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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

|(MARK ONE)                                       
|-------------------------------------------------
|ý                                                
|FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
|OR                                               
|o                                                

COMMISSION FILE NUMBER: 0-30859

CARESCIENCE, INC.(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|PENNSYLVANIA(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) |  | 23-2703715(I.R.S. EMPLOYER
IDENTIFICATION NO.)
|-------------------------------------------------------------------------- |  | ----------------------------------------------

3600 MARKET STREET
PHILADELPHIA, PA 19104(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)

(215) 387-9401(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

(FORMER
NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

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

The
number of shares of the registrant's Common Stock outstanding, as of November 7, 2002 was 13,300,391.

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CARESCIENCE, INC.

FORM 10-Q

SEPTEMBER 30, 2002

INDEX

|PART I. FINANCIAL INFORMATION                                                                                           |  |   
|----------------------------------------------------------------------------------------------------------------------- |  | --
|Item 1. Financial Statements                                                                                            |  |   
|Consolidated Balance SheetsSeptember 30, 2002 and December 31, 2001(unaudited)                                         |  | 2 
|Consolidated Statements of OperationsThree and Nine Months Ended September 30, 2002 and September 30, 2001 (unaudited) |  | 3 
|Consolidated Statements of Cash FlowsNine Months Ended September 30, 2002 and September 30, 2001 (unaudited)           |  | 4 
|Notes to Consolidated Financial Statements                                                                              |  | 5 
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 10
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 15
|Item 4. Controls and Procedures                                                                                         |  | 15
|PART II. OTHER INFORMATION                                                                                              |  |   
|Item 1. Legal Proceedings                                                                                               |  | 16
|Item 2. Changes in Securities and Use of Proceeds                                                                       |  | 16
|Item 6. Exhibits and Reports on Form 8-K                                                                                |  | 17
|Signatures                                                                                                              |  | 18

1

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                      | September 30,
2002         |                                            | December 31,
2001 |           
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | ----------
|
|ASSETS                               |                                                                                                                                                                                                     
|Current assets:                      |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Cash and cash equivalents                                                                                                                                                                            |                            | $                                          | 13,318,991        |           
|                                     | Short-term investments                                                                                                                                                                               |                            |                                            | 4,983,080         |           
|                                     | Interest receivable                                                                                                                                                                                  |                            |                                            | 14,695            |           
|                                     | Accounts receivable, net of allowance for doubtful accounts of $77,054 and $68,354, respectively                                                                                                     |                            |                                            | 1,364,598         |           
|                                     | Prepaid expenses and other                                                                                                                                                                           |                            |                                            | 715,284           |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Total current assets                 |                                                                                                                                                                                                      |                            | 20,396,648                                 |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Property and equipment:              |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Computer equipment                                                                                                                                                                                   |                            |                                            | 5,348,752         |           
|                                     | Office equipment                                                                                                                                                                                     |                            |                                            | 546,857           |           
|                                     | Leasehold improvements                                                                                                                                                                               |                            |                                            | 169,956           |           
|                                     | Furniture and fixtures                                                                                                                                                                               |                            |                                            | 516,059           |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      |                            | 6,581,624                                  |                   |           
|                                     | LessAccumulated depreciation and amortization                                                                                                                                                       |                            |                                            | (4,298,856        | )         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      | Net property and equipment |                                            |                   | 2,282,768 
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Other assets                         |                                                                                                                                                                                                      |                            | 151,493                                    |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Goodwill, net                        |                                                                                                                                                                                                      |                            | 1,245,687                                  |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      |                            | Total assets                               |                   | $         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                                                                                                                     
|Current liabilities:                 |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Current portion of capital lease obligations and notes payable                                                                                                                                       |                            | $                                          | 349,324           |           
|                                     | Accounts payable                                                                                                                                                                                     |                            |                                            | 472,478           |           
|                                     | Accrued expenses                                                                                                                                                                                     |                            |                                            | 1,243,286         |           
|                                     | Deferred revenues                                                                                                                                                                                    |                            |                                            | 3,130,250         |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Total current liabilities            |                                                                                                                                                                                                      |                            | 5,195,338                                  |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Capital lease obligations            |                                                                                                                                                                                                      |                            | 133,012                                    |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Notes payable                        |                                                                                                                                                                                                      |                            | 231,725                                    |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Commitments and contingencies        |                                                                                                                                                                                                      |                            |                                            |                   |           
|Shareholders' equity:                |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Preferred stock, no par value, 20,000,000 shares authorized, no shares issued or outstanding                                                                                                         |                            |                                            |                  |           
|                                     | Common stock, no par value, 100,000,000 shares authorized, 14,740,391 shares issued and 13,300,391 shares outstanding, and; 14,720,016 shares issued and 13,280,016 shares outstanding, respectively |                            |                                            | 60,282,656        |           
|                                     | Additional paid-in capital                                                                                                                                                                           |                            |                                            | 4,838,843         |           
|                                     | Deferred compensation                                                                                                                                                                                |                            |                                            | (1,243,369        | )         
|                                     | Accumulated other comprehensive income                                                                                                                                                               |                            |                                            | 32,123            |           
|                                     | Accumulated deficit                                                                                                                                                                                  |                            |                                            | (44,198,399       | )         
|                                     | Subscriptions receivable                                                                                                                                                                             |                            |                                            | (295,333          | )         
|                                     | Treasury stock, at cost, 1,440,000 shares                                                                                                                                                            |                            |                                            | (900,000          | )         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      | Total shareholders' equity |                                            |                   | 18,516,521
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      |                            | Total liabilities and shareholders' equity |                   | $         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           

