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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|(MARK ONE)                                                      |                                                                                         
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                               | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003                  
|OR                                                             
|o                                                               | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|for the transition period from
to                            to

COMMISSION FILE NUMBER: 0-30859

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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)          

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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

Indicated
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The
number of shares of the registrant's Common Stock outstanding, as of May 1, 2003 was 13,291,461.

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CARESCIENCE, INC.    FORM 10-Q    MARCH 31, 2003    INDEX

|                                                                                                       |  | Page
|------------------------------------------------------------------------------------------------------ |  | ----
|PART I. FINANCIAL INFORMATION                                                                          |  |     
|Item 1. Financial Statements                                                                           |  |     
|Consolidated Balance SheetsMarch 31, 2003 and December 31, 2002(unaudited)                            |  | 2   
|Consolidated Statements of OperationsThree Months Ended March 31, 2003 and March 31, 2002 (unaudited) |  | 3   
|Consolidated Statements of Cash FlowsThree Months Ended March 31, 2003 and March 31, 2002 (unaudited) |  | 4   
|Notes to Consolidated Financial Statements                                                             |  | 5   
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 9   
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                     |  | 15  
|Item 4. Controls and Procedures                                                                        |  | 15  
|PART II. OTHER INFORMATION                                                                             |  |     
|Item 1. Legal Proceedings                                                                              |  | 15  
|Item 2. Changes in Securities and Use of Proceeds                                                      |  | 16  
|Item 6. Exhibits and Reports on Form 8-K                                                               |  | 16  
|Signatures                                                                                             |  | 17  

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CARESCIENCE, INC. AND SUBSIDIARY  CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                      | March 31,
2003             |                                            | December 31,
2002 |           
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------------- | ----------
|
|ASSETS                               |                                                                                                                                                                                                     
|Current assets:                      |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Cash and cash equivalents                                                                                                                                                                            |                            | $                                          | 14,742,367        |           
|                                     | Short-term investments                                                                                                                                                                               |                            |                                            | 996,980           |           
|                                     | Interest receivable                                                                                                                                                                                  |                            |                                            | 18,745            |           
|                                     | Accounts receivable, net of allowance for doubtful accounts of $83,053 and $79,370, respectively                                                                                                     |                            |                                            | 1,535,979         |           
|                                     | Prepaid expenses and other                                                                                                                                                                           |                            |                                            | 461,746           |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Total current assets                 |                                                                                                                                                                                                      |                            | 17,755,817                                 |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Property and equipment:              |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Computer equipment                                                                                                                                                                                   |                            |                                            | 5,724,131         |           
|                                     | Office equipment                                                                                                                                                                                     |                            |                                            | 546,857           |           
|                                     | Leasehold improvements                                                                                                                                                                               |                            |                                            | 169,956           |           
|                                     | Furniture and fixtures                                                                                                                                                                               |                            |                                            | 516,059           |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      |                            | 6,957,003                                  |                   |           
|                                     | LessAccumulated depreciation and amortization                                                                                                                                                       |                            |                                            | (4,997,053        | )         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      | Net property and equipment |                                            |                   | 1,959,950 
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Other assets                         |                                                                                                                                                                                                      |                            | 255,562                                    |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      | Total assets               |                                            | $                 | 19,971,329
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                                                                                                                                                     
|Current liabilities:                 |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     | Current portion of capital lease obligations and notes payable                                                                                                                                       |                            | $                                          | 159,293           |           
|                                     | Accounts payable                                                                                                                                                                                     |                            |                                            | 578,783           |           
|                                     | Accrued expenses                                                                                                                                                                                     |                            |                                            | 954,967           |           
|                                     | Deferred revenues                                                                                                                                                                                    |                            |                                            | 3,455,459         |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Total current liabilities            |                                                                                                                                                                                                      |                            | 5,148,502                                  |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Capital lease obligations            |                                                                                                                                                                                                      |                            | 94,343                                     |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|Notes payable                        |                                                                                                                                                                                                      |                            | 199,848                                    |                   |           
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|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, 14,731,461 shares issued and 13,291,461 shares outstanding, and; 14,721,461 shares issued and 13,281,461 shares outstanding, respectively |                            |                                            | 60,266,226        |           
|                                     | Additional paid-in capital                                                                                                                                                                           |                            |                                            | 4,771,046         |           
|                                     | Deferred compensation                                                                                                                                                                                |                            |                                            | (726,178          | )         
|                                     | Accumulated other comprehensive income                                                                                                                                                               |                            |                                            | 683               |           
|                                     | Accumulated deficit                                                                                                                                                                                  |                            |                                            | (48,618,475       | )         
|                                     | Subscriptions receivable                                                                                                                                                                             |                            |                                            | (264,666          | )         
|                                     | Treasury stock, at cost, 1,440,000 shares                                                                                                                                                            |                            |                                            | (900,000          | )         
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      | Total shareholders' equity |                                            |                   | 14,528,636
|                                     |                                                                                                                                                                                                      |                            |                                            |                   |           
|                                     |                                                                                                                                                                                                      |                            | 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 March 31, |           
|------------------------------------ | ----------------------------------- | ------------------------------------ | ----------
|
|
|Revenues                             |                                     | $                                    | 3,156,542 
|Cost of revenues                     |                                     |                                      | 1,609,089 
|                                     |                                     |                                      |           
|                                     | Gross profit                        |                                      |           
|                                     |                                     |                                      |           
|Operating expenses:                  |                                     |                                      |           
|                                     | Research and development            |                                      |           
|                                     | Selling, general and administrative |                                      |           
|                                     |                                     |                                      |           
|                                     |                                     | Total operating expenses             |           
|                                     |                                     |                                      |           
|                                     | Operating loss                      |                                      |           
|Interest income                      |                                     |                                      | (71,467   
|Interest expense                     |                                     |                                      | 10,414    
|                                     |                                     |                                      |           
|Net loss                             |                                     | $                                    | (1,913,033
|                                     |                                     |                                      |           
|Net loss per common share:           |                                     |                                      |           
|                                     | Basic and diluted                   |                                      | $         
|                                     |                                     |                                      |           
|Weighted average shares outstanding: |                                     |                                      |           
|                                     | Basic and diluted                   |                                      |           
|                                     |                                     |                                      |           

