##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 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                                                 

Commission file number: 0-24975



---

WebMD Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                  |  |                                     
|------------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                          |  | 94-3236644                          
|(State of incorporation)                                                                          |  | (I.R.S. employer identification no.)
|                                                                                                 
|669 River Drive, Center 2
    Elmwood Park, New Jersey(Address of principal executive
    office) |  | 07407-1361(Zip code)                

(Registrants telephone number including
area code): (201) 703-3400

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $.0001 per
share

(Title of each class)


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
(the Exchange Act) 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 þ         No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference into Part III of this Form 10-K or any
amendment to this
Form 10-K.    þ

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

As of June 30, 2003, the aggregate market
value of the registrants common stock held by
non-affiliates was approximately $3,109,441,188 (based on the
closing price of the common stock of $10.87 per share on
that date, as reported on the Nasdaq Stock Markets
National Market and, for purposes of this computation only, the
assumption that all of the registrants directors and
executive officers are affiliates). As of March 1, 2004,
there were 309,464,573 shares of WebMD common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information in the registrants
definitive proxy statement to be filed with the Commission
relating to the registrants 2004 Annual Meeting of
Stockholders is incorporated by reference into Part III.



---






---










TABLE OF CONTENTS

|                                                              |  |                                                                                                        |     |      |    | 
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | --- | ---- | -- | 
|                                                              |  |                                                                                                        |     | Page
|                                                              |  |                                                                                                        |     |     
|Cautionary Statement
    Regarding Forward-Looking Statements |  |                                                                                                        | 2   |     
|PART I                                                       
|Item 1.                                                       |  | Business                                                                                               |     |      | 3  | 
|Item 2.                                                       |  | Properties                                                                                             |     |      | 42 | 
|Item 3.                                                       |  | Legal Proceedings                                                                                      |     |      | 42 | 
|Item 4.                                                       |  | Submission of Matters to a
    Vote of Security Holders                                                |     |      | 46 | 
|PART II                                                      
|Item 5.                                                       |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |     |      | 47 | 
|Item 6.                                                       |  | Selected Financial Data                                                                                |     |      | 49 | 
|Item 7.                                                       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |     |      | 51 | 
|Item 7A.                                                      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |     |      | 83 | 
|Item 8.                                                       |  | Financial Statements and
    Supplementary Data                                                        |     |      | 83 | 
|Item 9.                                                       |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure               |     |      | 83 | 
|Item 9A.                                                      |  | Controls and Procedures                                                                                |     |      | 83 | 
|PART III                                                     
|Item 10.                                                      |  | Directors and Executive
    Officers of the Registrant                                                 |     |      | 84 | 
|Item 11.                                                      |  | Executive Compensation                                                                                 |     |      | 84 | 
|Item 12.                                                      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |     |      | 84 | 
|Item 13.                                                      |  | Certain Relationships and
    Related Transactions                                                     |     |      | 84 | 
|Item 14.                                                      |  | Principal Accountant Fees
    and Services                                                             |     |      | 84 | 
|PART IV                                                      
|Item 15.                                                      |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |     |      | 85 | 
|Signatures                                                    |  |                                                                                                        | 86  |     
|Financial Statements                                          |  |                                                                                                        | F-1 |     
|Index to Exhibits                                             |  |                                                                                                        | E-1 |     
|EX-3.2 CERTIFICATE OF DESIGNATIONS                           
|EX-4.9 CONVERTIBLE REDEEMABLE EXCHANGEABLE                   
|EX-10.44 EMPLOYMENT AGMT DATED 9/11/2000                     
|EX-10.46 EMPLOYMENT AGMT 8-20-2001                           
|EX-10.49 EMPLOYMENT AGMT DATED 12-4-2003                     
|EX-12.1 COMPUTATION OF RATIO EARNINGS                        
|EX-21 SUBSIDIARIES OF REGISTRANT                             
|EX-23.1 CONSENT OF ERNST & YOUNG LLP                         
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO                 
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO                 
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO                 
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO                 
|EX-99.1 AMENDED & RESTATED AUDIT COMMITTEE CHARTER           
|EX-99.2 COMPENSATION COMMITTEE CHARTER                       
|EX-99.3 AMENDED & RESTATED NOMINATING COMMITTEE              



WebMD®, Web-MD®, WebMD Health®,
Digital Office Manager®, DIMDX®,
Envoy®, ExpressBill®, Intergy®, Medifax®,
Medifax-EDI®, Medscape®, MEDPOR®, Medpulse®,
POREX®, Publishers Circle®, The Little Blue
BookTM, The Little Yellow BookTM, The
Medical Manager®, ULTIATM, WebMD Health
HubTM and WellMed® are trademarks of WebMD
Corporation or its subsidiaries.

1



---



##### Table of Contents






CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
both historical and forward-looking statements. All statements
other than statements of historical fact are, or may be deemed
to be, forward-looking statements. These forward-looking
statements are not based on historical facts, but rather reflect
managements current expectations concerning future results
and events. These forward-looking statements generally can be
identified by use of expressions such as believe,
expect, anticipate, intend,
plan, foresee, likely,
will or other similar words or phrases. Similarly,
statements that describe our objectives, plans or goals are or
may be forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or
achievements to be different from any future results,
performance and achievements expressed or implied by these
statements. In addition to the risk factors described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Factors That May
Affect Our Future Financial Condition or Results of
Operations beginning on page 66, the following
important risks and uncertainties could affect future results,
causing these results to differ materially from those expressed
in our forward-looking statements:



| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the failure to achieve sufficient levels of
    customer utilization and market acceptance of new services or
    newly integrated services,                                         
|
| |  | the inability to successfully deploy new
    applications or newly integrated applications,                                                                                          
|
| |  | difficulties in forming and maintaining mutually
    beneficial relationships with customers and strategic partners,                                                                 
|
| |  | the inability to attract and retain qualified
    personnel, and                                                                                                                     
|
| |  | general economic, business or regulatory
    conditions affecting the healthcare, information technology,
    Internet and plastic industries being less favorable than
    expected.

These factors and the risk factors described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Factors That May
Affect Our Future Financial Condition or Results of
Operations beginning on page 66 are not necessarily
all of the important factors that could cause actual results to
differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable
factors also could have material adverse effects on our future
results. The forward-looking statements included in this Annual
Report on Form 10-K are made only as of the date of this
Annual Report. We expressly disclaim any intent or obligation to
update any forward-looking statements to reflect subsequent
events or circumstances.

2



---



##### Table of Contents






PART I






|        |         
|------- | --------
|Item 1. | Business

INTRODUCTION

General Information

WebMD Corporation is a Delaware corporation that
was incorporated in December 1995 and commenced operations in
January 1996 as Healtheon Corporation. Our common stock has
traded on the Nasdaq National Market under the symbol
HLTH since February 11, 1999.

Our principal executive offices are located at
669 River Drive, Center 2, Elmwood Park, New Jersey 07407-1361
and our telephone number is (201) 703-3400.

We make available free of charge at
www.webmd.com (in the About WebMD section)
copies of materials we file with, or furnish to, the Securities
and Exchange Commission, including our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports, as
soon as reasonably practicable after we electronically file such
materials with, or furnish them to, the SEC.

Overview of Our Businesses

Our business is comprised of four segments. Three
of our business segments, Portal Services, Transaction Services
and Physician Services, provide various types of healthcare
information services and technology solutions. Our fourth
business segment is Plastic Technologies. The following overview
describes our key products, services and markets:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Healthcare Information Services and
    Technology Solutions.We provide a
    range of information services and technology solutions for
    participants across the entire continuum of healthcare,
    including physicians and other healthcare providers, payers,
    suppliers and consumers. Our products and services promote
    administrative efficiency and assist in reducing the cost of
    healthcare and creating better patient outcomes.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Health.Our
    Portal Services segment, which is known as WebMD Health,
    provides online healthcare information, educational services and
    other resources for consumers and healthcare professionals. Our
    online offerings for consumers help them become better informed
    about healthcare choices and assist them in playing an active
    role in managing their own health. Our offerings for healthcare
    professionals help them improve their clinical knowledge, as
    well as their communication with patients regarding treatment
    options for specific health conditions. We also provide online
    content for use by media and healthcare partners in their Web
    sites, in some cases as part of a providing a co-branded site
    and in some cases on a private label basis under the
    partners branding.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We reach a large audience of health-involved
    consumers and clinically active healthcare professionals. We
    work closely with pharmaceutical, medical device and other
    healthcare companies to develop innovative online channels of
    communication to our audience, or targeted portions of our
    audience, that complement their offline education, marketing and
    customer service programs. In addition, through our WebMD Health
    Services business, we provide employers and health plans with
    access to a suite of online tools and related services, for use
    by their employees and plan members. These tools and services
    provide a framework for better decision-making by healthcare
    consumers and can assist employers and plans in managing demand
    while improving quality of care.
|
| | We generate the majority of our Portal Services
    revenue by selling sponsorships of specific pages, sections or
    events on our portals and related e-mailed newsletters, by
    selling advertising on our portals and the online and offline
    properties of our strategic partners and by licensing our
    content and our online tools and related software and services.
    The majority of our WebMD                                                                                                                                                                                                                                                                                                                                                                                                                      

3



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Health revenues come from a small number of
    customers. Our WebMD Health customers include pharmaceutical,
    biotech and medical device companies, employers and health plans
    and media distribution companies. WebMD Health also receives a
    small portion of its revenues from the sale of paid subscription
    services. In 2003, WebMD Health revenues were
    $110.7 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Envoy.Our
    Transaction Services segment, which is known as WebMD Envoy,
    provides healthcare reimbursement cycle management services,
    including transmission of electronic transactions between
    healthcare payers and physicians, pharmacies, dentists,
    hospitals, laboratory companies and other healthcare providers.
    The use of electronic transactions significantly reduces
    processing time and costs, as compared to mail, fax or
    telephone, and increases productivity for both payers and
    providers. The transactions that we facilitate include:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | administrative transactions, such as claims
    submission and status inquiry, eligibility and patient coverage
    verification, referrals and authorizations, and electronic
    remittance advice, and
|
| |  | clinical transactions, such as lab test ordering
    and reporting of results.                                                                                                                           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We processed more than 2 billion
    transactions in 2003, for over 200,000 providers and 5,000
    hospitals transacting with more than 1,200 commercial and
    government healthcare payers. We also provide automated patient
    billing services to providers, including statement printing and
    mailing services. In addition, through Advanced Business
    Fulfillment, Inc., which we acquired in July 2003, we provide
    healthcare paid-claims communications services for third-party
    administrators and health insurers, including print-and-mail
    services for the distribution of checks, remittance advice, and
    explanations of benefits. We are focused on continuing to
    increase the percentage of healthcare transactions that are
    handled electronically and on providing electronic reimbursement
    cycle management solutions that can be used by payers and
    providers to automate the entire reimbursement process.
|
| | We generate Transaction Services revenue by
    selling our transaction services to healthcare payers and
    providers, generally on either a per transaction basis or, in
    the case of some providers, on a monthly fixed fee basis. We
    also generate revenue by selling our patient statement and
    paid-claims communication services, typically on a per statement
    or per communication basis. A significant portion of WebMD Envoy
    revenues come from the countrys leading national and
    regional healthcare payers. In 2003, WebMD Envoy revenues were
    $505.7 million.                                                                                                                                                                                                                                                                                                                                                                   



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Practice
    Services.Our Physician Services
    segment, which is known as WebMD Practice Services, develops and
    markets information technology systems for healthcare providers,
    primarily under The Medical Manager, Intergy, ULTIA and Medical
    Manager Network Services brands. Our systems include:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | administrative and financial applications that
    enable healthcare providers and their administrative personnel
    to manage their practices more efficiently, and
|
| |  | electronic medical record and other clinical
    applications that assist them in delivering quality patient care.                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, through Medical Manager Network
    Services, we provide integrated access to our WebMD Envoy
    transaction services for our WebMD Practice Services customers.
    These systems and services allow physician offices to automate
    their scheduling, billing and other administrative tasks, to
    transmit transactions electronically, to maintain electronic
    medical records and to automate documentation of patient
    encounters.
|
| | WebMD Practice Services systems are scalable to
    meet the needs of a wide variety of healthcare provider
    settings, from small physician groups to large clinics, and
    across various medical specialties. Customers can purchase a
    base system and then add additional modules and services over
    time to expand their use of information technology as needed.                                                                                

4



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We generate Physician Services revenue from
    one-time fees for licenses to our software modules, for system
    hardware and for implementation services and from recurring fees
    for the maintenance and support of our software and system
    hardware. Pricing depends on the number and type of software
    modules to be licensed, the number of users, the complexity of
    the installation and other factors. Our Medical Manager Network
    Services and some of our other WebMD Practice Services products
    and services are priced on a monthly fee per provider basis or a
    per transaction basis. In 2003, WebMD Practice Services revenues
    were $302.6 million.



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that the combination, in one company,
    of WebMD Health, WebMD Envoy and WebMD Practice Services makes
    us well positioned to create significant improvements in the way
    that information is used by the healthcare industry, enabling
    increased efficiency, better decision-making and, ultimately,
    higher quality patient care at a lower cost.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Plastic
    Technologies.Our Plastic
    Technologies segment, which is known as Porex, develops,
    manufactures and distributes proprietary porous plastic products
    and components used in healthcare, industrial and consumer
    applications. Our Porex customers include both end-users of our
    finished products, as well as manufacturers that include our
    components in their products for the medical device, life
    science, research and clinical laboratory, surgical and other
    markets. Porex is an international business with manufacturing
    operations in North America, Europe and Asia and customers in
    more than 65 countries. In 2003, Porex revenues from continuing
    operations were $71.9 million.

During 2003, our revenues were divided among our
segments as follows: 52.5% from WebMD Envoy, 31.4% from WebMD
Practice Services, 11.5% from WebMD Health and 7.5% from Porex.
The sum of these percentages equals 102.9% of our total revenues
of $964.0 million because $27.0 million of our
revenues are from inter-segment transactions and are eliminated
when we consolidate our results.

A more complete description of the products and
services of each of our segments begins on page 10 below.
For additional information regarding the results of operations
of each of our segments, see Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Results of Operations by Operating
Segment and Note 8 to the Consolidated Financial
Statements included in this Annual Report.

Key Trends Affecting Our Healthcare
Information Services and Technology Solutions Business

Several key trends in the healthcare marketplace
are influencing the use of healthcare information services and
technology solutions of the types we provide or are developing.
Those trends, and the strategies we have developed in response,
are described briefly below; the implications for each of our
businesses are discussed further in the descriptions of our
products and services that follow.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High Rates of Increase in Healthcare
    Costs.According to the Centers
    for Medicare & Medicaid Services, or CMS, healthcare
    spending in the United States rose to $1.6 trillion in 2002, up
    from $1.4 trillion in 2001 and $1.3 trillion in 2000. The CMS
    report indicated a growth rate in healthcare spending of 9.3%
    for 2002, compared to 8.5% in 2001, and that the 9.3% rate of
    increase in 2002 was 5.7 percentage points higher than the
    2002 increase in gross domestic product for the United States
    and marked the sixth consecutive year in which health spending
    grew at an accelerated rate. CMS projects the healthcare share
    of gross domestic product will be 15.3% for 2003 and increase to
    18.4% by 2013. CMS expects that out-of-pocket healthcare
    spending by consumers  including deductibles,
    copayments, and payments for medical care not covered by
    insurance  will grow slightly faster in the next few
    years than during the previous few years, as employers continue
    to shift healthcare costs to employees. CMS projects that
    out-of-pocket spending growth will increase to a rate of 7.3% in
    2005 from 6.0% in 2002 and will continue to increase as a
    percentage of consumer disposable personal income, from 2.7% in
    2002 to 3.1%

5



---



##### Table of Contents



| |  |                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------
| |  | in 2013. The difficulties involved in controlling
    healthcare costs have resulted in the following key trends:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cost-Shifting by Employers to their Employees
    and Changes in Plan Design.Employers
    are seeking to shift a greater portion of healthcare costs onto
    their employees and to redefine traditional health benefits.
    People in employer-sponsored health plans have been paying more
    out of their own pockets each year and are likely to see their
    share continue to increase significantly in the near future.
    With the shift in financial burdens, consumers are assuming a
    more active role in managing their health and need information
    to make educated benefit, provider and treatment decisions. We
    are in the process of transforming WebMD Health, our consumer
    portal, from an online place that consumers go for information
    to a place they go to actively manage their health. In addition,
    through our WebMD Health Services business, we help employers
    and plans provide employees and plan members with answers to
    healthcare and plan benefit questions and other personalized
    information and feedback. We intend to make significant
    investments in WebMD Healths infrastructure, as well as in
    new products and services, to position ourselves to provide
    additional interactive online services.                                                                                                                                                                                                                                                                                                                
|
| |  | Increasing Outsourcing by Healthcare
    Payers.In order to be more efficient,
    many healthcare payers are focusing upon core
    activities  building cost-effective provider
    networks, marketing their services to employers, and
    adjudicating claims payment  and outsourcing pre- and
    post-adjudication administrative activities, such as printing
    and mailing checks and explanation of benefits. By outsourcing
    these services to us, payers can reduce operating costs and
    capital expenditures. In addition, our outsourcing services
    allow our customers to participate in the use of systems and
    technologies that would be too expensive for them to acquire for
    their own use. Our acquisitions of Advanced Business Fulfillment
    and Medifax-EDI in 2003 support our ability to provide more
    comprehensive outsourcing services. For more information on the
    services we provide to payers and on these acquisitions, see
    Healthcare Information Services and Technology
    Solutions  WebMD Envoy below and Note 2 to
    the Consolidated Financial Statements included in this Annual
    Report.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Increased Use of Information Technology for
    Clinical Purposes.Governmental and
    commercial payers continue to exert considerable pricing
    pressure on providers. As a result, in order to maintain their
    incomes, providers need to see more patients and increase
    productivity and/or reduce their operating costs. Use of
    information technology can assist providers in these efforts.
    Healthcare providers are also under pressure to increase quality
    and reduce medical errors. There are currently numerous federal,
    state and private initiatives seeking ways to increase the use
    of information technology in healthcare, including in the
    physicians office. In his State of the Union Address this
    year, President Bush stated: By computerizing health
    records, we can avoid dangerous medical mistakes, reduce costs
    and improve care. In a radio address the next week, he
    said we can control health care costs and improve care by
    moving American medicine into the information age. My budget for
    the coming year proposes doubling to $100 million the money
    we spend on projects that use promising health information
    technology. This would encourage the replacement of handwritten
    charts and scattered medical files with a unified system of
    computerized records. By taking this action, we would improve
    care, and help prevent dangerous medical errors, saving both
    lives and money. There are an increasing number of other
    governmental and private initiatives in this area.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | While information technology systems and
    electronic transaction services are used by many physician
    offices for administrative and financial applications, their use
    in clinical workflow is much more limited, especially in smaller
    practices. We believe that is changing and we are targeting the
    market for clinical applications as one of our priorities for
    the next several years. While it will be a long time before most
    physicians go to a paperless office, more and more
    physicians are beginning to incorporate information technology
    into their clinical workflow and our products allow them to make
    this shift in a gradual way. See Healthcare Information
    Services and Technology Solutions  WebMD Practice
    Services  EMR and Imaging Sys-

6



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | tems below. During 2004, we plan to improve
    the capacity and productivity of the WebMD Practice Services
    support, service and training infrastructure in order to be able
    to provide the additional assistance needed by customers as they
    increase their usage of our clinical solutions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Automation of the Healthcare
    Reimbursement Cycle.Government
    regulations concerning electronic transactions in healthcare are
    accelerating the shift from telephone and paper claims
    transactions to electronic ones and have the potential to have a
    similar effect on other phases of the reimbursement cycle. See
     Government Regulation  Health
    Insurance Portability and Accountability Act of 1996 
    HIPAA Transaction Standards.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Submission of claims electronically assists
    payers in reducing the cost of processing and servicing claims
    and can expedite the reimbursement process for providers.
    However, this is just a starting point for how electronic
    transactions can increase administrative efficiency. Our
    strategy is to be more than just a clearinghouse connection
    between payers and providers: we have been positioning our
    company to provide electronic reimbursement cycle management
    solutions that can be used by payers and providers to automate
    the entire reimbursement process. For example, our all
    payer transaction services include the capture, validation
    and routing of claims transactions on behalf of not just
    commercial payers, but also Blue Cross Blue Shield payers,
    Medicare and Medicaid, and the return electronic remittance from
    the payers back to the originating provider. We plan to continue
    to expand, through internal development and acquisitions, the
    transaction services we provide. See Healthcare
    Information Services and Technology Solutions  WebMD
    Envoy below and  Increased Outsourcing by
    Healthcare Payers above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The HIPAA Transaction Standards establish format
    and data content standards for the most common healthcare
    transactions. In order to implement the Transaction Standards,
    WebMD Envoy has made significant changes to its systems and the
    software it uses internally. Similarly, the implementation has
    required payers and providers to simultaneously implement
    changes to their systems and/or internal procedures. As a
    result, this implementation process and related testing has been
    an immense challenge for the healthcare industry, including
    WebMD. However, it also represents a great opportunity for the
    industry and for us, because it encourages payer/provider
    connectivity to evolve from its current focus on the sending and
    receiving of claims to automating ancillary transactions, such
    as eligibility, status or remittance. As a leading clearinghouse
    for healthcare transactions and a leading vendor of physician
    office management information systems, WebMD has been the focus
    of a great deal of scrutiny in the implementation process and
    has received some criticism for difficulties encountered by our
    customers and for delays in our correcting some of those
    problems. Given the nature and scope of the changes being
    implemented, the large number of healthcare industry
    participants involved and our position in the industry, we
    expected that there would be some processing problems and
    delays. We continue to work diligently to identify and resolve
    these problems as they occur, while at the same time committing
    significant resources to keeping the implementation process
    moving forward. We are also working to foster communication
    among healthcare industry participants regarding how to achieve
    the intended benefits of the Transaction Standards with as
    little disruption to healthcare payment systems as possible. We
    have been incurring, and expect to continue to incur,
    significant expenses relating to the Transaction Standards
    implementation, including for testing, quality assurance and
    customer service activities. For more information regarding the
    challenges involved in such implementation and a description of
    the HIPAA regulations, see Business  Government
    Regulation  Health Insurance Portability and
    Accountability Act of 1996  Transaction
    Standards below.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased Use of the Internet by Physicians
    and as a Source of Health Information for
    Consumers.According to a Pew
    Internet & American Life Project Survey published in
    December 2003, approximately seven million American
    consumers look for health information on the Internet each day.
    WebMD Health is a leading destination on the Internet for these
    consumers. See Healthcare Information Services and
    Technology Solutions  WebMD Health below. The
    Internet allows us

7



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to offer consumers the resources they are looking
    for, with immediate access to searchable information and dynamic
    interactive content. As a result, WebMD Health enables its
    sponsors, including pharmaceutical and medical device companies,
    to reach targeted consumers when they are looking for answers to
    healthcare questions and to reach physicians when they are
    exploring new treatment options. As recently noted by a
    Commissioner of the United States Food and Drug Administration:
    The evidence shows that promotions directed to consumers
    can play an especially important role in helping patients start
    a discussion with their health care practitioner about
    conditions that are often unrecognized and therefore
    undertreated, such as diabetes, high blood pressure, high
    cholesterol, and depression. Physicians are also
    increasingly turning to the Internet for professional
    activities. In 2003, physicians and healthcare professionals
    earned 629,000 continuing medical education credits at Medscape,
    an increase of 93% over 2002. Pharmaceutical companies and
    medical device manufacturers currently spend only a very small
    portion of their marketing and educational budgets on online
    media. Our strategy is to seek a greater portion of these
    budgets.

As discussed above and in the
Business section below, we intend to continue to
invest in new products and services and in improving our
existing products and services, both through internal
development activities and, in certain cases, through
acquisitions. We make these investments based on our assessments
of the needs of our customers and potential customers, including
the trends described above. However, the market for healthcare
in the United States is highly complicated, and there can be no
assurance that the trends identified above will continue or that
the intended benefits to WebMD from our responses to those
trends will be achieved. In addition, the markets for healthcare
information services and technology solutions are highly
competitive and not only are our existing competitors seeking to
benefit from these same trends, but the trends may also attract
additional competitors. See Healthcare Information
Services and Technology Solutions  Competition for
Our Healthcare Information Services and Technology
Solutions below.

Recent Developments

On March 4, 2004, WebMD sold
$100 million of Convertible Redeemable Exchangeable
Preferred Stock in a private transaction to CalPERS/PCG
Corporate Partners, LLC. CalPERS/PCG is a private equity fund
managed by the Pacific Corporate Group and principally backed by
California Public Employees Retirement System, or CalPERS.
Transfer of the Preferred Stock is subject to restrictions and
holders may not engage in hedging transactions with respect to
WebMD common stock.

The Preferred Stock ranks senior to WebMD common
stock with respect to rights upon liquidation, winding-up or
dissolution. The Preferred Stock has a liquidation preference of
$100 million in the aggregate and $10,000 per share. The
Preferred Stock is convertible into 10,638,297 shares of
WebMD common stock in the aggregate, representing a conversion
price of $9.40 per share of common stock. We may not redeem the
Preferred Stock prior to March 2007. Thereafter, we may redeem
any portion of the Preferred Stock at 105% of its liquidation
preference; provided that any redemption by us prior to March
2008 shall be subject to the condition that the average closing
sale prices of WebMD common stock is at least $13.16 per share,
subject to adjustment. We are required to redeem all shares of
the Preferred Stock then outstanding in March 2012, at a
redemption price equal to the liquidation preference, payable in
cash or, at our option, in shares of WebMD common stock. Upon
the occurrence of certain events constituting a change in
control of WebMD or certain significant acquisitions by WebMD of
businesses that are not related or complementary to its
businesses, holders of the Preferred Stock will have the right
to put their shares to WebMD at a purchase price equal to the
liquidation preference of the Preferred Stock.

If the average closing sales price of WebMD
common stock during the three-month period ended on the fourth
anniversary of the issuance date is less than $7.50 per share,
holders of the Preferred Stock will have a right to exchange the
Preferred Stock into WebMDs 10% Subordinated Notes due
March 2010. The Notes may be redeemed, in whole or in part, at
any time thereafter at WebMDs option at a price equal to
105% of the principal amount of Notes being redeemed.

8



---



##### Table of Contents



Holders of Preferred Stock will not receive any
dividends unless the holders of common stock do, in which case
holders of Preferred Stock will be entitled to receive ordinary
dividends in an amount equal to the ordinary dividends the
holders of Preferred Stock would have received had they
converted such Preferred Stock into common stock immediately
prior to the record date for such dividend distribution. So long
as the Preferred Stock remains outstanding, WebMD is required to
pay a quarterly fee to CalPERS/PCG of 0.35% of the face amount
of the then outstanding Preferred Stock.

We have agreed that we will not, without the
prior written consent of holders of 75% of the shares of
Preferred Stock then outstanding, issue any additional shares of
Preferred Stock or create any other class or series of capital
stock that ranks equal or senior to the Preferred Stock. We also
have agreed to use our reasonable best efforts to amend our
charter at our next Annual Meeting of Stockholders to provide
that the holders of the shares of Preferred Stock will have the
right to vote, together with the holders of WebMD common stock,
on matters that are put to a vote of holders of WebMD common
stock, with holders of Preferred Stock having the right to cast
the number of votes that could be cast by a holder of the WebMD
common stock into which the Preferred Stock would be convertible
immediately prior to the record date for the vote.

Holders of the shares of WebMD common stock
issued upon conversion of the Preferred Stock and any shares of
the WebMD common stock issued upon satisfaction of our right to
redeem Preferred Stock will have certain registration rights in
respect of their shares of common stock, beginning in March 2006.

WebMD intends to use the net proceeds from the
private placement for general corporate purposes, which may
include acquisitions.

9



---



##### Table of Contents



HEALTHCARE INFORMATION SERVICES AND TECHNOLOGY
SOLUTIONS

There are many types of transactions, information
exchanges and other communications that occur between the
various participants in the healthcare industry, including
physicians, patients, pharmacies, dentists, hospitals, billing
services, commercial health insurance companies, pharmacy
benefit management companies, managed care organizations, state
and federal government agencies and others. We offer a
comprehensive suite of transaction and information services and
technology solutions to healthcare industry participants. These
integrated and stand-alone products and services are designed to
facilitate transactions, information exchange and communication
among healthcare industry participants and to operate on various
platforms, including the Internet, private intranets and other
networks.




WebMD Health

Overview

WebMD Health, our Portal Services segment, offers
a variety of online resources and services for consumers and
healthcare professionals, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Health, our consumer portal, which is
    located at www.webmd.com. WebMD Health provides access to
    health and wellness content. We also distribute our content, and
    reach additional consumers, through AOL Health with WebMD and
    MSN Health with WebMD. In addition, WebMD Health offers paid
    subscription services that provide consumers with access to
    interactive tools, personalized in-depth content and expertise
    from leaders in their fields.
|
| |  | Medscape from WebMD,our portal for physicians and allied healthcare professionals,
    which is located at www.medscape.com. At Medscape,
    physicians and other healthcare professionals have access to
    resources that include timely medical news and professional
    conference coverage, continuing medical education activities,
    full-text medical journal articles and drug and medical
    literature databases.                                                    

We also license our content to health plans and
other healthcare partners for use on their Web sites, in some
cases as part of providing a co-branded site and in some cases
on a private label basis under the partners branding.

We reach a large audience of health-involved
consumers and clinically active healthcare professionals. We
work closely with pharmaceutical, medical device and other
healthcare companies to develop innovative online channels of
communication to our audience, or specific portions of our
audience, that complement their offline education, marketing and
customer service programs. These companies can sponsor specific
pages or sections of our portals or specific events, programs
and newsletters, all of which are clearly labeled as sourced
from or sponsored by the specific sponsor. In addition, sponsors
can reach specific demographic groups, condition-specific groups
or specialty-specific groups through our portals and through
newsletters that members have requested based on their
interests. Performance of our sponsored programs, including the
aggregate number of impressions, visitors and actions taken, is
tracked and reported to the sponsor on a regular basis.

Through our WebMD Health Services business, we
provide web-based tools and applications to employers and health
plans for use by their employees and plan members. These tools
and services provide a framework for better decision-making by
healthcare consumers and can assist employers and plans in
managing demand while improving quality of care.

We generate the majority of our Portal Services
revenue by selling sponsorships of specific pages, sections or
events on our portals and related e-mailed newsletters, by
selling advertising on our portals and the online and offline
properties of our strategic partners, and by licensing our
content and our online tools and related software and services.
Historically, the majority of our Portal Services revenues have
come from a small number of companies. Our WebMD Health
customers include pharmaceutical, biotech and

10



---



##### Table of Contents



medical device companies, employers and health
plans and media distribution companies. WebMD Health also
receives a small portion of its revenues from the sale of paid
subscription services.


WebMD Health Consumer Portal

General.Consumer
interest in convenient and reliable sources of general
information on health and wellness topics continues to grow. In
addition, consumers increasingly seek to educate themselves
about available treatment options for specific health conditions
or injuries. We believe that these trends are likely to
continue, as consumers are asked to bear an increasingly large
share of their healthcare expenditures due to changes in the
design of the medical plans and prescription drug plans being
offered by payers and employers. Traditional media have sought
to meet this demand by introducing magazines focused on health
and wellness and by increasing news coverage of
healthcare-related issues. The Internet allows us to offer
consumers the resources they are looking for, with immediate
access to searchable information and dynamic interactive content.

WebMD Health provides access to health and
wellness news and information, support communities, interactive
tools and opportunities to purchase health-related products and
services. There are no membership fees and no general usage
charges for the site; however, we do charge usage or
subscription fees for some premium content and services. See
 WebMD Health Subscription Services below.

Content Offerings.The content and service offerings on WebMD Health include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Original and Licensed
    Content.We offer proprietary,
    medically reviewed health and wellness news articles written
    daily by our staff of journalists. We also offer searchable
    access to a library of health and wellness articles, reference
    information and interactive presentations, some of which we own
    and some of which we have licensed from others. Our articles and
    other content cover various health-related topics, including:
    specific diseases and chronic health conditions, medical tests,
    pregnancy and parenting, diet and nutrition, fitness and sports
    medicine, and sexuality and relationships.
|
| |  | Membership.Consumers can choose to become members of WebMD Health, which
    allows them to make use of certain WebMD interactive content and
    services. Members can also select from more than 32 different
    e-mail newsletters on health-related topics or specific
    conditions and have access to our communities and events, as
    described below. We have built a large consumer membership, most
    of whom have chosen to receive our clinical alerts, newsletters
    and reports on specific diseases, conditions and other health
    and wellness topics.                                                                             
|
| |  | Communities.Our
    communities allow our members to participate in real-time
    discussions in our chat rooms and on our message boards. Members
    can share experiences and exchange information with other
    members who share their health condition or concern. Members can
    also use our Ask the Experts service to post their
    health questions for experts.                                                                                                                                                                                                                                                                             
|
| |  | Events.Our events
    include one-time programs and series in which experts make
    presentations and answer questions on specific health-related
    topics. Our events also include WebMD University programs, which
    are four week courses, live moderated by experts, on specific
    subjects. WebMD University programs have included: Take Charge
    of Your Diabetes; Feeding Your Self, Feeding Your Baby; Alive
    and Well, Taking Charge of Your Breast Cancer Treatments; and
    Stories of Survivors, Your Breast Cancer Guide.                                                                                                         
|
| |  | Interactive Personal Health Management Tools
    and Other Features.We provide access
    to interactive tools, calculators, quizzes and illustrated
    guides and slide shows on health topics. Our interactive tools
    include a pregnancy calendar, body mass index tool and a calorie
    counter. Our slide shows cover topics such as mammograms, fetal
    positions and common visual problems.                                                                                                                                                                                                                                                   
|
| |  | Physician Directory and Related
    Services.WebMD Health also has
    features that allow consumers to search for a physician or
    clinic in their area. The WebMD Physician Directory contains
    information on practicing physicians throughout the
    U.S. Users can search for a doctor by location                                                                                                                                                                                                                                                                                                                                                

11



---



##### Table of Contents



| |  |                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | or specialty and based on HMO or hospital
    affiliations. The WebMD Physician Directory is provided by The
    Little Blue Book, which was acquired by WebMD in 2003. See
     Physician Directory Services below.

WebMD Health Subscription
Services.WebMD Health also offers the
following paid subscription services, which provide access to
exclusive interactive tools, personalized in-depth content and
expertise from leaders in their fields:



| |   |                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Health
    Manager.We offer, on a subscription
    basis to individual consumers, a suite of healthcare
    decision-making tools and related services, which includes some
    of those we license to health plans and employers for use by
    their members and employees. See  WebMD Health
    Services Group below.
|
| |  | WebMD Weight Loss
    Clinic.The WebMD Weight Loss Clinic
    is a subscription service that provides members with a
    customized eating plan based on individual food preferences and
    other information and resources relating to weight loss.                                                                             
|
| |  | WebMD Fertility
    Center.The WebMD Fertility Center
    provides information, tools and personalized e-mail reminders
    relating to fertility, conception and pregnancy.                                                                                                                                                      



| |                    
| | -------------------
| | Medscape from WebMD

Medscape from WebMDis designed to meet the information needs of medical
professionals. Medscape from WebMD is organized by
medical specialty area, such as hematology-oncology and
cardiology, to make it easier for members to access the
information most relevant to them. We also have areas organized
by profession or interest area, including sites for nurses,
pharmacists, medical students, users interested in medical
policy and practice management issues, and members with a
particular interest in technology and medicine. Our extensive
and up-to-date medical content and easy-to-use search
capabilities assist medical professionals in keeping abreast of
medical advances and obtaining fast, accurate answers to medical
questions online. There are no membership fees and no general
usage charges for the site; however, we do charge usage or
subscription fees for some premium content and services.

Our content and service offerings, a combination
of original material and content licensed from major
professional publishers, are generally presented by specialty
and include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuing Medical Education
    (CME).More than 30 states and
    many medical specialty societies require physicians and selected
    other medical professionals to certify annually that they have
    accumulated a minimum number of CME hours to maintain licensure
    or membership. We offer a selection of free, regularly updated
    CME activities for physicians, registered nurses, pharmacists
    and other healthcare professionals, including original programs
    and online multimedia adaptations of live events. In addition,
    our CME Live offerings provide real time webcasts of CME
    programs on key topics and conditions, designed to educate
    healthcare professionals about timely clinical issues. These
    webcasts combine streaming audio and slide presentations and
    allow participants to interact with faculty. We also provide
    services that track CME credits accumulated through our site for
    our users. Many of our CME-certified programs also carry
    Continuing Education (CE) credit for nurses and/or
    pharmacists.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our CME activities have been planned and
    implemented in accordance with the Essential Areas and Policies
    of the Accreditation Council for Continuing Medical Education,
    or ACCME, which oversees providers of CME credit, and have been
    produced in collaboration with ACCME-accredited CME providers.
    In August 2002, ACCME awarded Medscape a two-year, provisional
    accreditation as a CME provider, allowing Medscape to certify
    online CME activities, which Medscape now does for most of its
    CME programs. We are currently in the process of seeking full
    accreditation.
|
| | In July 2002, Pharmaceutical Research and
    Manufacturers of America (PhRMA), a trade association of
    pharmaceutical manufacturers, instituted a new voluntary Code on
    Interactions with                                                                                                                                                                                                                                                                                                                                                                                                                         

12



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Healthcare Professionals, which outlined
    guidelines for how sales representatives and others involved in
    marketing pharmaceuticals should interact with healthcare
    professionals. The PhRMA Code is intended to help ensure that
    these interactions benefit patients and enhance the practice of
    medicine and to avoid concerns about inappropriate influence on
    the prescribing practices of physicians. The PhRMA Code provides
    that these interactions should not consist of entertainment,
    dining or recreation, but should focus on informing the
    healthcare professional about scientific and clinical
    information and supporting research and education. While
    providing subsidies directly to healthcare professionals for
    travel, lodging and other expenses of attending CME or
    scientific conferences is no longer permitted, sponsorship or
    underwriting of CME programs or conferences continues to be. We
    believe that the guidelines contained in this Code are likely to
    benefit providers of online CME and other online informational
    materials for healthcare professionals, such as Medscape, as
    pharmaceutical manufacturers seek efficient, effective and
    appropriate sponsorships and channels of communication.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Newsletters.Members
    receive MedPulse, our weekly e-mail newsletter, which is
    published in more than 25 specialty-specific editions and
    highlights new information and CME activities on the Medscape
    site of interest to each particular specialty. We also provide
    commercially supported Special Reports newsletters,
    which contain information on specific conditions and treatments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Medical Conference
    Coverage.We provide overviews and
    analysis of key data and presentations from about 150
    professional meetings each year, including major conferences in
    a variety of specialties. This benefits our members who were
    unable to attend and those who did attend but might not have
    been able to see all of the presentations of interest to them,
    as well as the sponsors of the conferences, by increasing the
    size of the audience exposed to this material. We cover a number
    of these conferences in collaboration with the societies and
    organizations that present them.                                                                                                                                                                                                                                                         
|
| |  | Medical News and Clinical
    Alerts.We provide original, daily
    medical news stories written by our staff of journalists and
    reviewed by our staff of physicians, in addition to news
    provided by professional wire services. Our news group also
    regularly produces analytical reports based on interviews with
    experts and newsmakers. In addition, we provide real-time alerts
    on such critical clinical issues as pharmaceutical recalls and
    product advisories.                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Resource Centers.Resource Centers are regularly updated collections of clinical
    content, selected by Medscapes editors, focused on a
    specific topic, condition or theme. Content includes news,
    journal articles, conference coverage, expert columns and CME
    programs. Medscape currently has more than 60 Resource Centers
    across multiple specialties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Electronic Journals.Medscape publishes an original electronic-only journal,
    Medscape General Medicine (MedGenMed), indexed in
    the National Library of Medicines MEDLINE reference
    database. MedGenMed, the worlds first online-only,
    primary source, peer-reviewed general medical journal, was
    established in April 1999. As of March 2004, it had published
    more than 1,100 papers. Since December 2002, MedGenMed at
    www.medgenmed.com has included specialty sections for HIV-AIDS,
    Gastroenterology, Hematology-Oncology, Pulmonary Medicine,
    OB-Gyn and Womens Health, Orthopedics and Sports Medicine
    and Psychiatry/ Mental Health, Neurology, and Technology and
    Medicine. Medscape also publishes Topics in Advanced Practice
    Nursing, which is indexed in CINAHL, the Cumulative Index of
    Nursing and Allied Health Literature.
|
| |  | Medscape Publishers
    Circle.Medscape Publishers
    Circle is a collection of high-quality clinical information from
    prominent medical publishers, available free to registered
    Medscape members.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Medical Reference
    Applications.Our medical reference
    applications include access to various medically related
    databases and abstracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Medical Reference
    Services.These services include the
    professional medical reference texts ACP Medicine
    (formerly WebMD Scientific American®
    Medicine) and ACS Surgery: Principles and Practice
    (formerly Scientific American Surgery), each available
    for sale by subscription to individual physicians and to
    institutions in multiple formats (print, CD-ROM and Online).
    ACP Medicine has                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

13



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | been a comprehensive and continually updated
    internal medicine reference for 25 years. ACP
    Medicine and ACS Surgeryare official publications of
    the American College of Physicians and the American College of
    Surgeons, respectively, although wholly owned by WebMD.