The accompanying notes are an integral part of these statements.

2

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CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                     |                                     | For the Three Months Ended
September 30, |           | For the Nine Months Ended
September 30, |          
|------------------------------------ | ----------------------------------- | ---------------------------------------- | --------- | --------------------------------------- | ---------
|
|
|Revenues                             |                                     | $                                        | 3,715,892 |                                         | $        
|Cost of revenues                     |                                     |                                          | 1,771,351 |                                         |          
|                                     |                                     |                                          |           |                                         |          
|                                     | Gross profit                        |                                          |           | 1,944,541                               |          
|                                     |                                     |                                          |           |                                         |          
|Operating expenses:                  |                                     |                                          |           |                                         |          
|                                     | Research and development            |                                          |           | 656,186                                 |          
|                                     | Selling, general and administrative |                                          |           | 2,083,339                               |          
|                                     |                                     |                                          |           |                                         |          
|                                     |                                     | Total operating expenses                 |           |                                         | 2,739,525
|                                     |                                     |                                          |           |                                         |          
|                                     | Operating loss                      |                                          |           | (794,984                                | )        
|Interest income                      |                                     |                                          | (116,720  | )                                       |          
|Interest expense                     |                                     |                                          | 18,238    |                                         |          
|                                     |                                     |                                          |           |                                         |          
|Net loss                             |                                     | $                                        | (696,502  | )                                       | $        
|                                     |                                     |                                          |           |                                         |          
|Net loss per common share:           |                                     |                                          |           |                                         |          
|                                     | Basic and diluted                   |                                          | $         | (0.05                                   | )        
|                                     |                                     |                                          |           |                                         |          
|Weighted average shares outstanding: |                                     |                                          |           |                                         |          
|                                     | Basic and diluted                   |                                          |           | 13,300,391                              |          
|                                     |                                     |                                          |           |                                         |          

The
accompanying notes are an integral part of these statements.

3

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CARESCIENCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                             | For the Nine Months Ended
September 30, |                        
|---------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------- | -----------------------
|
|
|Cash flows from operating activities:                |                                                                             |                                         |                        
|                                                     | Net loss                                                                    |                                         | $                      
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities |                                         |                        
|                                                     |                                                                             | Depreciation and amortization           |                        
|                                                     |                                                                             | Loss on disposal                        |                        
|                                                     |                                                                             | Provision for bad debts                 |                        
|                                                     |                                                                             | Stock-based compensation                |                        
|                                                     |                                                                             | Changes in assets and liabilities      |                        
|                                                     |                                                                             |                                         | (Increase) decrease in
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         | Increase (decrease) in
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|Cash flows from investing activities:                |                                                                             |                                         |                        
|                                                     | Purchases of short-term investments                                         |                                         |                        
|                                                     | Proceeds from the redemption of short-term investments                      |                                         |                        
|                                                     | Cash paid for acquisition                                                   |                                         |                        
|                                                     | Purchases of property and equipment                                         |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|Cash flows from financing activities:                |                                                                             |                                         |                        
|                                                     | Proceeds from the exercise of common stock options                          |                                         |                        
|                                                     | Payments on capital lease obligations and note payable                      |                                         |                        
|                                                     | Proceeds from notes payable                                                 |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|                                                     |                                                                             |                                         |                        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                         | 4,458,555              
|Cash and cash equivalents, beginning of period       |                                                                             |                                         | 8,860,436              
|                                                     |                                                                             |                                         |                        
|Cash and cash equivalents, end of period             |                                                                             | $                                       | 13,318,991             
|                                                     |                                                                             |                                         |                        

