                                          -----------
    NET LOSS                                              $10,649,000
                                                          ===========

NOTE E--INCOME TAXES

There was no  provision  or benefit  for federal or state  income  taxes for the
three years ended December 31, 2002.

The differences between the actual income tax benefit and the amount computed by
applying the statutory  federal tax rate to the loss before incomes taxes are as
follows:


                                      F-13
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE E--INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
                                                                   December 31,
                                                      2002             2001             2000
                                                  ------------     ------------     ------------
<S>                                               <C>              <C>              <C>
Benefit computed at federal statutory rate        $   (995,180)    $ (1,765,851)    $ (6,016,300)
Permanent differences                                   93,775           69,123           60,591
State income tax benefit, net of federal
     tax effect at state statutory rate                (83,419)        (148,214)        (520,249)
Increase in valuation reserve                          946,016        1,844,942        6,475,958
Other                                                   38,808             --               --
                                                  ------------     ------------     ------------
                                                  $       --       $       --       $       --
                                                  ============     ============     ============
</TABLE>

The components of the deferred tax assets and liabilities are as follows:

                                                           December 31,
                                                      2002             2001
                                                  ------------     ------------
Deferred tax assets:
  Net operating loss carryforwards                $ 15,335,262     $ 14,038,041
  Fixed assets                                            --            156,052
  Allowance for doubtful accounts                       12,898           12,940
Deferred revenue                                        17,504             --
Other                                                    2,211             --
                                                  ------------     ------------
Total deferred tax assets                           15,367,875       14,207,033
Valuation allowance for deferred tax assets        (15,153,049)     (14,207,033)
                                                  ------------     ------------
                                                       214,826             --
Deferred tax liabilities:
  Fixed assets                                        (214,826)            --
Deferred income tax assets, net of                        --               --
  deferred tax liabilities                        $       --       $       --
                                                  ============     ============

At December 31, 2002, the Company has  approximately  $42,000,000 of federal net
operating  loss  carryforwards,  which begin to expire in 2012.

As a result of stock  issued  during 2000,  2001 and 2002,  the Company may have
experienced an ownership change as defined in Internal Revenue Code section 382.
As a result,  the Company's ability to use net operating loss  carryforwards and
certain other  deductions to offset future  taxable  income may be limited.  The
annual  limit is an amount  equal to the value of the  Company at the date of an
ownership change multiplied by approximately 5%. In addition,  as the ability to
generate  future  taxable income is highly  uncertain,  the Company has recorded
valuation allowance against all of its deferred tax assets.

NOTE F--RELATED PARTY TRANSACTIONS

In August 2002,  the Company  entered into an  unsecured  loan  agreement in the
amount of $50,000 with a director of the Company.  Principal  and  interest,  at
9.5% per annum on the unpaid principal,  was due on September 30, 2002. The note
holder  agreed to forego  repayment at September 30, 2002 and to amend the terms
of the note to be due on demand. The Company has not repaid the principal amount
of the note or the accrued interest thereon.

In August 2002,  the Company  entered into an  unsecured  loan  agreement in the
amount of $50,000 with a 5% shareholder of the Company.  Principal and interest,
at 9.5% per annum on the unpaid principal, was due on September 30, 2002. The


                                      F-14
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE F--RELATED PARTY TRANSACTIONS (CONTINUED)

note holder  agreed to forego  repayment at September  30, 2002 and to amend the
terms of the note to be due on demand.  The Company has not repaid the principal
amount of the note or the accrued interest thereon.

In June  2002 the  Company  accepted  non-revocable  equity  investments  in the
aggregate amount of $50,000 from four members of the Board of Directors on terms
to be set by a committee of  disinterested  directors,  such terms to be no more
favorable  than those  which  would have been  negotiated  at arms  length  with
unaffiliated third parties.  Funds received were recorded as a current liability
until the equity  investment  terms were finalized.  In October 2002, based upon
the  determination  of the  committee of  disinterested  directors,  the Company
completed the private placement by issuing to the four directors an aggregate of
167  shares  of Series E  Preferred  Stock at the rate of $300 per share for net
proceeds of $50,000.

In February,  March,  April and June 2002, the Company  borrowed an aggregate of
$475,000  pursuant to six separate  unsecured  short-term  loan  agreements with
National  Financial  Corp.,  a related  entity.  In  February,  May,  August and
September  2002, the Company fully repaid  principal  pursuant to four notes and
partially  repaid principal on one note in the aggregate amount of $412,000 plus
accrued  interest  thereon.  An unpaid principal amount of $63,000 plus interest
was due on  September  30,  2002.  National  Financial  Corp.  agreed  to forego
repayment at September 30, 2002 and to amend the terms of the notes to be due on
demand.  In October and  December  2002,  upon the demand of National  Financial
Corp.,  the Company  repaid the  remaining  principal on one note and  partially
repaid  the  remaining  note in the  aggregate  amount of $45,000  plus  accrued
interest thereon.  The outstanding  $18,000 principal of the remaining note plus
interest, at 9.5% per annum on the unpaid principal, is due on demand.

In March  2001,  the  Company  entered  into a loan  agreement  in the amount of
$400,000 with American  Medical  Finance,  Inc., a related party.  Principal and
interest,  at 9.5% per annum on the unpaid principal,  was due in March 2002. In
April 2001,  the Company  repaid the full amount of the note along with  accrued
interest thereon.

In 2000,  American  Medical Finance  acquired  100,000 shares of common stock at
$3.00 per share.  In 2002,  American  Medical Finance  transferred  ownership of
these and all  previously  acquired  shares  of the  Company's  common  stock to
National Financial Corporation. As a result, National Financial Corporation owns
a total 482,000 shares of the Company's  common stock or 4.3% of the outstanding
shares at December 31, 2002.

NOTE G--STOCKHOLDERS' EQUITY

During 2002, the Company  completed the private placement of 3,675,000 shares of
common  stock to  accredited  investors  at $0.20 per share for net  proceeds of
$735,000.  In  connection  with the private  placement,  the Company also issued
warrants to purchase an  aggregate  of  3,675,000  shares of common  stock.  The
warrants  contain an exercise  price of $0.20 per share and expire  between June
and December 2007.

In October 2002, the Company hired a new president and chief  executive  officer
and issued him  warrants  to acquire an  aggregate  of 200,000  shares of common
stock.  The  warrants  contain an exercise  price of $0.20 per share,  expire in
October 2007, and vest 50% in October 2003 and fully in October 2004.

In October 2002, the Company issued  warrants to acquire an aggregate of 500,000
shares of common stock to a  non-employee  in  connection  with an agreement for
professional services to be rendered.  The warrants contain an exercise price of
$0.20 per share,  were fully  vested on the date of grant,  expire in  September
2007, and become  exercisable 50% in September 2003 and fully in September 2004.
The warrants were valued at $0.08 per share based on the Black-Scholes valuation
method (using the following  assumptions:  life of five years, risk free rate of
2.68%, no dividends  during the term, and a volatility of .752). The expense was
recognized on the date of the grant.

In June 2002,  the Company  accepted  non-revocable  equity  investments  in the
aggregate amount of $50,000 from four members of the Board of Directors on terms
to be set by a committee of  disinterested  directors,  such terms to be no more
favorable  than those  which  would have been  negotiated  at arms  length  with
unaffiliated third parties.  Funds received were recorded as a current liability
until the equity  investment  terms were finalized.  In October 2002, based upon
the  determination  of the  committee of  disinterested  directors,  the Company
completed the private placement by issuing to the four Directors an aggregate of
167 shares of Series E  Convertible  Redeemable  Preferred  Stock (the "Series E
Preferred

                                      F-15
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

Stock") at the rate of $300 per share.  The Series E Preferred  Stock was issued
at a stated value of $300 per share.  Each share of Series E Preferred Stock may
be  converted  into 1,000  shares of common stock at the election of the holder.
The Company has the right, but not the obligation,  to redeem all or any portion
of the Series E Preferred  Stock in the event that the closing sale price of the
Company's common stock exceeds $.60 for twenty of any thirty consecutive trading
days. The Series E Preferred Stock does not accrue  dividends but is entitled to
a preference over the common stock on liquidation of the Company. Holders of the
Series E  Preferred  Stock have the right to vote  together  with the holders of
common stock on an as converted basis.

In June 2002,  the Company  issued  warrants to acquire an  aggregate  of 50,000
shares of common stock to a  non-employee  in  connection  with an agreement for
professional services to be rendered.  The warrants contain an exercise price of
$0.30 per share and, as  originally  issued,  were  scheduled  to expire in June
2003.  The  warrants  were valued at $0.07 per share based on the  Black-Scholes
valuation method (using the following  assumptions:  life of one year, risk free
rate of 2.12%,  no dividends  during the term,  and a volatility  of .566).  The
expense was  recognized on the date of the grant.  In October 2002,  the Company
entered into a new professional service agreement for the period October 1, 2002
through  December 31, 2002 and agreed to cancel the original warrant and issue a
replacement  warrant under similar terms, except that the expiration date of the
warrants  was extended to June 2007.  The new warrants  were valued at $0.07 per
share  based  on  the  Black-Scholes   valuation  method  (using  the  following
assumptions:  life of five years,  risk free rate of 2.68%, no dividends  during
the term,  and a volatility of .752).  The expense was recognized on the date of
the grant.

In May 2002,  the Company  completed  the private  placement  of 3,304 shares of
Series D Convertible Redeemable Preferred Stock (the "Series D Preferred Stock")
to  accredited  investors at $250 per share for net  proceeds of  $826,000.  The
Series D Preferred  Stock was issued at a stated  value of $250 per share.  Each
share of Series D Preferred  Stock may be converted  into 1,000 shares of common
stock at the  election  of the holder.  The  Company has the right,  but not the
obligation,  to redeem all or any portion of the Series D Preferred Stock in the
event that the closing sale price of the Company's common stock exceeds $.50 for
twenty of any thirty consecutive trading days. The Series D Preferred Stock does
not accrue  dividends  but is entitled to a preference  over the common stock on
liquidation  of the  Company.  Holders of the Series D Preferred  Stock have the
right to vote  together  with the  holders  of common  stock on an as  converted
basis.  A portion  of the  proceeds  of the sale was used to repay  $305,000  of
short-term loans incurred in February and March 2002.