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 Three Months Ended
March 31,                                                       |                                                                  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -----------------------------------------------------------------
|
|
|Cash flows from operating activities:          |                                                                                                               |                                                                                            |                                                                  
|                                               | Net loss                                                                                                      |                                                                                            | $                                                                
|                                               | Adjustments to reconcile net loss to net cash used in operating activities
    Depreciation and amortization |                                                                                            |                                                                  
|                                               |                                                                                                               | Provision for bad debts                                                                    |                                                                  
|                                               |                                                                                                               | Stock-based compensation                                                                   |                                                                  
|                                               |                                                                                                               | Changes in assets and liabilities
    (Increase) decrease in
        Interest receivable |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            | Increase (decrease) in
    Accounts payable and accrued expenses
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|Cash flows from investing activities:          |                                                                                                               |                                                                                            |                                                                  
|                                               | Purchases of short-term investments                                                                           |                                                                                            |                                                                  
|                                               | Proceeds from the redemption of short-term Investments                                                        |                                                                                            |                                                                  
|                                               | Purchases of property and equipment                                                                           |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|Cash flows from financing activities:          |                                                                                                               |                                                                                            |                                                                  
|                                               | Proceeds from the exercise of common stock options                                                            |                                                                                            |                                                                  
|                                               | Payments on capital lease obligations and notes payable                                                       |                                                                                            |                                                                  
|                                               | Proceeds from note payable                                                                                    |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|                                               |                                                                                                               |                                                                                            |                                                                  
|Net increase in cash and cash equivalents      |                                                                                                               |                                                                                            | 3,065,142                                                        
|Cash and cash equivalents, beginning of period |                                                                                                               |                                                                                            | 11,677,225                                                       
|                                               |                                                                                                               |                                                                                            |                                                                  
|Cash and cash equivalents, end of period       |                                                                                                               | $                                                                                          | 14,742,367                                                       
|                                               |                                                                                                               |                                                                                            |                                                                  

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") is primarily a provider of care management services to hospitals and health systems. As a company specializing in
clinical knowledge, the Company supplies the people and technology to facilitate the delivery of quality care throughout the health care system. For over 10 years, the Company has helped
hospitals and health systems improve their performance by employing a systematic business approach to quality. The Company also has provided limited technology and services to the pharmaceutical and
biotechnology industry. The Company's offerings in the pharmaceutical marketplace have included data analysis, consulting services and customized research and strategic development support. These
services are now being refocused to leverage the Company's expertise in care management and data analysis.