The
accompanying notes are an integral part of these statements.

4

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CARESCIENCE, INC. AND SUDSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)    Summary of Significant Accounting Policies



CareScience, Inc. (the "Company") provides Internet-based tools designed to improve the quality and efficiency of health care. The Company uses its
proprietary clinical algorithms and data collection and storage technologies to perform complex clinical analyses. The Company's customers use its services to identify clinical inefficiencies and
medical errors and monitor the results of implemented solutions. Additionally, the Company facilitates the real-time exchange of clinical information over the Internet among local health
care constituents.

The
consolidated balance sheet as of September 30, 2002, the consolidated statements of operations for the three and nine months ended September 30, 2002 and 2001 and the
consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting
of normal and recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2002 and for all periods presented have been
made.

Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the three and nine months
ended September 30, 2002 are not necessarily indicative of the operating results for the full year.



The accompanying consolidated financial statements include the accounts of CareScience, Inc. and its subsidiary. All significant intercompany transactions
and balances have been eliminated.



On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." This statement modifies existing generally accepted
accounting principles related to the amortization and impairment of goodwill and other intangible assets. Goodwill, including goodwill associated with equity method investments, will no longer be
amortized. In addition, goodwill, other than goodwill associated with equity method investments, must be assessed at least annually for impairment using a fair-value based approach.
Impairment losses that arise due to the initial application of this statement are to be reported as a cumulative effect of change in accounting principle. The Company has completed an analysis of the
impact of implementing the provisions of this statement as of January 1, 2002 and has determined that there is no impairment loss. With the adoption of this new standard, as of
January 1, 2002 the Company discontinued the amortization of the

5

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goodwill balance. The following proforma disclosure is included pursuant to the disclosure requirements of SFAS 142:

|                                             |  | For the Three Months Ended
September 30, |          | For the Nine Months Ended
September 30, |  
|-------------------------------------------- |  | ---------------------------------------- | -------- | --------------------------------------- | -
|
|Reported net loss                            |  | $                                        | (696,502 | )                                       | $
|Add backGoodwill amortization               |  |                                          |         |                                         |  
|                                             |  |                                          |          |                                         |  
|Adjusted net loss                            |  | $                                        | (696,502 | )                                       | $
|                                             |  |                                          |          |                                         |  
|Basic and diluted net loss per Common share: |  |                                          |          |                                         |  
|Reported net loss                            |  | $                                        | (0.05    | )                                       | $
|Goodwill amortization                        |  |                                          |         |                                         |  
|                                             |  |                                          |          |                                         |  
|Adjusted net income                          |  | $                                        | (0.05    | )                                       | $
|                                             |  |                                          |          |                                         |  

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a disposal of a segment of a
business". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The impact of adopting this accounting standard did not have
a material effect on the Company's financial position or results of operations.

In
January 2002, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 01-14, "Income Statement
Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred." This consensus requires that reimbursements received for out-of-pocket expenses incurred are
characterized as revenue in the statement of operations. The Company adopted EITF 01-14 effective January 1, 2002 and has made the appropriate reclassifications as required by EITF
01-14. The effect of adopting EITF 01-14 was to increase revenues and expenses by $23,000 and $69,000 for the three and nine months ended September 30, 2002,
respectively and $49,000 and $125,000 for three and nine months ended September 30, 2001, respectively.



