##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K

(Mark One)

|                                            |  |                                                                                   
|------------------------------------------- |  | ----------------------------------------------------------------------------------
|x                                           |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                            |  |                                                                                   
|For the fiscal year ended December 31, 2002
|                                            |  |                                                                                   
|or                                         
|                                            |  |                                                                                   
|o                                           |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from
           
           
to

Commission File Number 000-22052

PROXYMED, INC.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 65-0202059                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

2555 Davie Road, Suite 110, Fort Lauderdale, Florida 33317-7424




(Address of principal executive offices) (Zip Code)


Registrants telephone number, including area code: (954) 473-1001

Securities registered under Section 12(b) of the Act: NONE

Securities registered under Section 12(g) of the Act:

Common Stock, $.001 Par Value




(Title of class)


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

Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the 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.   
o

The aggregate market value of the voting stock held by non-affiliates of
the registrant computed using $7.60 per share, the closing price of the
registrants common stock on the Nasdaq National Market on March 28, 2003, was
$28,070,472.

As of March 28, 2003, 6,782,938 shares of the registrants common stock
were issued and outstanding.

Documents Incorporated by Reference: Portions of the registrants
definitive Proxy Statement for its Annual Meeting of Shareholders to be held on
or about May 20, 2003, are incorporated by reference into Part III of this
Annual Report on Form 10-K.





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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|ITEM 1. OUR BUSINESS                                                                         
|ITEM 2. PROPERTIES                                                                           
|ITEM 3. LEGAL PROCEEDINGS                                                                    
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                                                      
|ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCK MATTERS                      
|ITEM 6. SELECTED FINANCIAL DATA                                                              
|FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS        
|ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                  
|PART III                                                                                     
|ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|ITEM 11. EXECUTIVE COMPENSATION                                                              
|ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|ITEM 14. CONTROLS AND PROCEDURES.                                                            
|PART IV                                                                                      
|ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                                                   
|POWER OF ATTORNEY                                                                            
|CERTIFICATIONS                                                                               
|EXHIBIT INDEX                                                                                
|EX-10.53 Employment Agreement/Rodriguez                                                      
|EX-10.54 Form of Bonus Letter                                                                
|Ex-10.55 Indemnification Agreement                                                           
|EX-21 Subsidiaries                                                                           
|EX-23 Consent of PricewaterhouseCoopers LLP                                                  
|EX-99.1 Certification of Chief Executive Officer                                             
|EX-99.2 Certification of Chief Financial Officer                                             



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PART I




ITEM 1. OUR BUSINESS

ProxyMed, Inc., incorporated in Florida in 1989, is an electronic
healthcare transaction processing services company providing connectivity
services and related value-add products to physician offices, payers, medical
laboratories, pharmacies and other healthcare institutions. Unlike our
competitors, we maintain an open electronic network for electronic transactions
with no equity ownership in businesses engaged in the front-end (i.e.,
physician practice management software system vendors and other physician desk
top vendors) or in the back-end (i.e., payers, laboratories and pharmacies).
Our business strategy is to leverage our leadership position in connectivity
services in order to establish ProxyMed as the premier provider of automated
financial, clinical, and administrative transaction services primarily between
small physician offices (offices with one to nine physicians) and payers,
clinical laboratories and pharmacies. With our neutral position, we believe
that we can better attract both front-end and back-end partners who may be more
comfortable doing business with a non-competitive partner.

Our electronic transaction processing services support a broad range of
financial, clinical, and administrative transactions. To facilitate these
services, we operate ProxyNet, our secure, proprietary national electronic
information network, which provides physicians and other healthcare providers
with connectivity to one of the industrys largest group of insurance companies
and managed care payers, the largest group of clinical laboratories, and the
largest group of chain and independent pharmacies. Our products and services
are provided from our operational facilities located in Fort Lauderdale,
Florida; New Albany, Indiana; Santa Ana, California; Norcross, Georgia; and
Sioux Falls, South Dakota. We also maintain offices in San Diego, California
and Richmond, Virginia. We operate our clinical computer networks and portions
of our financial and real time production computer networks from a secure,
third-party co-location site in Atlanta, Georgia. All of our revenues are
generated domestically.

According to industry analysts, the healthcare marketplace was over a $1.4
trillion industry in 2001, with 600,000 physicians controlling over 80% of the
spending. The healthcare industry is one of the most transaction oriented
industries in the country and generates over 30 billion financial and clinical
transactions each year, including new prescription orders, refill
authorizations, laboratory orders and results, medical insurance claims,
insurance eligibility inquiries, encounter notifications, and referral requests
and authorizations. Even with healthcare information technology spending at
$22 billion per year and growing at rates of 10% to 20% annually, we believe
that the healthcare industrys use of technology lags behind many other
transaction-intensive industries, with the vast majority of these healthcare
transactions being performed manually and on paper.

For physician offices, payers, laboratories and pharmacies to meet the
financial, clinical, and administrative demands of an evolving managed care
system, we believe that participants in the healthcare system will need to
process many of these types of transactions electronically. In fact, under new
legislation known as HIPAA (see Healthcare and Privacy Related Legislation
below) eight major transaction types, including claims, eligibility inquiries
and claims status inquiries, are generally required to be conducted
electronically after October 16, 2003. Due to the number of participants, the
challenges of meeting HIPAA requirements and the complexity of establishing
reliable and secure communication networks, the healthcare industry needs
companies such as ProxyMed with its secure, proprietary systems to facilitate
the processing of these transactions, its extensive connectivity to back-end
healthcare institutions, and its ability to market to the underserved niche of
small physician office practices.

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Acquisition of MedUnite

On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. (MedUnite) for $10,000,000 in cash, $13,400,000 in 4%
convertible promissory notes, and $8,321,000 in transaction and exit
related costs. Interest on the convertible notes is payable in cash on a
quarterly basis. The convertible promissory notes are payable in full on
December 31, 2008 and are convertible into an aggregate of 731,322 shares of
our common stock if the founders of MedUnite achieve certain revenue-based
triggers over the next three and one-half year period. The shares of our
common stock issuable upon conversion of the convertible notes will be
registered by us promptly after a stockholder achieves a conversion trigger
event. If and when these notes become convertible, we will record a beneficial
conversion charge in operations to the extent that the fair market value of the
common stock is in excess of the conversion price.

MedUnite was founded in November 2000 by seven of the nations leading
health insurers Aetna, Anthem, CIGNA, Health Net, Inc., Oxford Health Plans,
PacifiCare Health Systems, and Wellpoint Health Network  and its technology
includes one of the industrys largest Internet-based real time transaction
networks, in addition to electronic data interchange (EDI) based processes.
Exiting 2002, MedUnites legacy claims platform, which was acquired from
NDCHealth Corporation (NDC) in 2001, was annually
processing over 85 million transactions
with approximately 4.7 million real-time transactions processed by MedUnites
new state-of-the-art platform. The acquisition of MedUnite adds an additional
30,000 physicians to our network and provides unique opportunities for
cross-selling products and services to our existing and new customer base.

Our acquisition of MedUnite has resulted in an organization serving
140,000 physicians and other healthcare providers and processing over 200
million healthcare transactions processed annually, making us the nations
second largest physician-based transaction processing company, second only to
WebMD Corporation. In addition, in conjunction with the acquisition of MedUnite, we formed
a strategic relationship with NDC for processing claims and real-time
transactions and now have potential access to over 100,000 physicians that
utilize NDCs various practice management systems.

Acquisition of MDIP

In August 2002, we acquired substantially all of the assets of MDIP, Inc.
(MDIP and d/b/a Medical Data Insurance Processing), a privately-owned company
located in Sioux Falls, South Dakota, for $2,400,000 in cash and acquisition
related costs of $9,000. Our acquisition of MDIP provided us with
institutional and dental claims processing capabilities. Like ProxyMed, MDIP
is an Electronic Healthcare Network Accreditation Commission (or EHNAC)
accredited clearinghouse.

Acquisition of KenCom

In May 2002, we acquired all of the capital stock of KenCom Communications
& Services, Inc. (KenCom), a privately-owned provider of laboratory
communication solutions, for $3,237,000 in cash ($3,275,000 original cash
portion of purchase price less adjustment of $38,000 upon settlement of cash
holdback), 30,034 shares of unregistered ProxyMed common stock (valued at
$600,000), and acquisition related costs of $52,000. The shares of common
stock are being held in escrow by us against any unknown liabilities, and if
unused, will be released after one year from the closing. As a result of the
acquisition, we strengthened our presence in the Northeast United States,
enhanced our ability to provide multiple offerings to the laboratory industry
including penetration into the anatomical pathology laboratory market, and
reaffirmed our position as the nationwide leader of laboratory communication
products and services.

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Private Placement

In April 2002, we sold 1,569,366 shares of unregistered common stock at
$15.93 per share in a private placement to four entities affiliated with
General Atlantic Partners, LLC (GAP), a private equity investment fund,
resulting in net proceeds to us of $24.9 million. No placement agent was used
in this transaction. In addition, we also agreed to issue a two-year warrant
for the purchase of 549,279 shares of common stock at $15.93 per share. All
shares sold are subject to a one-year lock-up agreement from the date of
closing. We have agreed to grant GAP certain demand and piggy back
registration rights starting one year from closing. Additionally, in
connection with the transaction, our board of directors appointed a managing
member of GAP to fill a vacancy on our board.

*          *
          *

Our corporate offices are located at 2555 Davie Road, Suite 110, Fort
Lauderdale, Florida 33317-7424, and our telephone number is (954) 473-1001.

As used in this report, unless the context requires otherwise, we, us,
our, ProxyMed or the Company, means ProxyMed, Inc. and its consolidated
subsidiaries. Italicized terms in this document indicate trademarks or other
protected intellectual property that we own or license.

Overview of ProxyMed. Where Healthcare Connects

Our mission statement is as follows: ProxyMed solves the business
problems of physician offices every day by automating their financial,
administrative and clinical transactions with their healthcare institution
partners. We exceed customer expectations through our expertise, proven
methodologies and dedication to service excellence.

Our focus is connecting small physician offices with their contracted
financial and clinical partners so that they can conduct transactions
electronically. We are organized into two business segments: Electronic
Healthcare Transaction Processing and Laboratory Communication Solutions.
Electronic Healthcare Transaction Processing includes transaction and
value-added services principally between physician offices and insurance
companies (Payer Services) and physician offices and pharmacies/pharmacy
benefit managers (Prescription Services); and Laboratory Communication
Solutions includes the sale, lease and service of communication devices
principally to laboratories and the contract manufacturing of printed circuit
boards and other value-add services (Laboratory Services).

Since the beginning of 2001, our focus has been to double the number of
physicians and other healthcare providers we serve as well as to increase the
utilization of our transaction-based services amongst them over the following
five years. Our success is largely dependent upon our ability to cross-sell
our services across our provider base; to offer new transactions and services
as they become available; and to achieve economies of scale in our operations
resulting from the consolidation of our operation centers, including production
networks, from our various acquisitions.

We are well positioned today in each of our business units. With our
recently completed acquisition of MedUnite, we believe we are the second
largest medical claims clearinghouse for physician offices, the largest
provider of intelligent laboratory results reporting devices, and the largest
provider of retail pharmacy-to-physician connectivity. In 2002, we processed
approximately 114.2 million electronic transactions among physician offices,
payers, laboratories and pharmacies. We leverage the connectivity of our
back-end transaction network, ProxyNet, and continue to add partners by
developing new value-added products and services, by adding additional payer
transaction types such as improved eligibility and claim status reports, and by
expanding our Internet-based transaction offerings such as claims, lab orders,
lab results reporting and prescription refills through our Internet website,

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proxyMed.com. We are an attractive, neutral partner to front-end electronic
healthcare companies who are focused on physician office services, as we remain
the only national and independent transaction center that does not compete with
them for the physicians desktop and that can connect their physician offices
on the back-end to carry on electronic transactions between them and their
payers, laboratories and pharmacies. Financial information relating to the
Companys segments, including revenue, segment operating margin and assets
attributable to each segment for each of the fiscal years ending 2000, 2001,
and 2002 is presented in Note 7 of the Notes to Consolidated Financial
Statements in Item 8 (Financial Statements and Supplementary Data).

Our business is driven by the healthcare communitys need to process information more efficiently

With more than 30 billion financial and clinical transactions being
generated each year, the major driver of our business is the increasing number
of physicians who wish to adopt secure electronic solutions that improve the
quality of their patient care while reducing costs and administration time. We
believe that it is just a matter of time before the majority of physicians,
payers, laboratories and pharmacies embrace the electronic transmission and
processing of virtually all of a patients clinical and financial transactions.
Our efforts concentrate on the innovative design of our products and services
that make these electronic transactions easy to use, fast, reliable and secure.
ProxyNet, our secure, proprietary national healthcare information network, is
the key enabler that makes this possible. We are a leader in providing these
back-end connections and offer a host of transaction services to smaller
physician offices which we believe reduce costs by increasing efficiency,
reducing payment cycle time, and enabling physicians to make more informed
decisions at the point of care.

Connectivity to institutions and to physicians are key strengths

Our advantage lies in two critical areas. First, we offer the industrys
broadest range of financial, clinical and administrative connectivity available
from a single company. Our existing connectivity to payers positions us as the
second largest medical claims clearinghouse in the industry with 93% of our
annual transaction volume sent directly to the designated payer rather than
being routed through other transaction centers. In addition, we are the
largest provider of intelligent laboratory results reporting devices and the
largest provider of retail pharmacy connectivity. Our electronic transaction
processing services support a broad range of financial transactions (such as
claims, patient statements, claims status reports, eligibility verification,
explanations of benefits and electronic remittance advices); clinical
transactions (such as laboratory results, new prescription orders and
prescription refills); and administrative transactions (such as referrals and
pre-certifications). These connections allow information to reliably move back
and forth from the physicians office to the appropriate healthcare institution
(payer, laboratory and pharmacy) facilitating diagnosis, treatment and payment.

Our second advantage is our extensive physician relationships. Following
our acquisition of MedUnite, we have almost 76,000 physicians directly using at
least one of our existing solutions and approximately 64,000 more using our
services through referrals and pre-certifications. To reach these direct and
partnered physicians, we have licensing and connectivity agreements with many
national and regional companies, such as practice management system vendors,
billing services, and electronic healthcare companies, and with physician
offices directly. These relationships offer us an opportunity to cross-sell
our products and services to our existing physician office customer base.

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We have built a comprehensive back-end model which would be difficult and time-consuming to replicate

We were an early entrant into the healthcare electronic transaction
industry, having developed, as a result of our own efforts and through
acquisitions, our back-end connectivity for both financial and clinical
transactions. We believe that the development and maintenance of our
connections from both a technical and relationship perspective were costly,
complex and time-consuming, and represent a barrier to entry for would-be
competitors. Having accomplished much of this task, there is an opportunity
for us to leverage our existing connectivity and existing relationships,
especially since we believe we are the only connectivity company that is, in
fact, processing new prescriptions, refill prescriptions, laboratory test
results reports and financial transactions over a single network.

Current Products and Services

We offer a variety of financial and clinical electronic processing
services through our suite of Windows®-based1 products, through our Internet
portals (proxyMed.comand MedUnite.net) and through various direct network
connection programs. Each of these entry points connects physician offices to
our network and then routes transactions to their contracted payer, laboratory
and pharmacy partners.

Claims submission and reporting, insurance eligibility verification,
claims status inquiries, referral management, laboratory test results reporting
and prescription refills are all available today through proxyMed.com. We
continue to expand our offerings through proxyMed.comto include new financial
and clinical transactions such as claims response management, electronic
remittance advices, encounters and new prescriptions. Our acquisition of
MedUnite has brought us enhanced capabilities for several of these
transactions. All of our existing web-based applications can be
private-labeled and are being marketed through our channel partners to increase
distribution opportunities.

Payer Services

In our Payer Services business unit, we offer several Windows-based
products, including claims submission through our ProxyClaimsoftware product
and claims tracking through our ProxyTrackerproduct. We also offer Statlink,
MedUnites Windows-based desktop application that can be used to submit claims,
eligibility and claims status. Other non-Internet services include a
point-of-service terminal that allows for a low cost, stand-alone solution for
electronic eligibility verification, patient statement processing, paper claims
printing and Explanation of Benefits (EOB) scanning.

With regard to Internet services, we developed and have been operating our
provider transaction services web portal proxyMed.comfor over three years.
With our acquisition of MedUnite and its MedUnite.netweb portal, we are now
operating two provider web portals. Currently available web-based transactions
include claims submission and reporting, eligibility verification, claims
status inquiries, referral management and pre-certifications.

Much like other areas of our company that have duplicate offerings due to
our MedUnite acquisition, we have a plan in progress to integrate the two
provider portals into one go-forward platform. The resulting provider portal
will be located at www.proxymed.net (not yet operational at the time of this
filing) and will be branded as ProxyMed.

The project to consolidate the portals is based on integrating the current
MedUnite.netindividual application services with the proxyMed.commenu system,
user access management, enrollment and other infrastructure components. The
user interface and other business related functionality of the MedUnite



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|1 |  | Windows is a registered trademark of Microsoft Corporation.
|- |  | -----------------------------------------------------------

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application services will not significantly change but will just be
accessed through proxyMed.net(not yet operational at the time of this filing).

In addition, MedUnite had been offering, and we will continue to offer, to
software developers and large customers and partners an Application Programming
Interface (API) to connect to the MedUnite real-time transaction platform and
directly submit XML or X12 based transactions. MedUnite had referred to this
as their business-to-business (B2B) offering or the MedUnite Exchange. The
platform which supported the B2B offering was based on a proprietary XML
transaction format. The platform and the API as implemented were not
HIPAA-compliant and MedUnite had an ongoing project to bring the platform and
API to HIPAA-compliance. We are continuing this project with sufficient
resources to complete it by the HIPAA deadline in October 2003

MedUnite also had an active program in place to connect its founding
payers, as well as other payers, to its network to conduct real-time
transactions. The MedUnite Payer Interface Platform was based on the MedUnite
proprietary XML which was not HIPAA-compliant. Much like the other services,
ProxyMed was also actively implementing connections and interfaces with payers
to conduct real-time transactions. As in other areas, we will be consolidating
overlapping and duplicative efforts so that there is just one connection to
each payer.

We have had an ongoing project with dedicated resources to modify the
Payer Interface Platform so that it is HIPAA-compliant. This project will be
completed by the end of the second quarter of 2003. In parallel with this
project, we will be working with each connected payer to remediate its
connection for HIPAA-compliance. This work is scheduled so that testing of the
new interfaces will coincide with the new HIPAA-compliant platform being
completed.

Prescription Services

In our Prescription Services business unit, we offer both new prescription
ordering and refill management through our PreScribefamily of products. There
are currently over 1,300 physician clients using PreScribe. PreScribeand
ProxyNetsupport the largest and oldest electronic and fax gateway
infrastructure with connectivity to over 30,000 pharmacies nationwide. We also
offer a private-label version of our web-based refill prescription application.

Laboratory Services

Our Laboratory Services business unit offers lab order entry and results
reporting through our recently announced QuickReqproduct. We believe the
QuickReqadvantage is its enterprise scope with a modular approach, giving even
the smallest labs the ability to deploy an order entry and results reporting
solution. In addition to QuickReq, we offer a family of intelligent remote
reporting devices for communicating lab results to physician clients. Our
devices are installed in more than 100,000 physician offices throughout the
United States. Our FleetWatchSM monitors and reports the status of individual
remote reporting devices within a fleet. This service is valuable to
laboratories in its ability to detect and proactively resolve problems, many
times before clients ever notice a disruption in service.

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Product and Services Development

In Payer Services, several initiatives are underway to convert all current
transactions to their respective HIPAA-compliant formats (see Healthcare and
Privacy Related Legislation below). To date, our institutional, professional
and dental claims (837); electronic remittance advice (835); eligibility
(270/271); and claims status (276-277) transactions have been certified as
HIPAA-compliant by Claredi, one of the nations leading commercial providers of
HIPAA EDI compliance testing and certification services. HIPAA also affords us
many opportunities to increase both the number and type of transactions we
offer to both physicians and payers.

Our Physician HIPAA Readiness Services include training and education,
HIPAA Tools and Resources, Trading Partner Management, Gap Analysis and
American National Standards Institute (or ANSI) Testing, as well as ongoing
support, format translation, implementation and migration services. Vendor and
Payer HIPAA Readiness Services include B2B HIPAA Testing, B2B HIPAA Testing
with Certification and Third Party ANSI Testing and Certification. These new
value-add services will position ProxyMed as a revenue cycle manager for
physician offices.

In Laboratory Services, we were pursuing opportunities to convert our
business from the traditional sale, lease and service of intelligent laboratory
reporting devices to recurring transaction-based revenue streams. Although
this is a factor in our long-term growth strategy, to date, the marketplace has
been slow to adopt this economic model and we have had limited success with
this service. As a result, we have postponed any further development or
deployment at this time.

The total amount capitalized for purchased technology, capitalized
software and other intangible assets as of December 31, 2002, was approximately
$18.2 million, net of amortization. This amount includes $1.2 million ascribed
to the MedUnite legacy platform and $4.8 million ascribed to MedUnites
real-time platforms.

Our research and development expense was approximately $3.2 million in
2002, $2.0 million in 2001, and $3.1 million in 2000.

Marketing

We have a direct sales force and customer support staff that serves
physician offices, payers, laboratories and pharmacies. In addition, since we
do not compete for the physician desktop and allow for private branding of our
value-added products and services, we are able to leverage the marketing and
sales efforts of our partners by giving them even greater added value to drive
our revenues and transactions.

Our marketing efforts are focused on providing connectivity solutions for
the 326,000 small physician offices (one-to-nine physicians) in the United
States, a niche that is underserved by our competitors. Of the physician
offices that currently use our products and services directly, approximately
92% fall within this category.

We utilize a unique sales and marketing methodology called FOCUS (an
acronym for Find, Obtain, Capture, Utilize and Service) for targeting,
acquiring, retaining and maximizing the utilization of our services at the
small physician office. Working with our payer and pharmacy partners to
identify high volume paper claim submitters and prescription writing physicians
as qualified sales leads, the results of our FOCUS program indicate quick
contract-to-implementation time frames, low attrition rates and high
post-implementation satisfaction levels.

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We utilize the following distribution channels for our products and
services to maximize connectivity between physician offices, payers,
laboratories, pharmacies and other healthcare providers:

|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Channel  |  | Focus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Direct   |  | We have a direct sales force of account executives, inside
telemarketers, account managers and customer care representatives
who serve our physician offices, payers, laboratories and
pharmacies. We license access to our proprietary network,
ProxyNet, and provide intelligent laboratory results reporting
devices for communications between physicians and laboratories.                                                                                                                                                                                                                                                   
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Partners |  | We work with the vendors of physician and pharmacy office
management systems so that they may enable their existing
applications to process transactions through ProxyNetbetween
physicians and payers, laboratories and pharmacies. We also
license these customers to offer our products and services under
their own private label. We also connect other electronic
transaction processing networks to ProxyNetso that the
participants on both networks can communicate with each other in
National Council of Pharmacy Drug Program (NCPDP) standard, HIPAA
approved formats, and the HL-7 standard format for laboratories.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Internet |  | We are a provider of financial, clinical, and administrative
electronic transaction processing services through our website,
proxyMed.com, which may be easily accessed by any physician
office with an Internet connection.                                                                                                                                                                                                                                                                                                                                                                                                      

Competition

We face competition from many healthcare information systems companies and
other technology companies. Many of our competitors are significantly larger
and have greater financial resources than we do and have established
reputations for success in implementing healthcare electronic transaction
processing systems. Other companies, including WebMD Corporation, NDCHealth
Corporation, Per-Se Technologies, and other healthcare related entities such as
RxHub LLC, have targeted this industry for growth, including the development of
new technologies utilizing Internet-based systems. While our ability to
compete has been enhanced by our acquisition of MedUnite and its Internet-based
platform for real-time transactions, we cannot assure that we will be able to
compete successfully with these companies or that these or other competitors
will not commercialize products, services or technologies that render our
products, services or technologies obsolete or less marketable.

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Healthcare and Privacy Related Legislation

We and our customers are subject to extensive and frequently changing
federal and state healthcare laws and regulations. Political, economic and
regulatory influences are subjecting the healthcare industry in the United
States to fundamental change. Potential reform legislation may include:



| |  |  | mandated basic healthcare benefits;                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | controls on healthcare spending through limitations on the
growth of private health insurance premiums and Medicare and
Medicaid reimbursement;
|
| |  |  | the creation of large insurance purchasing groups;                                                                                             
|
| |  |  | fundamental changes to the healthcare delivery system;                                                                                         
|
| |  |  | FTC enforcement actions of existing privacy laws relating to the
Internet; or                                                                  
|
| |  |  | Medicare or Medicaid prescription benefit plans.                                                                                               

Several state and federal laws govern the collection, dissemination, use
and confidentiality of patient healthcare information. The federal Health
Insurance Portability and Accountability Act of 1996, known as HIPAA, was
signed into law on August 21, 1996. HIPAA was designed to improve the
efficiency and effectiveness of the healthcare system by standardizing the
interchange of electronic data for certain administrative and financial
transactions and to protect the confidentiality of patient information.
HIPAAs privacy regulations impose extensive requirements on healthcare
providers, clearinghouses, and plans. The deadline for compliance with the
privacy aspects of HIPAA is April 14, 2003. Although we have undertaken
several measures to ensure compliance with the privacy measures by the deadline
and believe that we are in compliance, the privacy regulations are less
definitive than other HIPAA regulations, are broad in scope, and will require
constant vigilance for ongoing compliance.

HIPAA also mandates the use of standard transactions, standard
identifiers, security and other provisions for electronic claims transactions.
HIPAA specifically designates clearinghouses (including us and other financial
network operators) as the compliance facilitators for healthcare providers and
payers. On August 17, 2000, the U.S. Department of Health and Human Services
published final regulations to govern eight of the most common electronic
transactions involving health information. Under a revised bill passed by the
U.S. Congress, the deadline for the transaction code set aspects of HIPAA was
extended to October 16, 2003, provided that a formal request for extension and
plan for compliance was submitted by October 16, 2002. The Company submitted
its request for extension and its compliance plan and expects to be in
compliance by the October 2003 deadline. The Company is currently migrating or
re-directing users of MedUnites legacy batch transactions processing
systemwhich is not HIPAA-compliantto the ProxyNetplatform, which is
undergoing HIPAA remediation. The Company expects to complete the migration of
customers to the ProxyNetplatform in the third quarter of 2003. While the
Company has incurred and will continue to incur substantial costs to become
compliant with HIPAA regulations governing transaction processing and privacy,
we do not believe the regulations will have a material impact on the our
results of operations. While we believe that no clearinghouse can be truly
HIPAA-compliant and work end-to-end with other compliant parties, we expect,
but have no assurances, that our business partners and larger customers, will
also be in compliance by the deadline. Our smaller physician office customers
will be more challenged to be in compliance, but we believe that we have
developed a number of innovative services to assist them with compliance, and
so be able to retain our existing relationships.

Another area in which privacy regulatory developments may impact the way
the Company does business is Internet privacy. Internet user privacy and the
extent to which consumer protection and privacy laws apply to the Internet is
an area of uncertainty in which future regulatory, judicial, and legislative
developments may have a significant impact on the way we do business, including
our ability to collect, store, use and transmit personal information. Internet
activity has come under heightened

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scrutiny in recent years, including several investigations in the healthcare
industry by various state and federal agencies, including the Federal Trade
Commission.

We anticipate that Congress and state legislatures will continue to review
and assess alternative healthcare delivery systems and payment methods, as well
as Internet and healthcare privacy legislation, and that public debate of these
issues will likely continue in the future. Due to uncertainties as to these
reform initiatives and their enactment and implementation, we cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or what impact they may have on us.

Our HIPAA readiness statement can be found on our website at
www.proxymed.com.

Intellectual Property

In large part, our success is dependent on our proprietary information and
technology. We rely on a combination of contracts, copyright, trademark and
trade secret laws and other measures to protect our proprietary information and
technology. Although we do not currently hold any patents, as a result of the
MedUnite acquisition we acquired rights under four patent applications filed by
MedUnite for its healthcare transaction processing platform and method for
facilitating the exchange of healthcare transactional information, in addition
to rights under various trademarks and trademark applications. We have twelve
(12) copyright registrations covering our various software and proprietary
products. As part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees, distributors and customers, and
limit access to and distribution of our software, databases, documentation and
other proprietary information. We cannot assure that the steps taken by us
will be adequate to deter misappropriation of our proprietary rights or that
third parties will not independently develop substantially similar products,
services and technology. Although we believe our products, services and
technology do not infringe on any proprietary rights of others, as the number
of software products available in the market increases and the functions of
those products further overlap, we and other software and Internet developers
may become increasingly subject to infringement claims. These claims, with or
without merit, could result in costly litigation or might require us to enter
into royalty or licensing agreements, which may not be available on terms
acceptable to us.

Employees

As of March 26, 2003, we employed 425 full-time employees, and 15
part-time employees. We are not and never have been a party to a collective
bargaining agreement. We consider our relationship with our employees to be
good.

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ITEM 2. PROPERTIES

Our significant offices are located as followed:

|                                |  |                           |  |                                          |  |                |        | 
|------------------------------- |  | ------------------------- |  | ---------------------------------------- |  | -------------- | ------ | 
|Business                        |  |                           |  |                                          |  | Approximate   
|Segment                         |  | Location                  |  | Description                              |  | Square Footage
|                                |  |                           |  |                                          |  |               
|Corporate/Prescription
Services |  | Fort Lauderdale, Florida  |  | Corporate headquarters/operations office |  |                | 20,500 | 
|Payer Services                  |  | Santa Ana, California     |  | Operations office/data center            |  |                | 19,600 | 
|                                |  | San Diego, California     |  | Operations office                        |  |                | 37,000 | 
|                                |  | Norcross, Georgia         |  | Operations
office/data center            |  |                | 31,200 | 
|                                |  | Sioux Falls, South
Dakota |  | Operations office                        |  |                | 3,700  | 
|                                |  | Richmond, Virginia        |  | Operations
office/data center            |  |                | 3,000  | 
|Laboratory Services             |  | New Albany, Indiana       |  | Operations office/manufacturing facility |  |                | 42,000 | 
|                                |  | Moorestown, New Jersey    |  | Operations office/depot service facility |  |                | 4,000  | 

We also maintain portions of our ProxyNetnetwork at a secure, third-party
co-location center in Atlanta, Georgia. In addition, we also lease several
remote sales offices and mini-warehouses. Our leases and subleases generally
contain renewal options and require us to pay base rent, plus property taxes,
maintenance and insurance. We consider our present facilities adequate for our
operations except that we are in the process of terminating our lease for our
San Diego facility acquired in our acquisition of MedUnite in favor of a
smaller office in the same general geographic area.




ITEM 3. LEGAL PROCEEDINGS

We do not have any material legal proceedings pending.




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

There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2002.

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PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCK MATTERS

Our common stock trades on the National Market tier of The Nasdaq Stock
Market under the symbol PILL. The following table sets forth the high and
low sale prices of the common stock for the periods indicated.

|      |                          |  |      |       |     |  |   |       | 
|----- | ------------------------ |  | ---- | ----- | --- |  | - | ----- | 
|      |                          |  | High |       | Low
|      |                          |  |      |       |    
|2001: |                          |  |      |       |     |  |   |      
|      | First Quarter            |  | $    | 23.44 |     |  | $ | 14.07 | 
|      | Second Quarter           |  |      | 17.55 |     |  |   | 10.05 | 
|      | Third Quarter            |  |      | 17.00 |     |  |   | 10.80 | 
|      | Fourth Quarter           |  |      | 22.35 |     |  |   | 11.25 | 
|2002: |                          |  |      |       |     |  |   |      
|      | First Quarter            |  | $    | 22.35 |     |  | $ | 15.00 | 
|      | Second Quarter           |  |      | 21.99 |     |  |   | 17.21 | 
|      | Third Quarter            |  |      | 20.44 |     |  |   | 10.50 | 
|      | Fourth Quarter           |  |      | 15.95 |     |  |   | 9.48  | 
|2003: |                          |  |      |       |     |  |   |      
|      | First Quarter            |  | $    | 11.45 |     |  | $ | 7.25  | 
|      | (through March 28, 2003) |  |      |       |     |  |   |       | 

On March 28, 2003, the last reported sale price of the common stock was
$7.60 per share. As of March 26, 2003, there were 276 registered holders of
record of the common stock. We believe that many of ProxyMeds holders of
record are in street name and that the number of individual shareholders is
greater than 4,200.

We have never paid any dividends on our common stock; however, in prior
years, we have paid dividends on our Series B and Series C Preferred Stock in
cash and/or in shares of our common stock pursuant to the terms of the Articles
of Incorporation, as amended. We intend to retain any earnings for use in our
operations and the expansion of our business, and do not anticipate paying any
dividends on the common stock in the foreseeable future. The payment of
dividends on our common stock is within the discretion of our Board of
Directors, subject to our Articles of Incorporation, as amended. Any future
decision with respect to dividends on common stock will depend on future
earnings, future capital needs and our operating and financial condition, among
other factors.




ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial information
for ProxyMed as of and for each of the five years leading up to the period
ended December 31, 2002, and has been derived from our audited consolidated
financial statements. In March 1995, our business focus changed from primarily
the sale of prescription drugs to providing connectivity services and related
value-add products to physicians, payers, medical laboratories, pharmacies and
other healthcare providers. Accordingly, financial information relating to our
prescription drug dispensing and network integration businesses (both disposed
of in 2000) has been reclassified as discontinued operations.

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As described more fully in Note 2 to our consolidated financial statements
beginning on page F-1, we acquired MedUnite on December 31, 2002 for $10.0
million in cash and $13.4 million in 4% convertible notes due December 31,
2008. As a result of this acquisition, we also recorded approximately $8.3
million in transaction and exit costs, of which $1.1 million is included in
long-term obligations in the table below. The operations of MedUnite are not
included in our 2002 results since the acquisition occurred after the close of
business on the last day of 2002.

The data set forth below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and
our Consolidated Financial Statements and related notes.

|                                                      |                                                     |  |                         |            |      |  |           |             |      |  |           |             |   |  |           |             |   |  |           |             |  
|----------------------------------------------------- | --------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | --------- | ----------- | ---- |  | --------- | ----------- | - |  | --------- | ----------- | - |  | --------- | ----------- | -
|                                                      |                                                     |  | Year Ended December 31,
|                                                      |                                                     |  |                        
|                                                      |                                                     |  | 2002                    |            | 2001 |  | 2000      |             | 1999 |  | 1998     
|                                                      |                                                     |  |                         |            |      |  |           |             |      |  |          
|STATEMENT OF OPERATIONS DATA:                         |                                                     |  |                         |            |      |  |           |             |      |  |           |             |   |  |           |             |   |  |           |            
|                                                      | Revenues                                            |  | $                       | 50,182,000 |      |  | $         | 43,230,000  |      |  | $         | 33,441,000  |   |  | $         | 29,023,000  |   |  | $         | 22,249,000  |  
|                                                      | Operating income (loss)                             |  | $                       | 1,340,000  |      |  | $         | (6,712,000  | )    |  | $         | (23,460,000 | ) |  | $         | (20,019,000 | ) |  | $         | (11,087,000 | )
|                                                      | Income (loss) from
continuing operations            |  | $                       | 1,950,000  |      |  | $         | (6,798,000  | )    |  | $         | (26,927,000 | ) |  | $         | (20,120,000 | ) |  | $         | (11,194,000 | )
|                                                      | Income (loss) from
discontinued operations          |  | $                       |           |      |  | $         |            |      |  | $         | 241,000     |   |  | $         | (1,714,000  | ) |  | $         | (595,000    | )
|                                                      | Net income (loss) applicable
to common shareholders |  | $                       | 1,338,000  |      |  | $         | (19,060,000 | )    |  | $         | (48,052,000 | ) |  | $         | (21,856,000 | ) |  | $         | (11,788,000 | )
|PER SHARE DATA:                                       |                                                     |  |                         |            |      |  |           |             |      |  |           |             |   |  |           |             |   |  |           |            
|Basic and diluted net loss
per share of common stock: |                                                     |  |                         |            |      |  |           |             |      |  |           |             |   |  |           |             |   |  |           |            
|                                                      | Income (loss) from
continuing operations            |  | $                       | 0.21       |      |  | $         | (8.81       | )    |  | $         | (37.03      | ) |  | $         | (16.75      | ) |  | $         | (10.73      | )
|                                                      | Income (loss) from
discontinued operations          |  | $                       |           |      |  | $         |            |      |  | $         | 0.19        |   |  | $         | (1.43       | ) |  | $         | (0.57       | )
|                                                      | Net income (loss)                                   |  | $                       | 0.21       |      |  | $         | (8.81       | )    |  | $         | (36.84      | ) |  | $         | (18.18      | ) |  | $         | (11.30      | )
|Diluted
weighted average common
shares outstanding    |                                                     |  | 6,396,893               |            |      |  | 2,162,352 |             |      |  | 1,304,342 |             |   |  | 1,202,136 |             |   |  | 1,043,558 |            
|DIVIDEND DATA:                                        |                                                     |  |                         |            |      |  |           |             |      |  |           |             |   |  |           |             |   |  |           |            
|                                                      | Dividends on
common stock                           |  | $                       |           |      |  | $         |            |      |  | $         |            |   |  | $         |            |   |  | $         |            |  
|                                                      | Dividends on
cumulative preferred stock             |  | $                       |           |      |  | $         | 1,665,000   |      |  | $         | 1,275,000   |   |  | $         | 22,000      |   |  | $         |            |  

|                                      |  |              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|------------------------------------- |  | ------------ | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2002         |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                                      |  |              |            |      |  |      |            |      |  |     
|BALANCE SHEET DATA:                   |  |              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Working capital                       |  | $            | 8,749,000  |      |  | $    | 9,393,000  |      |  | $    | 12,156,000 |  |  | $ | 12,580,000 |  |  | $ | 7,565,000  | 
|Convertible notes                     |  | $            | 13,400,000 |      |  | $    |           |      |  | $    |           |  |  | $ |           |  |  | $ |           | 
|Other long-term obligations           |  | $            | 2,581,000  |      |  | $    | 442,000    |      |  | $    | 729,000    |  |  | $ | 583,000    |  |  | $ | 1,367,000  | 
|Total assets                          |  | $            | 88,704,000 |      |  | $    | 35,882,000 |      |  | $    | 27,666,000 |  |  | $ | 44,773,000 |  |  | $ | 46,903,000 | 
|Net assets of
discontinued operations |  | $            |           |      |  | $    |           |      |  | $    |           |  |  | $ | 3,022,000  |  |  | $ | 4,040,000  | 
|Stockholders equity                  |  | $            | 50,735,000 |      |  | $    | 22,873,000 |      |  | $    | 22,377,000 |  |  | $ | 37,756,000 |  |  | $ | 40,279,000 | 

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

As discussed under the caption, Cautionary Statements Pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995 in
Item 7, certain statements in the Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report
that are not related to historical results are forward looking statements.
Forward-looking statements present our expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They frequently are accompanied by
words such as anticipate, estimate, expect, project, intend, plan,
believe, and other words and terms of similar meaning. Actual results may
differ materially from those projected or implied in the forward-looking
statements. Subsequent written and oral forward looking statements
attributable to the Company or to persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements and risk factors set
forth below and elsewhere in this report and in other reports filed by the
Company with the Securities and Exchange Commission.

Our business will suffer if we fail to successfully integrate into our business, the customers, products, and technology of the companies we acquire.

We have undertaken several acquisitions in the past few years as part of a
business strategy to expand our business, and we may continue in the future to
acquire businesses, assets, services, products, and technologies from other
persons or entities. During fiscal 2002, the Company completed the acquisition
of all of the outstanding stock of KenCom and MedUnite in May and December,
respectively. In addition, the Company acquired substantially all of the
assets of MDIP in August and the physician customer base of Claimsnet.com in
September. The anticipated efficiencies and other benefits to be derived from
these acquisitions and future acquisitions may not be realized if we are unable
to successfully integrate the acquired businesses into our operations,
including customers, personnel, product lines, and technology. We are
currently in the process of integrating into our operations, the customers,
products, personnel and technology of MedUnite. There is no guaranty that we
will be able to successfully integrate MedUnite or any future acquired
businesses into our operations. Integration of acquired businesses can be
expensive, time consuming, and may strain our resources. Integration may
divert managements focus and attention from other business concerns and expose
us to unforeseen liabilities and risks. We may also lose key employees,
strategic partners, and customers as a result of our inability to successfully
integrate in a timely matter or as a result of relationships the acquired
businesses may have with our competitors or the competitors of our customers
and strategic partners. Some challenges that we face in successfully
integrating MedUnite and other acquired businesses into our operations include:



| |  |  | conflicts or potential conflicts with customers, suppliers, and strategic partners;     
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | integration of platforms, product lines, networks, and other technology;                
|
| |  |  | the migration of new customers and products to our existing network;                    
|
| |  |  | the ability to cross-sell products and services to our new and existing customer base;  
|
| |  |  | retention of key personnel;                                                             
|
| |  |  | consolidation of accounting, operational and administrative functions;                  
|
| |  |  | coordinating new product and process development;                                       
|
| |  |  | increasing the scope, geographic diversity and complexity of operations;                
|
| |  |  | difficulties in consolidating facilities and transferring processes and know-how; and   
|
| |  |  | other difficulties in the assimilation of acquired operations, technologies or products.

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Government regulation and new legislation may have a negative impact on our
business and results of operations.

As discussed in Item 1 under the caption, Healthcare and Privacy Related
Legislation, the healthcare industry is highly regulated and is subject to
extensive and frequently changing federal and state healthcare laws. Several
state and federal laws govern the collection, dissemination, use and
confidentiality of patient health care information. Final HIPAA rules on
standards governing privacy of patient health care information were published
in 2000. The implementation deadline for HIPAAs privacy related regulations
is April 14, 2003. Although we have undertaken several measures, including the
adoption of policies and procedures for the handling of patient healthcare
information, to ensure compliance with the privacy measures by the deadline and
believe that we are in compliance, the privacy regulations are broad in scope,
and will require constant vigilance for ongoing compliance. We cannot
guarantee that we, our business partners or customers are or will be in
compliance in the future. HIPAA also mandates the use of standard
transactions, standard identifiers, security and other provisions for
electronic claims transactions. The deadline for compliance with the
transaction code set aspects of HIPAA is October 16, 2003. In relation to our
acquisition of MedUnite, we expect but cannot guarantee that we will be able to
complete the migration of MedUnite customers from MedUnites legacy platform
onto ProxyNetin a timely manner and in advance of the deadline.

The Companys contracts with its customers, strategic partners, providers,
payers, and other healthcare entities mandate or will mandate that the our
products and services be HIPAA compliant. If our products and services are not
in compliance with HIPAA on or before the deadline and on an ongoing basis
thereafter, our customers, strategic partners, and other healthcare providers
with whom we contract may terminate their contracts with us or sue us for
breach of contract. Additionally, our revenues may be reduced as some of our
non-compliant payer partners may be forced to accept paper-based transactions
for which we may not be the recipient for processing. We may be also subject
to penalties for non-compliance by federal and state governments, and patients
who believe that their confidential health information has been misused or
improperly disclosed may have certain remedial actions against us, our
partners, or customers.

Our networks may not be able to scale to support our continued rapid growth,
and our network integration efforts may not be as successful or timely as we
expect.

Our goal is to operate ProxyNetutilizing one consolidated network that
will provide for cost efficient scalability as we continue to grow our customer
base and transaction volumes. We have a network upgrade project underway to
enhance the scalability aspects of ProxyNetas well as to integrate the
transaction processing platforms that we have acquired. If our network
upgrade and integration projects are not completed in a timely basis, this
could have a detrimental effect on our ability to process transactions
efficiently and could result in lost customers and revenues.

While we generated positive earnings in this past fiscal year, we have incurred
losses in the past. There is no assurance that we will continue to generate
positive earnings in the future and this could have a detrimental effect on the
market price of our stock.

While 2002 was our first full year of positive earnings, we have incurred
substantial losses, including losses of $19,060,000 and $48,052,000 for the
fiscal years ended December 31, 2001 and 2000, respectively. As of December
31, 2002, we had an accumulated deficit of $95,273,000. While we believe that
our business model supports earnings growth in the future, various factors that
may affect loss of customers and related revenues or increased and unforeseen
expenses could cause us to fall short of our financial goals. Such shortfall
could have a detrimental effect on the market price of our stock.

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The acceptance of electronic transaction processing in the healthcare industry
is still in its early stages; thus, the future of our business is uncertain.

Our strategy anticipates that electronic processing of healthcare
transactions, including transactions involving clinical as well as financial
information, will become more widespread and that providers and third-party
payers increasingly will use electronic transaction processing networks for the
processing and transmission of data. Electronic transmission of healthcare
transactions (and, in particular, the use of the Internet to transmit them) is
still developing, and complexities in the nature and types of transactions
which must be processed have hindered, to some degree, the development and
acceptance of electronic transaction processing in this industry. While HIPAA
and other government enacted legislation might be a catalyst for the use of the
electronic processing of healthcare transactions, we cannot assure that
continued conversion from paper-based transaction processing to electronic
transaction processing in the healthcare industry, using proprietary physician
management systems or the Internet, will occur.

Businesses we acquire may have undisclosed liabilities that may have a negative
impact on the Companys results of operations and require unanticipated
expense.

In pursuing our acquisition strategy, our investigations of the
acquisition candidates may fail to discover certain undisclosed liabilities of
the acquisition candidates. If we acquire a company having undisclosed
liabilities, as a successor owner we may be responsible for such undisclosed
liabilities. We try to minimize our exposure to such liabilities by conducting
appropriate due diligence, by requiring audited financial statements, by
obtaining indemnification from each seller of the acquired companies, by
deferring payment of a portion of the purchase price as security for the
indemnification or by acquiring only specified assets. However, we cannot
insure that we will be able to obtain indemnifications or that they will be
enforceable, collectible or sufficient in amount, scope or duration to fully
offset any undisclosed liabilities arising from our acquisitions. In
connection with the MedUnite acquisition, we have only limited indemnification
rights that may not be sufficient in amount or scope to offset losses resulting
from unknown and undisclosed liabilities. In addition, we are in the process
of renegotiating certain known liabilities of MedUnite. Our failure to
successfully renegotiate such liabilities on more favorable terms may have a
material adverse effect on us. Furthermore, the introduction of new products
and services from acquired companies such as MedUnite may have a greater risk
of undetected or unknown errors, bugs, or liabilities than our historic
products.

Our business and future success may depend on our ability to cross-sell our
products and services.

Our ability to generate revenue and growth depends on our ability to
cross-sell our products and services to our existing customers and new
customers resulting from acquisitions. Our ability to successfully cross-sell
our products and services is one of the most significant factors influencing
our growth. There is no guaranty that we will be successful in cross-selling
our products and services, and our failure in this area would likely have an
adverse affect on our business.

We have important business relationships with other companies to market and
sell some of our clinical and financial products and services. If these
companies terminate their relationships with us, or are less successful in the
future, we will need to add this emphasis internally, which may divert our
efforts and resources from others projects.

For the marketing and sale of some of our products and services, we
entered into important business relationships with physician office management
information system vendors, with electronic medical record vendors, and with
other distribution partners. These business relationships, which have required
and may continue to require significant commitments of effort and resources,
are an important part of our distribution strategy and generate substantial
recurring revenue. Most of these relationships

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are on a non-exclusive basis, and we cannot assure that our electronic
commerce partners and other strategic partners, most of whom have significantly
greater financial and marketing resources than we do, will not develop and
market products and services in competition with us in the future or will not
otherwise discontinue their relationship with us. Also, our arrangements with
some of our partners involve negotiated payments to the partners based on
percentages of revenues generated by the partners. If the payments prove to be
too high, we may be unable to realize acceptable margins, but if the payments
prove to be too low, the partners may not be motivated to produce a sufficient
volume of revenues. The success of our important business relationships will
depend in part upon our partners own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
developed and marketed by such partners. If any such partners are unsuccessful
in marketing our products, we will need to place added emphasis on these
aspects of our business internally, which may divert our planned efforts and
resources from other projects.

Since an error by any party in the process of providing clinical connectivity,
such as prescribing drugs, filling prescriptions, and transmitting laboratory
orders and results could result in substantial injury to a patient, our
liability insurance may not be adequate in a catastrophic situation.

Our business exposes us to potential liability risks that are unavoidably
part of being in the healthcare electronic transaction processing industry.
Since many of our products and services relate to the prescribing and refilling
of drugs and the transmission of medical laboratory orders and results, an
error by any party in the process could result in substantial injury to a
patient. As a result, our liability risks are significant.

We cannot assure that our insurance will be sufficient to cover potential
claims arising out of our current or proposed operations, or that our present
level of coverage will be available in the future at a reasonable cost. A
partially or completely uninsured claim against us, if successful and of
sufficient magnitude, would have significant adverse financial consequences.
Our inability to obtain insurance of the type and in the amounts we require
could generally impair our ability to market our products and services.

We depend on connections to insurance companies and other payers, and if we
lose these connections, our service offerings would be limited and less
desirable to healthcare participants.

Our business is enhanced by the substantial number of payers, such as
insurance companies, Medicare and Medicaid agencies, to which we have
electronic connections. These connections may either be made directly or
through a clearinghouse. We have attempted to enter into suitable contractual
relationships to ensure long-term payer connectivity; however, we cannot assure
that we will be able to maintain our links with all these payers. In addition,
we cannot assure that we will be able to develop new connections, either
directly or through clearinghouses, on satisfactory terms. Lastly, some
third-party payers provide systems directly to healthcare providers, bypassing
us and other third-party processors. Our failure to maintain existing
connections with payers and clearinghouses or to develop new connections as
circumstances warrant, or an increase in the utilization of direct links
between providers and payers, could cause our electronic transaction processing
system to be less desirable to healthcare participants, which would slow down
or reduce the number of transactions that we process and for which we are paid.

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Our laboratory communication devices may be replaced with web-based technology
for lab results delivery, and we may not be successful in converting our
customers toProxyNetand to our own Internet site atproxyMed.com, which would
adversely impact our revenues.

A key element of our longer-term Laboratory Services business strategy is
to market our intelligent laboratory results reporting devices and related
services, and our web-based solutions directly to independent and
hospital-based medical laboratories. As the Internet becomes a more acceptable
method of transmitting laboratory orders and reporting results because of the
efficiencies and savings believed to be available, we are leveraging our
25-plus years of goodwill (through our Key Communications Service subsidiary)
and reputation for quality of products and superior service to migrate our
customers over to ProxyNet, more specifically to our Internet site at
proxyMed.com. We expect others to develop similar web-based solutions and
compete aggressively in an attempt to capture our large customer base. In
addition, many of our device customers may choose to offer Internet services
themselves, rather than utilizing a third party. We have no assurances that we
will be able to retain or continue to grow our customer base. Further, even as
to the continuing sales of our laboratory communication devices, we are unable
to control many of the factors that influence our customers buying decisions,
including our customers budgets and procedures for approving expenditures, and
the changing political, economic and regulatory influences which affect the
purchasing practices and operation of healthcare organizations.

Evolving industry standards and rapid technological changes could result in our
products becoming obsolete or no longer in demand.

Rapidly changing technology, evolving industry standards and the frequent
introduction of new and enhanced Internet-based services characterize the
market for our products and services. Our success will depend upon our ability
to enhance our existing services, introduce new products and services on a
timely and cost-effective basis to meet evolving customer requirements, achieve
market acceptance for new products or services and respond to emerging industry
standards and other technological changes. We cannot assure that we will be
able to respond effectively to technological changes or new industry standards.
Moreover, we cannot assure that other companies will not develop competitive
products or services, or that any such competitive products or services will
not cause our products and services to become obsolete or no longer in demand.

If electronic transaction processing penetrates the healthcare industry, we may
face pressure to reduce our prices which potentially may cause us to no longer
be competitive.

If electronic transaction processing extensively penetrates the healthcare
market or becomes highly standardized, it is possible that competition among
electronic transaction processors will focus increasingly on pricing. This
competition may put intense pressure on us to reduce our pricing in order to
retain market share. If we are unable to reduce our costs sufficiently to
offset declines in our prices, or if we are unable to introduce new, innovative
service offerings with higher prices, we may not be competitive.

Computer network systems like ours could suffer security and privacy breaches
that could harm our customers and us.

We currently operate servers and maintain connectivity from multiple
facilities. Despite our implementation of standard network security measures,
our infrastructure may be vulnerable to computer viruses, break-ins and similar
disruptive problems caused by customers or other users. Computer viruses,
break-ins or other security problems could lead to interruption, delays or
cessation in service to our customers. These problems could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which may deter potential customers from doing
business with us and give rise to possible liability to users whose security or
privacy has been infringed.

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The security and privacy concerns of existing and potential customers may
inhibit the growth of the healthcare information services industry in general,
and our customer base and business in particular. A significant security
breach could result in loss of customers, loss of revenues, damage to our
reputation, direct damages, costs of repair and detection and other unplanned
expenses. While we carry professional liability insurance to cover such
breaches, the coverage may not be adequate to compensate us for losses that may
occur.

We depend on uninterrupted computer access for our customers; any prolonged
interruptions in our operations could cause our customers to seek alternative
providers of our services.

Our success is dependent on our ability to deliver high-quality,
uninterrupted computer networking and hosting, requiring us to protect our
computer equipment and the information stored in servers against damage by
fire, natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. To mitigate this risk, we have
commenced the movement of our production computer networks to a secure,
third-party co-location site located in Atlanta, Georgia. This site has
back-up site capability and a program to manage technology to reduce risks in
the event of a disaster, including periodic back-ups of our computer programs
and data.

While we still continue to operate production networks in our Santa Ana,
Norcross and Richmond facilities, any damage or failure resulting in prolonged
interruptions in our operations, such as last years California rolling
blackouts, could cause our customers to seek alternative providers of our
services. In particular, a system failure, if prolonged, could result in
reduced revenues, loss of customers and damage to our reputation, any of which
could cause our business to suffer. While we carry property and business
interruption insurance to cover operations, the coverage may not be adequate to
compensate us for losses that may occur.

We may not be able to retain key personnel or replace them if they leave.

Our success is largely dependent on the personal efforts of Michael K.
Hoover, our Chairman of the Board and Chief Executive Officer and Nancy J. Ham,
our President and Chief Operating Officer. Although we have entered into
employment agreements with Mr. Hoover, Ms. Ham and other senior executives, the
loss of any of their services could cause our business to suffer. Our success
is also dependent upon our ability to hire and retain qualified operations,
development and other personnel. Competition for qualified personnel in the
healthcare information services industry is intense, and we cannot assure that
we will be able to hire or retain the personnel necessary for our planned
operations.

We may issue additional shares that could adversely affect the market price of
our Common Stock.

Certain events over which you have no control could result in the issuance
of additional shares of our common stock or preferred stock, which would dilute
your ownership percentage in ProxyMed and could adversely affect the market
price of our common stock. We may issue additional shares of common stock or
preferred stock for many reasons including:



| |  |  | to raise additional capital or finance acquisitions;                                                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | upon the exercise or conversion or an exchange of
outstanding options, warrants and shares of convertible
preferred stock; or
|
| |  |  | in lieu of cash payment of dividends.                                                                                        

In addition, the number of shares of common stock that we are required to
issue in connection with our outstanding warrants may increase if certain
anti-dilution events occur (such as, certain issuances of common stock, options
and convertible securities).

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The trading price of the Companys common stock may be volatile.

The stock market, including the Nasdaq National Market, on which the
shares of our common stock are listed, has from time to time experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of particular companies. In addition, the market price
of our common stock, like the stock prices of many publicly traded companies in
the healthcare industry, has been and may continue to be highly volatile.

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

In General

ProxyMed is an electronic healthcare transaction processing services
company providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies, and other
healthcare providers. Our electronic transaction processing services support a
broad range of both financial and clinical transactions. To facilitate these
services, we operate ProxyNet, our secure, proprietary national electronic
information network, which provides physicians and other healthcare providers
with direct connectivity to one of the industrys largest group of payers, the
largest group of clinical laboratories, and the largest group of chain and
independent pharmacies. Our products and services are currently provided from
our operating facilities located in Fort Lauderdale, Florida; New Albany,
Indiana; Santa Ana, California; Norcross, Georgia; and Sioux Falls, South
Dakota. We also operate our clinical network and portions of our financial and
real-time production computer networks from a secure co-location site in
Atlanta, Georgia.

We remain committed to our strategy, which is focused on leveraging our
leading position as an independent back-end connectivity provider to small
physician offices. Through strategic relationships and partnerships with
front-end solutions providers, our goal is to drive more healthcare
transactions through ProxyNetwhile remaining neutral in the battle for the
physicians desktop. Additionally, since we have an existing customer base of
physicians and other healthcare providers, we expect that there will be
opportunities to increase revenues by cross-selling our existing products and
services to these current customers, as well as revenue opportunities from the
development of new services from our development efforts, including
Internet-based transaction services, and from opportunities afforded by HIPAA
as it relates to privacy, security and education. We remain committed to
developing additional capabilities and value-added products and services, and
to expanding our back-end connectivity network.

2001 was a turnaround year for us as we were able to increase our growth
through internal and external means, raise $7,248,000 (net of expenses) in a
private placement of common stock, simplify our capital structure, and generate
our first year of positive cash flow from operations. In 2002, we continued to
improve our financial results and reported our first quarter and full year of
positive net income, raised an additional $24,886,000 (net of expenses) in
another private placement of our common stock, and completed the acquisitions
of three businesses. While the private placement from General Atlantic
Partners (see below) was critical in the execution of our plans during 2002,
the year culminated in our acquisition of MedUnite, Inc. on December 31, 2002
(see below). We believe that the organization created by the acquisition of
MedUnite now positions us as the second largest physician claims clearinghouse
in the country, creating the primary open and neutral alternative to the
current market leader; provides us the opportunity to leverage the industrys
leading real-time transaction network; creates synergies in our operations
leading to cost savings and increased margins; and brings to us preferred
relationships backed by an incentive plan to grow the business. We enter 2003
with an organization touching almost 140,000 physicians and other healthcare
providers, processing over 200 million transactions, and generating over $70
million in annual revenues.

On August 21, 2001, our Board of Directors effected a 1-for-15 reverse
stock split of the Companys common stock, par value $.001 per share. All
share and per share amounts have been restated to reflect this transaction.

In April 2002, we sold 1,569,366 shares of unregistered common stock at
$15.93 per share in a private placement to four entities affiliated with
General Atlantic Partners, LLC (GAP), a private equity investment fund,
resulting in net proceeds to us of $24,886,000. No placement agent was used in
this transaction. In addition, we also agreed to issue a two-year warrant for
the purchase of 549,279 shares of

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common stock at $15.93 per share. All shares sold are subject to a
one-year lock-up agreement from the date of closing. We have agreed to grant
GAP certain demand and piggy back registration rights starting one year from
closing. Additionally, in connection with the transaction, our board of
directors appointed a managing member of GAP to fill a vacancy on our board.

In May 2001, we acquired substantially all of the assets and the business
of MDP Corporation (MDP), a privately-owned electronic claims clearinghouse
and patient statement processor based in Atlanta, Georgia, for $10,000,000. We
paid $3,000,000 at closing and executed a $7,000,000 promissory note payable in
May 2002. Interest on this note was payable monthly at 7% simple interest. In
January 2002, we paid this note in full.

In May 2002, we acquired all of the capital stock of KenCom Communications
& Services, Inc. (KenCom), a privately-owned provider of laboratory
communication solutions, for $3,237,000 in cash ($3,275,000 original cash
portion of purchase price adjusted by $38,000 upon settlement of cash
holdback), 30,034 shares of unregistered ProxyMed common stock (valued at
$600,000), and acquisition related costs of $52,000. The shares of common
stock are being held in escrow by us against any unknown liabilities, and if
unused, will be released after one year from the closing. As a result of the
acquisition, we strengthened our presence in the Northeast United States,
enhanced our ability to provide multiple offerings to the laboratory industry
including penetration into the anatomical pathology laboratory market, and
reaffirmed our position as the nationwide leader of laboratory communication
products and services. The operations of KenCom since May 1, 2002 are included
in our operations for 2002.

In August 2002, we acquired substantially all of the assets of MDIP, Inc.
(MDIP and d/b/a Medical Data Insurance Processing), a privately-owned company
located in Sioux Falls, South Dakota, for $2,400,000 in cash and acquisition
related costs of $9,000. Our acquisition of MDIP provided us with
institutional and dental claims processing capabilities. Like ProxyMed, MDIP
is an EHNAC accredited clearinghouse. The operations of MDIP since August 1,
2002 are included in our operations for 2002.

In September 2002, we acquired the physician customer relationships and
related Internet-based revenue stream from Claimsnet.com, a provider of claims
processing services, for $700,000 cash.

On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. (MedUnite) for $10,000,000 in cash, an aggregate of
$13,400,000 principal amount of 4% convertible promissory notes, and $8,321,000
in transaction and exit related costs. Interest on the convertible notes is
payable in cash on a quarterly basis. The convertible promissory notes are
payable in full on December 31, 2008 and are convertible into an aggregate of
731,322 shares of our common stock if the founders of MedUnite achieve certain
revenue-based triggers over the next three and one-half year period. The
shares of our common stock issuable upon conversion of the convertible notes
will be registered by us promptly after a stockholder achieves a conversion
trigger event. If and when these notes become convertible, we will record a
beneficial conversion charge in our operations to the extent that the fair
market value of the common stock is in excess of the conversion price. The
operations of MedUnite are not included in our 2002 results since the
acquisition occurred after the close of business on the last day of 2002.

MedUnite was founded in November 2000 by seven of the nations leading
health insurers Aetna, Anthem, CIGNA, Health Net, Inc., Oxford Health Plans,
PacifiCare Health Systems, and Wellpoint Health Network, and its technology
includes one of the industrys largest Internet-based real time transaction
networks, in addition to electronic data interchange (EDI) based processes.
Exiting 2002, MedUnites legacy claims platform, which was acquired from
NDCHealth Corporation (NDC) in 2001, was annually
processing over 85 million
transactions and approximately 4.7 million real-time transactions were being
processed by MedUnites new state-of-the-art platform. The acquisition of
MedUnite adds an additional 30,000 physicians to our network and provides
unique opportunities for cross-selling products and services to our existing
and new customer base. In conjunction with the

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acquisition of MedUnite, we formed a strategic relationship with NDC for
processing claims and real-time transactions and now have potential access to
over 100,000 physicians that utilize NDCs various practice management systems.

Unfortunately, MedUnite had incurred significant losses since its
inception and was utilizing cash significantly in excess of amounts it was
generating. As a result, at the time it was acquired by us, there were
substantial liabilities and obligations (both recorded and unrecorded at
December 31, 2002) associated with the business. Subsequent to the our
acquisition, MedUnites senior management team was terminated along with
approximately 20% of the general workforce in an effort to eliminate
duplicative positions and control costs. We have consolidated certain of our
facilities with those leased by MedUnite and are in the process of terminating
other facility leases. Other contractual obligations are being cancelled or
renegotiated with certain vendors. Additionally, we have attempted to enter
into financing agreements with certain major vendors as a means to settling
existing liabilities. With continued efforts during the first and second
quarters of 2003, we anticipate that we will be able to drive cash flow and
operating profits in this business by the end of the 2003 year. Additionally,
for 2003, the post-acquisition goal is to migrate customers from MedUnites
legacy platform, which is not HIPAA-compliant, onto ProxyNet, which is currently being remediated in
time for the October 2003 HIPAA deadline for transaction code sets (see section
discussing Healthcare and Privacy Related Legislation above). The continued
growth of the real-time platform will be a significant contributor to our
long-term success.

Results of Operations

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.

Net Revenues.Consolidated net revenues for 2002 increased by $6,952,000
or 16%, to $50,182,000 from consolidated net revenues of $43,230,000 for 2001.
Net revenues classified by our reportable segments are as follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2002 |            | 2001
|                                             |  |      |            |     
|Electronic healthcare transaction processing |  | $    | 22,439,000 |      |  | $ | 16,938,000 | 
|Laboratory communication solutions           |  |      | 27,743,000 |      |  |   | 26,292,000
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 50,182,000 |      |  | $ | 43,230,000 | 
|                                             |  |      |            |      |  |   |            | 

Net revenues in our electronic healthcare transaction processing segment
increased by 32% primarily due to a 30% increase in the number of electronic
clinical and financial healthcare transactions processed through ProxyNet.
Total transactions grew from 87.9 million transactions in the 2001 period to
114.2 million transactions in 2002. Core transaction growth is up 47% from the
2001 period. The increase in transaction volume was primarily attributable to
internal growth in both claims and statements processed. Additionally, we
continued to make progress in our cross-selling efforts to our existing
customers resulting in an increased of transaction services utilized per
directly contracted provider from an 1.3 (estimated) in 2001 to 2.5 in 2002. A
summary of the number of transactions we processed for the periods presented is
as follows:

|                  |                    |  |            |             |      |  |            |            | 
|----------------- | ------------------ |  | ---------- | ----------- | ---- |  | ---------- | ---------- | 
|                  |                    |  | 2002       |             | 2001
|                  |                    |  |            |             |     
|Core transactions |                    |  | 89,123,000 |             |      |  | 60,523,000 |           
|Encounters        |                    |  | 25,045,000 |             |      |  | 27,419,000 |           
|                  |                    |  |            |             |      |  |            |           
|                  | Total transactions |  |            | 114,168,000 |      |  |            | 87,942,000 | 
|                  |                    |  |            |             |      |  |            |           

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Core transactions represent all transactions except for encounters.
Encounters are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather
than submitting on a routine basis, most providers choose to periodically
catch up on their submissions, creating monthly and quarterly swings in both
the number of encounters we process and what percentage of our transaction mix
they represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not
expect our encounter volume to grow on an annual basis, as payers are not
expanding the capitated service model that is the foundation of encounters.
Therefore, we believe that breaking out encounters shows more clearly our
growth in core transactions, which are the growth engine for our Electronic
healthcare transaction services segment.