In May 2002,  upon  election of a new  non-employee  director to the board,  the
Company  granted ten year options  exercisable  for 5,000 shares of common stock
under the Non-Employee Directors Plan. The option exercise price of $.30 was the
fair market  value of a share of the  outstanding  common  stock on the date the
options  were  granted.  The options vest to the extent of 50% one year from the
date of grant  and will  vest  fully on the  second  anniversary  of the date of
grant.

In April 2002 the Company negotiated a severance agreement with Bo W. Lycke, our
former  chief  executive  officer,  pursuant to which the Company  extended  the
exercise  period for 250,000 stock  options and warrants  issued to Mr. Lycke in
February  2002.  The  Company   recorded  a  $51,000   expense  related  to  the
modification of exercise terms.

In February 2002, upon election of a new non-employee director to the board, the
Company  granted ten year options  exercisable for 10,000 shares of common stock
under the Non-Employee Directors Plan. The option exercise price of $.35 was the
fair market  value of a share of the  outstanding  common  stock on the date the
options  were  granted.  The options vest to the extent of 50% one year from the
date of grant  and will  vest  fully on the  second  anniversary  of the date of
grant.

In February 2002, the Company  granted  employees the then remaining  options to
purchase  328,842  shares of common  stock under its 1997 Stock  Option Plan and
warrants to purchase an  additional  253,203  shares of common stock in exchange
for voluntary salary reductions.  The options and warrants contained an exercise
price of $0.35 per share,  the market price on the date of grant,  expire on the
tenth  anniversary of the grant, and vested 25% immediately on the date of grant
and an additional 25% on each third month anniversary of the date of grant.

In January  2002,  the Company  granted  employees  options under its 1997 Stock
Option Plan to purchase an  aggregate  of 456,000  shares of common  stock.  The
options  contain an exercise  price of $0.60 per share,  the market price on the
date of grant, expire on the tenth anniversary of the grant, and vested 100% one
year from the date of grant.

In December 2001, upon completion of our annual meeting, the Company granted ten
year options exercisable for an aggregate of 25,000 shares of common stock under
the  Non-Employee  Directors'  Plan. The option  exercise price of $0.50 was the
fair market  value of a share of the  outstanding  common  stock on the date the
options were granted.  The options vested to the extent of 50% one year from the
date of grant  and will  vest  fully on the  second  anniversary  of the date of
grant.


                                      F-16
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

In  December  2001,  the Company  issued in a private  placement  to  accredited
investors  660,000 shares of common stock,  including  440,000 shares  resulting
from  the  conversion  of 440  shares  of  Series  C 8%  Convertible  Redeemable
Preferred Stock ("Series C Preferred  Stock") at $0.70 per common share, for net
proceeds  of  $462,000.  The Series C  Preferred  Stock was issued at the stated
value of $700 per share.  No dividends  accrued  prior to March 31,  2002.  Each
share of Series C  Preferred  Stock was  automatically  convertible  into  1,000
shares of common stock upon approval of the shareholders,  which was received at
the annual  shareholders"  meeting  held on December  26,  2001.  Holders of the
Series C  Preferred  Stock have the right to vote  together  with the holders of
common stock on an as converted basis.

In June 2001, the Company issued 16,000 shares of common stock valued at $42,000
to New York Capital AG in connection with an agreement for professional services
to be rendered in 2001. The Company  recognized  expense of $42,000 for services
rendered.

In April  2001,  the  Company  entered  into an  agreement  with  McKesson  that
superseded  its  October  1999  agreement.  Under  the new  agreement,  McKesson
acquired  1,514,285  shares of common stock at $1.75 per share, for net proceeds
of $2,650,000,  and paid a one-time fee of $200,000.  The stock purchase warrant
originally  issued to  McKesson  in October  1999 was  cancelled  in April 2001.
Additionally,   the  new  agreement   eliminated  certain  Claimsnet   operating
requirements  to provide  dedicated  system  hosting,  operations,  and  support
services,  and eliminated future McKesson license and subscription fees. The new
agreement retains provisions for the payment of transaction fees by McKesson and
expands the scope of  transactions  that may be processed  under the license and
the scope of other  business  opportunities  which the Company and  McKesson may
jointly pursue.  No registration  rights were granted to McKesson for the shares
acquired.  The  Company  received  27% or  $366,000  of its 2001  revenues  from
McKesson, $288,000 of which was related to software license and support revenues
under the McKesson Development and Services Agreement,  and incurred $352,000 of
expense for services provided by McKesson.

Pursuant to the October 1999  agreement,  through March 31, 2001 the Company (a)
received payments in the aggregate amount of $2,202,000 (of which  approximately
$1,200,000 was received in December 2000) related to development and license fee
provisions, which were recorded as deferred revenue and were being accounted for
by amortizing the total amount,  received and to be received,  of  approximately
$4,500,000  ratably over the expected  contract life of 65 months,  (b) expended
$428,000 related to development and implementation  costs, which was recorded as
software development costs on the balance sheet, and was being amortized ratably
over the expected  contract  period of 65 months,  and  (c)recorded  in equity a
capital  contribution and an offsetting deferred sales discount in the amount of
$1,700,000  for the  imputed  value of the  warrant,  which was being  amortized
ratably over the expected  contract  period of 65 months.  As of March 31, 2001,
the Company had  amortized  $1,187,000  of the deferred  revenue  into  revenue,
$112,000 of the deferred  development costs into cost of revenues,  and $445,000
of the deferred sales discount as a reduction of revenues,  leaving  balances of
$1,015,000,  $316,000 and  $1,255,000,  respectively.  As of March 31, 2001, the
Company accrued the $200,000 payment,  received in April 2001 in connection with
the contract  modification,  as additional  deferred revenue. As a result of the
April 2001 modification of the October 1999 agreement with McKesson, as of March
31, 2001 the Company offset the remaining  deferred sales discounts  against the
remaining deferred revenue.  Although the new agreement with McKesson permits it
to continue to use the software, which the Company had developed specifically to
process  its  transactions,  there was no  requirement  for  McKesson to use the
system and no ability to project future transaction revenues.

In March 2001, the Company  completed the private placement of 400,000 shares of
common  stock to an  accredited  investor at $1.75 per share for net proceeds of
$596,000.  In April 2001, the Company issued  warrants to purchase 40,000 shares
of common  stock to  financial  advisors  that  assisted  the  Company  with the
negotiation  and  structuring of such  investment.  The warrants are immediately
exercisable  at a price of $1.75 per share and expire on the second  anniversary
of the date of grant.  The stock price on the date of grant was $1.74 per share.
The warrants  are fully  vested and issued for services  rendered in the current
period. The Company recognized a charge to earnings of $57,000,  which was equal
to the imputed  value of the  warrants,  estimated  at $1.41 per share using the
Black-Scholes  valuation  method (using the following  assumptions:  life of two
years,  risk free rate of 5.10  percent,  no  dividends  during the term,  and a
volatility of 1.5).


                                      F-17
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

In January 2001, the Company granted  employees options to purchase an aggregate
of 385,500  shares of common stock under the 1997 Stock Option Plan. The options
were  issued  at a price of $1.25 per  share,  the  market  price on the date of
grant,  expire  on the tenth  anniversary  of the  grant,  and vest on the first
anniversary of the grant.

In 2000, the Company sold 1,370,000 shares of common stock in private  placement
to various accredited  investors at prices between $3.00 and $3.50 per share for
proceeds of $4,227,000.  In connection  with the  financing,  the Company issued
warrants to purchase  270,000  shares of common  stock at a price of $4.60 for a
period of one year and warrants to purchase  270,000 shares of common stock at a
price of $5.60 for a period of two years.

The Company also issued  1,200,000  shares valued at $6,376,000 for the purchase
of assets from VHx Company. Subsequent adjustments pursuant to provisions of the
asset  purchase  agreement  resulted in the return of 888,000 shares to treasury
stock at a value of $1,415,000  and the issuance from treasury  stock of 244,000
shares  at a  value  of  $389,000  to  JDH in  forgiveness  of  all  the  unpaid
obligations of VHx Company to JDH under a development agreement.

In October 2000, upon completion of the Company's annual meeting and pursuant to
the terms of the Directors' Plan, options exercisable for an aggregate of 25,000
shares of common  stock  were  granted  under the  Directors'  Plan.  The option
exercise  price of $2.375 was the fair market  value of the common  stock on the
date the options were granted.

In June 2000, the Company granted certain employees warrants to purchase 178,250
shares  of common  stock at $3.00 per  share,  the  market  price on the date of
grant.  The warrants  expire on the 10th  anniversary  of the grant,  and become
exercisable one year from the grant date.

STOCK BASED COMPENSATION ARRANGEMENTS

The  Company's  1997 Plan  provides  for the  issuance to  employees,  officers,
directors,  and consultants of incentive and/or non-qualified options to acquire
1,307,692  shares of common  stock.  The options are to be issued at fair market
value, as defined,  and generally vest 25% each year from the date of the option
grant.   Options   generally  expire  10  years  from  the  date  of  grant  and
automatically expire on termination of employment.

The  Company's  Directors'  Plan  provides  for  the  issuance  to  non-employee
directors of options to acquire 361,538 shares of common stock.  The options are
to be issued at fair market value, as defined, and vest on the first anniversary
from the date of the option grant.  Options  generally  expire 10 years from the
date of grant and  automatically  expire  one year from the date upon  which the
participant ceases to be a Director.