Users must register as members to utilize the
features of Medscape from WebMD. This enables us to
deliver targeted medical content based on our members
registration profiles. The registration process enables
professional members to choose a home page tailored to their
medical specialty or interest. For example, a member registered
as a cardiologist is automatically directed to Medscape
Cardiology, rather than a more generic home page.

WebMD Health Services Group

Through the WebMD Health Services Group, formerly
known as WellMed, we provide employers and healthcare plans with
a suite of online tools and related services called the WebMD
Health Hub. The WebMD Health Hub integrates health and wellness
content, a personal medical record, health assessment tools,
decision support tools, health improvement programs and targeted
messaging. The WebMD Health Hub provides a framework for better
decision-making by healthcare consumers and allows employers and
health plans to manage demand, while improving the quality of
care and reducing administrative and communication costs. We
receive fees from employers for use of our applications and
services by their employees, and from health plans for use by
their members. The WebMD Health Hub is also distributed through
relationships with providers of benefits-related services as a
part of their own offerings to employers.

WebMD Health Hub applications are integrated into
the clients Intranet or Web site and work with the
clients specific health and benefit programs, disease
management vendors and other health-related systems and content
and can be co-branded or customized to match client branding and
look and feel. The core products and applications
that make up the WebMD Health Hub are Personal Health Manager,
Personal Health Insight, Personal Health Decisions and HubX:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Personal Health
    Manageris a suite of consumer
    applications that provides a personalized framework to manage
    health, wellness and benefit information and facilitate healthy
    behavior, including health risk and condition assessment tools,
    an online personal health record and health and lifestyle
    improvement programs.                                                                                                     
|
| |  | Personal Health
    Insightis an online service center
    that provides specialized decision-support for clients,
    including aggregated information regarding utilization of the
    WebMD Health Services platform and results of messaging
    campaigns. With Personal Health Insight, employers and plans can
    analyze aggregate health data in real time, address population
    health risks and proactively implement preventive programs.
|
| |  | Personal Health
    Decisionsis a set of benefit
    decision-support applications that explain benefit plan choices
    and facilitate informed selection and use of those benefits.                                                                                                                                                                                                                                                                   
|
| |  | HubXis a platform
    that integrates employer or plan applications and data into the
    WebMD Health Hub. In addition, the HubX Data Interchange option
    provides functionality to import data, such as healthcare claims
    and medication claims, for greater personalization and targeted
    messaging and to export self-reported information from the WebMD
    Health Hub to care providers.                                               

By educating and encouraging their employees and
plan members to take a more active role in their healthcare,
employers and plans can realize cost savings from more informed
decision-making, while also improving healthcare outcomes. Other
potential benefits to an employer or plan include efficiently
identifying and enrolling candidates in disease management or
other health management programs.

Physician Directory Services

In 2003, we acquired the company that publishes
The Little Blue Book, a leading source of practice contact
information for physicians since 1988. The pocket-sized
reference book is published annually in 146 distinct
metropolitan editions. Physicians utilize it for local and
up-to-date physician information. All physicians are listed free
of charge in their local metropolitan-area edition, along with
their specialties,

14



---



##### Table of Contents



HMO affiliations, hospital affiliations, office
addresses, telephone numbers and Medicare-assigned Unique
Physician Identification Number (UPIN). The database used to
create The Little Blue Book contains practice information on
approximately 400,000 practicing physicians. WebMD Health
receives revenues from sales of The Little Blue Book, as well as
from sponsors and advertisers in those books, most of whom are
pharmaceutical companies. Pharmaceutical companies also purchase
copies of The Little Blue Book for distribution to physicians.
In addition, we use the database to provide physician
information on the consumer portal. We also publish and sell to
physicians The Little Yellow Book, a directory of
physicians fax and e-mail information for 146 metropolitan
areas.


Sales and Marketing

A team of sales, marketing and account management
personnel represents WebMD Health and Medscape from WebMD
to pharmaceutical companies, medical device companies, health
plans and other healthcare and consumer companies. These
individuals work closely with clients and potential clients to
develop innovative means of using our portals to bring their
companies, and their products and services, to the attention of
target groups of consumers and healthcare professionals and to
create channels of communication with these audiences.

A separate team of sales, marketing and account
management personnel represents WebMD Health Services Group to
employers and health plans. These individuals customize our
services for each client according to the clients specific
plan design and business objectives. We also promote and
distribute WebMD Health Services Group through relationships
with employee benefits consultants and other companies that
assist employers in purchasing or managing employee benefits.

We seek to attract traffic and new members to
WebMD Health through a variety of methods, including online and
offline media campaigns. The primary focus of our media
campaigns has been member registration. We promote WebMD
Healths subscription services through our consumer portal
and our e-mailed newsletters.

We seek to attract traffic and new members to
Medscape through a variety of methods, including advertising on
other Internet sites and in medical journals, pharmaceutical and
other healthcare publications and other targeted publications.
We also promote Medscape at industry conferences, trade shows
and medical meetings and by using direct mail.



---

WebMD Envoy

Overview

To ensure timely reimbursement and comply with
managed care requirements, healthcare providers must interact
effectively with healthcare payers from the first point of
patient contact until final payment has been received.
Unfortunately, in these interactions, providers and payers often
juggle a confusing combination of electronic and manual
processes, phone calls and faxes, and disparate software
systems. WebMD Envoy, our Transaction Services segment, provides
an electronic link between payers and providers that allows them
to conduct medical, pharmacy and dental transactions
electronically. However, WebMD Envoy provides much more than
just a clearinghouse connection  we provide
electronic reimbursement cycle management solutions that can be
used by payers and providers to automate the entire
reimbursement process. In addition, as a complement to our
electronic transmission services, our WebMD ExpressBill
operations provide print-and-mail services to providers,
including patient statement processing, and, through Advanced
Business Fulfillment, Inc., which we acquired in July 2003, we
provide healthcare paid-claims communications services for
third-party administrators and health insurers, including
print-and-mail services for the distribution of checks,
remittance advice, and explanations of benefits. We also provide
connectivity and tools for automating clinical functions.

The customers for WebMD Envoys services
consist of healthcare providers, such as physician offices,
dental offices, billing services, national laboratories,
pharmacies, hospitals, and healthcare payers, including Medicare
and Medicaid agencies, Blue Cross and Blue Shield organizations,
pharmacy benefit management companies, commercial health
insurance companies and managed care organizations.

15



---



##### Table of Contents



Healthcare payers and providers pay fees to us
for our services, generally on a per transaction basis or, in
the case of some providers, as a flat rate per month.
Transaction fees vary according to the type of transaction and
other factors, such as volume level commitments. We may also
charge one-time implementation fees to providers and payers. A
significant portion of our WebMD Envoy revenues come from the
countrys leading national and regional healthcare payers.


We work with numerous medical and dental practice
management system vendors, hospital information system vendors
and other service providers to provide integrated transaction
processing between their systems and our clearinghouse. Most
practice management and hospital information systems support,
and can be integrated with, WebMD Envoy transaction services.
Many practice management system vendors, including WebMD
Practice Services, market a private label brand of our
transaction services that they have integrated with their
systems. We pay a sales commission, based on volume, to some of
these vendors as an inducement to use WebMD Envoy. We have
long-standing relationships with many vendors of practice
management systems. Medifax-EDI, which we acquired at the end of
2003, has similar relationships with vendors of hospital
information systems. We work together with these vendors to
increase the percentage of healthcare transactions that are
handled electronically.

EDI Transaction Services

General.We provide
our payer and provider customers connectivity and transaction
services through an integrated electronic transaction processing
system, which includes proprietary software, host computer
hardware, network management, switching services and interfaces.
We refer to these services as electronic data interchange, or
EDI. Our EDI transaction services reduce paperwork and the need
for communication by mail, telephone and fax, resulting in cost
savings for payers and providers. These services also expedite
the reimbursement process, which can result in a lower average
number of outstanding accounts receivable days for providers. A
further benefit to payers is that they are able to more easily
detect fraud and screen for unusual utilization trends.

Providers access our transaction services both
directly and through their relationships with integrated
delivery networks, clinics, physician and dental practice
management system vendors, hospital information management
system vendors, and retail pharmacy chains. Providers initiate
transactions using our proprietary applications, their practice
management systems or other computer systems or networks.
Providers submit transactions to our clearinghouse by modem
connections using regular telephone lines, using dedicated high
speed telecommunications services and over the Internet. At our
clearinghouse, the transaction is edited for accuracy, validated
for format and completeness, then translated in accordance with
the payers specifications and sent to the payers
claims adjudication and/or real-time database systems.

We maintain direct connections with many
healthcare payers, including Medicare contractors and Medicaid
agencies, Blue Cross and Blue Shield organizations, commercial
health insurance companies, pharmacy benefit management
companies and managed care organizations. Our direct payer
connectivity facilitates high levels of service by minimizing
the number of intermediaries between the provider and the payer.
Our direct connections with payers typically consist of
dedicated networks between the payer and our clearinghouse. Most
transactions are currently transmitted to the payers using our
proprietary software and dedicated telephone lines, with some
transmitted securely over the Internet. Other clearinghouses
also use our services to transmit transactions that they have
received from providers to payers. We make payments, based on
volume, to some of these clearinghouses as an inducement to use
WebMD Envoy to complete the transactions submitted through their
systems.

Medical and Dental Administrative
Services.Our medical and dental
administrative services provide the connectivity and transaction
processing services needed for providers and payers in the
healthcare

16



---



##### Table of Contents



industry to automate key business functions and
communicate with each other. WebMD Envoy provides connectivity
throughout the healthcare reimbursement cycle:




| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | beginning with insurance eligibility verification,                            
|
| |  | continuing through the claim submission process,                              
|
| |  | followed by tracking the reimbursement through
    claim status inquiries, and
|
| |  | concluding with electronic remittance information
    and payment posting.    

Providers can submit real-time or batch claims to
us for processing and reimbursement by payers and inquire as to
the status of claims previously submitted. Most claims are
submitted to us as batch claims, which are collected by
providers throughout the day and submitted to us in bulk. We
then sort, format and edit the claims to meet each particular
payers requirements before transmission to the payer.
Providers can receive an electronic remittance advice which
provides payer payment information and an explanation of the
settlement of a related claim. Providers can also use our
services to verify patient enrollment and eligibility and to
obtain authorization from payers, at the point of care, for
services and referrals to other providers. Our acquisition of
Medifax-EDI at the end of 2003 has strengthened our service
offerings for these types of transactions.

Our all-payer suite of services
includes the capture, validation and routing of claims
transactions on behalf of not just commercial payers, but also
Blue Cross Blue Shield payers, Medicare and Medicaid.
Additionally, our all-payer services include the return of an
electronic remittance transaction, which is the equivalent of a
paper explanation of benefits, or EOB, from all the payers back
to the originating provider. The goal is to provide a single
source EDI reimbursement cycle management solution for providers
and practice management system vendors. A single EDI solution
reduces administrative burdens on the provider office in sending
claims transactions and receiving electronic remittance advice
transactions and, more importantly, allows us to provide a
single report back to the provider office regarding those
transactions. That, in turn, allows the provider office to
determine more easily whether it has been paid on a particular
claim and how much. Provider offices without such a solution
typically receive five or more different reports that they then
have to reconcile in order to manage their accounts receivable.
Implementation of our all-payer services has
presented technical, operational and customer service challenges
and has resulted in a large increase in the amount of
transactions we transmit to Blue Cross Blue Shield payers,
Medicare and Medicaid which, in certain cases, has caused
service delays. In addition, this implementation, happening
together with the implementation of the HIPAA Transaction
Standards, has required, and continues to require, system
upgrades, additional programming and changes in our processes
and procedures. We have been incurring, and expect to continue
to incur, significant expenses relating to the
all-payer implementation, including system upgrades
and testing and related quality assurance activities.

We provide various products designed to assist
healthcare providers and payers in utilizing our administrative
services, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Office.Through our WebMD Office Internet-based service, providers can
    securely access our transaction services through either a
    standard dial-up or high speed DSL or cable modem. WebMD Office
    can be used as a stand-alone system or as a complement to a
    practice management system through an import and data management
    function that allows transactions to be generated from the
    practice management system and submitted through WebMD Office.
    In addition, our practice management system vendor partners may
    elect to market a private-label brand version of WebMD Office.
|
| |  | AccuClaim Plus.Our
    AccuClaim Plus solution is designed for the claims submission
    processes of hospitals and large physician practices. AccuClaim
    Plus interfaces with their existing management systems,
    importing claim files and subjecting them to payer-specific
    edits, prompting users to correct claim errors prior to
    submission to payers in order to minimize the claim rejection
    rate while increasing the first pass and auto-adjudication rate
    at the payers adjudication system.                                                                                             

17



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | WebMD Empower.WebMD
    Empower is an EDI-enabling software and data hosting solution
    that gives healthcare payers the ability to automate
    communication with their providers through our network, using
    our infrastructure. WebMD Empower takes claims data submitted to
    the WebMD Envoy clearinghouse, applies value-added editing,
    including checks against payer-specific business rules and data,
    and sends it directly to the payers information system.
    For real-time transactions, WebMD Empower works by downloading
    appropriate eligibility, provider, benefit,
    referral/authorization and claims data from the payers
    system onto our server. Downloads are performed periodically or
    in real time as information in the payers database is
    updated.
|
| |  | Medifax Assistant.Medifax Assistant integrates with hospital information systems
    (HIS) to automate various registration activities such as
    insurance eligibility verification, credit checking and address
    verification. Medifax Assistant can be configured to
    automatically perform real-time tasks during patient
    registration. This saves the registration staff time by
    eliminating the need to use separate systems for registration
    and for eligibility verification. The eligibility response can
    be automatically stored within the patient record as a permanent
    reference.                                                                                                                                                                                         
|
| |  | Medifax Receivable
    Analysis.Medifax Receivable Analysis
    is an electronic screening service designed to verify Medicaid
    and other forms of insurance eligibility in an electronic batch
    format. The healthcare provider submits a file electronically
    and the file is processed against the Medifax-EDI payer
    databases to determine eligibility. Medifax customers use this
    service to identify Medicaid and other forms of eligibility that
    may apply to patients who have been classified as not having
    coverage. The resulting reclassification often results in
    significant reimbursements.                                                                                                                                                                           

Pharmacy Administrative
Services.A typical pharmacy benefit
transaction takes place in a real-time setting using a pharmacy
management system or other claim submission product. The claim
is submitted to WebMD Envoy in a standard format and includes
all required information about the prescription. The claim is
then routed to the appropriate adjudicating processor where the
claim is processed within seconds. Response information includes
patient coverage, formulary compliance (specific drug coverage),
potential drug interactions, patients co-payment due and
anticipated reimbursement amount due to the pharmacy from the
payer. Final dollar amounts due to the pharmacy are typically
paid by the payer 15-30 days after claim submission.

Lab Ordering and Reporting
Services.We provide clinical lab
ordering and reporting services through WebMD Clinician, our
Internet-based product. This product supports the ordering of
clinical tests and the reporting of test results between
healthcare providers and labs. WebMD Clinician reduces costs and
improves the quality of patient care by improving order entry
accuracy and expediting the delivery of lab results, while
enhancing the ability to share those results with multiple
physicians. In addition, we provide similar services to practice
management system vendors, hospital information system vendors
and electronic medical record vendors through an application
programming interface known as Clinician eXT.

Other Communications Services

ABF.In July 2003,
WebMD Envoy acquired Advanced Business Fulfillment, Inc., which
we refer to as ABF, a provider of healthcare paid-claims
communication services for healthcare payers. ABFs
operations are supported by proprietary software and systems
that allow healthcare payers to outsource print-and-mail
activities by sending an electronic feed to ABF. By outsourcing
these services to ABF, its clients can reduce operating costs
and capital expenditures. ABFs systems include a Web-based
suite of management tools to facilitate the printing and mailing
of checks and remittance advice to providers and EOBs to plan
members. These management tools allow clients to control the
processes they have outsourced to ABF and to access archived
data from their desktops. ABF has worked closely with leading
claims processing system vendors to allow its software to
interface with their systems. In return for marketing ABFs
post-adjudication services and for the creation and maintenance
of an ABF-specific data extract, ABF makes periodic payments to
vendor partners based on transaction volumes.

Healthpayers USA is ABFs proprietary
program to cross-consolidate provider mail in order to create
savings in postal costs for its clients. Healthpayers USA
screens, sorts and consolidates mail from any

18



---



##### Table of Contents



number of its clients destined for a single
provider into one package and automatically produces a recipient
cover sheet that itemizes the contents. ABF and its clients
share the resulting postal savings.


WebMD ExpressBill.Through WebMD ExpressBill, we provide print-and-mail services to
healthcare practitioners, hospitals and high volume commercial
customers throughout the United States. WebMD ExpressBill
accepts client data via modem or the Internet, generates printed
materials and prepares them for mailing. Our WebMD ExpressBill
services include:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patient Mailings.On
    behalf of healthcare provider customers, we print invoices,
    account statements, collection letters, recall notices and other
    communications and mail them to patients.       
|
| |  | Paper Claims.Claims
    that cannot be sent electronically to payers can be sent by
    healthcare providers electronically to WebMD ExpressBill, where
    we print and mail them on their behalf.          
|
| |  | Payment Processing.We process payments on behalf of providers and other customers,
    receiving and depositing checks, posting payments and
    transmitting funds in accordance with customer instructions.
|
| |  | Electronic Payment
    Services.Our electronic payment
    services offer healthcare providers the ability to receive
    payment via the Internet.                                                          

HIPAA

Under the Healthcare Insurance Portability and
Accountability Act of 1996, or HIPAA, Congress mandated a
package of interlocking administrative simplification rules,
including rules to establish standards and requirements for the
electronic transmission of certain health information, which we
refer to as the Transaction Standards. As a supplier of
EDI-enabling products and connectivity services to patients,
payers, providers and third party vendors, WebMD Envoy is
affected by many of the HIPAA provisions, including the
Transaction Standards.

In order to implement the Transaction Standards,
WebMD Envoy has made and continues to make significant changes
to its systems and the software it uses internally. Similarly,
the implementation has required payers and providers to
simultaneously implement changes to their systems and/or
internal procedures. As a result, this implementation process
and related testing has been an immense challenge for the
healthcare industry, including WebMD. However, it also
represents a great opportunity for the industry and for us,
because it encourages payer/provider connectivity to evolve from
its current focus on the sending and receiving of claims to
automating ancillary transactions, such as eligibility, status
or remittance.

We believe that, even though the intent of HIPAA
was to make electronic transactions more standardized, the use
of clearinghouses will continue to be the most efficient way for
most providers to send their electronic claims and related
transactions to multiple payers. The standardization resulting
from implementation of Transaction Standards is only partial:
payer systems and requirements continue to vary in certain
respects even after HIPAA implementation and will continue to
evolve and change in the future. Payers have published
approximately 440 Companion Guides setting forth
their individual interpretations of the Transaction Standards
and that number can be expected to continue to grow. These
payer-specific interpretations require us to perform extensive
customized programming and related testing. Another source of
the implementation challenges resulting from the Transaction
Standards is the increase in computing capacity required. The
Transaction Standards formats are much larger than the
pre-existing ones. We are utilizing more computing capacity than
we had anticipated. As a result, our systems have experienced
inefficiencies that have resulted in processing delays. Another
difficulty for us and our provider customers results from the
fact that the Transaction Standards cover not only transaction
formats, but also required content, including some content not
previously collected by most providers. We continue to work with
payers, providers, practice management system vendors and other
healthcare participants to implement the Transaction Standards.
For more information regarding challenges involved in such
implementation and a description of the HIPAA regulations, see
Business  Government Regulation 
Health Insurance Portability and Accountability Act of
1996 below.

19



---



##### Table of Contents



Sales and Marketing

Our WebMD Envoy sales and marketing efforts are
conducted by sales, marketing and account management personnel
located throughout the United States. We participate in trade
shows and use direct mail and various advertising media to
promote our services.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We promote our EDI services to organizations that
    have relationships with or access to a large number of
    providers, such as practice management systems vendors, hospital
    information systems vendors, practice management companies and
    other clearinghouses. In certain cases, we agree to pay a sales
    commission based on transaction volume to these organizations as
    an inducement to use WebMD Envoy as the clearinghouse for the
    transactions made through their systems or by providers with
    which they have relationships.
|
| |  | We also market our EDI services directly to
    healthcare payers, as well as to small and large physician
    practices, dentists, hospitals and other healthcare providers.
    We offer our payer customers the opportunity to work with us in
    targeted programs to educate physicians and dentists to increase
    the utilization of electronic services. When a payer agrees to
    participate in such a program, WebMD utilizes information
    supplied by the payer to target providers that may not be
    sending claims electronically.           
|
| |  | In the pharmacy EDI area, WebMD Envoy has
    established relationships with large retail pharmacy chains and
    pharmacy software vendors.                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In the post-adjudication services area, we have
    established relationships with vendors of claims processing
    software. Our ABF account management personnel also market
    directly to healthcare payers and, as part of their sales
    effort, provide potential clients with an operational audit and
    identify the efficiencies that we believe we can help them
    achieve.                                                                                                                                                                       



---

WebMD Practice Services

Overview

WebMD Practice Services, our Physician Services
segment, develops and markets information technology systems for
healthcare providers, primarily under The Medical Manager,
Intergy, ULTIA and Medical Manager Network Services brands. Our
systems include administrative and financial applications that
enable healthcare providers and their administrative personnel
to manage their practices more efficiently and clinical
applications that assist them in delivering quality patient
care. These applications and related services:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | automate scheduling, billing, receivables
    management and other administrative and financial management
    tasks,       
|
| |  | enable providers to maintain electronic medical
    records and to automate the documentation of patient
    encounters, and
|
| |  | facilitate the use of electronic data interchange
    for administrative and clinical healthcare transactions.              

We expect that most of our future sales of
practice management systems will be Intergy systems. However, we
intend to continue to develop and support The Medical Manager
system, which is currently the most widely used physician
practice management system in the United States.

Healthcare providers pay us a one-time license
fee for the purchase of a license to our software or to
additional software modules and for system hardware and also pay
us recurring fees for the maintenance and support of our
software. Many providers also pay us recurring fees for the
provision of hardware support and maintenance. Pricing depends
on several factors, including the number and type of modules to

20



---



##### Table of Contents



be licensed, the number of users per site, the
number of practices, the operating system, the hardware to be
supported and the complexity of the installation. Healthcare
providers pay us fees for our Medical Manager Network Services
transactions services, generally on a per provider per month
subscription basis or a per transaction basis.


Practice Management Systems

Intergy.Intergy,
our new practice management software product, is the result of a
significant, multi-year commitment to engineering and
development of a completely new practice management system. The
Intergy systems graphical user interface
(GUI) packages complex medical practice functions into
easy-to-navigate windows with consistent point-and-click drop
down menus and buttons. The Intergy software operates on Windows
and UNIX based servers, together with Windows based workstations.

Intergy systems are scalable to meet the needs of
a wide variety of healthcare provider settings, from small
physician groups to large clinics, and across various medical
specialties. Customers can purchase a base system and then add
additional modules and services over time to expand their use of
technology as needed. The Intergy base package allows an office
to automate appointment scheduling and recalls, registration,
encounter form management, billing, collections and other
administrative and financial functions. The Intergy system also
has a customizable security system, with access to functions and
features that can be defined for each user based on practice
policies and procedures.

One of our optional Intergy administrative and
financial modules is the managed care system, which provides
functions required to track incoming and outgoing referrals to
facilities and specialists and to provide risk management
capabilities. The managed care system assists providers in
automating referral management, capitation payment posting, and
contract management and profitability tracking. The system is
designed to work in all managed care scenarios, including
primary and specialty care. Optional clinical modules include
imaging systems, tools that can be used to create and maintain
electronic medical records and automate the documentation of
patient encounters at the point of care, manage clinical
workflow, write and send electronic prescriptions, and request
and review laboratory tests and results. We believe that there
is a significant opportunity to increase the use by physician
practices of electronic medical record systems and are focusing
on cross-selling these products and services to our existing
customers and as part of our new systems sales. See
 EMR and Imaging Systems below for
descriptions of these products and services. Intergy users can
also elect to implement some or all of the integrated products
and services described below under  Additional
Products and Services, including our ULTIA handheld
wireless device and our Medical Manager Network Services
connectivity services.

The Medical Manager.The Medical Manager system provides physician practices with a
broad range of patient care and practice management features. We
also offer The Medical Manager system in customized versions to
meet the functionality needs of public health and community
health markets and family planning clinics and intend to
continue to market The Medical Manager system in these formats.

The Medical Manager softwares base package
serves as the foundation of the system and includes an
appointment scheduler, billing system, financial management
system and other features. Additional modules containing
advanced administrative and financial features are also
available, including automated collections, advanced billing and
multiple resource scheduling and managed care modules. The
Medical Manager system also has optional electronic medical
record and document and image management system products. See
 EMR and Imaging Systems below. The
Medical Manager users can elect to implement some or all of the
integrated products and services described below under
 Additional Products and Services,
including our ULTIA handheld wireless device and our Medical
Manager Network Services connectivity services.

Other Practice Management
Systems.Through our acquisitions of
various businesses, we have also obtained ownership of other
practice management systems with smaller user bases, including
the practice management systems previously owned by Physician
Computer Network, Inc., or PCN. We currently support these other
systems and may provide periodic updates to the users of some of
these systems. We face competition for the support services we
market to users of these practice management systems. See

21



---



##### Table of Contents



Competition for Our Healthcare Information
Services and Technology Solutions below. In addition,
although we seek to market our Intergy practice management
system to these customers when they are evaluating the purchase
of a new system, we face competition from numerous other vendors
of practice management systems. If our existing customers choose
a practice management system from a competing vendor, they will
no longer need support services from us. Loss of a significant
number of these customers could have a material adverse effect
on our Practice Services revenues.


Medical Manager Network Services

Our practice management systems support
integrated use of our WebMD Envoy EDI services through Medical
Manager Network Services. For a description of WebMD
Envoys EDI services, see WebMD Envoy above.
The administrative transactions supported include electronic
claims, claims status inquiry, eligibility verification,
electronic referral authorization/status, patient statements and
remittances. We also provide connectivity to laboratories,
pharmacies, third party connectivity networks and hospitals and
credit card authorization services. Users of our practice
management systems can also choose third party EDI transaction
service providers to transmit their transactions.

Through Medical Manager Network Services,
providers have access to EDI functionality that is integrated
into their practice management workflow and recordkeeping
systems. Integrated EDI allows providers and their staff to send
and receive EDI transactions from within the practice management
system and to generate reports regarding these transactions,
including whether submitted claims have been accepted or
rejected. These capabilities can be combined with our
all-payer suite of transaction services to provide a
single-source electronic reimbursement management solution (see
WebMD Envoy above). In addition, our systems allow
automated eligibility verification by contacting payers
electronically overnight so that the practice can start the day
with pre-checked eligibility and benefits for each scheduled
patient. This information is stored as part of the
patients record. In addition, eligibility checking for
unscheduled patients can be performed in real time.

As discussed more fully under
 Government Regulation  Health
Insurance Portability and Accountability Act of 1996 
Transaction Standards below, the process of implementing
the HIPAA Transaction Standards has been an immense challenge
for the healthcare industry, including WebMD. However, it also
represents a great opportunity for the industry and for us
because it encourages payer/provider connectivity to evolve from
its current focus on the sending and receiving of claims to
automating ancillary transactions, such as eligibility, status
or remittance. Implementation of our all-payer
services has also presented technical, operational and customer
service challenges. See  WebMD Envoy  EDI
Transaction Services  Medical and Dental
Administrative Services above. We continue to work
diligently to identify and resolve any service problems as they
occur. We are also working to foster communication among
healthcare industry participants regarding how to achieve the
intended benefits of the Transaction Standards with as little
disruption to healthcare payment systems as possible. We have
been incurring, and expect to continue to incur, significant
expenses relating to the Transaction Standards and
all-payer implementations, including for testing,
quality assurance and customer service activities.

Medical Manager Network Services also provides
integrated access to our WebMD ExpressBill print-and-mail
services for patient statements, collection notices and recall
notices. Practices transmit the required data from Intergy or
The Medical Manager systems to our processing center. From
there, customized statements, letters and inserts and complete
mailing services are provided. Customization options include
logos and patient education inserts.

EMR and Imaging Systems

Healthcare providers record, use and share
various types of clinical data about their patients, including
patient histories, examination notes, lab results, medication
orders and referrals. Much of this data is currently recorded in
handwritten or printed form on paper records, often referred to
as patient charts. As the amount of patient information
maintained by a practice increases, so do the logistical
challenges of

22



---



##### Table of Contents



moving paper charts from site to site and
physician to physician. Many healthcare organizations are
finding that the most promising solution to this challenge is
the use of electronic medical record, or EMR, and imaging
systems. These systems allow providers to share patient charts
and other medical records, access them simultaneously and view
them from remote locations. EMR systems not only help healthcare
providers enhance clinical processes and patient safety, they
also assist them in sharing information appropriately and
efficiently and in collecting and managing the data necessary to
meet the requirements of third-party billing procedures and
contractual requirements.


Our suite of EMR applications allows healthcare
providers that use Intergy or The Medical Manager practice
management systems to computerize their patient records without
disrupting the way they practice medicine. We also provide
technical assistance and support that helps the practice
transition from the paper chart to the fully electronic medical
record. Our encounter documentation module automates the
documentation of a patient encounter at the point of care. This
product allows healthcare providers to generate progress
notes  and estimated evaluation and management
service levels  simply by pointing and clicking on
the findings appropriate to a patient exam, reducing the need
for transcription services and enhancing the accuracy of
documentation of care provided. Customization tools allow the
practice to create pre-defined, disease-specific templates, with
lists of symptoms or other information that can be easily
completed at any workstation.

Our EMR suite includes a prescription module that
automates the process of writing and tracking prescriptions,
providing improved efficiency with both the clinical and
administrative aspects of the prescription process. The
resulting prescription can be printed or called in to the
patients preferred pharmacy. With optional services
through Medical Manager Network Services, practices can perform
full drug utilization review (DUR) screenings, transmit
prescriptions electronically to connected pharmacies, and verify
formulary compliance with the patients health plan.

Our Laboratory System module allows providers to
access, review and maintain all lab results from within the EMR
system. Practices may also arrange a sponsorship through
national and regional laboratories to place orders and receive
accurate and timely lab test results via a direct,
bi-directional link with the sponsoring laboratory. Test results
are received electronically from the sponsoring laboratory and
are stored directly in the patients file for viewing,
printing and analysis.

Using our EMR applications, healthcare providers
can locate all tasks needing their attention. For example, items
on the providers clinical task list are automatically
generated whenever a lab report is ready, a transcription needs
to be signed, or a prescription refill needs approval. Tasks can
then be completed using the system or forwarded to another
provider in the practice, accompanied by appropriate notes.

We also offer our Document Image Management
(DIM) system, which is fully integrated with our Intergy
and The Medical Manager practice management systems. The DIM
system allows a practice to scan, store, catalog and retrieve
documents, images and sound files in electronic form, which then
becomes part of the patients medical record and can be
accessed from multiple workstations simultaneously.
DIMDX, the diagnostic version of our imaging system,
allows a practice to organize and store X-rays and other
diagnostic images. Using an imaging system, multiple files can
be viewed at the same time making it possible to view diagnostic
reports alongside images or compare before-and-after images such
as pre- and post-operative X-rays.

Our Digital Office Manager module provides
additional capabilities for the scanning and organization of
documents that are practice-related rather than
patient-specific. Documentation such as contracts and personnel
records are easily and efficiently managed with the Digital
Office Manager, which can handle video, Adobe®
Acrobat® and sound files as well as spreadsheets and word
processing documents.

23



---



##### Table of Contents



Additional Products and Services

Maintenance and Support
Services.We separately sell software
support and maintenance services and hardware maintenance
services to our customers. Through our software support and
maintenance services, we:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide customers with access to our telephone
    help desk, typically advising customers in the use and operation
    of our software and services and remotely accessing
    customers systems to provide support, and
|
| |  | in some cases, provide periodic releases to our
    software to customers.                                                                                                                                                

Through our hardware maintenance services, we
typically provide customers with on-site hardware technical
service and, if necessary, the replacement of hardware
components that fail to function properly. Our contracts for
maintenance and support services are generally up to one year in
duration. Our customers may decide whether or not to purchase
maintenance and support services from us. In addition, some of
these services are also available from third party providers.
See  Competition for Our Healthcare Information
Services and Technology Solutions below. We cannot provide
assurance regarding the levels at which our customers will
continue to purchase maintenance and support services after the
expiration of existing contracts.

ULTIA Handheld
Solution.Healthcare providers are
becoming increasingly aware of the benefits of using wireless
handheld computers in their practices. ULTIA, our handheld
point-of-care solution, combines the power of our clinical and
administrative systems with the convenience of mobile handheld
connectivity. ULTIA runs on a handheld device, such as a
Compaq®iPaq®. From anywhere in the office, healthcare
providers can use ULTIA with a wireless local area network, or
LAN, to access information stored within, or to enter data into,
the Intergy or The Medical Manager system, giving them instant
access at the point-of-care to:



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | appointment schedules, hospital rounds
    information and clinical tasks needing the providers
    attention;                                                                                                                                                                                                                                     
|
| |  | a user-friendly electronic prescription writer,
    with integrated DUR and formulary checking, which electronically
    submits prescriptions to the patients chosen pharmacy and,
    at the same time, adds prescription information directly to the
    patients electronic medical record in the Intergy or The
    Medical Manager software;
|
| |  | electronic lab ordering and reporting of results
    that can be viewed using ULTIA, available through the Intergy or
    The Medical Manager system in the providers office;                                                                                                                                                                      
|
| |  | their patients electronic medical records,
    including demographic data, progress notes, medications, lab
    results, procedure histories and other information and
    transcribed patient documentation; and                                                                                                                                  
|
| |  | a fully customized encounter form for capturing
    patient charges, which displays procedure and diagnosis codes in
    customized checklists and automatically posts charge information
    to the practice management system.                                                                                                                    

Physicians can also use ULTIA to digitally record
dictation and then send the voice file electronically for
transcription, reducing the number of devices the physician has
to carry and reducing turn-around time.

In addition, ULTIA provides a range of offsite
functionality that can be used at hospitals and other remote
locations. Using the wireless LAN connection, up to ten days of
hospital rounds and patient data can be downloaded to the
handheld device. This information is then accessible to the
provider when he or she is working at another location. The
provider can enter new data and capture patient charges, all of
which are then uploaded to The Medical Manager or Intergy system
when the provider returns to the office. Using ULTIA Online,
providers can access remotely, using a secure Internet
connection, the clinical, administrative and financial data on
the Intergy or The Medical Manager system in their office. See
 ULTIA Online below.

24



---



##### Table of Contents



ULTIA Online.ULTIA
Online allows physicians whose offices use the Intergy or The
Medical Manager practice management systems to remotely access,
via an encrypted Internet connection through our Medscape
portal, information contained in their offices practice
management system, including daily schedules, patient records
and clinical items that need their attention. This enables
physicians to view, in a secure manner, information residing on
their office-based computer system from any personal or handheld
computer with a connection to the Internet. The physician can
use this connection to send and receive secure email messages,
to write and send electronic prescriptions, or to create
laboratory orders and view test results. ULTIA Online also
provides access to Medscape health content and related services.
See  WebMD Health  Medscape from
WebMD above.

Remote Monitoring
System.Our Remote Monitoring System,
or RMS, allows for a pro-active approach to system support and
maintenance. Real-time connections allow us to monitor
installations of our Intergy and ULTIA systems for problems that
need immediate attention or for potential problems that are
likely to need attention in the near future or that are
adversely affecting system performance. RMS checks for
particular conditions on a fixed schedule. For example, when a
server has reached a defined percentage of capacity, an alert is
forwarded to us to analyze the situation. This type of
monitoring allows the system to be supported regardless of
whether our customers become aware of problems or report them.
In addition, if a required technical component has failed, we
will be alerted to take action without the time it takes for a
customer to call our help desk and have a support representative
analyze and address the issue. For example, RMS alerts us if a
prescription sits in the prescription queue for more than 15
minutes, thus notifying us of a potential system or connection
issue. That issue can then be immediately addressed, even if it
has not yet come to the attention of, or been reported by, our
customer. The RMS infrastructure can also be used as a
cost-effective means to deliver software updates and other
support.

InfoPOINT and
InfoCENTRAL.InfoPOINT, our decision
support and reporting application, is designed to provide timely
access to practice data for informed managerial decision-making
and to automate the process of generating reports using data
from The Medical Manager and Intergy systems. InfoPOINT also
provides access to tools to analyze that data and to export it
to other applications. InfoCENTRAL is a flexible data warehouse
solution, designed to support ambulatory healthcare
organizations such as group practices, managed care
organizations and physician services organizations. InfoCENTRAL
consolidates financial, administrative, clinical and other data
and manages the interface to the practice management system.

Sales and Marketing

We market and distribute our WebMD Practice
Services systems and related services nationally through a
direct sales organization, who are also supported by field
technicians and training and support personnel. We also
participate in trade shows and use direct mail and various
advertising media to promote our systems and services. In the
past few years, we have acquired a significant number of
independent dealers of The Medical Manager software and
independent dealers no longer constitute a significant sales and
marketing channel for our software. We believe that the
acquisition of independent dealers and resellers has enabled us
to establish direct relationships with end users of our software
products, providing us with an opportunity to offer a wider
range of products and services to these end users.