The
consolidated balance sheet as of March 31, 2003, the consolidated statements of operations for the three months ended March 31, 2003 and 2002 and the consolidated
statements of cash flows for the three months ended March 31, 2003 and 2002 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 March 31, 2003 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 months ended March 31, 2003 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.



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.

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As
of March 31, 2003 cash and cash equivalents and short-term investments at cost and fair market value consisted of the following:

|                          |  | March 31, 2003
|------------------------- |  | --------------
|
|Cash and cash equivalents |  | $             
|Short-term investments    |  |               
|                          |  |               
|                          |  | $             
|                          |  |               

As
of March 31, 2003 short-term investments consisted of one debt instrument maturing June 9, 2003.



The Company paid interest of $10,414 and $10,841 for the three months ended March 31, 2003 and 2002, 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 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. These agreements typically cover an initial period of three-to-five years and are typically fixed priced.
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 has also historically supported development agreements, with periods typically ranging from three-to-five years, that provided 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 has treated revenue on
those agreements as a single element contract and recognized 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 multi-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 providers. The company had two customers for the three
month period ended March 31,

6

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2003 and two different customers for the three month period ended March 31, 2002, which together accounted for 30% and 24% of total revenues, respectively.

The
Company had one customer at March 31, 2003, which accounted for 11% of total accounts receivable.



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

Balance, December 31, 2002

$
24,136Current-period change


(23,453
)Balance, March 31, 2003

$
683




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 2003 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 1,802,875 shares of common stock at exercise prices ranging from $0.25 to $12.00 were outstanding as of March 31, 2003,
but were excluded from the computation of diluted net loss per share since the inclusion would be anti-dilutive due to the net loss.

7

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(3) COMMITMENTS AND CONTINGENCIES



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 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 the
Company's consolidated financial position or results of operations.

(4) INCOME TAXES

The Company has incurred operating losses and generated a significant accumulated deficit through March 31, 2003, therefore, no tax provisions have been
recorded. As of March 31, 2003 the Company had federal net operating loss carryforwards of approximately $37.4 million which expire from 2010 through 2023. As of March 31, 2003
and March 31, 2002, 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.

(5) RESTRUCTURING COSTS

In December 2002 the Company decided to minimize the pharmaceutical resources associated with the Strategic Outcomes Services operations and move any
remaining resources from pharmacoeconomic consulting to data analysis and other activities consistent with its core care management business. In accordance with FASB No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities", the Company recognized $180,000 of expense, included in selling, general and administrative expense, during the three months ended March 31,
2003 related to the estimated future lease commitment for a vacated office lease.

8

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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:



9

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CareScience, Inc. is primarily a provider of care management services to hospitals and health systems. As a company specializing in clinical knowledge, we
supply the people and technology to facilitate the delivery of quality care throughout the health care system. For over 10 years, we have helped hospitals and health systems improve their
performance by employing a systematic business approach to quality. We call this approach "care management." The primary goals of care management are to deliver patient care in the correct setting and
to have patients receive "error-free" access to the best treatment choices.

Our
mission is to make quality the way of life in health care by providing innovative care management solutions to the health care industry. We help hospitals and health systems improve
quality by building organizational support for change, addressing underlying barriers to improved clinical performance, and by expanding the role of care management. We work with health care providers
and health systems to manage clinical processes surrounding the point of care so that fundamental reductions can be achieved in operating costs, clinical inefficiencies and medical errors. We collect,
share, store and analyze clinical data generated by widely used health information systems and provide the care management services and staffing required to drive the realization of underlying
clinical performance opportunities. We enable customers to apply their clinical data to enhance patient

10

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safety and to the management of care, including quality monitoring, performance improvement, credentialing, profiling, error tracking, case management and evidence based medicine. We also provide
consulting services to health care providers that support strategic planning and clinical operations.

We
also have provided limited technology and services to the pharmaceutical and biotechnology industry. Our offerings have included data analysis, consulting services and customized
research and strategic development support. These services are now being refocused to leverage our expertise in care management and data analysis.

Over
the past decade, we have pioneered and commercialized several clinical information technologies. We developed one of the nation's first online quality measurement and management
tools, commercialized one of the first clinically based outcome risk assessment algorithms, became established as one of the first health care application service providers, and, most recently,
developed the first peer-to-peer clinical data sharing technology.