We exited the year on an annualized run rate of over 120 million total
transactions for ProxyMed on a stand-alone basis. The acquisition of MedUnite
added another 90 million transactions; therefore, we exited 2002
with a combined annualized run rate of almost 210 million total transactions.

For 2002, approximately 45% of our revenues came from our Electronic
healthcare transaction processing segment, compared to 39% from this segment
for 2001.

Laboratory communication solutions segment net revenues increased by 6%
primarily due to the acquisition of KenCom and an increase in contract
manufacturing revenues, offset by decreases in sales and leases of
communication devices, and field service revenues.

Cost of sales.Consolidated cost of sales decreased from 47% in 2001 to
46% in 2002. Cost of sales classified by our reportable segments is as
follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2002 |            | 2001
|                                             |  |      |            |     
|Electronic healthcare transaction processing |  | $    | 8,793,000  |      |  | $ | 6,531,000  | 
|Laboratory communication solutions           |  |      | 14,230,000 |      |  |   | 13,877,000 | 
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 23,023,000 |      |  | $ | 20,408,000 | 
|                                             |  |      |            |      |  |   |            | 

Cost of sales in the Electronic healthcare transaction processing segment
consists of transaction fees, services and license fees, third-party electronic
transaction processing costs, certain telecommunication and co-location center
costs, revenue sharing arrangements with our business partners, third-party
database licenses, and certain labor and travel expenses. Cost of sales as a
percentage of revenues remained constant at 39% for 2002 and 2001.

Cost of sales in the Laboratory communication solutions segment includes
hardware, third-party software, and consumable materials. Cost of sales as a
percentage of revenues decreased to 51% for 2002 compared to 53% for 2001
primarily as a result of a change in the mix of revenues from higher margin
leases of communication devices (as our lease base shrinks) to lower margin
device sales and contract manufacturing.

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Selling, General and Administrative Expenses.Consolidated SG&A increased
for 2002 by $1,878,000, or 9%, to $23,145,000 from consolidated SG&A of
$21,267,000 for 2001. Consolidated SG&A expenses as a percentage of
consolidated revenues decreased to 46% for 2002 compared to 49% in 2001. SG&A
expenses classified by our reportable segments are as follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2002 |            | 2001
|                                             |  |      |            |     
|Electronic healthcare transaction processing |  | $    | 11,430,000 |      |  | $ | 9,906,000  | 
|Laboratory communication solutions           |  |      | 9,121,000  |      |  |   | 8,168,000  | 
|Corporate                                    |  |      | 2,594,000  |      |  |   | 3,193,000  | 
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 23,145,000 |      |  | $ | 21,267,000 | 
|                                             |  |      |            |      |  |   |            | 

Electronic healthcare transaction processing segment SG&A expenses for
2002 increased 15% over 2001 primarily due to adding associates in our Payer
Services transaction business sales and marketing teams to drive our core
revenue growth and in our technical and development areas as it relates to our
HIPAA compliance efforts, and incremental expenses incurred at our South Dakota
operations as a result of our acquisition of MDIP. These increases were offset
by the capitalization of payroll and other costs for HIPAA and private label
internal-use software projects for 2002. Segment SG&A expenses as a percentage
of segment net revenues decreased to 51% for 2002 compared to 58% for 2001 due
to the operational leverage inherent in the business. As we increase the
number of transactions we process, we do not experience a direct correlation in
our costs due to the semi-fixed nature of operating expenses in this segment.

Laboratory communication solutions segment SG&A expenses for 2002
increased by 12% primarily due to incremental expenses incurred for the May
2002 acquisition and operations of KenCom plus increases in contract
manufacturing personnel. As a result, segment SG&A expenses as a percentage of
segment net revenues increased to 33% for 2002 compared to 31% for 2001.
However, in the fourth quarter of 2002, we enacted several cost containment
programs in an effort to curtail spending.

Corporate SG&A expenses decreased 19% for 2002 compared to 2001 primarily
due to the non-cash compensatory warrants and the additional accrual recorded
for our software licensing contingency for 2001.

Depreciation and Amortization.Consolidated depreciation and amortization
decreased by $5,540,000 to $2,636,000 for 2002 from $8,176,000 for 2001. This
decrease was primarily from a reduction in amortization expense due to the
conclusion of amortization of certain intangible assets in 2001 related to
prior acquisitions in our Electronic healthcare transaction processing segment
and the adoption of SFAS No. 142 on January 1, 2002, offset by amortization of
identifiable intangible assets (other than goodwill) related to the
acquisitions of KenCom, MDIP, and the customer relationships of Claimsnet.com
in September 2002 for $700,000. Amortization expense related to these
acquisitions is expected to be approximately $146,000 per quarter through the
first quarter of 2005. Depreciation and amortization classified by our
reportable segments is as follows:

|                                             |  |      |           |      |  |   |           | 
|-------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                             |  | 2002 |           | 2001
|                                             |  |      |           |     
|Electronic healthcare transaction processing |  | $    | 1,581,000 |      |  | $ | 7,285,000 | 
|Laboratory communication solutions           |  |      | 857,000   |      |  |   | 561,000   | 
|Corporate                                    |  |      | 198,000   |      |  |   | 330,000   | 
|                                             |  |      |           |      |  |   |           | 
|                                             |  | $    | 2,636,000 |      |  | $ | 8,176,000 | 
|                                             |  |      |           |      |  |   |           | 

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Operating Income (Loss).As a result of the foregoing, consolidated
operating income for 2002 was $1,340,000 compared to a loss of $6,712,000 for
2001. Operating income (loss) classified by our reportable segments is as follows:

|                                             |  |      |            |      |  |   |            |  
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                             |  | 2002 |            | 2001
|                                             |  |      |            |     
|Electronic healthcare transaction processing |  | $    | 597,000    |      |  | $ | (6,859,000 | )
|Laboratory communication solutions           |  |      | 3,535,000  |      |  |   | 3,686,000  |  
|Corporate                                    |  |      | (2,792,000 | )    |  |   | (3,539,000 | )
|                                             |  |      |            |      |  |   |            |  
|                                             |  | $    | 1,340,000  |      |  | $ | (6,712,000 | )
|                                             |  |      |            |      |  |   |            |  

Write-off of Obsolete and Impaired Assets. We wrote off $38,000 in
capitalized programming costs in connection with the development of our
real-time transaction processing applications as a result of acquiring the same
functionality in the software platforms acquired from MedUnite in December
2002.

Interest, net.Consolidated net interest income for 2002 was $345,000
compared to net interest expense of $126,000 for 2001. This net increase is
primarily due to higher cash balances as a result of our investment from GAP in
April 2002, even though effective interest rates are lower for 2002 compared to
2001 on the cash invested.

Net Income (Loss). As a result of the foregoing, consolidated net income
for 2002 was $1,950,000 compared to a net loss of $6,798,000 for 2001.

Deemed Dividends and Other Charges.We incurred deemed dividends and other
charges of $612,000 for 2002 as a result of non-cash accounting charges for the
conversion of 31,650 preferred shares into 242,510 shares of common stock by
our Series C preferred shareholders in 2002 pursuant to our offer to convert
their shares commencing in December 2001. For the 2001 period, we incurred
total deemed dividend and other charges of $12,262,000 primarily as a result
of non-cash accounting charges from the anti-dilution reset in number and price
of certain warrants issued to our Series B preferred shareholders in February
2001, non-cash accounting charges from the exchange of 271,700 warrants into
218,828 shares of common stock by our Series B preferred shareholders in April
2001, non-cash accounting charges from the exchange of 1,412,033 warrants into
1,050,691 shares of common stock by our Series C preferred shareholders in
August 2001, non-cash accounting charges related to the conversion of our
Series C preferred into 1,296,126 shares of common stock pursuant to our
Conversion Offer through December 31, 2001, non-cash charges from the
anti-dilution reset in number and price of certain warrants issued to our
remaining Series B preferred warrant holder in December 2001 as a result of the
reduced conversion price pursuant to our Conversion Offer to Series C preferred
stockholders and dividends paid to the holder of our Series B Preferred stock
(which was fully converted in October 2001) and dividends paid to our Series C
preferred shareholders through the issuance of shares of common stock.

Net Income (Loss) Applicable to Common Shareholders.As a result of the
foregoing, we reported net income applicable to common shareholders of
$1,338,000 for 2002 compared to a net loss applicable to common shareholders of
$19,060,000 for 2001.

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Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net Revenues.Consolidated net revenues for 2001 increased by $9,789,000,
or 29%, to $43,230,000 from consolidated net revenues of $33,441,000 for 2000.
Net revenues classified by our reportable segments are as follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2001 |            | 2000
|                                             |  |      |            |      |  |   |            | 
|Electronic healthcare transaction processing |  | $    | 16,938,000 |      |  | $ | 10,103,000 | 
|Laboratory communication solutions           |  |      | 26,292,000 |      |  |   | 23,338,000 | 
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 43,230,000 |      |  | $ | 33,441,000 | 
|                                             |  |      |            |      |  |   |            | 

Electronic healthcare transaction processing segment net revenues
increased by 68% primarily due to a 48% increase in the number of electronic
clinical and financial healthcare transactions processed through ProxyNetfrom
59.2 million transactions for 2000 to 87.9 million transactions for 2001. Core
transaction growth was up 85% from prior year (including 13.5 million patient
statement and electronic claims transactions from our acquisition of MDP). A
summary of the number of transactions we processed for the periods presented is
as follows:

|                  |                    |  |            |            |      |  |            |            | 
|----------------- | ------------------ |  | ---------- | ---------- | ---- |  | ---------- | ---------- | 
|                  |                    |  | 2001       |            | 2000
|                  |                    |  |            |            |     
|Core transactions |                    |  | 60,523,000 |            |      |  | 32,756,000 |           
|Encounters        |                    |  | 27,419,000 |            |      |  | 26,465,000 |           
|                  |                    |  |            |            |      |  |            |           
|                  | Total transactions |  |            | 87,942,000 |      |  |            | 59,221,000 | 
|                  |                    |  |            |            |      |  |            |           

For 2001, approximately 39% of our revenues came from our Electronic
healthcare transaction processing segment, compared to only 30% from this
segment for 2000.

Laboratory communication solutions segment net revenues increased by 13%
primarily as a result of increased sales in communication device units and
contract manufacturing offset by decreases in other laboratory services such as
communication device leases and field service events.

Cost of sales.Consolidated cost of sales increased from 37% in 2000 to
48% in 2001. Cost of sales classified by our reportable segments is as
follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2001 |            | 2000
|                                             |  |      |            |      |  |   |            | 
|Electronic healthcare transaction processing |  | $    | 6,531,000  |      |  | $ | 1,918,000  | 
|Laboratory communication solutions           |  |      | 13,877,000 |      |  |   | 10,331,000 | 
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 20,408,000 |      |  | $ | 12,249,000 | 
|                                             |  |      |            |      |  |   |            | 

Cost of sales in the Electronic healthcare transaction processing segment
consists of transaction fees, services and license fees, third-party electronic
transaction processing costs, certain telecommunication and co-location center
costs, revenue sharing arrangements with our business partners, third-party
database licenses, and certain labor and travel expenses. Cost of sales as a
percentage of revenues increased from 19% for 2000 to 39% for 2001 primarily
due to an increase in patient statement processing services (which have a
higher direct cost compared to the traditional financial transactions that we
offer) as a result of our MDP acquisition in May 2001.

Cost of sales in the Laboratory communication solutions segment includes
hardware, third-party software, and consumable materials. Cost of sales as a
percentage of revenues increased to 53% for 2001 compared to 44% for 2000
primarily due to a shift in the revenue mix from lower cost leases to higher
cost communication device units and contract manufacturing.

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Selling, General and Administrative Expenses.Consolidated SG&A decreased
for 2001 by $5,830,000, or 22%, to $21,267,000 from consolidated SG&A of
$27,097,000 for 2000. Consolidated SG&A expenses as a percentage of
consolidated revenues decreased to 49% for 2001 compared to 81% for 2001. SG&A
expenses classified by our reportable segments are as follows:

|                                             |  |      |            |      |  |   |            | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                             |  | 2001 |            | 2000
|                                             |  |      |            |     
|Electronic healthcare transaction processing |  | $    | 9,906,000  |      |  | $ | 12,255,000 | 
|Laboratory communication solutions           |  |      | 8,168,000  |      |  |   | 8,443,000  | 
|Corporate                                    |  |      | 3,193,000  |      |  |   | 6,399,000  | 
|                                             |  |      |            |      |  |   |            | 
|                                             |  | $    | 21,267,000 |      |  | $ | 27,097,000 | 
|                                             |  |      |            |      |  |   |            | 

Electronic healthcare transaction processing segment SG&A expenses for
2001 decreased by 19% compared to 2000 primarily due to decreases in net
payroll, outside labor and related expenses due to the effect of our
restructuring plan which commenced in May 2000 and additional personnel
reductions enacted at the end of 2000 and in the first quarter of 2001.
Segment SG&A expenses as a percentage of segment net revenues decreased to 58%
for 2001 compared to 121% for 2000 as operational leverage continues to be
recognized.

Laboratory communication solutions segment SG&A expenses for 2001
decreased by 3% compared to 2000.

Corporate SG&A expenses decreased 50% for 2001 compared to 2000 primarily
due to decreases in net payroll, other selling, general and administrative
expenses due to the effect of our restructuring plan and the non-cash
compensatory warrants to outside consultants as fees related to our financial
advisory agreement with Commonwealth Associates which ceased to be amortized
after April 2001.

Depreciation and Amortization.Consolidated depreciation and amortization
decreased by $5,199,000 to $8,176,000 for 2001 from $13,375,000 for 2000. This
net decrease was primarily from a reduction in amortization expense due to the
conclusion of amortization of certain intangible assets in 2001 related to
prior acquisitions in our Electronic healthcare transaction processing segment.
Depreciation and amortization classified by our reportable segments is as
follows:

|                                             |  |      |           |      |  |   |            | 
|-------------------------------------------- |  | ---- | --------- | ---- |  | - | ---------- | 
|                                             |  | 2001 |           | 2000
|Electronic healthcare transaction processing |  | $    | 7,285,000 |      |  | $ | 12,147,000 | 
|Laboratory communication solutions           |  |      | 561,000   |      |  |   | 722,000    | 
|Corporate                                    |  |      | 330,000   |      |  |   | 506,000    | 
|                                             |  |      |           |      |  |   |            | 
|                                             |  | $    | 8,176,000 |      |  | $ | 13,375,000 | 
|                                             |  |      |           |      |  |   |            | 

Operating Income
(Loss). As a result of the foregoing, consolidated operating
income (loss)
for 2001 was $6,712,000 compared to a loss of $23,460,000 in 2000. Operating
income (loss) classified by our reportable segments is as follows:

|                                             |  |      |            |      |  |   |             |  
|-------------------------------------------- |  | ---- | ---------- | ---- |  | - | ----------- | -
|                                             |  | 2001 |            | 2000
|Electronic healthcare transaction processing |  | $    | (6,859,000 | )    |  | $ | (18,949,000 | )
|Laboratory communication solutions           |  |      | 3,686,000  |      |  |   | 3,724,000   |  
|Corporate                                    |  |      | (3,539,000 | )    |  |   | (6,905,000  | )
|Restructuring                                |  |      |           |      |  |   | (1,330,000  | )
|                                             |  |      |            |      |  |   |             |  
|                                             |  | $    | (6,712,000 | )    |  | $ | (23,460,000 | )
|                                             |  |      |            |      |  |   |             |  

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Write-off of Obsolete and Impaired Assets.As a result of our periodic
review of fixed assets and co-location of our clinical production network, in
December 2001 we wrote off $91,000 in obsolete fixed assets, primarily computer
hardware and software. These write-offs are expected to lower our depreciation
and amortization charges by approximately $66,000 in 2002.

Interest, net.Consolidated net interest expense decreased by $4,007,000
to $126,000 for 2001 from $4,133,000 in 2000. This decrease is primarily due
to charges in 2000 related to the amortization of costs from our private
placement of convertible debt securities completed in June 2000, and a
beneficial conversion charge resulting from the conversion price of the
convertible debt being less than the market price of our stock on the dates of
issuance in 2000.

Loss from Continuing Operations.As a result of the foregoing, the
consolidated loss from continuing operations was $6,798,000 for 2001 compared
to a loss of $26,927,000 for 2000.

Deemed Dividends and Other Charges.We incurred deemed dividends and
other charges of $12,262,000 in 2001 primarily as a result of non-cash
accounting charges from the anti-dilution reset in number and price of certain
warrants issued to our Series B preferred stockholders in February 2001;
non-cash accounting charges of from the exchange of 271,700 warrants into
218,828 shares of common stock by certain of our Series B preferred
stockholders in April 2001; non-cash accounting charges of from the exchange of
1,412,033 warrants into 1,050,691 shares of common stock by certain of our
Series C preferred stockholders in August 2001; non-cash accounting charges
related to the conversion of 169,149 shares of our Series C preferred into
1,296,126 shares of common stock pursuant to our Conversion Offer through
December 31, 2001; non-cash accounting charges from the anti-dilution reset in
number and price of certain warrants issued to our remaining Series B preferred
warrant holder in December 2001 as a result of the reduced conversion price
pursuant to our Conversion Offer to Series C preferred and cash dividends paid
to our Series B preferred shareholders and dividends paid to our Series C
preferred shareholders through the issuance of shares of common stock.

Net Loss Applicable to Common Shareholders.As a result of the foregoing,
we reported a net loss applicable to common shareholders of $19,060,000 for
2001 compared to a net loss applicable to common shareholders of $48,052,000
for 2000.

Liquidity and Capital Resources

In 2002, cash provided by operating activities totaled $2,848,000. During
this period, we paid $9,121,000 ($10,000,000 cash less $879,000 cash acquired,
in addition to $13,400,000 in 4% convertible notes due December 2008) for our
acquisition of MedUnite; we paid $2,932,000 ($3,237,000 adjusted cash purchase
price less $305,000 cash acquired, in addition to 30,034 shares of our common
stock valued at $600,000) for our acquisition of KenCom; we paid $2,400,000 for
our acquisition of MDIP; paid $700,000 for our acquisition of customer
relationships from Claimsnet.com; paid in full our $7,000,000 promissory note
for our acquisition of MDP, and paid $2,006,000 for fixed assets and
capitalized software. These activities were principally financed through a
private placement of our common stock valued at $25,025,000 (resulting in net
proceeds to us of $24,886,000) in April 2002, proceeds of $450,000 from the
exercise of 34,500 Series B warrants, and available cash resources. After
these activities, we had cash and cash equivalents totaling $16,378,000 as of
December 31, 2002. These available funds will be used for operations,
strategic acquisitions, the further development of our products and services,
and other general corporate purposes. We continue to evaluate other
acquisition opportunities and strategic alternatives that may add synergies to
our product offerings and business strategy.

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Additionally in September 2002, we settled a contract dispute in our favor
in the amount of $325,000. The settlement resulted in the issuance of a
promissory note, which was recorded at its present value of $299,000. The
present value of the promissory note, less legal expenses of $34,000, was
reported as other income. Under the terms of the promissory note, payments of
$25,000 will be made each quarter over the next 3 years, starting in October
2002.

At the current time, we do not have any material commitments for capital
expenditures except for approximately $333,000 that is committed evenly over
the next two years related to the licensing of software for use in our internal
systems. In February 2003, we paid the second $167,000 towards this
commitment.

We expect to incur $600,000 for various development projects originally
scheduled to be undertaken by us in 2003. Additionally, we expect to incur
additional development and related hardware/software costs of up to
approximately $2.0 million in the future related to the completion of
enhancements for the real-time network platform acquired from MedUnite.

During 2002, we consistently improved our operating results as a result of
both internal and external growth, successful cross-selling of our transaction
services, and our ability to monitor expenses. With our additional equity
financing, we were able to consummate four acquisitions, culminating with our
acquisition of MedUnite at the end of the year. Unfortunately, MedUnite had
incurred significant losses since its inception and was utilizing cash
significantly in excess of amounts it was generating primarily due to technical
and research and development activities related to their various processing
platforms. As a result, at the time we acquired MedUnite, there were
substantial liabilities and obligations as well as future commitments (both recorded and unrecorded at
December 31, 2002) associated with the business in addition to the transaction
and exit costs associated with the acquisition.

In an effort to immediately curtail and reduce the expenditure levels,
MedUnites senior management team was terminated along with approximately 20%
of the general workforce in an effort to control these costs as many
duplicative positions were eliminated. We have moved our prior Atlanta
facility into MedUnites Norcross facility and are working towards terminating
our San Diego facility lease effective July 1, 2003 in return for a $750,000
letter of credit held by the current landlord and furniture at that facility.
Furthermore, other contractual obligations have been or are in the process of
being cancelled or renegotiated with the respective vendors. We have attempted
to enter into financing agreements with certain major vendors as a means to
settling existing liabilities, and to date have financed $3,368,000 of
liabilities to one vendor assumed as part of our acquisition of MedUnite at
December 31, 2002 and $382,000 for a required insurance policy as part of the
acquisition. Between these financing agreements, existing capital leases, and
the convertible notes issued in the acquisition, we will incur significant
interest expense charges in 2003. With continued efforts during the first and
second quarters of 2003, we anticipate that we will be able to drive positive
cash flow and operating profits in this business before the fourth quarter of
2003.

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The following table represents our contractual cash obligations due over
the next several years. At the present time, none of our contractual cash
obligations extend beyond 2006 except for the maturity of our
$13,400,000 in convertible notes on December 31, 2008 (assuming no
prior conversion). Operating leases are shown net of any sublease
agreements.

|                                  |        |   |           |            |      |   |           |           |      |   |           |           |  |   |         |         |  |   |         |         | 
|--------------------------------- | ------ | - | --------- | ---------- | ---- | - | --------- | --------- | ---- | - | --------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                  |        |   | 2003      |            | 2004 |   | 2005      |           | 2006 |   | 2006     
|                                  |        |   |           |            |      |   |           |           |      |   |          
|Interest on convertible
notes (1) |        | $ | 536,000   |            |      | $ | 536,000   |           |      | $ | 536,000   |           |  | $ | 536,000 |         |  | $ | 536,000 |        
|Notes payable                     |        |   | 2,316,000 |            |      |   | 1,164,000 |           |      |   | 1,032,000 |           |  |   | 172,000 |         |  |   |        |        
|Capital lease obligations         |        |   | 480,000   |            |      |   | 298,000   |           |      |   | 112,000   |           |  |   | 12,000  |         |  |   |        |        
|Operating leases                  |        |   | 2,443,000 |            |      |   | 1,268,000 |           |      |   | 391,000   |           |  |   | 9,000   |         |  |   |        |        
|Acquisition related costs         |        |   | 6,800,000 |            |      |   | 708,000   |           |      |   | 413,000   |           |  |   |        |         |  |   |        |        
|Other obligations                 |        |   | 207,000   |            |      |   | 167,000   |           |      |   |          |           |  |   |        |         |  |   |        |        
|                                  |        |   |           |            |      |   |           |           |      |   |           |           |  |   |         |         |  |   |         |        
|                                  | Totals |   | $         | 12,782,000 |      |   | $         | 4,141,000 |      |   | $         | 2,484,000 |  |   | $       | 729,000 |  |   | $       | 536,000 | 
|                                  |        |   |           |            |      |   |           |           |      |   |           |           |  |   |         |         |  |   |         |        



---

|(1) |  | Assumes no conversion of convertible notes
|--- |  | ------------------------------------------

We believe that we have sufficient cash and cash equivalents on hand to
fund our future operational capital requirements and expenditures, and a
sufficient level of capital in order to fund specific research and development
projects or to pursue smaller additional strategic acquisitions. However, if
we need additional capital funding in the future to further our strategic
plans, there can be no assurance that any additional funding will be available
to us, or if available, that it will be available on acceptable terms. If we
are successful in obtaining additional financing, the terms of the financing
may have the effect of significantly diluting or adversely affecting the
holdings or the rights of the holders of our common stock. We believe that if
we are not successful in obtaining additional financing for further product
development or strategic acquisitions, such inability may adversely impact our
ability to successfully execute our business plan and may put us at a
competitive disadvantage.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates 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 may differ from these estimates under different
assumptions or conditions but we believe that any variation in results would
not have a material effect on our financial condition. On an ongoing basis, we
evaluate our estimates.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a detailed discussion on the application of these
and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements beginning on Page F-7.

Revenue Recognition  Electronic transaction processing fee revenue is
recorded in the period the service is rendered. Certain transaction fee
revenue may be subject to revenue sharing per agreements with resellers,
vendors or gateway partners and are recorded as gross revenues. Revenue from
sales of inventory and manufactured goods is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is probable. Revenue from certain up-front
fees is amortized ratably over the expected life of the customer or contract.
Revenue from hardware leases, network access and maintenance fees is recognized
ratably over the applicable period.

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Goodwill  We adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets effective January 1, 2002. Under SFAS No. 142, goodwill is
reviewed at least annually for impairment. This adoption resulted in the
reduction of approximately $808,000 of amortization relating to its existing
goodwill each quarter, which would have otherwise been recorded through the
first quarter of 2004. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption and at least annually
thereafter, utilizing a fair value methodology versus an undiscounted cash
flow method required under previous accounting rules. In accordance with its
adoption of FAS No. 142, we completed its initial impairment test of goodwill
during the first quarter of 2002 and our annual test at December 31, 2002
utilizing various valuation techniques including a market value analysis. No
impairment charges were recorded as a result of these tests.

Capitalized Software Development and Research and Development  Costs
incurred internally and fees paid to outside contractors and consultants during
the application development stage of our internally used software products are
capitalized. Costs of upgrades and major enhancements that result in
additional functionality are also capitalized. Costs incurred for maintenance
and minor upgrades are expensed as incurred. All other costs are expensed as
incurred as research and development expenses (which are included in selling,
general and administrative expenses). Application development stage costs
generally include software configuration, coding, installation to hardware and
testing. Once the project is completed, capitalized costs are amortized over
their remaining estimated economic life. Our judgment is used in determining
whether costs meet the criteria for immediate expense or capitalization. We
periodically review projected cash flows and other criteria in assessing the
impairment of any internal-use capitalized software and take impairment charges
as needed.

Equity Transactions  Over the past two years we have engaged in various
equity transactions. These transactions were first aimed at providing capital
to continue to operate and grow our business and then became a critical step
aimed at simplifying our capital structure. These transactions are complex and
require the application of various accounting rules and standards that have
resulted in significant cash and non-cash charges reflected primarily as deemed
dividend charges included our net loss applicable to common shareholders.

Bad Debt Estimates  We rely on estimates to determine the bad debt
expense and the adequacy of the reserve for doubtful accounts receivable.
These estimates are based on our historical experience and the industry in
which we operate. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

New Accounting Pronouncements

In May 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds the
automatic treatment of gains or losses from extinguishments of debt as
extraordinary unless they meet the criteria for extraordinary items as outlined
in APB Opinion No. 30, Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. In addition, SFAS No. 145
also requires sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions and makes
various technical corrections to existing pronouncements. The provisions of
SFAS No. 145 related to the rescission of FASB Statement No. 4 are effective
for fiscal years beginning after May 15, 2002, with early adoption encouraged.
All other provisions of SFAS No. 145 are effective for transactions occurring
after May 15, 2002, with early adoption encouraged. The Company does not
anticipate that SFAS No. 145 will have a material effect on its financial
statements.

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In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs incurred in a Restructuring). SFAS No.
146 replaces Issue 94-3. The provisions of SFAS No. 146 are to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not anticipate that SFAS No. 146 will have a material effect
on its financial statements.

In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosure. SFAS No. 148 amends Statement of Financial
Accounting Standards No. 123, Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. We continue to account for stock-based
compensation using Accounting Principles Board Statement No. 25, Accounting
for Stock Issued to Employees, and have not adopted the recognition provisions
of SFAS No. 123, as amended by SFAS No. 148. The disclosure provisions of SFAS
No. 148 have
been incorporated into our footnotes to the financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies and
expands on the existing disclosure requirements for guarantees. FIN No. 45
also requires recognition of a liability at fair value of a companys
obligations under certain guarantee contracts. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002. We believe that the consolidated financial statements as of
and for the year ended December 31, 2002 are in compliance with the disclosure
requirements of FIN No. 45. The initial recognition and measurement provisions
of FIN No. 45 are applied only on a prospective basis to guarantees issued
after December 31, 2002, irrespective of the guarantors fiscal year-end. We
do not believe that the implementation of FIN No. 45 will have a material
effect on the our consolidated financial statements and related disclosures

In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or both. The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Disclosure requirements apply to any financial statements issued after
January 31, 2003. Since currently we do not have variable interest entities,
we do not believe that the implementation of FIN No. 46 will have a material
effect on our consolidated financial statements and related disclosures.

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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995

This document contains forward-looking statements that reflect our current
assumptions and expectations regarding future events. While these statements
reflect our current judgment, they are subject to risks and uncertainties.
Actual results may differ significantly from projected results due to a number
of factors, including, but not limited to, the soundness of our business
strategies relative to the perceived market opportunities; our ability to
identify suitable acquisition candidates; our successful integration of
MedUnite and any other future acquisitions; our ability to successfully
develop, market, sell, cross-sell, install and upgrade our clinical and
financial transaction services and applications to new and current physicians,
payers, medical laboratories and pharmacies; our ability to compete effectively
on price and support services; our assessment of the healthcare industrys
need, desire and ability to become technology efficient; and our ability and
that of our business associates to comply with various government rules
regarding healthcare information and patient privacy. These and other risk
factors are more fully discussed the risk factors starting on page 15 of this
Form 10-K, which we strongly urge you to read. We expressly disclaim any
intent or obligation to update any forward-looking statements. When used in
this document, the words believes, estimated, expects, anticipates,
may and similar expressions are intended to identify forward-looking
statements.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We own no derivative financial instruments or derivative commodity instruments.
We derive no revenues from international operations and do not believe that we
are exposed to material risks related to foreign currency exchange rates.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and schedule are included beginning at Page F-1.




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

We have not had any change in or disagreement with our accountants on
accounting and financial disclosures during our two most recent fiscal years or
any later interim period.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our Companys directors and executive officers are as follows:

|                       |  |     |    |          |  |                                                                                             
|---------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Edwin M. Cooperman (1) |  |     | 59 |          |  | Director                                                                                    
|Michael S. Falk (2)    |  |     | 41 |          |  | Director                                                                                    
|John Paul Guinan       |  |     | 42 |          |  | Executive Vice President  Prescription Services                                            
|Nancy J. Ham           |  |     | 41 |          |  | President and Chief Operating Officer                                                       
|Lonnie W. Hardin       |  |     | 48 |          |  | Senior Vice President  Payer Services                                                      
|A. Thomas Hardy        |  |     | 49 |          |  | Senior Vice President  Laboratory Services and
President  Key Communications Service, Inc.
|Thomas E. Hodapp (2)   |  |     | 43 |          |  | Director                                                                                    
|Michael K. Hoover      |  |     | 47 |          |  | Chairman of the Board and Chief Executive
Officer                                           
|Braden R. Kelly (2)    |  |     | 32 |          |  | Director                                                                                    
|Kevin M. McNamara (1)  |  |     | 47 |          |  | Director                                                                                    
|Rafael G. Rodriguez    |  |     | 34 |          |  | Vice President, Senior Corporate Counsel and
Secretary                                      
|Judson E. Schmid       |  |     | 41 |          |  | Executive Vice President, Chief Financial
Officer and Treasurer                             
|Eugene R. Terry (1)    |  |     | 64 |          |  | Director                                                                                    
|Timothy J. Tolan       |  |     | 44 |          |  | Senior Vice President  Business Development                                                



---

|(1) |  | Member of the Audit Committee, the Chairman of which is Mr. Terry.      
|--- |  | ------------------------------------------------------------------------
|   
|(2) |  | Member of the Compensation Committee, the Chairman of which is Mr. Falk.

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Edwin M. Coopermanhas served as a director of ProxyMed since July 2000.
He is a principal of T.C. Solutions, a privately-held investment and financial
services consulting firm. Previously, Mr. Cooperman was Chairman of the
Travelers Bank Group and Executive Vice President, Travelers Group, where he
was responsible for strategic marketing, the integration of Travelers brands
and products, joint and cross marketing efforts and corporate identity
strategies, as well as expanding the Travelers Bank Groups credit card
portfolios. After joining Travelers in 1991, Mr. Cooperman became Chairman and
CEO of Primerica Financial Services Group, which comprises Primerica Financial
Services, Benefit Life Insurance Company and Primerica Financial Services
Canada. Previous to this, Mr. Cooperman served at American Express where he
became Chairman and Co-Chief Executive of Travel Related Services, North
America. Mr. Cooperman is also a director of Comdial Corporation, US Wireless
Data, Inc. and Grannum Value Mutual Fund.