---

Competition for Our Healthcare Information
Services and Technology Solutions

The markets for healthcare information services
and technology solutions are intensely competitive, continually
evolving and, in some cases, subject to rapid technological
change. We have many competitors, including:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | healthcare information system vendors and support
    providers, including physician practice management system and
    EMR system vendors and support providers;

25



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | transaction processing companies, including those
    providing EDI and/or Internet-based services and those providing
    services through other means, such as paper and fax;                                                        
|
| |  | large information technology consulting service
    providers;                                                                                                                                                                         
|
| |  | online services, portals or Web sites targeted to
    the healthcare industry, healthcare consumers and/or physicians
    generally, including both commercial sites and not-for-profit
    sites;                                     
|
| |  | consortiums of health insurance companies and of
    pharmacy benefit management companies that have announced that
    they are developing electronic transaction services for use by
    their members and other potential customers;
|
| |  | publishers and distributors of traditional
    offline media, including those targeted to healthcare
    professionals, many of which have established or may establish
    their own Web sites or partner with other Web sites;       
|
| |  | general purpose consumer online services and
    portals and other high-traffic Web sites that provide access to
    healthcare-related content and services;                                                                          
|
| |  | public sector and non-profit Web sites that
    provide healthcare information without advertising or commercial
    sponsorships; and                                                                                                 
|
| |  | vendors of healthcare information, products and
    services distributed through other means, including direct
    sales, mail and fax messaging.                                                                                      

We also compete, in some cases, with alliances
formed by the above competitors. Major software, hardware and
information systems companies, both with and without healthcare
companies as their partners, offer or have announced their
intention to offer products or services that are competitive
with some of ours. Competitors for one or more of our healthcare
information services and technology solutions include, among
others, Amicore (a joint venture of IBM Corporation, Microsoft
Corporation and Pfizer, Inc.), Allscripts Healthcare Solutions,
Eclipsys Corporation, First Consulting Group, Inc., General
Electric Corporation, IDX Systems Corporation, iVillage Inc.,
McKesson Corporation, Misys plc, NDCHealth Corporation, Per-Se
Technologies, Inc., ProxyMed, Inc., Quality Systems, Inc.,
Siemens Corporation, TriZetto Group, Inc. and VitalWorks Inc.
Many of our competitors have greater financial, technical,
product development, marketing and other resources than we do.
These organizations may be better known than we are and have
more customers than we do. We cannot provide assurance that we
will be able to compete successfully against these organizations
or any alliances they have formed or may form.

Some of our existing payer and provider customers
and some of our strategic partners may compete with us or plan
to do so or belong to alliances that compete with us or plan to
do so. For example, some payers currently offer, through
affiliated clearinghouses, Web portals and other means,
electronic data transmission services to healthcare providers
that allow the provider to have a direct connection to the
payer, bypassing third party EDI service providers such as WebMD
Envoy. Any significant increase in the utilization of direct
links between healthcare providers and payers could have a
material adverse effect on our business and results of
operations. We cannot provide assurance that we will be able to
maintain our existing links to payers or develop new connections
on satisfactory terms, if at all. In addition, some of our other
services allow healthcare payers to outsource business processes
that they have been or could be performing for themselves and,
in order for us to be able to compete, use of our services must
be more efficient than use of internal resources.

WebMD Health faces competition both in attracting
members and visitor traffic and in generating revenue from
sponsors and others. We compete with numerous companies and
organizations for the attention of healthcare professionals and
consumers including traditional offline media such as network
and cable television, print journals, conferences, continuing
medical education programs and symposia. We also face
significant competition from online information resources. There
are many healthcare-related Web sites on the Internet. In
addition, there are many companies that provide non- Internet
based marketing and advertising services to the healthcare
industry. These competitors include advertising agencies,
consulting firms, marketing and communications companies and
contract sales and marketing organiza-

26



---



##### Table of Contents



tions. In addition, to the extent that we are
successful in increasing revenue from our portals, competition
for our portals audience and the potential sources of revenue
are likely to increase.


WebMD Practices Services faces competition for
the support services it markets to owners of The Medical Manager
and Intergy practice management systems, as well as for similar
services that we market to owners of certain other practice
management systems that we have acquired. See WebMD
Practice Services  Additional Products and
Services  Maintenance and Support Services and
WebMD Practice Services  Practice Management
Systems  Other Practice Management Systems
above. Physician practices may seek such support from third
parties, including businesses that support or manage information
technology for various types of clients and businesses that
specialize in physician office management systems, some of whom
may formerly have been independent dealers of The Medical
Manager software or of practice management systems we have
acquired. We cannot provide assurance that we will be able to
compete successfully against these service providers. In
addition, some physician practices, especially larger ones, may
use their own employees and other internal resources to support
their practice management systems.

POREX

Overview

Our plastic technologies segment is known as
Porex. Through Porex, we develop, manufacture and distribute
proprietary porous plastic products and components used in
healthcare, industrial and consumer applications. Porex also
works with porous structures using other materials such as fiber
and membranes. Our Porex customers include both end-users of its
finished products as well as manufacturers that include our
components in their products, which we refer to as original
equipment manufacturers or OEMs.

Porex is an international business with
manufacturing operations in North America, Europe and Asia.
Porexs global sales and customer service network markets
its products to customers in more than 65 countries. In 2003,
Porex derived approximately 57% of its revenues from the United
States, approximately 29% from Europe, approximately 11% from
Asia and approximately 3% from Canada and Latin America.

Porex Products

Porous Plastics.Porous plastics are permeable plastic structures having
omni-directional (porous in all directions) inter-connecting
pores to permit the flow of fluids and gases. These pores,
depending upon the number and size, control the flow of liquids
and gases. We manufacture porous plastics with pore sizes
between approximately 1 and 500 micrometers. One micrometer is
equal to one-millionth of a meter; an object of 40 micrometers
in size is about as small as can be discerned by the naked eye.
Our ability to control pore size provides the opportunity to
serve numerous applications, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Filtering.In
    filtration applications, the pore structure acts as both a
    surface filter and a depth filter. The structure acts as a
    surface filter by trapping particles larger than its average
    pore size and as a depth filter by trapping much smaller
    particles deep in its complex channels. Unlike the direct
    passages in woven synthetic materials and metal screens, the
    pores in porous plastics join to form many tortuous paths.
    Examples of these applications include: filters for drinking
    water purification, air filters, fuel filters for power tools
    and appliances and other liquid filters for clarification of
    drugs, blood separation and chemicals.
|
| |  | Venting.In venting
    applications, the pore structure allows gases to easily escape
    while retaining fluids. Examples of these applications include:
    vents for medical devices, printers and automotive batteries;
    and caps and closures.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Wicking.When used
    as a wicking device, the pore structure creates capillary
    channels for liquid transfer allowing fluid to flow, or wick,
    from a reservoir. Examples of these applications include: nibs
    or tips for writing instruments, such as highlighters and
    coloring markers; fluid delivery components for printers and
    copiers; fragrance wicks; and absorbent media for diagnostic
    testing.                                                                                                                                                                                                                                                                                    

27



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Diffusing.When used
    in diffusion applications, porous plastic components emit a
    multitude of small, evenly distributed bubbles. Examples of
    these applications include air diffusers for fermentation, metal
    finishing and plating.                       
|
| |  | Muffling.In
    muffling applications, exhaust air is channeled through a
    tortuous path, causing significant sound reduction by breaking
    up and diffusing the sound waves. Examples of these applications
    include industrial mufflers for pneumatic equipment.

We produce porous plastic components and products
in our own manufacturing facilities, which are equipped to
manufacture products for our customers in custom-molded shapes,
sheets, tubes or rods, depending on customer needs.

Other Porous Media.We believe that, in some applications, fiber and other porous
membranes are preferred over our standard porous plastic
materials. We use fiber technology for applications requiring
high flow rates. Based on the same principles used in making our
standard porous plastic products, fibers are thermally bonded
into a matrix. This fiber material is well-suited for use in
filtration and wicking applications, including our products for
the consumer fragrance market. We also use sub-micron porous
polytetrafluoroethylene, or PTFE, membranes to serve product
markets where porous plastics do not have the physical
properties to meet application demands. PTFE material is
commonly known as Teflon®.

Markets for Our Porous Plastic
Products.Our porous plastic products
are used in healthcare, consumer and industrial applications,
including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Healthcare Products.We manufacture a variety of porous plastic components for the
    healthcare industry that are incorporated into the products of
    other manufacturers. These components are used to vent or
    diffuse gases or fluids and are used as membrane supports,
    including catheter vents, self-sealing valves in surgical vacuum
    canisters, fluid filtration components and components for
    diagnostic devices.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We also use proprietary porous plastic technology
    to produce Medpor® implants for use in aesthetic and
    reconstructive surgery of the head and face. These permanent
    implants, which are composed of biocompatible porous
    high-density plastics, allow for rapid growth of the
    patients tissue and capillary blood vessels. Since the
    initial product introduction in 1985, we have continued to
    introduce new products to meet the markets needs for a
    variety of shapes, sizes and uses of porous plastic implants.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consumer Products.Our porous plastics are used in a variety of office and home
    products. These products include writing instrument tips, or
    nibs, which we supply to manufacturers of
    highlighting pens and childrens coloring markers. The
    porous nib conducts the ink stored in the pen barrel to the
    writing surface by capillary action. Our porous plastic
    components are also found in products such as air fresheners,
    power tool dust canisters and computer printers. We also produce
    a variety of porous plastic water filters used to improve the
    taste and safety of drinking water.
|
| |  | Industrial Products.We manufactures a variety of custom porous plastic components
    for industrial applications, designed to customer specifications
    as to size, rigidity, porosity and other needs, including
    automobile battery vents and various types of filters and
    filtration components.                                                                                                                                                                                                                                                                                                                          

Operating Room
Products.We also produce two product
lines for the operating room supplies market: surgical markers
and surgical drainage systems.

Competition

Porex operates in competitive markets and its
products are, in general, used in applications that are affected
by technological change and product obsolescence. The
competitors for Porexs porous plastic products include
other producers of porous plastic materials as well as companies
that manufacture and sell products made from materials other
than porous plastics that can be used for the same purposes as
Porexs products. For example, Porexs porous plastic
pen nibs compete with felt and fiber tips manufactured by a
variety of suppliers worldwide. Other Porex porous plastic
products compete, depending

28



---



##### Table of Contents



on the application, with membrane material,
porous metals, metal screens, fiberglass tubes, pleated paper,
resin-impregnated felt, ceramics and other substances and
devices. Porexs competitors include, among others, Pall
Corporation, Millipore Corporation, Filtrona (a division of
Bunzl plc), Porvair plc and Whatman plc. The MEDPOR®
Biomaterial products compete for surgical use against autogenous
and allograph materials and alloplastic biomaterials.
Porexs surgical drains and markers compete against a
variety of products from several manufacturers.


Some of Porexs competitors may have greater
financial, technical, product development, marketing and other
resources than Porex does. We cannot provide assurance that
Porex will be able to compete successfully against these
companies or against particular products and services they
provide or may provide in the future.

Raw Materials

The principal raw materials used by Porex include
a variety of plastic resins that are generally available from a
number of suppliers. Some of Porexs products also require
high-grade plastic resins with specific properties as raw
materials. While Porex has not experienced any material
difficulty in obtaining adequate supplies of high-grade plastic
resins that meet its requirements, it relies on a limited number
of sources for some of these plastic resins. If Porex
experiences a reduction or interruption in supply from these
sources, it may not be able to access alternative sources of
supply within a reasonable period of time or at commercially
reasonable rates, which could have a material adverse effect on
its business and financial results.

Marketing

Sales and marketing of our porous plastic
products are conducted by a sales and marketing team of
professionals with in-depth knowledge of plastic technologies.
Marketing activities include advertising in various trade
publications and directories and participating at tradeshows.
Sales to OEM customers in the United States of our porous
plastic products are made directly by our sales and marketing
team. Internationally, these products are sold by our sales and
marketing team and through independent distributors and agents.

We sell our MEDPOR Biomaterial products directly
to medical centers, trauma centers, hospitals and private
practice surgeons using independent and direct sales
representatives. Internationally, these products are sold in
over 40 countries through local stock distributors. We provide
training, materials and other support to the sales
representatives and distributors. Market awareness is primarily
achieved through exhibitions in conjunction with medical
specialty meetings, presentations by surgeons at medical
meetings, journal publication of clinical papers, a group
sponsored visiting speaker program and direct mail
programs. Journal advertising is placed on a selected basis and
we maintain an active database of contacts for targeted direct
mail programs.

EMPLOYEES

As of December 31, 2003, we had
approximately 5,635 employees, of which approximately 175 work
in our corporate headquarters or related functions,
approximately 2,230 are WebMD Envoy employees, approximately 430
are WebMD Health employees, approximately 2,200 are WebMD
Practice Services employees and approximately 600 are Porex
employees.

DEVELOPMENT AND ENGINEERING

We have developed internally and acquired through
acquisitions healthcare information services and technology
solutions products and services. Our development and engineering
expense totaled $43.0 million in 2003, $43.5 million
in 2002 and $43.6 million in 2001.

29



---



##### Table of Contents



The markets for some of our products and services
are characterized by rapid change and technological advances.
Our future success will depend, in part, upon our ability to
enhance our existing products and services, to respond
effectively to technological changes, and to introduce new and
newly integrated applications and technologies that address the
changing needs of our customers. Accordingly, we intend to
continue to make investments in development and engineering and
to recruit and hire experienced development personnel. However,
we cannot provide assurance that we will be able to successfully
complete the development of new products or services,
enhancements to existing products or services. Further, there
can be no assurance that products or technologies developed by
others will not adversely affect our competitive position or
render our products, services or technologies noncompetitive or
obsolete.

INTELLECTUAL PROPERTY

We rely upon a combination of patent, trade
secret, copyright and trademark laws, license agreements,
confidentiality procedures, employee and client nondisclosure
agreements and technical measures to protect the intellectual
property used in our businesses.

We use numerous trademarks, trade names and
service marks for healthcare information services and technology
solutions, including WebMD®, Web-MD®, WebMD
Health®, Digital Office Manager®,
DIMDX®, Envoy®, ExpressBill®,
Intergy®, Medifax®, Medifax-EDI®, Medscape®,
Medpulse®, Publishers Circle®, The Little Blue
BookTM, The Little Yellow BookTM, The
Medical Manager®, ULTIATM and WellMed®. In
addition, Porex uses trademarks and trade names, including
POREX®, Lateral-FloTM, MEDPOR®,
SQUEEZE-MARK®, and TLS®. We also use numerous other
registered and unregistered trademarks and service marks for our
various products and services. In addition to our trademark
registrations and applications, we have registered the domain
names webmd.com, my.webmd.com and
medscape.com and numerous other domain names that
either are or may be relevant to conducting our business. Our
inability to protect our marks and domain names adequately could
have a material adverse effect on our business and hurt us in
establishing and maintaining our brands.

We also rely on a variety of intellectual
property rights that we license from third parties, including
our Internet server software and healthcare content used on our
Web sites, as well as various products incorporated into our
physician practice management systems. These third party
licenses may not continue to be available to us on commercially
reasonable terms. Our loss of or inability to maintain or obtain
upgrades to any of these licenses could significantly harm us.
In addition, because we license content from third parties, we
may be exposed to copyright infringement actions if these
parties are subject to claims regarding the origin and ownership
of that content.

The steps we have taken to protect our
proprietary rights may not be adequate, and we may not be able
to secure trademark or service mark registrations for marks in
the United States or in foreign countries. Third parties may
infringe upon or misappropriate our copyrights, trademarks,
service marks and similar proprietary rights. In addition,
effective copyright and trademark protection may be unavailable
or limited in many foreign countries, and the global nature of
the Internet makes it impossible to control the ultimate
destination of our services. It is possible that competitors or
others will adopt product or service names similar to our names,
which could impede our efforts to build brand identity and
possibly lead to customer confusion. Moreover, because domain
names derive value from the individuals ability to
remember such names, our domain name will lose its value if, for
example, users begin to rely on mechanisms other than domain
names to access online resources. Our inability to protect our
marks and domain names adequately would hurt our ability to
establish and maintain our brands. In the future, litigation may
be necessary to enforce and protect our trade secrets,
copyrights and other intellectual property rights. Litigation
would divert management resources and be expensive and may not
effectively protect our intellectual property.

Substantial litigation regarding intellectual
property rights exists in the software industry, and we expect
that software products may be increasingly subject to third
party infringement claims as the number of competitors in our
industry grows and the functionality of products overlaps.
Although we believe that

30



---



##### Table of Contents



our products do not infringe on the intellectual
property rights of others, we cannot provide assurance that such
a claim will not be asserted against us in the future, or that a
license or similar agreement will be available on reasonable
terms in the event of an unfavorable ruling on any such claim.


We have several patents covering our software
technology. Due to the nature of our application software, we
believe that patent protection is less significant than our
ability to further develop, enhance and modify our current
services and products. However, any infringement or
misappropriation of our proprietary software and databases could
disadvantage us in our efforts to attract and retain customers
in a highly competitive market and could cause us to lose
revenue or incur substantial litigation expense. Moreover, in
recent years, there have been a large number of patents issued
in general and numerous patents issued related to Internet
business methods. While we are unaware of any patent the loss of
which would impact our ability to conduct our business, defense
of a patent infringement claim against us could divert
management and monetary resources, and an adverse judgment in
any such matter may negatively impact our ability to conduct our
business in the manner we desire.

Porex relies upon a combination of patent and
trade secret laws, license agreements, confidentiality
procedures, employee and client nondisclosure agreements and
technical measures in its efforts to protect its intellectual
property and proprietary rights. For example, Porex seeks to
protect its proprietary manufacturing technology by designing
and fabricating its own manufacturing equipment and molds. In
addition, in some cases, Porex has patented specific products
and processes and intends to do so in some instances in the
future. The majority of Porexs patents relate to porous
plastics and medical devices and medical device components.
Porex seeks to take appropriate steps to protect its
intellectual property and proprietary rights and intends to
defend those rights as may be necessary. However, we cannot
provide assurance that the steps it has taken to protect these
rights are adequate. In the future, litigation may be necessary
to enforce and protect those rights, which would divert
management resources, may be expensive and may not effectively
protect those rights.

GOVERNMENT REGULATION

The healthcare industry is highly regulated and
is subject to changing political, regulatory and other
influences. These factors affect the purchasing practices and
operations of healthcare organizations as well as the behavior
and attitudes of consumers. Federal and state legislatures and
agencies periodically consider programs to reform or revise the
United States healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare,
lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare
industry participants may respond by reducing their investments
or postponing investment decisions, including investments in our
products and services. We are unable to predict future proposals
with any certainty or to predict the effect they would have on
our businesses.

Existing laws and regulations could also create
liability, cause us to incur additional cost and restrict our
operations. Many healthcare laws are complex, applied broadly
and subject to interpretation by courts and other governmental
authorities. In addition, many existing healthcare laws and
regulations, when enacted, did not anticipate the healthcare
information services and technology solutions that we provide.
However, these laws and regulations may nonetheless be applied
to our products and services. Our failure, or the failure of our
business partners, to accurately anticipate the application of
these healthcare laws and regulations, or other failure to
comply, could create liability for us, result in adverse
publicity and negatively affect our businesses.

Health Insurance Portability and
Accountability Act of 1996

General.Under the
Health Insurance Portability and Accountability Act of 1996, or
HIPAA, Congress mandated a package of interlocking
administrative simplification rules to establish standards and

31



---



##### Table of Contents



requirements for the electronic transmission of
certain health information. The five rules published in final
form are:




| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Standards for Electronic Transactions,
    published August 17, 2000, which we refer to as the
    Transaction Standards;                              
|
| |  | the Standards for Privacy of Individually
    Identifiable Health Information, published December 28,
    2000, which we refer to as the Privacy Standards;
|
| |  | the Standard Unique Employer Identifier,
    published May 31, 2002;                                                                                       
|
| |  | the Health Insurance Reform: Security Standards,
    published February 20, 2003, which we refer to as the
    Security Standards; and                     
|
| |  | the Standard Unique Health Identifier for Health
    Care Providers, published January 23, 2004, which we refer
    to as the NPI Standard.                

These rules took or will take effect on
October 16, 2000, April 14, 2001, July 30, 2002,
April 21, 2003 and May 23, 2005, respectively, with
compliance by healthcare providers, healthcare clearinghouses
and large health plans required under the rules two years
following the respective effective dates. Small health plans are
given an additional year to comply. On December 27, 2001,
President Bush signed into law a one-year extension, to
October 16, 2003, of the date for complying with the HIPAA
Transaction Standards for any covered entity that submitted to
the Secretary of the United States Department of Health and
Human Services, or HHS, a plan of how the entity would come into
compliance with the requirements by that deadline.

Transaction
Standards.The Transaction Standards
establish format and data content standards for the most common
healthcare transactions, using technical standards promulgated
by recognized standards publishing organizations. These
transactions include healthcare claims, enrollment, payment and
eligibility. The Transaction Standards were intended to make it
easier for payers and providers to send and receive healthcare
transactions electronically, using specified formats. The
Transaction Standards are applicable to that portion of our
business involving the processing of healthcare transactions
among physicians, payers, patients and other healthcare industry
participants, including WebMD Envoy and Medical Manager Network
Services.

October 16, 2003 was the deadline for
covered entities to comply with the Transaction Standards.
Failure to comply with the Transaction Standards may subject
covered entities, including our WebMD Envoy clearinghouse, to
civil monetary penalties and possibly to criminal penalties.
However, the ability of each covered entity to comply is
dependent on compliance efforts by numerous other covered
entities. The Centers for Medicare & Medicaid Services,
or CMS, is responsible for enforcing the Transaction Standards.
On July 24, 2003, in response to concerns communicated to
CMS regarding the readiness of a significant portion of the
covered entities for the October 16 deadline and the
consequences to the healthcare industry if significant claim
processing problems occur at that time, CMS released its
Guidance on Compliance with HIPAA Transactions and Code
Sets After the October 16, 2003 Implementation
Deadline (which we refer to as the CMS Guidance). In
addition, on July 24, 2003, CMS officials participated in
an Open Door Forum teleconference during which they
provided additional clarification on planned enforcement
practices. CMS also urged the adoption of contingency
plans to help prevent disruptions in the healthcare
payment system. Under CMSs contingency plan for Medicare,
it will continue to accept claims in both HIPAA standard and
legacy formats, with the legacy formats to be accepted for a
period to be determined by CMS based upon a regular reassessment
of the readiness of its electronic trading partners.
In response, WebMD Envoy announced a contingency plan, pursuant
to which it continues to process HIPAA standard transactions
and, for a limited period of time, will also process legacy
transactions as appropriate based on the needs of our business
partners.

On February 27, 2004, CMS modified its
Medicare contingency plan to delay the payment of electronic
claims that are not HIPAA-compliant. Specifically, effective
July 1, 2004, only claims that are compliant with the
Transaction Standards are to be reported as electronic media
claims (EMC), which

32



---



##### Table of Contents



may be paid no earlier than after a 13 day
waiting period. All other claims (including both electronic
claims that are not compliant with the Transaction Standards, as
well as paper claims) may be paid no earlier than after a
26 day waiting period. Calling it a measured step
toward ending the contingency plan entirely, CMS
implemented the change to encourage providers to move more
quickly with their efforts to achieve HIPAA compliance. This
policy may provide an incentive for providers who cannot send
HIPAA standard claims from their desktop to use a clearinghouse,
such as WebMD Envoy, to do so.


CMS has made clear that it expects each party to
every transaction to be accountable for compliance with the new
standards as of October 16, 2003. However, the CMS Guidance
provides for a flexible, complaint-driven enforcement strategy.
CMS indicated that it will respond to complaints regarding
non-compliant transactions submitted to it in writing and that,
upon receipt of a complaint, CMS will notify the entity that a
complaint has been filed and provide an opportunity for the
entity to demonstrate compliance or to document its good faith
effort to comply with the standards. In evaluating good faith
efforts, CMS stated that it will consider not only the
entitys efforts on behalf of itself, but its
efforts  through outreach and testing  to
ensure that its trading partners are also in compliance. CMS
also noted that its expectations regarding compliance efforts
will vary with the size and type of covered entity. We
understand that CMS expects that larger organizations will have
more sophisticated compliance efforts and outreach to their
smaller trading partners.

We believe that the CMS enforcement approach
assisted in reducing disruptions in the flow of electronic
transactions that otherwise could have occurred in connection
with the October 16, 2003 deadline and that a smoother
transition benefits our company and the entire healthcare
industry. We continue to work with payers, providers, practice
management system vendors and other healthcare participants to
implement the Transaction Standards. Transaction clearinghouses
can provide a great deal of support for the healthcare industry
in addressing the requirements of the Transaction Standards and
in overcoming other connectivity challenges that HIPAA does not
eliminate. Even though the goal of HIPAA was to make electronic
transactions more standardized, the use of clearinghouses will
continue to be the most efficient way for most providers to send
their electronic claims and related transactions to multiple
payers. The standardization resulting from implementation of
HIPAA is only partial: payer systems and requirements continue
to vary in certain respects even after HIPAA implementation and
will continue to evolve and change in the future. Payers have
published approximately 440 Companion Guides setting
forth their individual interpretations of the Transaction
Standards and that number can be expected to continue to grow.
These payer-specific interpretations require us to perform
extensive customized programming and related testing.

Healthcare payers and providers who are unable to
exchange data in the required standard formats can achieve
Transaction Standards compliance by contracting with a
clearinghouse, like WebMD Envoy, to translate between standard
and non-standard formats. As a result, use of a clearinghouse
allows numerous providers and payers to move to the Transaction
Standards independently and at different times, reducing
transition costs and risks. As various healthcare entities are
in different stages of migration during the transition, WebMD
Envoy is working to translate claim information from
non-standard to standard formats and vice versa. In addition,
the Transaction Standards require healthcare providers to
collect and supply more information than they have in the past
in order to submit a healthcare claim. From October 16,
2003 to the date of this Annual Report, a large majority of the
claims we have received from submitters used legacy formats and
very few contained the additional data content provided for in
the Transaction Standards. Some providers who can submit claims
in the HIPAA standard formats cannot yet collect all of the data
payers may require to process the claim. In order to assist in
claims processing, our clearinghouse software edits the
information submitted in a claim using logic, mapping and
defaults. A small number of our submitters currently send some
additional HIPAA data content that does not yet pass through our
clearinghouse.

We cannot provide assurance regarding how CMS
will regulate clearinghouses in general or WebMD Envoy in
particular. In addition, even though major disruptions in the
flow of electronic transactions may be less likely in light of
CMSs current approach to enforcement of the Transaction
Standards, we have

33



---



##### Table of Contents



experienced isolated disruptions and some delays
and we expect there will continue to be some problems for a
period of time.


Implementation of the Transaction Standards has
presented us with significant technical and operational
challenges. For example, we are working with our trading
partners to complete quality assurance and testing on our
enhanced clearinghouse data services for transmitting additional
HIPAA data content. We do not plan to place these services into
full production until both our systems and payers
adjudication systems are capable of handling the production
volume of transactions with the additional data content. As with
any highly complex data transition involving significant
modifications to trading partner systems, we are experiencing
some problems during this process. Another aspect of the
implementation challenges resulting from the Transaction
Standards is the increase in computing capacity required. The
Transaction Standards formats are much larger than the
pre-existing ones. We are utilizing more computing capacity than
we had anticipated. As a result, our systems have experienced
inefficiencies that have resulted in processing delays. We seek
to resolve all such problems when identified, but testing
continues with numerous submitters and payers, and no assurance
can be given that we will identify all problems promptly or that
we will not continue to experience problems that delay the full
implementation of these enhanced data services. The costs to us
of dealing with those problems are inherently difficult to
estimate and may be more than we expect and/or continue for
longer than anticipated. In addition, most of our trading
partners are currently operating under their own contingency
plans and, accordingly, we would expect that there will be
further disruptions during the adjustment period that occurs
once CMS requires all applicable parties to perform in
accordance with the Transaction Standards. We may not have
enough technicians, programmers and customer service personnel
to meet the demands placed on those functions by our customers
and partners during the adjustment period, which could adversely
affect our relationships with them.

Privacy Standards.The Privacy Standards establish a set of basic national privacy
standards and fair information practices for the protection by
health plans, healthcare clearinghouses, healthcare providers
and their business associates of individually identifiable
health information. This rule became effective on April 14,
2001 and the compliance date for most entities was
April 14, 2003. The Privacy Standards apply to the portions
of our business that process healthcare transactions or provide
certain technical services to other participants in the
healthcare industry, and certain of our portal services may be
affected through contractual relationships. This rule provides
for civil and criminal liability for its breach and requires us,
our customers and our partners to use health information in a
highly restricted manner, to establish policies and procedures
to safeguard the information, to obtain individual
authorizations for some activities, and to provide certain
access rights to individuals. This rule may require us to incur
significant costs to change our products and services, may
restrict the manner in which we transmit and use the
information, and may adversely affect our ability to generate
revenue from the provision of de-identified information to third
parties. The effect of the Privacy Standards on our business is
difficult to predict and there can be no assurances that we will
adequately address the risks created by the Privacy Standards
and their implementation or that we will be able to take
advantage of any resulting opportunities. In addition, we are
unable to predict what changes to the Privacy Standards might be
made in the future or how those changes could affect our
business.

Unique Employer Identifier
Standard.The Unique Employer
Identifier Standard establishes a standard for identifying
employers in healthcare transactions where information about the
employer is transmitted electronically, as well as requirements
concerning its use by covered entities. This rule requires the
use of an employer identification number (EIN) as assigned
by the IRS on all standard transactions that require an employer
identifier to identify a person or entity as an employer. This
standard applies to the portions of our business that process
healthcare transactions or provide certain technical services to
other participants in the healthcare industry, and certain of
our portal services may be affected through contractual
relationships. Most participants in the healthcare industry must
be in compliance with the Unique Employer Identifier Standard by
July 30, 2004. The effect of the Unique Employer Identifier
Standard on our business is difficult to predict and there can
be no assurances that we will adequately

34



---



##### Table of Contents



address the risks created by the Unique Employer
Identifier Standard and its implementation or that we will be
able to take advantage of any resulting opportunities.


Security Standards.On February 20, 2003, HHS published the final Security
Standards. The Security Standards establish detailed
requirements for safeguarding patient information that is
electronically transmitted or electronically stored. The rule
establishes 42 implementation specifications, 20 of which are
required, meaning they must be implemented as
specified in the rule. Twenty-two are addressable.
Complying with addressable implementation specifications
requires a business to assess whether they constitute a
reasonable and appropriate safeguard for the particular
business; if not, an alternative approach must be designed and
implemented to achieve the particular standard. The Security
Standards apply to the portions of our business that process
healthcare transactions, that provide certain technical services
to other participants in the healthcare industry, or that enable
electronic communications of patient information among
healthcare industry participants, and certain of our portal
services may be affected through contractual relationships. Most
participants in the healthcare industry must be in compliance
with the Security Standards by April 21, 2005. Some of the
Security Standards are technical in nature, while others may be
addressed through policies and procedures for using information
systems. The Security Standards may require us to incur
significant costs in evaluating our products and in establishing
that our systems meet the 42 specifications. We are unable to
predict what changes might be made to the Security Standards
prior to the 2005 implementation deadline or how those changes
might help or hinder our business. The effect of the Security
Standards on our business is difficult to predict and there can
be no assurances that we will adequately address the risks
created by the Security Standards and their implementation or
that we will be able to take advantage of any resulting
opportunities.

NPI Standard.On
January 23, 2004, HHS published the final HIPAA standard
for a unique health identifier for health care providers,
commonly referred to as the National Provider Identifier (NPI)
Standard. The NPI Standard requires health care providers that
transmit any health information in electronic form in connection
with a HIPAA covered transaction to obtain a single, 10 position
all-numeric NPI from the National Provider System (NPS), and to
use the NPI in standard transactions where a provider identifier
is required. The NPI Standard requires health plans and health
care clearinghouses to use a providers NPI to identify the
provider on all standard transactions where that providers
identifier is required. The NPI Standard is effective
May 23, 2005. Most participants in the healthcare industry
must be in compliance with the NPI Standard by May 23,
2007. The effect of the NPI Standard is difficult to predict and
there can be no assurances that we will adequately address any
business risks created by the NPI rule and its implementation or
that we will be able to take advantage of any resulting business
opportunities.

Other Restrictions Regarding Confidentiality
and Privacy of Patient Information

Numerous state and federal laws other than HIPAA
govern the collection, dissemination, use, access to and
confidentiality of patient health information. In addition, some
states are considering new laws and regulations that further
protect the confidentiality of medical records or medical
information. These state laws are not in most cases preempted by
the HIPAA Privacy Standard and may be subject to interpretation
by various courts and other governmental authorities, thus
creating potentially complex compliance issues for us and our
customers and strategic partners. Definitions in the various
state and federal laws concerning what constitutes
individually identifiable data sometimes differ and
sometimes are not provided, creating further complexity. In
addition, determining whether data has been sufficiently
de-identified may require complex factual and statistical
analyses. The HIPAA Privacy Standards contain a restrictive
definition of de-identified information, which is information
that is not individually identifiable, that could create a new
standard of care for the industry. These other privacy laws at a
state or federal level, or new interpretations of these laws,
could create liability for us, could impose additional
operational requirements on our business, could affect the
manner in which we use and transmit patient information and
could increase our cost of doing business. In addition, parties
may also have contractual rights that provide additional limits
on our collection, dissemination, use, access to and
confidentiality of patient health information. Claims of
violations of privacy rights or contractual breaches, even if we
are not found

35



---



##### Table of Contents



liable, could be expensive and time-consuming to
defend and could result in adverse publicity that could harm our
business.


Other Regulation of Transaction
Services

Other state and federal statutes and regulations
governing transmission of healthcare information may affect our
operations. For example, Medicaid rules require some processing
services and eligibility verification to be maintained as
separate and distinct operations. Furthermore, the
recently-enacted Medicare Prescription Drug, Improvement and
Modernization Act of 2003 authorizes the development of an
electronic prescription drug program that specifies standards
for electronically transmitted prescriptions and other required
information related to Medicare-covered prescription drugs. We
carefully review our practices with regulatory experts in an
effort to ensure that we are in compliance with all applicable
state and federal laws. These laws, though, are complex and
changing, and the courts and other governmental authorities may
take positions that are inconsistent with our practices. See
also  Regulation of Healthcare
Relationships below.

International Data Regulation

Other countries also have, or are developing,
their own laws governing the collection, use, storage and
dissemination of personal information or patient data. These
laws could create liability for us, impose additional
operational requirements or restrictions on our business, affect
the manner in which we use or transmit data and increase our
cost of doing business.

Regulation of Healthcare
Relationships

Anti-kickback Laws.There are federal and state laws that govern patient referrals,
physician financial relationships and inducements to
beneficiaries of federal healthcare programs. The federal
healthcare programs anti-kickback law prohibits any person or
entity from offering, paying, soliciting or receiving anything
of value, directly or indirectly, for the referral of patients
covered by Medicare, Medicaid and other federal healthcare
programs or the leasing, purchasing, ordering or arranging for
or recommending the lease, purchase or order of any item, good,
facility or service covered by these programs. Many states also
have similar anti-kickback laws that are not necessarily limited
to items or services for which payment is made by a federal
healthcare program. In 2002, the Office of the Inspector
General, or OIG, of HHS, the federal government agency
responsible for interpreting the federal anti-kickback law,
issued an advisory opinion that concluded that the sale of
advertising and sponsorships to healthcare providers and vendors
by Web-based information services, such as us, implicates the
federal anti-kickback law. However, the advisory opinion
suggests that enforcement action will not result if the fees
paid represent fair market value for the advertising/sponsorship
arrangements, the fees do not vary based on the volume or value
of business generated by the advertising and the
advertising/sponsorship relationships are clearly identified as
such to users. We carefully review our practices with regulatory
experts in an effort to ensure that we comply with all
applicable laws. However, the laws in this area are both broad
and vague and it is often difficult or impossible to determine
precisely how the laws will be applied, particularly to new
services. Penalties for violating the federal anti-kickback law
include imprisonment, fines and exclusion from participating,
directly or indirectly, in Medicare, Medicaid and other federal
healthcare programs. Any determination by a state or federal
regulatory agency that any of our practices violate any of these
laws could subject us to civil or criminal penalties and require
us to change or terminate some portions of our business. Even an
unsuccessful challenge by regulatory authorities of our
practices could cause us adverse publicity and be costly for us
to respond to.

False Claims Laws.We currently provide transaction services to healthcare
providers and, therefore, may be subject to state and federal
laws that govern the submission of claims for medical expense
reimbursement. These laws generally prohibit an individual or
entity from knowingly presenting or causing to be presented a
claim for payment from Medicare, Medicaid or other third party
payers that is false or fraudulent, or is for an item or service
that was not provided as claimed. These laws also provide civil
and criminal penalties for noncompliance, and can be enforced by
individuals through qui tam actions. We

36



---



##### Table of Contents



cannot guarantee that state and federal agencies
will regard billing errors processed by us as inadvertent and
not in violation of these laws. In addition, changes in these
laws could also require us to incur costs or restrict our
business operations. As part of our data transmission and claims
submission services, we may employ certain edits, using logic,
mapping and defaults, when submitting claims to third party
payers. Such edits are utilized when the information received
from providers is insufficient to complete individual data
elements requests by payers for reimbursement claims. We believe
our editing processes are consistent with industry practice.
However, it is possible that a court or governmental agency
might view such practices in a manner that could result in
liability and adversely affect our business.


Regulation of Medical Devices

Overview.We
manufacture and market medical devices subject to extensive
regulation by the Food and Drug Administration, or FDA, under
the Federal Food, Drug, and Cosmetic Act, or the FDC Act. The
FDAs regulations govern, among other things, product
development, testing, manufacturing, labeling, storage,
premarket clearance (referred to as 510(k) clearance), premarket
approval (referred to as PMA approval), advertising and
promotion, and sales and distribution. If the FDA finds that we
have failed to comply, the agency can institute a wide variety
of enforcement actions, ranging from a public warning letter to
more severe sanctions such as: fines, injunctions, and civil
penalties; recall or seizure of our products; issuance of public
notices or warnings; operating restrictions, partial suspension
or total shutdown of production; refusal of our requests for
510(k) clearance or PMA approval of new products, withdrawal of
510(k) clearance or PMA approvals already granted, and criminal
prosecution.

Access to
U.S. Market.Each medical device
that we wish to commercially distribute in the U.S. will
likely require either 510(k) clearance or PMA approval from the
FDA prior to commercial distribution, unless exempt. Devices
deemed to pose relatively less risk are placed in either
class I or II, which requires the manufacturer to
submit a premarket notification requesting 510(k) clearance.
Some low risk devices are exempted from this requirement.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or
devices deemed not substantially equivalent to a previously
510(k) cleared device or to a preamendment
class III device (in commercial distribution before
May 28, 1976) for which PMA applications have not been
called, are placed in Class III requiring PMA approval.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 510(k) Clearance
    Process.To obtain 510(k) clearance,
    we must submit a premarket notification demonstrating that the
    proposed device is substantially equivalent in intended use and
    in safety and effectiveness to a predicate
    device  either a previously 510(k) cleared
    class I or class II device or a preamendment
    class III device for which the FDA has not called for PMA
    applications. The FDAs 510(k) clearance process usually
    takes from four to 12 months, but it can last longer. After
    a device receives 510(k) clearance, any modification that could
    significantly affect its safety or effectiveness, or that would
    constitute a major change in its intended use, requires a new
    510(k) clearance or could even require a PMA approval. The FDA
    requires each manufacturer to make this determination in the
    first instance, but the FDA can review any such decision. If the
    FDA disagrees with it, the agency may retroactively require the
    manufacturer to seek 510(k) clearance or PMA approval. The FDA
    also can require the manufacturer to cease marketing and/or
    recall the modified device until 510(k) clearance or PMA
    approval is obtained.
|
| |  | PMA Approval
    Process.If a product is not eligible
    for 510(k) clearance, the product is placed in class III
    and must follow the PMA approval process, which requires proof
    of the safety and effectiveness of the device to the FDAs
    satisfaction. A PMA approval application must provide extensive
    preclinical and clinical trial data and also information about
    the device and its components regarding, among other things,
    device design, manufacturing and labeling. As part of the PMA
    approval application review, the FDA will inspect the
    manufacturers facilities for compliance with the Quality
    System Regulation, which requires manufacturers to follow
    elaborate design, testing, control, documentation and other
    quality assurance procedures during the manufacturing process.
    The PMA approval pathway is costly, lengthy and uncertain. It
    generally takes from one to three years or longer. After
    approval of a PMA approval application, a new PMA                                                                                                                                                                                                                 

37



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | approval or PMA supplement approval may be
    required in the event of a modification to the device, its
    labeling or its manufacturing process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Clinical Studies.A
    clinical study is generally required to support a PMA approval
    application and is sometimes required for a 510(k) premarket
    notification. For significant risk devices, such
    studies generally require submission of an application for an
    Investigational Device Exemption, or IDE. The IDE application
    must be supported by appropriate data, such as animal and
    laboratory testing results, showing that it is safe to test the
    device in humans and that the testing protocol is scientifically
    sound. The IDE must be approved in advance by the FDA for a
    specified number of patients. Clinical studies may begin once
    the IDE application is approved by the FDA and the appropriate
    institutional review boards at the study sites. For
    nonsignificant risk devices, one or more
    institutional review boards must review the study, but
    submission of an IDE application to the FDA for advance approval
    is not required. Both types of studies are subject to record
    keeping, reporting and other IDE regulation requirements.