The following  table  summarizes  the stock option  activity under the two Plans
related to the Company:
<TABLE>
<CAPTION>
                                                                  PER SHARE EXERCISE       WEIGHTED AVERAGE
                                              NUMBER OF SHARES           PRICE              EXERCISE PRICE
                                              ----------------    ------------------       ----------------
<S>                                           <C>                 <C>                      <C>
 Outstanding options-December 31, 1999             519,750             7.00-8.80                  7.70
     Granted                                       220,000             2.38-8.00                  7.36
     Expired                                      (221,837)            7.00-8.00                  7.46
                                              ----------------    ------------------       ----------------
 Outstanding options-December 31, 2000             517,913             2.38-8.80                  7.66
     Granted                                       435,500             0.50-1.75                  1.21
     Expired                                      (273,813)            1.25-8.00                  6.20
                                              ----------------    ------------------       ----------------
 Outstanding options-December 31, 2001             679,600            $0.50-8.80                $ 4.11
     Granted                                       799,842             0.30-0.60                  0.49
     Expired                                      (418,875)            0.50-8.80                  1.96
                                              ----------------    ------------------       ----------------
 Outstanding options-December 31, 2002           1,060,567            $0.30-8.00                $ 2.23
                                              ================    ==================       ================
 Options exercisable-December 31, 2002             728,886            $0.35-8.00                $ 2.60
                                              ================    ==================       ================
</TABLE>


                                      F-18
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)

Outstanding  options as of December 31, 2002, had a weighted  average  remaining
contractual life of approximately 8.3 years and a weighted average fair value at
issuance of $0.36  based on the  Black-Scholes  value  method.  No  compensation
expense  has been  recognized  for  options  granted to  employees  in 2002.  At
December 31, 2002,  options available for grant under the Company's 1997 Plan at
December 31, 2002,  were 369,625,  and under the Company's  Directors' Plan were
239,038.

The following table summarizes the warrant activity related to employee grants:
<TABLE>
<CAPTION>
                                                                                       WEIGHTED
                                                NUMBER OF          PER SHARE           AVERAGE
                                                 SHARES          EXERCISE PRICE     EXERCISE PRICE
                                              --------------     --------------     --------------
<S>                                           <C>                <C>                <C>
  Outstanding warrants-January 1, 2000                 -               $ -                  $ -
      Granted                                    178,250              3.00                 3.00
      Expired                                   (33,800)              3.00                 3.00
                                              --------------     --------------     --------------
  Outstanding warrants-December 31, 2000         144,450              3.00                 3.00
      Granted                                          -                -                     -
      Expired                                   (51,200)              3.00                 3.00
                                              --------------     --------------     --------------
  Outstanding warrants-December 31, 2001          93,250              $3.00              $ 3.00
      Granted                                    453,203            0.20-0.35              0.28
      Expired                                   (87,226)            0.35-3.00              1.85
                                              --------------     --------------     --------------
  Outstanding warrants-December 31, 2002         459,227           $0.20-0.35            $ 0.54
                                              ==============     ==============     ==============
  Warrants exercisable-December 31, 2002         259,227           $0.35-3.00            $ 0.80
                                              ==============     ==============     ==============
</TABLE>

Outstanding  employee  warrants as of December 31, 2002, had a weighted  average
contractual life of approximately 6.6 years and a weighted average fair value at
issuance of $0.23 based on the Black-Scholes value method.

Approximately  $98,000 of expense  has been  recognized  in 2002 for options and
warrants issued as consideration for services provided by non-employees.


NOTE H--NOTES PAYABLE TO RELATED PARTIES AND OTHER NOTE PAYABLE

 The following is a summary of notes payable at December 31, 2002:

 Note payable to a Director.  Principal due
     on demand; unsecured.  Interest payable at 9.5%.                $  50,000
 Note payable to a 5% shareholder; unsecured.  Principal due
     on demand; unsecured.  Interest payable at 9.5%.                   50,000
 Note payable to NFC, a related party.  Principal due
     on demand; unsecured. Interest payable at 9.5%.                    18,066
 Note payable to a 5% shareholder. Principal due August 31,
     2005; unsecured.  Interest payable at 8%.                          10,000
 Note payable. Principal due August 31,
     2005; unsecured.  Interest payable at 8%                           25,000
                                                                     ---------
     Total                                                           $ 153,066
                                                                     =========

All unpaid interest has been accrued.


                                      F-19
<PAGE>

                      CLAIMSNET.COM INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2002, 2001, AND 2000

NOTE H--NOTES PAYABLE TO RELATED PARTIES AND OTHER NOTE (CONTINUED)

The following are the maturities of notes payable for years ended December 31:

       2003                              $ 118,066
       2004                                      -
       2005                                 35,000

                                         ---------
       Total                             $ 153,066
                                         =========


NOTE I--COMMITMENTS AND CONTINGENCIES

The Company leases office space under a lease agreement that expires on June 30,
2003. Rent expense totaled  $147,000,  $184,000 and $492,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.  The Company also leases servers
and Web server  management  facilities  under an agreement that expires in 2005.
The Company's aggregate lease commitments are shown below.

                   2003             $  303,704
                   2004             $  247,704
                   2005             $  185,778

From time to time in the normal  course of  business,  the Company is a party to
various  matters  involving  claims or  possible  litigation.  One such  dispute
relates to a $500,000 amount  associated with the acquisition of HECOM assets in
April 2000,  which is accrued in current  liabilities  as of December  31, 2002.
Management  believes the ultimate  resolution  of these  matters will not have a
material  adverse  effect on the  Company's  financial  position  or  results of
operations.

NOTE J--RETIREMENT PLAN

The Company utilizes a third party for the processing and  administration of its
payroll  and  benefits.  Under  the  agreement,  the  third  party is  legally a
co-employer  of all of the Company's  employees,  which are covered by the third
party's 401(k)  retirement  plan.  Under the plan,  employer  contributions  are
discretionary.  The  Company  has  made no  contributions  to the  plan  through
December 31, 2002.

NOTE K--FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  No. 107,  "Disclosure  About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate.  Cash,
accounts receivable,  accounts payable,  notes payable and other liabilities are
carried at amounts that reasonably approximate their fair values.

NOTE L--SUBSEQUENT EVENTS

In January, February and March 2003, the Company completed the private placement
of 950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $189,000. In connection with the private placement,  the Company
also issued warrants to purchase an aggregate of 950,000 shares of common stock.
The warrants  contain an exercise  price of $0.20 per share and expire  December
31, 2007.  The private  placement  included  100,000 shares of common stock plus
warrants to acquire an additional  100,000  shares of common stock  purchased by
National Financial  Corporation and 500,000 shares of common stock plus warrants
to acquire an  additional  500,000  shares of common  stock  purchased by Elmira
United.



                                      F-20
<PAGE>

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

On February 20, 2003 we discontinued  the engagement of Ernst & Young LLP, which
served as our  independent  auditors  since 1999.  The report  issued by Ernst &
Young LLP on the financial  statements  for the year ended December 31, 2001 did
not  contain  an  adverse  opinion  nor a  disclaimer  of  opinion,  and was not
qualified  or modified as to audit scope or  accounting  principles.  The report
issued  by Ernst & Young  LLP on our  financial  statements  for the year  ended
December 31, 2001 was modified to include an  explanatory  paragraph  describing
conditions  that  raised  substantial  doubt  about our ability to continue as a
going concern.  Based on the  recommendation of our Audit Committee of the Board
of Directors, the Board approved the decision to change independent auditors. In
connection  with its audits for the years  ended  December  31, 2000 and 2001and
through February 20, 2003, there were no disagreements with Ernst & Young LLP on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to
make  reference  thereto in their report on the  financial  statements  for such
years or such  interim  periods.  Ernst & Young LLP  furnished  us with a letter
addressed to the Commission stating that it agrees with the above statements.  A
copy of such letter,  dated February 26, 2003, is filed as Exhibit 1 to the Form
8-K, dated February 26, 2003.

We engaged  King Griffin & Adamson  P.C. as our new  independent  auditors as of
February 20, 2003. Our Audit Committee  approved the engagement.  During the two
most recent  fiscal years and through  February 20, 2003,  we have not consulted
with King Griffin & Adamson P.C. with respect to the  application  of accounting
principles to a specified transaction, either completed or proposed, or the type
of  audit  opinion  that  might  be  rendered  on  our  consolidated   financial
statements,  or any other  matters  or  reportable  events as set forth in Items
304(a)(1)(v)  and (ii) of Regulation S-K. We allowed King Griffin & Adamson P.C.
to review the  aforementioned  Form 8-K before it was filed with the Commission.
King Griffin & Adamson,  P.C. has not furnished us with a letter  containing any
new information,  clarification,  or disagreement with the information set forth
herein.

On March 14, 2003,  King Griffin & Adamson P.C.  resigned to allow its successor
entity, KBA Group LLP, to be engaged as our independent public accountants. King
Griffin & Adamson P.C. had not issued  reports on our financial  statements  for
any prior  fiscal  periods nor has King  Griffin & Adamson  P.C.  completed  any
reviews of our interim financial  statements since being engaged on February 20,
2003. From February 20, 2003, through March 14, 2003 there were no disagreements
with King  Griffin & Adamson  P.C.  on any matter of  accounting  principles  or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements,  if not  resolved to the  satisfaction  of King Griffin & Adamson
P.C.,  would have caused King Griffin & Adamson P.C. to make  reference  thereto
for such interim periods. King Griffin & Adamson P.C. furnished us with a letter
addressed  to the  Commission  stating  whether or not it agrees  with the above
statements.  A copy of such letter,  dated March 14,  2003,  is filed as Exhibit
16.1 to the Form 8-K, dated March 17, 2003.