The Company invests excess cash in highly liquid investment-grade marketable securities including corporate commercial paper and U.S. government agency bonds. For
financial reporting purposes, the Company considers all highly liquid investment instruments purchased with an original maturity of three months or less to be cash equivalents. All investment
instruments with maturities greater than three months are available for use in current operations and accordingly are classified as current assets. All investments are considered
available-for-sale and accordingly, unrealized gains and losses are included in a separate component of shareholders' equity.

6

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As
of September 30, 2002 cash and cash equivalents and short-term investments at cost and fair market value consisted of the following:

September 30, 2002Original
Cost

Unrealized
Gains

Fair
Market
ValueCash and cash equivalents

$
13,318,991

$


$
13,318,991Short-term investments


4,950,957


32,123


4,983,080$
18,269,948

$
32,123

$
18,302,071


At
September 30, 2002 short-term investments consisted of five debt instruments maturing between October 31, 2002 and February 14, 2003.



The Company paid interest of $39,517 and $66,215 for the nine months ended September 30, 2002 and 2001, respectively.

The
Company financed $23,585 and $0 of property and equipment purchases with capital leases for the nine months ended September 30, 2002 and 2001, respectively.



The Company generates revenue from subscriptions to its internet based proprietary technology applications and hosting of customer data, as well as development
agreements and consulting services.

The
Company's agreements for its internet based tools, which typically cover an initial period of one-to-five years and are fixed priced, provide to customers,
among other things, a software license, project management services, data management services, data storage and computer server maintenance and software support and maintenance. Revenues under these
contracts are recognized ratably over the contract period. Any additional consulting fees, outside of the initial contract, are recognized as the service is delivered.

The
Company's development agreements, with periods ranging from three-to-five years, provide for customer funding for the development of new solutions and
services. In accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", the Company is treating revenue on these agreements as a single element
contract and is recognizing total revenue on a cost-to-cost basis over the entire agreement period.

The
Company's various consulting services are delivered either as a single program or as a project whose completion normally occurs over a several month period. Consulting revenues from
program services are recorded as the program is completed. Consulting revenues from projects are recorded on a percentage of completion basis over the term of the project.



The Company's operations are conducted in one business segment and sales are primarily made to health care payors and providers. One customer accounted for 10%
and two customers accounted for 22% of total revenues for the three and nine months ended September 30, 2002. One different customer accounted for 10% of total accounts receivable as of
September 30, 2002. Two customers accounted for 22% and one customer accounted for 13% of total revenues for the three months and nine months ended September 30, 2001, respectively. As
of December 31, 2001, a different customer represented 12% of accounts receivable.

7

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Accumulated other comprehensive income consists of unrealized gains and losses on available for sale securities as follows:

Balance, December 31, 2001

$
57,852Current-period change


(25,729
)Balance, September 30, 2002

$
32,123




The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual amounts could differ from those estimates.



Certain amounts have been reclassified in the prior years consolidated financial statements to conform to the 2002 presentation.

(2)    Net Loss per Share

Net loss per share is calculated utilizing the principles of SFAS No. 128, "Earnings per Share" ("EPS"). Basic EPS excludes potentially dilutive securities
and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion or
exercise of all dilutive securities such as options and warrants.

Under
SFAS No. 128, the Company's granting of certain stock options and warrants resulted in potential dilution of basic EPS. The number of incremental shares from the assumed
exercise of stock options and warrants is calculated applying the treasury stock method. Stock options and warrants and convertible into common shares were excluded from the calculations as they were
anti-dilutive due to the net loss. Stock options to purchase 2,047,873 shares of common stock at exercise prices ranging from $0.25 to $12.00 were outstanding as of September 30,
2002, but were excluded from the computation of diluted net loss per share since the inclusion would be anti-dilutive due to the net loss.