Post-market
Regulation.After the FDA permits a
device to enter commercial distribution, numerous regulatory
requirements apply. These include the Quality System Regulation,
labeling regulations, the FDAs general prohibition against
promoting products for unapproved or off-label uses,
and the Medical Device Reporting regulation, which requires that
manufacturers report to the FDA if their device may have caused
or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or
serious injury if it were to recur.

Products.Certain of
Porexs products are FDA-regulated medical devices, such as
plastic and reconstructive surgical implants, blood filters, and
tissue expanders. In addition, the FDA regulates WebMD Practice
Services DIMDX System as a medical image
management device. It received 510(k) clearance on
August 25, 2000. Subsequently, we have made modifications
to certain of Porexs products and to the DIMDX
System that we believe do not require new 510(k) clearance. If
the FDA disagrees with our decisions, it can retroactively
require new 510(k) clearance or PMA approval. The FDA also can
require us to cease marketing and/or recall the modified device
until 510(k) clearance or PMA approval is obtained. Because
Porexs medical devices and the DIMDX System are
in commercial distribution, we are subject to inspection and
market surveillance by the FDA to determine compliance with all
regulatory requirements. Compliance with these requirements can
be costly and time-consuming. Our failure to comply could
subject us to FDA enforcement action and sanctions.

The FDA has a long-standing draft software policy
exempting computer software products from active regulation as
medical devices if they are decision support systems intended to
involve competent human intervention before any impact on human
health occurs (in other words, where clinical judgment and
experience can be used to check, interpret and potentially
challenge a systems output). Except for the cleared
DIMDX System, we believe that, under the draft
software policy, the Intergy and The Medical Manager practice
management systems are subject to limited FDA regulation and do
not require 510(k) clearance or PMA approval. WebMD Practice
Services has created an interface between the Intergy and The
Medical Manager practice management systems and the image
device. We are marketing the interface and the image device as
the DIMDX System. We believe that the sale of our
practice management systems with the DIMDX System
does not require a new 510(k) clearance or PMA approval. Our
ULTIA handheld solution permits access to the Intergy and The
Medical Manager practice management systems and makes it
available in a wireless handheld format, including allowing
access to the medical images stored in the DIMDX
System. Because any displayed medical images are not intended
for diagnostic use, we believe that ULTIAs ability to
access such medical images does not subject it to a 510(k)
clearance or PMA approval requirement. We cannot assure you,
however, that the FDA would agree with any of these conclusions.
If the FDA does not agree, we may be required to obtain 510(k)
clearance or PMA approval for these products and may be required
to cease marketing and/or recall such products until 510(k)
clearance or PMA approval is obtained.

The FDAs draft software policy has been
under review for several years. A risk exists that the Intergy
or The Medical Manager practice management system or other of
our software or hardware

38



---



##### Table of Contents



components could in the future become subject to
some or all of the medical device regulation requirements. In
addition, the FDA may take the position that other products and
services we offer, such as ULTIA, are subject to FDA regulation.
We also may expand our services in the future to areas that
subject us to FDA regulation. Except with respect to WebMD
Practice Services and Porex, we have no experience in complying
with FDA regulations. We believe that complying with FDA
regulations is time consuming, burdensome and expensive and
could delay our introduction of new applications or services.


FDA and FTC Regulation of Drug and Medical
Device Advertising and Promotion

The FDA and the FTC regulate the form, content
and dissemination of labeling, advertising and promotional
materials, including direct-to-consumer prescription drug and
medical device advertising, prepared by, or for, pharmaceutical
or medical device companies. The FTC regulates over-the-counter
drug advertising and, in some cases, medical device advertising,
as well as general product or service advertising. Generally,
based on FDA requirements, regulated companies must limit their
advertising and promotional materials to discussions of
FDA-approved claims. In limited circumstances, regulated
companies may disseminate non-promotional scientific information
regarding products or claims not yet approved by the FDA.

Any information that promotes the use of
pharmaceutical products or medical devices that is put on our
Web site is subject to the full array of the FDA and FTC
requirements and enforcement actions and any information
regarding other products and services is subject to FTC
requirements. Areas of our Web site that could be the primary
focus of the FDA and FTC include pages and programs that discuss
use of an FDA-regulated product or that the regulators believe
may lack editorial independence from the influence of sponsoring
pharmaceutical or medical device companies. Television broadcast
advertisements by WebMD may also be subject to FTC regulation
and FDA regulation depending on the content. The FDA and the FTC
place the principal burden of compliance with advertising and
promotional regulations on the company that advertises on our
Web site to make truthful, substantiated claims. If the FDA or
the FTC finds that any information on our Web site violates FDA
or FTC regulations, they may take regulatory or judicial action
against us or the advertiser or sponsor of that information.

Drug Advertising.The FDC Act requires that prescription drugs (including
biological products) be approved for a specific medical
indication by the FDA prior to their marketing in interstate
commerce. It is a violation of the Act and of FDA regulations to
market, advertise or otherwise commercialize such products prior
to approval. The FDA does allow for preapproval exchange of
scientific information, provided it is nonpromotional in nature
and does not draw conclusions regarding the ultimate safety or
effectiveness of the unapproved drug. Upon approval, the
FDAs regulatory authority extends to the labeling and
advertising of prescription drugs offered in interstate
commerce. Such products may only be promoted and advertised for
their approved indications. In addition, the labeling and
advertising can be neither false nor misleading, and must
present all material information in a balanced manner. Labeling
and advertising that violate these legal standards are subject
to FDA enforcement action.

The FDA regulates the safety, efficacy, and
labeling of over-the-counter drugs or OTC drugs
under the FDC Act either through specific product approvals or
through regulations that define approved claims for specific
categories of such products. The FTC regulates the advertising
of OTC drugs under the section of the Federal Trade Commission
Act that prohibits unfair or deceptive trade practices.
Together, the FDA and FTC regulatory framework requires that OTC
drugs be formulated and labeled in accordance with FDA approvals
or regulations and promoted in a manner that is truthful,
adequately substantiated, and consistent with the labeled uses.
OTC drugs that do not meet these requirements are subject to FDA
or FTC enforcement action depending on the nature of the
violation.

Continuing Medical
Education.Activities and information
provided in the context of a medical or scientific educational
program, often referred to as continuing medical education or
CME, usually are treated as nonpromotional and fall
outside the FDAs jurisdiction. The FDA does however
evaluate such CME activities to determine whether they are
independent of the promotional influence of the drug or medical
device sponsor or whether they are promotional activities
subject to FDAs advertising and

39



---



##### Table of Contents



labeling requirements. In order to determine
whether a companys activities are sufficiently
independent, the FDA looks at a number of factors related to the
planning, content, speakers and audience selection of such
activities. To the extent that the FDA concludes that such
activities are not independent from a manufacturer, such content
must fully comply with the FDAs requirements.


There are several administrative, civil and
criminal sanctions available to the FDA for violations of the
FDC Act or FDA regulations as they relate to labeling and
advertising. Administrative sanctions may include a written
request that violative advertising or promotion cease and/or
that corrective action be taken, such as requiring a company to
provide to healthcare providers and/or consumers information to
correct misinformation previously conveyed. In addition, the FDA
may use publicity, such as press releases, to warn the public
about false and misleading information concerning a drug or
medical device product. More serious civil sanctions include
seizures, as well as injunctions and their resulting consent
decrees. Such measures could prevent a company from introducing
or maintaining its product in the marketplace. Criminal
penalties for severe violations can result in a prison term
and/or substantial fines.

Any increase in FDA regulation of the Internet or
other media for direct-to-consumer advertisements of
prescription drugs could make it more difficult for WebMD Health
to obtain advertising and sponsorship revenue. In the last
15 years, the FDA has gradually relaxed its formerly
restrictive policies on direct-to-consumer advertising of
prescription drugs. Companies can now advertise prescription
drugs for serious conditions to consumers in any medium.
However, physician groups and others have criticized the
FDAs current policies, and have called for restrictions on
any advertising of prescription drugs to consumers and increased
FDA enforcement. These critics point to both public health
concerns and to the laws of many other countries that make
direct-to-consumer advertising of prescription drugs a criminal
offense. In response to these critics, the FDA or the FTC may
alter its present policies on the direct-to-consumer advertising
of prescription drugs or medical devices in a way that would
materially reduce our advertising and sponsorship revenues. FDA
recently issued three draft guidance documents intended to
improve communication of: (1) risk information in
direct-to-consumer print advertisements, (2) disease
awareness information, and (3) risk information in
direct-to-consumer advertising of restricted medical devices.
These draft guidance documents do not alter existing FDA
regulatory requirements, but may lead to future policy changes.

Medical Professional Regulation

The practice of most healthcare professions
requires licensing under applicable state law. In addition, the
laws in some states prohibit business entities from practicing
medicine, which is referred to as the prohibition against the
corporate practice of medicine. We do not believe that we engage
in the practice of medicine and we have attempted to structure
our Web site, strategic relationships and other operations to
avoid violating these state licensing and professional practice
laws. A state, however, may determine that some portion of our
business violates these laws and may seek to have us discontinue
those portions or subject us to penalties or licensure
requirements. We provide Web site capabilities for our physician
customers. Many states regulate the ability of medical
professionals to advertise or maintain referral services. We do
not represent that a physicians use of our Web site will
comply with these or other state laws regulating professional
practice and we do not monitor or control the content that
physicians post on their individual practice Web sites using our
Web site application. It is possible a state or a court may
determine we are responsible for any non-compliance with these
laws, which could affect our ability to offer this service to
our customers. We employ and contract with physicians who
provide only medical information to consumers, and we have no
intention to provide medical care or advice. Any determination
that we are a healthcare provider and acted improperly as a
healthcare provider may result in liability to us.

Consumer Protection Regulation

General.Advertising
and promotional activities presented to consumers on our Web
sites are subject to Federal and state consumer protection laws
which regulate unfair and deceptive practices. We are also
subject to various other federal and state consumer protection
laws, including the ones described below.

40



---



##### Table of Contents



Can-Spam Act.Effective January 1, 2004, the Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003, or the
Can-Spam Act, became effective. The Can-Spam Act regulates
commercial emails and provides a right on the part of the
recipient to request the sender to stop sending messages, and
establishes penalties for the sending of email messages which
are intended to deceive the recipient as to source or content.
Under the Can-Spam Act, senders of commercial emails are
required to make sure that these do not contain false or
misleading transmission information. Commercial emails are
required to include a valid return email address and other
subject heading information so that the sender and the Internet
location from which the message has been sent are accurately
identified. Recipients must be furnished with an electronic
method of informing the sender of the recipients decision
to not receive further commercial emails. In addition, the email
must include a postal address of the sender and notice that the
email is an advertisement. We believe that our email practices
comply with the requirements of the Can-Spam Act.

Regulation of Advertisements Sent by
Fax.A recent modification to the
Telephone Consumer Protection Act was issued by the Federal
Communication Commission that affects advertisements sent to
telephone facsimile (fax) machines. Under this new regulation,
which is effective as of January 1, 2005, advertisements
which advertise the commercial availability or quality of a
product or service cannot be sent to the fax machine of a
recipient unless the recipient has signed a written statement
that includes the fax number to which these advertisements may
be sent and clearly indicates the recipients consent to
receive these advertisements by fax from the sender. We do not
send advertisements to fax machines in any significant portions
of our business. However, in those areas in which we do send
advertisements to a recipients fax machine that are the
subject of this new regulation, we intend to be in compliance
with this new regulation in advance of January 1, 2005.

COPPA.The
Childrens Online Privacy Protection Act, or COPPA, extends
to operators of commercial Web sites and online services
directed to U.S. children under the age of 13 that collect
personal information from children, and operators of general
audience sites with actual knowledge that they are collecting
information from U.S. children under 13. WebMDs sites
are not directed at children and its general audience site,
WebMD Health, states that no one under the applicable age is
entitled to use the site. In addition, WebMD Health employs a
kick-out procedure whereby anyone identifying themselves as
being under the age of 13 during the registration process is not
allowed to register for the sites member only services,
such as message boards and live chat events. COPPA, however, is
a relatively new law, can be applied broadly and is subject to
interpretation by courts and other governmental authorities. The
failure to accurately anticipate the application or
interpretation of this law could create liability to us, result
in adverse publicity and negatively affect our business.

Other Consumer Protection
Regulation.The Federal Trade
Commission, or FTC, and many state attorneys general are
applying federal and state consumer protection laws to require
that the online collection, use and dissemination of data, and
the presentation of Web site content, comply with certain
standards for notice, choice, security and access. Courts may
also adopt these developing standards. In many cases, the
specific limitations imposed by these standards are subject to
interpretation by courts and other governmental authorities. We
believe that we are in compliance with these consumer protection
standards, but a determination by a state or federal agency or
court that any of our practices do not meet these standards
could result in liability and adversely affect our business. New
interpretations of these standards could also require us to
incur additional costs and restrict our business operations.

In addition, several foreign governments have
regulations dealing with the collection and use of personal
information obtained from their citizens. Those governments may
attempt to apply such laws extraterritorially or through
treaties or other arrangements with U.S. governmental
entities. We might unintentionally violate such laws, such laws
may be modified and new laws may be enacted in the future. Any
such developments (or developments stemming from enactment or
modification of other laws) or the failure to accurately
anticipate the application or interpretation of these laws could
create liability to us, result in adverse publicity and
negatively affect our businesses.

41



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

We believe that the offices and other facilities
described are, in general, in good operating condition and
adequate for our current operations.

Headquarters

We lease our corporate headquarters offices in
Elmwood Park, New Jersey, which consists of approximately
45,000 square feet of space, under leases that expire in,
or prior to, March 2006.

WebMD Envoy, WebMD Health and WebMD Practice
Services

We lease important facilities in:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | Nashville, Tennessee for WebMD Envoys
    headquarters and primary data and call centers and
    Medifaxs operations;                  
|
| |  | St. Louis, Missouri for Advanced Business
    Fulfillments operations;                                                                  
|
| |  | Scottsdale, Arizona and Toledo, Ohio for
    ExpressBills operations;                                                                   
|
| |  | Tampa, Florida for WebMD Practice Services
    headquarters and Alachua, Florida for its development and
    engineering operations; and
|
| |  | New York, New York for WebMD
    Healths headquarters and its editorial and marketing
    operations.                                   

We also use facilities in approximately 130
additional locations throughout the United States, 11 of which
are owned and the rest of which are leased. These locations
include sales and other offices, production centers, data
centers and call centers.

Porex

We use approximately 380,000 square feet for
Porexs headquarters and for office and manufacturing
operations related to its porous plastics and other porous media
product lines, including: the Porex headquarters and largest
plant, which are located in property that we own in Fairburn,
Georgia, a suburb of Atlanta; space that we own in Newnan,
Georgia, College Park, Georgia and Bautzen, Germany; and space
that we lease in Selangor, Malaysia and Alness, Scotland.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Envoy Securities Litigation

Several years prior to our acquisition of Envoy
Corporation, Envoy and some of its officers were named as
defendants in three identical lawsuits filed in the United
States District Court for the Middle District of Tennessee,
Nashville Division. In 1998, the District Court ordered the
three cases consolidated under the caption In re Envoy
Corporation Securities Litigation.

Plaintiffs alleged that the defendants made
material misrepresentations and omissions in Envoys public
filings and public statements concerning Envoys financial
statements and Envoys accounting for some charges taken in
connection with acquisitions. In addition, plaintiffs alleged
that, as a result of defendants alleged actions,
Envoys reported earnings during the class period were
overstated and the price for Envoys common stock was
artificially inflated.

In April 2002, the court certified a class of
plaintiffs consisting of all persons, other than defendants, who
purchased shares of Envoy common stock between February 27,
1997 and August 18, 1998.

As previously disclosed, on September 18,
2003, Envoy entered into a definitive Stipulation of Settlement
regarding the settlement of this litigation, as contemplated by
a Memorandum of Understanding dated July 11, 2003. Pursuant
to the Stipulation of Settlement, the defendants paid into a
settlement fund the amount of $11 million in settlement of
the claims asserted in the action and the

42



---



##### Table of Contents



Stipulation of Settlement. On December 17,
2003, the United States District Court for the Middle District
of Tennessee, following a hearing, entered an Order granting
final approval of the settlement of this litigation on the terms
contained in the Stipulation of Settlement. Pursuant to the
Courts Order, all members of the plaintiff class released
defendants and the litigation was dismissed with prejudice. No
appeal from the Courts Order was taken and the Order
became final and non-appealable on January 17, 2004.
Defendants have denied and continue to deny the allegations
asserted in the lawsuit and agreed to the settlement in order to
eliminate the burden and expense of further litigation. As
previously disclosed, the settlement of this litigation was
funded entirely with the proceeds of Envoys insurance
policy.


Litigation Regarding Distribution of Shares in
Healtheon Initial Public Offering

In the summer and fall of 2001, seven purported
class action lawsuits were filed against Morgan
Stanley & Co. Incorporated and Goldman Sachs &
Co., underwriters of the initial public offering of the Company
(then known as Healtheon) in the United States District Court
for the Southern District of New York. Three of these suits
also named WebMD and certain former officers and directors of
WebMD as defendants. These suits were filed in the wake of
reports of governmental investigations of the underwriters
practices in the distribution of shares in certain initial
public offerings. Similar suits were filed in connection with
over 300 other initial public offerings that occurred in 1999,
2000 and 2001.

The complaints against WebMD and its former
officers and directors alleged violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 under
that Act and Section 11 of the Securities Act of 1933
because of failure to disclose certain practices alleged to have
occurred in connection with the distribution of shares in the
Healtheon IPO. Claims under Section 12(a)(2) of the
Securities Act of 1933 were also brought against the
underwriters. These claims were consolidated, along with claims
relating to over 300 other initial public offerings, in the
Southern District of New York.

The plaintiffs have dismissed the claims against
the four former officers and directors of WebMD without
prejudice, pursuant to Reservation of Rights and Tolling
Agreements with those individuals.

On July 15, 2002, the issuer defendants in
the consolidated action, including WebMD, filed a joint motion
to dismiss the consolidated complaints. On February 18,
2003, the District Court denied, with certain exceptions not
relevant to WebMD, the issuer defendants motion to dismiss.

After a lengthy mediation under the auspices of
former United States District Judge Nicholas Politan, the issuer
defendants in the consolidated action (including WebMD), the
affected insurance companies and the plaintiffs reached an
agreement on a settlement to resolve the matter among the
participating issuer defendants, their insurers and the
plaintiffs. The settlement is embodied in a Memorandum of
Understanding and a number of related agreements that together
set out a comprehensive framework for settlement of the
consolidated actions among these parties. The settlement calls
for the participating issuers insurers jointly to
guarantee that plaintiffs recover a certain amount in the IPO
litigation and certain related litigation from the underwriters
and other non-settling defendants. Accordingly, in the event
that the guarantee becomes payable, the agreement calls for
WebMDs insurance carriers, not WebMD, to pay WebMDs
pro rata share.

WebMD has approved the settlement, and we
understand that virtually all of the approximately 260 other
issuer defendants who are eligible have also elected to
participate in the settlement. Although WebMD believes that the
claims alleged in the lawsuits were primarily directed at the
underwriters and, as they relate to WebMD, were without merit,
we believe that the settlement is beneficial to WebMD because it
reduces the time, expense and risks of further litigation,
particularly since virtually all of the other issuer defendants
will participate and our insurance carriers strongly support the
settlement.

In order for the settlement to become final, the
Memorandum of Understanding must be reduced to a separate
settlement agreement as to each issuer, each of which must be
approved by the court. Accordingly, we anticipate, though we
cannot guarantee, that this settlement will resolve the IPO
allocation securities litigation between the plaintiffs and
WebMD.

43



---



##### Table of Contents



Merrill Lynch Fundamental Growth Fund, Inc.
et al. v. McKesson HBOC, Inc., et al.

WebMD has been named as a defendant in the action
Merrill Lynch Fundamental Growth Fund, Inc.,
et al. v. McKesson HBOC, Inc., et al., Case
No. 405792, in the San Francisco Superior Court. The
original complaint in this matter alleged that McKesson HBOC,
HBO and Company (which we refer to as HBOC), certain officers
and directors of those firms, Arthur Andersen LLP, and Bear
Stearns & Co. engaged in a number of practices whereby
HBOC and later McKesson HBOC improperly recognized revenues.
When these practices were discovered, McKesson HBOC eliminated
more than $327 million in revenues that HBOC had recognized
over the prior three years. Plaintiffs claim to have lost more
than $150 million as a result of the decline in McKesson
HBOCs share value after the accounting practices came to
light in April 1999.

On September 4, 2003, the plaintiffs filed a
fourth amended complaint, naming WebMD and two other defendants,
General Electric Capital Corporation, Inc. and Computer
Associates International, Inc., for the first time. The
complaint alleges that WebMD aided and abetted alleged fraud by
certain defendants and conspired with those defendants in
relation to HBOCs and McKesson HBOCs alleged
improper recognition of approximately $14 million in
revenue on two software transactions. Plaintiffs also allege
that WebMD made certain negligent misrepresentations with
respect to these transactions.

Plaintiffs allege that WebMD, Inc. (then a
separate private company and now a subsidiary of WebMD), through
its participation in certain transactions with HBOC and McKesson
HBOC, learned that officers of HBOC and/or McKesson HBOC, HBOC
and McKesson HBOC were breaching duties owed to McKesson HBOC
shareholders by making material misstatements and suppressing or
omitting facts with respect to HBOCs and McKesson
HBOCs financial results for the periods ending
December 31, 1998 and March 31, 1999 and that WebMD,
Inc. aided and abetted and conspired with these defendants. One
of the officers became an officer of WebMD, Inc. on
December 1, 1998, after having served as HBOCs
representative on the board of WebMD, Inc. and was dismissed by
WebMD, Inc. after the accounting fraud at HBOC was disclosed.
The other officer served as HBOCs representative on the
Board of WebMD, Inc. and ceased to be a director of WebMD, Inc.
upon dismissal by McKesson HBOC. Plaintiffs seek unspecified
damages against WebMD. The complaint alleges numerous instances
of improper accounting by HBOC unrelated to the transactions
between WebMD, Inc. and HBOC and/or McKesson HBOC.

WebMD intends to vigorously defend against the
plaintiffs claims against WebMD and WebMD, Inc.
On December 16, 2003, WebMD filed a demurrer, seeking
dismissal of the two claims against it. This demurrer is pending
with the Court.

Investigations by United States Attorney for
the District of South Carolina and the SEC

The United States Attorney for the District of
South Carolina is conducting an investigation of our company,
which we first learned about on September 3, 2003. On that
date, Federal Bureau of Investigation and Internal Revenue
Service agents executed search warrants at our corporate
headquarters in Elmwood Park, New Jersey and the offices of
Medical Manager Health Systems in Tampa, Florida and Alachua,
Florida and delivered subpoenas for documents and financial
records. Based on the information available to us as of the date
of this Annual Report, we believe that the investigation relates
principally to issues of financial reporting for Medical Manager
Corporation, a predecessor of WebMD (by its merger into WebMD in
September 2000), and our Medical Manager Health Systems
subsidiary; however, we cannot be sure of the
investigations exact scope or how long it will continue.
Included among the materials removed or subject to subpoena are
records relating to a $5.5 million restatement of revenue
by Medical Manager Corporation in August 1999 and to
acquisitions by our Medical Manager Health Systems subsidiary of
other companies, most of which were dealers of Medical Manager
products and services. In August 1999, Medical Manager
Corporation announced that it would restate previously reported
results of Medical Manager Health Systems, which it had acquired
in July 1999, for the six months ended immediately prior to the
acquisition. Medical Manager Corporation determined at the time
that the accounting treatment previously accorded to five
transactions involving the bulk sales of software licenses
entered into concurrently with business combinations and other
related transactions should be

44



---



##### Table of Contents



restated to reflect the software license revenues
as a reduction of the acquisition price of the related
transactions. At the time, Medical Manager Corporation also
noted that the transactions represented $5,532,000 of revenue
and $3,502,000 of net income for the six months ended
June 30, 1999. WebMD understands that the SEC is also
conducting a formal investigation into this matter.


WebMD intends to continue to fully cooperate with
the authorities in this matter and our Board of Directors has
formed a special committee consisting solely of independent
directors to oversee this matter. The special committee has
retained independent legal counsel to advise it.

While WebMD is not able to estimate, at this
time, the amount of the expenses that it will incur in
connection with the investigations, it expects that they may be
significant. For the year ended December 31, 2003, those
expenses are reflected as Legal Expenses in the
Consolidated Statements of Operations included in this Annual
Report.

At Home Corporation General Unsecured
Creditors Trust

In 1999, WebMD, Inc. entered into an agreement
with Excite Corp. concerning placing WebMD content on Excite
Corp.s consumer internet portal. In 2001, WebMD and Excite
Corp.s successor, AtHome Corp., entered into a revised
agreement, which terminated the 1999 agreement and included a
release of claims under the 1999 agreement. AtHome Corp. later
filed for bankruptcy.

On December 4, 2003, WebMD was served with a
complaint in an adversary proceeding in the Bankruptcy Court for
the Northern District of California brought by the trustee for
the At Home Corporation General Unsecured Creditors Trust. The
plaintiff alleges that the 2001 agreement provided AtHome Corp.
less than reasonably equivalent value for its rights under the
1999 agreement and that the 2001 agreement should be avoided as
a fraudulent transfer. The plaintiff also alleges that WebMD
breached the 1999 agreement by failing to make required cash
payments, and failed to pay AtHome Corp. fair and reasonable
value for services that AtHome Corp. provided. The plaintiff has
claimed that its damages are in excess of $8 million. WebMD
intends to vigorously defend against the plaintiffs claims.

Porex Mammary Implant Litigation

From 1988 through 1990, Porex distributed
silicone mammary implants in the United States pursuant to a
distribution arrangement with a Japanese manufacturer. Porex
believes that, after accounting for implants returned to Porex,
the aggregate number of persons who received implants
distributed by Porex totals approximately 2,500. Since March
1991, Porex has been named as one of many co-defendants in a
number of actions brought by recipients of mammary implants. The
typical case or claim alleges that the individuals mammary
implants caused one or more of a wide range of ailments. These
implant cases and claims generally raise difficult and complex
factual and legal issues and are subject to many uncertainties
and complexities, including, but not limited to, the facts and
circumstances of each particular case or claim, the jurisdiction
in which each suit is brought, and differences in applicable
law. Porex does not have sufficient information to evaluate each
case and claim.

Certain of the actions against Porex have been
dismissed, where it was determined that the implant in question
was not distributed by Porex. In addition, as of March 10,
2004, approximately 300 actions have been settled by the
manufacturer, or by Porexs insurance carriers, without
material cost to Porex. As of March 10, 2004, no
implant-related claims were pending against Porex. During
calendar year 2003, there were no implant-related claims made
against Porex by individuals, as compared to two claims during
each of 2002, 2001 and 2000, 39 claims during 1999 and nine
claims during 1998. The majority of claims made during 1999 were
claims that were filed by individuals following a court ruling
in 1999 that cases filed in earlier years would not proceed as
class actions, as a result of which such individuals would not
be members of a class in such cases.

In 1994, Porex was notified that its insurance
carrier would not renew its then-existing insurance coverage
after December 31, 1994 with respect to actions and claims
arising out of its distribution of implants. However, Porex
exercised its right, under such policy, to purchase extended
reporting period coverage with respect to such actions and
claims. Such coverage provides insurance subject to existing
policy limits, but for an unlimited time period with respect to
actions and claims made after December 31,

45



---



##### Table of Contents



1994 based on events that occurred during the
policy period. In addition, Porex has purchased extended
reporting period coverage with respect to other excess
insurance. This coverage also extends indefinitely, replacing
coverage that would, by its terms, have otherwise expired by
December 31, 1997. Porex will continue to evaluate the need
to purchase further extended reporting period coverage from
excess insurers to the extent such coverage is reasonably
available.


Porex believes that its present coverage,
together with its insurance policies in effect on or before
December 31, 1994, should provide adequate coverage against
liabilities that could result from actions or claims arising out
of Porexs distribution of silicone mammary implants.
However, Porex cannot be certain that particular cases and
claims will not result in liability that is greater than
expected based on Porexs prior experience. If so,
Porexs liability could exceed the amount of its insurance
coverage. Furthermore, certain actions and claims seek punitive
and compensatory damages arising out of alleged intentional
torts. If these claims are successful, such damages may or may
not be covered, in whole or in part, by Porexs insurance
policies.

Other Legal Proceedings

In the normal course of business, we are involved
in various other claims and legal proceedings. While the
ultimate resolution of these matters, and those discussed above,
has yet to be determined, we do not believe that their outcome
will have a material adverse effect on our financial position or
results of operations.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

During the fourth quarter of 2003, no matters
were submitted to a vote of security holders of WebMD.

46



---



##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

We completed the initial public offering of our
common stock on February 10, 1999. Our common stock has
been traded on the Nasdaq National Market under the symbol
HLTH since February 11, 1999.

The high and low prices for each quarterly period
during the last two fiscal years are as follows:

|     |                |      |   |       |  |  |   |      | 
|---- | -------------- | ---- | - | ----- |  |  | - | ---- | 
|     |                | High |   | Low  
|     |                |      |   |      
|2002 |                |      |   |       |  |  |   |     
|     | First quarter  |      | $ | 8.86  |  |  | $ | 6.25 | 
|     | Second quarter |      |   | 7.78  |  |  |   | 5.05 | 
|     | Third quarter  |      |   | 6.23  |  |  |   | 4.25 | 
|     | Fourth quarter |      |   | 9.30  |  |  |   | 4.54 | 
|2003 |                |      |   |       |  |  |   |     
|     | First quarter  |      | $ | 10.28 |  |  | $ | 8.25 | 
|     | Second quarter |      |   | 12.00 |  |  |   | 8.28 | 
|     | Third quarter  |      |   | 12.49 |  |  |   | 8.20 | 
|     | Fourth quarter |      |   | 9.32  |  |  |   | 7.59 | 

On March 1, 2004, there were approximately
4,470 holders of record of our common stock. Because many of
these shares are held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders.

The market price of our common stock has
fluctuated since the date of our initial public offering and is
likely to fluctuate in the future. Changes in the market price
of our common stock and other securities may result from, among
other things:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | quarter-to-quarter variations in operating results                                                        
|
| |  | operating results being less than analysts
    estimates                                                 
|
| |  | changes in analysts earnings estimates                                                                   
|
| |  | announcements of new technologies, products and
    services or pricing policies by us or our competitors 
|
| |  | announcements of acquisitions or strategic
    partnerships by us or our competitors                      
|
| |  | developments in existing customer or strategic
    relationships                                          
|
| |  | actual or perceived changes in our business
    strategy                                                  
|
| |  | developments in new or pending litigation and
    claims                                                  
|
| |  | sales of large amounts of our common stock                                                                
|
| |  | changes in market conditions in the healthcare,
    information technology, Internet or plastic industries
|
| |  | changes in general economic conditions                                                                    
|
| |  | fluctuations in the securities markets in general.                                                        

In addition, the market prices of Internet and
healthcare information technology stocks in general, and of our
common stock in particular, have experienced large fluctuations,
sometimes quite rapidly. These fluctuations often may be
unrelated or disproportionate to the operating performance of
these companies.

47



---



##### Table of Contents



Any negative change in the publics
perception of the prospects of these companies, as well as other
broad market and industry factors, may result in changes in the
price of our common stock.


We have never declared or paid any cash dividends
on our common stock, and we do not anticipate paying cash
dividends in the foreseeable future. We intend to retain
earnings to finance the expansion of our operations.

Sales of Unregistered Securities During the
Fourth Quarter of 2003

On December 12, 2003, WebMD issued
288 shares of WebMD common stock to an individual in a
transaction exempt from registration under Section 3(a)(9)
of the Securities Act. The shares were issued upon exercise of
an outstanding warrant originally issued to Gleacher &
Co. and transferred by it to the individual.

48



---



##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated financial
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and with the consolidated financial statements
and notes thereto, which are included elsewhere in this Annual
Report. On August 1, 2003, we completed the sale of two
operating units of our Plastic Technologies segment.
Accordingly, the following selected consolidated financial data
has been reclassified to reflect the historical results of these
two operating units as discontinued operations.

|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |          |   | 
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | - | ---- | ------- | ------- | - | ---- | ---------- | ---------- | --------- | - | ---------- | ---------- | - | - | -------- | -------- | - | 
|                                                                                          |                                                                     |                                      
|                                                                                          |                                                                     | Years Ended December 31,             
|                                                                                          |                                                                     |                                      
|                                                                                          |                                                                     | 2003                                  |         | 2002    |   | 2001 |         | 2000    |   | 1999
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |     
|                                                                                          |                                                                     |                                      
|                                                                                          |                                                                     | (In thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                           |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Revenue                                                                                   |                                                                     | $                                     | 963,980 |         |   | $    | 871,696 |         |   | $    | 842,020    |            |           | $ | 574,524    |            |   | $ | 102,149  |         
|Costs and expenses:                                                                       |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Cost of operations                                                  |                                       |         | 564,939 |   |      |         | 509,744 |   |      |            | 568,321    |           |   |            | 430,296    |   |   |          | 88,576   |  
|                                                                                          | Development and engineering                                         |                                       |         | 42,985  |   |      |         | 43,467  |   |      |            | 43,572     |           |   |            | 59,867     |   |   |          | 29,669   |  
|                                                                                          | Sales, marketing, general and administrative                        |                                       |         | 282,482 |   |      |         | 283,424 |   |      |            | 448,082    |           |   |            | 535,462    |   |   |          | 82,315   |  
|                                                                                          | Depreciation, amortization and other                                |                                       |         | 62,434  |   |      |         | 125,593 |   |      |            | 2,394,857  |           |   |            | 2,188,461  |   |   |          | 193,067  |  
|                                                                                          | Legal expense                                                       |                                       |         | 3,959   |   |      |         |        |   |      |            |           |           |   |            |           |   |   |          |         |  
|                                                                                          | Impairment of long-lived and other                                  |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |          |  
|                                                                                          |                                                                     | assets                                |         |         |  |      |         |         |  |      |            |            | 3,816,115 |   |            |            |  |   |          |          |  | 
|                                                                                          | Restructuring and integration (benefit) charge                      |                                       |         |        |   |      |         | (5,850  | ) |      |            | 266,755    |           |   |            | 452,919    |   |   |          |         |  
|                                                                                          | (Gain) loss on investments                                          |                                       |         | (1,659  | ) |      |         | (6,547  | ) |      |            |           |           |   |            | 40,365     |   |   |          |         |  
|                                                                                          | Interest income                                                     |                                       |         | 22,901  |   |      |         | 19,590  |   |      |            | 30,409     |           |   |            | 51,467     |   |   |          | 4,013    |  
|                                                                                          | Interest expense                                                    |                                       |         | 15,214  |   |      |         | 8,491   |   |      |            | 507        |           |   |            | 735        |   |   |          | 527      |  
|                                                                                          | Other income, net                                                   |                                       |         | 4,218   |   |      |         | 3,844   |   |      |            |           |           |   |            |           |   |   |          |         |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Income (loss) from continuing operations before
    income tax provision (benefit)        |                                                                     |                                       | 20,745  |         |   |      | (63,192 | )       |   |      | (6,665,780 | )          |           |   | (3,082,114 | )          |   |   | (287,992 | )       
|                                                                                          | Income tax provision (benefit)                                      |                                       |         | 4,140   |   |      |         | (10,079 | ) |      |            | 2,588      |           |   |            | 790        |   |   |          |          |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Income (loss) from continuing operations                            |                                       |         | 16,605  |   |      |         | (53,113 | ) |      |            | (6,668,368 | )         |   |            | (3,082,904 | ) |   |          | (287,992 | )
|                                                                                          | Income (loss) from discontinued operations, net
    of income taxes |                                       |         | (33,611 | ) |      |         | 3,411   |   |      |            | (3,950     | )         |   |            | 1,296      |   |   |          |         |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Net loss                                                                                  |                                                                     | $                                     | (17,006 | )       |   | $    | (49,702 | )       |   | $    | (6,672,318 | )          |           | $ | (3,081,608 | )          |   | $ | (287,992 | )       
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Basic loss per common share:                                                              |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Income (loss) from continuing operations                            |                                       | $       | 0.05    |   |      | $       | (0.17   | ) |      | $          | (19.13     | )         |   | $          | (12.60     | ) |   | $        | (3.58    | )
|                                                                                          | Income (loss) from discontinued operations                          |                                       |         | (0.11   | ) |      |         | 0.01    |   |      |            | (0.01      | )         |   |            | 0.01       |   |   |          |         |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Net loss                                                                                  |                                                                     | $                                     | (0.06   | )       |   | $    | (0.16   | )       |   | $    | (19.14     | )          |           | $ | (12.59     | )          |   | $ | (3.58    | )       
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Diluted loss per common share:                                                            |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Income (loss) from continuing operations                            |                                       | $       | 0.05    |   |      | $       | (0.17   | ) |      | $          | (19.13     | )         |   | $          | (12.60     | ) |   | $        | (3.58    | )
|                                                                                          | Income (loss) from discontinued operations                          |                                       |         | (0.10   | ) |      |         | 0.01    |   |      |            | (0.01      | )         |   |            | 0.01       |   |   |          |         |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Net loss                                                                                  |                                                                     | $                                     | (0.05   | )       |   | $    | (0.16   | )       |   | $    | (19.14     | )          |           | $ | (12.59     | )          |   | $ | (3.58    | )       
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|Weighted-average shares outstanding used in
    computing income (loss) per common share: |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Basic                                                               |                                       |         | 304,858 |   |      |         | 304,168 |   |      |            | 348,570    |           |   |            | 244,688    |   |   |          | 80,367   |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         
|                                                                                          | Diluted                                                             |                                       |         | 325,811 |   |      |         | 304,168 |   |      |            | 348,570    |           |   |            | 244,688    |   |   |          | 80,367   |  
|                                                                                          |                                                                     |                                       |         |         |   |      |         |         |   |      |            |            |           |   |            |            |   |   |          |         

49



---



##### Table of Contents



|                                                  |  |                    |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------------------------------------- |  | ------------------ | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                  |  |                   
|                                                  |  | As of December 31,
|                                                  |  |                   
|                                                  |  | 2003               |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                                                  |  |                    |           |      |  |      |           |      |  |     
|                                                  |  |                   
|                                                  |  | (In thousands)    
|Consolidated Balance Sheet Data:                  |  |                    |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|Cash, cash equivalents and short-term investments |  | $                  | 270,681   |      |  | $    | 186,484   |      |  | $    | 378,762   |  |  | $ | 505,793   |  |  | $ | 291,286   | 
|Long-term marketable securities                   |  |                    | 456,034   |      |  |      | 456,716   |      |  |      | 18,769    |  |  |   | 222,774   |  |  |   |          | 
|Working capital                                   |  |                    | 202,573   |      |  |      | 193,031   |      |  |      | 360,429   |  |  |   | 528,136   |  |  |   | 216,304   | 
|Total assets                                      |  |                    | 2,135,306 |      |  |      | 1,766,248 |      |  |      | 1,601,454 |  |  |   | 8,487,108 |  |  |   | 4,123,668 | 
|Convertible subordinated notes                    |  |                    | 649,999   |      |  |      | 300,000   |      |  |      |          |  |  |   |          |  |  |   |          | 
|Other long-term liabilities                       |  |                    | 1,182     |      |  |      | 498       |      |  |      | 1,226     |  |  |   | 15,279    |  |  |   | 2,695     | 
|Convertible redeemable preferred stock            |  |                    |          |      |  |      |          |      |  |      | 10,000    |  |  |   | 10,000    |  |  |   |          | 
|Convertible preferred stock                       |  |                    |          |      |  |      |          |      |  |      |          |  |  |   | 710,746   |  |  |   |          | 
|Stockholders equity                              |  |                    | 1,178,597 |      |  |      | 1,153,801 |      |  |      | 1,255,512 |  |  |   | 8,097,435 |  |  |   | 3,973,672 | 

50



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This Item 7 contains forward-looking
statements with respect to possible events, outcomes or results
that are, and are expected to continue to be, subject to risks,
uncertainties and contingencies, including those identified in
this Item. See Cautionary Statement Regarding
Forward-Looking Statements on page 2.