Our Audit Committee  approved the engagement of KBA Group LLP and we engaged KBA
Group LLP as our new  independent  public  accountants  as of March 14, 2003. We
allowed KBA Group LLP to review the aforementioned  Form 8-K before it was filed
with the  Commission.  King Griffin & Adamson  P.C. has not  furnished us with a
clarification or disagreement with the information set forth herein.



                                       50
<PAGE>

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

Our directors and executive officers,  their ages, and their positions held with
us are as follows:

 NAME                      AGE       POSITION
 ----                      ---       --------
 Don Crosbie                59       President, Chief Executive Officer,
                                       Chairman of the Board of Directors and
                                       Class I Director
 Paul W. Miller             46       Chief Operating Officer, Chief Financial
                                       Officer and Class II Director
 Alfred Dubach              55       Vice Chairman of the Board of Directors
                                       and Class I Director
 John C. Willems, III       47       Class II Director
 Jeffry M. Black            46       Class I Director
 Thomas Michel              51       Class II Director

The  following is certain  summary  information  with  respect to our  executive
officers and directors.

DON CROSBIE  joined us in October 2002 from Xactimed  where he was President and
CEO.  Xactimed is a claims  processing  and  clearinghouse  company  serving the
hospital  market.  In the year he was at  Xactimed  the  company  experienced  a
dramatic  turnaround,  with  revenue  growing  150% over the  prior  year and an
operating  profit was achieved as compared to significant  operating  losses for
the prior year.  From September 2000 to July 2001, Mr. Crosbie served as CFO and
President of North American  Operations of Blue Wave Systems, a high density DSP
board supplier to the telecom  infrastructure  market,  including media gateways
and 2 1/2 and 3 G  wireless.  He joined  Blue Wave  with a  corporate  strategic
direction to identify and complete a sale of the company.  This was accomplished
in July 2001 with the sale of the company to  Motorola  for $125  million.  From
September 1999 to June 2000,  Mr.  Crosbie  served as President,  COO and CFO of
Ypay.com,  an internet start up company in the free  ISP/media rich  advertising
space.  From  June  1997  to  December  1998,  Mr.  Crosbie  served  as  CEO  of
Rheumatology Research  International,  a Site Management Organization performing
clinical  trials for  pharmaceutical  and biotech  companies in pre FDA approval
trials for new arthritis drugs.  Prior to Rheumatology  Research  International,
Mr.  Crosbie  served as Founder,  Chairman and CEO of ComVest  Partners Inc., an
institutional research boutique with an emphasis on networking,  wireless, voice
and remote access;  and Executive Vice President and Chief Financial  Officer of
InterVoice Inc, a high technology provider of customized voice response systems.

PAUL W. MILLER, a Certified Public Accountant, has served as our Chief Financial
Officer since November 1997, and our Chief Operating Officer since October 2000.
From March 2002 to October 2002,  Mr. Miller also served as our Chief  Executive
Officer.  From  September  1995 to  October  1997,  Mr.  Miller  served as Chief
Financial  Officer  and  Vice  President  of  Quality  Management  Services  for
Sweetwater Health Enterprises,  Inc., a NCQA accredited credentials verification
organization  and  commercial  software  firm  serving  the  managed  healthcare
industry.  From April 1991 to May 1995,  Mr.  Miller  served as Chief  Financial
Officer and Secretary of Quantra Corporation,  formerly, Melson Technologies, an
information  systems company serving the commercial real estate  industry.  From
January  1984 to  February  1991,  Mr.  Miller held a variety of  financial  and
operations  management positions in the independent clinical laboratory industry
with  SmithKline  Beecham  Clinical  Laboratories,  Inc.  and Nichols  Institute
Laboratories North Texas, Ltd.

ALFRED  DUBACH has served as the Vice  Chairman of our board of directors  since
January  2002.  He has been an  independent  business  consultant  and financial
advisor in Zurich,  Switzerland for more than 10 years.  Since January 2002, Mr.
Dubach  has  been an  independent  business  consultant  working  with  non-food
consumer  goods,  luxury  goods,  cosmetics,  retail  and  wholesale,   banking,
e-banking,  e-commerce,  and pharmaceuticals.  From March 2001 to February 2002,
Mr.  Dubach served as the Chief  Investment  Officer for  Swissquote  Bank and a
member of the Executive  Management  Team that developed the first pure Internet
Bank in Switzerland.  CASH magazine voted  Swissquote Bank the best Swiss online
broker in Autumn 2001 and the bank reached a market  share of twenty  percent by
the end of 2001.  From June 1994 to February  2001, Mr. Dubach was a Director of
Credit  Suisse,  where he served as a member of the  project  team for the legal
integration of Volksbank and Credit Suisse as well as the  restructuring  of the
Credit Suisse  Group.  Prior to that,  Mr.  Dubach served in several  capacities
within management and executive  management in the  pharmaceutical  industry and
other leading Swiss banks (Louis Widmer Intl,  Union Bank of Switzerland,  Swiss
Volksbank).


                                       51
<PAGE>

JOHN C. WILLEMS,  III has served as a director of our Company since 1998 and has
been our legal counsel since April 1996.  Since  September 1993, Mr. Willems has
been an attorney with the law firm of McKinley,  Ringer & Zeiger, PC, in Dallas,
Texas, practicing in the area of business law. From January 1992 to August 1993,
Mr. Willems was an attorney in the law firm of Settle & Pou, PC, also located in
Dallas, Texas.

JEFFREY M. BLACK was elected a director of our Company in February  2002. He has
been  engaged  for over 20 years in  advising  and  developing  publicly  traded
companies in strategic  planning and procedures for many aspects  concerning the
business of operating in a public arena.  For the past six years,  Mr. Black has
served as President  of  Investors  Communications  Group,  Inc.  (ICG) a public
relations firm. ICG focuses on helping  companies  develop and implement  public
relation programs for the investment /broker community,  consulting on financing
for new capital infusion and planning/implementing acquisition strategies.

THOMAS MICHEL was elected as a director of our Company in February  2002.  Since
1996, Mr. Michel has been a Principal of Switzerland based CIMA Consulting,  AG,
of which  he was a  founder,  and  which  provides  financial  and fund  raising
services  in the form of  venture  capital,  private  equity,  and  bridge  loan
facilities.  From 1980 to 1996,  he served in various  capacities  at Swiss Bank
Corporation in Zurich, Switzerland.  Mr. Michel currently serves on the Board of
Directors  for Best 243 AG, IQUBE AG and Spirit of Covey AG, a  manufacturer  of
natural skincare products.

In March 2002, Mr. Bo W. Lycke resigned as President and Chief Executive Officer
and in October 2002 he resigned as Chairman of the Board of  Directors  and as a
Director of our  Company.  In October  2002,  Mr.  Steve  Hedlund  resigned as a
director of our Company.  In January 2003, Ms. Patricia Davis,  who had been our
Senior Vice  President of Sales,  Marketing  and Business  Development,  and Mr.
Jeffrey P. Baird, who had been our Senior Vice President of Technology,  left us
as part of downsizing  and  reorganization.  Messrs.  Crosbie and Miller are our
executive officers.

STRUCTURE OF THE BOARD OF DIRECTORS

The Board of Directors  is divided  into two classes with each class  consisting
of,  as  nearly  as  possible,   one-half  of  the  total  number  of  directors
constituting the entire board of directors.  The Class I directors currently are
Messrs. Crosbie, Dubach and Black, whose terms expire at the next annual meeting
of stockholders,  which is to be held in 2003. The Class II directors  currently
are Messrs.  Miller,  Willems,  and Michel,  whose terms expire at the following
annual  meeting of  stockholders.  Each  director  is elected  for a term of two
years,  except  when the  election  is by the Board to fill a vacancy,  in which
case, the director's term expires at the next annual meeting of stockholders.

There are no family relationships among our directors and executive officers.

ITEM 11. EXECUTIVE COMPENSATION

The  following  table  sets  forth the  compensation  paid or  accrued by us for
services  rendered in all  capacities  during the years ended December 31, 2002,
2001, and 2000 by the chief executive  officer and each of the other most highly
compensated  executive  officers of our Company who received  compensation of at
least $100,000 during the year ended December 31, 2002.
<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE
                                               ANNUAL COMPENSATION
                                                                                      SECURITIES
                                                                                      UNDERLYING
                                                                                       OPTIONS/         OTHER
NAME AND PRINCIPAL POSITION                         YEAR      SALARY       BONUS       WARRANTS      COMPENSATION
---------------------------------------------       ----     --------     -------     ----------     ------------
<S>                                                 <C>      <C>          <C>         <C>            <C>
Don Crosbie(1).                                     2002     $ 21,538           -        200,000               -
  President and Chief Executive Officer

Paul W. Miller                                      2002      124,231           -        189,285               -
  Chief Operating Officer and Chief                 2001      153,173      35,742         50,000               -
   Financial Officer                                2000      130,192       7,723         12,000               -

Bo W. Lycke(2)                                      2002       56,827           -        324,000         111,343
 Formerly Chairman of the Board of Directors,       2001      267,500           -         75,000               -
  President and Chief Executive Officer             2000      263,173      11,891         22,500               -

Patricia Davis(3)                                   2002      127,861           -        107,143               -
  Formerly Senior Vice President of Sales,          2001      143,173      11,029         50,000               -
  Marketing and Business Development                2000      109,680       3,482         12,000               -

Jeffrey P. Baird(4)                                 2002      131,923           -        107,143               -
  Formerly Senior Vice President of                 2001       67,308      16,381              -               -
  Technology
</TABLE>


                                       52
<PAGE>

(1)      Mr. Crosbie joined us in October 2002.
(2)      Mr. Lycke  resigned from his position as President and Chief  Executive
         Officer in March 2002. Other compensation is comprised of cash payments
         due pursuant to a severance  agreement  entered into with Mr. Lycke, of
         which  payments  aggregating  $38,891  have been paid to Mr.  Lycke and
         payments aggregating $72,451 are delinquent.
(3)      Mrs. Davis ceased being employed by us in January 2003.
(4)      Mr.  Baird  joined us in June 2001 and ceased  being  employed by us in
         January 2003.