CareScience
was incorporated in 1992. In 1993, we exclusively licensed the intellectual property underlying our core analytic technology in a 30-year agreement with the
University of Pennsylvania. In 1996, we launched our first Internet-based commercial solution based on this proprietary technology through our Care Management System. In 1999, we
initiated development of the Care Data Exchange, ®1 in October 2000, we licensed the core clinical data exchange technology from the California HealthCare Foundation
and on March 7, 2000, we changed our name from Care Management Science Corporation to CareScience, Inc.

In
the fall of 2002 due to a lack of perceived interest in the pharmaceutical marketplace, we discontinued the active sale of our Lifecycle Decision System. No significant revenue was
ever generated from the Lifecycle Decision System. We may at some point in the future again to decide to offer for sale the Lifecycle Decision System: however there are no plans at this time to do so.
Our initial consulting and development contract with the California HealthCare Foundation for the Care Data Exchange expired in October 2002. Although we have entered into a limited extension
contract with the California HealthCare Foundation, that extension is for significantly less revenue than the initial consulting and development agreement.

On
January 12, 2001, we acquired substantially all of the assets and certain liabilities of Strategic Outcomes Services, Inc., a pharmacoeconomic consulting company located
in North Carolina. The total purchase price was approximately $1.3 million, which included a cash payment of $1.1 million and 250,000 shares of our common stock. The purchase agreement
also provided for additional contingent payments based on achieving revenue and profitability milestones that are highly unlikely to be achieved. No such contingent payments were accrued in 2001 or
2002 as the required milestones were not met. The transaction was accounted for using the purchase method of accounting. In December 2002, a goodwill impairment charge of $1,245,687 was
recognized for the writedown of the goodwill associated with the Strategic Outcomes Services operations, representing the difference between the carrying amount of the unit and its fair value (as
determined by using the expected present value of the expected future cash flows). Beginning in December 2002, we decided to minimize our remaining resources dedicated to the pharmaceutical
marketplace and move those resources from pharmacoeconomic consulting to data analysis and other activities consistent with our core care management business.

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11

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We
generate revenues from subscriptions to our Internet-based proprietary technology applications and hosting of customer data, as well as from consulting services and from time to time,
development agreements. We sell our solutions 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
subscription agreements typically cover an initial three-year to five-year period with provisions for automatic renewals. We recognize training and
implementation fees, as well as subscriptions and related hosting revenues, on a pro-rata basis over the life of the contract. We recognize consulting fees as the program or service is
delivered and development revenues on a cost-to-cost basis over the entire agreement period.

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 $3.5 million and $4.1 million as of March 31, 2003 and December 31, 2002, respectively.

More
than 160 health care organizations subscribe to our services.

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 as we focus more highly on our core business.
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, 2002, we had
net operating loss carryforwards of approximately $37.4 million for federal income tax purposes. The net operating loss carryforwards, if not utilized, expire from 2010 through 2023. 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.



Total revenues decreased 4% to $3.2 million for the three months ended March 31, 2003 from $3.3 million for the three months ended
March 31, 2002. The decrease was due primarily to the expiration of a three-year consulting and development contract with the California HealthCare Foundation that ended on
October 1, 2002 and to a decline in pharmaceutical consulting revenue both of which more than offset an increase in our core care management technology and service revenue.

Unrecognized
revenues related to customer and development contracts (backlog) as of March 31, 2003 totaled $26.9 million.

12

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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 March 31, 2003 was $1.6 million a decrease of $111,000 or 6% compared to $1.7 million for the three months ended March 31, 2002. We expect our cost of revenues
to fluctuate over time, decreasing as we minimize the remaining resources dedicated to the pharmaceutical marketplace and increasing to the extent that we increase the service component of our
revenues in our core care management solutions.



Our gross profit margin increased from 47% for the three months ended March 31, 2002, to 49% for the three months ended March 31, 2003. The increase
in gross profit margin is primarily due to the expiration of our funded development contracts. We do not expect significant changes in gross profit margin for the foreseeable future.



Research and development costs include technology and product development costs. Research and development costs for the three months ended March 31, 2003
were $1.3 million, an increase of $527,000 or approximately 73%, compared to $725,000 for the three months ended March 31, 2002. This increase is primarily due to the expiration of our
funded development contract.