Overview

Managements discussion and analysis of
financial condition and results of operations, or MD&A, is
provided as a supplement to the consolidated financial
statements and notes thereto included elsewhere in this Annual
Report and to provide an understanding of our results of
operations, financial condition, and changes in financial
condition. Our MD&A is organized as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Introduction.This
    section provides a general description of our business, a brief
    discussion of our operating segments, summarizes the
    acquisitions we completed during the last two years and
    describes the restructuring and integration plans we undertook
    to eliminate duplication and redundancies that resulted from
    acquisitions we have made.                                                                                                
|
| |  | Critical Accounting Policies and
    Estimates.This section discusses
    those accounting policies that both are considered important to
    our financial condition and results of operations, and require
    us to exercise subjective or complex judgments in their
    application. In addition, all of our significant accounting
    policies, including our critical accounting policies, are
    summarized in Note 1 to our consolidated financial
    statements.
|
| |  | Results of Operations and Results of
    Operations by Operating Segment.These
    sections provide our analysis and outlook for the significant
    line items on our consolidated statements of operations, on both
    a company-wide and a segment-by-segment basis.                                                                                                                                                                                                     
|
| |  | Liquidity and Capital
    Resources.This section provides an
    analysis of our liquidity and cash flows, as well as a
    discussion of our outstanding debt and commitments, that existed
    as of December 31, 2003.                                                                                                                                                                                                                                                    
|
| |  | Factors That May Affect Our Future Financial
    Condition or Results of Operations.This section describes circumstances or events that could have a
    negative effect on our financial results or operations or that
    could change, for the worse, existing trends in some or all of
    our businesses. The factors discussed in this section are in
    addition to factors that may be described elsewhere in this
    Annual Report.                               

Introduction

WebMD Corporation is a Delaware corporation that
was incorporated in December 1995 and commenced operations in
January 1996 as Healtheon Corporation. We changed our name to
Healtheon/ WebMD Corporation in November 1999 and to WebMD
Corporation in September 2000. Our common stock has traded on
the Nasdaq National Market under the symbol HLTH
since February 11, 1999.

On August 1, 2003, we completed the sale of
two operating units of our Plastic Technologies segment.
Accordingly, the historical results of these two operating
units, including the loss related to the divestitures, have been
reclassified as discontinued operations in our financial
statements.

Operating
Segments

We have aligned our business into four operating
segments as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transaction Services or WebMD
    Envoy.We provide healthcare
    reimbursement cycle management services, including transmission
    of transactions between healthcare payers and physicians,
    pharmacies, dentists, hospitals, laboratory companies and other
    healthcare providers using dial-up, Internet and dedicated
    communication methods. Our services assist our customers in
    automating

51



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | key administrative and clinical functions. In
    addition, we provide automated patient billing services to
    providers, including statement printing and mailing services,
    and provide paid-claims communication services to third party
    administrators and health insurers, including print-and-mail
    services for the distribution of checks, remittance advice, and
    explanation of benefits.                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Physician Services or WebMD Practice
    Services.We develop and market
    integrated physician practice management systems, including
    administrative, financial and clinical applications and
    services, under The Medical Manager, Intergy, ULTIA and Medical
    Manager Network Services brands. These systems and services
    allow physician offices to automate their scheduling, billing
    and other administrative tasks, to transmit transactions
    electronically, to maintain electronic medical records and to
    automate documentation of patient encounters.                                                                                                                                                                                                               
|
| |  | Portal Services or WebMD
    Health.We provide online healthcare
    information, educational services and related resources for
    consumers and healthcare professionals, both directly and
    through our relationships with leading general consumer Internet
    portals. We also provide online content for use by media and
    healthcare partners in their Web sites. We develop and sell
    online and offline channels of communication and sponsorship
    programs to pharmaceutical, biotech, medical device and consumer
    products companies, particularly those who are interested in
    influencing healthcare decisions. In addition, we provide a
    suite of online tools and related services to employers and
    health plans for use by their employees and plan members.
|
| |  | Plastic Technologies or
    Porex.We develop, manufacture and
    distribute proprietary porous plastic products and components
    used in healthcare, industrial and consumer applications, as
    well as in finished products used in the medical device and
    surgical markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Acquisitions

In 2003, we completed 12 acquisitions. Our Portal
Services segment acquired two companies for a total purchase
consideration of approximately $14,612, comprised of $14,400 in
cash and $212 of estimated acquisition costs. We will pay an
additional $2,500 if certain financial milestones are achieved.
In connection with the preliminary allocation of the purchase
price, we recorded goodwill of $12,731 and intangible assets of
$3,525, with estimated useful lives of three to seven years. Our
Transaction Services segment acquired three companies for a
total purchase price of $399,138, comprised of $390,238 in cash
and $8,900 in estimated acquisition costs. Additionally, we will
pay up to an additional $154,200 if certain milestones are
achieved in the future. In connection with the preliminary
allocation of the purchase price of these three acquisitions, we
recorded goodwill of $244,021 and intangibles assets of
$142,092, with estimated useful lives ranging from nine months
to fifteen years. Also, during 2003, our Physician Services
segment acquired seven companies for a total cost of $2,182,
which was paid in cash. We will pay an additional $675 if
certain of the acquired companies meet certain financial
milestones. In connection with the preliminary allocation of the
purchase prices, goodwill of $1,469 and intangible assets
subject to amortization of $1,054 were recorded. The intangible
assets have estimated useful lives from three to nine years.

In 2002, we completed 22 acquisitions. On
October 31, 2002, our Portal Services segment acquired one
company. The total purchase consideration for this acquisition
was approximately $19,031, comprised of $18,781 in cash and
estimated acquisition costs of $250. In connection with the
allocation of the purchase price, we recorded goodwill of
$18,380 and an intangible asset of $2,700 with an estimated
useful life of three years. Also, throughout 2002, our Physician
Services segment acquired 21 companies for a total cost of
$14,400 which was paid in cash. In connection with the
allocation of the purchase price, goodwill of $11,784 and
intangible assets subject to amortization of $4,049 were
recorded. The intangible assets have estimated useful lives of
one to nine years.

Restructuring
and Integration Initiatives

After the mergers with Medical Manager
Corporation, CareInsite, Inc. and OnHealth Network Company in
2000, our Board of Directors approved a restructuring and
integration plan, with the objective

52



---



##### Table of Contents



of eliminating duplication and redundancies that
resulted from these and certain prior acquisitions and
consolidating our operational infrastructure into a common
platform to more efficiently serve our customers.


Our restructuring and integration efforts
continued in 2001, and a plan to include the impact of
eliminating functions resulting from our acquisition of Medscape
in December 2001 was initiated.

We have substantially completed our restructuring
and integration efforts related to the 2000 and 2001
restructuring plans, with the primary exception being remaining
lease payments of previously vacated facilities.

Critical Accounting Policies and
Estimates

Our discussion and analysis of WebMDs
financial condition and results of operations are based upon our
Consolidated Financial Statements and Notes to Consolidated
Financial Statements, which were prepared in conformity with
accounting principles generally accepted in the United States.
The preparation of the consolidated financial statements
requires us to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements. We
base our estimates on historical experience, current business
factors, and various other assumptions that we believe are
necessary to form a basis for making judgments about the
carrying values of assets and liabilities and disclosure of
contingent assets and liabilities. Actual results could differ
from these estimates.

We evaluate our estimates on an ongoing basis,
including those related to revenue recognition, short-term and
long-term investments, deferred tax assets, income taxes,
collectibility of customer receivables, prepaid content and
distribution services, long-lived assets including goodwill and
other intangible assets, certain accrued expenses, accruals
related to our restructuring program, contingencies and
litigation.

We believe the following reflect our critical
accounting policies and our more significant judgments and
estimates used in the preparation of our consolidated financial
statements:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | Revenue
    Our revenue recognition policies for each reportable segment are
    as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transaction Services or WebMD
    Envoy.Healthcare payers and providers
    pay us fees for our services, generally on a per transaction
    basis or monthly basis. We recognize revenue as we perform the
    service. Healthcare payers and providers also pay us one-time
    implementation and annual maintenance fees. We recognize revenue
    from these fees ratably over the term of the respective
    agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Physician Services or WebMD Practice
    Services.Healthcare providers pay us
    one-time fees for the purchase of our practice management
    systems. We recognize revenue from these one-time fees when we
    enter into noncancelable agreements with our customers, the
    products have been delivered and there are no uncertainties
    regarding product acceptance and delivery, no significant future
    performance obligations exist, fees are fixed and determinable
    and collectability is probable. Amounts received in advance of
    meeting these criteria are deferred until we meet these
    criteria. Revenue from multiple-element software arrangements is
    recognized using the residual method as vendor specific
    objective evidence (VSOE) of fair value exists for
    the undelivered elements, but not for all of the delivered
    elements. The residual method requires revenue to be allocated
    to the undelivered elements based on the fair value of such
    elements, as indicated by VSOE. VSOE is based on the price
    charged when an element is sold separately. Healthcare providers
    also pay us fees for maintenance and support of their practice
    management system, including the hardware and software. We
    recognize revenue from these fees ratably over the contract
    period, typically in one year or less. Healthcare providers also
    pay us fees for transmitting transactions to payers and
    patients. We recognize revenue from these fees, which are
    generally paid on a monthly or per transaction basis, as we
    provide the service.
|
| | Portal Services or WebMD
    Health.Customers pay us for
    advertising, sponsorship, healthcare management tools,
    continuing medical education (CME), content
    syndication and distribution,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

53



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | and e-commerce transactions related to our online
    distribution channels and the online and offline distribution
    channels of our strategic partners. Revenue from advertising is
    recognized as advertisements are delivered. Revenues from
    sponsorship arrangements and healthcare management tools are
    recognized ratably over the term of the applicable agreement.
    Revenue from CME arrangements is recognized over the period we
    satisfy the minimum credit hour requirements of the applicable
    agreements. Revenue from fixed fee content license or carriage
    fees is recognized ratably over the term of the applicable
    agreement. E-commerce revenue is recognized when a subscriber or
    consumer utilizes our Internet-based services or purchases goods
    or services through our Web site or co-branded Web site with one
    of our strategic partners. Subscription revenue, including
    subscription revenue from sponsorship arrangements, is
    recognized over the subscription period. When contractual
    arrangements contain multiple elements, revenue is allocated to
    the elements based on their relative fair values, determined
    using prices charged when elements are sold separately.
|
| | Plastic Technologies or
    Porex.We develop, manufacture and
    distribute porous plastic products and components. For standard
    products, we recognize revenue upon shipment of product, net of
    sales returns and allowances. For sales of certain custom
    products, we recognize revenue upon completion and customer
    acceptance. Recognition of amounts received in advance of
    meeting these criteria is deferred until we meet these criteria.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Long-Lived
    Assets Our long-lived
    assets consist of property and equipment, goodwill and other
    intangible assets. Goodwill and other intangible assets arise
    from the acquisitions we have made. The amount assigned to
    intangible assets is subjective and based on our estimates of
    the future benefit of the intangible asset using accepted
    valuation techniques, such as discounted cash flow and
    replacement cost models. Our long-lived assets are amortized
    over their estimated useful lives, which we determine based on
    the consideration of several factors, including the period of
    time the asset is expected to remain in service. We evaluate the
    carrying value and remaining useful lives of long-lived assets,
    excluding goodwill, whenever indicators of impairment are
    present. We evaluate the carrying value of goodwill annually. We
    use a discounted cash flow approach to determine the fair value
    of goodwill. During 2001, we identified certain indicators of
    possible impairment of our long-lived assets, primarily goodwill
    and other intangible assets. We evaluated our long-lived assets
    for impairment by determining identifiable cash flows to related
    asset groupings, and compared the projected undiscounted cash
    flows for each asset grouping to its carrying value. Once we
    determined there was an impairment, we quantified the impairment
    based on projected discounted cash flows. As a result of this
    analysis in 2001, we recorded an impairment charge of
    approximately $3.8 billion. There was no impairment of
    goodwill noted as a result of our impairment testing in 2003 or
    2002. Other unknown future indications of possible impairment
    charges, such as a significant downturn in one of our business
    segments or reporting units or general economic conditions,
    could result in an additional assessment of our long-lived
    assets for impairment and could result in an additional
    impairment charge in the future.
|
| |  | Investments
    Our investments, at December 31, 2003, consisted
    principally of certificates of deposit, municipal bonds, asset
    backed securities, Federal Agency Notes, U.S. Treasury
    Notes and an equity investment in a publicly traded company. For
    each reporting period, we evaluate the carrying value of our
    investments and record a loss on investments when we believe an
    investment has experienced a decline in value that is other than
    temporary. We do not recognize a gain on an investment until
    sold. Future changes in market or economic conditions or
    operating results of our investments could result in gains or
    losses or an inability to recover the carrying value of the
    investments that may not be reflected in an investments
    carrying value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Deferred Tax
    Assets Our deferred
    tax assets are comprised primarily of net operating loss
    carryforwards. At December 31, 2003, we had net operating
    loss carryforwards of approximately $1.9 billion. These
    loss carryforwards may be used to offset taxable income in
    future periods, reducing the amount of taxes we might otherwise
    be required to pay. Due to a lack of a history of generating
    taxable income, we record a valuation allowance equal to 100% of
    our net deferred tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

54



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | assets. In the event that we are able to generate
    taxable earnings in the future and determine it is more likely
    than not that we can realize our deferred tax assets, an
    adjustment to the valuation allowance would be made which may
    increase income in the period that such determination was made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Restructuring and
    Integration In
    connection with our restructuring and integration efforts,
    modifications to our strategic relationship with News
    Corporation resulted in a change in the carrying value of
    advertising services we have the rights to, classified as
    prepaid content and distribution services. We estimated the fair
    value of our rights under the new agreement using a discounted
    cash flow approach. This estimate also affects the amortization
    of this asset in future periods over the contractual term. Also,
    in connection with our restructuring and integration efforts, we
    recorded charges for estimated future lease obligations and
    lease cancellation penalties related to exited facilities based
    on many different variables, such as the term to expiration,
    contractual rights under the lease agreement and current real
    estate market conditions. Future changes in any of these
    variables, such as a change in real estate market conditions,
    could have an impact on these estimates.

Results of Operations

The following table sets forth our consolidated
statements of operations data and expresses that data as a
percentage of revenue for the periods presented (amounts in
thousands):

|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |        |  
|---------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------- | ------- | - | ---- | ----- | ---- | - | - | ------- | ------- | - |  | ----- | ---- | - |  | ---------- | ---------- | - |  | ------ | ------ | -
|                                                                                   |                                                                     |                         
|                                                                                   |                                                                     | Years Ended December 31,
|                                                                                   |                                                                     |                         
|                                                                                   |                                                                     |                          |         |         |   |     
|                                                                                   |                                                                     | 2003                     |         | 2002    |   | 2001
|                                                                                   |                                                                     |                          |         |         |   |     
|                                                                                   |                                                                     | $                        |         | %       |   | $    |       | %    |   | $ |         | %      
|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |        
|Revenue                                                                            |                                                                     |                          | 963,980 |         |   |      | 100.0 |      |   |   | 871,696 |         |   |  | 100.0 |      |   |  | 842,020    |            |   |  | 100.0  |       
|Costs and expenses:                                                                |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |       
|                                                                                   | Cost of operations                                                  |                          |         | 564,939 |   |      |       | 58.6 |   |   |         | 509,744 |   |  |       | 58.5 |   |  |            | 568,321    |   |  |        | 67.5   |  
|                                                                                   | Development and engineering                                         |                          |         | 42,985  |   |      |       | 4.5  |   |   |         | 43,467  |   |  |       | 5.0  |   |  |            | 43,572     |   |  |        | 5.2    |  
|                                                                                   | Sales, marketing, general and administrative                        |                          |         | 282,482 |   |      |       | 29.3 |   |   |         | 283,424 |   |  |       | 32.5 |   |  |            | 448,082    |   |  |        | 53.2   |  
|                                                                                   | Depreciation, amortization and other                                |                          |         | 62,434  |   |      |       | 6.5  |   |   |         | 125,593 |   |  |       | 14.4 |   |  |            | 2,394,857  |   |  |        | 284.4  |  
|                                                                                   | Legal expense                                                       |                          |         | 3,959   |   |      |       | 0.4  |   |   |         |        |   |  |       |     |   |  |            |           |   |  |        |       |  
|                                                                                   | Impairment of long-lived and other assets                           |                          |         |        |   |      |       |     |   |   |         |        |   |  |       |     |   |  |            | 3,816,115  |   |  |        | 453.2  |  
|                                                                                   | Restructuring and integration (benefit) charge                      |                          |         |        |   |      |       |     |   |   |         | (5,850  | ) |  |       | (0.7 | ) |  |            | 266,755    |   |  |        | 31.7   |  
|                                                                                   | Gain on investments                                                 |                          |         | 1,659   |   |      |       | 0.2  |   |   |         | 6,547   |   |  |       | 0.8  |   |  |            |           |   |  |        |       |  
|                                                                                   | Interest income                                                     |                          |         | 22,901  |   |      |       | 2.4  |   |   |         | 19,590  |   |  |       | 2.3  |   |  |            | 30,409     |   |  |        | 3.6    |  
|                                                                                   | Interest expense                                                    |                          |         | 15,214  |   |      |       | 1.6  |   |   |         | 8,491   |   |  |       | 1.0  |   |  |            | 507        |   |  |        | 0.0    |  
|                                                                                   | Other income, net                                                   |                          |         | 4,218   |   |      |       | 0.4  |   |   |         | 3,844   |   |  |       | 0.4  |   |  |            |           |   |  |        |       |  
|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |       
|Income (loss) from continuing operations before
    income tax provision (benefit) |                                                                     |                          | 20,745  |         |   |      | 2.1   |      |   |   | (63,192 | )       |   |  | (7.2  | )    |   |  | (6,665,780 | )          |   |  | (791.6 | )     
|                                                                                   | Income tax provision (benefit)                                      |                          |         | 4,140   |   |      |       | 0.4  |   |   |         | (10,079 | ) |  |       | (1.1 | ) |  |            | 2,588      |   |  |        | 0.3    |  
|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |       
|                                                                                   | Income (loss) from continuing operations                            |                          |         | 16,605  |   |      |       | 1.7  |   |   |         | (53,113 | ) |  |       | (6.1 | ) |  |            | (6,668,368 | ) |  |        | (791.9 | )
|                                                                                   | Income (loss) from discontinued operations, net
    of income taxes |                          |         | (33,611 | ) |      |       | (3.5 | ) |   |         | 3,411   |   |  |       | 0.4  |   |  |            | (3,950     | ) |  |        | (0.5   | )
|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |       
|Net loss                                                                           |                                                                     |                          | (17,006 | )       |   |      | (1.8  | )    |   |   | (49,702 | )       |   |  | (5.7  | )    |   |  | (6,672,318 | )          |   |  | (792.4 | )     
|                                                                                   |                                                                     |                          |         |         |   |      |       |      |   |   |         |         |   |  |       |      |   |  |            |            |   |  |        |       

Revenue is derived from our four business
segments: Transaction Services, Physician Services, Portal
Services and Plastic Technologies. Our Transaction Services
include administrative services, such as transaction processing
for medical, dental and pharmacy claims, automated patient
statements and clinical

55



---



##### Table of Contents



lab and reporting services, such as lab test
orders and results. A significant portion of Transaction
Services revenues is generated from the countrys largest
national and regional healthcare payers. Our Physician Services
include sales of practice management systems, including
administrative, financial and clinical applications and
services, under The Medical Manager, Intergy, ULTIA and Medical
Manager Network Services brands. We also sell support and
maintenance services related to the hardware and software
associated with our practice management systems. Portal Services
include advertising, sponsorship, continuing medical education,
content syndication and distribution, and e-commerce
transactions through our online distribution channels and the
online and offline distribution channels of our strategic
partners. The majority of Portal Services revenues are derived
from a small number of customers. Our customers include
pharmaceutical companies, biotech companies, medical device
companies and media companies. Our Plastic Technologies revenue
includes the sale of porous plastic components used to control
the flow of fluids and gases for use in healthcare, industrial
and consumer applications, as well as in finished products used
in the medical device and surgical markets.


Cost of operations consists of costs related to
services and products we provide to customers and costs
associated with the operation and maintenance of our networks.
These costs include salaries and related expenses for network
operations personnel and customer support personnel,
telecommunication costs, maintenance of network equipment, cost
of hardware related to the sale of practice management systems,
a portion of facilities expenses, leased personnel and
facilities costs, sales commissions paid to certain distributors
of our Transaction Services products, non-cash expenses related
to content and distribution services. In addition, cost of
operations includes raw materials, direct labor and
manufacturing overhead, such as fringe benefits and indirect
labor related to our Plastic Technologies segment.

Development and engineering expense consists
primarily of salaries and related expenses associated with the
development of applications and services. Expenses include
compensation paid to development and engineering personnel, fees
to outside contractors and consultants, and the maintenance of
capital equipment used in the development process.

Sales, marketing, general and administrative
expense consists primarily of advertising, product and brand
promotion, salaries and related expenses for sales,
administrative, finance, legal, information technology, human
resources and executive personnel. These expenses include items
related to account management and marketing personnel,
commissions, costs and expenses for marketing programs and trade
shows, and fees for professional marketing and advertising
services, as well as fees for professional services, costs of
general insurance and costs of accounting and internal control
systems to support our operations. Also included are non-cash
expenses related to content and distribution services acquired
in exchange for our equity securities and stock compensation
expense primarily related to the amortization of deferred
compensation. Content and distribution services consist of
advertising, promotion and distribution services from our
arrangements with News Corporation, Microsoft, AOL and other
partners. Stock compensation primarily relates to deferred
compensation associated with the intrinsic value of the vested
portion of stock options issued in exchange for outstanding
stock options of companies we acquired in 2000, and the excess
of the market price over the exercise price of options granted
to employees.



| |              
| | -------------
| | 2003 and 2002



| |        
| | -------
| | Revenue

Our total revenues increased to $963,980 in 2003
from $871,696 in 2002. Transaction Services, Physician Services,
Portal Services and Plastic Technologies accounted for $38,919,
$27,334, $26,369 and $6,129, respectively, of the revenue
increase. This revenue increase was partially offset by an
increase in inter-segment eliminations of $6,467.

Revenue from customers acquired through the 2003
Acquisitions and 2002 Acquisitions contributed $55,629 to the
overall increase in revenue for 2003 of $92,284. For purposes of
this discussion, only revenue from existing customers of the
acquired business on the date of the acquisition is considered
to be revenue from acquired customers. We integrate acquisitions
as quickly as practicable, and only revenue

56



---



##### Table of Contents



recognized during the first twelve months
following the quarter in which the acquisitions closed is
considered to be revenue from acquired customers.




| |                   
| | ------------------
| | Costs and Expenses

Cost of Operations.Cost of operations increased to $564,939 in 2003 from $509,744
in 2002. Our cost of operations represented 58.6% of revenues in
2003, compared to 58.5% in 2002. While cost of operations as a
percentage of revenue has remained relatively consistent from
2003 to 2002, cost of operations increased due to our
July 17, 2003 acquisition of ABF, whose products have a
lower gross margin. Additionally, cost of operations increased
due to higher sales commissions paid to our channel partners and
due to higher consulting and personnel costs related to our
implementation of the Health Insurance Portability and
Accountability Act of 1996, or HIPAA. These increases were
offset by lower data communication costs and the costs
associated with the lower margin terminated products and
relationships exited in May 2002. Cost of operations for 2003
and 2002 includes approximately $2,356 and $4,765, respectively,
of non-cash expenses related to content and distribution
services.

Development and
Engineering.Development and
engineering expense was $42,985 and $43,467 in 2003 and 2002,
respectively. Development and engineering expense was relatively
flat in 2003 compared to 2002, both in the aggregate and at the
segment level, reflecting relatively consistent spending
throughout all operating segments.

Sales, Marketing, General and
Administrative.Sales, marketing,
general and administrative expense decreased to $282,482 in
2003, from $283,424 in 2002, which represents a decrease of
$942. Included in sales, marketing, general and administrative
expense are non-cash expenses related to content and
distribution services and stock compensation. Non-cash expenses
related to content and distribution services were $21,942 in
2003, compared to $20,941 in 2002. Non-cash stock compensation
was $12,449 in 2003, compared to $25,265 in 2002. The decrease
in non-cash stock compensation is primarily related to the
vesting schedules of options issued and assumed in connection
with our 2000 acquisitions. Sales, marketing, general and
administrative expense excluding the non-cash expenses discussed
above, were $248,091, or 25.7% of revenue in 2003, compared to
$237,218, or 27.2% of revenue in 2002. The decrease in sales,
marketing, general and administrative expense, excluding the
non-cash expenses discussed above, as a percentage of revenue,
is due to the fixed cost leverage of our increased revenues as
well as lower sales and marketing costs, partially offset by
higher consulting and personnel costs related to our
implementation efforts with respect to the HIPAA Transaction
Standards and our all-payer services, higher
professional services expenses, and higher insurance expenses.

Depreciation, Amortization and
Other.Depreciation, amortization and
other expense decreased to $62,434 in 2003 from $125,593 in
2002. The decrease was primarily the result of intangible assets
relating to certain acquisitions made in 1999 and 2000 becoming
fully amortized since the beginning of the prior year period.

Legal Expense.Legal
expense in 2003 was $3,959 and represents the costs and expenses
incurred related to the investigation by the United States
Attorney for the District of South Carolina initiated on
September 3, 2003. Over the course of the investigation, we
expect that these costs and expenses may be significant.

Impairment of Long-Lived and Other
Assets.During 2003 and 2002, we
performed the impairment tests of goodwill, as required by
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
There was no impairment resulting from these tests.

Restructuring and Integration (Benefit)
Charge.In connection with our
restructuring and integration efforts, we recorded a benefit of
$5,850 in 2002, which related to the settlement of certain
contractual obligations. There were no restructuring or
integration charges recorded during 2003.

Gain on Investments.During 2003, the gain on investments in the amount of $1,659
consisted of a gain of $2,973 related to the sale of a portion
of our investments in marketable equity securities, offset by a
loss of $1,314 related to the sale of our investments in
marketable debt securities. During 2002, we

57



---



##### Table of Contents



recognized a gain on investments of $6,547, which
is comprised of a gain of $5,866 and $681 related to the sale of
our investment in an available-for-sale and an early redemption
call of a held-to-maturity security, respectively.


Interest Income.Interest income increased to $22,901 in 2003, from $19,590 in
2002. This increase was mainly due to higher average investment
balances, partially offset by lower average rates of return,
during 2003 as compared to 2002. The higher average investment
balances in 2003 were primarily attributable to the proceeds
from the issuance of our $300,000 3 1/4% Convertible
Subordinated Notes in April 2002, and the issuance of our
$350,000 1.75% Convertible Subordinated Notes in June and
July 2003.

Interest Expense.Interest expense increased to $15,214 in 2003, from $8,491 in
2002, due to the inclusion of a full year of interest expense
and amortization of debt issuance costs related to our $300,000
3 1/4% Convertible Subordinated Notes issued in April
2002 and the interest expense and amortization of debt issuance
costs related to our $350,000 1.75% Convertible
Subordinated Notes issued in June and July of 2003.

Other Income, Net.Other income for 2003 of $4,218 is comprised of a gain of $3,100
for the sale of property in California and Ohio and a benefit of
$1,118 from a state tax refund which applied to a
pre-acquisition tax year of a company we acquired. Other income
of $3,844 in 2002 includes $5,223 for the settlement of various
pre-acquisition issues related to certain companies acquired in
1998 through 2000, partially offset by $1,379 in expenses
related to our disposition plan for our Plastic Technologies
business.

Income Tax Provision
(Benefit).Income tax provision
(benefit) in 2003 and 2002 primarily represents taxes from
profitable operations in certain states and foreign countries in
which we do not have net operating losses to offset that income.
Accordingly, we provided for taxes of $4,140 and $2,808 related
to foreign, state and other jurisdictions during 2003 and 2002,
respectively. Also included in the 2002 income tax provision
(benefit) is a $12,887 benefit reflecting the carryback of net
operating losses to the prior periods of certain acquired
subsidiaries, in which those subsidiaries generated taxable
income. The carryback was allowed as a result of the Job
Creation and Worker Assistance Act of 2002 that was
enacted on March 9, 2002.

Discontinued
Operations.Loss from discontinued
operations in 2003 represents the operating results of the
discontinued units of the Plastic Technologies segment as well
as the loss of $3,491 recognized in connection with their
disposal on August 1, 2003. Also included in the loss from
discontinued operations in 2003 was an impairment charge of
$33,113 to reduce the long-lived assets of the discontinued
units to fair value. The income from discontinued operations in
2002 includes the operating results of the discontinued units.



| |              
| | -------------
| | 2002 and 2001

Revenue

Our total revenues increased to $871,696 in 2002
from $842,020 in 2001. Transaction Services, Physician Services,
Portal Services and Plastic Technologies accounted for $9,362,
$15,097, $9,670 and $3,794, respectively, of the revenue
increase. This revenue increase was partially offset by an
increase in inter-segment eliminations and other of $8,247 which
included revenue related to technology outsourcing and
consulting relationships and other non-core products that the
Company exited in 2002 and 2001.



| |                   
| | ------------------
| | Costs and Expenses

Cost of Operations.Cost of operations decreased to $509,744 in 2002 from $568,321
in 2001. Our cost of operations represented 58.5% of revenues in
2002, compared to 67.5% in 2001. This decrease was primarily due
to the elimination of costs as a result of our restructuring and
integration initiatives, primarily reduced personnel and
facilities related costs from consolidating data center
operations in our Transaction Services segment as well as in our
Portal Services segment. Also contributing to the decrease was
the elimination of direct costs associated with residual revenue
from technology outsourcing and

58



---



##### Table of Contents



consulting relationships and other non-core
products that were exited in 2002 and 2001. Cost of operations
for 2002 and 2001 includes approximately $4,765 and $1,531,
respectively, in non-cash expenses related to content and
distribution services.


Development and
Engineering.Development and
engineering expense was $43,467 in 2002 and $43,572 in 2001.
During 2002, we increased our investment in product offerings in
both the Transaction Services and Physician Services segments,
which was predominantly offset by the impact of cost reductions
resulting from our restructuring and integration efforts.

Sales, Marketing, General and
Administrative.Sales, marketing,
general and administrative expense decreased to $283,424 in 2002
from $448,082 in 2001, which represents a decrease of 36.7% or
$164,658. Included in sales, marketing, general and
administrative expense are non-cash expenses related to content
and distribution services and stock compensation. Non-cash
expenses related to content and distribution services were
$20,941 in 2002, compared to $43,943 in 2001. This decrease was
primarily due to the expiration of certain content and
distribution alliance agreements. Non-cash stock compensation
was $25,265 in 2002, compared to $78,451 in 2001. The decrease
in non-cash stock compensation was primarily related to the
vesting schedules of options issued and assumed in connection
with our 2000 acquisitions. Sales, marketing, general and
administrative expense excluding the non-cash expenses discussed
above, decreased to $237,218 in 2002 from $325,688 in 2001. This
decrease was primarily due to the elimination of costs as a
result of our restructuring and integration efforts and, to a
lesser extent, due to reduced advertising expenses related to
the elimination of barter arrangements and distribution costs in
our Portal Services segment, as well as lower personnel related
costs and lower bad debt expense.

Depreciation, Amortization and
Other.Depreciation, amortization and
other expense decreased to $125,593 in 2002 from
$2.4 billion in 2001. The decrease was primarily
attributable to the adoption of SFAS No. 142 on
January 1, 2002, which eliminates amortization expenses
related to goodwill and certain intangibles and requires these
assets to be tested for impairment at least annually. We
recorded goodwill and intangible amortization of
$2.2 billion in 2001, related to goodwill and certain
intangible assets that were not subject to amortization in 2002.

Impairment of Long-Lived and Other
Assets.During 2002, we performed both
the transitional and annual impairment tests of goodwill, as
required by SFAS No. 142. There was no impairment
resulting from these tests. During 2001, we identified certain
indicators of possible impairment of long-lived assets,
primarily goodwill and other acquired intangible assets. These
indicators included a further decline in the price of our common
stock to its lowest price in the previous twelve months
accompanied by a significant decline in the volatility of our
stock price, a sustained decline in valuations in the e-health,
technology and Internet sectors, and the impact of recent trends
in general economic conditions. Based on these indicators, we
reviewed substantially all of our long-lived assets for
impairment. As a result of this review, we determined that our
long-lived and other assets, primarily goodwill and other
acquired intangibles, were impaired and recorded a write-down of
$3.8 billion during 2001.

Restructuring and Integration (Benefit)
Charge.In connection with our
restructuring and integration efforts, we recorded a net benefit
of $5,850 in 2002, which was primarily due to the settlements of
certain contractual obligations. During 2001, we continued our
restructuring efforts that began in 2000, with the intention of
eliminating duplication and redundancy that resulted from 2000
and 2001 acquisitions. These restructuring efforts resulted in a
charge of $266,755 in 2001.

Gain on Investments.Gain on investments of $6,547 in 2002 represented a $5,866 gain
related to the sale of one of our investments in
available-for-sale securities and a $681 gain related to one of
our investments in held-to-maturity securities that was called
for early redemption.

Interest Income.Interest income decreased to $19,590 in 2002, from $30,409 in
2001. This decrease is due to lower average balances available
for investment as a result of cash used to settle certain
contracts with certain of our strategic partners, repurchases of
our stock, acquisitions during 2002 and payments made under our
restructuring and integration program combined with lower
available rates of return, offset

59



---



##### Table of Contents



in part by interest income related to the
$292,000 of net proceeds received from the issuance of our
$300,000 3 1/4% Convertible Subordinated Notes in
April 2002.


Interest Expense.Interest expense increased to $8,491 in 2002 from $507 in 2001,
as a result of interest expense and amortization of debt
issuance costs related to our $300,000
3 1/4% Convertible Subordinated Notes issued in April
2002.

Other Income, Net.Other income of $3,844 in 2002 included $5,223 for the
settlement of various preacquisition issues related to certain
companies acquired in 1998 through 2000. This income was
partially offset by $1,379 in expenses related to our
disposition plan for our Plastic Technologies business.

Income Tax Provision
(Benefit).Income tax provision
(benefit) in 2002 included a $12,887 benefit reflecting the
carryback of net operating losses to the prior periods of
certain acquired subsidiaries, in which those subsidiaries
generated taxable income. The carryback was allowed as a result
of the Job Creation and Worker Assistance Act of
2002 that was enacted on March 9, 2002. In addition,
we have operations that are profitable in certain states and
foreign countries in which we do not have net operating losses
to offset that income. Accordingly, we provided for taxes of
$2,808 and $2,588 related to foreign, state and other
jurisdictions during 2002 and 2001, respectively.

Discontinued
Operations.Income from discontinued
operations in 2002 represents the operating results of the
discontinued units of the Plastic Technologies segment. The loss
from discontinued operations in 2001 includes the operating
results of the discontinued operating units as well as an
impairment charge of $10,778 representing the difference between
the carrying value and fair value of the discontinued operating
units assets.

Results of Operations by Operating
Segment

We evaluate the performance of our business
segments based upon income or loss before restructuring, taxes,
non-cash and other items. Non-cash and other items include
depreciation, amortization, accretion of preferred stock,
impairment charges, costs and expenses related to the
investigation by the United States Attorney for the District of
South Carolina and the SEC (legal expense), gain on
investments, other income, non-cash expenses related to content,
advertising and distribution services acquired in exchange for
our equity securities in acquisitions and strategic alliances,
and stock compensation primarily related to stock options issued
and assumed in connection with acquisitions. The accounting
policies of the segments are the same as the accounting policies
for the consolidated company. We record inter-segment revenues
at rates comparable to those charged to third parties for
comparable services. Inter-segment revenues are eliminated in
consolidation.

The following table presents the results of our
operations for each of our reportable segments (amounts in
thousands):

|                                                                        |  |                          |         |      |  |      |         |   |  |   |         |     
|----------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | ----
|                                                                        |  |                         
|                                                                        |  | Years Ended December 31,
|                                                                        |  |                         
|                                                                        |  | 2003                     |         | 2002 |  | 2001
|                                                                        |  |                          |         |      |  |     
|Revenues                                                                |  |                          |         |      |  |      |         |   |  |   |         |     
|Transaction services                                                    |  | $                        | 505,729 |      |  | $    | 466,810 |   |  | $ | 457,448 |     
|Physician services                                                      |  |                          | 302,640 |      |  |      | 275,306 |   |  |   | 260,209 |     
|Portal services                                                         |  |                          | 110,665 |      |  |      | 84,296  |   |  |   | 74,626  |     
|Plastic technologies                                                    |  |                          | 71,940  |      |  |      | 65,811  |   |  |   | 62,017  |     
|Eliminations and other, net                                             |  |                          | (26,994 | )    |  |      | (20,527 | ) |  |   | (12,280 | )(a)
|                                                                        |  |                          |         |      |  |      |         |   |  |   |         |     
|                                                                        |  | $                        | 963,980 |      |  | $    | 871,696 |   |  | $ | 842,020 |     
|                                                                        |  |                          |         |      |  |      |         |   |  |   |         |     
|Income (loss) before restructuring, taxes,
    non-cash and other items |  |                          |         |      |  |      |         |   |  |   |         |     
|Transaction services                                                    |  | $                        | 94,218  |      |  | $    | 85,154  |   |  | $ | 41,987  |     
|Physician services                                                      |  |                          | 20,924  |      |  |      | 26,685  |   |  |   | 20,827  |     

60



---



##### Table of Contents



|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |            |  
|--------------------------------------------------------------------- | -------- | ------------------------ | ------- | ------- | - | ---- | -------- | ------- | - | - | ---------- | ---------- | -
|                                                                      |          |                         
|                                                                      |          | Years Ended December 31,
|                                                                      |          |                         
|                                                                      |          | 2003                     |         | 2002    |   | 2001
|                                                                      |          |                          |         |         |   |     
|Portal services                                                       |          |                          | 24,898  |         |   |      | 5,574    |         |   |   | (79,437    | )         
|Plastic technologies                                                  |          |                          | 20,532  |         |   |      | 19,891   |         |   |   | 17,406     |           
|Corporate and other                                                   |          |                          | (50,251 | )       |   |      | (51,272  | )       |   |   | (94,813    | )         
|Interest income                                                       |          |                          | 22,901  |         |   |      | 19,590   |         |   |   | 30,409     |           
|Interest expense                                                      |          |                          | (15,214 | )       |   |      | (8,491   | )       |   |   | (507       | )         
|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |           
|                                                                      |          | $                        | 118,008 |         |   | $    | 97,131   |         |   | $ | (64,128    | )         
|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |           
|Restructuring, taxes, non-cash and other
    items                    |          |                          |         |         |   |      |          |         |   |   |            |           
|Depreciation, amortization and other                                  |          | $                        | (62,434 | )       |   | $    | (125,593 | )       |   | $ | (2,394,857 | )         
|Non-cash content and distribution services and
    stock compensation |          |                          | (36,747 | )       |   |      | (50,971  | )       |   |   | (123,925   | )         
|Impairment of long-lived and other assets                             |          |                          |        |         |   |      |         |         |   |   | (3,816,115 | )         
|Restructuring and integration benefit (charge)                        |          |                          |        |         |   |      | 5,850    |         |   |   | (266,755   | )         
|Legal expense                                                         |          |                          | (3,959  | )       |   |      |         |         |   |   |           |           
|Gain on investments                                                   |          |                          | 1,659   |         |   |      | 6,547    |         |   |   |           |           
|Other income, net                                                     |          |                          | 4,218   |         |   |      | 3,844    |         |   |   |           |           
|Income tax benefit (provision)                                        |          |                          | (4,140  | )       |   |      | 10,079   |         |   |   | (2,588     | )         
|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |           
|Income (loss) from continuing operations                              |          |                          | 16,605  |         |   |      | (53,113  | )       |   |   | (6,668,368 | )         
|Income (loss) from discontinued operations, net
    of income taxes   |          |                          | (33,611 | )       |   |      | 3,411    |         |   |   | (3,950     | )         
|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |           
|                                                                      | Net loss |                          | $       | (17,006 | ) |      | $        | (49,702 | ) |   | $          | (6,672,318 | )
|                                                                      |          |                          |         |         |   |      |          |         |   |   |            |           



---



|    |  |                                                                                                                                                                                                                                                                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2001, includes revenues related to technology
    outsourcing and consulting relationships and other non-core
    products that we decided to exit as a result of restructuring
    and integration efforts that commenced in the third quarter of
    2000, as well as the elimination of inter-segment revenues of
    $14,061.



| |              
| | -------------
| | 2003 and 2002

Transaction
Services.Revenues were $505,729 in
2003, an increase of $38,919 or 8.3% from 2002. Revenues from
customers acquired through the 2003 Acquisitions contributed
$37,870 to the increase in Transaction Services revenue.
Additionally, revenues for 2002 include $7,460 of revenues
associated with terminated laboratory connectivity products and
relationships exited. Excluding the impact of the 2003
Acquisitions and terminated products and relationships, revenues
for 2003 increased by $8,509, primarily the result of a postal
rate increase that went into effect on July 1, 2002.