(3)    Commitments and Contingencies

Litigation

The Company and certain of its officers are defendants in a purported class action litigation pending in the United States District Court for the Eastern District
of Pennsylvania. The complaints purport to bring claims on behalf of all persons who allegedly purchased Company common stock between June 29, 2000 and November 1, 2000, for alleged
violations of the federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with
respect to the initial public offering of Company common stock. Specifically, the complaints allege, among other things, that the Company's Prospectus and Registration Statement misrepresented and
omitted to disclose material facts concerning the Company's competitors, two of the Company's prospective products and the Company's contract with the California HealthCare Foundation. The actions
seek compensatory and other damages, and costs and expenses associated with litigation. Although the Company cannot predict the ultimate outcome of

8

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the case or estimate the range of any potential loss that may be incurred in the litigation, management believes the lawsuits are frivolous and without merit, strenuously denies all allegations of
wrongdoing asserted by plaintiffs, and believes it has meritorious defenses to plaintiffs' claims. The Company intends to vigorously defend the lawsuits. Management believes that the resolution of
this litigation will not have a material effect on our consolidated financial position or results of operations.

(4)    Income Taxes

The Company has incurred operating losses and generated a significant accumulated deficit through September 30, 2002, therefore, no tax provisions have
been recorded. As of September 30, 2002 the Company had federal net operating loss carryforwards of approximately $34 million which expire from 2010 through 2021. As of
September 30, 2002 and September 30, 2001, a valuation allowance was recorded for 100% of the Company's deferred tax asset as realization of the tax benefit was not considered more
likely than not under the provisions of SFAS No. 109.

The
Tax Reform Act of 1986 contains certain provisions that limit the utilization of net operating losses and tax credit carryforwards if there has been a cumulative ownership change
greater than 50% within a three-year period. Such limitation could result in the expiration of the net operating losses before such losses are fully utilized.

9

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words
such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. For these statements we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There are important factors that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements, including:



10

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Overview

CareScience, Inc. is a provider of online care management services. Our mission is to transform the quality and efficiency of care delivery by providing
innovative clinical information technology to the health care industry. We market our services to hospitals, health systems and pharmaceutical and biotechnology manufacturers, and support more than
150 customers in 40 states.

We
work with health care providers to manage clinical processes surrounding the point of care so that fundamental reductions in errors and operating cost can be achieved. Our products
collect, share, store and analyze clinical data generated by widely used health information systems. Our services allow customers to apply this data to the management of care, including quality
monitoring, practice improvement, credentialing, profiling, error tracking, case management and clinical guidelines. We also provide consulting services to healthcare providers that support strategic
planning and clinical operations.

For
the pharmaceutical and biotechnology industry, we provide services that shorten the drug development cycle and improve development yield. Our offerings consulting services,
customized research and strategic development support. These services are aimed at the specialized drug development needs of pharmaceutical industry clinicians, product managers, market strategists,
health economists and outcomes researchers.

We
have pioneered and commercialized numerous clinical information technologies. We have developed one of the nation's first online quality measurement and management tools, one of the
first clinically based outcome risk assessment algorithms, one of the first health care application service providers, and, most recently, the first peer-to-peer clinical data
sharing technology. We have developed these tools in collaboration with leading public organizations, including the Wharton School of Business
at the University of Pennsylvania, the National Library of Medicine, Los Alamos National Laboratory and The California HealthCare Foundation.

CareScience
was incorporated in 1992 with the purpose of commercializing intellectual property that was developed at the University of Pennsylvania School of Medicine and The Wharton
School of Business. In 1993, we exclusively licensed the intellectual property underlying our core technology in a 30-year agreement with the University of Pennsylvania. In 1996, we
launched our first Internet-based commercial product based on this proprietary technology under our Care Management System product line. In 1999, we initiated our Care Data
Exchange, as well as our Lifecycle Decision System, which is aimed at the pharmaceutical and biotechnology industries. On March 7, 2000, we changed our name from Care
Management Science Corporation to CareScience, Inc.

We
generate revenues from subscriptions to our Internet-based proprietary technology applications and hosting of customer data, as well as from consulting services and development
agreements. We sell our services individually or as an integrated suite of solutions and services. We price our subscription services on a per-encounter basis, such as the number of a
hospital's patient admissions or outpatient visits.

Our
agreements for our internet based tools, which typically cover an initial period of one-to-five years and are fixed priced, provide to customers, among other
things, a software license, project management services, data management services, data storage and computer server maintenance and software support and maintenance. Revenues under these contracts are
recognized ratably over the contract period.

11

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Our
development agreements, with periods ranging from one-to-five years, provide for customer funding for the development of new solutions and services. In
accordance with Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements", the Company is treating revenue on these agreements as a single element contract and is
recognizing total revenue on a cost-to-cost basis over the entire agreement period.