The  following  table  provides  information  on the  value of each of the named
executive officers' options at December 31, 2002:

FISCAL YEAR AND FISCAL YEAR-END OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
                                                       NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                                      UNDERLYING UNEXERCISED     IN THE MONEY OPTIONS/
                                                        OPTIONS/WARRANTS AT           WARRANTS AT
                           SHARES                      DECEMBER 31, 2002 (#)     DECEMBER 31, 2002 ($)
                          ACQUIRED        VALUE       ----------------------
                         ON EXERCISE     REALIZED          EXERCISABLE/               EXERCISABLE/
 NAME                        (#)           ($)            UNEXERCISABLE              UNEXERCISABLE
 -------------------     -----------     --------     ----------------------     ---------------------
<S>                      <C>             <C>          <C>                        <C>
 Don Crosbie                 --             --                -- / 200,000              -- / 8,000
 Bo W. Lycke                 --             --           250,000 / --                   -- / --
 Paul W. Miller              --             --           213,785 / 87,500               -- / --
 Patricia Davis              --             --           125,143 / 52,000               -- / --
 Jeffrey P. Baird            --             --            57,143 / 50,000               -- / --
</TABLE>

All options  were  granted at an exercise  price not less than the fair value of
the common stock on the date of the grant.

The value of  unexercised  in the money  warrants for Mr. Crosbie was calculated
based on the closing price of our common stock on December 31, 2002,  $.24.  All
other stock  options  and  warrants  for the named  executive  officers  contain
exercise prices greater than $.24.

DIRECTOR COMPENSATION

During the year ended December 31, 2002,  directors received no compensation for
their  services  other than  reimbursement  of expenses  relating  to  attending
meetings of the board of directors.

DIRECTORS' STOCK OPTION PLAN (THE "DIRECTORS' PLAN")

In April 1998, we adopted the Directors' Plan to tie the compensation of outside
(non-employee)  directors  to  future  potential  growth  in our  earnings,  and
encourage  them to remain on our board of  directors,  to  provide  them with an
increased  incentive to make significant and extraordinary  contributions to our
long-term  performance  and  growth,  and to align their  interests  through the
opportunity   for  increased  stock   ownership,   with  the  interests  of  our
stockholders.  Only outside  directors are eligible to receive options under the
Directors' Plan.

An  aggregate  of 361,538  shares of common  stock are  reserved for issuance to
participants  under the  Directors'  Plan.  In the event of any  changes  in the
common stock by reason of stock dividends, split-ups, recapitalization, mergers,
consolidations,  combinations,  or  other  exchanges  of  shares  and the  like,
appropriate  adjustments will be made by the board of directors to the number of
shares of common stock  available for issuance  under the  Directors'  Plan, the
number of shares  subject to  outstanding  options,  and the exercise  price per
share of outstanding  options,  as necessary  substantially  to preserve  option
holders' economics interests in their options.


                                       53
<PAGE>

The period for  exercising  an option ends ten years from the date the option is
granted. With the exception of those options to purchase 80,000 shares of common
stock  issued in April 1999,  which were fully  exercisable  in May 1999,  fifty
percent of the options  granted become  exercisable on the first  anniversary of
the  date of  grant  with  the  remainder  becoming  exercisable  on the  second
anniversary  of the date of grant.  During the period an option is  exercisable,
the  option  holder  may  pay  the  purchase   price  in  cash  or,  under  some
circumstances, by surrender of shares of common stock, valued at their then fair
market value on the date of exercise, or by a combination of cash and shares.

Shares  subject to an option  which has not been  exercised  at the  expiration,
termination,  or  cancellation  of an option will be available for future grants
under the Directors' Plan, but shares  surrendered as payment for an option,  as
described  above will not again be available for use under the Directors'  Plan.
As of December 31, 2002 there were outstanding  options to purchase an aggregate
of 122,500 shares at exercise prices ranging from $.30 to $8.00 per share.

Unless earlier  terminated,  the Directors'  Plan will terminate on December 31,
2007.

1997 STOCK OPTION PLAN

In April 1997,  our board of directors and  stockholders  adopted the 1997 Plan.
The 1997 Plan  provides  for the grant of options to  purchase  up to  1,307,692
shares of common stock to our employees,  officers,  directors, and consultants.
Options may be either  "incentive stock options" or non-qualified  options under
the  Federal  tax laws.  Incentive  stock  options  may be  granted  only to our
employees,  while non-qualified options may be issued to non-employee directors,
consultants, and others, as well as to our employees.

The  1997  Plan is  administered  by  "disinterested  members"  of the  board of
directors or the compensation committee, who determine,  among other things, the
individuals who shall receive  options,  the period during which the options may
be exercised, the number of shares of common stock issuable upon the exercise of
each option, and the option exercise price.

Subject to some exceptions, the exercise price per share of common stock subject
to an  incentive  option may not be less than the fair market value per share of
common stock on the date the option is granted.  The per share exercise price of
the common stock subject to a  non-qualified  option may be  established  by the
board of directors,  but shall not, however, be less than 85% of the fair market
value per share of common stock on the date the option is granted. The aggregate
fair market value of common stock for which any person may be granted  incentive
stock options which first become exercisable in any calendar year may not exceed
$100,000 on the date of grant.

No stock option may be transferred by an optionee other than by will or the laws
of descent and distribution, and, during the lifetime of an optionee, the option
will be  exercisable  only by the  optionee.  In the  event  of  termination  of
employment or engagement  other than by death or  disability,  the optionee will
have no more than three months after such termination  during which the optionee
shall be entitled to exercise the option to the extent  exercisable  at the time
of  termination,  unless  otherwise  determined by the board of directors.  Upon
termination  of  employment  of an optionee by reason of death or permanent  and
total disability,  the optionee's incentive stock options remain exercisable for
one  year  to the  extent  the  options  were  exercisable  on the  date of such
termination.  Options  may not be granted  under the 1997 Plan beyond a date ten
years  from the  effective  date of the 1997 Plan.  Subject to some  exceptions,
holders of incentive  stock options  granted under the 1997 Plan cannot exercise
these options more than ten years from the date of grant.  Options granted under
the 1997 Plan  generally  provide for the payment of the exercise  price in cash
and may  provide  for the  payment of the  exercise  price by  delivery to us of
shares of common stock already owned by the optionee  having a fair market value
equal to the exercise price of the options being exercised,  or by a combination
of these methods.

Any unexercised options that expire or that terminate upon an employee's ceasing
to be employed by us become available again for issuance under the 1997 Plan.

The following table summarizes the stock option activity under the 1997 Plan and
the Directors' Plan through  December 31, 2002 (none of the options granted have
been exercised):


                                       54
<PAGE>
<TABLE>
<CAPTION>
                                                                PER SHARE EXERCISE       WEIGHTED AVERAGE
                                           NUMBER OF SHARES           PRICE               EXERCISE PRICE
                                           ----------------     ------------------       ----------------
<S>                                        <C>                  <C>                      <C>
 Outstanding options-January 1, 1999                  -            $        -                $    -
     Granted                                    562,500             7.00-8.80                  7.73
     Expired                                   (42,750)               8.00                     8.00
                                           ----------------     ------------------       ----------------
 Outstanding options-December 31, 1999          519,750             7.00-8.80                  7.70
     Granted                                    220,000             2.38-8.00                  7.36
     Expired                                  (221,837)             7.00-8.00                  7.46
                                           ----------------     ------------------       ----------------
 Outstanding options-December 31, 2000          517,913             2.38-8.80                  7.66
     Granted                                    435,500             0.50-1.75                  1.21
     Expired                                  (273,813)             1.25-8.00                  6.20
                                           ----------------     ------------------       ----------------
 Outstanding options-December 31, 2001          679,600            $0.50-8.80                $ 4.11
     Granted                                    799,842             0.30-0.60                  0.49
     Expired                                  (418,875)             0.50-8.80                  1.96
                                           ----------------     ------------------       ----------------
 Outstanding options-December 31, 2002        1,060,567            $0.30-8.00                $ 2.23
                                           ================     ==================       ================
 Options exercisable-December 31, 2002          728,886            $0.35-8.00                $ 2.60
                                           ================     ==================       ================
</TABLE>

Outstanding  options as of December 31, 2002, had a weighted  average  remaining
contractual life of approximately 8.3 years and a weighted average fair value at
issuance of $0.36 based on the Black-Scholes value method.


WARRANTS

The  Company  has from  time to  time,  issued  warrants  to its  employees  and
directors.

The following table summarizes the warrant activity related to employee grants:
<TABLE>
<CAPTION>
                                                                       PER SHARE EXERCISE     WEIGHTED AVERAGE
                                                  NUMBER OF SHARES           PRICE             EXERCISE PRICE
                                                  ----------------     ------------------     ----------------
<S>                                               <C>                  <C>                    <C>
 Outstanding warrants-January 1, 2000                        -              $   -                 $    -
     Granted                                           178,250               3.00                   3.00
     Expired                                          (33,800)               3.00                   3.00
                                                  ----------------     ------------------     ----------------
 Outstanding warrants-December 31, 2000                144,450               3.00                   3.00
     Granted                                                 -                 -                       -
     Expired                                          (51,200)               3.00                   3.00
                                                  ----------------     ------------------     ----------------
 Outstanding warrants-December 31, 2001                 93,250               $3.00                $ 3.00
     Granted                                           453,203             0.20-0.35                0.28
     Expired                                          (87,226)             0.35-3.00                1.85
                                                  ----------------     ------------------     ----------------
 Outstanding warrants-December 31, 2002                459,227            $0.20-0.35              $ 0.54
                                                  ================     ==================     ================
 Warrants exercisable-December 31, 2002                259,227            $0.35-3.00              $ 0.80
                                                  ================     ==================     ================
</TABLE>

Outstanding  employee  warrants as of December 31, 2002, had a weighted  average
contractual life of approximately 6.6 years and a weighted average fair value at
issuance of $0.23 based on the Black-Scholes value method.