Michael S. Falkhas served as a director of ProxyMed since July 2000. Mr.
Falk co-founded Commonwealth Associates L.P. in 1988, and in 1995 he became
Chairman and Chief Executive Officer. Commonwealth Associates is a merchant and
investment bank that provides financing for small to medium size publicly
traded growth businesses. He is also a director of Comdial Corporation and
Managing Partner of Comvest Venture Partners, a merchant banking investment
partnership. Mr. Falk is a graduate of the Stanford University Executive
Program for Smaller Companies, and holds a Bachelors degree with honors in
Economics from Queens College.

John Paul Guinanjoined ProxyMed in April 1993 and currently serves as
Executive Vice President and Chief Technology Officer. Mr. Guinan served as
President and a director of ProxyMed between June 1995 and December 1999. He
was also its Chief Operating Officer from August 1996 to January 1998. He was
an Executive Vice President of ProxyMed from July 1993 until June 1995. From
March 1993 to June 1993, Mr. Guinan was the Chief Executive Officer and
co-founder of ProxyScript, Inc., which ProxyMed acquired in June 1993. From
1989 until April 1993, Mr. Guinan founded and developed two companies: The
Desktop Professionals, Inc., a company which supplied automation systems to
South Florida professional offices; and POSitive Thinking, Inc., a software
development company which specialized in point-of-sale systems. He received
both a BS in Computer Science and his Juris Doctor degree from the University
of Miami.

Nancy J. Hamjoined ProxyMed in October 2000 and currently serves as
President and Chief Operating Officer. Prior to joining ProxyMed in October
2000, Ms. Ham served as General Manager, Institutional and Connectivity
Services of Healtheon/WebMD Corporation from June 1999 to March 2000. She
originally joined Healtheon in May 1998 with its acquisition of ActaMed
Corporation, where she had served with Mr. Michael K. Hoover, ProxyMeds
Chairman and CEO, as Chief Financial Officer and Senior Vice President,
Business Development. Upon the merger with WebMD Corporation, she became
General Manager. Before joining ActaMed in 1993, Ms. Ham was a Director,
Corporate Finance at Equifax, Inc. from 1992-1993, and prior to that spent five
years with GE Capitals Corporate Finance Group. Ms. Ham has a B.A. from Duke
University and a Masters in International Business Studies from the University
of South Carolina.

Lonnie W. Hardinjoined ProxyMed in November 1997 in connection with its
acquisition of US Healthdata Interchange, Inc. (USHDI), and since October
2000 has been serving as Senior Vice President of Payer Services and from
November 1997 to October 2000 as the Senior Vice President of Field Claims
Operations. Prior to joining ProxyMed, Mr. Hardin was employed by USHDI from
1991 through 1997, during which time he held the positions of Vice President -
Sales/Marketing and General Manager.

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A. Thomas Hardyjoined ProxyMed in December 1998 in conjunction with
ProxyMeds acquisition of Key Communications Service, Inc. and since January
2000, has served as President and Chief Operating Officer of Key
Communications. From October 2000 Mr. Hardy has also served as Senior Vice
President of Laboratory Services of ProxyMed. Mr. Hardy joined Key
Communications in 1995 where he served as Key Communications Executive Vice
President and Chief Financial Officer. Mr. Hardy is a certified public
accountant and has a BBA in Business from Georgia College & State University
and a MBA degree from the University of Arkansas.

Thomas E. Hodapphas served as a director of ProxyMed since July 2000. In
1999, Mr. Hodapp founded Access Capital Management, a private banking and
management firm dedicated to providing financial and strategic advisory
services to select, early stage private healthcare and information technology
companies. From 1992 to 1998, Mr. Hodapp was a Managing Director for Robertson
Stephens & Company, LLC, a leading international investment banking firm,
overseeing the firms Healthcare Managed Care Research Group, with a focus on
the managed care, practice management and healthcare information services
industries. From 1988 to 1992, he was with Montgomery Medical Ventures, a
venture firm focused on the biotechnology, medical device and healthcare
service fields. MMV I and II actively managed long-term investments in over 40
early stage companies, many of which the firm was involved in co-founding.
Prior to that, Mr. Hodapp researched the healthcare industry as an industry
analyst with Goldman, Sachs & Company, S.G. Warburg Securities and Volpe &
Covington. Additionally, Mr. Hodapp has been published in a number of major
financial and healthcare industry journals and publications, was a two-time
selection to the Wall Street Journal Research Analyst All-Star Team, and is a
frequent speaker at national healthcare investment and strategy forums.

Michael K. Hooverwas appointed Chairman of the Board and Chief Executive
Officer of ProxyMed in July 2000. He served as President and Director of
Healtheon/WebMD Corporation after Healtheon acquired ActaMed Corporation, an
eHealth information systems and transaction company similar to ProxyMed in May
1998. Mr. Hoover co-founded ActaMed in May 1992 and served as its President
from its inception to May 1998, and as its President and Chief Executive
Officer from December 1995 to May 1998. From 1989 to 1992, Mr. Hoover served
as the Executive Director of Financial Services of the MicroBilt Division of
First Financial Management Corporation. Prior to that, he founded FormMaker
Software Corporation, a producer of electronic forms automation systems, and
served as its Chief Executive Officer from 1982 to 1988.

Braden R. Kellywas appointed director of ProxyMed in April 2002. Mr.
Kelly is a Managing Member of General Atlantic Partners, LLC, a private equity
investment firm that invests in information, communications and media companies
on a global basis, where he has been employed in various capacities since 1995.
Prior to joining General Atlantic, Mr. Kelly was a member of the Mergers,
Acquisitions, and Restructurings Department at Morgan Stanley & Co. He also
serves as a director of Eclipsys Corporation, Tickets.com, HEALTHvision, Inc.
and Schaller Anderson, Inc. Mr. Kelly received his B.A. in Finance and
Business Economics from the University of Notre Dame.

Kevin M. McNamarawas appointed as a Director of ProxyMed in September
2002. He has served as a principal with Voyent Partners, a private equity
firm, since August 2001. Mr. McNamara served as the Chief Executive Officer
for Private Business, Inc. from 1999 until 2001. From 1996 to 1999, he served
as Chief Financial Officer for ENVOY Corporation, and was President of Merchant
Services Division of National Bancard Corporation (NaBANCO) from 1994 to 1995.
Mr. McNamara also serves as a director of Enhancement Services Corporation,
HEALTHvision, Inc. and Digiscripts, Inc. Mr. McNamara received his
undergraduate degree at Virginia Commonwealth University and his Masters of
Business Administration at the University of Richmond, Virginia. Mr. McNamara
is a certified public accountant in Virginia.

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##### Table of Contents



Rafael G. Rodriguezre-joined ProxyMed in January 2002 and currently
serves as Vice President, Senior Corporate Counsel and Secretary. Mr.
Rodriguez was Associate Counsel of ProxyMed from June 1997 to February 1999.
Between February 1999 to April 2001, he served as Counsel to Milgo Solutions,
LLC, (now NextiraOne), a Platinum Equity portfolio company. Prior to first
joining ProxyMed in 1997, Mr. Rodriguez was Associate Counsel for GMIS, a
McKesson HBOC, Inc. company. Mr. Rodriguez graduated from the University of
Pennsylvania School of Law in 1994, and he is admitted to practice law in the
states of Pennsylvania, New Jersey and Florida.

Judson E. Schmidcurrently serves as Executive Vice President, Chief
Financial Officer and Treasurer of ProxyMed. From April 1996 to October 2000,
he was ProxyMeds Vice President  Corporate Finance and Corporate Controller.
From August 1994 to September 1995, Mr. Schmid was the Corporate Controller for
CardioLife Corporation, a privately-held medical provider of transtelephonic
cardiac monitoring services. From September 1990 to August 1994, he was the
Corporate Controller of Sports-Tech International, Inc., a publicly-held
developer and supplier of computer controlled video editing systems for the
sports industry. From September 1985 to September 1990, he worked as an Audit
Supervisor for two public accounting firms, including KPMG. Mr. Schmid
received his undergraduate degree at the University of Florida and his Masters
of Accounting at Florida Atlantic University. Mr. Schmid is a certified public
accountant in Florida (inactive status elected).

Eugene R. Terryhas been a director of ProxyMed since August 1995. Mr.
Terry is a pharmacist and is a principal of T.C. Solutions, a privately-held
investment and financial services consulting firm. Until 2001, Mr. Terry was a
director on the board of In-Home Health, a home health care company acquired by
Manor Care, Inc. In 1971, Mr. Terry founded Home Nutritional Support, Inc.
(HNSI), one of the first companies established in the home infusion industry.
In 1984, HNSI was sold to Healthdyne, Inc. HNSI was later sold to the W.R.
Grace Group. From 1975 to 1984, Mr. Terry was also founder and Chief Executive
Officer of Paramedical Specialties, Inc., a respiratory and durable medical
equipment company, which was also sold to Healthdyne, Inc. Since April 2002,
Mr. Terry also serves as chairman of Gender Sciences, Inc. a Nasdaq
nutraceutical company headquartered in New Jersey.

Timothy J. Tolanwas appointed Senior Vice President of Business
Development in January 2001. Before joining ProxyMed, Mr. Tolan was Vice
President of Sales for ePhysician, Inc from May 2000 until his appointment at
ProxyMed. He was Vice President of Sales  Lab/PBM for Healtheon/WebMD
Corporation from August 1998 through May 2000. Prior to Healtheon/WebMD, Mr.
Tolan also held the position of Vice President of Sales  Eastern Region for
CITATION Computer Systems, a laboratory information system company. Prior to
CITATION, Mr. Tolan spent twelve years in the physician practice management
market.

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##### Table of Contents



Audit Committee- Our Audit Committee consists of three non-employee,
independent directors: Eugene R. Terry (Chair), Edwin M. Cooperman and Kevin M.
McNamara. Gerald B. Cramer, a former director of the Company and member of the
Audit Committee, resigned in February 2003 and has not been replaced.
Additionally, Braden R. Kelly is an observer to this committee. The Audit
Committee is responsible for meeting with representatives of our independent
accountants and with representatives of senior management to review the general
scope of our annual audit, matters relating to internal audit control systems
and the fee charged by the independent accountants. In addition, pursuant to
its Charter, the Audit Committee is responsible for reviewing and monitoring
the performance of non-audit services by our independent accountants and for
recommending the engagement or discharge of our independent accountants.

Compensation Committee- Our Compensation Committee consists of three
non-employee, independent directors: Michael S. Falk, Thomas E. Hodapp and
Braden R. Kelly. Gerald B. Cramer, a former director of the Company and chair
of the Compensation Committee, resigned in February 2003. In March 2003, Mr.
Falk was appointed to the committee to replace Mr. Cramer and was also
appointed as chairman of this committee. The Compensation Committee is
responsible for approving and reporting to the Board on the annual compensation
for all officers, including salary, stock options and other consideration, if
any. The Compensation Committee is also responsible for granting stock options
to be made under our existing plans.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities and Exchange Act of 1934 (the Exchange
Act) requires our officers and directors, and persons who own more than 10% of
the registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the SEC).
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.

Based solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons, we believe that during
our fiscal year ended December 31, 2002, all filing requirements applicable to
our officers and directors and greater than 10% beneficial owners were complied
with, except that Messrs. Guinan, Hardin, Hardy and Schmid failed to timely
file Form 4s relating to their cancellation of stock options in March 2002;
Messrs. Hardin and Schmid failed to timely file a Form 4 regarding the granting
of stock options in September 2002; Mr. Hardy failed to timely file a Form 4
relating to our Series C warrant exchange in 2001; and Messrs. Cooperman, Kelly
and Terry failed to timely file Form 4s relating to their respective grants of
stock options upon re-election to our Board of Directors in May 2002.

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ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid during the past three
fiscal years to our Chief Executive Officers and our other four most highly
compensated executive officers during year 2002 with annual compensation over
$100,000 for such years (the named executive officers), plus up to two
additional individuals for whom disclosure would have been provided but for the
fact that the individuals were not serving as executive officers at the end of
the last completed fiscal year:

Summary Compensation Table

|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  |          |         |            |  |                        |   |      |  |       |         |     |  |  |   |  |  |  |       |    
|---------------------------- |  | ---- | ---- | --- |  | ------------------- | ------- | ------ |  | ------- | ------ | -------- |  | -------- | ------- | ---------- |  | ---------------------- | - | ---- |  | ----- | ------- | --- |  |  | - |  |  |  | ----- | ---
|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  |          |         |            |  | Long-Term Compensation |   |      |  |      
|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  |          |         |            |  |                        |   |      |  |      
|                             |  |      |      |     |  | Annual Compensation |         | Awards |  | Payouts |        |          |  |         
|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  |         
|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  | Other    |         | Restricted |  | Securities             |   |      |  |       |         | All
|Name and                     |  |      |      |     |  |                     |         |        |  |         |        |          |  | Annual   |         | Stock      |  | Underlying             |   | LTIP |  | Other
|Principal                    |  |      |      |     |  | Salary              |         | Bonus  |  | Comp.   |        | Award(s) |  | Options/ |         | Payouts    |  | Compen-               
|Position                     |  | Year |      | ($) |  | ($)                 |         | ($)    |  | ($)     |        | SARs (#) |  | ($)      |         | sation ($)
|                             |  |      |      |     |  |                     |         |        |  |         |        |          |  |          |         |           
|Michael K. Hoover            |  |      | 2002 |     |  |                     | 150,000 |        |  |         | 15,000 | (2)      |  |          |         |            |  |                        |   |      |  |       | 45,508  |     |  |  |   |  |  |  |      |    
|Chairman and Chief           |  |      | 2001 |     |  |                     | 110,019 |        |  |         |       |          |  |          |        |            |  |                        |  |      |  |       | 19,104  |     |  |  |  |  |  |  | 1,000 | (6)
|Executive Officer            |  |      | 2000 |     |  |                     | 56,553  | (1)    |  |         |       |          |  |          | 285,000 | (1)        |  |                        |  |      |  |       | 333,333 |     |  |  |  |  |  |  | 1,000 | (6)
|                            
|John Paul Guinan             |  |      | 2002 |     |  |                     | 180,192 |        |  |         | 2,500  | (2)      |  |          |        |            |  |                        |  |      |  |       | 29,788  | (8) |  |  |  |  |  |  |      |    
|EVP  Prescription           |  |      | 2001 |     |  |                     | 175,155 |        |  |         |       |          |  |          |        |            |  |                        |  |      |  |       | 2,740   |     |  |  |  |  |  |  | 1,000 | (6)
|Services                     |  |      | 2000 |     |  |                     | 188,059 |        |  |         |       |          |  |          |        |            |  |                        |  |      |  |       | 26,667  |     |  |  |  |  |  |  | 1,000 | (6)
|                            
|Nancy J. Ham                 |  |      | 2002 |     |  |                     | 163,269 |        |  |         | 15,000 | (2)      |  |          | 34,481  | (3)(4)     |  |                        |  |      |  |       | 38,572  |     |  |  |  |  |  |  |      |    
|President and Chief          |  |      | 2001 |     |  |                     | 141,096 |        |  |         |       |          |  |          | 26,180  | (4)        |  |                        |  |      |  |       | 9,596   |     |  |  |  |  |  |  | 1,000 | (6)
|Operating Officer            |  |      | 2000 |     |  |                     | 35,585  | (5)    |  |         | 5,000  | (2)      |  |          |        |            |  |                        |  |      |  |       | 43,333  |     |  |  |  |  |  |  |      |    
|                            
|Lonnie W. Hardin             |  |      | 2002 |     |  |                     | 164,057 |        |  |         | 10,000 | (2)      |  |          |         |            |  |                        |  |      |  |       | 21,522  | (8) |  |  |  |  |  |  |      |    
|SVP, Payer Services          |  |      | 2001 |     |  |                     | 137,800 |        |  |         | 14,138 | (2)      |  |          |        |            |  |                        |  |      |  |       | 3,000   |     |  |  |  |  |  |  | 1,000 | (6)
|                             |  |      | 2000 |     |  |                     | 137,800 |        |  |         | 8,750  | (2)      |  |          |        |            |  |                        |  |      |  |       | 13,333  |     |  |  |  |  |  |  | 1,000 | (6)
|                            
|A. Thomas Hardy              |  |      | 2002 |     |  |                     | 182,346 |        |  |         | 2,500  | (2)      |  |          |        |            |  |                        |  |      |  |       | 25,921  | (8) |  |  |  |  |  |  |      |    
|SVP  Lab Services and       |  |      | 2001 |     |  |                     | 199,904 |        |  |         |       |          |  |          |        |            |  |                        |  |      |  |       | 12,624  |     |  |  |  |  |  |  | 1,000 | (6)
|President of Key             |  |      | 2000 |     |  |                     | 230,602 |        |  |         | 20,000 | (2)      |  |          |        |            |  |                        |  |      |  |       | 20,000  |     |  |  |  |  |  |  | 8,667 | (7)
|Communications
Service, Inc. |  |      |      |     |  |                     |         |        |  |         |        |          |  |          |         |            |  |                        |   |      |  |       |         |     |  |  |   |  |  |  |       |    



---

|(1) |  | Mr. Hoover joined us on July 28, 2000. As part of his employment
agreement dated July 28, 2000, Mr. Hoover was awarded 13,333 shares of
common stock valued at $285,000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Earned in current fiscal year but paid in following fiscal year.                                                                                                        
|   
|(3) |  | Consists of reimbursement of relocation expenses of $9,461, including tax
reimbursement of $3,122.                                                                      
|   
|(4) |  | Consists of reimbursement of living expenses for Florida housing,
including tax reimbursements of $7,020 and $4,580 in 2002 and 2001,
respectively.                     
|   
|(5) |  | Ms. Ham joined us on October 16, 2000.                                                                                                                                  
|   
|(6) |  | Matching employer contributions made under the ProxyMed, Inc. 401(k) Plan.                                                                                              
|   
|(7) |  | Includes matching employer contributions of $8,000 the Key Communications
Service, Inc. 401(k) Plan and $667 made under the ProxyMed, Inc. 401(k)
Plan for 2000.        
|   
|(8) |  | Includes stock options cancelled and reissued as follows: 13,333 options
for Mr. Guinan, 1,434 options for Mr. Hardin, and 9,466 options for Mr.
Hardy.                 

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##### Table of Contents



The following table provides information on stock option grants during
fiscal year 2002 to each of the named executive officers:

Option/SAR Grants in Last Fiscal Year

|                  |  |                            |        |              |  |                  |      |            |  |    |       |     |  |                             |         |  |  |   |         |  |  |   |           | 
|----------------- |  | -------------------------- | ------ | ------------ |  | ---------------- | ---- | ---------- |  | -- | ----- | --- |  | --------------------------- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                  |  | Individual Grants          |        |              |  |                  |      |            |  |    |       |     |  |                             |         |  |  |  
|                  |  | Potential Realizable Value
|                  |  | # of Securities            |        | % of Total   |  |                  |      |            |  |    |       |     |  | at Assumed Annual Rates    
|                  |  | Underlying                 |        | Options/SARs |  |                  |      |            |  |    |       |     |  | of Stock Price Appreciation
|                  |  | Options/                   |        | Granted To   |  |                  |      |            |  |    |       |     |  | for Option Term*           
|                  |  | SARs                       |        | Employee In  |  | Exercise or Base |      | Expiration |  |   
|Name              |  | Granted                    |        | Fiscal Year  |  | Price            |      | Date       |  | 5% |       | 10%
|                  |  |                            |        |              |  |                  |      |            |  |    |       |    
|Michael K. Hoover |  |                            | 45,508 |              |  |                  | 13.8 | %          |  | $  | 17.36 |     |  |                             | 6/18/12 |  |  | $ | 496,839 |  |  | $ | 1,259,087 | 
|John Paul Guinan  |  |                            | 29,788 |              |  |                  | 9.0  | %          |  | $  | 15.55 |     |  |                             | 9/27/12 |  |  | $ | 291,306 |  |  | $ | 738,227   | 
|Nancy J. Ham      |  |                            | 2,640  |              |  |                  | 0.8  | %          |  | $  | 16.82 |     |  |                             | 3/31/07 |  |  | $ | 12,268  |  |  | $ | 27,110    | 
|Nancy J. Ham      |  |                            | 35,932 |              |  |                  | 10.9 | %          |  | $  | 17.36 |     |  |                             | 6/18/12 |  |  | $ | 392,292 |  |  | $ | 994,144   | 
|Lonnie W. Hardin  |  |                            | 21,522 |              |  |                  | 6.5  | %          |  | $  | 15.55 |     |  |                             | 9/27/12 |  |  | $ | 210,470 |  |  | $ | 533,373   | 
|A. Thomas Hardy   |  |                            | 25,921 |              |  |                  | 7.8  | %          |  | $  | 15.55 |     |  |                             | 9/27/12 |  |  | $ | 253,490 |  |  | $ | 642,392   | 



|* |  | The assumed annual rates of stock price appreciation are required disclosures,
and are not intended to forecast future stock appreciation.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth certain information concerning unexercised
options held by each of the named executive officers:

Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Options/SAR Values

|                  |  |             |   |          |  |             |   |                            |  |                              |         |                      |  |  |         |  |  |   |   |  |  |   |   | 
|----------------- |  | ----------- | - | -------- |  | ----------- | - | -------------------------- |  | ---------------------------- | ------- | -------------------- |  |  | ------- |  |  | - | - |  |  | - | - | 
|                  |  |             |   |          |  |             |   |                            |  | Number of Securities         |         | Value of Unexercised
|                  |  |             |   |          |  |             |   |                            |  | Underlying Unexercised       |         | In-the-Money        
|                  |  | # of Shares |   |          |  |             |   | Options/SARs at FY-End (#) |  | Options/SARs at FY-End ($)**
|                  |  | Acquired on |   | $ Value  |  |             |   |                           
|Name              |  | Exercise    |   | Realized |  | Exercisable |   | Unexercisable              |  | Exercisable                  |         | Unexercisable       
|                  |  |             |   |          |  |             |   |                            |  |                              |         |                     
|Michael K. Hoover |  |             |  |          |  |             |  |                            |  |                              | 253,343 |                      |  |  | 144,602 |  |  | $ |  |  |  | $ |  | 
|John Paul Guinan  |  |             |  |          |  |             |  |                            |  |                              | 27,404  |                      |  |  | 31,791  |  |  | $ |  |  |  | $ |  | 
|Nancy J. Ham      |  |             |  |          |  |             |  |                            |  |                              | 51,444  |                      |  |  | 40,057  |  |  | $ |  |  |  | $ |  | 
|Lonnie W. Hardin  |  |             |  |          |  |             |  |                            |  |                              | 18,673  |                      |  |  | 19,182  |  |  | $ |  |  |  | $ |  | 
|A. Thomas Hardy   |  |             |  |          |  |             |  |                            |  |                              | 29,714  |                      |  |  | 28,831  |  |  | $ |  |  |  | $ |  | 



|** |  | Year-end values for unexercised in-the-money options represent the
positive spread between the exercise price of such options and the fiscal
year-end market value of the common stock, which was $10.44 on December
31, 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There were no awards made to named executive officers in the last
completed fiscal year under any long-term incentive plan for performance to
occur over a period longer than one fiscal year. We do not have any defined
benefit or actuarial plans for our employees.

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The following table sets forth certain information concerning repriced
stock options held by each of the named executive officers:

Ten Year Options/SAR Repricings

|                 |  |      |         |     |  |              |        |              |  |                |       |                    |  |              |        |              |  |                    |       |  |  |           |  | 
|---------------- |  | ---- | ------- | --- |  | ------------ | ------ | ------------ |  | -------------- | ----- | ------------------ |  | ------------ | ------ | ------------ |  | ------------------ | ----- |  |  | --------- |  | 
|                 |  |      |         |     |  | Number of    |        |              |  |                |       |                    |  |              |        |              |  |                    |       |  |  |          
|                 |  |      |         |     |  | securities   |        | Market price |  |                |       |                    |  |              |        |              |  | Length of original
|                 |  |      |         |     |  | underlying   |        | of stock at  |  |                |       |                    |  |              |        |              |  | option term       
|                 |  |      |         |     |  | options/SARs |        | time of      |  | Exercise price |       |                    |  |              |        | remaining at
|                 |  |      |         |     |  | repriced or  |        | repricing or |  | at time of     |       |                    |  |              |        | date of     
|                 |  |      |         |     |  | amended      |        | amendment    |  | repricing or   |       | New exercise price |  | repricing or
|Name             |  | Date |         | (#) |  | ($)          |        | amendment    |  | ($)            |       | amendment         
|                 |  |      |         |     |  |              |        |              |  |                |       |                   
|John Paul Guinan |  |      | 9/27/02 |     |  |              | 10,000 |              |  | $              | 15.55 |                    |  | $            | 57.45  |              |  | $                  | 15.55 |  |  | 1.1 years
|John Paul Guinan |  |      | 9/27/02 |     |  |              | 1,000  |              |  | $              | 15.55 |                    |  | $            | 104.10 |              |  | $                  | 15.55 |  |  | 4.1 years
|John Paul Guinan |  |      | 9/27/02 |     |  |              | 2,333  |              |  | $              | 15.55 |                    |  | $            | 198.75 |              |  | $                  | 15.55 |  |  | 1.8 years
|Lonnie
W. Hardin |  |      | 9/27/02 |     |  |              | 667    |              |  | $              | 15.55 |                    |  | $            | 148.20 |              |  | $                  | 15.55 |  |  | 1.4 years
|Lonnie
W. Hardin |  |      | 9/27/02 |     |  |              | 767    |              |  | $              | 15.55 |                    |  | $            | 198.75 |              |  | $                  | 15.55 |  |  | 1.8 years
|A. Thomas Hardy  |  |      | 9/27/02 |     |  |              | 6,533  |              |  | $              | 15.55 |                    |  | $            | 165.00 |              |  | $                  | 15.55 |  |  | 1.9 years
|A. Thomas Hardy  |  |      | 9/27/02 |     |  |              | 2,933  |              |  | $              | 15.55 |                    |  | $            | 176.25 |              |  | $                  | 15.55 |  |  | 6.3 years

Certain stock options for executive officers and directors were amended in
2000 and 2001 to allow for extensions of exercise periods (typically one to
three years) after termination of employment. Additionally, in January 2002,
the exercise period of certain vested options held by our three resigning
directors were extended through December 31, 2003. In January 2002, our Board
of Directors agreed to cancel a total of 37,767 stock options with exercise
prices ranging from 57.45 to $202.50 previously issued to employees with the
intent of reissuing the same number of options in the future at the then
current market price. In September 2002, we issued 36,867 stock options at an
exercise price of $15.55 per share pursuant to these instructions, including
24,233 stock options to the named executives in the above table. In all cases
noted here, the market price of our common stock was below the exercise price
of the options at the time of amendment.

In January 2002, the Compensation Committee of our Board of Directors
agreed to authorize bonuses for members of executive and senior management in
the event of a change in control of our company. These bonuses would be based
on the calculated per share value of the transaction, are payable in cash
and/or stock, and are contingent upon certain conditions including obtaining a
minimum per share value and being an active employee at the time of such event.

Compensation of Directors

Our employee directors are not compensated for their services as
directors. Non-employee directors are compensated with stock options for their
services as directors as follows: Effective beginning May 22, 2002, each
non-employee director will be granted 15,000 stock options upon his or her
initial appointment or election to the Board of Directors by the shareholders
with such grant vesting equally over the following three years. On each
subsequent election by the shareholders, each non-employee director receives an
additional 5,000 share stock option grant which vests immediately.
Additionally, each non-employee director receives an annual 2,500 share stock
option grant for each subcommittee membership. Such subcommittee grants vest
in full after three years but may be accelerated to vest immediately on a
prorata basis (based on four projected subcommittee meetings per election year)
as determined by the attendance of the director at each subcommittee meeting.
For the 2002-2003 election year, options to purchase a total of 71,875 shares
of common stock at exercise prices of $12.54 to $20.20 were granted pursuant to
the above guidelines. Of this amount, 8,125 stock options were accelerated to
vest by December 31, 2002. Additionally, all directors are reimbursed for
reasonable expenses incurred in attending board meetings.

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Employment Agreements with the Named Executive Officers

In July 2000, we entered into an employment agreement with Mr. Hoover.
The agreement is for a three-year term and automatically extends from year to
year thereafter unless terminated by us upon 90 days written notice or by the
employee upon 30 days written notice prior to the end of the initial term or
any extension. Mr. Hoover currently receives an annual base salary of $225,000
(effective January 1, 2003) and is entitled to such bonuses as may be awarded
from time to time and to participate in any stock option plans that we may now
have or in the future develop. He may be terminated for cause as defined in
his agreement. If terminated for cause, he will be entitled to base salary
earned, and he will retain all vested stock options. If, upon 90 days prior
written notice, he is terminated without cause, he will be entitled to
receive an amount equal to his base salary plus bonus, if any, and continuation
of health insurance for six months following termination, plus any unvested
options shall vest. In addition, the agreement contains confidentiality and
non-competition covenants.

In October 2000, we entered into an employment agreement with Ms. Ham.
The agreement is for a three-year term and automatically extends from year to
year thereafter unless terminated by us upon 90 days written notice or by the
employee upon 30 days written notice prior to the end of the initial term or
any extension. Ms. Ham currently receives an annual base salary of $200,000
(effective January 1, 2003) and is entitled to such bonuses as may be awarded
from time to time and to participate in any stock option plans that we may now
have or in the future develop. Upon her promotion to president in October
2001, Ms. Ham was awarded a $25,000 salary increase which she deferred until
April 1, 2002. In lieu of this increase, she was granted 2,640 stock options
at an exercise price of $16.82 per share; these options vested on March 31,
2002. She may be terminated for cause as defined in her agreement. If
terminated for cause, she will be entitled to base salary earned, and she will
retain all vested stock options. If, upon 90 days prior written notice, she is
terminated without cause, she will be entitled to receive an amount equal to
her base salary plus bonus, if any, and continuation of health insurance for
six months following termination, plus any unvested options shall vest. In
addition, the agreement contains confidentiality and non-competition covenants.

In December 1995, we entered into an employment agreement with Mr. Guinan,
which is automatically extended from year to year unless terminated by either
party upon 60 days written notice. Mr. Guinan currently receives an annual
base salary of $185,000 (effective January 1, 2003) and is entitled to such
bonuses as may be awarded from time to time by the Board of Directors and to
participate in any stock option plans that we may now have or in the future
develop. Mr. Guinan may be terminated for cause as defined in the agreement.
If he is terminated for cause, he will be entitled to base salary earned, and
he will retain all vested stock options. If he is terminated without cause,
then he will be entitled to receive an amount equal to his base salary and
bonus, if any, and continuation of health insurance for six months following
termination, plus any unvested options shall vest. In addition, the agreement
contains confidentiality and non-competition covenants.

In March 2001, we entered into an employment agreement with Mr. Hardin.
The agreement is for a three-year term and automatically extends from year to
year thereafter unless terminated by us upon 90 days written notice or by the
employee upon 30 days written notice prior to the end of the initial term or
any extension. Mr. Hardin currently receives an annual base salary of $185,000
(effective January 1, 2003), and is entitled to such bonuses as may be awarded
from time to time and to participate in any stock option plans that we may now
have or in the future develop. He may be terminated for cause as defined in
his agreement. If terminated for cause, he will be entitled to base salary
earned, and he will retain all vested stock options. If, he is terminated
without cause, he will be entitled to receive an amount equal to his base
salary plus bonus, if any, and continuation of health insurance for six months
following termination, plus any unvested options shall vest. In addition, the
agreement contains confidentiality and non-competition covenants.

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In December 1998, upon acquiring Key Communications, we entered into a
three-year employment agreement with Mr. Hardy. Under this agreement, Mr.
Hardy received an annual base salary of $225,000 and was eligible to receive an
annual bonus up to $40,000 as may be awarded by the Board of Directors. In
December 2001, we entered into a new employment agreement with Mr. Hardy. The
agreement is for a three-year term and automatically extends from year to year
thereafter unless terminated by us upon 90 days written notice or by the
employee upon 30 days written notice prior to the end of the initial term or
any extension. Under this new agreement, Mr. Hardy currently receives an
annual base salary of $185,000 (effective January 1, 2003) and is entitled to
such bonuses as may be awarded from time to time and to participate in any
stock option plans which we may now have or in the future develop. He may be
terminated for cause as defined in his agreement. If terminated for cause,
he will be entitled to base salary earned, and he will retain all vested stock
options. If he is terminated without cause, he will be entitled to receive
an amount equal to his base salary plus bonus, if any, and continuation of
health insurance for six months following termination, plus any unvested
options shall vest. In addition, the agreement contains confidentiality and
non-competition covenants.