Our
various consulting services are delivered either as a single program or as a project whose completion normally occurs over a several month period. Consulting revenues from program
services are recorded as the program is completed. Consulting revenues from projects are recorded on a percentage of completion basis over the term of the project.

Our
contracts generally provide for payment in advance of services rendered. Therefore, we record these payments as deferred revenues and recognize these payments when earned in
accordance with
our revenue recognition policy. Our deferred revenue balances were $3.1 million and $3.5 million at September 30, 2002 and December 31, 2001, respectively.

We
have incurred substantial research and development costs since inception and have also invested in our corporate infrastructure to support our long-term growth strategy.
We expect that our operating expenses will continue at historic or greater levels as we further our product development and sales and marketing efforts. Accordingly, we expect to continue to incur
quarterly net losses for the foreseeable future.

Since
inception, we have incurred cumulative net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of December 31, 2001, we had
net operating loss carryforwards of approximately $34.0 million for federal income tax purposes. The net operating loss carryforwards, if not utilized, expire from 2010 through 2021. Federal
tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of an ownership change as defined in Section 382 of the Internal Revenue Code.

Results of Operations

Three Months Ended September 30, 2002 and September 30, 2001



Total revenues increased 4% to $3.7 million for the three months ended September 30, 2002 from $3.6 million for the three months ended
September 30, 2001. The increase was primarily related to revenues generated from additional customer and development contracts.

Unrecognized
revenues related to customer and development contracts (backlog) as of September 30, 2002 totaled $26.4 million.



Cost of revenues include customer and service-related costs including personnel and facility costs, depreciation and maintenance. Cost of revenues for the three
months ended September 30, 2002 was $1.8 million a decrease of $55,000 or 3% compared to $1.8 million for the three months ended September 30, 2001. We have been able to
service an increasing revenue base while keeping cost of revenues relatively constant as a result of cost control initiatives.



Our gross profit margin increased from 49% for the three months ended September 30, 2001, to 52% for the three months ended September 30, 2002. The
increase in gross profit margin is primarily due to increased revenues spread over a partially fixed cost base, as well as the results of our cost control initiatives.

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Research and development costs include technology and product development costs. Research and development costs for the three months ended September 30,
2002 were $656,000, a decrease of $194,000 or approximately 23%, compared to $850,000 for the three months ended September 30, 2001. This decrease is primarily due to lowering costs as certain
development projects near completion.

As
a percentage of revenue, research and development costs were 18% for the three months ended September 30, 2002 as compared to 24% for the three months ended
September 30, 2001. As we continue to invest in research and development, we expect these costs will increase as a percentage of revenue in the future.



Selling, general and administrative expenses include costs associated with our sales, marketing, finance, human resource and administrative functions. Selling,
general and administrative expenses for the three months ended September 30, 2002 were $2.1 million, a decrease of $480,000, or 19% compared to $2.6 million for the three months
ended September 30, 2001. The decrease was primarily related to a reduction in marketing and other administrative expenditures in 2002 as part of the company's efforts of reducing costs.

As
a percentage of revenues, selling, general, and administrative expenses were 56% for the three months ended September 30, 2002 as compared to 72% for the three months ended
September 30, 2001. We expect the percentage of selling, general and administrative costs to increase as a percentage of revenues in the future as we invest in new sales and marketing
initiatives in order to promote growth in revenues.



We granted certain stock options to our officers and employees with exercise prices deemed to be below the fair market value of the underlying stock. The
remaining cumulative difference between the fair value of the underlying stock at the date the options were granted and the exercise price of the granted options was $1.2 million at
September 30, 2002. We expect to amortize this amount over the remaining one to four year vesting periods of the granted options. Accordingly, our results from operations will include
stock-based compensation expense at least through 2006. We recognized $262,000 and $316,000 of this expense during the three months ended September 30, 2002 and 2001, respectively.



Net interest income for the three months ended September 30, 2002 was $98,000, a decrease of $126,000, compared to $224,000 for the three months ended
September 30, 2001. The decrease is primarily due to lower investable cash balances and a decrease in investment interest rates.