                                       55
<PAGE>

No options or warrants were  exercised  during 2002.  The  following  table sets
forth  information  with respect to options and warrants  granted during 2002 to
the individuals set forth in the Summary Compensation Table above:
<TABLE>
<CAPTION>
                                                         INDIVIDUAL GRANTS

                         Number of      % of Total                                         Potential Realizable
                        Securities     Options and                                        Value at Assumed Annual
                        Underlying       Warrants                                          Rates of Stock Price
                        Options and     Granted to      Exercise                          Appreciation for Option     Alternative
                         Warrants      Employees in      Price         Expiration           or Warrant Term (1)       Grant Date
 Name                     Granted       Fiscal Year    ($/Share)          Date               5%             10%        Value (2)
 ------------------     -----------    ------------    ---------    -----------------     --------       --------     -----------
<S>                       <C>              <C>         <C>          <C>                   <C>            <C>          <C>
 Don Crosbie              200,000          21.2%         $0.20       October 20, 2007     $ 25,156       $ 63,750         $   -

 Paul W. Miller           189,288          20.0        0.35-0.60     January 2, 2012-       53,456        135,468             -
                                                                    February 21, 2012

 Bo W. Lycke              325,000          34.4        0.35-0.60     January 2, 2012        83,329        211,171             -
                                                                    February 21, 2012

 Patricia Davis           107,143          11.3        0.35-0.60     January 2, 2012        31,445         79,687             -
                                                                    February 21, 2012

 Jeffrey P. Baird         107,143          11.3        0.35-0.60     January 2, 2012        31,445         79,687             -
                                                                    February 21, 2012
</TABLE>

(1)      In accordance with the rules of the Securities and Exchange  Commission
         (the "Commission"),  shown are the gains or "option or warrant spreads"
         that would  exist for the  options or  warrants  granted,  based on the
         assumed rates of annually compounded stock price appreciation of 5% and
         10%, respectively, from the date the option or warrant was granted over
         the full option or warrant  term,  without  adjustment  for the present
         valuation of such potential future option or warrant spread.

(2)      The  alternative  grant date value is based upon the actuarial value of
         the options at the date of grant as  estimated  using the  Black-Sholes
         method using the following  average  assumption:  expected  life,  four
         years;  risk free rate of 3.51 to 7%; no dividends  during the expected
         term; and a volatility of 0.8 to 1.4.

We account for our stock based awards to  employees  using the  intrinsic  value
method in accordance  with APB 25,  "Accounting  for Stock Issued to Employees,"
and its related interpretations.

DIRECTORS' LIMITATION OF LIABILITY

Our certificate of incorporation and by-laws include provisions to (1) indemnify
the  directors  and  officers to the fullest  extent  permitted  by the Delaware
General Corporation Law, including  circumstances under which indemnification is
otherwise  discretionary  and (2) eliminate the personal  liability of directors
and officers for monetary  damages  resulting  from breaches of their  fiduciary
duty,  except  for  liability  for  breaches  of the  duty of  loyalty,  acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation  of  law,  violations  under  Section  174  of  the  Delaware  General
Corporation  Law,  or for any  transaction  from which the  director  derived an
improper  personal  benefit.  We believe that these  provisions are necessary to
attract and retain qualified persons as directors and officers.

We provide directors and officers liability insurance coverage of $5,000,000.

Insofar as  indemnification  for liability  arising under the  Securities Act of
1933 may be permitted to our directors,  officers,  and  controlling  persons as
stated in the foregoing  provisions or otherwise,  we have been advised that, in
the opinion of the Commission,  this indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.


                                       56
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of March 28, 2003,

o    each person who is known by us to be the  beneficial  owner of more than 5%
     of the outstanding common stock,
o    each director and each of our executive officers, named in the compensation
     table under Item 11,
o    all our directors and executive officers as a group, and
o    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.

As used in the table below and  elsewhere  in this report,  the term  BENEFICIAL
OWNERSHIP  with respect to a security  consists of sole or shared  voting power,
including the power to vote or direct the vote, and/or sole or shared investment
power, including the power to dispose or direct the disposition, with respect to
the security through any contract, arrangement, understanding,  relationship, or
otherwise,  including  a right to acquire  such  power(s).  Except as  otherwise
indicated,  the stockholders listed in the table have sole voting and investment
powers  with  respect to the shares  indicated.  Beneficial  ownership  includes
shares issuable upon exercise of options  exercisable within sixty days of March
28, 2003.

Except as otherwise noted below, the address of each of the persons in the table
is c/o  Claimsnet.com  inc., 12801 N. Central  Expressway,  Suite 1515,  Dallas,
Texas 75243.

Unless otherwise noted, beneficial ownership consists of sole ownership, voting,
and  investment  power with  respect to all common  stock shown as  beneficially
owned by them.
<TABLE>
<CAPTION>
                                                                       SHARES BENEFICIALLY OWNED
                                                                ----------------------------------------
                                                                 Number of
                                                                   Shares                    Percent of
 Name and Address of                                            Beneficially    Percent of      Voting
 Beneficial Owner                Class of Security                 Owned         Class         Power
 ------------------------        ------------------------       ------------    ----------    ----------
 <S>                             <C>                            <C>             <C>           <C>
 Don Crosbie                     Common Stock                             -         - %          - %

 Paul W. Miller (1)              Common Stock                       302,885         2.0          1.6

 Bo W. Lycke (2) (3)             Common Stock                     2,111,326        13.7         11.2
 4730 Melissa Ln.                Series E Preferred Stock            33.333        20.0            *
 Dallas, Texas 75229

 Patricia Davis (4)              Common Stock                       177,243         1.2            *
 1600 Thorntree Dr.
 Desoto, Texas 75115

 Jeffrey P. Baird (5)            Common Stock                       107,143           *            *
 1414 Kaitlyn Ln.
 Keller, Texas 76248

 John C. Willems, III (6)        Common Stock                        21,777           *            *

 Thomas Michel (7)               Common Stock                       162,500         1.1            *
                                 Series D Preferred Stock               100         3.0            *
                                 Series E Preferred Stock                50        30.0            *

 Jeffrey M. Black (8)            Common Stock                         2,500           *            *

 Alfred Dubach (9)               Common Stock                       617,500         4.0          3.3
                                 Series D Preferred Stock               565        17.1          3.0
                                 Series E Preferred Stock                50        30.0            *

 Robert H. Brown, Jr. (2) (10)   Common Stock                       892,354         5.8          4.7
 2727 N. Harwood, #1000
 Dallas, Texas 75201
</TABLE>


                                       57
<PAGE>

<TABLE>
<CAPTION>
                                                                       SHARES BENEFICIALLY OWNED
                                                                ----------------------------------------
                                                                 Number of
                                                                   Shares                    Percent of
 Name and Address of                                            Beneficially    Percent of      Voting
 Beneficial Owner                Class of Security                 Owned         Class         Power
 ------------------------        ------------------------       ------------    ----------    ----------
 <S>                             <C>                            <C>             <C>           <C>
 Sture Hedlund (11)              Common Stock                        33,333           *            *
 Norrmalmstorg 14                Series E Preferred Stock            33.333        20.0            *
 S-11184 Stockholm
 Sweden

 McKesson Corporation            Common Stock                     1,514,285         9.8          8.0
 One Post Street
 San Francisco, CA 94104

 J. R. Schellenberg (2) (12)     Common Stock                     1,043,603         6.8          5.5
 Kohlrainstrasse 1               Series D Preferred Stock               120         3.6            *
 Kusnacht
 Switzerland CH-8700

 Elmira United (13)              Common Stock                     6,100,000        39.6         32.3
 Swiss Tower - 16th Floor        Series D Preferred Stock             1,600        48.4          8.5
 Panama
 Republic of Panama

 New York Ventures (14)          Common Stock                       620,000         4.0          3.3
 c/o BDO Visura                  Series D Preferred Stock               620        18.8          3.3
 Entfelderstrasse 1
 CH-5001 Aarau

 All our directors and           Common Stock                     1,107,162         7.2          5.9
 executive officers as a         Series D Preferred Stock               665        20.1          3.5
 group (6 persons) (15)          Series E Preferred Stock               100        60.0            *
</TABLE>

*    Less than one percent.
(1)  Consists of 1,600 shares of common stock owned of record by Mr.  Miller and
     301,285  shares which Mr.  Miller has the right to acquire upon exercise of
     options or warrants.
(2)  Includes  581,603  shares of  common  stock  owned of  record  by  National
     Financial Corporation. Messrs. Lycke, Bensen and Brown own 71.1%, 11.2% 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, Bensen, Brown and Schellenberg may be deemed to beneficially own the
     shares of common stock owned by National Financial Corporation.
(3)  Common Stock  consists of 1,246,390  shares of common stock owned of record
     by Mr.  Lycke,  33,333  shares  which  may be  issued  to  Mr.  Lycke  upon
     conversion of preferred stock, 250,000 shares which Mr. Lycke has the right
     to acquire  upon  exercise of options or  warrants,  and 581,603  shares of
     Common Stock owned of record by National Financial Corporation.
(4)  Consists  of 100 shares of common  stock  owned of record by Ms.  Davis and
     177,243  shares which Ms.  Davis has the right to acquire upon  exercise of
     options or warrants.
(5)  Consists of 107,143  shares  which Mr.  Baird has the right to acquire upon
     exercise of options or  warrants.
(6)  Consists of 9,277 shares of common stock owned of record by Mr. Willems and
     12,500  shares which Mr.  Willems has the right to acquire upon exercise of
     options or warrants.
(7)  Common Stock  consists of 110,000 shares of common stock owned of record by
     Mr. Michel, 50,000 shares which may be issued to Mr. Michel upon conversion
     of preferred  stock,  and 2,500  shares  which Mr.  Michel has the right to
     acquire upon exercise of options or warrants.
(8)  Consists  of 2,500  shares  which Mr.  Black has the right to acquire  upon
     exercise of options or warrants.
(9)  Common Stock  consists of 615,000  shares which may be issued to Mr. Dubach
     upon conversion of preferred  stock,  and 2,500 shares which Mr. Dubach has
     the right to acquire upon exercise of options or warrants.
(10) Consists of 310,751 shares of common stock owned of record by Mr. Brown and
     581,603  shares of Common  Stock  owned of  record  by  National  Financial
     Corporation.
(11) Common Stock  consists of 33,333 shares which may be issued to Hedlund upon
     conversion of preferred stock.
(12) Common Stock  consists of 342,000 shares of common stock owned of record by
     Mr.  Schellenberg,  120,000 shares which may be issued to Mr.  Schellenberg
     upon  conversion  of preferred  stock,  and 581,603  shares of Common Stock
     owned of record by National Financial Corporation.