Liability and Indemnification of Our Directors and Officers

The Florida Business Corporation Act provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duty as directors, except for liability (i) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) for any unlawful payment of a dividend or
unlawful stock repurchase or redemption, as provided in Section 607.0834 of the
Florida Business Corporation Act, (iii) for any transaction from which the
director derived an improper personal benefit, or (iv) for a violation of
criminal law (the Exceptions). Our Restated Articles of Incorporation and
Bylaws also provide that we shall indemnify our directors and officers to the
fullest extent permitted by Section 607.0831 of the Florida Business
Corporation Act, including circumstances in which indemnification is otherwise
discretionary. We have procured and maintain insurance under which our
directors and officers are insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers. Subject to the Exceptions, we have entered into indemnification
agreements with most of our directors and executive officers limiting their
personal liability for monetary damages and reasonable attorney fees, except
for personal liability that cannot be eliminated under the Florida Business
Corporation Act.

Certain information required by Item 402(j) of Regulation S-K is
incorporated herein by reference to the Companys Proxy Statement, which will
be filed with the SEC within 120 days after December 31, 2002, under the
caption Compensation Committee Interlocks and Insider Participation. The
Report of the Compensation Committee and the Stock Performance Graph contained
in the Proxy Statement are specifically excluded from incorporation by
reference herein.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information to our knowledge or as reported
to us regarding the beneficial ownership of our common stock as of March 28,
2003, with respect to (i) each person known to us to be the beneficial owner of
more than 5% of our common stock, including exercisable options and warrants;
(ii) each director; (iii) each executive officer named in the Summary
Compensation Table; and (iv) all of our directors and officers as a group.
Beneficial ownership is determined under the rules and regulations of the
Securities and Exchange Commission, or SEC.

|                                         |  |                 |           |            |  |  |      |  
|---------------------------------------- |  | --------------- | --------- | ---------- |  |  | ---- | -
|Name and Address (1)                     |  | # of Shares (2) |           | % of Class
|                                         |  |                 |           |           
|Edwin M. Cooperman (3)                   |  |                 | 21,202    |            |  |  | *    |  
|Michael S. Falk (4)                      |  |                 | 429,674   |            |  |  | 6.3  | %
|John Paul Guinan (5)                     |  |                 | 26,154    |            |  |  | *    |  
|Nancy J. Ham (6)                         |  |                 | 55,527    |            |  |  | *    |  
|Lonnie W. Hardin (7)                     |  |                 | 18,673    |            |  |  | *    |  
|A. Thomas Hardy (8)                      |  |                 | 78,357    |            |  |  | 1.2  | %
|Thomas E. Hodapp (9)                     |  |                 | 18,206    |            |  |  | *    |  
|Michael K. Hoover (10)                   |  |                 | 394,457   |            |  |  | 5.6  | %
|Braden R. Kelly (11)                     |  |                 | 2,124,895 |            |  |  | 29.0 | %
|Kevin M. McNamara (12)                   |  |                 | 625       |            |  |  | *    |  
|Rafael G. Rodriguez (13)                 |  |                 | 1,000     |            |  |  | *    |  
|Judson E. Schmid (14)                    |  |                 | 20,566    |            |  |  | *    |  
|Eugene R. Terry (15)                     |  |                 | 21,139    |            |  |  | *    |  
|Timothy J. Tolan (16)                    |  |                 | 24,435    |            |  |  | *    |  
|General Atlantic Partners, LLC (11)      |  |                 | 2,118,645 |            |  |  | 28.9 | %
|Three Pickwick Plaza
Greenwich, CT 06830 |  |                 |           |            |  |  |      |  
|Cramer Rosenthal & McGlynn, LLC (17)     |  |                 | 489,629   |            |  |  | 7.2  | %
|520 Madison Avenue
New York, NY 10022    |  |                 |           |            |  |  |      |  
|FMR Corp. (18)                           |  |                 | 409,200   |            |  |  | 6.0  | %
|82 Devonshire Street
Boston, MA 02109    |  |                 |           |            |  |  |      |  

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|                                                        |  |                 |           |            |  |  |      |  
|------------------------------------------------------- |  | --------------- | --------- | ---------- |  |  | ---- | -
|Name and Address (1)                                    |  | # of Shares (2) |           | % of Class
|                                                        |  |                 |           |           
|All directors and officers
as a group (29 persons) (19) |  |                 | 3,245,464 |            |  |  | 41.4 | %



---

|*    |  | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(1)  |  | The address for each person, unless otherwise noted, is 2555 Davie Road,
Suite 110, Fort Lauderdale, Florida 33317-7424.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(2)  |  | In accordance with Rule 13d-3 of the Exchange Act, shares that are not
outstanding, but that are subject to options, warrants, rights or
conversion privileges exercisable within 60 days from March 28, 2003, have
been deemed to be outstanding for the purpose of computing the percentage
of outstanding shares owned by the individual having such right, but have
not been deemed outstanding for the purpose of computing the percentage
for any other person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(3)  |  | Includes 5,450 shares held of record and 15,752 shares issuable upon the
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(4)  |  | Includes 132,190 shares held of record by Michael Falk and various Falk
family trusts and foundations and 6,723 shares issuable upon the exercise
of currently exercisable stock options and warrants. Additionally,
includes (i) 19,402 shares held of record by Commonwealth Associates, LP
for which Mr. Falk is a control person; (ii) 16,278 shares held of record
by ComVest Capital Partners, LLC for which Mr. Falk is a managing member;
and (iii) 248,446 shares held of record and 6,635 shares issuable upon the
exercise of currently exercisable warrants by Commonwealth Liquidation,
LLC for which Mr. Falk is a controlling member as reported in Form 4 filed
with the SEC on March 6, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(5)  |  | Includes 67 shares held of record and 26,087 shares issuable upon the
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(6)  |  | Includes 4,083 shares held of record and 51,444 shares issuable upon the
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(7)  |  | Includes 18,673 shares issuable upon exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(8)  |  | Includes 48,643 shares held of record and 29,715 shares issuable upon
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(9)  |  | Includes 3,067 shares held of record and 15,139 shares issuable upon
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(10) |  | Includes 141,114 shares held of record and 253,343 shares issuable upon
exercise of currently exercisable stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(11) |  | Includes 6,250 shares issuable upon exercise of currently exercisable
stock options for Mr. Kelly. Additionally, includes the following shares
of common stock held by various General Atlantic entities: (i) 1,289,821
shares owned by General Atlantic Partners 74, L.P.; (ii) 175,141 shares
owned by GAP Coinvestment Partners II, L.P.; (iii) 101,833 shares owned by
GapStar, LLC; and (iv) 2,571 shares owned by GAPCO GmbH & Co. KG. These
shares, along with warrants to purchase an aggregate of 549,279 shares of
common stock (which are exercisable beginning April 5, 2003), were
acquired in a private placement transaction completed on April 5, 2002.
Braden R. Kelly, a director of the Company, is a managing member of
General Atlantic Partners, LLC and general partner of GAP Coinvestment
Partners II, L.P. General Atlantic Partners, LLC is the general partner
of General Atlantic Partners 74, L.P. and the manager member of GapStar,
LLC. All but one of the managing members of General Atlantic Partners,
LLC are also the general partners of GAP Coinvestment Partners II, L.P.
Certain of the managing members of General Atlantic Partners, LLC are
authorized and empowered to vote and dispose of the shares held by GAPCO
GmbH & Co KG. Mr. Kelly disclaims beneficial ownership of the shares
referred in clauses (i), (ii), (iii) and (iv) above, except to the extent
of his pecuniary interest herein.
|    
|(12) |  | Includes 625 shares issuable upon exercise of currently exercisable stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(13) |  | Includes 1,000 shares issuable upon exercise of currently exercisable
stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents



|(14) |  | Includes 1,186 shares held of record and 19,380 shares issuable upon
exercise of currently exercisable stock options.                                                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(15) |  | Includes 21,139 shares issuable upon exercise of currently exercisable
stock options.                                                                                                                                                                                                                                                 
|    
|(16) |  | Includes 1,333 shares held of record and 23,102 shares issuable upon
exercise of currently exercisable stock options.                                                                                                                                                                                                                 
|    
|(17) |  | Includes 365,990 shares beneficially owned by Cramer Rosenthal McGlynn,
LLC (CRM LLC) and 123,639 shares beneficially owned by Gerald B. Cramer
as reported in Form 13D filed with the SEC on January 10, 2003. Mr.
Cramer is principally employed as the Chairman of CRM LLC and was a
director of the Company until February 2003.
|    
|(18) |  | Includes 409,200 shares beneficially owned by FMR Corp as reported in
Form 13G filed with the SEC on February 14, 2003. FMR Corp. is the parent
company of Fidelity Management & Research Company which, through its
ownership of the Fidelity Small Cap Stock Fund, owns these shares of the
Company.                                
|    
|(19) |  | Includes 2,190,626 shares held of record by the named officers and
directors and their related parties and 1,054,838 shares issuable upon
exercise of currently exercisable stock options and warrants.                                                                                                                               

Equity Compensation Plans

We have various stock option plans for employees, directors and outside
consultants, under which both incentive stock options and non-qualified options
may be issued. Under such plans, options to purchase up to 1,281,017 shares of
common stock may be granted. Options may be granted at prices equal to the
fair market value at the date of grant, except that incentive stock options
granted to persons owning more than 10% of the outstanding voting power must be
granted at 110% of the fair market value at the date of grant. At the
Companys Annual Meeting of Shareholders held on May 22, 2002, the shareholders
approved a new 2002 Stock Option Plan pursuant to which options to purchase
600,000 shares of common stock may be issued to employees, officers and
directors. In addition, as of December 31, 2002, options for the purchase of
418,142 shares to newly-hired employees remain outstanding. Stock options
issued by ProxyMed generally vest within three years, and expire up to ten
years from the date granted. See Note 15 to the Consolidated Financial
Statements and related notes beginning on page F-1 for more information on our
equity compensation plans.

The following table sets forth information regarding our compensation
plans under which equity securities are authorized for issuance as of December
31, 2002:

Equity Compensation Plan Information

|                                                               |       |                              |                      |                              |                           |                           |                         |       |                      |  |         |         | 
|-------------------------------------------------------------- | ----- | ---------------------------- | -------------------- | ---------------------------- | ------------------------- | ------------------------- | ----------------------- | ----- | -------------------- |  | ------- | ------- | 
|                                                               |       |                              | Number of securities |                              |                           |                           |                         |       | Number of securities
|                                                               |       |                              | to be issued upon    |                              | Weighted-average exercise |                           | remaining available for
|Plan                                                           |       | exercise of outstanding      |                      | price of outstanding         |                           | future issuance under    
|Category                                                       |       | options, warrants and rights |                      | options, warrants and rights |                           | equity compensation plans
|                                                               |       |                              |                      |                              |                           |                          
|Equity compensation plans approved
by security holders         |       |                              | 666,413              |                              |                           | $                         | 22.12                   |       |                      |  | 575,042 |        
|Equity compensation plans not
approved
by security holders (1) |       |                              | 418,142              |                              |                           | $                         | 25.10                   |       |                      |  |        |        
|                                                               | Total |                              |                      | 1,084,555                    |                           |                           | $                       | 23.27 |                      |  |         | 575,042 | 



---

|(1) |  | The Company maintains a stock option plan to grant stock options to
newly-hired employees. Such plan was not required to be approved by the
shareholders of the Company. Since January 2002, no additional
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | grants of options have been made from this plan. Any grants to newly-hired
employees since January 2002 have since been made from plans approved by our
shareholders.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In April 1997, we made loans totaling $350,000 to Mr. Blue, our former
chairman of the board and chief executive officer. The funds were advanced
pursuant to two demand promissory notes in the principal amounts of $290,000
and $60,000, respectively, each bearing interest at a rate of 7-3/4% per annum.
On June 30, 2000, we amended the terms of these notes whereby interest on the
notes ceased to accrue subsequent to July 1, 2000 and the loan plus accrued
interest, totaling $435,900 at June 30, 2000, would be payable in a balloon
payment in December 2001. The loans were collateralized with options to
purchase 36,667 shares of common stock granted to Mr. Blue under our stock
option plans. As of December 31, 1999, these loans were included in other
assets on the balance sheet; as of December 31, 2000, all amounts owed under
these loans were reclassified to stockholders equity.

In December 2001, a payment of $250,000 was received from Mr. Blue and
applied against the outstanding balance of the loans. We agreed to refinance
the remaining $185,983 balance and a new promissory note was executed by Mr.
Blue. This new note requires monthly interest payments at prime rate plus 1%,
established at the beginning of each calendar quarter, and is payable in a
balloon payment on or before December 31, 2003. The note is collateralized
with options to purchase 36,667 shares of common stock granted to Mr. Blue
under the our stock option plans along with additional warrants granted to Mr.
Blue from various other public companies. In January 2002, Mr. Blue resigned
from the our Board of Directors and the remaining Board members agreed to
extend the exercise period of the stock options held as collateral for the note
in an effort to maximize the potential for repayment.

In March 2001, Mr. Guinan entered into an uncollateralized promissory note
for $45,400 for amounts previously borrowed from us. The promissory note calls
for minimum bi-weekly payments of $350 deducted directly from Mr. Guinans
payroll until the note is paid in full on or before February 2006. The note is
non-interest bearing but interest is imputed annually based on the Internal
Revenue Service Applicable Federal Rate at the time the note was originated
(4.98%). Under terms of the promissory note, if Mr. Guinan is terminated
without cause the note is due in full after nine months from the date of
termination as long as the scheduled bi-weekly payments continue to be made.
As of December 31, 2002, the unpaid principal balance of the note is $23,000.




ITEM 14. CONTROLS AND PROCEDURES.

Within 90 days prior to the date of this report, the Company evaluated the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in Exchange Act Rule 13a-14(c)), under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer. Based upon
such evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that there was no reasonably apparent deficiency in the Companys
disclosure controls and procedures such that the controls and procedures should
not be expected to operate effectively. The Company is not aware of any
significant changes in the Companys internal controls or in other factors that
could significantly affect those controls subsequent to the date of the most
recent evaluation of such controls by the Company.

49



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PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|    |  |                                    |  |                                                                                                                                                                                                                                      |  |           
|--- |  | ---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------
|    |  |                                    |  |                                                                                                                                                                                                                                      |  | Page      
|    |  |                                    |  |                                                                                                                                                                                                                                      |  |           
|(a) |  | (1)                                |  | The following financial statements are included in Part II, Item 8:                                                                                                                                                                  |  |           
|    |  | Consolidated Financial Statements: |  |                                                                                                                                                                                                                                     
|    |  |                                    |  | Report of Independent Certified Public Accountants                                                                                                                                                                                   |  | F-2       
|    |  |                                    |  | Consolidated Balance Sheets  December 31, 2002 and 2001                                                                                                                                                                             |  | F-3       
|    |  |                                    |  | Consolidated Statements of Operations  Years Ended December
31, 2002, 2001 and 2000                                                                                                                                                 |  | F-4       
|    |  |                                    |  | Consolidated Statements of Stockholders Equity  Years Ended
December 31, 2002, 2001 and 2000                                                                                                                                       |  | F-5       
|    |  |                                    |  | Consolidated Statements of Cash Flows  Years Ended December
31, 2002, 2001 and 2000                                                                                                                                                 |  | F-6       
|    |  |                                    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                           |  | F-7 
F-46
|    |  | (2)                                |  | The following schedule for the years 2002, 2001 and 2000
is submitted herewith:                                                                                                                                                      |  |           
|    |  |                                    |  | Schedule II  Valuation and Qualifying Accounts -
Years Ended December 31, 2002, 2001 and 2000                                                                                                                                       |  | F-47      
|    |  | (3)                                |  | Exhibits required to be filed by Item 601 of Regulation
S-K as exhibits to this Report are listed in the Exhibit
Index appearing on pages 54 through 59.                                                                             |  |           
|(b) |  |                                    |  | Reports on Form 8-K:                                                                                                                                                                                                                 |  |           
|    |  |                                    |  | October 24, 2002  Report announcing Third Quarter 2002
telephone conference call to be held on October 24, 2002,
including information to be presented on call and press
release dated October 23, 2002, pursuant to Regulation FD. |  |           

50



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SIGNATURES

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

|                      |  |               |  |                                          
|--------------------- |  | ------------- |  | -----------------------------------------
|Dated: April 15, 2003 |  | PROXYMED, INC
|                      |  |               |  |                                          
|                      |  | By:           |  | /s/ Michael K. Hoover                    
|                      |  |               |  |                                          
|                      |  |               |  | Michael K. Hoover
Chief Executive Officer




POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael K. Hoover and Judson E. Schmid and each
of them, his true and lawful attorney-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.

In accordance with the Securities and Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                         |  |                                                                                                   |  |               
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|SIGNATURES                               |  | TITLE                                                                                             |  | DATE          
|                                         |  |                                                                                                   |  |               
|/s/ Michael K. HooverMichael K. Hoover   |  | Chairman of the Board and
Chief Executive Officer
(principal executive officer)                   |  | April 15, 2003
|                                        
|/s/ Judson E. SchmidJudson E. Schmid     |  | Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer) |  | April 15, 2003
|                                        
|/s/ Edwin M. CoopermanEdwin M. Cooperman |  | Director                                                                                          |  | April 15, 2003
|                                        
|/s/ Michael S. FalkMichael S. Falk       |  | Director                                                                                          |  | April 15, 2003
|                                        
|/s/ Thomas E. HodappThomas E. Hodapp     |  | Director                                                                                          |  | April 15, 2003
|                                        
|/s/ Braden R. KellyBraden R. Kelly       |  | Director                                                                                          |  | April 15, 2003
|                                        
|/s/ Kevin M. McNamaraKevin M. McNamara   |  | Director                                                                                          |  | April 15, 2003
|                                        
|/s/ Eugene R. TerryEugene R. Terry       |  | Director                                                                                          |  | April 15, 2003

51



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##### Table of Contents






CERTIFICATIONS

I, Michael K. Hoover, Chief Executive Officer of ProxyMed, Inc., certify
that:



| | 1. |  | I have reviewed this annual report on Form 10-K of ProxyMed,
Inc;                                                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | 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;
|
| | 3. |  | 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;                   
|
| | 4. |  | 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 others 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 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;                                                                                                                        



| | 5. |  | 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 the 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 weaknesses 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                                                                                                                                        



| | 6. |  | 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 the significant deficiencies and material weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                    |  | 
|------------------------------------------------------------------- |  | 
|Date: April 15, 2003                                                |  | 
|                                                                    |  | 
|/s/ Michael K. Hoover                                               |  | 
|                                                                    |  | 
|Michael K. Hoover
Chairman of the Board and
Chief Executive Officer |  | 

52



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##### Table of Contents



I, Judson E. Schmid, Chief Financial Officer of ProxyMed, Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of ProxyMed,
Inc;                                                                                                                                                                                                                                                       
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | 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;
|
| | 3. |  | 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;                   
|
| | 4. |  | 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 others 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 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;                                                                                                                        



| | 5. |  | 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 the 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 weaknesses 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                                                                                                                                        



| | 6. |  | 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 the significant deficiencies and material weaknesses.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                       |  | 
|---------------------------------------------------------------------- |  | 
|Date: April 15, 2003                                                   |  | 
|                                                                       |  | 
|/s/ Judson E. Schmid                                                   |  | 
|                                                                       |  | 
|Judson E. Schmid
Executive Vice President, and
Chief Financial Officer |  | 

53



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EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                  
|2.1         |  | Asset Purchase Agreement dated July 30, 2002 between ProxyMed,
Inc. and MDIP, Inc. (incorporated by reference to Exhibit 2.1
of Form 8-K File No. 000-22052, reporting an event dated July
31, 2002).                                                            
|2.2         |  | Stock Purchase Agreement dated May 6, 2002 between ProxyMed,
Inc. and KenCom Communications & Services, Inc. (incorporated
by reference to Exhibit 2.1 of Form 8-K File No. 000-22052,
reporting an event dated May 6, 2002).                                    
|2.3         |  | Agreement and Plan of Merger and Reorganization dated December
31, 2002 between ProxyMed, Inc., Davie Acquisition Corp., and
MedUnite Inc. (incorporated by reference to Exhibit 2.1 of
Form 8-K File No. 000-22052, reporting an event dated December
31, 2002).
|3.1         |  | Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-2678).                                                                                                                  
|3.2         |  | Bylaws, as amended (incorporated by reference to Exhibit 3.1
of the Registration Statement on Form SB-2, File No.
333-2678).                                                                                                                                     
|3.3         |  | Articles of Amendment to Articles of Incorporation dated July
25, 2001 (incorporated by reference to Exhibit 2.1 of Form
8-K, File No. 000-22052, reporting an event dated August 17,
2001).                                                                     
|3.4         |  | Articles of Amendment to Articles of Incorporation dated
August 21, 2001 (incorporated by reference to Exhibit 2.2 of
Form 8-K, File No. 000-22052, reporting an event dated August
17, 2001).                                                                   
|3.5         |  | Articles of Amendment to Articles of Incorporation of
ProxyMed, Inc. dated December 21, 2001 (incorporated by
reference to Exhibit 3.1 of Form 8-K File No. 000-22052,
reporting an event dated December 13, 2001).                                              
|4.1         |  | Form of Warrant to Purchase Common Stock of ProxyMed dated
December 23, 1999, issued to certain investors (incorporated
by reference to Exhibit 4.1 of Form 8-K, File No. 000-22052,
reporting an event dated December 23, 1999).                                
|4.2         |  | Registration Rights Agreement by and among ProxyMed and the
investors named therein dated as of December 23, 1999
(incorporated by reference to Exhibit 4.2 of Form 8-K, File
No. 000-22052, reporting an event dated December 23, 1999).                        
|4.3         |  | Form of Exchanged Warrant to Purchase Common Stock of ProxyMed
dated May 4, 2000, issued to certain investors (incorporated
by reference to Exhibit 4.1 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).                                  
|4.4         |  | Form of New Warrant to Purchase Common Stock of ProxyMed dated
May 4, 2000, issued to certain investors (incorporated by
reference to Exhibit 4.2 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).                                        

54



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|            |  |                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                
|4.5         |  | Registration Rights Agreement by and among ProxyMed and the
investors named therein dated as of May 4, 2000 (incorporated
by reference to Exhibit 4.3 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).                  
|4.6         |  | Registration Rights Agreement between ProxyMed and Fisher
Capital Ltd. and Wingate Capital Ltd. dated as of April 24,
2001 (incorporated by reference to Exhibit 4.1 of Form 8-K,
File No. 000-22052, reporting an event dated April 24, 2001).
|4.7         |  | Registration Rights Agreement between ProxyMed and Royal Bank
of Canada and Leonardo, L.P. dated as of April 24, 2001
(incorporated by reference to Exhibit 4.2 of Form 8-K, File
No. 000-22052, reporting an event dated April 24, 2001).     
|10.2        |  | Strategic Marketing Agreement among ProxyMed, IntePlex, Inc.
and Bergen Brunswig Drug Company dated February 1, 1996
(incorporated by reference to Exhibit 1 of Form 8-K, File No.
000-22052, reporting an event dated February 1, 1996).      
|10.3        |  | Agreement for Acquisition of Stock between ProxyMed and
National Health Care Affiliates, Inc. dated September 6, 1995
(incorporated by reference to Exhibit 1 of Form 8-K, File No.
000-22052, reporting an event dated August 28, 1996).      
|10.4        |  | Asset Purchase Agreement between ProxyMed and Eckerd
Corporation (incorporated by reference to Exhibit 1 to the
Form 8-K, File No. 000-22052, reporting an event dated
February 7, 1995).                                                      
|10.6        |  | *Employment Agreement between ProxyMed and John Paul Guinan
(incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form SB-2, File No. 333-2678).                                                                          
|10.8        |  | Asset Purchase Agreement between ProxyMed and Clinical
Microsystems, Inc. and Glenn Gilchrist (incorporated by
reference to Exhibit 1 of Form 8-K, File No. 000-22052,
reporting an event dated March 14, 1997).                               
|10.9        |  | *Employment Agreement between ProxyMed and Frank M. Puthoff
dated November 11, 1996 (incorporated by reference to Exhibit
10.7 of the Form 10-KSB for the period ending December 31,
1996).                                                    
|10.10       |  | *Amended 1993 Stock Option Plan (incorporated by reference to
Exhibit A of ProxyMeds Proxy Statement for its 1994 Annual
Meeting of Shareholders).                                                                                            
|10.11       |  | *1995 Stock Option Plan (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No.
333-2678).                                                                                                              
|10.12       |  | *1995 Outside Director Stock Option Plan (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-2678).                                                                                             

55



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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                 
|10.15       |  | Stock Purchase Agreement between ProxyMed and WPJ, Inc. and
Robert Weinberger and Mark Pehl (incorporated by reference to
Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting an
event dated May 19, 1998).                                                                                  
|10.16       |  | Asset Purchase Agreement between ProxyMed and Hayes Computer
Systems, Inc. and Danny Hayes (incorporated by reference to
Exhibit 1 of From 8-K, File No. 000-22052, reporting an event
dated April 30, 1997).                                                                                   
|10.17       |  | Asset Purchase Agreement between ProxyMed and US HealthData
Interchange, Inc. (incorporated by reference to Exhibit 2.1 of
Form 8-K, File No. 000-22052, reporting an event dated
November 19, 1997).                                                                                           
|10.18       |  | *1997 Stock Option Plan (incorporated by reference to Exhibit
A of ProxyMeds Proxy Statement for its 1997 Annual Meeting of
Shareholders).                                                                                                                                                     
|10.20       |  | Agreement and Plan of Merger between ProxyMed Acquisition
Corp., Key Communications Service, Inc., Jeff K. Carpenter, A.
Thomas Hardy and Carl W. Garmon (incorporated by reference to
Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting an
event dated December 31, 1998).                
|10.22       |  | Asset Purchase Agreement between ProxyMed and Specialized
Medical Management, Inc. and its parent, Texas Health
Management Services, Inc., dated January 12, 1999
(incorporated by reference to Exhibit 10.22 of the 10-K for
the period ending December 31, 1998).                             
|10.23       |  | *Form of Employee Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.23 of the
Registration Statement on Form S-8, File No. 333-92905).                                                                                                                              
|10.25       |  | Securities Purchase Agreement dated as of December 23, 1999,
by and among ProxyMed and the Series B Preferred investors
listed on the Schedule of Buyers attached thereto
(incorporated by reference to Exhibit 10.24 of Form 8-K, File
No. 000-22052, reporting an event on December 23, 1999).
|10.26       |  | Prospectus dated as of December 28, 2000, relating to the sale
of Series C Preferred to the selling shareholders listed
therein (incorporated by reference to the Registration
Statement on Form S-3, File No. 333-51856).                                                                      
|10.27       |  | Redemption and Exchange Agreement between ProxyMed and certain
investors named therein (incorporated by reference to Exhibit
10.27 of Form 8-K, File No. 000-22052, reporting an event
dated May 4, 2000).                                                                                      
|10.28       |  | *Employment Agreement between ProxyMed and Michael K. Hoover
dated July 28, 2000 (incorporated by reference to Exhibit 99.1
of Form 10-Q for the period ending September 30, 2000).                                                                                                             
|10.29       |  | *Employment Agreement between ProxyMed and Judson E. Schmid
dated September 29, 2000 (incorporated by reference to Exhibit
99.2 of Form 10-Q for the period ending September 30, 2000).                                                                                                         

56



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|            |  |                                                                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                              
|10.30       |  | *Employment Agreement between ProxyMed and Nancy J. Ham dated
October 2, 2000 (incorporated by reference to Exhibit 99.3 of
Form 10-Q for the period ending September 30, 2000).                                                                                                             
|10.31       |  | *Employment Agreement between ProxyMed and Timothy J. Tolan
dated January 23, 2001 (incorporated by reference to Exhibit
10.30 of Form 10-K for the period ending December 31, 2000).                                                                                                        
|10.32       |  | *2000 Stock Option Plan (incorporated by reference to Exhibit
B of the Proxy Statement filed on July 7, 2000).                                                                                                                                                                               
|10.33       |  | *2000-1/2 Stock Option Plan (incorporated by reference to
Exhibit C of the Proxy Statement filed on July 7, 2000).                                                                                                                                                                           
|10.34       |  | *Employment Agreement between ProxyMed and Lonnie W. Hardin
dated March 29, 2001 (incorporated by reference to Exhibit
10.1 of Form 10-Q for the period ending March 31, 2001).                                                                                                              
|10.35       |  | Exchange Agreement between ProxyMed and Fisher Capital Ltd.
and Wingate Capital Ltd. dated as of April 24, 2001
(incorporated by reference to Exhibit 10.27 of Form 8-K, File
No. 000-22052 reporting an event dated April 24, 2001).                                                        
|10.36       |  | Exchange Agreement between ProxyMed and Royal Bank of Canada
dated as of April 24, 2001 (incorporated by reference to
Exhibit 10.28 of Form 8-K, File No. 000-22052 reporting an
event dated April 24, 2001).                                                                                
|10.37       |  | Exchange Agreement between ProxyMed and Leonardo, L.P. dated
as of April 24, 2001 (incorporated by reference to Exhibit
10.29 of Form 8-K, File No. 000-22052 reporting an event dated
April 24, 2001).                                                                                      
|10.38       |  | Asset Purchase Agreement between ProxyMed and MDP Corporation
dated April 23, 2001 (incorporated by reference to Exhibit 2.1
of Form 8-K, File No. 000-22052, reporting an event dated May
1, 2001).                                                                                         
|10.39       |  | *2001 Stock Option Plan (incorporated by reference to Exhibit
B of the Proxy Statement filed on June 22, 2001).                                                                                                                                                                              
|10.40       |  | *Employment Agreement between ProxyMed and A. Thomas Hardy
dated December 31, 2001 (incorporated by reference to Exhibit
10.40 of Form 10-K for the period ending December 31, 2001).                                                                                                        
|10.41       |  | Stock and Warrant Purchase Agreement between ProxyMed and
General Atlantic Partners 74, L.P., GAP Coinvestment Partners
II, L.P., GAPCO GmbH & Co., KG and GapStar, LLC (incorporated
by reference to Exhibit 10.1 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).
|10.42       |  | Registration Rights Agreement between ProxyMed and General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GapStar, LLC, and GAPCO GmbH & Co. KG (incorporated by
reference to Exhibit 10.3 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).       

57



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|            |  |                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                  
|10.43       |  | Form of Common Stock Purchase Warrants issued to General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GAPCO GmbH & Co., KG and GapStar, LLC (incorporated by
reference to Exhibit 10.2 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).                                                                             
|10.44       |  | Subscription Agreement dated December 21, 2001 for the private
placement issuance of up to $8,000,000 of ProxyMed, Inc.
common stock (incorporated by reference to Exhibit 10.1 of
Form 8-K File No. 000-22052, reporting an event dated December
13, 2001).                                                                                                     
|10.45       |  | Placement Agency Agreement dated December 18, 2001 between
ProxyMed, Inc. and Commonwealth Associates, L.P. for the
private placement issuance of up to $8,000,000 of ProxyMed,
Inc. common stock (incorporated by reference to Exhibit 10.2
of Form 8-K File No. 000-22052, reporting an event dated
December 13, 2001).                                        
|10.46       |  | Conversion Agreement for Series C 7% Convertible Preferred
shareholder pursuant to conversion offer dated December 13,
2001 (incorporated by reference to Exhibit 10.3 of Form 8-K
File No. 000-22052, reporting an event dated December 13,
2001).                                                                                                              
|10.47       |  | Designation and Subscription Amendment Agreement for Series C
7% Convertible Preferred shareholder pursuant to conversion
offer dated December 13, 2001 (incorporated by reference to
Exhibit 10.4 of Form 8-K File No. 000-22052, reporting an
event dated December 13, 2001).                                                                                  
|10.48       |  | Registration Rights Agreement dated May 6, 2002 ProxyMed, Inc.
and Deborah M. Kennedy and Colleen Phillips-Norton
(incorporated by reference to Exhibit 10.1 of Form 8-K File
No. 000-22052, reporting an event dated May 6, 2002).                                                                                                                              
|10.49       |  | Form of 4% Convertible Promissory Notes dated December 31,
2002 issued in connection with the Agreement and Plan of
Merger and Reorganization dated December 31, 2002 between
ProxyMed, Inc., Davie Acquisition Corp., and MedUnite, Inc.
(incorporated by reference to Exhibit 10.1 of Form 8-K File
No. 000-22052, reporting an event dated December 31, 2002).
|10.50       |  | Registration Rights Agreement dated December 31, 2002 among
ProxyMed, Inc. and the holders of the 4% Convertible
Promissory Notes (incorporated by reference to Exhibit 10.2 of
Form 8-K File No. 000-22052, reporting an event dated December
31, 2002).                                                                                                        
|10.51       |  | Indenture dated December 31, 2002 between ProxyMed, Inc. and
LaSalle Bank National Association, a national banking
association (incorporated by reference to Exhibit 10.3 of Form
8-K File No. 000-22052, reporting an event dated December 31,
2002).                                                                                                           
|10.52       |  | *2002 Stock Option Plan (incorporated by reference to Exhibit
A of the Proxy Statement filed on April 22, 2002).                                                                                                                                                                                                                                                 

58



---



##### Table of Contents



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                       
|            |  |                                                                                                                                                   
|10.53       |  | *Employment Agreement between ProxyMed and Rafael G. Rodriguez
dated January 2, 2003.                                                             
|10.54       |  | *Form of bonus letter offered to executive and senior
management on February 26, 2002.                                                            
|10.55       |  | Form of Indemnification Agreement for all Officers and Directors
adopted May 22, 2002.                                                            
|21          |  | Subsidiaries of ProxyMed, Inc.                                                                                                                    
|23          |  | Consent of PricewaterhouseCoopers LLP.                                                                                                            
|99.1**      |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|99.2**      |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.