Nine Months Ended September 30, 2002 and September 30, 2001



Total revenues increased 15% to $10.5 million for the nine months ended September 30, 2002 from $9.1 million for the nine months ended
September 30, 2001. The increase was primarily related to revenues generated from additional customer and development contracts.

Unrecognized
revenues related to customer and development contracts (backlog) as of September 30, 2002 totaled $26.4 million.

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Cost of revenues includes customer and service-related costs including personnel and facility costs, depreciation and maintenance. Cost of revenues for the nine
months ended September 30, 2002 was $5.2 million an increase of $61,000 or 1%, compared to $5.1 million for the nine months ended September 30, 2001. We have been able to
service an increasing revenue base while keeping cost of revenues relatively constant as a result of a partially fixed cost base as well as cost control initiatives.



Our gross profit margin increased from 44% for the nine months ended September 30, 2001, to 51% for the nine months ended September 30, 2002. The
increase in gross profit margin is primarily due to increased revenues spread over a partially fixed cost base, as well as the results of our cost control initiatives.



Research and development costs include technology and product development costs. Research and development costs for the nine months ended September 30,
2002 were $2.0 million, a decrease of
$1.2 million or approximately 37%, compared to $3.2 million for the nine months ended September 30, 2001. This decrease is primarily due to lowering costs as certain development
projects were completed.

As
a percentage of revenue, research and development costs were 19% for the nine months ended September 30, 2002 as compared to 35% for the nine months ended September 30,
2001. As we continue to invest in research and development, we expect these costs will increase as a percentage of revenue in the future.



Selling, general and administrative expenses include costs associated with our sales, marketing, finance, human resource and administrative functions. Selling,
general and administrative expenses for the nine months ended September 30, 2002 were $6.9 million, a decrease of $2.0 million, or 22% compared to $8.9 million for the nine
months ended September 30, 2001. The decrease was primarily related to a planned reduction in marketing and other administrative expenditures in 2002 as part of the company's efforts of
reducing costs.

As
a percentage of revenues, selling, general, and administrative expenses were 65% for the nine months ended September 30, 2002 as compared to 97% for the nine months ended
September 30, 2001. We expect the percentage of selling, general and administrative costs to increase as a percentage of revenues in the future as we invest in new sales and marketing
initiatives in order to promote growth in revenues.



We granted certain stock options to our officers and employees with exercise prices deemed to be below the fair market value of the underlying stock. The
remaining cumulative difference between the fair value of the underlying stock at the date the options were granted and the exercise price of the granted options was $1.2 million at
September 30, 2002. We expect to amortize this amount over the remaining one to four year vesting periods of the granted options. Accordingly, our results from operations will include
stock-based compensation expense at least through 2006. We recognized $789,000 and $947,000 of this expense during the nine months ended September 30, 2002 and 2001, respectively.

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Net interest income for the nine months ended September30, 2002 was $260,000, a decrease of $563,000, compared to $823,000 for the nine months ended
September 30, 2001. The decrease is primarily due to lower investable cash balances and a decrease in investment interest rates.



Since inception, we have financed our operations and funded our capital expenditures through the public offering and private sale of equity securities,
supplemented by private debt and equipment leases. We believe that current capital resources will be sufficient to fund anticipated capital expenditures and working capital requirements for at least
the next 12 months. As of September 30, 2002, we had $18.3 million in cash and cash equivalents and short-term investments and working capital of $15.2 million.

Net
cash used in operating activities was $2.1 million for the nine months ended September 30, 2002 and $6.0 million for the nine months ended September 30,
2001. For those periods, net cash used in operating activities was primarily to fund losses from operations offset by changes in current assets and liabilities.

Net
cash provided by investing activities was $6.3 million for the nine months ended September 30, 2002 and consisted primarily of the net proceeds from the redemption of
short-term investments offset with purchases of property and equipment. Net cash used in investing activities was $4.2 million for the nine months ended September 30, 2001
and consisted primarily of the net purchases of short-term investments offset with funding of an acquisition and purchases of property and equipment.

Net
cash provided by financing activities was $309,000 for the nine months ended September 30, 2002 and consisted of proceeds from notes payable and the exercise of common stock
options net of payments on capital lease obligations and notes payable. Net cash used in financing activities consisted of $101,000 for nine months ended September 30, 2001, and consisted of
payments on capital lease obligations net of proceeds from a note payable and the exercise of common stock options.