As
a percentage of revenues, research and development costs were 40% for the three months ended March 31, 2003 as compared to 22% for the three months ended March 31, 2002.
Although they may increase somewhat over 2003, we expect that these costs will decrease gradually as a percentage of revenue as our revenues increase 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 March 31, 2003 were $2.3 million, a decrease of $158,000, or 6% compared to $2.4 million for the three months ended
March 31, 2002. The decrease was primarily related to a reduction in marketing and other administrative expenditures in 2003 as part of the Company's efforts to control costs.

As
a percentage of revenues, selling, general, and administrative expenses were 72% for the three months ended March 31, 2003 as compared to 74% for the three months ended
March 31, 2002. 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 future growth in revenues.

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The Company accounts for all stock-based plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations, under
which compensation expense is recognized based on the amount by which the fair value of the underlying common stock exceeds the exercise price of the stock options on the measurement date. For
financial reporting purposes, the Company has determined that the deemed fair market value on the measurement date for certain stock options was in excess of the exercise price. This amount has been
recorded as deferred compensation and is being amortized over the vesting period of the applicable options which range between four and seven years. The Company recorded deferred compensation of
$5,624,839 and $120,683 during the years ended December 31, 1999 and 2000.

Had
compensation expense for all options issued been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss, basic EPS and
diluted EPS would have been equal to the pro forma amounts indicated below:

|                                                                                                             |  |             |  | Quarter Ended March 31, |           
|------------------------------------------------------------------------------------------------------------ |  | ----------- |  | ----------------------- | ----------
|
|Net loss applicable to common shareholders                                                                   |  | As reported |  | $                       | (1,913,033
|AddStock-based employee compensation included in Net Loss                                                   |  |             |  |                         | 203,021   
|LessTotal stock-based employee compensation expense determined under fair value-based method for all awards |  |             |  |                         | (304,106  
|                                                                                                             |  |             |  |                         |           
|                                                                                                             |  | Pro forma   |  | $                       | (2,014,118
|                                                                                                             |  |             |  |                         |           
|Basic and diluted EPS                                                                                        |  | As reported |  | $                       | (0.14     
|                                                                                                             |  |             |  |                         |           
|                                                                                                             |  | Pro forma   |  | $                       | (0.15     
|                                                                                                             |  |             |  |                         |           



Net interest income for the three months ended March 31, 2003 was $61,000, a decrease of $37,000, compared to $98,000 for the three months ended
March 31, 2002. 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 through at
least 2004. As of March 31, 2003, we had $15.7 million in cash and cash equivalents and short-term investments and working capital of $12.6 million.

Net
cash used in operating activities was $1.1 million for the three months ended March 31, 2003 and $563,000 for the three months ended March 31, 2003. For those
periods, net cash used in operating activities was primarily to fund losses from operations offset by changes in current assets and liabilities.

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Net
cash provided by investing activities was $4.3 million for the three months ended March 31, 2003 and $1.9 million for the three months ended March 31,
2002. For those periods, net cash provided by investing activities consisted primarily of the net proceeds from the redemption of short-term investments offset with purchases of property
and equipment.

Net
cash used in financing activities was $125,000 for the three months ended March 31, 2003 and consisted payments on capital lease obligations and notes payable net of the
proceeds from the exercise of common stock options. Net cash provided by financing activities consisted of $297,000 for three months ended March 31, 2002, and consisted of proceeds from a note
payable and the exercise of common stock options offset by payments on capital lease obligations and notes payable.

As
we execute our strategy, we expect increases in our operating expenses to fund the development and sales and marketing of current and new service lines. Presently, we anticipate that
our existing capital resources will meet our operating and investing needs through at least 2004. 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, note payable 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 March 31, 2003 all of our short-term investments mature within 3 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

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

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plaintiffs, and believe we have meritorious defenses to plaintiffs' claims. We intend to vigorously defend the lawsuits.

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 and we are currently
awaiting action by the Judge presiding over the case on this motion. 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

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
March 31, 2003, we have used approximately $28.6 million of the net proceeds from our initial public offering of which approximately $17.3 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 $3.7 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.

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: May 1, 2003 |  | By:              
|Date: May 1, 2003 |  | By:              

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Sarbanes-Oxley Section 302(a) Certification

I,
David J. Brailer, certify that:





|                  |  |    
|----------------- |  | ---
|Date: May 1, 2003 |  | By:

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Sarbanes-Oxley Section 302(a) Certification

I,
Kurt Palek, certify that:





|Date: May 1, 2003 |  | By: | /s/KURT PALEKKurt Palek
Chief Accounting 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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