---

|*  |  | Denotes employment agreement or compensatory plan.                                                                                   
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | This exhibit shall be treated as accompanying this Annual Report on Form 10-K
and shall not be deemed as filed as part of the report.

59



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

PAGEConsolidated Financial StatementsReport of Independent Certified Public Accountants
        
        
        F-2Consolidated Balance Sheets  December 31, 2002 and 2001
        
        
        F-3Consolidated Statements of Operations 
Years Ended December 31, 2002, 2001 and 2000
        
        
        F-4Consolidated Statements of Stockholders Equity 
Years Ended December 31, 2002, 2001 and 2000
        
        
        F-5Consolidated Statements of Cash Flows 
Years Ended December 31, 2002, 2001 and 2000
        
        
        F-6Notes to Consolidated Financial Statements
        
        
        F-7 - F-46Schedule II  Valuation and Qualifying Accounts 
Years Ended December 31, 2002, 2001, and 2000
        
        
        F-47


F-1



---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and the
 Shareholders of ProxyMed, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 50 present fairly, in all material
respects, the financial position of ProxyMed, Inc. and its subsidiaries (the
Company) at December 31, 2002 and December 31, 2001, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 15(a)(2) on page 50 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. 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 of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 10 to the consolidated financial statements, pursuant to
the adoption of Financial Accounting Standards Board Statement No. 142,
Goodwill and Other Intangible Assets, the Company changed its method of
accounting for goodwill in 2002.

/s/ PricewaterhouseCoopers LLP

Fort Lauderdale, Florida
February 18, 2003, except
 as to Note 21, which is as of March 13, 2003

F-2



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001

2002
        
        2001AssetsCurrent assets:Cash and cash equivalents
        
        $
        16,378,000
        
        
        $
        12,601,000Accounts receivable  trade, net of allowance for
doubtful accounts of $1,096,000 and $228,000 respectively
        
        
        10,060,000
        
        
        
        5,589,000Other receivables
        
        
        503,000
        
        
        
        89,000Inventory
        
        
        2,774,000
        
        
        
        3,351,000Other current assets
        
        
        1,022,000
        
        
        
        331,000Total current assets
        
        
        30,737,000
        
        
        
        21,961,000Property and equipment, net
        
        
        5,719,000
        
        
        
        3,832,000Goodwill, net
        
        
        32,797,000
        
        
        
        7,961,000Purchased technology, capitalized software and
other intangible assets, net
        
        
        18,220,000
        
        
        
        2,076,000Restricted cash
        
        
        825,000
        
        
        
        Other assets
        
        
        406,000
        
        
        
        52,000Total assets
        
        $
        88,704,000
        
        
        $
        35,882,000Liabilities and Stockholders EquityCurrent liabilities:Note payable
        
        $
        
        
        
        $
        7,000,000Accounts payable and accrued expenses
        
        
        21,472,000
        
        
        
        5,345,000Deferred revenue
        
        
        516,000
        
        
        
        222,000Total current liabilities
        
        
        21,988,000
        
        
        
        12,567,000Convertible notes
        
        
        13,400,000
        
        
        
        Long-term deferred revenue and other long-term liabilities
        
        
        2,581,000
        
        
        
        442,000Total liabilities
        
        
        37,969,000
        
        
        
        13,009,000Commitments and contingenciesStockholders equity:Series C
7% Convertible preferred stock  $.01 par value
Authorized 300,000 shares; issued 253,265 shares;
outstanding 2,000 and 34,650 shares, respectively;
liquidation preference $13,333 and $3,465,000 respectively
        
        
        
        
        
        
        Common stock  $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 6,782,938 and 4,894,433 shares
(after deducting 15,061 shares held in treasury in 2001), respectively
        
        
        7,000
        
        
        
        5,000Additional paid-in capital
        
        
        146,187,000
        
        
        
        120,277,000Accumulated deficit
        
        
        (95,273,000
        )
        
        
        (97,223,000
        )Note receivable from stockholder
        
        
        (186,000
        )
        
        
        (186,000
        )Total stockholders equity
        
        
        50,735,000
        
        
        
        22,873,000Total liabilities and stockholders equity
        
        $
        88,704,000
        
        
        $
        35,882,000


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

F-3



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001 and 2000

2002
        
        2001
        
        2000Revenues:Transaction fees, services and license fees
        
        $
        28,455,000
        
        
        $
        23,366,000
        
        
        $
        18,440,000Communication devices
and other tangible goods
        
        
        21,727,000
        
        
        
        19,864,000
        
        
        
        15,001,00050,182,000
        
        
        
        43,230,000
        
        
        
        33,441,000Costs and expenses:Cost of transaction fees, services and license fees
        
        
        8,858,000
        
        
        
        6,530,000
        
        
        
        1,886,000Cost of tangible goods
        
        
        14,165,000
        
        
        
        13,878,000
        
        
        
        10,363,000Selling, general and administrative expenses
        
        
        23,145,000
        
        
        
        21,267,000
        
        
        
        27,097,000Depreciation and amortization
        
        
        2,636,000
        
        
        
        8,176,000
        
        
        
        13,375,000Restructuring charges
        
        
        
        
        
        
        
        
        
        
        1,330,000Write-off of impaired and obsolete assets
        
        
        38,000
        
        
        
        91,000
        
        
        
        2,850,00048,842,000
        
        
        
        49,942,000
        
        
        
        56,901,000Operating income (loss)
        
        
        1,340,000
        
        
        
        (6,712,000
        )
        
        
        (23,460,000
        )Income from litigation settlement and other, net
        
        
        265,000
        
        
        
        40,000
        
        
        
        667,000Interest income (expense), net
        
        
        345,000
        
        
        
        (126,000
        )
        
        
        (4,133,000
        )Income (loss) from continuing operations
        
        
        1,950,000
        
        
        
        (6,798,000
        )
        
        
        (26,926,000
        )Discontinued operations (Note 3):Loss from discontinued operations
        
        
        
        
        
        
        
        
        
        
        (304,000
        )Gain on disposal of discontinued operations
        
        
        
        
        
        
        
        
        
        
        545,000
        
        
        
        
        
        
        
        241,000Net income (loss)
        
        
        1,950,000
        
        
        
        (6,798,000
        )
        
        
        (26,685,000
        )Deemed dividends and other charges
        
        
        612,000
        
        
        
        12,262,000
        
        
        
        21,367,000Net income (loss) applicable to
common shareholders
        
        $
        1,338,000
        
        
        $
        (19,060,000
        )
        
        $
        (48,052,000
        )Basic weighted average shares outstanding
        
        
        6,322,086
        
        
        
        2,162,352
        
        
        
        1,304,342Basic income (loss) per share:Income (loss) from continuing operations
        
        $
        .21
        
        
        $
        (8.81
        )
        
        $
        (37.03
        )Gain from discontinued operations
        
        
        
        
        
        
        
        
        
        
        .19Net income (loss)
        
        $
        .21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )Diluted weighted average shares outstanding
        
        
        6,396,893
        
        
        
        2,162,352
        
        
        
        1,304,342Diluted income (loss) per share:Income (loss) from continuing operations
        
        $
        .21
        
        
        $
        (8.81
        )
        
        $
        (37.03
        )Gain from discontinued operations
        
        
        
        
        
        
        
        
        
        
        .19Net income (loss)
        
        $
        .21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )


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

F-4



---



##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2002, 2001 and 2000

Series B
        
        Series CPreferred stock
        
        Preferred stock
        
        Common stock
        
        
        
        
        
        NotereceivableNumber
        
        Par
        
        Number
        
        Par
        
        Number
        
        Par
        
        Additional
        
        Accumulated
        
        fromof shares
        
        value
        
        of shares
        
        value
        
        of shares
        
        value
        
        paid-in capital
        
        deficit
        
        stockholder
        
        TotalBalances, January 1, 2000
        
        
        15,000
        
        
        $
        
        
        
        
        
        
        
        $
        
        
        
        
        1,221,827
        
        
        $
        1,000
        
        
        $
        101,495,000
        
        
        $
        (63,740,000
        )
        
        $
        
        
        
        $
        37,756,000Sale of Series C preferred stock
        
        
        
        
        
        
        
        
        
        
        10,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,000,000
        
        
        
        
        
        
        
        
        
        
        
        1,000,000Exercise of stock options and warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        11,229
        
        
        
        
        
        
        
        427,000
        
        
        
        
        
        
        
        
        
        
        
        427,000Treasury stock received for sales
of discontinued businesses
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (15,061
        )
        
        
        
        
        
        
        (1,930,000
        )
        
        
        
        
        
        
        
        
        
        
        (1,930,000
        )Common stock issued
for acquired businesses
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        2,247
        
        
        
        
        
        
        
        67,000
        
        
        
        
        
        
        
        
        
        
        
        67,000Common stock issued for
stock compensation award
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        13,333
        
        
        
        
        
        
        
        285,000
        
        
        
        
        
        
        
        
        
        
        
        285,000Conversions of Series B
Preferred stock
        
        
        (1,890
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        108,129
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Redemptions of Series B
Preferred stock
        
        
        (13,000
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (15,730,000
        )
        
        
        
        
        
        
        
        
        
        
        (15,730,000
        )Warrants issued to placement agent
under advisory agreement
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,300,000
        
        
        
        
        
        
        
        
        
        
        
        1,300,000Warrants issued to placement agent
pursuant to Convertible Debt offering
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        10,876,000
        
        
        
        
        
        
        
        
        
        
        
        10,876,000Reclassification of unaccreted
value of Put Warrants
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        12,085,000
        
        
        
        
        
        
        
        
        
        
        
        12,085,000Amortization of beneficial
conversion of Convertible Debt
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        3,203,000
        
        
        
        
        
        
        
        
        
        
        
        3,203,000Conversion of Convertible
Debt into Series C
preferred stock, net of costs
        
        
        
        
        
        
        
        
        
        
        243,265
        
        
        
        2,000
        
        
        
        
        
        
        
        
        
        
        
        (332,000
        )
        
        
        
        
        
        
        
        
        
        
        (330,000
        )Compensatory stock options
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        492,000
        
        
        
        
        
        
        
        
        
        
        
        492,000Dividends on preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        31,194
        
        
        
        
        
        
        
        (4,000
        )
        
        
        
        
        
        
        
        
        
        
        (4,000
        )Reclassification of stockholder note
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (436,000
        )
        
        
        (436,000
        )Other, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,000
        
        
        
        
        
        
        
        
        
        
        
        1,000Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (26,685,000
        )
        
        
        
        
        
        
        (26,685,000
        )Balances, December 31, 2000
        
        
        110
        
        
        
        
        
        
        
        253,265
        
        
        
        2,000
        
        
        
        1,372,898
        
        
        
        1,000
        
        
        
        113,235,000
        
        
        
        (90,425,000
        )
        
        
        (436,000
        )
        
        
        22,377,000Sales of common stock, net
of expenses of $729,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        483,414
        
        
        
        1,000
        
        
        
        7,247,000
        
        
        
        
        
        
        
        
        
        
        
        7,248,000Conversion of Series B
preferred stock
        
        
        (110
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        8,766
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Conversions of Series C
preferred stock
        
        
        
        
        
        
        
        
        
        
        (49,466
        )
        
        
        
        
        
        
        329,773
        
        
        
        1,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,000Conversions of Series C
preferred stock pursuant
to Conversion Offer
        
        
        
        
        
        
        
        
        
        
        (169,149
        )
        
        
        (2,000
        )
        
        
        1,296,126
        
        
        
        1,000
        
        
        
        (32,000
        )
        
        
        
        
        
        
        
        
        
        
        (33,000
        )Exchange of Series B warrants
into common stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        218,828
        
        
        
        
        
        
        
        (73,000
        )
        
        
        
        
        
        
        
        
        
        
        (73,000
        )Exchange of Series C warrants
into common stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,050,691
        
        
        
        1,000
        
        
        
        (54,000
        )
        
        
        
        
        
        
        
        
        
        
        (53,000
        )Dividends on preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        133,937
        
        
        
        
        
        
        
        (7,000
        )
        
        
        
        
        
        
        
        
        
        
        (7,000
        )Repayment of note from stockholder
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        250,000
        
        
        
        250,000Other, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (39,000
        )
        
        
        
        
        
        
        
        
        
        
        (39,000
        )Net loss
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (6,798,000
        )
        
        
        
        
        
        
        (6,798,000
        )Balances, December 31, 2001
        
        
        
        
        
        
        
        
        
        
        34,650
        
        
        
        
        
        
        
        4,894,433
        
        
        
        5,000
        
        
        
        120,277,000
        
        
        
        (97,223,000
        )
        
        
        (186,000
        )
        
        
        22,873,000Sales of common stock, net
of expenses of $139,000
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,569,366
        
        
        
        2,000
        
        
        
        24,884,000
        
        
        
        
        
        
        
        
        
        
        
        24,886,000Common stock issued for acquired
business
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        30,034
        
        
        
        
        
        
        
        600,000
        
        
        
        
        
        
        
        
        
        
        
        600,000Conversions of Series C
preferred stock pursuant
to Conversion Offer
        
        
        
        
        
        
        
        
        
        
        (31,650
        )
        
        
        
        
        
        
        242,508
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Conversions of Series C
preferred stock
        
        
        
        
        
        
        
        
        
        
        (1,000
        )
        
        
        
        
        
        
        6,666
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Exchange of Series B warrants
into common stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        34,500
        
        
        
        
        
        
        
        450,000
        
        
        
        
        
        
        
        
        
        
        
        450,000Exchange of Series C warrants
into common stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,190
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Dividends on preferred stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        4,241
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Other, net
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (24,000
        )
        
        
        
        
        
        
        
        
        
        
        (24,000
        )Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,950,000
        
        
        
        
        
        
        
        1,950,000Balances, December 31, 2002
        
        
        
        
        
        $
        
        
        
        
        2,000
        
        
        $
        
        
        
        
        6,782,938
        
        
        $
        7,000
        
        
        $
        146,187,000
        
        
        $
        (95,273,000
        )
        
        $
        (186,000
        )
        
        $
        50,735,000


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

F-5



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000

2002
        
        2001
        
        2000Cash flows from operating activities:Net income (loss)
        
        $
        1,950,000
        
        
        $
        (6,798,000
        )
        
        $
        (26,685,000
        )Adjustments to reconcile net income (loss) to net provided by
(used in) operating activities:Depreciation and amortization
        
        
        2,636,000
        
        
        
        8,176,000
        
        
        
        13,706,000Amortization of private placement related costs
        
        
        
        
        
        
        
        
        
        
        4,473,000Restructuring charges
        
        
        
        
        
        
        
        
        
        
        1,330,000Provision for doubtful accounts
        
        
        38,000
        
        
        
        70,000
        
        
        
        425,000Write-off of obsolete and impaired assets
        
        
        38,000
        
        
        
        91,000
        
        
        
        2,850,000Recovery of obsolete inventory
        
        
        
        
        
        
        (50,000
        )
        
        
        (26,000
        )Compensatory stock options and warrants
and stock compensation awards issued
        
        
        
        
        
        
        433,000
        
        
        
        1,643,000Payment for non-compete agreement
        
        
        
        
        
        
        
        
        
        
        (200,000
        )Net gain on sales of discontinued operations
        
        
        
        
        
        
        
        
        
        
        (545,000
        )Changes in net current assets of discontinued operations
        
        
        
        
        
        
        
        
        
        
        (735,000
        )Changes in assets and liabilities, net of
effect of acquisitions and dispositions:Accounts and other receivables
        
        
        (1,445,000
        )
        
        
        (614,000
        )
        
        
        (1,210,000
        )Inventory
        
        
        747,000
        
        
        
        (612,000
        )
        
        
        (773,000
        )Accounts payable and accrued expenses
        
        
        (1,150,000
        )
        
        
        576,000
        
        
        
        (1,016,000
        )Deferred revenue
        
        
        76,000
        
        
        
        (264,000
        )
        
        
        (321,000
        )Other, net
        
        
        (42,000
        )
        
        
        11,000
        
        
        
        7,000Net cash provided by (used in) operating activities
        
        
        2,848,000
        
        
        
        1,019,000
        
        
        
        (7,077,000
        )Cash flows from investing activities:Acquisition of businesses, net of cash acquired
        
        
        (14,453,000
        )
        
        
        (3,000,000
        )
        
        
        Acquisition of assets
        
        
        (700,000
        )
        
        
        
        
        
        
        Short term investments
        
        
        (15,000,000
        )
        
        
        
        
        
        
        Redemption of short term investments
        
        
        15,000,000
        
        
        
        
        
        
        
        Capital expenditures
        
        
        (1,561,000
        )
        
        
        (1,325,000
        )
        
        
        (967,000
        )Capital expenditures of discontinued operations
        
        
        
        
        
        
        
        
        
        
        (230,000
        )Capitalized software
        
        
        (445,000
        )
        
        
        (120,000
        )
        
        
        (1,611,000
        )Collection of notes receivable
        
        
        65,000
        
        
        
        298,000
        
        
        
        1,649,000Payments for acquisition-related costs
        
        
        (96,000
        )
        
        
        (42,000
        )
        
        
        (18,000
        )Net cash used in investing activities
        
        
        (17,190,000
        )
        
        
        (4,189,000
        )
        
        
        (1,177,000
        )Cash flows from financing activities:Net proceeds from sale of common stock
        
        
        24,886,000
        
        
        
        7,248,000
        
        
        
        Net proceeds from sale of convertible debt securities
        
        
        
        
        
        
        
        
        
        
        21,383,000Net proceeds from sale of convertible preferred stock
        
        
        
        
        
        
        
        
        
        
        1,000,000Redemption of convertible preferred stock
        
        
        
        
        
        
        
        
        
        
        (15,748,000
        )Preferred stock conversion offer and warrant exchange costs
        
        
        
        
        
        
        (158,000
        )
        
        
        Dividends on preferred stock
        
        
        
        
        
        
        (7,000
        )
        
        
        (4,000
        )Proceeds from exercise of stock options and warrants
        
        
        450,000
        
        
        
        
        
        
        
        427,000Payment of note payable related to acquisition of business
        
        
        (7,000,000
        )
        
        
        
        
        
        
        Draw on line of credit
        
        
        
        
        
        
        
        
        
        
        2,000,000Repayment of line of credit
        
        
        
        
        
        
        
        
        
        
        (3,000,000
        )Payment of notes payable, long-term debt and capital leases
        
        
        (217,000
        )
        
        
        (153,000
        )
        
        
        (451,000
        )Net cash provided by financing activities
        
        
        18,119,000
        
        
        
        6,930,000
        
        
        
        5,607,000Net increase (decrease) in cash and cash equivalents
        
        
        3,777,000
        
        
        
        3,760,000
        
        
        
        (2,647,000
        )Cash and cash equivalents at beginning of year
        
        
        12,601,000
        
        
        
        8,841,000
        
        
        
        11,488,000Cash and cash equivalents at end of year
        
        $
        16,378,000
        
        
        $
        12,601,000
        
        
        $
        8,841,000


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

F-6



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

(1) Business and Summary of Significant Accounting Policies



| | (a) |  | Business of ProxyMed  ProxyMed, Inc. (ProxyMed or the Company)
is an electronic healthcare transaction processing services company
providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies and other
healthcare providers. ProxyMeds products and services are provided
from its operating facilities located in Fort Lauderdale, Florida; New
Albany, Indiana; Santa Ana, California; Norcross, Georgia; and Sioux
Falls, South Dakota.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2000, the Company sold its non-core network integration and
prescription drug dispensing businesses. These two businesses are shown
as discontinued operations in the consolidated financial statements, and
the related notes have been reclassified to segregate the operating
results of these businesses (see Note 3).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 21, 2001, the Companys Board of Directors effected a 1-for-15
reverse stock split of the Companys common stock, par value $.001 per
share. All share and per share amounts have been restated to reflect
this transaction.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May 2002, the Company acquired all of the capital stock of KenCom
Communications & Services, Inc., a privately-owned provider of laboratory
communication solutions, for $3,237,000 in cash and 30,034 shares of
unregistered ProxyMed common stock (valued at $600,000 (see Note 2(b)).
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August 2002, the Company acquired substantially all of the assets of
MDIP, Inc., a privately-owned company providing institutional claims
processing services for $2,400,000 in cash (see Note 2(c)).
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On December 31, 2002, the Company acquired all of the capital stock of
MedUnite, Inc. , a privately-held company providing healthcare claims
processing services founded by seven of the nations largest health
insurers, for $10,000,000 in cash and $13,400,000 in 4% convertible debt
(see Note 2(a)).
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Principles of Consolidation  The consolidated financial statements
include the accounts of ProxyMed and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated in
consolidation.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-7



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (c) |  | Use of Estimates  The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Revenue Recognition  Electronic transaction processing fee revenue
is recorded in the period the service is rendered. Certain transaction
fee revenue may be subject to revenue sharing per agreements with
resellers, vendors or gateway partners and are recorded as gross
revenues. Revenue from sales of inventory and manufactured goods is
recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable and collectibility is
probable. Revenue from certain up-front fees is amortized ratably over
the expected life of the customer. Revenue from hardware leases,
software rentals and maintenance fees is recognized ratably over the
applicable period.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Cash and Cash Equivalents  ProxyMed considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. Cash balances in excess of immediate needs are invested
in bank certificates of deposit, money market accounts and commercial
paper with high-quality credit institutions. At times, such amounts
may be in excess of FDIC insurance limits. ProxyMed has not
experienced any loss to date on these investments. Cash and cash
equivalents used to support collateral instruments, such as letters of
credit, are reclassified as either current or long-term assets
depending upon the maturity date of the obligation they collateralize.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | Inventory  Inventory consisting of component parts, materials,
supplies and finished goods (including direct labor and overhead) used
to manufacture laboratory communication devices is stated at the lower
of cost (first-in, first-out method) or market. Reserves for obsolete,
damaged and slow-moving inventory are maintained and are periodically
reviewed by management.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) |  | Property and Equipment  Property and equipment is stated at cost
and includes revenue earning equipment. Depreciation of property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on
the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gains or losses are reflected in other income for the period;
upon sale or retirement of revenue earning equipment, the gross proceeds
are included in net revenues and the undepreciated cost of the equipment
sold is included in cost of sales. Maintenance and repair of property
and equipment are charged to expense as incurred. Renewals and
betterments are capitalized and depreciated. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for Impairment or Disposition of Long-lived Assets, management
periodically examines the Companys fixed assets for obsolete, damaged
and impaired fixed assets.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | Intangible Assets
| | --- |  | -----------------



| |  |  | Goodwill  Goodwill representing the excess of cost over the estimated
fair value of net assets acquired was amortized on the straight-line
basis over 3 to 15 years until December 31, 2001, at which time the
Company adopted SFAS No. 142 (see Note 1(l) below).
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other Intangibles  Other acquired intangible assets, consisting
primarily of customer relationships and covenants-not-to-compete, are
being amortized on a straight-line basis over their estimated useful
lives of 5 to 10 years.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ProxyMed regularly reviews the recoverability of goodwill, other
intangible assets and other long-lived assets for indications that the
carrying value may be impaired or that the useful lives assigned may be
excessive. In performing such review, goodwill associated with
acquisition of the intangible assets is included in the analysis of the
impairment of such intangible assets. When indications exist that
impairment may have occurred, the carrying values are assessed based upon
an analysis of estimated future cash flows on an undiscounted basis and
before interest charges, or useful lives are changed prospectively.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Purchased Technology and Capitalized Software  ProxyMed has recorded
amounts related to various software and technology that it has purchased
or capitalized for external sale to its customers or for its own internal
systems use.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Internal and external costs incurred to develop internal-use computer
software during the application stage are capitalized. Application
development stage costs generally include software configuration, coding,
installation to hardware and testing. Costs of upgrades and major
enhancements that result in additional functionality are also
capitalized. Costs incurred for maintenance and minor upgrades are
expensed as incurred. All other costs are expensed as incurred as
research and development expenses (which are included in selling, general
and administrative expenses). Capitalized internal-use software
development costs are periodically evaluated by ProxyMed for indications
that the carrying value may be impaired or that the useful lives assigned
may be excessive.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | Purchased technology and capitalized software are being amortized on a
straight-line basis over their estimated useful lives of 1 to 12 years.
Purchased technology and capitalized software and related accumulated
amortization are removed from the accounts when fully amortized.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | Research and Development  Software development costs incurred
prior to achieving technological feasibility are charged to research
and development expense when incurred. Research and development
expense of approximately $3,187,000 in 2002, $1,960,700 in 2001, and
$3,130,000 in 2000 was recorded in selling, general and administrative
expenses.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Income Taxes  Deferred income taxes are determined based upon
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred tax assets are also established for the future tax benefits of
loss and credit carryovers. Valuation allowances are established for
deferred tax assets when, based on the weight of available evidence, it
is deemed more likely than not that such amounts will not be realized.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Net Income (Loss) Per Share  Basic net income (loss) per share is
computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share reflects
the potential dilution from the exercise or conversion of securities
into common stock; however, 1,130,596 stock options and warrants
for the year ended December 31, 2002, were excluded from
the calculation of diluted net income per share because the exercise
price of these options and warrants was greater than the average market
price of the Companys common stock during the period. Additionally,
stock options and warrants totaling 1,018,713 shares and 2,450,130
shares shares for the years ended December 31, 2001 and 2000,
respectively, as well as common shares issuable on conversion of Series
B and Series C preferred stock (231,000 shares and 1,696,500 shares if
converted on December 31, 2001 and 2000, respectively) were excluded
from the calculation of diluted per share results because their effect
was antidilutive.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | The following schedule sets forth the computation of basic and diluted
net income (loss) per share for the years ending December 31 2002, 2001
and 2000:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

2002
        
        2001
        
        2000Net income (loss) applicable to common shareholders
        
        $
        1,338,200
        
        
        $
        (19,060,000
        )
        
        $
        (48,052,000
        )Common shares outstanding:Weighted average common shares used in computing
basic net income (loss) per share
        
        
        6,322,086
        
        
        
        2,162,352
        
        
        
        1,304,342Plus incremental shares from assumed conversions:Convertible preferred stock
        
        
        13,833
        
        
        
        
        
        
        
        Stock options
        
        
        11,464
        
        
        
        
        
        
        
        Warrants
        
        
        49,510
        
        
        
        
        
        
        
        74,807
        
        
        
        
        
        
        
        Weighted average common shares used in computing
diluted net income (loss) per share
        
        
        6,396,893
        
        
        
        2,162,352
        
        
        
        1,304,342Net income (loss) per common share:Basic
        
        $
        0.21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )Diluted
        
        $
        0.21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )




| |  |  | ProxyMed applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting
for its stock-based compensation plans. The Company measures
compensation expense related to the grant of stock options and
stock-based awards to employees (including independent directors) in
accordance with the provisions of APB No. 25. In accordance with APB No.
25, compensation expense, if any, is generally based on the difference
between the exercise price of an option, or the amount paid for an award,
and the market price or fair value of the underlying common stock at the
date of the award or at the measurement date for variable awards.
Stock-based compensation arrangements involving non-employees are
accounted for under SFAS No. 123, Accounting for Stock-Based
Compensation, under which such arrangements are accounted for based on
the fair value of the option or award.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | Under SFAS No. 123, compensation cost for the Companys stock-based
compensation plans would be determined based on the fair value at the
grant dates for awards under those plans. The assumptions underlying the
fair value calculations of the stock option grants are presented in Note
16. Had the Company adopted SFAS No. 123 in accounting for its stock
option plans, the Companys consolidated net income (loss) and net income
(loss) per share for the years ended December 31, 2002, 2001 and 2000
would have been adjusted to the pro forma amounts indicated as follows:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2002
        
        2001
        
        2000Net income (loss) applicable to
common shareholders, as reported
        
        $
        1,338,000
        
        
        $
        (19,060,000
        )
        
        $
        (48,052,000
        )Total stock-based employee pro forma
compensation
expense determined under fair value
based
method for all awards, net of related
tax benefits
        
        $
        (6,814,000
        )
        
        $
        (5,881,000
        )
        
        $
        (3,184,000
        )Pro forma net income (loss) applicable to
common shareholders
        
        $
        (5,476,000
        )
        
        $
        (24,941,000
        )
        
        $
        (51,236,000
        )Basic net income (loss) per common share:As reported
        
        $
        0.21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )Pro forma
        
        $
        (0.87
        )
        
        $
        (11.54
        )
        
        $
        (39.30
        )Diluted net income (loss) per common
shareAs reported
        
        $
        0.21
        
        
        $
        (8.81
        )
        
        $
        (36.84
        )Pro forma
        
        $
        (0.87
        )
        
        $
        (11.54
        )
        
        $
        (39.30
        )




| | (l) |  | New Accounting Pronouncements  In May 2002, the Financial
Accounting Standards Board issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 rescinds the automatic treatment
of gains or losses from extinguishments of debt as extraordinary unless
they meet the criteria for extraordinary items as outlined in APB
Opinion No. 30, Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. In
addition, SFAS No. 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar
to sale-leaseback transactions and makes various technical corrections
to existing pronouncements. The provisions of SFAS No. 145 related to
the rescission of FASB Statement No. 4 are effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. All
other provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, with early adoption encouraged. The
Company does not anticipate that SFAS No. 145 will have a material
effect on its financial statements.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12



---



##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities.
The standard requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Previous accounting guidance
was provided by EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring). SFAS No. 146
replaces Issue 94-3. The provisions of SFAS No. 146 are to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. The Company does not anticipate that SFAS No. 146 will have a
material effect on its financial statements.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure. SFAS No. 148
amends Statement of Financial Accounting Standards No. 123, Stock-Based
Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company continues to account for
stock-based compensation using Accounting Principles Board Statement No.
25, Accounting for Stock Issued to Employees, and has not adopted the
recognition provisions of SFAS No. 123, as amended by SFAS No. 148.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN No. 45
clarifies and expands on the existing disclosure requirements for
guarantees. FIN No. 45 also requires recognition of a liability at fair
value of a companys obligations under certain guarantee contracts. The
disclosure requirements are effective for financial statements of interim
or annual periods ending after December 15, 2002. The Company believes
that the consolidated financial statements as of and for the year ended
December 31, 2002 are in compliance with the disclosure requirements of
FIN No. 45. The initial recognition and measurement provisions of FIN
No. 45 are applied only on a prospective basis to guarantees issued after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
Company does not believe that the implementation of FIN No. 45 will have
a material effect on the Companys consolidated financial statements and
related disclosures.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. FIN No. 46 expands upon
and strengthens existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity
is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN No. 46
requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to receive a
majority of the entitys residual returns or both. The consolidation
requirements of FIN No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Disclosure requirements apply to any
financial statements issued after January 31, 2003. Since currently the
Company does not have variable interest entities, the Company does not
believe that the implementation of FIN No. 46 will have a material effect
on the Companys consolidated financial statements and related
disclosures.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (m) |  | Reclassifications  Certain prior year amounts have been
reclassified to conform to the current year presentation.
| | --- |  | ------------------------------------------------------------------------------------------------------------------