                                       58
<PAGE>

(13) Common Stock  consists of 2,250,000  shares of common stock owned of record
     by Elmira  United,  1,600,000  shares which may be issued to Elmira  United
     upon  conversion  of preferred  stock,  and  2,250,000  shares which Elmira
     United has the right to acquire upon exercise of options or warrants.
(14) Common  Stock  consists of 620,000  shares  which may be issued to New York
     Ventures upon conversion of preferred stock.
(15) Includes an aggregate of 321,285  shares which they have a right to acquire
     upon exercise of options or warrants.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Bo W. Lycke,  formerly our Chairman of the Board,  President and Chief Executive
Officer,  Ward L. Bensen, a former Director,  and Robert H. Brown, Jr., a former
Director,  are,  respectively,  the Chairman of the Board, a Director and Senior
Vice President and a Director,  and owners,  respectively,  of 71.1%, 11.2%, and
17.7% of the outstanding capital stock of American Medical Finance.

Messrs.  Lycke, Bensen and Brown are owners,  respectively,  of 71.1%, 11.1, and
17.8 of the outstanding capital stock of National Financial Corporation.

In February,  March,  April and June 2002,  we borrowed an aggregate of $475,000
pursuant to six separate  unsecured  short-term  loan  agreements  with National
Financial  Corp. In February,  May,  August and September  2002, we fully repaid
principal  pursuant to four notes and partially  repaid principal on one note in
the  aggregate  amount of $412,000  plus accrued  interest  thereon.  The unpaid
principal  amount of  $63,000  plus  interest  was due on  September  30,  2002.
National Financial Corp. agreed to forego repayment at September 30, 2002 and to
amend the terms of the notes to be due on demand.  In October and December 2002,
upon the demand of National  Financial Corp., we repaid the remaining  principal
on one note and partially  repaid the remaining note in the aggregate  amount of
$45,000 plus accrued  interest  thereon.  The $18,000  principal  balance of the
remaining note plus interest, at 9.5% per annum on the unpaid principal,  is due
on demand.

In May 2002,  we  completed  the private  placement  of 3,304 shares of Series D
Preferred  Stock to  accredited  investors at $250 per share for net proceeds of
$826,000.  Each share of Series D Preferred Stock has a stated value of $250 per
share, a liquidation  preference  over holders of common stock,  does not accrue
dividends but is entitled to a preference  over the common stock on  liquidation
of the Company, and is convertible into 1,000 shares of common stock at a stated
value of $0.25 per share at the  election  of the  holder.  We have the right to
initiate  redemption of the Series D Preferred  Stock at the stated value in the
event that the average high and low bid price of our common  stock  exceeds $.50
for  20  of  any  30  consecutive   trading  days.  If  we  initiate  redemption
proceedings,  the  holders  may elect to convert to common  shares  prior to the
redemption date.  Holders of the Series D Preferred Stock have the right to vote
together with the holders of common stock on an as converted  basis. The private
placement  included  100 shares of Series D  Preferred  Stock  purchased  by Mr.
Michel,  565 shares of Series D Preferred Stock  purchased by Mr. Dubach,  1,600
shares of Series D Preferred Stock purchased by Elmira United, a 5% stockholder,
and 620 shares of Series D Preferred  Stock purchased by New York Venture Corp.,
an entity for which Jeffrey Black, a Director of the Company,  was the corporate
secretary.  Messrs.  Michel and Black were  elected  Directors of the Company in
February 2002.

In June 2002,  we accepted  non-revocable  equity  investments  in the aggregate
amount of $50,000 from Messrs.  Michel,  Dubach, Lycke and Hedlund,  four of our
Directors,  on terms to be set by a committee of disinterested  directors,  such
terms to be no more  favorable  than those which would have been  negotiated  at
arms length with unaffiliated  third parties.  Funds received were recorded as a
current liability until the equity  investment terms were finalized.  In October
2002, based upon the determination of the committee of disinterested  directors,
we completed the private placement by issuing to the four Directors an aggregate
of 167 shares of Series E  Preferred  Stock at the rate of $300 per  share.  The
Series E Preferred  Stock was issued at a stated  value of $300 per share.  Each
share of Series E Preferred  Stock may be converted  into 1,000 shares of common
stock  at the  election  of the  holder.  We  have  has the  right,  but not the
obligation,  to redeem all or any portion of the Series E Preferred Stock in the
event that the closing sale price of our common stock exceeds $.60 for twenty of
any thirty  consecutive  trading  days.  The Series E  Preferred  Stock does not
accrue  dividends  but is  entitled  to a  preference  over the common  stock on
liquidation  of the  Company.  Holders of the Series E Preferred  Stock have the
right to vote  together  with the  holders  of common  stock on an as  converted
basis.

In August 2002, we borrowed $50,000 from Mr. Michel.  Principal and interest, at
9.5% per annum on the unpaid  principal,  was due on  September  30,  2002.  Mr.
Michel  agreed to forego  repayment at September 30, 2002 and to amend the terms
of the note to be due on demand.  We have not repaid the principal amount of the
note or the accrued interest thereon.



                                       59
<PAGE>

In August  2002,  we  borrowed  $50,000  from Mr.  Schellenberg.  Principal  and
interest,  at 9.5% per annum on the unpaid  principal,  was due on September 30,
2002. Mr.  Schellenberg  agreed to forego repayment at September 30, 2002 and to
amend  the  terms  of the  note to be due on  demand.  We have  not  repaid  the
principal amount of the note or the accrued interest thereon.

During 2002,  we completed the private  placement of 3,675,000  shares of common
stock to  accredited  investors at $0.20 per share for net proceeds of $735,000.
In connection with the private placement, we also issued warrants to purchase an
aggregate of 3,675,000  shares of common stock. The warrants contain an exercise
price of $0.20 per share and expire  between June and December 2007. The private
placement  included 1,750,000 shares of common stock plus warrants to acquire an
additional  1,750,000  shares of common stock  purchased by Elmira United,  a 5%
stockholder.

In January,  February  and March 2003,  we  completed  the private  placement of
950,000  shares of common stock to  accredited  investors at $0.20 per share for
net  proceeds  of  $190,000  ($189,000  net).  In  connection  with the  private
placement, we also issued warrants to purchase an aggregate of 950,000 shares of
common  stock.  The  warrants  contain an exercise  price of $0.20 per share and
expire  December 31, 2007.  The private  placement  included  100,000  shares of
common stock plus  warrants to acquire an  additional  100,000  shares of common
stock purchased by National  Financial  Corporation and 500,000 shares of common
stock plus  warrants to acquire an  additional  500,000  shares of common  stock
purchased by Elmira United.

The  foregoing  transactions  and all  future  transactions  between  us and our
officers,  directors,  and 5% stockholders were and will be on terms at least as
favorable to us than as obtainable from unaffiliated third parties and have been
and  will  be  approved  by a  majority  of our  independent  and  disinterested
directors.

ITEM 14. CONTROLS AND PROCEDURES.

Within the 90 days prior to this report, we carried out an evaluation, under the
supervision and with the  participation  of our management,  including our Chief
Executive  Officer and Chief  Financial  Officer,  of the  effectiveness  of the
design  and  operation  of the  Company's  disclosure  controls  and  procedures
pursuant to Exchange  Act Rule  13a-14.  Based upon that  evaluation,  the Chief
Executive  Officer and Chief  Financial  Officer  concluded  that the  Company's
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information relating to the Company that is required to be included in
our periodic SEC filings. There have been no significant changes in our internal
controls or in other  factors that could  significantly  affect  these  controls
subsequent to the date of our evaluation.



                                       60
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

The following documents are filed as part of this report:

a)   Consolidated  Financial  Statements:  See Index to  Consolidated  Financial
     Statements included herein in Part II, Item 8 of this report.

b)   Financial Statement Schedule:  See page 45 of this report for Schedule II -
     Valuation and Qualifying Accounts.  All other schedules for which provision
     is  made in the  applicable  accounting  regulation  of the  Securities  an
     Exchange Commission are not required under the related  instructions or are
     inapplicable and therefore have been omitted.

The  following  exhibits  are  filed  herewith  or are  incorporated  herein  by
reference:

2.1(1)      Asset purchase agreement, dated as of March 23, 2000, related to the
            acquisition of VHX.