As
we execute our strategy, we expect significant increases in our operating expenses to fund development of current and new divisions and product lines. Presently, we anticipate that
our existing capital resources will meet our operating and investing needs for at least the next 12 months. After that time, additional funding may not be available on acceptable terms or at
all. If we require additional capital resources to grow our business, execute our operating plans or acquire complementary
businesses at any time in the future, we may seek to sell additional equity or debt securities or secure additional lines of credit, which may result in ownership dilution to our shareholders.

ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our cash equivalents, short-term investments and capital lease obligations are at fixed interest rates and therefore the fair market value of these
instruments is affected by changes in market interest rates. As of September 30, 2002 all of our short-term investments mature within 5 months and we had the ability to
immediately liquidate our investments. Therefore, we believe that we are exposed to immaterial levels of market risk.

ITEM 4. CONTROLS AND PROCEDURES

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We and certain of our officers are defendants in a purported shareholder class action lawsuit litigation pending in the United States District Court for the
Eastern District of Pennsylvania described below for alleged violations of federal securities laws. Although we cannot predict the ultimate outcome of the case or estimate the range of any potential
loss that may be incurred in the litigation, we believe the lawsuits are frivolous and without merit, strenuously deny all allegations of wrongdoing asserted by plaintiffs, and believe we have
meritorious defenses to plaintiffs' claims. We intend to vigorously defend the lawsuits. We believe that the resolution of this litigation will not have a material effect on our business, financial
condition or results of operations.

The
class action litigation is the result of several complaints filed with the court beginning on October 17, 2001. These actions were consolidated on November 16, 2001.
The court approved the selection of the lead plaintiff in the litigation on March 12, 2002. We filed a motion to dismiss the consolidated complaint on August 7, 2002. These complaints
purport to bring claims on behalf of all persons who allegedly purchased our common stock between June 29, 2000 and November 1, 2000, for alleged violations of the federal securities
laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with respect to the initial public
offering of our common stock. Specifically, the complaints allege, among other things, that our Prospectus and Registration Statement misrepresented and omitted to disclose material facts concerning
our competitors, two of our prospective products and our contract with the California HealthCare Foundation. The actions seek compensatory and other damages, and costs and expenses associated with
litigation.

We
are not involved in any other legal proceedings that either individually or taken as a whole would have a material adverse effect on our business, financial condition or results of
operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



On June 28, 2000 the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File number
333-32376), relating to the initial public offering of our Common Stock, no par value per share. The net offering proceeds to us after total expenses were $43.4 million. As of
September 30, 2002, we have used approximately $26.1 million of the net proceeds from our initial public offering of which approximately $15.8 million was used for working capital
and other general corporate purposes, including expansion of our sales and marketing efforts as well as development of our solutions and services, approximately $6.5 million was used for
dividends on and the redemption of preferred stock, approximately $3.4 million was used for the purchase of property plant and equipment, including technology and equipment expenditures
required to support our product development infrastructure and $1.1 million was used for the acquisition of Strategic Outcomes Services, Inc.,

None
of the net proceeds from the offering were used to pay, directly or indirectly, directors, officers, persons owning ten percent or more of the Company's equity securities, or
affiliates of the Company.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K





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

|                       |  | CARESCIENCE, INC.
|---------------------- |  | -----------------
|Date: November 7, 2002 |  | By:              
|Date: November 7, 2002 |  | By:              
|                       |  |                  

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Sarbanes-Oxley Section 302(a) Certification

I,
David J. Brailer, certify that:





|Date: November 7, 2002 |  | By: |  | /s/DAVID J. BRAILERDavid J. Brailer Chairman and Chief
Executive Officer
|---------------------- |  | --- |  | ------------------------------------------------------------------------

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Sarbanes-Oxley Section 302(a) Certification

I,
Steven Bell, certify that:





|Date: November 7, 2002 |  | By: |  | /s/STEVEN BELLSteven Bell Chief Financial Officer
and Treasurer
|---------------------- |  | --- |  | ---------------------------------------------------------------

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EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------
|99.1        |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|99.2        |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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