F-14



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(2) Acquisitions of Businesses



| | (a) |  | MedUnite  On December 31, 2002, the Company acquired all of the
capital stock of MedUnite, Inc., a privately-held company providing
healthcare claims processing services founded by seven of the nations
largest health insurers, for $10,000,000 in cash, $13,400,000 in 4%
convertible promissory notes, and acquisition-related and exit costs of
$8,321,000 (of which $50,000 was paid as of December 31, 2002). The
purchase price was allocated as follows: current assets ($4,684,000,
including cash acquired of $879,000); property and equipment
($1,793,000); customer relationships ($6,600,000); purchased technology
($6,000,000); other long-term assets ($1,033,000, including restricted
cash of $825,000); current liabilities ($9,515,000); and other
long-term liabilities ($1,233,000). The excess of the consideration
paid over the estimated fair value of net assets acquired in the amount
of $22,359,000 was recorded as goodwill, none of which is deductible
for income tax purposes. The weighted average useful life of the customer
relationships is approximately 10 years and the weighted average useful
life of the purchased technology is 4.2 years. The valuation of
MedUnites real-time processing platform was based on an independent
third-party appraisal of the assets utilizing a replacement cost
methodology while the value of the customer relationships was
calculated on a discounted cash flow model.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The 4% convertible promissory notes are uncollateralized and mature on
December 31, 2008. Interest is payable quarterly in cash in arrears.
The notes are convertible into an aggregate of 731,322 shares of the
Companys common stock (based on a conversion price of $18.323 per share)
if the former shareholders of MedUnite achieve certain aggregate
incremental revenue based targets over a baseline revenue of
$16,100,000
with the Company over the next three and one-half year period as
follows: (i) one-third of the principal if incremental revenues during
the measurement period from January 1, 2003 through June 30, 2004 are in
excess of $5,000,000; (ii) one-third of the principal if incremental
revenues during the measurement period from July 1, 2004 through June 30,
2005 are in excess of $12,500,000; and (iii) one-third of the principal
if incremental revenues during the measurement period from July 1, 2005
through June 30, 2006 are in excess of $21,000,000. Amounts in excess
of any measurement period will be credited towards the next measurement
period; however, if the revenue trigger is not met for any period, the
ability to convert that portion of the principal is lost. Of the
$13,400,000
in principal amount, $4,000,000 is being held in escrow until
December 31, 2003 as a source for limited indemnification conditions of
the acquisition. If and when these notes become convertible, the Company
will record a beneficial conversion charge in operations to the extent
that the fair market value of the common stock is in excess of the
conversion price.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | MedUnite had incurred significant losses since its inception and was
utilizing cash significantly in excess of amounts it was generating. As
a result, at the time it was acquired by ProxyMed, there were substantial
liabilities and obligations (both recorded and unrecorded at December 31,
2002) associated with the business. Subsequent to the acquisition by
ProxyMed, MedUnites senior management team was terminated along with
approximately 20% of the general workforce in an effort to eliminate
duplicative positions and control these costs. Certain operating
facilities are being consolidated and or eliminated. Other contractual
obligations are being cancelled or renegotiated with the respective
vendors. Additionally, the Company has attempted to enter into financing
agreements with certain major vendors as a means to settle existing
liabilities (see Note 21). The Company is also in the process of
terminating its San Diego facility lease effective July 1, 2003 in
consideration for the $750,000 letter of credit held by the landlord
(included in other assets at December 31, 2002) and furniture at that
facility valued at approximately $153,000. In replacement of this
facility, the Company will relocate approximately 20 technical employees
to a smaller office in the same general area.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the acquisition, all notes payable, convertible notes and
related accrued interest to MedUnites founders with a carrying value of
$23,370,000 (except for a $2,300,000 note payable issued to NDCHealth
Corporation (NDC) in August 2001, plus $198,000 of accrued interest on
this note, and a $2,569,000 note payable issued to NDCHealth on December
31, 2002, together know as the NDC Debt) were cancelled. Additionally,
as part of the acquisition, NDC released MedUnite from $4,000,000 of
the NDC Debt and agreed to amend certain existing MedUnite agreements in
favor of future relationships with ProxyMed to be entered into in good
faith. The remaining $1,067,000 is included in accrued expenses at
December 31, 2002.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (b) |  | KenCom Communications & Services  In May 2002, the Company acquired
all of the capital stock of KenCom Communications & Services, Inc.
(KenCom), a privately-owned provider of laboratory communication
solutions, for $3,237,000 in cash ($3,275,000 original cash portion of
the purchase price less purchase price adjustments of $38,000 upon
settlement of cash holdback), 30,034 shares of unregistered ProxyMed
common stock (valued at $600,000), and acquisition related costs of
$52,000 (of which $37,000 was paid as of December 31, 2002). The number
of shares of common stock issued was based on the average of the closing
prices of the Companys common stock for the five days immediately
preceding the closing. The shares of common stock are being held in
escrow by the Company for unknown liabilities and will be released after
one year, if unused.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The purchase price was allocated as follows: current assets ($999,000,
including cash acquired of $305,000); property and equipment ($338,000);
customer relationships ($1,690,000); purchased technology ($95,000);
other long-term assets ($14,000); current liabilities ($797,000); and
other long-term liabilities ($22,000). The excess of the consideration
paid over the estimated fair value of net assets acquired in the amount
of $1,572,000 was recorded as goodwill, none of which is deductible for
income tax purposes. The weighted average useful life of the customer
relationships is approximately 9.5 years and the weighted average useful
life of the purchased technology is 3 years. Additionally, the Company
entered into 20-month employment agreements with the former owners of
KenCom and one technical employee. In October 2002, one former owner
separated from the Company and in January 2003 the other former owner
terminated her employment agreement and was retained as a consultant
through December 2003. The results of KenComs operations have been
included in the consolidated financial statements since May 1, 2002 in
our laboratory communications solutions segment.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (c) |  | MDIP  In August 2002, the Company acquired substantially all of the
assets of MDIP, Inc. (MDIP and d/b/a Medical Data Insurance
Processing), a privately-owned company providing institutional claims
processing services for $2,400,000 in cash and acquisition related costs
of $9,000 (all of which was paid as of December 31, 2002).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The purchase price was allocated as follows: current assets ($19,000);
property and equipment ($34,000); customer relationships ($1,150,000);
and purchased technology ($300,000). The excess of the consideration
paid over the estimated fair value of net assets acquired in the amount
of $906,000 was recorded as goodwill, all of which is deductible for tax
purposes. The weighted average useful life of the customer relationships
is 7 years and the weighted average useful life of the purchased
technology is 3 years. Additionally, the Company entered into 17-month
employment agreements with the former owners of MDIP and one technical
employee. The results of MDIP have been included in the consolidated
financial statements since August 1, 2002 in our electronic healthcare
transaction processing segment.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | MDP Corporation  In May 2001, the Company acquired substantially all
of the assets and the business of MDP Corporation, a privately-owned
electronic claims clearinghouse and patient statement processor based in
Atlanta, Georgia, for $10,000,000 cash. ProxyMed paid
$3,000,000 at the
closing and executed a $7,000,000 promissory note, payable in May 2002.
Interest on this note was payable monthly at 7% simple interest. The
assets of MDP collateralized the note. The purchase price was allocated
as follows: working capital ($273,000); property and equipment
($165,000); and other assets ($4,000). The excess of the consideration
paid over the estimated fair value of net assets acquired in the amount
of $9,558,000 was recorded as goodwill, all of which is deductible for
income tax purposes. In January 2002, the Company paid the $7,000,000
promissory note in full. The results of MDP have been included in the
consolidated financial statements since May1, 2001 in our electronic
healthcare transaction processing segment.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

The following unaudited pro forma summary presents the consolidated
results of operations of ProxyMed, MedUnite, MDIP and KenCom as if the
acquisitions of these businesses had occurred at the beginning of
each year presented. These
pro forma results do not necessarily represent results that would have occurred
if the acquisition had taken place at those dates, or of results that may occur
in the future.

2002
        
        2001Revenues
        
        $
        72,015,000
        
        
        $
        55,406,000Net loss from continuing operations
        
        $
        (25,892,000
        )
        
        $
        (51,978,000
        )Net loss applicable to
common shareholders
        
        $
        (26,504,000
        )
        
        $
        (64,240,000
        )Basic and diluted net loss
per share of common stock
        
        $
        (4.19
        )
        
        $
        (29.30
        )


(3) Discontinued Operations

In March 2000, ProxyMed sold its network integration and prescription drug
dispensing businesses in separate transactions. Proceeds from the sale of the
network integration business were $3,398,000 and were paid with 13,928 shares
of ProxyMed common stock (valued at $1,776,000, based on the closing market
price of the common stock on the date of closing, and recorded as treasury
stock) and a note receivable of $1,622,000 due on July 31, 2000. The sale
resulted in a gain of $608,400. As of December 31, 2000, all amounts due under
this note receivable had been collected.

Proceeds from the sale of the prescription drug dispensing business were
$255,000 and were paid with 1,133 shares of ProxyMed common stock (valued at
$154,000, based on the closing market price of the common stock on the date of
closing, and recorded as treasury stock) and a note receivable of $101,000
payable in monthly installments over two years and bearing interest at 9% per
annum. The sale resulted in a loss of $63,100. As of December 31, 2002, all
amounts due under this note receivable have been collected.

F-19



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

The following table represents the results of discontinued operations for
the year ended December 31, 2000:

2000Net revenues:Network integration
        
        $
        2,371,700Prescription drug dispensing
        
        
        574,700$
        2,946,400Net income (loss):Network integration
        
        $
        (327,700
        )Prescription drug dispensing
        
        
        23,800$
        (303,900
        )


(4) Restructuring Charge

In May 2000, the Company announced a reorganization plan aimed at reducing
costs and reallocating resources. As a result, the Company reduced its
workforce by approximately 70 employees, including the resignation of its chief
executive officer, president/chief operating officer, chief financial officer,
chief marketing officer and other management positions. The Company recorded a
charge of $1,330,000 in the year ended December 31, 2000 primarily for
separation payments and marketing contracts that were canceled in connection
with the implementation of the reorganization plan. As of December 31, 2001,
all restructuring charges had been paid. In conjunction with this
restructuring, the Company also paid $200,000 to its former president/chief
operating officer under the non-compete clause of his employment contract.
This payment had been recorded as a prepaid expense and was being amortized
over a one-year period through May 2001. The following table sets forth the
detail and activity in the restructuring expense accrual:

Accrual
        
        
        
        
        
        
        
        
        
        AccrualBalance at
        
        
        
        
        
        
        
        
        
        Balance atDecember 31,
        
        2000
        
        2000
        
        2001
        
        2001
        
        December 31,1999
        
        Additions
        
        Expenditures
        
        Expenditures
        
        Adjustments
        
        2001Severance and
other employee costs
        
        $
        
        
        
        $
        1,203,000
        
        
        $
        981,000
        
        
        $
        200,000
        
        
        $
        (22,000
        )
        
        $
        Contract termination costs
        
        
        
        
        
        
        85,000
        
        
        
        60,000
        
        
        
        
        
        
        
        (25,000
        )
        
        
        Other
        
        
        
        
        
        
        42,000
        
        
        
        32,000
        
        
        
        
        
        
        
        (10,000
        )
        
        
        Total restructuring accrual
        
        $
        
        
        
        $
        1,330,000
        
        
        $
        1,073,000
        
        
        $
        200,000
        
        
        $
        (57,000
        )
        
        $
        


F-20



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(5) Equity Transactions



| | (a) |  | Sales of Common Stock  On December 21, 2001, the Company sold
483,414 shares of common stock at $16.50 per share in a private
placement to nine U.S. and Canadian institutional and accredited
investors, resulting in net proceeds of $7,247,000 after total costs of
$729,000 (including a 7% cash fee and reimbursement of out-of-pocket
expenses totaling $602,000 to Commonwealth Associates, L.P.
(Commonwealth) who acted as placement agent in the transaction).
Certain executive officers, directors and controlling persons of the
Company had agreed to a lock-up on all shares owned or beneficially
owned by them until a registration statement covering the shares sold
in the private placement was declared effective. On February 14, 2002,
a registration statement filed by the Company under Form S-3 covering
the above shares was declared effective.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On April 5, 2002, the Company sold 1,569,366 shares of unregistered
common stock at $15.93 per share (the Primary Shares) in a private
placement to General Atlantic Partners 74, L.P., GAP Coinvestment
Partners II, L.P., Gapstar, LLC, GAPCO GmbH & Co. KG. (the General
Atlantic Purchasers), four companies affiliated with General Atlantic
Partners, LLC (GAP), a private equity investment fund and received net
proceeds of $24,886,000. In addition, the Company also issued two-year
warrants for the purchase of 549,279 shares of common stock exercisable
at $15.93 per share (the GAP Warrants). No placement agent was used in
this transaction. The Company granted the General Atlantic Purchasers
and certain of their transferees and affiliates certain demand and piggy
back registration rights starting one year from closing. Additionally,
in connection with the transaction, a managing member of GAP was
appointed as a director to fill a vacancy on the Companys Board of
Directors.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the purchase of the Primary Shares, the General Atlantic
Purchasers owned approximately 23.4% of the then outstanding shares of
the Companys common stock. At the Companys Annual Meeting of
Shareholders held on May 22, 2002, the shareholders of the Company
approved that the GAP Warrants may be exercised at any time after April
5, 2003, and prior to April 5, 2004, pursuant to the original terms of
the warrant.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (b) |  | Series B Preferred Stock  In December 1999, ProxyMed sold 15,000
shares of 6% Series B non-voting, non-redeemable convertible preferred
stock (the Series B Preferred) in a private placement to
institutional investors resulting in net proceeds of $14,160,000 after
costs of $840,000. ProxyMed, in whole or in part during the first
year, could call for conversion at 93% of the then current market price
of its common stock, or redemption at 107% of the face value plus
accrued dividends, with full conversion or redemption (at ProxyMeds
election) of all of the preferred stock within two years. ProxyMed was
required to convert 30% of the preferred shares by June 23, 2000, and
another 30% of the preferred shares by September 23, 2000. After the
first year, the preferred shares are convertible at the option of the
investors. Dividends are cumulative and are payable quarterly in cash
or common stock. As part of this sale, warrants to purchase 53,333
shares of common stock (the Old Warrants) were issued at an exercise
price of $180.75 per share. As a result of a Redemption and Exchange
Agreement executed in May 2000, 46,222 of these warrants were repriced
(see Note 5(c) below). Additionally, in 2000, we recorded a cumulative
beneficial conversion charge of $4,978,000 included as a dividend
charge in the loss applicable to common shareholders pursuant to
accounting literature allowing for a cumulative adjustment relating to
convertible securities.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through December 31, 2001, 2,000 shares of the Series B Preferred had
been converted into an aggregate of 116,895 shares of common stock. As
described below, the balance of 13,000 shares were redeemed pursuant to a
redemption agreement in May 2000.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2000, dividends valued at $224,000 were paid by issuing 2,123
shares of common stock plus cash payments of $3,000. In 2001, cash
dividends of $5,000 were paid on the Series B Preferred.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (c) |  | Series B Redemption and Exchange Agreement  Due to the decline in
the price of the Companys common stock below $63.15 for a period of
ten consecutive trading days in April and May 2000, certain contractual
provisions were triggered which would have permitted the holders of the
Series B Preferred shares to immediately convert the preferred shares
and exercise the Old Warrants into a potentially large number of shares
of common stock. As a result, on May 4, 2000, the Company entered into
a Redemption and Exchange Agreement (the Redemption Agreement) with
the holders of 13,000 shares of the Series B Preferred (the Redemption
Agreement Holders). Under the terms of the Redemption Agreement, the
Company immediately redeemed 4,000 shares of the Series B Preferred for
$4,687,000 (a 16.5% premium) and was required to redeem an additional
2,500 shares of the Series B Preferred on each of June 19, 2000, August
1, 2000, and August 31, 2000, and an additional 1,500 shares of the
Series B Preferred on September 29, 2000. So long as the Company
remained in compliance with the terms of the Redemption Agreement, the
Redemption Agreement Holders were prohibited from converting their
shares of Series B Preferred into shares of common stock. As a result
of the completion of a private placement financing of convertible
securities (see Note 5(e) below), the Company was able to redeem the
remaining 9,000 shares of the Series B Preferred in June 2000 for
$10,636,000. The total premium of $2,323,000 paid on the redemption of
the 13,000 shares of Series B Preferred, in addition to $728,000 of
unamortized original issuance costs of the Series B Preferred, was
recorded as dividend charges included in the net loss applicable to
common stockholders in the year ended December 31, 2000.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | Also pursuant to the Redemption Agreement, 46,222 of the Old Warrants
(with an exercise price of $180.75 per share) issued to the Redemption
Agreement Holders were exchanged for an equal number of warrants (the
Exchanged Warrants) with an exercise price of $22.50 per share. Such
holders also received, in the aggregate, 43,333 additional warrants to
purchase common stock (the New Warrants) at an exercise price of $22.50
per share. The total value of the Exchanged Warrants and New Warrants of
approximately $1,325,000 was included as dividend charges in the net loss
applicable to common stockholders in the year ended December 31, 2000.
The Exchanged Warrants expired on December 23, 2002 and the New Warrants
expire on May 5, 2003. The exercise price and number of shares of common
stock which may be purchased upon exercise of the Exchanged Warrants and
the New Warrants are subject to adjustment upon the occurrence of certain
dilution events including, without limitation, certain issuances of
common stock, stock options or convertible securities issued after
November 2000, or certain corporate transactions such as stock splits,
mergers or asset sales. As a result, in February 2001, the Exchanged
Warrants were converted into 228,366 warrants with an exercise price of
$18.89 per share and the Company recorded a deemed dividend charge of
$1,968,000 in the quarter ended March 31, 2001. Subject to certain
restrictions, the holders of the Exchanged Warrants and the New Warrants
agreed not to exercise such warrants for a period of 180 days following
the date of the Redemption Agreement. The Company incurred approximately
$476,000 in costs for professional fees and other charges related to the
negotiation of the Redemption Agreement which were recorded as dividend
charges included in the net loss applicable to common stockholders in the
year ended December 31, 2000.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additionally, under the terms of the Redemption Agreement, the Company
had agreed to pay the Redemption Agreement Holders the aggregate amount
of $4,333,000 if there was a change of control of the Company on or
before December 23, 2002.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company had not entered into an agreement to redeem the shares of
Series B Preferred held by the holder of 2,000 shares of the Series B
Preferred (the Remaining Holder). Through December 31, 2000, the
Remaining Holder had converted 1,890 shares of the Series B Preferred
into an aggregate of 108,129 shares of common stock, and the balance of
110 shares of Series B Preferred was converted into 8,766 shares of
common stock in October 2001.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | In addition, as a result of certain anti-dilution provisions triggered in
June 2000, 7,111 Old Warrants issued to the Remaining Holder at an
exercise price of $180.75 were converted into 85,689 warrants with an
exercise price of $15.00 per share. In December 2001, these warrants
were reset into 98,493 warrants at an exercise price of $13.05 per share
as a result of a conversion offer to convert the Companys Series C 7%
Convertible Preferred Stock (see Note 5(g) below). In December 2002, the
Remaining holder converted 34,500 of these warrants into an equivalent
number of common shares for $450,000 in cash. The balance of 63,993
warrants subsequently expired without conversion.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Series B Warrant Exchange  In April 2001, the Company entered into
an exchange agreement (the Series B Exchange Agreements) with the
Redemption Agreement Holders. Under the Series B Exchange Agreements,
the Company canceled and exchanged all outstanding Exchanged Warrants
and New Warrants for an aggregate of 218,828 shares of common stock.
In accordance with the terms of the Series B Exchange Agreements, the
Company registered these shares under Form S-3 effective on June 25,
2001. For this transaction, the Company recorded a deemed dividend
charge of $1,855,000 in the quarter ended June 30, 2001. In connection
with the cancellation and exchange of these warrants, the holders of
the Series B Preferred and the holders of Series C 7% Convertible
Preferred Stock agreed to waive certain anti-dilution rights afforded
by certain outstanding warrants, the Series B Preferred and the Series
C 7% Convertible Preferred Stock.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-25



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (e) |  | Convertible Debt and Series C Preferred Stock  In June 2000, the
Company sold, in a private placement to institutional and individual
investors (the Financing), a total of $24,310,000 of 7% Convertible
Senior Secured Notes (the Notes) due January 1, 2001. Together with
the Notes, the Company issued five-year warrants for the purchase of an
aggregate of 810,333 shares of the Companys common stock at an
exercise price of $15.00 per share. The total net proceeds received by
the Company from the Financing was approximately $21,383,000. Under
different circumstances the Notes were convertible into either common
stock at a conversion price of $15.00 per share, or into shares of the
Companys Series C 7% Convertible Preferred Stock (the Series C
Preferred) at the rate of one Series C Preferred share for each $100
of principal and accrued interest under the Notes. As described below,
all of the Notes have been converted into shares of Series C Preferred.
The conversion price of the Series C Preferred, the warrant exercise
price, and number of shares of common stock issuable upon exercise of
the warrants were subject to adjustment upon the occurrence of certain
dilution events including, without limitation, certain issuances of
common stock, stock options or convertible securities issued after June
2001, or certain corporate transactions such as stock splits, mergers
or asset sales. As the conversion price of the Notes was less than the
market price of the Companys common stock on the dates of issuance,
the Company recorded a beneficial conversion charge in interest expense
of approximately $3,203,000 in the year ended December 31, 2000. The
total proceeds were allocated between the debt and the warrants
resulting in an accretion charge through interest expense of
approximately $260,000 recorded in the year ended December 31, 2000.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The warrants issued to the investors in the Financing provided that they
were not exercisable until such time as the Company had obtained
shareholder approval of an increase in the number of shares of its
authorized common stock which was ultimately approved by the Companys
shareholders at its July 7, 2000 annual meeting. However, since the
investors agreed to accept a $30.00 per warrant redemption price as
protection in case shareholder approval did not occur before January 1,
2001, the value of these put warrants was accreted up to their
redemption value through July 7, 2000, the date shareholder approval was
obtained, at which time the recorded value of $12,085,000 was
reclassified from debt to equity. Charges of approximately $740,000
associated with accreting the put warrants up to their redemption value
was recorded as interest expense in the year ending December 31, 2000.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | As a result of completion of the redemption of the Series B Preferred
pursuant to the Redemption Agreement, the Notes, plus accrued interest
thereon of $20,000, automatically converted into 243,265 shares of Series
C Preferred on June 30, 2000. Shares of Series C Preferred were
immediately convertible into common stock at any time by the holder at an
initial conversion price of $15.00 per share, subject to adjustment upon
the occurrence of certain dilution events including, without limitation,
certain issuances of common stock, stock options or convertible
securities issued after June 15, 2001, or certain corporate transactions
such as stock splits, mergers or asset sales. Shares of Series C
Preferred are mandatorily convertible if the Company raised more than $30
million in gross proceeds from the issuance of securities in a private or
public placement or if the closing stock price of the Company is trading
at $45.00 for 20 consecutive trading days. The Series C Preferred is
entitled to receive a 7% annual non-cumulative dividend, payable
quarterly in cash or shares of common stock at the Companys option. If
paid in stock, the stock is valued at $15.00 per share, subject to
adjustment. Additionally, upon the conversion of the Notes to Series C
Preferred, the unamortized balance of the beneficial conversion feature
of $9,763,000 was taken as a charge included in the net loss applicable
to common stockholders in the year ended December 31, 2000.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Commonwealth represented the Company as private placement agent in the
Financing for which it received cash fees of $2,431,000 and five-year
warrants to purchase 486,200 shares of the Companys common stock at an
exercise price of $15.00 per share (valued at $10,876,000). Other costs
of the transaction aggregated approximately $547,000.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs of $13,854,000 incurred in the Financing were capitalized and were
amortized through the original maturity date of the Notes. Of this
amount, $268,000 was charged to interest expense. However, due to the
conversion of the Notes to Series C Preferred on June 30, 2000, the
unamortized financing costs of $13,585,000, and the recorded value of the
debt of $12,705,000, were reclassified to equity.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | As required, the Company registered under Form S-3 the underlying common
shares with the Securities and Exchange Commission on December 14, 2000.
The investors in this transaction agreed to a one-year lock-up on the
transfer or sale of any shares of common stock received upon conversion
of the Series C Preferred shares and exercise of the warrants issued.
Additionally, Commonwealth agreed to a 15-month lockup on the sale or
transfer of the shares of common stock underlying the warrants issued in
connection with this financing and certain officers of the Company had
also agreed to a similar lockup on all common stock owned or acquired
during the 15-month period. At the discretion of Commonwealth, lockup
periods for all parties could have been extended for a period of up to an
additional 12 months or may have been terminated early. Furthermore, as
part of the financing, the size of ProxyMeds Board of Directors was
required to be increased including the appointment of four new members,
two of which were appointed by the investors and the other two by
Commonwealth. On July 20, 2000, one existing director resigned and five
new directors were appointed to serve with the remaining three directors.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August 2000, the Company sold 10,000 shares of Series C Preferred for
$1 million in a private placement and issued five-year warrants for the
purchase of 33,333 shares of the Companys common stock at an exercise
price of $15.00 per share to Mr. Hoover, its new chairman/chief executive
officer, under terms substantially identical to the Financing. Mr.
Hoovers shares were locked-up similarly to those of other officers of
the Company, as noted above. As the conversion price of these preferred
shares was less than the market price of the Companys common stock on
the date of issuance, the Company recorded a beneficial conversion charge
of $500,000 in the year ended December 31, 2000.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through December 12, 2001, 49,466 shares of Series C Preferred had been
converted into 329,773 shares of common stock under terms in the Series C
Preferred. On December 13, 2001, the Company offered to convert any of
the 203,799 outstanding shares of Series C Preferred at a reduced
conversion rate (see Note 5(g) below).
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dividends on the Series C Preferred for 2001 and 2000 valued at
$1,658,000 and $1,047,000, respectively, were paid with 108,434 shares of
common stock (of which 104,254 shares were distributed by December 31,
2001) and 58,754 shares of common stock (of which 29,071 shares were
distributed by December 31, 2000), plus cash for fractional shares of
$2,000 and $200, respectively. Dividends were paid through the date of
conversion for all conversions of Series C Preferred.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (f) |  | Series C Warrant Exchange  In June 2001, the Company offered to
exchange into shares of common stock (the Series C Exchange Offer)
(i) 843,667 warrants (the Investor Warrants) that were issued to
holders of the Series C Preferred; (ii) 552,867 warrants (the Agents
Warrants) that were issued to Commonwealth in connection with the
private placement of the Series C Preferred; and (iii) 66,667 warrants
(the Advisory Warrants) that were issued to Commonwealth for certain
advisory services that Commonwealth provided to the Company. Under the
terms of the Series C Exchange Offer, the Company would issue 0.75
shares of its common stock for each Investor Warrant, 0.75 shares of
its common stock for each Agents Warrant, and 0.625 shares of its
common stock for each Advisory Warrant. The Investor Warrants, the
Agents Warrants and the Advisory Warrants are collectively known as
the Series C Warrants.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On August 15, 2001, the Company canceled and exchanged 1,412,033, or
96.5%, of the 1,463,201 Series C Warrants for 1,050,691 shares of common
stock. As required in accordance with terms of the original Subscription
Agreement dated June 15, 2000, these shares were registered under a Form
S-3 on February 14, 2002. In connection with the cancellation and
exchange of the Series C Warrants, the exchanged shares were subject to
an additional lock-up period through February 15, 2002. Additionally,
for this transaction, the Company recorded a deemed dividend charge of
$3,201,000 in 2001. In 2002, 8,333 Series C Warrants were converted
into 1,190 shares of common stock (through cashless exercises). As of
December 31, 2002, 42,833 of the Series C
Warrants remain outstanding.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) |  | Series C Preferred Conversion Offer  On December 13, 2001, the
Company offered to convert its then outstanding Series C Preferred into
shares of common stock at a reduced conversion price (the Conversion
Offer). For a period of sixty days ending February 11, 2002, the
holders of the Series C Preferred shares were able to convert such
shares at a reduced conversion price of $13.05 per share instead of the
original conversion price of $15.00. As of December 31, 2001, holders
of 83.0% of the outstanding Series C Preferred had converted their
shares into 1,296,126 shares of common stock and, as a result, the
Company recorded a deemed dividend charge of $3,365,000 included in the
net loss applicable to common shareholders in the fourth quarter of
2001. At the conclusion of the Conversion Offer on February 11, 2002,
holders of 98.5% of the outstanding Series C Preferred had converted
their shares into a total of 1,538,636 common shares. A deemed
dividend charge of $612,000 was recorded in the first quarter of 2002
for conversions consummated after the 2001 year-end. Subsequent to
February 22, 2002, 1,000 shares of Series C Preferred were converted
into 6,667 shares of common stock. As of December 31, 2002, there were
2,000 unconverted shares of Series C Preferred, which are convertible
into 13,333 shares of common stock.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | In addition, holders of more than two-thirds of the outstanding Series C
Preferred had voted to amend the Articles of Designation governing the
Series C Preferred and the Subscription Agreement dated as of June 15,
2000. These amendments eliminated certain rights of the Series C
Preferred shareholders, including anti-dilution provisions, voting rights
and certain restrictive covenants agreed to by the Company, and apply to
those Series C Preferred shareholders who decided not to participate in
the Conversion Offer.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As noted above, a registration statement filed by the Company under Form
S-3 was declared effective on February 14, 2002 covering the resale of
the December 2001 private placement shares of the investors, the
additional shares that would have been required to be issued to the
investors under that private placement if a registration statement was
not declared effective by March 20, 2002, and the resale of the
additional shares issuable to the holders of the Series C Preferred
shares electing to convert at the reduced conversion price pursuant to
the Conversion Offer.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the reduced conversion price in the Conversion Offer,
85,689 warrants with an exercise price of $15.00 per share issued to the
Remaining Holder in connection with our Series B Preferred were reset
into 98,493 warrants with a new exercise price of $13.05 per share as a
result of anti-dilution provisions relating to the Series B Preferred.
As a result of this reset, the Company recorded a deemed dividend charge
of approximately $208,000 in the fourth quarter of 2001.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | Other Warrants  At December 31, 2002, there are 27,282 warrants
exercisable at prices ranging from $113.40 to $181.50 at various times
through June 2007 issued in connection with prior equity and other
business transactions consummated by ProxyMed.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | Reverse Stock Split  On August 21, 2001, the Companys Board of
Directors effected a 1-for-15 reverse stock split of its common stock
whereby each 15 shares of common stock was exchanged for one new share
of common stock. As a result of this reverse stock split, the par
value of the common stock remained unchanged at $.001 per share and no
cash was issued for fractional interests.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Treasury shares  In October 2002, the Companys Board of Directors
voted to cancel and retire 15,061 shares held by the Company in its
treasury related to the sale of its discontinued operations (see Note
3).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-30



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (k) |  | Other  ProxyMed has remaining 1,731,735 authorized but unissued
shares of preferred stock, par value $.01 per share, which are entitled
to rights and preferences to be determined at the discretion of the
Board of Directors.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The value of any stock options and warrants issued in connection with the
sales of common stock and convertible preferred stock are netted against
the proceeds within stockholders equity, and have no impact on earnings.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(7) Segment Information

ProxyMed operates in two reportable segments that are separately
managed: electronic healthcare transaction processing and laboratory
communication solutions. Electronic healthcare transaction processing
includes transaction and value-added services principally between physicians
and insurance companies (Payer Services) and physicians and pharmacies
(Prescription Services); and laboratory communication solutions includes the
sale, lease and service of communication devices principally to laboratories
and the contract manufacturing of printed circuit boards (Laboratory
Services). Inter-segment sales are not material and there were no foreign
sales for any periods presented.

Year Ending December 31,2002
        
        2001
        
        2000Net revenues:Electronic healthcare transaction processing
        
        $
        22,439,000
        
        
        $
        16,938,000
        
        
        $
        10,103,000Laboratory communication solutions
        
        
        27,743,000
        
        
        
        26,292,000
        
        
        
        23,338,000$
        50,182,000
        
        
        $
        43,230,000
        
        
        $
        33,441,000Operating income (loss):Electronic healthcare transaction processing
        
        $
        597,000
        
        
        $
        (6,859,000
        )
        
        $
        (18,949,000
        )Laboratory communication solutions
        
        
        3,535,000
        
        
        
        3,686,000
        
        
        
        3,724,000Corporate and consolidating
        
        
        (2,792,000
        )
        
        
        (3,539,000
        )
        
        
        (6,905,000
        )Restructuring charges
        
        
        
        
        
        
        
        
        
        
        (1,330,000
        )$
        1,340,000
        
        
        $
        (6,712,000
        )
        
        $
        (23,460,000
        )Depreciation and amortization:Electronic healthcare transaction processing
        
        $
        1,581,000
        
        
        $
        7,285,000
        
        
        $
        12,147,000Laboratory communication solutions
        
        
        857,000
        
        
        
        561,000
        
        
        
        722,000Corporate and consolidating
        
        
        198,000
        
        
        
        330,000
        
        
        
        506,000$
        2,636,000
        
        
        $
        8,176,000
        
        
        $
        13,375,000Capital expenditures and capitalized software:Electronic healthcare transaction processing
        
        $
        1,291,000
        
        
        $
        771,000
        
        
        $
        2,126,000Laboratory communication solutions
        
        
        693,000
        
        
        
        628,000
        
        
        
        358,000Corporate and consolidating
        
        
        22,000
        
        
        
        46,000
        
        
        
        94,000$
        2,006,000
        
        
        $
        1,445,000
        
        
        $
        2,578,000


December 31,Total assets:
        
        2002
        
        2001Electronic healthcare transaction processing
        
        $
        58,957,000
        
        
        $
        14,076,000Laboratory communication solutions
        
        
        12,904,000
        
        
        
        8,525,000Corporate and consolidating
        
        
        16,843,000
        
        
        
        13,281,000$
        88,704,000
        
        
        $
        35,882,000


F-31



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(8) Inventory

Inventory consists of the following at December 31, 2002 and 2001:

2002
        
        2001Materials, supplies and component parts
        
        $
        2,015,000
        
        
        $
        2,433,000Work in process
        
        
        261,000
        
        
        
        159,000Finished goods
        
        
        498,000
        
        
        
        759,000$
        2,774,000
        
        
        $
        3,351,000


(9) Property and Equipment

Property and equipment consists of the following at December 31, 2002 and
2001:

Estimated2002
        
        2001
        
        useful livesFurniture, fixtures and equipment
        
        $
        2,553,000
        
        
        $
        2,052,000
        
        
        
        4 to 7 yearsComputer hardware and software
        
        
        5,109,000
        
        
        
        3,548,000
        
        
        
        2 to 5 yearsService vehicles
        
        
        230,000
        
        
        
        251,000
        
        
        5 yearsLeasehold improvements
        
        
        887,000
        
        
        
        759,000
        
        
        Life of leaseRevenue earning equipment
        
        
        1,357,000
        
        
        
        772,000
        
        
        5 years10,136,000
        
        
        
        7,382,000Less accumulated depreciation
        
        
        4,417,000
        
        
        
        3,550,000Property and equipment, net
        
        $
        5,719,000
        
        
        $
        3,832,000


Depreciation expense was $1,839,000 in 2002, $1,470,000 in 2001 and
$1,515,000 in 2000. Accumulated depreciation for revenue earning equipment at
December 31, 2002 and 2001 was $607,000 and $447,000 respectively. In
addition, as a result of managements periodic review for impairment, the
Company wrote off $91,000 of remaining book value in 2001 related to damaged
and obsolete computer hardware and software.