3.1(2)      Certificate of Incorporation

3.1(a)(2)   Form of Certificate of Amendment to Certificate of Incorporation

3.1(b)(6)   Certificate of Designation of Series A Preferred Stock

3.1(c)(6)   Certificate of Designation of Series B Preferred Stock

3.1(d)(6)   Certificate of Designation of Series C Preferred Stock

3.1(e)(6)   Certificate of Designation of Series D Preferred Stock

3.1(f)      Certificate of Designation of Series E Preferred Stock

3.2(2)      Bylaws, as amended

4.1(2)      Form of warrant issued to Cruttenden Roth Inc.

4.2(2)      Form of Common Stock Certificate

4.3(a)(6)   Forms of Warrant issued to Jeff Baird

4.3(b)(6)   Forms of Warrant issued to Patricia Davis

4.3(c)(6)   Forms of Warrant issued to Bo W. Lycke

4.3(d)(6)   Forms of Warrant issued to Paul W. Miller

4.3(e)      Forms of Warrant issued to Don Crosbie

10.1(2)     Employment   Agreement,   dated  as  of  April   8,   1997   between
            Claimsnet.com inc. and Bo W. Lycke

10.1(a)(6)  Severance Agreement dated April 8, 2002 between Claimsnet.com and Bo
            W. Lycke

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)     Agreement   and  Plan  of  Merger,   dated   June  2,  1997,   among
            Claimsnet.com Inc.  (formerly,  American NET Claims),  ANC Holdings,
            Inc.,  Medica Systems,  Inc., and the stockholders of Medica Systems
            Inc.

10.5(4)     Employment  Agreement,  dated  as of  September  17,  1996,  between
            Claimsnet.com  inc.  and Terry A. Lee,  as  amended  as of March 26,
            1997, April 6, 1998 and June 7, 1999.

10.5(a)(5)  Severance Agreement with Mr. Lee



                                       61
<PAGE>


10.6(2)     Service  Agreement,  dated August 5, 1997,  between American Medical
            Finance and Claimsnet.com Inc.

10.7(2)     Form of Agreement,  dated September 14, 1998, between  Claimsnet.com
            and BlueCross BlueShield of Louisiana

10.8(2)     Form of Non-Employee Director's Plan

10.9(2)     Service Agreement,  dated November 1998,  between  Claimsnet.com and
            Southern Medical Association.

10.10(4)    Development and Services Agreement,  dated October 27, 1999, between
            Claimsnet.com and McKesson HBOC, Inc.

10.10(a)(3) Agreement,  dated April 12, 2001, between Claimsnet.com and McKesson
            HBOC, Inc. superseding October 1999 Agreement.

10.11(3)    Note dated March 9, 2001 between  Claimsnet.com and American Medical
            Finance related to $400,000 loan.

10.12       Note dated  February  1, 2002  between  Claimsnet.com  and  National
            Financial Corporation related to $105,000 loan.

10.13       Note dated  February  27, 2002  between  Claimsnet.com  and National
            Financial Corporation related to $100,000 loan.

10.14       Note  dated  March  12,  2002  between  Claimsnet.com  and  National
            Financial Corporation related to $100,000 loan.

10.15       Note  dated  March  20,  2002  between  Claimsnet.com  and  National
            Financial Corporation related to $85,000 loan.

10.16       Note  dated  April  8,  2002  between   Claimsnet.com  and  National
            Financial Corporation related to $25,000 loan.

10.17       Note dated June 6, 2002 between Claimsnet.com and J. R. Schellenberg
            related to $50,000 loan.

10.18       Note dated June 6, 2002 between Claimsnet.com and National Financial
            Corporation related to $60,000 loan.

10.19       Note  dated  August  1,  2002  between   Claimsnet.com   and  J.  R.
            Schellenberg related to $10,000 loan.

10.20       Note dated August 1, 2002 between  Claimsnet.com  and Thomas  Michel
            related to $50,000 loan.

10.21(7)    Note dated August 20, 2002 between  Claimsnet.com and J. D. Stauffer
            related to $25,000 loan.

10.22(8)    Asset  Purchase  Agreement  dated  September 11, 2002 by and between
            Claimsnet.com, Inc. and ProxyMed, Inc.

10.23(8)    Affiliate and Partner Services and License Agreement dated September
            11, 2002, by and between Claimsnet.com, Inc. and ProxyMed, Inc.

10.24(8)    Form of Preferred Escrow Agreement by and among Claimsnet.com, Inc.,
            ProxyMed, Inc. and DSI Technology Escrow Services, Inc.

16.1(2)     Letter from King Griffin & Adamson  P.C. as to change in  certifying
            accountant to Ernst & Young LLP,  dated August 16, 1999 and filed on
            Form 8K.

16.2(9)     Letter from Ernst & Young LLP as to change in certifying  accountant
            to King Griffin & Adamson P.C., dated February 26, 2003 and filed on
            Form 8K.

16.3(10)    Letter from King Griffin & Adamson  P.C. as to change in  certifying
            accountant to KBA Group LLP,  dated March 14, 2003 and filed on Form
            8K.

99.1        Certification  pursuant  to  18  U.S.C.  Section  1350,  as  adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


                                       62
<PAGE>

99.2        Certification  pursuant  to  18  U.S.C.  Section  1350,  as  adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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

(1)         Incorporated by reference to the corresponding  exhibit filed by the
            Registrant  with its  Current  Report on Form 8-K,  dated  March 23,
            2000.

(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, 1999.

(5)         Incorporated by reference to the corresponding  exhibit filed by the
            Registrant with its Current Report on Form 8-K dated June 28, 2000.

(6)         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.

(7)         Incorporated by reference to the corresponding  exhibit filed by the
            Registrant  with its Current  Report on Form 8-K dated  September 4,
            2002.

(8)         Incorporated by reference to the corresponding  exhibit filed by the
            Registrant its Current Report on Form 8-K dated September 17, 2002.

(9)         Incorporated by reference to the corresponding  exhibit filed by the
            Registrant  with its Current  Report on Form 8-K dated  February 26,
            2003.

(10)        Incorporated by reference to the corresponding  exhibit filed by the
            Registrant its Current Report on Form 8-K dated March 17, 2002.




                                       63
<PAGE>
<TABLE>
<CAPTION>
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  Years ended December 31, 2002, 2001, and 2000
                                 (In Thousands)

                                                                    Charge to Other
                                    Beginning of     Charge to         Accounts/                        End of
                                      Period         Operations       Adjustments       Deductions      Period
                                    ------------     ----------     ---------------     ----------     ---------
<S>                                 <C>              <C>            <C>                  <C>           <C>
Allowance for doubtful accounts
    2002                             $     35        $       9         $   --            $   (11)      $     33
    2001                                   29               19             --                (13)            35
    2000                                   26               27             --                (24)            29

Valuation allowance for deferred
  tax assets                                             (1)
    2002                             $ 14,207        $     946         $   --            $    --       $ 15,153
    2001                               12,362            1,845             --                 --         14,207
    2000                                5,886            6,476             --                 --         12,362

</TABLE>

(1) Offset to deferred tax benefit created primarily by net losses.





                                       64
<PAGE>


                                   SIGNATURES

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

CLAIMSNET.COM INC.
(Registrant)

By:    /s/ Don Crosbie
       -----------------------------
       Don Crosbie
       President,
       Chief Executive Officer,
       Class I Director and
       Chairman of the Board on
       behalf of the Registrant


By:    /s/ Paul W. Miller
       ----------------------------
       Paul W. Miller
       Chief Operating Officer,
       Chief Financial Officer and
       Class II Director


By:    /s/ Alfred Dubach
       -----------------------------
       Alfred Dubach
       Class I Director and
       Vice Chairman of the Board


By:    /s/ John C. Willems, III
       -----------------------------
       John C. Willems, III
       Class II Director


By:    /s/ Thomas Michel
       -----------------------------
       Thomas Michel
       Class II Director


By:    /s/ Jeffrey M. Black
       -----------------------------
       Jeffrey M. Black
       Class I Director


March 31, 2003




                                       65
<PAGE>


                                  CERTIFICATION


     I, Don Crosbie, certify that:

     I have reviewed this annual report on Form 10-K of CLAIMSNET.COM INC.;

(1)  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

(2)  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

(3)  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a)    designed  such  disclosure  controls and  procedures  to ensure that
            material  information  relating  to the  registrant,  including  its
            consolidated subsidiaries, is made known to us by other within those
            entities, particularly during the period in which this annual report
            is being prepared;

     (b)    evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

     (c)    presented  in  this  annual   report  our   conclusions   about  the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

(4)  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     (a)    all significant  deficiencies in the design or operation of internal
            controls which could adversely  affect the  registrant's  ability to
            record,  process,  summarize  and  report  financial  data  and have
            identified for the  registrant's  auditors any material  weakness in
            internal controls; and

     (b)    any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal controls; and

(5)  The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


     /s/ Don Crosbie
     -----------------------
     Don Crosbie
     President and Chief Executive Officer
     March 31, 2003




                                       66
<PAGE>


                                  CERTIFICATION


     I, Paul W. Miller, certify that:

     I have reviewed this annual report on Form 10-K of CLAIMSNET.COM INC.;

(1)  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

(2)  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

(3)  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     (a)    designed  such  disclosure  controls and  procedures  to ensure that
            material  information  relating  to the  registrant,  including  its
            consolidated subsidiaries, is made known to us by other within those
            entities, particularly during the period in which this annual report
            is being prepared;

     (b)    evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

     (c)    presented  in  this  annual   report  our   conclusions   about  the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

(4)  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     (a)    all significant  deficiencies in the design or operation of internal
            controls which could adversely  affect the  registrant's  ability to
            record,  process,  summarize  and  report  financial  data  and have
            identified for the  registrant's  auditors any material  weakness in
            internal controls; and

     (b)    any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal controls; and

(5)  The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


     /s/ Paul W. Miller
     ------------------------
     Paul W. Miller
     Chief Operating Officer and Chief Financial Officer
     March 31, 2003



                                       67
<PAGE>