Income before restructuring, taxes, non-cash and
other items was $94,218 in 2003, an increase of $9,064 or 10.6%
from 2002. As a percentage of revenue, income before
restructuring, taxes, non-cash and other items was 18.6% in
2003, compared to 18.2% in 2002. The slight improvement in
income as a percentage of revenue was due to lower data
communication costs and the elimination of costs associated with
the terminated products and relationship discussed above, offset
by higher sales commissions paid to our channel partners, and
increased costs related to our implementation efforts with
respect to the HIPAA Transaction Standards and our
all-payer network services.

Physician Services.Revenues were $302,640 in 2003, an increase of $27,334 or 9.9%
from 2002. The increase was primarily attributable to an
increase in Network Services revenues. Systems sales and
maintenance revenues also increased, primarily as a result of
revenues from customers acquired. Those customers contributed
$8,180 to the increase in revenues in 2003.

61



---



##### Table of Contents



Income before restructuring, taxes, non-cash and
other items was $20,924 in 2003, a decrease of $5,761 from 2002.
As a percentage of revenue, income before restructuring, taxes,
non-cash and other items was 6.9% in 2003, compared to 9.7% in
2002. This decrease in income as a percentage of revenue was
primarily attributable to increased costs related to our
implementation efforts with respect to the HIPAA Transaction
Standards and our all-payer network services, as
well as a shift in sales focus to larger accounts in 2003, which
generally carry lower margins as a percentage of sales.

Portal Services.Revenues were $110,665 in 2003, an increase of $26,369 or 31.3%
from 2002. Revenues from customers acquired through 2003
Acquisitions and 2002 Acquisitions contributed $9,579 to the
increase in Portal Service revenue for 2003. Excluding the 2003
Acquisitions and 2002 Acquisitions, the increase was primarily
attributable to growth in advertising and sponsorship revenues
on our consumer and professional sites, and, to a lesser extent,
an increase in revenues from health plans and employers.

Income before restructuring, taxes, non-cash and
other items in 2003 was $24,898, compared to $5,574 in 2002. As
a percentage of revenue, the income before restructuring, taxes,
non-cash and other items improved to 22.5% in 2003, compared to
6.6% in 2002. This improvement was the result of fixed cost
leverage related to the increased revenues discussed above and
reduced sales and marketing related costs during 2003 compared
to 2002. Also included in income before restructuring, taxes,
non-cash and other items in 2003 was $1,863 of expense related
to the acquisition of certain resources of Physicians Online.

Plastic
Technologies.Revenues were $71,940 in
2003, an increase of $6,129 or 9.3% from 2002. The increase was
primarily due to a favorable impact of foreign exchange rates,
higher sales of our computer printing and writing instrument
components and higher sales of our surgical products.

Income before restructuring, taxes, non-cash and
other items in 2003 was $20,532, an increase of $641 from 2002.
As a percentage of revenue, income before restructuring, taxes,
non-cash and other items was 28.5% in 2003, compared to 30.2% in
2002. This decrease in income as a percentage of revenue was due
to higher sales and marketing and product development expenses.

Corporate and Other.Corporate and other includes expenses shared across all
segments, such as executive personnel, corporate finance, legal,
human resources and risk management. Corporate and other
expenses declined to $50,251 or 5.2% of consolidated revenue in
2003 from $51,272 or 5.9% of consolidated revenue in 2002 due to
lower personnel and facility costs, partially offset by higher
insurance expenses and higher professional services expenses.

Eliminations and Other,
Net.The increase of $6,467 in
inter-segment eliminations from 2002 resulted from higher sales
of Transaction Services products into the Physician Services
customer base.



| |              
| | -------------
| | 2002 and 2001

Transaction
Services.Revenues were $466,810 in
2002, an increase of $9,362 from 2001. The increase was due to
higher transaction volumes and the impact of the postal rate
increase that was effective July 1, 2002. These increases
were partially offset by the net reduction in revenues of
$22,511 in 2002, when compared to 2001. This reduction in
revenue related to certain terminated products and
relationships, such as hospital and laboratory connectivity
relationships and consolidation of duplicate product offerings
in 2001 and 2002.

Income before restructuring, taxes, non-cash and
other items in 2002 increased by $43,167 or 102.8% from 2001. As
a percentage of revenue, income before restructuring, taxes,
non-cash and other items improved to 18.2% in 2002, from 9.2% in
2001. The improvement was a result of our consolidation and
integration efforts which resulted in lower personnel and
occupancy-related expenses and the elimination of certain
unprofitable products and relationships.

Physician Services.Revenues were $275,306 in 2002, an increase of $15,097 from
2001. The increase was primarily attributable to an increase in
Network Services revenues, as well as higher systems sales and
maintenance revenues. The higher sales in 2002 reflect the
impact of the June 2002 release of Intergy. Revenues from
customers acquired through 2002 Acquisitions and 2001
Acquisitions contributed $6,781 to the increase in revenues in
2002.

62



---



##### Table of Contents



Income before restructuring, taxes, non-cash and
other items increased by $5,858 in 2002 from 2001. As a
percentage of revenue, income before restructuring, taxes,
non-cash and other items was 9.7% in 2002, compared to 8.0% in
2001. This improvement related to changes in the mix of revenues
offset by roll-out costs related to our new products.

Portal Services.Revenues were $84,296 in 2002, an increase of $9,670 from 2001.
The increase was a result of higher levels of sponsorship from
our customers, the acquisition of Medscape in late 2001 and
WellMed in late 2002, which contributed an aggregate of $23,449
in revenues during 2002, partially offset by the elimination of
arrangements which generated barter revenue of $19,009 in 2001.
No barter revenue was recognized during 2002. Revenue from
related parties was $3,000 in 2001. These revenues consist of
services provided to News Corporation. Revenue from News
Corporation ceased being considered from a related party as of
February 15, 2001 when News Corporation surrendered our
Series A Convertible Preferred Stock.

Income before restructuring, taxes, non-cash and
other items in 2002 was $5,574, compared to a loss of $79,437 in
2001. As a percentage of revenue, the income (loss) before
restructuring, taxes, non-cash and other items improved to 6.6%
in 2002, compared to (106.4)% in 2001. Our restructuring,
integration and cost containment efforts have resulted in
substantial reductions in personnel, marketing, advertising,
content, distribution and other expenses.

Plastic
Technologies.Revenues were $65,811 in
2002, an increase of $3,794 from 2001. The increase was
primarily due to higher sales of medical OEM components,
surgical products and computer printing components.

Income before restructuring, taxes, non-cash and
other items in 2002 was $19,891, an increase of $2,485 from
2001. As a percentage of revenue, income before restructuring,
taxes, non-cash and other items was 30.2% in 2002 compared to
28.1% in 2001. This increase was due to higher sales discussed
above, partially offset by an increase in certain direct
manufacturing and other costs.

Corporate and Otherincludes expenses shared across all segments, such as executive
personnel, corporate finance, legal, human resources and risk
management as well as the residual costs during the prior year
periods related to the exit of discontinued products resulting
from our restructuring and integration efforts. Corporate and
other expenses declined to $51,272 in 2002 from $94,813 in 2001
as a result of consolidating many duplicative corporate
functions and the elimination of residual expenses related to
discontinued products. These efforts resulted in reduced
expenses in occupancy, personnel, outside services and other
operating expenses.

Eliminations and Other,
Net.The increase of $8,247 in
inter-segment eliminations from 2001 resulted from higher sales
of Transaction Services products into the Physician Services
customer base, offset by the elimination of $1,781 in revenues
from technology outsourcing and consulting relationships and
other non-core products exited in 2001.

Liquidity and Capital Resources

We have incurred significant operating and net
losses since we began operations and, as of December 31,
2003, we had an accumulated deficit of $10.2 billion. We
plan to continue to invest in acquisitions, strategic
relationships, infrastructure and product development.

As of December 31, 2003, we had
approximately $270,681 in cash and cash equivalents and
short-term investments and working capital of $202,573.
Additionally, we had long-term investments of $451,290 in
marketable debt securities and $4,744 in marketable equity
securities. We invest our excess cash principally in
U.S. Treasury obligations and federal agency notes and
expect to do so in the future. During 2003, we reviewed the
classification of our marketable securities between
available-for-sale and held-to-maturity. As a result of our
review, we reclassified all remaining held-to-maturity
securities to available-for-sale.

Cash provided by operating activities was $82,239
in 2003, compared to cash provided by operating activities of
$93,097 in 2002. The cash provided by operating activities in
2003 was primarily attributable to the net loss of $17,006 and a
net decrease in operating assets and liabilities of $36,164,
offset by non-

63



---



##### Table of Contents



cash charges of $101,427 and the loss from
discontinued operations of $33,611. The impact of changes in
operating assets and liabilities may change in future periods,
depending on the timing of each period end in relation to items
such as internal payroll and billing cycles, payments from
customers, payments to vendors, interest payments relating to
our 3 1/4% Convertible Subordinated Notes and our
1.75% Convertible Subordinated Notes and interest receipts
relating to our investments in marketable securities. The cash
provided by operating activities in 2002 was primarily
attributable to a net loss of $49,702 and a net decrease in
operating assets and liabilities of $34,828, offset by non-cash
charges of $177,673. The non-cash charges consist of
depreciation and amortization, non-cash expenses related to
content and distribution services and stock compensation and
amortization of debt issuance costs.


Cash used in investing activities was $556,526 in
2003, compared to cash used in investing activities of $402,663
in 2002. Cash used in investing activities during 2003 included
$598,367 of purchases of held-to-maturity and available-for-sale
securities, partially offset by $405,213 of proceeds from the
maturities, sales and redemptions of available-for-sale and
held-to-maturity securities. Cash used in investing activities
in 2002 primarily related to purchases of held-to-maturity and
available-for-sale securities. The 2003 Acquisitions consumed
cash of $400,491, net of cash acquired, primarily related to the
Medifax and ABF acquisitions. Cash paid for the 2002
Acquisitions was $33,471 and related to the Medscape and
Physician Services acquisitions. Investments in property and
equipment were $18,385 in 2003, compared to $26,267 in 2002.
Additionally we received proceeds of $56,279 related to the sale
of our discontinued operations and the sale of certain property,
primarily land and buildings.

Cash provided by financing activities was
$356,621 in 2003 compared to cash provided by financing
activities of $201,751 in 2002. Cash provided by financing
activities for 2003 principally relates to net proceeds of
$339,125 from the issuance of the 1.75% Convertible
Subordinated Notes on June 25, 2003 and July 7, 2003,
and $44,719 related to the issuance of common stock, primarily
due to exercises of employee stock options. Cash provided by
financing activities for 2002 primarily related to $292,000 of
net proceeds related to the issuance of our
3 1/4% Convertible Subordinated Notes on April 1,
2002. During 2003 and 2002, $20,316 and $104,960, respectively,
was used for repurchases of our common stock.

As of December 31, 2003, we did not have any
material commitments for capital expenditures. Our principal
commitments at December 31, 2003 consisted primarily of our
commitments related to the $350,000 of 1.75% Convertible
Subordinated Notes due in June of 2023 and the $299,999 of
3 1/4% Convertible Subordinated Notes due in April of
2007, obligations under operating leases and potential earnout
payments of up to an aggregate of $157,375 related to completed
acquisitions. The following table summarizes our principal
commitments as of December 31, 2003, as well as
managements estimates of the timing of the cash flows
associated with these commitments. Managements estimates
of the timing of future cash flows are largely based on
historical experience, and accordingly, actual timing of cash
flows may vary from these estimates. The potential earnout
payments of up to $157,375 have not been included in the table
below as it is impracticable to estimate the timing or amount of
any payments related to these commitments.

|                            |       |                |         |           |  |           |        |           |  |           |        |        |  |   |         |         |  |   |         |         | 
|--------------------------- | ----- | -------------- | ------- | --------- |  | --------- | ------ | --------- |  | --------- | ------ | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                            |       |                |         | Less Than |  |           |        |           |  | More Than
|                            |       | Total          |         | 1 Year    |  | 1-3 Years |        | 3-5 Years |  | 5 Years  
|                            |       |                |         |           |  |           |        |           |  |          
|                            |       |               
|                            |       | (In thousands)
|Leases                      |       | $              | 119,508 |           |  | $         | 24,082 |           |  | $         | 36,038 |        |  | $ | 26,547  |         |  | $ | 32,841  |        
|Strategic Relationships     |       |                | 2,641   |           |  |           | 1,262  |           |  |           | 1,254  |        |  |   | 125     |         |  |   |        |        
|Long-Term Debt              |       |                | 649,999 |           |  |           |       |           |  |           |       |        |  |   | 299,999 |         |  |   | 350,000 |        
|Purchase Obligations        |       |                | 35,485  |           |  |           | 20,886 |           |  |           | 14,599 |        |  |   |        |         |  |   |        |        
|Other Long-Term Liabilities |       |                | 1,182   |           |  |           |       |           |  |           | 727    |        |  |   | 51      |         |  |   | 404     |        
|                            |       |                |         |           |  |           |        |           |  |           |        |        |  |   |         |         |  |   |         |        
|                            | Total |                | $       | 808,815   |  |           | $      | 46,230    |  |           | $      | 52,618 |  |   | $       | 326,722 |  |   | $       | 383,245 | 
|                            |       |                |         |           |  |           |        |           |  |           |        |        |  |   |         |         |  |   |         |        

Purchase obligations include amounts committed
under legally enforceable contracts or purchase orders for goods
and services with defined terms as to price, quantity and
delivery.

64



---



##### Table of Contents



The lease amounts include leases identified in
our restructuring and integration efforts and are net of
sublease income. Other long-term liabilities primarily include
those amounts on the Companys December 31, 2003
balance sheet representing the long term portion of capital
leases.

We believe that, for the foreseeable future, we
will have sufficient cash resources to meet the commitments
described above and our currently anticipated working capital
and capital expenditure requirements, including the capital
requirements related to the roll-out of new or updated products
in 2004 and 2005. Our future liquidity and capital requirements
will depend upon numerous factors, including the success of the
integration of our businesses, retention of customers at current
volume and revenue levels, our existing and new application and
service offerings, competing technological and market
developments, potential future acquisitions and additional
repurchases of our common stock. In addition, we have been
incurring, and expect to continue to incur, costs relating to
our own implementation of the HIPAA Transaction Standards and
for assistance we provide to our customers in their
implementation efforts. Our ability to perform our services in
compliance with HIPAA and the cost to us of doing so will depend
on, among other things, the status of the compliance efforts of
our payer and provider customers and the extent of the need to
adjust our systems and procedures in response to changes in
their systems and procedures. We may need to raise additional
funds to support expansion, develop new or enhanced applications
and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of
unanticipated opportunities. If required, we may raise such
additional funds through public or private debt or equity
financing, strategic relationships or other arrangements. There
can be no assurance that such financing will be available on
acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.

Recent Accounting Pronouncements

In May 2003, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
(SFAS No. 150). SFAS No. 150
requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be
accounted for as liabilities. The financial instruments affected
include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and
must be applied to our existing financial instruments effective
July 1, 2003, the beginning of the first fiscal period
after June 15, 2003. The adoption of SFAS No. 150
on June 1, 2003 did not have any effect on our consolidated
financial position or results of operations.

In November 2002, the Emerging Issues Task Force
issued a final consensus on issue 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables
(EITF 00-21) which addresses how to account for
arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets.
EITF 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15,
2003. Companies may also elect to apply the provisions of
EITF 00-21 to existing arrangements and record the
operating statement impact as the cumulative effect of a change
in accounting principle. We have adopted EITF 00-21
prospectively for contracts beginning after June 30, 2003.
The adoption of EITF 00-21 did not have a material impact
on our consolidated financial position or results of operations.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The
interpretation elaborates on the disclosures to be made in our
interim and annual financial statements about obligations under
certain guarantees. It also requires us to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure
requirements are effective for financial statements of interim
and annual periods ending after December 15, 2002. The
initial measurement and recognition provisions are required to
be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of
FIN 45 did not have a material impact on our consolidated
financial position or results of operations.

65



---



##### Table of Contents



In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS No. 146). SFAS No. 146
requires recording costs associated with exit or disposal
activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which
is generally before an actual liability has been incurred.
SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002.
SFAS No. 146 will have an impact on the timing of the
recording of any future restructuring charges.

Factors That May Affect Our Future Financial
Condition or Results of Operations

This section describes circumstances or events
that could have a negative effect on our financial results or
operations or that could change, for the worse, existing trends
in some or all of our businesses. The occurrence of one or more
of the circumstances or events described below could have a
material adverse effect on our financial condition, results of
operations and cash flows or on the trading prices of the common
stock and convertible notes that we have issued. The risks and
uncertainties described below are not the only ones facing
WebMD. Additional risks and uncertainties that are not currently
known to us or that we currently believe are immaterial may also
adversely affect our business and operations.



---

Risks Related to Our Relationships with
Customers and Strategic Partners



| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | WebMD Envoys transaction volume and
    financial results could be adversely affected if we do not
    maintain relationships with practice management system vendors
    and large submitters of healthcare electronic data interchange,
    or EDI, transactions

We have developed relationships with practice
management system vendors and large submitters of healthcare
claims to increase the usage of our WebMD Envoy transaction
services. WebMD Practice Services is a competitor of these
practice management system vendors. These vendors, as a result
of our ownership of WebMD Practice Services or for other
reasons, may choose in the future to diminish or terminate their
relationships with WebMD Envoy. Some other large submitters of
claims compete with, or may have significant relationships with
entities that compete with, WebMD Envoy or WebMD Health. To the
extent that we are not able to maintain mutually satisfactory
relationships with the larger practice management system vendors
and large submitters of healthcare EDI transactions, WebMD
Envoys transaction volume and financial results could be
adversely affected.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | WebMD Envoys transaction volume and
    financial results could be adversely affected if payers and
    providers conduct EDI transactions without using a
    clearinghouse

There can be no assurance that healthcare payers
and providers will continue to use WebMD Envoy and other
independent companies to transmit healthcare transactions. Some
payers currently offer electronic data transmission services to
healthcare providers that establish a direct link between the
provider and payer, bypassing third-party EDI service providers
such as WebMD Envoy. We cannot provide assurance that we will be
able to maintain our existing links to payers and providers or
develop new connections on satisfactory terms, if at all.
Although the standardization of formats and data standards
required by HIPAA is only partial and we believe that use of
clearinghouses will continue to be the most efficient way for
most providers to transact electronically with multiple payers,
such standardization may facilitate additional use of direct EDI
links for transmission of transactions between a greater number
of healthcare payers and providers without use of a
clearinghouse. Any significant increase in the utilization of
direct links between healthcare providers and payers could have
a material adverse effect on WebMD Envoys transaction
volume and financial results.

66



---



##### Table of Contents





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Loss of a small number of sponsors could
    have a material adverse effect on WebMD Healths
    revenues

A substantial portion of WebMD Healths
revenues come from a relatively small number of companies. Thus,
the loss of a small number of these relationships or a reduction
in the purchases by a portion of these sponsors could have a
material adverse effect on our Portal Services revenues. We may
lose such relationships or experience a reduction in purchases
if customers decide not to renew their commitments or renew at
lower levels, which may occur if we fail to meet our
customers expectations or needs or fail to keep up with
our competition or for reasons outside our control, including
changes in economic and regulatory conditions affecting the
healthcare industry or changes specific to the businesses of
particular customers. For more information, see Risks
Related to Providing Products and Services to the Healthcare
Industry  Developments in the healthcare industry
could adversely affect our business below and
Business  Government Regulation above.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | Third parties may bring claims as a result
    of the activities of our strategic partners or resellers of our
    products and services

We could be subject to claims by third parties,
and to liability, as a result of the activities, products or
services of our strategic partners or resellers of our products
and services. Even if these claims do not result in liability to
us, investigating and defending these claims could be expensive,
time-consuming and result in adverse publicity that could harm
our business.



---

Risks Related to the Development and
Performance of Our

Healthcare Information Services and Technology
Solutions




| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to generate revenue could
    suffer if we do not continue to update and improve our existing
    products and services and develop new ones

We must introduce new healthcare information
services and technology solutions and improve the functionality
of our existing products and services in a timely manner in
order to retain existing customers and attract new ones.
However, we may not be successful in responding to technological
and regulatory developments and changing customer needs. The
pace of change in the markets we serve is rapid, and there are
frequent new product and service introductions by our
competitors and by vendors whose products and services we use in
providing our own products and services. If we do not respond
successfully to technological and regulatory changes and
evolving industry standards, our products and services may
become obsolete. Technological changes may also result in the
offering of competitive products and services at lower prices
than we are charging for our products and services, which could
result in our losing sales unless we lower the prices we charge.
In addition, there can be no assurance that the products we
develop or license will be able to compete with the alternatives
available to our customers. For more information about the
competition we face, see Business  Healthcare
Information Services and Technology Solutions 
Competition for Our Healthcare Information Services and
Technology Solutions above.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Developing and implementing new or updated
    products and services may take longer and cost more than
    expected

We rely on a combination of internal development,
strategic relationships, licensing and acquisitions to develop
our products and services. The cost of developing new healthcare
information services and technology solutions is inherently
difficult to estimate. Our development and implementation of
proposed products and services may take longer than originally
expected, require more testing than originally anticipated and
require the acquisition of additional personnel and other
resources. If we are unable to develop new or updated products
and services on a timely basis and implement them without
significant disruptions to the existing systems and processes of
our customers, we may lose potential sales and harm our
relationships with current or potential customers.

67



---



##### Table of Contents



For example, we have been incurring, and expect
to continue to incur, significant expenses relating to
implementation of the HIPAA electronic transaction and code sets
standards and our all-payer suite of services,
including expenses for additional technical and customer service
personnel.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implementation of the HIPAA transaction standards
    requires us, among other things, to make significant changes to
    the software WebMD Envoy uses internally, to engage in testing
    with its customers and to implement additional quality assurance
    processes. If our reprogramming and testing are not completed on
    a timely basis, we could lose customers and revenues.                                                                                                                                                                                                          
|
| |  | Implementation of our all-payer suite
    of transaction services requires us to expand our connectivity
    to support a broader set of transaction services to
    non-commercial payers in key markets as well as to improve the
    functional capability of our claims and accounts receivable
    management solutions. We may not have enough technicians,
    programmers and customer service personnel to meet the demands
    placed on those functions by our customers and partners during
    the implementation period, which could adversely affect our
    relationships with them.

The amount and timing of future expenses for the
HIPAA and all-payer implementations are difficult to
estimate and may exceed amounts we have budgeted or continue for
longer than expected. For more information about HIPAA see
Business  Government Regulation above.
For a description of our all-payer suite of services
see Business  Healthcare Information Services
and Technology Solutions  WebMD Envoy  EDI
Transaction Services  Medical and Dental
Administrative Services above.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | New or updated products and services will
    not become profitable unless they achieve sufficient levels of
    market acceptance

There can be no assurance that healthcare
providers and payers will accept from us new or updated products
and services or products and services that result from
integrating existing and/or acquired products and services.
Providers and payers may choose to use similar products and
services from our competitors if they are already using products
and services of those competitors and have made extensive
investments in hardware, software and training relating to those
products and services. Even providers and payers who are already
our customers may not purchase new or updated products or
services, especially when they are initially offered. Providers
and payers using our existing products and services may refuse
to adopt new or updated products and services when they have
made extensive investments in hardware, software and training
relating to those existing products and services. In addition,
there can be no assurance that any pricing strategy that we
implement for any such products and services will be
economically viable or acceptable to the target markets. Failure
to achieve broad penetration in target markets with respect to
new or updated products and services could have a material
adverse effect on our business prospects.

For example, we are working to transform WebMD
Envoy from a commercial claims clearinghouse to a supplier of a
full complement of reimbursement cycle management solutions,
including outsourcing of pre- and post-adjudication services for
payer customers, sending claims transactions and receiving
electronic remittance advice transactions for our provider and
vendor customers, and other value-added services. However, there
can be no assurance that customers who use our services for
sending and receiving claims will use our other services, that
our other services will attract additional customers or that
such services will generate sufficient revenues to cover the
costs of developing, marketing and providing those services.



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Achieving market acceptance of new or
    updated products and services is likely to require significant
    efforts and expenditures

Achieving market acceptance for new or updated
products and services is likely to require substantial marketing
efforts and expenditure of significant funds to create awareness
and demand by participants in the healthcare industry. In
addition, deployment of new or updated products and services may
require the use of additional resources for training our
existing sales force and customer service personnel and for
hiring and training additional salespersons and customer service
personnel. There can be no assurance that

68



---



##### Table of Contents



the revenue opportunities from new or updated
products and services will justify amounts spent for their
development, marketing and roll-out.




| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to breach of warranty,
    product liability or other claims if our software products,
    information technology systems or transmission systems contain
    errors or experience failures

Undetected errors in the software and systems we
provide to customers or the software and systems we use to
provide services could cause serious problems for our customers.
For example, errors in our transaction processing systems can
result in healthcare payers paying the wrong amount or making
payments to the wrong payee. If problems like these occur, our
customers may seek compensation from us or may seek to terminate
their agreements with us, withhold payments due to us, seek
refunds from us of part or all of the fees charged under those
agreements or initiate litigation or other dispute resolution
procedures. We also provide products and services that assist in
healthcare decision-making, including some that relate to
patient medical histories and treatment plans. If these products
malfunction or fail to provide accurate and timely information,
we could be subject to product liability claims. In addition, we
could face breach of warranty or other claims or additional
development costs if our software and systems do not meet
contractual performance standards, do not perform in accordance
with their documentation, or do not meet the expectations that
our customers have for them. Our software and systems are
inherently complex and, despite testing and quality control, we
cannot be certain that errors will not be found in prior
versions, current versions or future versions or enhancements.
See also During times when we are making significant
changes to our products and services, there are increased risks
of performance problems below.

We attempt to limit, by contract, our liability
for damages arising from negligence, errors or mistakes.
However, contractual limitations on liability may not be
enforceable in certain circumstances or may otherwise not
provide sufficient protection to us from liability for damages.
We maintain general liability insurance coverage, including
coverage for errors and omissions. However, it is possible that
claims could exceed the amount of our applicable insurance
coverage or that this coverage may not continue to be available
on acceptable terms or in sufficient amounts. Even if these
claims do not result in liability to us, investigating and
defending against them could be expensive and time consuming and
could divert managements attention away from our
operations. In addition, negative publicity caused by these
events may delay market acceptance of our products and services,
including unrelated products and services.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Performance problems with WebMD
    Envoys systems or system failures could cause us to lose
    customers or cause customers to reduce the number of
    transactions we process for them

We process payer and provider transactions and
data at our own facilities and at a data center in Tampa,
Florida that is operated by an independent third party. We have
contingency plans for emergencies with our systems; however, we
have limited backup facilities to process information if these
facilities are not functioning. The occurrence of a major
catastrophic event or other system failure at any of our
facilities or at the third-party facility could interrupt data
processing or result in the loss of stored data, which could
have a material adverse impact on our business.

Our payer and provider customer satisfaction and
our business could be harmed if WebMD Envoy experiences
transmission delays or failures or loss of data in its systems.
WebMD Envoys systems are complex and, despite testing and
quality control, we cannot be certain that problems will not
occur or that they will be detected and corrected promptly if
they do occur. See also During times when we are making
significant changes to our products and services, there are
increased risks of performance problems below.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | During times when we are making significant
    changes to our products and services, there are increased risks
    of performance problems

If we do not respond successfully to
technological and regulatory changes and evolving industry
standards, our products and services may become obsolete. See
Our ability to generate revenue could suffer if we do not
continue to update and improve our existing products and
services and develop new

69



---



##### Table of Contents



ones. The software and systems that we sell
and that we use to provide services are inherently complex and,
despite testing and quality control, we cannot be certain that
errors will not be found in any enhancements, updates and new
versions that we market or use. Even if new products and
services do not have performance problems, our technical and
customer service personnel may have difficulties in installing
them or in their efforts to provide any necessary training and
support to customers.


For example, we have had and may continue to have
transmission or processing problems relating to implementation
of the HIPAA electronic transaction and code sets standards and
our all-payer suite of services. See
Developing and implementing new or updated products and
services may take longer and cost more than expected
above. These problems include: transmission failures resulting
from sending large batches of electronic transactions to
non-commercial payers who have been accustomed to receiving
transactions through a greater number of smaller batches;
enrollment and other set-up errors resulting from the
implementation of large numbers of customers simultaneously; and
various other transmission, processing, interfacing and service
problems resulting from the implementation of new software and
new business processes.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | If our systems or the Internet experience
    security breaches or are otherwise perceived to be insecure, our
    business could suffer

A significant security breach could damage our
reputation or result in liability. We retain and transmit
confidential information, including patient health information,
in our processing centers and other facilities. It is critical
that these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. We may be required to
expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors, attacks
by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or
systems that they interface with, could reduce demand for our
services. See also Business  Government
Regulation  Health Insurance Portability and
Accountability Act of 1996  Security Standards.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Performance problems with WebMD
    Envoys systems could affect our relationships with
    customers of our Practice Services business

WebMD Envoy provides the transaction services,
including the all-payer transaction services, used
by the Medical Manager Network Services customers of our
Practice Services business. As an increasing number of our WebMD
Practice Services customers rely on us to provide our
all-payer suite of transaction services, disruptions
to those services could cause some of those customers to obtain
some or all of their software support requirements from
competitors of ours or could cause some customers to switch to a
competing physician practice management or billing software
solution.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | WebMD Envoys ability to provide
    transaction services depends on services provided by
    telecommunications companies

WebMD Envoy relies on a limited number of
suppliers to provide some of the telecommunications services
necessary for its transaction services. The telecommunications
industry has been subject to significant changes as a result of
changes in technology, regulation and the underlying economy.
Recently, many telecommunications companies have experienced
financial problems and some have sought bankruptcy protection.
Some of these companies have discontinued telecommunications
services for which they had contractual obligations to WebMD
Envoy. WebMD Envoys inability to source telecommunications
services at reasonable prices due to a loss of competitive
suppliers could affect its ability to maintain its margins until
it is able to raise its prices to its customers and, if it is
not able to raise its prices, could have a material adverse
effect on its financial results.



---

70



---



##### Table of Contents



Risks Related to Providing Products and
Services to the Healthcare Industry



| |                                                                                
| | -------------------------------------------------------------------------------
| | Developments in the healthcare industry
    could adversely affect our business

Almost all of the revenues of WebMD Health, WebMD
Envoy and WebMD Practice Services come from customers in various
parts of the healthcare industry. In addition, a significant
portion of Porexs revenues come from products used in
healthcare or related applications. Developments that result in
a reduction of expenditures by customers or potential customers
in the healthcare industry could have a material adverse effect
on our business. General reductions in expenditures by
healthcare industry participants could result from, among other
things:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | government regulation or private initiatives that
    affect the manner in which healthcare providers interact with
    patients, payers or other healthcare industry participants,
    including changes in pricing or means of delivery of healthcare
    products and services (for additional discussion of the
    potential effects of regulatory matters on our business and on
    participants in the healthcare industry, see the other
    Risks Related to Providing Products and Services to the
    Healthcare Industry described below in this section and
    Business  Government Regulation above);
|
| |  | consolidation of healthcare industry participants;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | reductions in governmental funding for
    healthcare; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | adverse changes in business or economic
    conditions affecting healthcare payers or providers,
    pharmaceutical companies, medical device manufacturers or other
    healthcare industry participants.                                                                                                                                                                                                                                                                                                                                                                                                                

Even if general expenditures by industry
participants remain the same or increase, developments in the
healthcare industry may result in reduced spending on
information technology and services or in some or all of the
specific segments of that market we serve or are planning to
serve. For example, use of our products and services could be
affected by:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the billing patterns of healthcare
    providers;                                                                                                                                                                                                                              
|
| |  | changes in the design of health insurance plans;                                                                                                                                                                                                                                          
|
| |  | changes in the contracting methods payers use in
    their relationships with providers; and                                                                                                                                                                                              
|
| |  | decreases in marketing expenditures by
    pharmaceutical companies or medical device manufacturers,
    including as a result of governmental regulation or private
    initiatives that discourage or prohibit promotional activities
    by pharmaceutical or medical device companies.

In addition, expectations of our customers
regarding pending or potential industry developments may also
affect their budgeting processes and spending plans with respect
to products and services of the types we provide.

The healthcare industry has changed significantly
in recent years and we expect that significant changes will
continue to occur. However, the timing and impact of
developments in the healthcare industry are difficult to
predict. We cannot provide assurance that the markets for our
products and services will continue to exist at current levels
or that we will have adequate technical, financial and marketing
resources to react to changes in those markets.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The HIPAA Transaction and Code Set
    Standards creates risks and challenges with respect to our
    compliance efforts, business strategies and customer
    relationships

Application of the Transaction Standards to
WebMD.October 16, 2003 was the
deadline for covered entities to comply with HIPAAs
electronic transaction and code sets standards (which we refer
to as the Transaction Standards). Failure to comply with the
Transaction Standards may subject WebMD Envoy to civil monetary
penalties, and possibly to criminal penalties. On July 24,
2003, the Centers for Medicare & Medicaid Services, or
CMS, released its Guidance on Compliance with HIPAA
Transactions and Code Sets After the October 16, 2003
Implementation Deadline (which we refer to as the CMS
Guidance). In addition, on July 24, 2003, CMS officials
participated in an Open Door Forum teleconference
during

71



---



##### Table of Contents



which they provided additional clarification on
planned enforcement practices. CMS also urged the adoption of
contingency plans to help prevent disruptions in the
healthcare payment system. Under CMSs contingency plan for
Medicare, it will continue to accept claims in both HIPAA
standard and legacy formats, with the legacy formats to be
accepted for a period to be determined by CMS based upon a
regular reassessment of the readiness of its electronic
trading partners. In response, WebMD Envoy announced
a contingency plan, pursuant to which it continues to process
HIPAA standard transactions and, for a limited period of time,
will also process legacy transactions as appropriate based on
the needs of our business partners.


On February 27, 2004, CMS modified its
Medicare contingency plan to delay the payment of electronic
claims that are not HIPAA-compliant. Specifically, effective
July 1, 2004, only claims that are compliant with the
Transaction Standards are to be reported as electronic media
claims (EMC), which may be paid no earlier than after a
13 day waiting period. All other claims (including both
electronic claims that are not compliant with the Transaction
Standards, as well as paper claims) may be paid no earlier than
after a 26 day waiting period. Calling it a measured
step toward ending the contingency plan entirely, CMS
implemented the change to encourage providers to move more
quickly with their efforts to achieve HIPAA compliance. This
policy may provide an incentive for providers who cannot send
HIPAA standard claims from their desktop to use a clearinghouse,
such as WebMD Envoy, to do so.

CMS has made clear that it expects each party to
every transaction to be accountable for compliance with the new
standards. However, the CMS Guidance provides for a flexible,
complaint-driven enforcement strategy that will take into
consideration good faith efforts to comply with the Transaction
Standards. We believe that CMSs enforcement approach
assisted in reducing disruptions in the flow of electronic
transactions that otherwise could have occurred. However, one
short-term effect of CMSs approach and related transition
matters may be that, as a result of the extended period of
testing and implementation, there could be fewer electronic
transactions for us to process in 2004 than would otherwise have
been the case.

We cannot provide assurance regarding how CMS
will regulate clearinghouses in general or WebMD Envoy in
particular. In addition, even though major disruptions in the
flow of electronic transactions may be less likely in light of
CMSs current approach to enforcement of the Transaction
Standards, we have experienced isolated disruptions and some
delays and we expect that there will continue to be some
problems for a period of time. We continue to work diligently to
identify and resolve problems as they occur. The costs to us of
dealing with those problems are inherently difficult to estimate
and may be more than we expect and/or continue for longer than
anticipated. In addition, most of our trading partners are
currently operating under their own contingency plans and,
accordingly, we would expect that there will be further
disruptions during the adjustment period that occurs once CMS
requires all applicable parties to perform in accordance with
the Transaction Standards. We may not have enough technicians,
programmers and customer service personnel to meet the demands
placed on those functions by our customers and partners during
that adjustment period, which could adversely affect our
relationships with them.

Implementation
Challenges.Implementation of the
Transaction Standards has presented us with significant
technical and operational challenges. For example, the
Transaction Standards cover not only transaction formats, but
also required content, including some content not previously
collected by most providers. We are working with our trading
partners to complete quality assurance and testing on our
enhanced clearinghouse data services for transmitting additional
data content provided for in the Transaction Standards. We do
not plan to place these services into full production until both
our systems and payers adjudication systems are capable of
handling the production volume of transactions with the
additional data content. As with any highly complex data
transition involving significant modifications to trading
partner systems, we are experiencing some problems during this
process. Another aspect of the implementation challenges
resulting from the Transaction Standards is the increase in
computing capacity required. The Transaction Standards formats
are much larger than the pre-existing ones. We are utilizing
more computing capacity than we had anticipated. As a result,
our systems have experienced inefficiencies that have resulted
in processing delays. We seek to resolve all such problems when
identified, but testing

72



---



##### Table of Contents



continues with numerous submitters and payers and
no assurance can be given that we will identify all problems
promptly or that we will not continue to experience problems
that delay the full implementation of these enhanced data
services. See also Developing and implementing new or
updated products and services may take longer and cost more than
expected and During times when we are making
significant changes to our products and services, there are
increased risks of performance problems above.


From October 16, 2003 to the date of this
Annual Report, a large majority of the claims we have received
from submitters used legacy formats and very few contained the
additional data content provided for in the Transaction
Standards. A small number of our submitters currently send some
additional HIPAA data content that does not yet pass through our
clearinghouse. In order to facilitate transmission of claims
with the standard HIPAA format, our clearinghouse software uses
edits, including the use of default data, in the transmission of
claims from our clearinghouse and some data received by us is
not transmitted by us. To date, our software, editing procedures
and production criteria for additional HIPAA content have not
had a material effect on our ability to process and transmit
transactions.