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(10) Goodwill and Other Intangible Assets



| | (a) |  | Goodwill  The Company adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets effective January 1, 2002.
Under SFAS No. 142, goodwill is reviewed at least annually for
impairment. This adoption resulted in the reduction of approximately
$808,000 of amortization relating to its existing goodwill each
quarter, which would have otherwise been recorded through the first
quarter of 2004. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption and at least
annually thereafter, utilizing a fair value methodology versus an
undiscounted cash flow method required under previous accounting rules.
In accordance with the adoption of FAS No. 142, the Company completed
its initial impairment test of goodwill during the first quarter of
2002 and its annual test at December 31, 2002 utilizing various
valuation techniques including a market value analysis. No impairment
charges were recorded as a result of these tests.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The changes in the carrying amounts of goodwill, net, for 2002 by
operating segment are as follows:
| |  |  | ---------------------------------------------------------------------------------------------------

Electronichealthcare
        
        Laboratorytransaction
        
        communicationprocessing
        
        solutions
        
        TotalBalance as of December 31, 2001
        
        $
        7,431,000
        
        
        $
        530,000
        
        
        $
        7,961,000Goodwill acquired during the period
        
        
        23,264,000
        
        
        
        1,572,000
        
        
        
        24,836,000Balance as of December 31, 2002
        
        $
        30,695,000
        
        
        $
        2,102,000
        
        
        $
        32,797,000


F-33



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| |  |  | In accordance with SFAS No. 142, a reconciliation of the previously
reported net income (loss) applicable to common shareholders and net
income (loss) per share to the amounts adjusted for the exclusion of
goodwill amortization, net of any related income tax effect, is as
follows:
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2001
        
        2000Reported net loss applicable to common shareholders
        
        $
        (19,060,000
        )
        
        $
        (48,052,000
        )Goodwill amortization
        
        
        4,637,000
        
        
        
        6,299,000Adjusted net loss applicable to common shareholders
        
        $
        (14,423,000
        )
        
        $
        (41,753,000
        )Basic weighted average common shares outstanding
        
        
        2,162,352
        
        
        
        1,304,342Basic net loss per share of common stock:Reported net loss applicable to common shareholders
        
        $
        (8.81
        )
        
        $
        (36.84
        )Goodwill amortization
        
        
        2.14
        
        
        
        4.83Adjusted net loss applicable to common shareholders
        
        $
        (6.67
        )
        
        $
        (32.01
        )Diluted weighted average common shares outstanding
        
        
        2,162,352
        
        
        
        1,304,342Diluted net loss per share of common stock:Reported net loss applicable to common shareholders
        
        $
        (8.81
        )
        
        $
        (36.84
        )Goodwill amortization
        
        
        2.14
        
        
        
        4.83Adjusted net loss applicable to common shareholders
        
        $
        (6.67
        )
        
        $
        (32.01
        )




| | (b) |  | Other Intangible Assets  The carrying amounts of other intangible
assets as of December 31, 2002 and 2001 by category, are as follows:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------

December 31, 2002
        
        December 31, 2001Carrying
        
        Accumulated
        
        
        
        Carrying
        
        AccumulatedAmount
        
        Amortization
        
        Net
        
        Amount
        
        Amortization
        
        NetCapitalized software
        
        $
        527,000
        
        
        $
        (58,000
        )
        
        $
        469,000
        
        
        $
        637,000
        
        
        $
        (445,000
        )
        
        $
        192,000Purchased technology
        
        
        9,127,000
        
        
        
        (1,315,000
        )
        
        $
        7,812,000
        
        
        
        2,732,000
        
        
        
        (1,025,000
        )
        
        $
        1,707,000Customer relationships
        
        
        10,251,000
        
        
        
        (312,000
        )
        
        $
        9,939,000
        
        
        
        853,000
        
        
        
        (676,000
        )
        
        $
        177,000$
        19,905,000
        
        
        $
        (1,685,000
        )
        
        $
        18,220,000
        
        
        $
        4,222,000
        
        
        $
        (2,146,000
        )
        
        $
        2,076,000


F-34



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##### Table of Contents





| |  |  | In mid-September 2002, the Company acquired the customer relationships
and related Internet-based revenue stream from Claimsnet.com, a provider
of claims processing services, for $700,000 cash. As part of its
acquisition of MedUnite (see Note 2(a)), the Company recorded $6,600,000
in customer relationships, and $1,200,000 and $4,800,000 for the legacy
and real-time technology platforms, respectively. In addition, as a
result of managements periodic review for impairment, the Company wrote
off $38,000 of previously capitalized real-time software development
costs as the Company acquired the same functionality through the software
platform acquired from MedUnite.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | During 2002, the Company wrote off $517,000 and $741,000 in fully
amortized capitalized software and purchased technology, respectively.
During 2001, the Company wrote off $124,000 and $11,000,000 in fully
amortized capitalized software and purchased technology, respectively.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Estimates of useful lives of other intangible assets are based on
historical experience, the historical experience of the entity from which
the intangible assets were acquired, the industry in which the Company
operates, or on contractual terms. If indications arise that would
materially affect these lives, an impairment charge may be required.
Intangible assets are being amortized over their estimated useful lives
as follows:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Estimateduseful livesCapitalized software
        
        3  yearsPurchased technology
        
        1 - 12  yearsCustomer relationships
        
        4.6 - 10  years




| |  | Amortization expense of other intangible assets was $797,000, $1,987,000
and $5,194,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As of December 31, 2002, estimated future amortization expense of other
intangible assets is as follows: $3,349,000 in 2003, $2,607,000 in 2004,
$2,486,000 in 2005, $2,297,00 in 2006, and $2,265,000 in 2007.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Restricted Cash  Restricted cash of $825,000 at December 31, 2002
includes a certificate of deposit of $750,000 that has been pledged as
security for an outstanding letter of credit (see Note 19(a)). Restricted
cash is included in other assets in the accompanying balance sheet.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(12) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists of the following at
December 31, 2002 and 2001:

2002
        
        2001Accounts payable
        
        $
        9,949,000
        
        
        $
        2,501,000Accrued payroll and related costs
        
        
        3,091,000
        
        
        
        1,579,000Acquisition related costs
        
        
        7,149,000
        
        
        
        Other accrued expenses
        
        
        1,283,000
        
        
        
        1,265,000Total accounts payable and accrued expenses
        
        $
        21,472,000
        
        
        $
        5,345,000


As part of its acquisition of MedUnite, the Company recorded a total of
$8,321,000 in transaction related and exit costs including investment banking
fees and expenses ($1,020,000); professional fees ($315,000); required
liability insurance ($400,000); severance and other pay for executives and
employees ($2,417,000); terminated facility obligations ($1,682,000); contract
cancellation fees and penalties ($2,430,000) and other ($57,000). Of these
amounts $1,122,000 has been reclassified as long term obligations based on the
contracted or expected payment timeframes and $50,000 in professional fees had
been paid by December 31, 2002.

Other accrued expenses include the current portion of capital leases
payable, customer deposits, estimated property and other taxes.

(13) Debt Obligations



| | (a) |  | On December 31, 2002, the Company issued $13,400,000 in
uncollateralized convertible promissory notes to the former
shareholders of MedUnite as part of the consideration paid in its
acquisition of MedUnite. Interest is payable quarterly in cash in
arrears. The convertible promissory notes are payable in full on
December 31, 2008 unless converted earlier upon the meeting of certain
aggregate revenue triggers by the former shareholders (see Note 2(a)).
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | In January 2002, the Company paid in full its $7,000,000 promissory
note related to its May 2001 acquisition of MDP.
| | --- |  | --------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(14) Income Taxes

The company did not recognize an income tax provision or benefit for any
of the years in the three year period ended December 31, 2002.

This differed from the amount computed by applying the statutory federal
income tax rate to the net loss reflected on the Consolidated Statements of
Operations in the three years ended December 31, 2002 due to the following:

2002
        
        2001
        
        2000Amount
        
        %
        
        Amount
        
        %
        
        Amount
        
        %Federal income tax benefit at statutory rate
        
        
        663,000
        
        
        
        34.0
        %
        
        
        (2,311,000
        )
        
        
        (34.0)
        %
        
        
        (9,073,000
        )
        
        
        (34.0)
        %State income tax benefit
        
        
        80,000
        
        
        
        4.1
        
        
        
        (245,000
        )
        
        
        (3.6
        )
        
        
        (427,000
        )
        
        
        (1.6
        )Non-deductible items
        
        
        21,000
        
        
        
        1.1
        
        
        
        238,000
        
        
        
        3.5
        
        
        
        1,388,000
        
        
        
        5.2Increase (decrease) in valuation allowance
        
        
        (764,000
        )
        
        
        (39.2
        )
        
        
        2,318,000
        
        
        
        34.1
        
        
        
        8,112,000
        
        
        
        30.4Total provision
        
        
        
        
        
        
        
        %
        
        
        
        
        
        
        
        %
        
        
        
        
        
        
        
        %


The significant components of the deferred tax asset account is as follows
at December 31, 2002 and 2001:

2002
        
        2001Net operating losses  Federal
        
        $
        42,456,000
        
        
        $
        22,440,000Net operating losses  State
        
        
        7,172,000
        
        
        
        2,387,000Depreciation and amortization
        
        
        4,770,000
        
        
        
        9,387,000Capitalized start up costs
        
        
        9,789,000
        
        
        
        Acquisition costs
        
        
        2,716,000
        
        
        
        Other  net
        
        
        (833,000
        )
        
        
        1,341,000Total deferred tax assets
        
        
        66,070,000
        
        
        
        35,555,000Less valuation allowance
        
        
        (66,070,000
        )
        
        
        (35,555,000
        )Net deferred tax assets
        
        $
        
        
        
        $
        


Based on the weight of available evidence, a valuation allowance has been
provided to offset the entire deferred tax asset amount. The net increase in
the valuation allowance for the year ended December 31, 2002 includes an
increase of $31,279,000 related to the acquisition of MedUnite, Inc.

Total net operating loss carryforwards at December 31, 2002 are
$118,468,000, of which $57,694,000 is attributed to the acquisition of MedUnite
and may only be used to reduce the future taxable income of MedUnite due to the
Separate Return Limitation Year (SRLY) income tax regulations. These net
operating losses begin to expire in 2008. Due to the changes in ownership
control of the Company at various dates, as defined under Internal Revenue Code
Section 382, net operating losses of $109,224,000 ($51,530,000 for ProxyMed and
$57,694,000 for MedUnite) are limited in their availability to offset current
and future taxable income.

F-37



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(15) Stock Options

ProxyMed has various stock option plans for employees, directors and
outside consultants, under which both incentive stock options and non-qualified
options may be issued. Under such plans, options to purchase up to 1,281,017
shares of common stock may be granted. Options may be granted at prices equal
to the fair market value at the date of grant, except that incentive stock
options granted to persons owning more than 10% of the outstanding voting power
must be granted at 110% of the fair market value at the date of grant. In
addition, as of December 31, 2002, options for the purchase of 418,142 shares
to newly-hired employees remained outstanding. Stock options issued by
ProxyMed generally vest within three years, and expire up to ten years from the
date granted. Stock option activity was as follows for the three years ended
December 31, 2002:

Options
        
        
        
        Weighted averageavailable
        
        Options
        
        exercise pricefor grant
        
        outstanding
        
        of optionsBalance, December 31, 1999
        
        
        10,983
        
        
        
        173,714
        
        
        $
        130.20Options authorized
        
        
        646,979
        
        
        
        
        
        
        
        Options granted
        
        
        (667,183
        )
        
        
        667,183
        
        
        $
        22.20Options exercised
        
        
        
        
        
        
        (5,208
        )
        
        $
        81.90Options expired/forfeited
        
        
        39,473
        
        
        
        (87,360
        )
        
        $
        127.95Balance, December 31, 2000
        
        
        30,252
        
        
        
        748,329
        
        
        $
        34.50Options authorized
        
        
        292,131
        
        
        
        
        
        
        
        Options granted
        
        
        (101,236
        )
        
        
        101,236
        
        
        $
        15.97Options expired/forfeited
        
        
        11,320
        
        
        
        (19,794
        )
        
        $
        74.58Balance, December 31, 2001
        
        
        232,467
        
        
        
        829,771
        
        
        $
        31.22Options authorized
        
        
        608,000
        
        
        
        
        
        
        
        Options granted
        
        
        (330,847
        )
        
        
        330,847
        
        
        $
        16.89Options expired/forfeited
        
        
        65,422
        
        
        
        (76,063
        )
        
        $
        82.29Balance, December 31, 2002
        
        
        575,042
        
        
        
        1,084,555
        
        
        $
        23.27


The following table summarizes information regarding outstanding and
exercisable options as of December 31, 2002:

Options outstanding
        
        Options exercisableRange of exercise
        
        Number
        
        Weighted average remaining
        
        Weighted average
        
        Number
        
        Weighted averageprices
        
        outstanding
        
        contractual life (years)
        
        exercise price
        
        exercisable
        
        exercise price$11.00 - $18.00
        
        
        376,977
        
        
        
        9.1
        
        
        $
        15.60
        
        
        
        133,253
        
        
        $
        15.85$18.01 - $22.00
        
        
        184,623
        
        
        
        7.6
        
        
        $
        19.29
        
        
        
        124,337
        
        
        $
        19.13$22.01 - $23.00
        
        
        476,020
        
        
        
        7.0
        
        
        $
        22.63
        
        
        
        320,795
        
        
        $
        22.64$23.01 - $203.40
        
        
        46,935
        
        
        
        1.4
        
        
        $
        106.94
        
        
        
        45,690
        
        
        $
        106.691,084,555
        
        
        
        
        
        
        
        
        
        
        
        624,075


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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

The following table summarizes information regarding options exercisable
as of December 31:

2002
        
        2001
        
        2000Number exercisable
        
        
        624,075
        
        
        
        355,757
        
        
        
        125,102Weighted average exercise price
        
        $
        26.64
        
        
        $
        41.06
        
        
        $
        74.55


The weighted average grant date fair value of options granted ($13.37 in
2002, $12.65 in 2001, and $16.65 in 2000) was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions:

2002
        
        2001
        
        2000Risk-free interest rate
        
        
        4.46
        %
        
        
        4.75
        %
        
        
        6.00
        %Expected life
        
        9.9 years
        
        9.9 years
        
        10.0 yearsExpected volatility
        
        
        81.0
        %
        
        
        82.8
        %
        
        
        80.9
        %Expected dividend yield
        
        
        0.0
        %
        
        
        0.0
        %
        
        
        0.0
        %


In September 2000, the Companys Board of Directors approved the issuance
of options for the six independent directors to purchase 93,333 shares of the
Companys common stock at an exercise price as of the approval date of $18.30
per share. Of these options granted, 31,111 were issued under existing stock
option plans previously approved by the Companys shareholders and vested after
one year. The remaining 62,222 options were originally granted outside of any
approved plan, vested equally on the second and third anniversary dates of the
date of grant at an exercise price of $18.30 per share, and were subject to
approval at the Companys next annual meeting of shareholders. At its annual
meeting of shareholders held on July 25, 2001, the Companys shareholders
approved the 2001 Stock Option Plan including these options. Since the closing
market price on the date of the approval was lower than the $18.30 exercise
price of these remaining options, no compensatory charge was recorded for these
options in 2000 or 2001.

In April 2001, the Companys Board of Directors authorized the issuance of
65,000 options to purchase the Companys common stock to ProxyMeds executive
and senior management as part of their compensation plan for the 2001 year. Of
these options granted, 19,333 options were issued with an exercise price of
$15.15 under available stock option plans, and the balance of 45,667 options
were granted under the Companys proposed 2001 Stock Option Plan, subject to
approval by the Companys shareholders at its annual meeting on July 25, 2001.
In July 2001, the shareholders of the Company approved the 2001 Stock Option
Plan pursuant to which options to purchase 333,333 shares of common stock may
be issued to employees, officers and directors and, as a result, the 45,667
options were issued with an exercise price of $13.80 per share. These options
are for a ten-year term and vest after five years. In addition, these options
contained a clause which enabled the accelerated vesting of a portion or all of
the options if specific, pre-determined individual performance goals were met
during the 2001 year and, as a result of these performance goals being met,
4,978 options with an exercise price of $15.15 and 11,757 options with an
exercise price of $13.80 were accelerated to vest on December 31, 2001.

F-39



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Additionally, certain stock options for executive management and directors
were amended in 2000 to allow for extensions of exercise periods (typically one
to three years) after termination of employment. In January 2002, 40,000
vested stock options for three resigning directors were amended to allow for an
extension of the exercise period through December 31, 2003 (see
Note 19(d)
below). In all cases, the market price of ProxyMeds common stock was below
the exercise price of these options at the time of amendment.

In January 2002, the Companys Board of Directors agreed to cancel up to
37,767 stock options with exercise prices ranging from $57.45 to $202.50 issued
to current officers and employees of the Company with the intent of reissuing
the same number of options in the future at the then current market price. In
September 2002, the Company issued 36,867 stock options, including 25,366 to
the Companys chief financial officer and three senior executives, at an
exercise price of $15.55 per share pursuant to this cancellation and reissuance
program.

At the Companys Annual Meeting of Shareholders held on May 22, 2002, the
shareholders approved a new 2002 Stock Option Plan pursuant to which options to
purchase 600,000 shares of common stock may be issued to employees, officers
and directors.

Additionally, in May 2002, the Companys outside directors were granted a
total of 55,000 options at an exercise price of $20.20 to compensate the
directors upon initial appointment to the board, re-election to the board, and
participation in sub-committees. Option grants for initial appointment and
subsequent re-election to the board vest equally over a three-year period.
Options for participation in sub-committees vest in full after three years but
may be accelerated to vest after each sub-committee meeting attended. In
October 2002, 15,000 and 1,875 options with an exercise price of $12.54 were
granted to a newly appointed outside director for initial appointment and
sub-committee membership, respectively. Of the total sub-committee grants,
8,125 options were accelerated to vest on December 31, 2002 and the remaining
8,750 sub-committee grants are expected to vest in 2003.

In June 2002, the Companys Board of Directors authorized the issuance of
stock options to employees and officers of the Company as part of a structured
retention and reward plan. Initially in June 2002, 47,267 options were granted
at an exercise price of $17.36 per share. Included in these grants were a
total of 25,000 options granted to the Companys chairman/chief executive
officer and president/chief operating officer. In September 2002, an
additional 38,050 options were granted to other employees and officers at an
exercise price of $15.55 per share, including 14,100 stock options to the
Companys chief financial officer and one other senior executive. In general,
these options are for a ten-year term and vest equally over a three-year
period.

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Also in June 2002, the Companys Board of Directors authorized the
issuance of stock options to ProxyMeds executive and senior management as part
of their compensation plan for the 2002 year. As a result, 56,440 options were
granted to the Companys chairman/chief executive officer and president/chief
operating officer at an exercise price of $17.36. In September 2002, 63,106
options were granted to the remaining executive and senior management at an
exercise price of $15.55 per share. All of these options are for a ten-year
term, vest in full after five years and contain a clause that enables the
accelerated vesting of a portion or all of the options if specific,
pre-determined individual and company goals are met during the 2002 year. Of
the 119,546 total options granted under the 2002 compensation plan discussed
above, 80,194 options were accelerated to vest on December 31, 2002 and the
remaining 39,352 options will vest in 2007.

(16) Supplemental Disclosure of Cash Flow Information

Year Ending December 31,2002
        
        2001
        
        2000Cash paid for interest
        
        $
        63,000
        
        
        $
        368,000
        
        
        $
        184,000Common stock issued for payment of preferred stock dividends
        
        $
        
        
        
        $
        1,658,000
        
        
        $
        1,271,000Common stock issued for payment of long-term debt
        
        $
        
        
        
        $
        
        
        
        $
        375,000Acquisition of businesses:Common stock issued for businesses acquired
        
        $
        600,000
        
        
        $
        
        
        
        $
        Debt issued for businesses acquired
        
        
        13,400,000
        
        
        
        7,000,000
        
        
        
        Other acquisition costs accrued
        
        
        8,382,000
        
        
        
        30,000
        
        
        
        Details of acquisitions:Working capital components, including cash acquired
        
        
        4,609,000
        
        
        
        (303,000
        )
        
        
        Property and equipment
        
        
        (2,165,000
        )
        
        
        (165,000
        )
        
        
        Goodwill
        
        
        (24,837,000
        )
        
        
        (9,558,000
        )
        
        
        Intangible assets acquired:
        
        
        Customer Relationships
        
        
        (9,440,000
        )
        
        
        
        
        
        
        Purchased Technology
        
        
        (6,395,000
        )Other long term liabilities, net
        
        
        209,000
        
        
        
        (4,000
        )
        
        
        (15,637,000
        )
        
        
        (3,000,000
        )
        
        
        Cash acquired in acquisitions
        
        
        1,184,000
        
        
        
        
        
        
        
        Net cash used in acquisitions
        
        $
        (14,453,000
        )
        
        $
        (3,000,000
        )
        
        $
        Disposition of businesses:Common stock received
        
        $
        
        
        
        $
        
        
        
        $
        (1,930,000
        )Notes and other receivables received
        
        
        
        
        
        
        
        
        
        
        (1,723,000
        )Net gain recognized
        
        
        
        
        
        
        
        
        
        
        545,000Details of dispositions:Working capital components, other than cash
        
        
        
        
        
        
        
        
        
        
        1,906,000Property and equipment
        
        
        
        
        
        
        
        
        
        
        1,071,000Goodwill
        
        
        
        
        
        
        
        
        
        
        110,000Other assets
        
        
        
        
        
        
        
        
        
        
        21,000Net cash provided by dispositions
        
        $
        
        
        
        $
        
        
        
        $
        


F-41



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(17) Concentration of Credit Risk

Substantially all of ProxyMeds accounts receivable are due from
physicians and various healthcare institutional suppliers (payers, laboratories
and pharmacies). Collateral is not required. Approximately 10% of the 2002
and 2001 revenues were from a single, but different, customer for the sale,
lease and service of communication devices. There were no sales to any one
customer in excess of 10% of consolidated revenues in 2000.

(18) Employee Benefit Plans

Through November 30, 2000, ProxyMed had two 401(k) retirement plans,
including one plan that was acquired in its merger with Key Communications, for
substantially all employees who met certain minimum lengths of employment and
minimum age requirements. As of December 1, 2000, these two plans were
combined. Contributions may be by employees up to 15% of their annual
compensation. Discretionary matching contributions under the combined plan
were made in January 2001 and covered eligible wages paid to Key Communications
participants from May 1, 2000 through December 31, 2000 and annual eligible
wages paid to ProxyMed employees for the full 2000 year. Discretionary
matching contributions paid to all eligible employees for 2001 were made in
February 2002. Discretionary matching contributions under the combined plans
were based on 1% of eligible wages up to $1,000 and limited by the employees
actual contribution into the plan. No prior matching contributions had been
made under the original ProxyMed plan. Matching contributions totaling $51,000
and $105,000 for the years ended December 31, 2001 and 2000, respectively, have
been expensed. There were no matching contributions for 2002. Funding of
matching contributions each year is offset by forfeitures from terminated
employees.

The 401(k) retirement plan acquired with the purchase of MedUnite, Inc.
was maintained for substantially all employees who met certain minimum lengths
of employment and minimum age requirements. Contributions are made by
employees based on the lesser of 60% of eligible compensation or the deferral
limit set by the government. Previously non-discretionary employer matching
contributions have been eliminated under this plan. The MedUnite 401(k) plan
will be combined with the ProxyMed 401(k) plan in the future.

F-42



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(19) Commitments, Contingencies and Other



| | (a) |  | Leases  ProxyMed leases certain equipment used in its contract
manufacturing business that have been classified as capital leases and
also leases premises, operating and office equipment, and vehicles
under operating leases which expire on various dates through 2006. The
leases for the premises contain renewal options, and require ProxyMed
to pay such costs as property taxes, maintenance and insurance. At
December 31, 2002, the present value of the capital leases and the
future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year (net of
payments to be received under subleases) are as follows:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Capital
        
        OperatingLeases
        
        Leases2003
        
        $
        480,000
        
        
        $
        2,443,0002004
        
        
        298,000
        
        
        
        1,268,0002005
        
        
        112,000
        
        
        
        391,0002006
        
        
        12,000
        
        
        
        9,000Total minimum lease payments
        
        
        902,000
        
        
        $
        4,111,000Less amount representing interest
        
        
        78,000Present value of
minimum lease payments
        
        $
        824,000




| |  |  | In connection with MedUnites facility lease in San Diego, California,
the Company acquired an irrevocable letter of credit in the amount of
$750,000 (collateralized by restricted cash of the same amount). The
letter of credit expires September 30, 2004. The Company is in the
process of terminating this facility lease effective July 1, 2003 in
consideration for the $750,000 letter of credit and furniture at the
facility with a value of approximately $153,000. As of December 31,
2002, gross rents of $700,000 are included in the table above for rents
through June 2003.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company recognizes rent expense on a straight-line basis over the
related lease term. Total rent expense for all operating leases amounted
to $1,461,000 in 2002, $1,405,000 in 2001 and $1,157,000 in 2000. The
current portion of capital leases is included in accounts payable and
other accrued expenses and the long-term portion of capital leases is
included in other long-term liabilities in the balance sheet at December
31, 2001 and 2002.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued



| | (b) |  | Software Maintenance Services  The Company has decided to migrate
off of a software license used to operate MedUnites web portal,
however, it may still be liable to purchase software maintenance
services from the supplier of that license. The total amount of the
future commitments below is included in the acquisition-related accrual
for the MedUnite acquisition. Such commitments would be due as follows
for the years ending December 31:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
        
        $
        700,0002004
        
        
        700,0002005
        
        
        408,000$
        1,808,000




| | (c) |  | Services Agreement  In April 2002, MedUnite had entered into a
three-year information technology services agreement to outsource
certain hosting, system maintenance and operation services. Actual
service fees are based on the number of transactions processed by the
software being supported; however, MedUnite is committed to pay a
minimum annual service fee of $1,212,000. At December 31, 2002,
$790,000 is accrued towards this minimum annual amount and is included
in accrued expenses. The Company has the option to cancel the
agreement by providing 90 days notice and paying an early termination
fee which will be equal to between one and three months average
transaction fees, depending upon when the agreement is terminated.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | Resignation of Directors  In January 2002, three directors of the
Company resigned in an effort to reconstitute the size of the Board of
Directors from nine members to seven. Additionally, the remaining
Board members agreed to extend the exercise period of certain vested
options held by the three resigning directors through December 31,
2003.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Settlement of Litigation  In September 2002, the Company favorably
settled a contract dispute in the amount of $325,000. The settlement
resulted in the issuance of a promissory note, which was recorded at
its present value of $299,000. The present value of the promissory
note, less legal expenses of $34,000, was reported as other income.
Under the terms of the promissory note, payments of $25,000 will be
made each quarter over the next three years starting October 2002.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) |  | Employment Agreements  The Company entered into employment
agreements with certain executives and other members of management that
provide for cash severance payments if these employees are terminated
without cause. The Companys aggregate commitment under these
agreements is $800,000 at December 31, 2002.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-44



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(20) Related Party Transactions

In April 1997, the Company made loans totaling $350,000 to Mr. Blue, its
former chairman of the board and chief executive officer. The funds were
advanced pursuant to two demand promissory notes in the principal amounts of
$290,000 and $60,000, respectively, each bearing interest at a rate of 73/4%
per annum. On June 30, 2000, the Company amended the terms of these notes
whereby interest on the notes ceased to accrue subsequent to July 1, 2000 and
the loan plus accrued interest, totaling $436,000 at June 30, 2000, would be
payable in a balloon payment in December 2001. The loans were collateralized
with options to purchase 36,667 shares of common stock granted to Mr. Blue
under the Companys stock option plans. Prior to 2000, these loans were
included in other assets; as of December 31, 2001 and 2000, all amounts owed
under these loans have been reclassified to stockholders equity.

In December 2001, a payment of $250,000 was received from Mr. Blue and
applied against the outstanding balance of the loans. The Company agreed to
refinance the remaining $186,000 balance and a new promissory note was executed
by Mr. Blue. This new note requires monthly interest payments at prime rate
plus 1%, established at the beginning of each calendar quarter, and is payable
in a balloon payment on or before December 31, 2003. The note is
collateralized with options to purchase 36,667 shares of common stock granted
to Mr. Blue under the Companys stock option plans along with additional
warrants granted to Mr. Blue from various other public companies. In January
2002, Mr. Blue resigned from the Companys Board of Directors and the remaining
Board members agreed to extend the exercise period of the stock options of the
Company held as collateral for the note in an effort to maximize the potential
for repayment.

In March 2001, a senior executive of the Company entered into an
uncollateralized promissory note for $45,400 for amounts previously borrowed
from us. The promissory note calls for minimum bi-weekly payments of $350
deducted directly from the executives payroll until the note is paid in full
on or before February 2006. The note is non-interest bearing but interest is
imputed annually based on the Internal Revenue Service Applicable Federal Rate
at the time the note was originated (4.98%). Under terms of the promissory
note, if the executive is terminated without cause, the note is due in full
after nine months from the date of termination as long as the scheduled
bi-weekly payments continue to be made. As of December 31, 2002, the unpaid
principal balance of the note is $23,000 and is included in other receivables.

F-45



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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

(21) Subsequent Events

In February 2003, a director of the Company resigned for personal reasons,
and as a result, one vacancy currently remains unfilled on the Companys Board
of Directors.

In March 2003, the Company restructured $3,368,000 in accounts
payable and accrued expenses acquired from MedUnite and outstanding at December
31, 2002 to one vendor into an uncollateralized note payable over 36 months at
8% commencing March 2003 and has financed $382,000 for an insurance policy
required in the MedUnite acquisition over 24 months at 5.25% commencing
February 2003.

In March 2003, the Company granted a total of 46,000 stock options,
including 36,000 stock options at an exercise price of $9.24 per share to
certain employees of MedUnite.

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##### Table of Contents



PROXYMED, INC. AND SUBSIDIARIES

SCHEDULE II  Valuation and Qualifying Accounts

Allowance for Doubtful AccountsAdditionsYear ended
        
        Balance at
        
        Charged to
        
        Charged to
        
        
        
        Balance atDecember 31,
        
        beginning of year
        
        costs and expenses
        
        other accounts (1)(2)
        
        Deductions (3)
        
        end of year2002
        
        $
        228,000
        
        
        
        38,000
        
        
        
        1,008,000
        
        
        
        178,000
        
        
        $
        1,096,0002001
        
        $
        691,000
        
        
        
        70,000
        
        
        
        84,000
        
        
        
        617,000
        
        
        $
        228,0002000
        
        $
        663,000
        
        
        
        420,000
        
        
        
        245,000
        
        
        
        637,000
        
        
        $
        691,000




|(1) |  | Includes amounts charged against revenue in 2000 ($245,000), 2001 ($65,000), and 2002 ($346,000)
|--- |  | ------------------------------------------------------------------------------------------------



|(2) |  | Includes amounts acquired through acquisitions in 2001 ($19,000) and 2002 ($662,000)
|--- |  | ------------------------------------------------------------------------------------



|(3) |  | Primarily write-off of bad debts and amounts charged against revenues, net of recoveries
|--- |  | ----------------------------------------------------------------------------------------

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