Implementation
Costs.We have been incurring, and
expect to continue to incur, significant expenses relating to
implementation of the Transaction Standards. Implementation of
the Transaction Standards requires us, among other things, to
make significant changes to the software WebMD Envoy uses
internally, to engage in testing with its customers and to
implement additional quality assurance processes. If our
reprogramming and testing are not completed on a timely basis,
we could lose customers and revenues. In addition, our ability
to perform our transaction services in compliance with HIPAA and
the cost to us of doing so will depend on, among other things,
the status of the compliance efforts of our payer and provider
customers and the extent of the need to adjust our systems and
procedures in response to changes in their systems and
procedures. We cannot control when or how payers, providers,
practice management system vendors or other healthcare
participants will comply with the Transaction Standards or
predict how their compliance efforts will affect their
relationships with us, including the volume of transactions for
which they use our services. Our technological and strategic
responses to the Transaction Standards may result in conflicts
with, or other adverse changes in our relationships with, some
healthcare industry participants, including some who are
existing or potential customers for our products and services or
existing or potential strategic partners.

Use of Direct Links.Although the standardization of formats and data standards
required by HIPAA is only partial and we believe that use of
clearinghouses will continue to be the most efficient way for
most providers to transact electronically with multiple payers,
such standardization may facilitate use of direct EDI links, for
transmission of transactions between a greater number of
healthcare payers and providers without use of a clearinghouse.
Any significant increase in the utilization of direct links
between healthcare providers and payers could have a material
adverse effect on WebMD Envoys transaction volume and
financial results.

For additional information regarding the
Transaction Standards and a discussion of the risks and
challenges associated with other portions of HIPAA and related
regulations, see Business  Government
Regulation above.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Changes in government regulation or
    industry guidelines could adversely affect our continuing
    medical education offerings

WebMD Healths Medscape physician portal is
a leading provider of online continuing medical education, or
CME, to physicians and other healthcare professionals, offering
a wide selection of free, regularly updated online CME
activities. We receive funding from pharmaceutical and medical
device companies for these CME programs. See
Business  Healthcare Information Services and
Technology Solutions  WebMD Health 
Medscape from WebMD  Continuing Medical
Education (CME) above.

Our CME activities are planned and implemented in
accordance with the Essential Areas and Policies of the
Accreditation Council for Continuing Medical Education, or
ACCME, which oversees providers of CME credit. In August 2002,
ACCME awarded Medscape a two-year provisional accreditation as a
CME

73



---



##### Table of Contents



provider, allowing Medscape to certify online CME
activities. Provision of CME is also subject to government
regulation by the FDA and the Office of Inspector General, or
OIG, of the United States Department of Health and Human
Services, a federal agency responsible for interpreting certain
federal laws relating to healthcare. Among the goals of
regulation of CME is ensuring that funding of CME programs by
pharmaceutical and medical device companies is not a means of
providing improper remuneration to physicians or others in a
position to generate business for those companies and does not
result in improper influence or control of the content of CME
programs by the sponsoring companies. See
Business  Government Regulation 
Regulation of Healthcare Relationships and
 FDA and FTC Regulation of Advertising
above and Other government regulation of healthcare and
healthcare information technology creates risks and challenges
with respect to our compliance efforts and our business
strategies below.


Increased scrutiny by regulators of CME
sponsorship by pharmaceutical or medical device companies,
changes to existing regulation or ACCME guidelines or changes in
internal compliance procedures of potential sponsors may require
Medscape to make changes in the way it offers or provides CME
programs, may slow sponsors internal approval processes
for CME, and may reduce the volume of sponsored CME programs
implemented by Medscape to levels that are lower than expected.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other government regulation of healthcare
    and healthcare information technology creates risks and
    challenges with respect to our compliance efforts and our
    business strategies

General.The
healthcare industry is highly regulated and is subject to
changing political, regulatory and other influences. These
factors affect the purchasing practices and operations of
healthcare organizations. Federal and state legislatures and
agencies periodically consider programs to reform or revise the
United States healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare,
lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare
industry participants may respond by reducing their investments
or postponing investment decisions, including investments in our
applications and services. We are unable to predict future
proposals with any certainty or to predict the effect they would
have on our business. In addition, existing laws and regulations
could create liability, cause us to incur additional costs or
restrict our operations. Although we carefully review our
practices with regulatory experts in an effort to ensure that we
are in compliance with all applicable state and federal laws,
these laws are complex and subject to interpretation by courts
and other governmental authorities, who may take positions that
are inconsistent with our practices.

Healthcare
Relationships.A federal law commonly
known as the Federal Healthcare Programs anti-kickback law and
several similar state laws prohibit payments that are intended
to induce healthcare providers either to refer patients or to
acquire or arrange for or recommend the acquisition of
healthcare products or services. These laws are broad and may
apply to some of our activities or our relationships with our
customers, advertisers or strategic partners. Other federal and
state laws generally prohibit individuals or entities from
knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid, or other third-party payers
that are false or fraudulent, or are for items or services that
were not provided as claimed. Since we provide transaction
services to healthcare providers, we cannot provide assurance
that the government will regard errors in transactions processed
by us as inadvertent and not in violation of these laws. In
addition, our transaction services include providing edits,
using logic, mapping and defaults, to enhance the information
submitted in claims in order to assist in claims processing. We
believe that our editing practices are in compliance with
industry practice and applicable laws; however, it is possible
that a court or governmental agency might interpret these laws
in a different manner, which could result in liability and
adversely affect our business. In addition, changes in these
laws could also require us to incur costs or restrict our
business operations. Many anti-kickback and false claims laws
prescribe civil and criminal penalties for noncompliance that
can be substantial. Even an unsuccessful challenge by regulatory
authorities of our practices could cause us adverse publicity
and be costly for us to respond to.

74



---



##### Table of Contents



Regulation of Medical
Devices.Certain of Porexs
products are medical devices regulated by the Food and Drug
Administration, or FDA, such as plastic and reconstructive
surgical implants, intravenous administration sets, blood
filters, and tissue expanders. These products are subject to
comprehensive government regulation under the Food, Drug and
Cosmetic Act and implementing regulations. In addition, the FDA
regulates WebMD Practice Services DIMDX System
as a medical image management device. If the FDA were to find
that we have not complied with required procedures, it can bring
a wide variety of enforcement actions that could result in
severe civil and criminal sanctions. Porex is also subject to
similar regulation in international markets, with similar risks.
Future products that we wish to bring to market may require
clearances or approvals from governmental authorities, which may
be expensive, time-consuming and burdensome to obtain or which
may never be obtained.

For more information regarding healthcare
regulation to which we are or may be subject, see
Business  Government Regulation above.



---

Risks Related to Our Web Sites and Our Use of
the Internet



| |                                                                              
| | -----------------------------------------------------------------------------
| | Government regulation of the Internet could
    adversely affect our business

The Internet and its associated technologies are
subject to government regulation. Our failure, or the failure of
our business partners, to accurately anticipate the application
of applicable laws and regulations, or any other failure to
comply, could create liability for us, result in adverse
publicity, or negatively affect our business. In addition, new
laws and regulations, or new interpretations of existing laws
and regulations, may be adopted with respect to the Internet or
other online services covering user privacy, patient
confidentiality, consumer protection and other issues, including
pricing, content, copyrights and patents, distribution, and
characteristics and quality of products and services. We cannot
predict whether these laws or regulations will change or how
such changes will affect our business. Government regulation of
the Internet could limit the effectiveness of the Internet for
services that we are providing or developing or even prohibit
particular services.

For more information regarding government
regulation of the Internet to which we are or may be subject,
see Business  Government Regulation above.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We face potential liability related to the
    privacy and security of personal information we collect on our
    Web sites

Internet user privacy has become a controversial
issue both in the United States and abroad. We have privacy
policies posted on our consumer portal and our professional
portal that we believe comply with applicable laws requiring
notice to users about our information collection, use and
disclosure practices. However, whether and how existing privacy
and consumer protection laws in various jurisdictions apply to
the Internet is still uncertain and may take years to resolve.
Any legislation or regulation in the area of privacy of personal
information could affect the way we operate our Web sites and
could harm our business. Further, we can give no assurance that
the statements on our portals, or our practices, will be found
sufficient to protect us from liability or adverse publicity in
this area.

Some of our portal services may, through
contractual relationships, be affected by the HIPAA Privacy
Standards and Security Standards. For more information regarding
the HIPAA Privacy and Security Standards and other regulation of
the collection, use and disclosure of personal information to
which we may be subject, see Business 
Government Regulation above.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to maintain or increase our
    Portal Services sponsorship revenues will depend, in part, on
    our ability to retain or increase usage of our Portal Services
    by consumers and physicians

WebMD Health generates revenues by, among other
things, selling sponsorships of specific pages, sections or
events on its online physician and consumer portals and related
e-mailed newsletters. Our WebMD Health sponsors include
pharmaceutical, biotech, medical device and consumer products

75



---



##### Table of Contents



companies that are interested in communicating
with and educating our audience or parts of our audience. While
we currently attract a large audience of health-involved
consumers and clinically active healthcare professionals to our
online offerings, we cannot provide assurance that we will
continue to do so. Users of our portals have numerous other
online and offline sources of healthcare information services.
In addition, some of WebMD Healths traffic and new members
come to it through relationships with third parties, including
MSN and AOL, and, as a result, depends on the amount of traffic
to sites of the third parties and other factors outside our
control and may cease if the relationship ends.




| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Implementation of changes in hardware and
    software platforms used to deliver our Web sites may result in
    performance problems

From time to time, we implement changes to the
hardware and software platforms we use for creating and
delivering our Web sites. During and after the implementation of
those changes, a platform may not perform as expected, which
could result in interruptions in the operation of our Web sites,
an increase in response time of those sites or an inability to
track performance metrics.

Any significant interruption in our ability to
operate our Web sites could have an adverse effect on our
relationship with users and sponsors and, as a result, on our
financial results.



| |                                                                      
| | ---------------------------------------------------------------------
| | Our Internet-based services rely on
    third-party service providers

Our Web sites are designed to operate
24 hours a day, seven days a week, without interruption. To
do so, we rely on communications and hosting services provided
by third parties. We do not maintain redundant systems or
facilities for some of these services. To operate without
interruption, both we and our service providers must guard
against:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | damage from fire, power loss and other natural
    disasters;               
|
| |  | communications failures;                                                    
|
| |  | software and hardware errors, failures or crashes;                          
|
| |  | security breaches, computer viruses and similar
    disruptive problems; and
|
| |  | other potential interruptions.                                              

We have experienced periodic system interruptions
in the past, and we cannot guarantee that they will not occur
again. In addition, our Web sites may, at times, be required to
accommodate higher than usual volumes of traffic. At those
times, our Web sites may experience slower response times or
system failures. Any sustained or repeated interruptions or
disruptions in these systems or increase in their response times
could result in reduced usage of our Web sites and could damage
our relationships with strategic partners, advertisers and
sponsors. Although we maintain insurance for our business, we
cannot guarantee that our insurance will be adequate to
compensate us for all losses that may occur or to provide for
costs associated with business interruptions.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our Internet-based services are dependent
    on the development and maintenance of the Internet
    infrastructure

Our ability to deliver our Internet-based
services is dependent on the development and maintenance of the
infrastructure of the Internet by third parties. This includes
maintenance of a reliable network backbone with the necessary
speed, data capacity and security, as well as timely development
of complementary products such as high-speed modems, for
providing reliable Internet access and services. The Internet
has experienced, and is likely to continue to experience,
significant growth in the number of users and the amount of
traffic. If the Internet continues to experience increased
usage, the Internet infrastructure may be unable to support the
demands placed on it. In addition, the performance of the
Internet may be harmed by increased usage.

76



---



##### Table of Contents



The Internet has experienced a variety of outages
and other delays as a result of damages to portions of its
infrastructure, and it could face outages and delays in the
future. These outages and delays could reduce the level of
Internet usage as well as the availability of the Internet to us
for delivery of our Internet-based services. In addition, our
customers who utilize our Web-based services depend on Internet
service providers, online service providers and other Web site
operators for access to our Web site. All of these providers
have experienced significant outages in the past and could
experience outages, delays and other difficulties in the future
due to system failures unrelated to our systems. Any significant
interruptions in our services or increases in response time
could result in a loss of potential or existing users of and
advertisers and sponsors on our Web site and, if sustained or
repeated, could reduce the attractiveness of our services.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Third parties may challenge the
    enforceability of our online agreements

The law governing the validity and enforceability
of online agreements and other electronic transactions is
evolving. We could be subject to claims by third parties that
our online agreements with consumers and physicians that provide
the terms and conditions for use of our portal services are
unenforceable. A finding by a court that these agreements are
invalid could harm our business and require costly changes to
our portals.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third parties may bring claims against us
    as a result of content provided on our Web sites, which may be
    expensive and time consuming to defend

We could be subject to third-party claims based
on the nature and content of information supplied on our Web
sites by us or third parties, including content providers,
medical advisors or users. We could also be subject to liability
for content that may be accessible through our Web sites or
third-party Web sites linked from our Web sites or through
content and information that may be posted by users in chat
rooms, bulletin boards or on Web sites created by professionals
using our Web site application. Even if these claims do not
result in liability to us, investigating and defending against
these claims could be expensive and time consuming and could
divert managements attention away from our operations.



---

Risks Related to Porexs Business and
Industry



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Porexs success depends upon demand
    for its products, which in some cases ultimately depends upon
    end-user demand for the products of its customers

Demand for our Porex products may change
materially as a result of economic or market conditions and
other trends that affect the industries in which Porex
participates. In addition, because a significant portion of our
Porex products are components that are eventually integrated
into or used with products manufactured by customers for resale
to end-users, the demand for these product components is
dependent on product development cycles and marketing efforts of
these other manufacturers, as well as variations in their
inventory levels, which are factors that we are unable to
control. Accordingly, the amount of Porexs sales to
manufacturer customers can be difficult to predict and subject
to wide quarter-to-quarter variances.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Porexs success may depend on
    satisfying rapidly changing customer requirements

A significant portion of our Porex products are
integrated into end products used in various industries, some of
which are characterized by rapidly changing technology, evolving
industry standards and practices and frequent new product
introductions. Accordingly, Porexs success depends to a
substantial degree on our ability to develop and introduce in a
timely manner products that meet changing customer requirements
and to differentiate our offerings from those of our
competitors. If we do not introduce new Porex products in a
timely manner and make enhancements to existing products to meet
the changing needs of our Porex customers, some of our products
could become obsolete over time, in which case our customer
relationships, revenue and operating results would be negatively
impacted.

77



---



##### Table of Contents





| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Potential new or enhanced Porex products
    may not achieve sufficient sales to be profitable or justify the
    cost of their development

We cannot be certain, when we engage in Porex
research and development activities, whether potential new
products or product enhancements will be accepted by the
customers for which they are intended. Achieving market
acceptance for new or enhanced products may require substantial
marketing efforts and expenditure of significant funds to create
awareness and demand by potential customers. In addition, sales
and marketing efforts with respect to these products may require
the use of additional resources for training our existing Porex
sales forces and customer service personnel and for hiring and
training additional salespersons and customer service personnel.
There can be no assurance that the revenue opportunities from
new or enhanced products will justify amounts spent for their
development and marketing. In addition, there can be no
assurance that any pricing strategy that we implement for any
new or enhanced Porex products will be economically viable or
acceptable to the target markets.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | Porex may not be able to source the raw
    materials it needs or may have to pay more for those raw
    materials

Some of Porexs products require high-grade
plastic resins with specific properties as raw materials. While
Porex has not experienced any material difficulty in obtaining
adequate supplies of high-grade plastic resins that meet its
requirements, it relies on a limited number of sources for some
of these plastic resins. If Porex experiences a reduction or
interruption in supply from these sources, it may not be able to
access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates, which could have a
material adverse effect on its business and financial results.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Disruptions in Porexs manufacturing
    operations could have a material adverse effect on its business
    and financial results

Any significant disruption in Porexs
manufacturing operations, including as a result of fire, power
interruptions, equipment malfunctions, labor disputes, material
shortages, earthquakes, floods, computer viruses, sabotage,
terrorist acts or other force majeure, could have a material
adverse effect on Porexs ability to deliver products to
customers and, accordingly, its financial results.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | The nature of Porexs products exposes
    it to product liability claims that may not be adequately
    covered by indemnity agreements or insurance

The products sold by Porex, whether sold directly
to end-users or sold to other manufacturers for inclusion in the
products that they sell, expose it to potential risk of product
liability claims, particularly with respect to Porexs life
sciences, clinical, surgical and medical products. Some of
Porexs products are designed to be permanently implanted
in the human body. Design defects and manufacturing defects with
respect to such products sold by Porex or failures that occur
with the products of Porexs manufacturer customers that
contain components made by Porex could result in product
liability claims and/or a recall of one or more of Porexs
products. Porex also manufactures products that are used in the
processing of blood for medical procedures and the delivery of
medication to patients. Porex believes that it carries adequate
insurance coverage against product liability claims and other
risks. We cannot assure you, however, that claims in excess of
Porexs insurance coverage will not arise. In addition,
Porexs insurance policies must be renewed annually.
Although Porex has been able to obtain adequate insurance
coverage at an acceptable cost in the past, we cannot assure you
that Porex will continue to be able to obtain adequate insurance
coverage at an acceptable cost.

In most instances, Porex enters into indemnity
agreements with its manufacturing customers. These indemnity
agreements generally provide that these customers would
indemnify Porex from liabilities that may arise from the sale of
their products that incorporate Porex components to, or the use
of such products by, end-users. While Porex generally seeks
contractual indemnification from its customers, any such
indemnification is limited, as a practical matter, to the
creditworthiness of the indemnifying party. If Porex does not
have adequate contractual indemnification available, product
liability claims, to the extent

78



---



##### Table of Contents



not covered by insurance, could have a material
adverse effect on its business, operating results and financial
condition.


Since March 1991, Porex has been named as one of
many co-defendants in a number of actions brought by recipients
of mammary implants distributed by Porex in the United States.
For a description of these actions, see the information under
Legal Proceedings  Porex Mammary Implant
Litigation above.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Economic, political and other risks
    associated with Porexs international sales and
    geographically diverse operations could adversely affect
    Porexs operations and results

Since Porex sells its products worldwide, its
business is subject to risks associated with doing business
internationally. In addition, Porex has manufacturing facilities
in the United Kingdom, Germany and Malaysia. Accordingly,
Porexs operations and financial results could be harmed by
a variety of factors, including:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates;                                                                            
|
| |  | changes in a specific countrys or
    regions political or economic conditions, particularly in
    emerging markets;
|
| |  | trade protection measures and import or export
    licensing requirements;                                             
|
| |  | potentially negative consequences from changes in
    tax laws;                                                        
|
| |  | difficulties in managing international and
    geographically diverse operations;                                      
|
| |  | differing protection of intellectual
    property; and                                                                 
|
| |  | unexpected changes in regulatory requirements.                                                                         



| |                                                                     
| | --------------------------------------------------------------------
| | Environmental regulation could adversely
    affect Porexs business

Porex is subject to foreign and domestic
environmental laws and regulations and is subject to scheduled
and random checks by environmental authorities. Porexs
business involves the handling, storage and disposal of
materials that are classified as hazardous. Although
Porexs safety procedures for handling, storage and
disposal of these materials are designed to comply with the
standards prescribed by applicable laws and regulations, Porex
may be held liable for any environmental damages that result
from Porexs operations. Porex may be required to pay
fines, remediation costs and damages, which could have a
material adverse effect on its results of operations.



---

Risks Applicable to Our Entire
Company



| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The ongoing investigations by the United
    States Attorney for the District of South Carolina and the SEC
    could negatively impact our company and divert management
    attention from our business operations

The United States Attorney for the District of
South Carolina is conducting an investigation of our company. As
more fully described in Legal Proceedings above,
based on the information available to WebMD as of the date of
this Annual Report, we believe that the investigation relates
principally to issues of financial reporting for Medical Manager
Corporation, a predecessor of WebMD (by its merger into WebMD in
September 2000), and our Medical Manager Health Systems
subsidiary; however, we cannot be sure of the
investigations exact scope or how long it may continue. In
addition, WebMD understands that the SEC is conducting a formal
investigation into this matter. Adverse developments in
connection with the investigations, if any, including as a
result of matters that the authorities or WebMD may discover,
could have a negative impact on our company and on how it is
perceived by investors and potential investors and customers and
potential customers. In addition, the management effort and

79



---



##### Table of Contents



attention required to respond to the
investigations and any such developments could have a negative
impact on our business operations.


WebMD intends to continue to fully cooperate with
the authorities in this matter. While we are not able to
estimate, at this time, the amount of the expenses that we will
incur in connection with the investigations, we expect that they
may be significant.



| |                                                                  
| | -----------------------------------------------------------------
| | We face significant competition for our
    products and services

The markets in which we operate are intensely
competitive, continually evolving and, in some cases, subject to
rapid technological change. Many of our competitors have greater
financial, technical, product development, marketing and other
resources than we do. These organizations may be better known
than we are and have more customers than we do. We cannot
provide assurance that we will be able to compete successfully
against these organizations or any alliances they have formed or
may form. For more information about the competition we face,
see Business  Healthcare Information Services
and Technology Solutions  Competition for Our
Healthcare Information Services and Technology Solutions
and Business  Porex 
Competition above.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | The performance of our businesses depends
    on attracting and retaining qualified executives and
    employees

Our performance depends on attracting and
retaining key personnel, including executives, product managers,
software developers and other technical personnel and sales and
marketing personnel. Failure to do so could have a material
adverse effect on the performance of our business and the
results of our operations.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We may not be successful in protecting our
    intellectual property and proprietary rights

Our intellectual property is important to all of
our businesses. We rely on a combination of trade secret, patent
and other intellectual property laws and confidentiality
procedures and non-disclosure contractual provisions to protect
our intellectual property. We believe that our non-patented
proprietary technologies and business and manufacturing
processes are protected under trade secret, contractual and
other intellectual property rights. However, those rights do not
afford the statutory exclusivity provided by patented processes.
In addition, the steps that we take to protect our intellectual
property, proprietary information and trade secrets may prove to
be inadequate and, whether or not adequate, may be expensive.

There can be no assurance that we will be able to
detect potential or actual misappropriation or infringement of
our intellectual property, proprietary information or trade
secrets. Even if we detect misappropriation or infringement by a
third party, there can be no assurance that we will be able to
enforce our rights at a reasonable cost, or at all. In addition,
our rights to intellectual property, proprietary information and
trade secrets may not prevent independent third-party
development and commercialization of competing products or
services.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third parties may claim that we are
    infringing their intellectual property, and we could suffer
    significant litigation or licensing expenses or be prevented
    from selling products or services

We could be subject to claims that we are
misappropriating or infringing intellectual property or other
proprietary rights of others. These claims, even if not
meritorious, could be expensive to defend and divert
managements attention from our operations. If we become
liable to third parties for infringing these rights, we could be
required to pay a substantial damage award and to develop
non-infringing technology, obtain a license or cease selling the
products or services that use or contain the infringing
intellectual property. We may be unable to develop
non-infringing products or services or obtain a license on
commercially reasonable terms, or at all. We may also be
required to indemnify our customers if they become subject to
third-party claims relating to intellectual property that we
license or otherwise provide to them, which could be costly.

80



---



##### Table of Contents





| |                                                      
| | -----------------------------------------------------
| | We have incurred and may continue to incur
    losses

We began operations in January 1996 and have
incurred net losses in each year since our inception and, as of
December 31, 2003, we had an accumulated deficit of
approximately $10.2 billion. Although we generated net
income, determined in accordance with generally accepted
accounting principles, in the quarters ended December 31,
2003, September 30, 2003 and September 30, 2002, we
incurred a net loss for the year ended December 31, 2003.
We currently intend to continue to invest in infrastructure
development, applications development, sales and marketing, and
acquisitions and whether we continue to incur losses in a
particular period will depend on, among other things, the amount
of such investments and whether those investments lead to
increased revenues.



| |                                    
| | -----------------------------------
| | We may be subject to
    litigation

Our business and operations may subject us to
claims, litigation and other proceedings brought by private
parties and governmental authorities. For information regarding
certain proceedings to which we are currently a party, see
Legal Proceedings above.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Business combinations and other
    transactions may be difficult to complete and, if completed, may
    have negative consequences for our business and our
    securityholders

We intend to seek to acquire or to engage in
business combinations with companies engaged in complementary
businesses. In addition, we may enter into joint ventures,
strategic alliances or similar arrangements with third parties.
These transactions may result in changes in the nature and scope
of our operations and changes in our financial condition. Our
success in completing these types of transactions will depend
on, among other things, our ability to locate suitable
candidates and negotiate mutually acceptable terms with them, as
well as the availability of financing. Significant competition
for these opportunities exists, which may increase the cost of
and decrease the opportunities for these types of transactions.
Financing for these transactions may come from several sources,
including:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | cash and cash equivalents on hand and marketable
    securities,                                                 
|
| |  | proceeds from the incurrence of
    indebtedness, and                                                            
|
| |  | proceeds from the issuance of additional common
    stock, preferred stock, convertible debt or other securities.

Our issuance of additional securities could:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | cause substantial dilution of the percentage
    ownership of our stockholders at the time of the issuance,
|
| |  | cause substantial dilution of our earnings per
    share, and                                              
|
| |  | adversely affect the prevailing market price for
    our outstanding securities.                           

We do not intend to seek securityholder approval
for any such acquisition or security issuance unless required by
applicable law or regulation or the terms of existing securities.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business will suffer if we fail to
    successfully integrate acquired businesses and technologies or
    to assess the risks in particular transactions

We have in the past acquired, and may in the
future acquire, businesses, technologies, services, product
lines and other assets. The successful integration of the
acquired businesses and assets into our operations, on a
cost-effective basis, can be critical to our future performance.
The amount and timing of the expected benefits of any
acquisition, including potential synergies between WebMD and the
acquired

81



---



##### Table of Contents



business, are subject to significant risks and
uncertainties. These risks and uncertainties include, but are
not limited to, those relating to:




| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to maintain relationships with the
    customers of the acquired business;                                                                                                            
|
| |  | our ability to cross-sell products and services
    to customers with which we have established relationships and
    those with which the acquired businesses have established
    relationships;
|
| |  | our ability to retain or replace key personnel;                                                                                                                                                   
|
| |  | potential conflicts in payer, provider, strategic
    partner, sponsor or advertising relationships;                                                                                              
|
| |  | our ability to coordinate organizations that are
    geographically diverse and may have different business
    cultures; and                                                                     
|
| |  | compliance with regulatory requirements.                                                                                                                                                          

We cannot guarantee that any acquired businesses
will be successfully integrated with our operations in a timely
or cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.

Although our management attempts to evaluate the
risks inherent in each transaction and to value acquisition
candidates appropriately, we cannot assure you that we will
properly ascertain all such risks or that acquired businesses
and assets will perform as we expect or enhance the value of our
company as a whole. In addition, acquired companies or
businesses may have larger than expected liabilities that are
not covered by the indemnification, if any, we are able to
obtain from the sellers.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We may not be able to raise additional
    funds when needed for our business or to exploit
    opportunities

Our future liquidity and capital requirements
will depend upon numerous factors, including the success of the
integration of our businesses, our existing and new applications
and service offerings, competing technologies and market
developments, potential future acquisitions and additional
repurchases of our common stock. We may need to raise additional
funds to support expansion, develop new or enhanced applications
and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of
unanticipated opportunities. If required, we may raise such
additional funds through public or private debt or equity
financing, strategic relationships or other arrangements. There
can be no assurance that such financing will be available on
acceptable terms, if at all, or that such financing will not be
dilutive to our stockholders.

82



---



##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Interest Rate Sensitivity

The primary objective of our investment
activities is to preserve principal and maintain adequate
liquidity, while at the same time maximizing the yield we
receive from our investment portfolio. This objective is
accomplished by adherence to our investment policy, which
establishes the list of eligible types of securities and credit
requirements for each investment.

Changes in prevailing interest rates will cause
the principal amount of the investment to fluctuate. To minimize
this risk, we maintain our portfolio of cash equivalents,
short-term investments and marketable securities in commercial
paper, non-government debt securities, money market funds and
highly liquid United States Treasury notes. We view these high
grade securities within our portfolio as having similar market
risk characteristics.

Principal amounts expected to mature are
$204.0 million, $23.0 million, $319.1 million and
$102.0 million during 2004, 2005, 2006 and 2007,
respectively. These include investments totaling
$358.0 million in federal agency notes that are callable
subjecting us to interest rate risk on the reinvestment of these
securities. We believe that the impact of any call and resulting
reinvestment of proceeds would not have a material effect on our
financial condition or results of operations.

We have not utilized derivative financial
instruments in our investment portfolio.

Exchange Rate Sensitivity

Currently, substantially all of our sales and
expenses are denominated in United States dollars; however,
Porex is exposed to fluctuations in foreign currency exchange
rates, primarily the rate of exchange of the United States
dollar against the Euro. This exposure arises primarily as a
result of translating the results of Porexs foreign
operations to the United States dollar at exchange rates that
have fluctuated from the beginning of the accounting period.
Porex has not engaged in foreign currency hedging activities to
date. Foreign currency translation gains (losses) were
$3.3 million, $2.5 million and $(0.7) million, in
2003, 2002 and 2001, respectively. We believe that future
exchange rate sensitivity related to Porex will not have a
material effect on our financial condition or results of
operations.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our financial statements required by this item
are contained on pages F-1 through F-44 of this Annual Report on
Form 10-K. See Item 15(a)(1) for a listing of
financial statements provided.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As required by Exchange Act Rule 13a-15(b),
WebMD management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the
effectiveness of WebMDs disclosure controls and
procedures, as defined in Exchange Act Rule 13a-15(e), as
of December 31, 2003. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that
WebMDs disclosure controls and procedures provided
reasonable assurance that all material information required to
be filed in this Annual Report has been made known to them in a
timely fashion.

In connection with the evaluation required by
Exchange Act Rule 13a-15(d), WebMD management, including
the Chief Executive Officer and Chief Financial Officer,
concluded that no changes in WebMDs internal control over
financial reporting occurred during the fourth quarter of 2003
that have materially affected, or are reasonably likely to
materially affect, WebMDs internal control over financial
reporting.

83



---



##### Table of Contents



PART III

Information required by Items 10, 11, 12, 13
and 14 of Part III is omitted from this Annual Report and
will be filed in a definitive proxy statement or by an amendment
to this Annual Report not later than 120 days after the end of
the fiscal year covered by this Annual Report.

Item 10.     Directors
and Executive Officers of the Registrant

We will provide information that is responsive to
this Item 10 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after
the end of the fiscal year covered by this Annual Report, in
either case under the caption Directors and Executive
Officers, and possibly elsewhere therein. That information
is incorporated in this Item 10 by reference.

Item 11.     Executive
Compensation

We will provide information that is responsive to
this Item 11 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after
the end of the fiscal year covered by this Annual Report, in
either case under the caption Executive
Compensation, and possibly elsewhere therein. That
information is incorporated in this Item 11 by reference.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

We will provide information that is responsive to
this Item 12 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after
the end of the fiscal year covered by this Annual Report, in
either case under the caption Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters, and possibly elsewhere therein. That information
is incorporated in this Item 12 by reference.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

We will provide information that is responsive to
this Item 13 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after
the end of the fiscal year covered by this Annual Report, in
either case under the caption Certain Relationships and
Related Transactions, and possibly elsewhere therein. That
information is incorporated in this Item 13 by reference.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

We will provide information that is responsive to
this Item 14 in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after
the end of the fiscal year covered by this Annual Report, in
either case under the caption Principal Accountant Fees
and Services, and possibly elsewhere therein. That
information is incorporated in this Item 14 by reference.

84



---



##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1)-(2) Financial Statements and
Schedules

The financial statements and schedules listed in
the accompanying Index to Consolidated Financial Statements and
Supplemental Data on page F-1 are filed as part of this Report.

(a)(3) Exhibits

See Index to Exhibits beginning on
page E-1, which is incorporated by reference herein. The Index
to Exhibits lists all exhibits filed with this Report and
identifies which of those exhibits are management contracts and
compensation plans.

(b) Reports on Form 8-K

During the last quarter of the fiscal year ended
December 31, 2003, the registrant filed or furnished the
following Reports on Form 8-K:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Report on Form 8-K filed on October 14,
    2003 pursuant to which the registrant announced preliminary
    results for the quarter ended September 30, 2003.          
|
| |  | Report on Form 8-K filed on October 24,
    2003 pursuant to which the registrant announced that it had
    entered into a definitive agreement to acquire Medifax-EDI.
|
| |  | Report on Form 8-K filed on November 6,
    2003 pursuant to which the registrant announced results for the
    quarter ended September 30, 2003.                      
|
| |  | Report on Form 8-K filed on December 1,
    2003 pursuant to which the registrant announced that the
    Medifax-EDI acquisition agreement had been amended.           
|
| |  | Report on Form 8-K filed on
    December 24, 2003 pursuant to which the registrant
    announced that the Medifax-EDI acquisition had been completed.                  

85



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereto duly authorized, on the 11th day
of March, 2004.



| |                  
| | -----------------
| | WEBMD CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ ANDREW C. CORBIN

| |                             
| | ----------------------------
| |                             
| | Andrew C. Corbin            
| | Executive Vice President and
| | Chief Financial Officer     

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
jointly and severally, Andrew C. Corbin, Lewis H. Leicher and
Charles A. Mele, and each one of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all
capacities, to sign any and all amendments to this Annual Report
on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all
that each said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                           |  |                                                                                                       |  |                |  | 
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                                       |  |               
|Signature                                  |  | Capacity                                                                                              |  | Date          
|                                           |  |                                                                                                       |  |               
|                                          
|/s/ ROGER C. HOLSTEINRoger C. Holstein     |  | Chief Executive Officer (principal
    executive officer) and Director                                |  | March 11, 2004
|                                          
|/s/ ANDREW C. CORBINAndrew C. Corbin       |  | Executive Vice President and Chief Financial
    Officer (principal financial and accounting officer) |  | March 11, 2004
|                                          
|/s/ MARK J. ADLER, M.D.Mark J. Adler, M.D. |  | Director                                                                                              |  | March 11, 2004
|                                          
|/s/ PAUL A. BROOKEPaul A. Brooke           |  | Director                                                                                              |  | March 11, 2004
|                                          
|/s/ NEIL F. DIMICKNeil F. Dimick           |  | Director                                                                                              |  | March 11, 2004
|                                          
|/s/ JAMES V. MANNINGJames V. Manning       |  | Director                                                                                              |  | March 11, 2004
|                                          
|/s/ HERMAN SARKOWSKYHerman Sarkowsky       |  | Director                                                                                              |  | March 11, 2004

86



---



##### Table of Contents



|                                       |  |          |  |                |  | 
|-------------------------------------- |  | -------- |  | -------------- |  | 
|                                       |  |          |  |               
|Signature                              |  | Capacity |  | Date          
|                                       |  |          |  |               
|                                      
|/s/ MICHAEL A. SINGERMichael A. Singer |  | Director |  | March 11, 2004
|                                      
|/s/ JOSEPH E. SMITHJoseph E. Smith     |  | Director |  | March 11, 2004
|                                      
|/s/ MARTIN J. WYGODMartin J. Wygod     |  | Director |  | March 11, 2004

87



---



##### Table of Contents






WebMD Corporation

Index to Consolidated Financial Statements and
Supplemental Data


The following financial statements of the Company
and its subsidiaries required to be included in
Item 15(a)(1) of Form 10-K are listed below:

|                                 |                                                                                                                                                                   |      |  |     | 
|-------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | --- | 
|                                 |                                                                                                                                                                   | Page
|                                 |                                                                                                                                                                   |     
|Historical Financial Statements: |                                                                                                                                                                   |      |  |    
|                                 | Report of Independent Auditors                                                                                                                                    |      |  | F-2 | 
|                                 | Consolidated Balance Sheets at December 31,
    2003 and 2002                                                                                                     |      |  | F-3 | 
|                                 | Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001                                                                    |      |  | F-4 | 
|                                 | Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2003, 2002 and 2001                                                          |      |  | F-5 | 
|                                 | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001                                                                    |      |  | F-6 | 
|                                 | Notes to Consolidated Financial Statements                                                                                                                        |      |  | F-8 | 
|Supplemental Financial Data:     |                                                                                                                                                                   |      |  |    
|                                 | The following supplementary financial data of the
    Registrant and its subsidiaries required to be included in
    Item 15(a)(2) of Form 10-K are listed below: |      |  |     | 
|                                 | Schedule II  Valuation and
    Qualifying Accounts                                                                                                               |      |  | S-1 | 

All other schedules not listed above have been
omitted as not applicable or because the required information is
included in the Consolidated Financial Statements or in the
notes thereto. Columns omitted from schedules filed have been
omitted because the information is not applicable.

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

WebMD Corporation


We have audited the accompanying consolidated
balance sheets of WebMD Corporation as of December 31, 2003
and 2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of WebMD Corporation at
December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 10 to the financial
statements, the Company changed its accounting for goodwill and
other indefinite lived intangible assets in 2002.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

MetroPark, New Jersey

February 27, 2004, except for Note 22,


as to which the date is March 4, 2004


F-2



---



##### Table of Contents



WebMD Corporation

Consolidated Balance Sheets

(In thousands, except share and per share
data)


|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |             |           | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | --------- | ----------- | --------- | - | --------- | ----------- | --------- | 
|                                                   |                                                                                                                                                                                                                                                        |                           
|                                                   |                                                                                                                                                                                                                                                        | December 31,              
|                                                   |                                                                                                                                                                                                                                                        |                           
|                                                   |                                                                                                                                                                                                                                                        | 2003                       |           | 2002       
|                                                   |                                                                                                                                                                                                                                                        |                            |           |            
|ASSETS                                             |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|Current assets:                                    |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   | Cash and cash equivalents                                                                                                                                                                                                                              |                            | $         | 63,298      |           |   | $         | 175,596     |          
|                                                   | Short-term investments                                                                                                                                                                                                                                 |                            |           | 207,383     |           |   |           | 10,888      |          
|                                                   | Accounts receivable, net of allowance for
    doubtful accounts of $20,500 in 2003 and $22,417 in 2002                                                                                                                                                 |                            |           | 181,173     |           |   |           | 163,244     |          
|                                                   | Inventory                                                                                                                                                                                                                                              |                            |           | 12,158      |           |   |           | 9,976       |          
|                                                   | Current portion of prepaid content and
    distribution services                                                                                                                                                                                       |                            |           | 18,116      |           |   |           | 25,406      |          
|                                                   | Assets of discontinued operations                                                                                                                                                                                                                      |                            |           |            |           |   |           | 94,056      |          
|                                                   | Other current assets                                                                                                                                                                                                                                   |                            |           | 25,973      |           |   |           | 25,814      |          
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   |                                                                                                                                                                                                                                                        | Total current assets       |           |             | 508,101   |   |           |             | 504,980   | 
|Marketable debt securities                         |                                                                                                                                                                                                                                                        |                            | 451,290   |             |           |   | 449,289   |            
|Marketable equity securities                       |                                                                                                                                                                                                                                                        |                            | 4,744     |             |           |   | 7,427     |            
|Property and equipment, net                        |                                                                                                                                                                                                                                                        |                            | 77,278    |             |           |   | 70,488    |            
|Prepaid content and distribution services          |                                                                                                                                                                                                                                                        |                            | 31,992    |             |           |   | 48,532    |            
|Goodwill                                           |                                                                                                                                                                                                                                                        |                            | 844,448   |             |           |   | 586,043   |            
|Intangible assets, net                             |                                                                                                                                                                                                                                                        |                            | 184,130   |             |           |   | 73,222    |            
|Other assets                                       |                                                                                                                                                                                                                                                        |                            | 33,323    |             |           |   | 26,267    |            
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   |                                                                                                                                                                                                                                                        | $                          | 2,135,306 |             |           | $ | 1,766,248 |            
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                  
|LIABILITIES AND STOCKHOLDERS
    EQUITY           |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|Current liabilities:                               |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   | Accounts payable                                                                                                                                                                                                                                       |                            | $         | 10,390      |           |   | $         | 10,063      |          
|                                                   | Accrued expenses                                                                                                                                                                                                                                       |                            |           | 208,430     |           |   |           | 208,342     |          
|                                                   | Deferred revenue                                                                                                                                                                                                                                       |                            |           | 86,708      |           |   |           | 81,179      |          
|                                                   | Liabilities of discontinued operations                                                                                                                                                                                                                 |                            |           |            |           |   |           | 12,365      |          
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   |                                                                                                                                                                                                                                                        | Total current liabilities  |           |             | 305,528   |   |           |             | 311,949   | 
|3 1/4% convertible subordinated notes
    due 2007 |                                                                                                                                                                                                                                                        |                            | 299,999   |             |           |   | 300,000   |            
|1.75% convertible subordinated notes due 2023      |                                                                                                                                                                                                                                                        |                            | 350,000   |             |           |   |          |            
|Other long-term liabilities                        |                                                                                                                                                                                                                                                        |                            | 1,182     |             |           |   | 498       |            
|Commitments and contingencies                      |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|Stockholders equity:                              |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   | Preferred stock, $.0001 par value;
    5,000,000 shares authorized and no shares issued at
    December 31, 2003 and December 31, 2002                                                                                                                 |                            |           |            |           |   |           |            |          
|                                                   | Common stock, $.0001 par value;
    900,000,000 shares authorized at December 31, 2003;
    600,000,000 shares authorized at December 31, 2002;
    384,751,705 shares issued at December 31, 2003;
    374,661,064 shares issued at December 31, 2002 |                            |           | 38          |           |   |           | 37          |          
|                                                   | Additional paid-in capital                                                                                                                                                                                                                             |                            |           | 11,726,734  |           |   |           | 11,682,443  |          
|                                                   | Deferred stock compensation                                                                                                                                                                                                                            |                            |           | (4,683      | )         |   |           | (17,805     | )        
|                                                   | Treasury stock, at cost; 76,576,865 shares
    at December 31, 2003; 74,254,669 shares at
    December 31, 2002                                                                                                                                        |                            |           | (347,858    | )         |   |           | (327,542    | )        
|                                                   | Accumulated deficit                                                                                                                                                                                                                                    |                            |           | (10,212,054 | )         |   |           | (10,195,048 | )        
|                                                   | Accumulated other comprehensive income                                                                                                                                                                                                                 |                            |           | 16,420      |           |   |           | 11,716      |          
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   |                                                                                                                                                                                                                                                        | Total stockholders equity |           |             | 1,178,597 |   |           |             | 1,153,801 | 
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            
|                                                   |                                                                                                                                                                                                                                                        | $                          | 2,135,306 |             |           | $ | 1,766,248 |            
|                                                   |                                                                                                                                                                                                                                                        |                            |           |             |           |   |           |            

See accompanying notes.

F-3



---



##### Table of Contents



WebMD Corporation

Consolidated Statements of
Operations

(In thousands, except per share
data)


|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |            |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | ---------- | ---------- | -
|                                                                                          |                                                                     |                         
|                                                                                          |                                                                     | Years Ended December 31,
|                                                                                          |                                                                     |                         
|                                                                                          |                                                                     | 2003                     |         | 2002    |   | 2001
|                                                                                          |                                                                     |                          |         |         |   |     
|Revenue                                                                                   |                                                                     | $                        | 963,980 |         |   | $    | 871,696 |         |   | $ | 842,020    |           
|Costs and expenses:                                                                       |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Cost of operations                                                  |                          |         | 564,939 |   |      |         | 509,744 |   |   |            | 568,321    |  
|                                                                                          | Development and engineering                                         |                          |         | 42,985  |   |      |         | 43,467  |   |   |            | 43,572     |  
|                                                                                          | Sales, marketing, general and administrative                        |                          |         | 282,482 |   |      |         | 283,424 |   |   |            | 448,082    |  
|                                                                                          | Depreciation, amortization and other                                |                          |         | 62,434  |   |      |         | 125,593 |   |   |            | 2,394,857  |  
|                                                                                          | Legal expense                                                       |                          |         | 3,959   |   |      |         |        |   |   |            |           |  
|                                                                                          | Impairment of long-lived and other assets                           |                          |         |        |   |      |         |        |   |   |            | 3,816,115  |  
|                                                                                          | Restructuring and integration (benefit) charge                      |                          |         |        |   |      |         | (5,850  | ) |   |            | 266,755    |  
|                                                                                          | Gain on investments                                                 |                          |         | 1,659   |   |      |         | 6,547   |   |   |            |           |  
|                                                                                          | Interest income                                                     |                          |         | 22,901  |   |      |         | 19,590  |   |   |            | 30,409     |  
|                                                                                          | Interest expense                                                    |                          |         | 15,214  |   |      |         | 8,491   |   |   |            | 507        |  
|                                                                                          | Other income, net                                                   |                          |         | 4,218   |   |      |         | 3,844   |   |   |            |           |  
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Income (loss) from continuing operations before
    income tax provision (benefit)        |                                                                     |                          | 20,745  |         |   |      | (63,192 | )       |   |   | (6,665,780 | )         
|                                                                                          | Income tax provision (benefit)                                      |                          |         | 4,140   |   |      |         | (10,079 | ) |   |            | 2,588      |  
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Income (loss) from continuing operations                            |                          |         | 16,605  |   |      |         | (53,113 | ) |   |            | (6,668,368 | )
|                                                                                          | Income (loss) from discontinued operations, net
    of income taxes |                          |         | (33,611 | ) |      |         | 3,411   |   |   |            | (3,950     | )
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Net loss                                                                                  |                                                                     | $                        | (17,006 | )       |   | $    | (49,702 | )       |   | $ | (6,672,318 | )         
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Basic loss per common share:                                                              |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Income (loss) from continuing operations                            |                          | $       | 0.05    |   |      | $       | (0.17   | ) |   | $          | (19.13     | )
|                                                                                          | Income (loss) from discontinued operations                          |                          |         | (0.11   | ) |      |         | 0.01    |   |   |            | (0.01      | )
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Net loss                                                                                  |                                                                     | $                        | (0.06   | )       |   | $    | (0.16   | )       |   | $ | (19.14     | )         
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Diluted loss per common share:                                                            |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Income (loss) from continuing operations                            |                          | $       | 0.05    |   |      | $       | (0.17   | ) |   | $          | (19.13     | )
|                                                                                          | Income (loss) from discontinued operations                          |                          |         | (0.10   | ) |      |         | 0.01    |   |   |            | (0.01      | )
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Net loss                                                                                  |                                                                     | $                        | (0.05   | )       |   | $    | (0.16   | )       |   | $ | (19.14     | )         
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|Weighted-average shares outstanding used in
    computing income (loss) per common share: |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Basic                                                               |                          |         | 304,858 |   |      |         | 304,168 |   |   |            | 348,570    |  
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           
|                                                                                          | Diluted                                                             |                          |         | 325,811 |   |      |         | 304,168 |   |   |            | 348,570    |  
|                                                                                          |                                                                     |                          |         |         |   |      |         |         |   |   |            |           

See accompanying notes.

F-4



---



##### Table of Contents



WebMD Corporation Consolidated Statements of Stockholders Equity (In thousands, except share data)
 Stockholders EquityConvertibleRedeemable
    
    ConvertiblePreferred Stock
    
    Preferred Stock
    
    Common Stock
    
    Additional
    
    DeferredPaid-In
    
    StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    CompensationBalances at
December 31, 2000
    
    
    100
    
    
    $
    10,000
    
    
    
    155,951
    
    
    $
    710,746
    
    
    
    361,233,643
    
    
    $
    36
    
    
    $
    11,028,461
    
    
    $
    (144,467
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net increase in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,722,517
    
    
    
    1
    
    
    
    12,994
    
    
    
    Issuance, net of
reductions, and
exercise of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000
    
    
    
    
    
    
    
    24,739
    
    
    
    Reacquisition of
convertible
preferred stock and
issuance of
warrants in
connection with
revision of
strategic alliance
    
    
    
    
    
    
    
    
    
    
    (155,951
    )
    
    
    (710,746
    )
    
    
    
    
    
    
    
    
    
    
    559,575
    
    
    
    Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,909
    
    
    
    88,359Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,935
    )
    
    
    13,935Balances at
December 31, 2001
    
    
    100
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    366,956,160
    
    
    
    37
    
    
    
    11,652,743
    
    
    
    (42,173
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net decrease in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,704,904
    
    
    
    
    
    
    
    28,774
    
    
    
    Issuance, net of
repurchase, of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    Redemption of
convertible
redeemable
preferred stock
    
    
    (100
    )
    
    
    (10,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    (2,500
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    24,873Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,995
    )
    
    
    1,995Balances at
December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374,661,064
    
    
    
    37
    
    
    
    11,682,443
    
    
    
    (17,805
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net increase in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,090,641
    
    
    
    1
    
    
    
    44,718
    
    
    
    Issuance of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    Deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    (25
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335
    
    
    
    12,293Purchase of
treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (854
    )
    
    
    854Balances at
December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    384,751,705
    
    
    $
    38
    
    
    $
    11,726,734
    
    
    $
    (4,683
    )
 [Table continued below] [Table continued from above] Stockholders EquityAccumulatedTreasury Stock
    
    
    
    
    
    Other
    
    TotalAccumulated
    
    Comprehensive
    
    Stockholders'Shares
    
    Amount
    
    Deficit
    
    Income
    
    EquityBalances at
December 31, 2000
    
    
    5,163,509
    
    
    $
    (30,759
    )
    
    $
    (3,473,028
    )
    
    $
    6,446
    
    
    $
    8,097,435Net loss
    
    
    
    
    
    
    
    
    
    
    (6,672,318
    )
    
    
    
    
    
    
    (6,672,318
    )Net increase in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,097
    
    
    
    7,097Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (710
    )
    
    
    (710
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,665,931
    )Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,995Issuance, net of
reductions, and
exercise of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,739Reacquisition of
convertible
preferred stock and
issuance of
warrants in
connection with
revision of
strategic alliance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151,171
    )Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,268Purchase of
treasury stock
    
    
    50,928,426
    
    
    
    (191,823
    )
    
    
    
    
    
    
    
    
    
    
    (191,823
    )Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at
December 31, 2001
    
    
    56,091,935
    
    
    
    (222,582
    )
    
    
    (10,145,346
    )
    
    
    12,833
    
    
    
    1,255,512Net loss
    
    
    
    
    
    
    
    
    
    
    (49,702
    )
    
    
    
    
    
    
    (49,702
    )Net decrease in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,640
    )
    
    
    (3,640
    )Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,523
    
    
    
    2,523Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,819
    )Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,774Issuance, net of
repurchase, of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29Redemption of
convertible
redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,265Purchase of
treasury stock
    
    
    18,162,734
    
    
    
    (104,960
    )
    
    
    
    
    
    
    
    
    
    
    (104,960
    )Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at
December 31, 2002
    
    
    74,254,669
    
    
    
    (327,542
    )
    
    
    (10,195,048
    )
    
    
    11,716
    
    
    
    1,153,801Net loss
    
    
    
    
    
    
    
    
    
    
    (17,006
    )
    
    
    
    
    
    
    (17,006
    )Net increase in
unrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,419
    
    
    
    1,419Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,285
    
    
    
    3,285Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,302
    )Issuance of common
stock for option
exercises, ESPP,
401(k) and other
issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,719Issuance of
warrants in
connection with
strategic alliances
and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Deferred stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,628Purchase of
treasury stock
    
    
    2,322,196
    
    
    
    (20,316
    )
    
    
    
    
    
    
    
    
    
    
    (20,316
    )Adjustment to
deferred stock
compensation for
terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at
December 31, 2003
    
    
    76,576,865
    
    
    $
    (347,858
    )
    
    $
    (10,212,054
    )
    
    $
    16,420
    
    
    $
    1,178,597
 See accompanying notes. F-5




---



##### Table of Contents



WebMD Corporation

Consolidated Statements of Cash
Flows

(In thousands)


|                                                                                              |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |           |         |          |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | -------------------------------------------------------- | ------ | ------- | -------- | -------- | ------- | ------- | -------- | ---------- | --------- | ------- | -------- | -
|                                                                                              |                                                              |                                          
|                                                                                              |                                                              | Years Ended December 31,                 
|                                                                                              |                                                              |                                          
|                                                                                              |                                                              | 2003                                      |                                                          | 2002   |         | 2001    
|                                                                                              |                                                              |                                           |                                                          |        |         |         
|Cash flows from operating
    activities:                                                     |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|Net loss                                                                                      |                                                              | $                                         | (17,006                                                  | )      |         | $        | (49,702  | )       |         | $        | (6,672,318 | )        
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|                                                                                              | Loss (income) from discontinued operations                   |                                           |                                                          | 33,611 |         |          |          | (3,411  | )       |          |            | 3,950     |        
|                                                                                              | Depreciation, amortization and other                         |                                           |                                                          | 62,434 |         |          |          | 125,593 |         |          |            | 2,394,857 |        
|                                                                                              | Impairment of long-lived and other assets                    |                                           |                                                          |       |         |          |          |        |         |          |            | 3,816,115 |        
|                                                                                              | Amortization of debt issuance costs                          |                                           |                                                          | 2,246  |         |          |          | 1,109   |         |          |            |          |        
|                                                                                              | Non-cash content and distribution services                   |                                           |                                                          | 24,298 |         |          |          | 25,706  |         |          |            | 45,474    |        
|                                                                                              | Non-cash stock based compensation                            |                                           |                                                          | 12,449 |         |          |          | 25,265  |         |          |            | 78,451    |        
|                                                                                              | Non-cash portion of restructuring and integration
    charge |                                           |                                                          |       |         |          |          |        |         |          |            | 185,498   |        
|                                                                                              | Gain on investments                                          |                                           |                                                          | (1,659 | )       |          |          | (6,547  | )       |          |            |          |        
|                                                                                              | Gain on sale of property and equipment                       |                                           |                                                          | (3,100 | )       |          |          |        |         |          |            |          |        
|                                                                                              | Changes in operating assets and liabilities:                 |                                           |                                                          |        |         |          |          |         |         |          |            |           |        
|                                                                                              |                                                              | Accounts receivable                       |                                                          |        | 5,515   |          |          |         | (2,631  | )        |            |           | 46,908  |         
|                                                                                              |                                                              | Inventory                                 |                                                          |        | (2,176  | )        |          |         | (872    | )        |            |           | 927     |         
|                                                                                              |                                                              | Prepaid content and distribution services |                                                          |        | (467    | )        |          |         | 753     |          |            |           | (7,609  | )       
|                                                                                              |                                                              | Other assets                              |                                                          |        | 4,259   |          |          |         | (4,416  | )        |            |           | 20,318  |         
|                                                                                              |                                                              | Accounts payable                          |                                                          |        | (651    | )        |          |         | (7,541  | )        |            |           | (5,815  | )       
|                                                                                              |                                                              | Accrued expenses                          |                                                          |        | (42,419 | )        |          |         | (32,651 | )        |            |           | (45,124 | )       
|                                                                                              |                                                              | Deferred revenue                          |                                                          |        | (225    | )        |          |         | 12,530  |          |            |           | 11,508  |         
|                                                                                              |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|                                                                                              |                                                              |                                           | Net cash provided by (used in) continuing
    operations |        |         | 77,109   |          |         |         | 83,185   |            |           |         | (126,860 | )
|                                                                                              |                                                              |                                           | Net cash provided by discontinued operations             |        |         | 5,130    |          |         |         | 9,912    |            |           |         | 12,591   |  
|                                                                                              |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|                                                                                              |                                                              |                                           | Net cash provided by (used in) operating
    activities  |        |         | 82,239   |          |         |         | 93,097   |            |           |         | (114,269 | )
|Cash flows from investing
    activities:                                                     |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|Proceeds from maturities and sales of
    available-for-sale securities                       |                                                              |                                           | 247,294                                                  |        |         |          | 108,991  |         |         |          | 124,725    |          
|Proceeds from maturities and redemptions of
    held-to-maturity securities                   |                                                              |                                           | 157,919                                                  |        |         |          | 59,095   |         |         |          | 1,014      |          
|Purchases of available-for-sale securities                                                    |                                                              |                                           | (8,254                                                   | )      |         |          | (207,833 | )       |         |          |           |          
|Purchases of held-to-maturity securities                                                      |                                                              |                                           | (590,113                                                 | )      |         |          | (300,970 | )       |         |          | (1,014     | )        
|Purchases of property and equipment                                                           |                                                              |                                           | (18,385                                                  | )      |         |          | (26,267  | )       |         |          | (27,256    | )        
|Proceeds received from sale of discontinued
    operations                                    |                                                              |                                           | 46,500                                                   |        |         |          |         |         |         |          |           |          
|Proceeds received from sale of property and
    equipment                                     |                                                              |                                           | 9,779                                                    |        |         |          |         |         |         |          |           |          
|Other changes in equity of discontinued operations                                            |                                                              |                                           | 1,754                                                    |        |         |          | 10,369   |         |         |          | 2,496      |          
|Cash paid in business combinations, net of cash
    acquired                                  |                                                              |                                           | (400,491                                                 | )      |         |          | (33,471  | )       |         |          | (17,334    | )        
|                                                                                              |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|                                                                                              |                                                              |                                           | Net cash provided by (used in) continuing
    operations |        |         | (553,997 | )        |         |         | (390,086 | )          |           |         | 82,631   |  
|                                                                                              |                                                              |                                           | Net cash used in discontinued operations                 |        |         | (2,529   | )        |         |         | (12,577  | )          |           |         | (6,238   | )
|                                                                                              |                                                              |                                           |                                                          |        |         |          |          |         |         |          |            |          
|                                                                                              |                                                              |                                           | Net cash provided by (used in) investing
    activities  |        |         | (556,526 | )        |         |         | (402,663 | )          |           |         | 76,393   |  

F-6



---



##### Table of Contents



|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |          |  
|----------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | -------- | ------- | - | ---- | -------- | ------- | - | - | -------- | -------- | -
|                                                            |                                                          |                         
|                                                            |                                                          | Years Ended December 31,
|                                                            |                                                          |                         
|                                                            |                                                          | 2003                     |          | 2002    |   | 2001
|                                                            |                                                          |                          |          |         |   |     
|Cash flows from financing
    activities:                   |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|Proceeds from issuance of common stock                      |                                                          |                          | 44,719   |         |   |      | 28,765   |         |   |   | 12,995   |         
|Purchase of treasury shares                                 |                                                          |                          | (20,316  | )       |   |      | (104,960 | )       |   |   | (191,823 | )       
|Payment of notes payable and other                          |                                                          |                          | (361     | )       |   |      | (2,904   | )       |   |   | (2,911   | )       
|Net proceeds from issuance of convertible debt              |                                                          |                          | 339,125  |         |   |      | 292,000  |         |   |   |         |         
|Redemption of Series B Preferred Stock                      |                                                          |                          |         |         |   |      | (10,000  | )       |   |   |         |         
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|                                                            | Net cash provided by (used in) continuing
    operations |                          |          | 363,167 |   |      |          | 202,901 |   |   |          | (181,739 | )
|                                                            | Net cash used in discontinued operations                 |                          |          | (6,546  | ) |      |          | (1,150  | ) |   |          | (456     | )
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|                                                            | Net cash provided by (used in) financing
    activities  |                          |          | 356,621 |   |      |          | 201,751 |   |   |          | (182,195 | )
|Effects of exchange rates on cash                           |                                                          |                          | 1,423    |         |   |      | 1,083    |         |   |   | (312     | )       
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|Net decrease in cash and cash equivalents                   |                                                          |                          | (116,243 | )       |   |      | (106,732 | )       |   |   | (220,383 | )       
|Changes in cash attributable to discontinued
    operations |                                                          |                          | 3,945    |         |   |      | 3,815    |         |   |   | (5,897   | )       
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|Cash and cash equivalents at beginning of year              |                                                          |                          | 175,596  |         |   |      | 278,513  |         |   |   | 504,793  |         
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         
|Cash and cash equivalents at end of year                    |                                                          | $                        | 63,298   |         |   | $    | 175,596  |         |   | $ | 278,513  |         
|                                                            |                                                          |                          |          |         |   |      |          |         |   |   |          |         

See accompanying notes.

F-7



---



##### Table of Contents



WebMD Corporation

Notes to Consolidated Financial
Statements

December 31, 2003


(In thousands, except share and per share
data)




|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies

Basis of Presentation

WebMD Corporation was incorporated in Delaware in
December 1995 and commenced operations in January 1996 as
Healtheon Corporation. The Company changed its name to
Healtheon/ WebMD Corporation in November 1999 and to WebMD
Corporation in September 2000. The accompanying consolidated
financial statements include the consolidated accounts of WebMD
Corporation and its subsidiaries (the Company) and
have been prepared in United States dollars, and in accordance
with accounting principles generally accepted in the United
States (GAAP). As described in Note 6, on
August 1, 2003 the Company completed the sale of two
operating units of its Plastic Technologies segment.
Accordingly, the results of these two operating units, including
the loss related to the divestitures, have been presented as
discontinued operations in the accompanying consolidated
financial statements.

Business

The Company has aligned its business into four
operating segments as follows:

Transaction Services or WebMD
Envoyprovides healthcare
reimbursement cycle management services, including transmission
of transactions between healthcare payers and physicians,
pharmacies, dentists, hospitals, laboratory companies and other
healthcare providers using dial-up, Internet and dedicated
communication methods. WebMD Envoys services assist its
customers in automating key administrative and clinical
functions. In addition, WebMD Envoy provides automated patient
billing services to providers, including statement printing and
mailing services, and provides paid-claims communication
services to third party administrators and health insurers,
including print-and-mail services for the distribution of
checks, remittance advice, and explanations of benefits.

Physician Services or WebMD Practice
Servicesdevelops and markets
integrated physician practice management systems, including
administrative, financial and clinical applications and
services, under The Medical Manager, Intergy, ULTIA and Medical
Manager Network Services brands. These systems and services
allow physician offices to automate their scheduling, billing
and other administrative tasks, to transmit transactions
electronically, to maintain electronic medical records and to
automate documentation of patient encounters.

Portal Services or WebMD
Healthprovides online healthcare
information, educational services and related resources for
consumers and healthcare professionals, both directly and
through its relationships with leading general consumer Internet
portals. WebMD Health also provides online content for use by
media and healthcare partners on their Web sites. WebMD Health
develops and sells online and offline channels of communication
and sponsorship programs to pharmaceutical, biotech, medical
device and consumer products companies, particularly those who
are interested in influencing healthcare decisions. In addition,
WebMD Health provides a suite of online tools and related
services to employers and health plans for use by their
employees and plan members.

Plastic Technologies or
Porexdevelops, manufactures and
distributes proprietary porous plastic products and components
used in healthcare, industrial and consumer applications, as
well as in finished products used in the medical device and
surgical markets.

Principles of Consolidation

The accompanying consolidated financial
statements include the accounts of the Company and its
subsidiaries. The results of operations for companies acquired
or disposed of are included in the

F-8



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

consolidated financial statements from the
effective date of acquisition or up to the date of disposal. All
material intercompany accounts and transactions have been
eliminated in consolidation.

Accounting Estimates

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 amounts reported in the consolidated
financial statements and accompanying notes. The Company is
subject to uncertainties such as the impact of future events,
economic, environmental and political factors and changes in the
Companys business environment; therefore, actual results
could differ from these estimates. Accordingly, the accounting
estimates used in the preparation of the Companys
financial statements will change as new events occur, as more
experience is acquired, as additional information is obtained
and as the Companys operating environment changes. Changes
in estimates are made when circumstances warrant. Such changes
in estimates and refinements in estimation methodologies are
reflected in reported results of operations; if material, the
effects of changes in estimates are disclosed in the notes to
the consolidated financial statements. Significant estimates and
assumptions by management affect: the Companys allowance
for doubtful accounts, the carrying value of inventory, the
carrying value of prepaid content and distribution services, the
carrying value of long-lived assets (including goodwill and
intangible assets), the amortization period of long-lived assets
(excluding goodwill), the carrying value, capitalization and
amortization of software development costs, the carrying value
of short-term and long-term investments, the provision for taxes
and related deferred tax accounts, certain accrued expenses,
revenue recognition, restructuring costs, contingencies,
litigation and the value attributed to warrants issued for
services.

Cash and Cash Equivalents

All highly liquid investments with an original
maturity from the date of purchase of three months or less are
considered to be cash equivalents. These short-term investments
are stated at cost, which approximates market. The
Companys cash and cash equivalents are invested in various
investment-grade commercial paper, money market accounts and
federal agency notes.

Marketable Securities

Management determines the appropriate
classification of its investments in debt securities at the time
of purchase and re-evaluates such determinations at each balance
sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are carried
at amortized cost. Debt securities that the Company does not
have the intent or ability to hold to maturity are classified as
available-for-sale. Investments in marketable equity securities
are classified as available-for-sale. Available-for-sale
securities are carried at fair value as of the balance sheet
date. The Company uses specific identification to determine the
cost basis of a security sold.

Allowance for Doubtful Accounts

The allowance for doubtful accounts receivable
reflects the Companys best estimate of probable losses
inherent in the Companys receivable portfolio determined
on the basis of historical experience, specific allowances for
known troubled accounts and other currently available evidence.

Inventory

Inventory is stated at the lower of cost or
market value using the first-in, first-out basis. Cost includes
raw materials, direct labor, and manufacturing overhead. Market
value is based on current replacement

F-9



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

cost for raw materials and supplies and on net
realizable value for work-in-process and finished goods.
Inventory consisted of the following as of December 31,
2003 and 2002:

|                           |  |      |        |      |  |   |       | 
|-------------------------- |  | ---- | ------ | ---- |  | - | ----- | 
|                           |  | 2003 |        | 2002
|                           |  |      |        |     
|Raw materials and supplies |  | $    | 3,142  |      |  | $ | 3,019 | 
|Work-in-process            |  |      | 1,394  |      |  |   | 1,308 | 
|Finished goods and other   |  |      | 7,622  |      |  |   | 5,649 | 
|                           |  |      |        |      |  |   |       | 
|                           |  | $    | 12,158 |      |  | $ | 9,976 | 
|                           |  |      |        |      |  |   |       | 

Long-Lived Assets



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful life of the
related asset, generally three to twelve years for equipment and
up to forty years for buildings. Leasehold improvements and
equipment acquired under capital leases are depreciated over the
shorter of the lease term or the estimated useful life of the
related asset. Expenditures for maintenance, repair and renewals
of minor items are charged to expense as incurred. Major
betterments are capitalized.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

Goodwill and intangible assets result from
acquisitions accounted for under the purchase method. Goodwill
is no longer being amortized but is subject to impairment by
applying a fair value based test. Intangible assets related to
acquired technology, customer lists, trademarks and other
intangibles are being amortized on a straight-line basis over
the estimated useful life of the related asset, generally one to
nine years, with the exception of certain technology and
trademarks that have estimated useful lives of nineteen to forty
years.



| |               
| | --------------
| | Recoverability

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the Company reviews the
carrying value of goodwill and intangible assets with indefinite
lives annually. The Company measures impairment losses by
comparing carrying value to fair value. Fair value is determined
using discounted cash flow methodology.

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets used in operations are reviewed
for impairment whenever events or changes in circumstances
indicate that carrying amounts may not be recoverable. For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment
loss based on the difference between the carrying amount and
fair value. Long-lived assets held for sale are reported at the
lower of cost or fair value less costs to sell.

Prior to January 1, 2002, the Company
accounted for its long-lived assets under
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. In accordance with SFAS No. 121, the Company
reviewed the recoverability of long-lived assets using an
undiscounted cash flow methodology, whenever events or changes
in circumstances indicated that carrying amounts may not be
recoverable. The Company measured impairment losses using a
discounted cash flow methodology.

F-10



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



| |                           
| | --------------------------
| | Software Development Costs



| |                                                      
| | -----------------------------------------------------
| | Software to be Sold, Leased or Otherwise
    Marketed

SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, requires the capitalization of certain software
development costs subsequent to the establishment of
technological feasibility. Based upon the Companys product
development process, technological feasibility is established
upon the completion of a working model. The costs incurred from
the time a working model is available until general release are
immaterial.



| |                      
| | ---------------------
| | Internal Use Software

The Company accounts for internal use software
development costs in accordance with Statement of Position
(SOP) No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal
Use (SOP 98-1). Software development
costs that are incurred in the preliminary project stage are
expensed as incurred. Once the specified criteria of
SOP 98-1 have been met, internal and external direct costs
incurred in developing or obtaining computer software are
capitalized. Training and data conversion costs are expensed as
incurred. Capitalized software costs are amortized over a
three-year period.



| |                    
| | -------------------
| | Revenue Recognition

Revenue is derived from the Companys
Transaction Services, Physician Services, Portal Services and
Plastic Technologies segments.

The Companys transaction services include
administrative services, such as transaction processing for
medical, dental and pharmacy claims, automated patient
statements, and clinical lab and reporting services, such as lab
test orders and results. In addition, the Company provides
paid-claims communication services to third party administrators
and health insurers, including print-and-mail services for the
distribution of checks, remittance advice, and explanation of
benefits. Healthcare payers and providers pay fees to the
Company for these services, generally on a per transaction
basis. Transaction fees vary according to the type of
transaction and other factors, such as volume level commitments.
The Company also charges one-time implementation fees to
providers and payers that are recognized ratably over the
contract term. Revenue from transaction services, which are
generally priced on a per transaction or monthly per provider
basis, is recognized when the services are provided.

The Companys physician services include
sales of The Medical Manager and Intergy practice management
systems and related hardware, as well as the support and
maintenance of these systems. Revenue from software licenses is
recognized in accordance with SOP No. 97-2, Software
Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions.
Software license fee revenue is recognized when a customer
enters into a noncancelable license agreement, the software
product has been delivered, there are no uncertainties
surrounding product acceptance, there are no significant future
performance obligations, the license fees are fixed or
determinable and collection of the license fee is considered
probable. Amounts received in advance of meeting these criteria
are deferred. Revenue from multiple-element software
arrangements is recognized using the residual method as vendor
specific objective evidence (VSOE) of fair value
exists for the undelivered elements, but not for all the
delivered elements. The residual method requires revenue to be
allocated to the undelivered elements based on the fair value of
such elements, as indicated by VSOE. VSOE is based on the price
charged when an element is sold separately. Revenue from the
sale of hardware is recognized upon delivery to the customer.
Revenue from support and maintenance contracts is recognized
ratably over the contract period, which typically does not
exceed one year. The Company also markets a variety of
transaction processing services to physician practices, such as
medical claim

F-11



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

processing and automated patient statements.
Payment for these services is typically monthly on a per
transaction or fixed fee basis. Revenues are recognized when
these services are provided.

The Companys portal services include
advertising, sponsorship, healthcare management tools,
continuing medical education (CME), content
syndication and distribution, and e-commerce transactions
related to the Companys online distribution channels and
the online and offline distribution channels of the
Companys strategic partners. Revenue from advertising is
recognized as advertisements are delivered. Revenues from
sponsorship arrangements and healthcare management tools are
recognized ratably over the term of the applicable agreement.
Revenue from CME arrangements is recognized over the period the
Company satisfies the minimum credit hour requirements of the
applicable agreements. Revenue from fixed fee content license or
carriage fees is recognized ratably over the term of the
applicable agreement. E-commerce revenue is recognized when a
subscriber or consumer utilizes the Companys
Internet-based services or purchases goods or services through
the Companys Web site or co-branded Web site with one of
its strategic partners. Subscription revenue, including
subscription revenue from sponsorship arrangements, is
recognized over the subscription period. Subscription fees to
the Companys physician portal were discontinued as of
December 31, 2000. When contractual arrangements contain
multiple elements, revenue is allocated to the elements based on
their relative fair values, determined using prices charged when
elements are sold separately.

The Companys Plastic Technologies segment
develops, manufactures and distributes porous plastic products
and components. For standard products, revenue is recognized
upon shipment of product, net of sales returns and allowances,
in accordance with Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements and SFAS No. 48 Revenue
Recognition When Right of Return Exists. These statements
establish that revenue can be recorded when persuasive evidence
of an arrangement exists, delivery has occurred and all
significant obligations have been satisfied, the fee is fixed or
determinable and collection is considered probable. Appropriate
reserves are established for anticipated returns and allowances
based on past experience. For sales of certain custom products,
revenue is recognized upon completion and customer acceptance.
The amount of cash received at the time a customers order
is placed is recorded as a liability. The liability is reversed
at the time revenue is recognized.

The Company recognizes revenue related to the
nonmonetary exchange of advertising for advertising
(Barter) when such exchanges are objectively
determinable based on the criteria set forth in Accounting
Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions for contractual agreements
entered into prior to January 20, 2000. Revenues from these
exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly
evident. For contractual arrangements after January 20,
2000, the Company recognizes revenue based on the criteria set
forth in EITF Issue No. 99-17, Accounting for
Advertising Barter Transactions
(EITF 99-17). EITF 99-17 requires that an
entity recognize revenue and expenses from advertising barter
transactions at the fair value of the advertising surrendered
only when an entity received cash for similar transactions.
There were no revenues recognized from Barter transactions in
2003 or 2002. Revenue recognized from arrangements deemed to be
Barter transactions totaled approximately $19,009 in 2001. The
costs related to these transactions were equal to the revenues
and are included in sales, marketing, general and administrative
expenses in the accompanying consolidated statement of
operations.



| |                 
| | ----------------
| | Foreign Currency

The financial statements and transactions of the
Companys foreign manufacturing facilities are maintained
in their local currency. In accordance with
SFAS No. 52, Foreign Currency Translation,
the translation of foreign currencies into United States dollars
is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate for the period.
The gains or losses resulting from translation are included as a

F-12



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

component of accumulated other comprehensive
income within stockholders equity. Foreign currency
transaction gains and losses are included in net loss and were
not material in any of the periods presented.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

None of the Companys customers individually
accounted for more than 10% of the Companys consolidated
revenues in 2003, 2002 or 2001.

The Companys revenues are principally
generated in the United States. An adverse change in economic
conditions in the United States could negatively affect the
Companys revenues and results of operations.

The Company places its short-term investments in
a variety of financial instruments and, by policy, limits the
amount of credit exposure through diversification and by
restricting its investments to highly rated securities.



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for using the
liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method,
deferred income taxes are recognized for the future tax
consequence of differences between the tax and financial
reporting basis of assets and liabilities at each year end. A
valuation allowance is established to reduce deferred tax assets
to the amounts expected to be realized.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

As discussed more fully in Note 15, the
Company accounts for its stock-based employee compensation plans
using the intrinsic value method under the recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25), and related interpretations. No stock-based
employee compensation cost is reflected in net loss with respect
to options granted with an exercise price equal to the market
value of the underlying common stock on the date of grant.
Stock-based awards to non-employees are accounted for based on
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation
(SFAS No. 123), and EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The following table illustrates the
effect on net loss and net loss per common share if the Company
had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:

|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ------------------------ | ------- | ------- | - | ---- | -------- | -------- | - | - | ---------- | ---------- | -
|                                                                                                                                                                                 |                               |                         
|                                                                                                                                                                                 |                               | Years Ended December 31,
|                                                                                                                                                                                 |                               |                         
|                                                                                                                                                                                 |                               | 2003                     |         | 2002    |   | 2001
|                                                                                                                                                                                 |                               |                          |         |         |   |     
|Net loss as reported                                                                                                                                                             |                               | $                        | (17,006 | )       |   | $    | (49,702  | )        |   | $ | (6,672,318 | )         
|Deduct: Stock-based employee compensation expense
    included in reported net loss (including stock-based employee
    compensation expense related to discontinued operations) |                               |                          | 12,629  |         |   |      | 25,265   |          |   |   | 129,268    |           
|Add: Total stock-based employee compensation
    expense determined under fair value based method for all awards                                                                 |                               |                          | (76,484 | )       |   |      | (119,670 | )        |   |   | (317,166   | )         
|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |           
|                                                                                                                                                                                 | Pro forma net loss            |                          | $       | (80,861 | ) |      | $        | (144,107 | ) |   | $          | (6,860,216 | )
|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |           
|Net loss per common share:                                                                                                                                                       |                               |                          |         |         |   |      |          |          |   |   |            |           
|                                                                                                                                                                                 | Basic  as reported           |                          | $       | (0.06   | ) |      | $        | (0.16    | ) |   | $          | (19.14     | )
|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |           
|                                                                                                                                                                                 | Diluted  as reported         |                          | $       | (0.05   | ) |      | $        | (0.16    | ) |   | $          | (19.14     | )
|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |           
|                                                                                                                                                                                 | Basic and diluted  pro forma |                          | $       | (0.27   | ) |      | $        | (0.47    | ) |   | $          | (19.68     | )
|                                                                                                                                                                                 |                               |                          |         |         |   |      |          |          |   |   |            |           

F-13



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

The pro forma results above are not intended to
be indicative of or a projection of future results. Refer to
Note 15 for assumptions used in computing the fair value
amounts above.

Net Loss Per Common Share

Basic loss per common share and diluted loss per
common share are presented in conformity with
SFAS No. 128, Earnings Per Share. In
accordance with SFAS No. 128, basic loss per common
share has been computed using the weighted-average number of
shares of common stock outstanding during the period. Diluted
loss per common share has been computed using the
weighted-average number of shares of common stock outstanding
during the period, increased to consider the effect of
potentially dilutive securities. The following table presents
the calculation of basic and diluted loss per common share
(shares in thousands):

|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |        |  
|------------------------------------------------------------------------ | ------------------------------------------ | ------------------------ | ------- | ----- | - | ---- | ------- | ----- | - | - | ---------- | ------ | -
|                                                                         |                                            |                         
|                                                                         |                                            | Years Ended December 31,
|                                                                         |                                            |                         
|                                                                         |                                            | 2003                     |         | 2002  |   | 2001
|                                                                         |                                            |                          |         |       |   |     
|Income (loss) from continuing operations                                 |                                            | $                        | 16,605  |       |   | $    | (53,113 | )     |   | $ | (6,668,368 | )     
|Income (loss) from discontinued operations                               |                                            |                          | (33,611 | )     |   |      | 3,411   |       |   |   | (3,950     | )     
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Net loss attributable to common stockholders                             |                                            | $                        | (17,006 | )     |   | $    | (49,702 | )     |   | $ | (6,672,318 | )     
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Weighted-average shares  Basic                                          |                                            |                          | 304,858 |       |   |      | 304,168 |       |   |   | 348,570    |       
|Effect of dilutive securities:                                           |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Employee stock options and warrants                                      |                                            |                          | 20,953  |       |   |      |        |       |   |   |           |       
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Adjusted weighted-average shares after assumed
    conversions  Diluted |                                            |                          | 325,811 |       |   |      | 304,168 |       |   |   | 348,570    |       
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Basic loss per common share:                                             |                                            |                          |         |       |   |      |         |       |   |   |            |       
|                                                                         | Income (loss) from continuing operations   |                          | $       | 0.05  |   |      | $       | (0.17 | ) |   | $          | (19.13 | )
|                                                                         | Income (loss) from discontinued operations |                          |         | (0.11 | ) |      |         | 0.01  |   |   |            | (0.01  | )
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Net loss                                                                 |                                            | $                        | (0.06   | )     |   | $    | (0.16   | )     |   | $ | (19.14     | )     
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Diluted loss per common share:                                           |                                            |                          |         |       |   |      |         |       |   |   |            |       
|                                                                         | Income (loss) from continuing operations   |                          | $       | 0.05  |   |      | $       | (0.17 | ) |   | $          | (19.13 | )
|                                                                         | Income (loss) from discontinued operations |                          |         | (0.10 | ) |      |         | 0.01  |   |   |            | (0.01  | )
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       
|Net loss                                                                 |                                            | $                        | (0.05   | )     |   | $    | (0.16   | )     |   | $ | (19.14     | )     
|                                                                         |                                            |                          |         |       |   |      |         |       |   |   |            |       

The Company has excluded convertible subordinated
notes and restricted stock, as well as certain outstanding
warrants and stock options from the calculation of diluted loss
per common share because such securities were either
anti-dilutive or were not convertible to common stock in
accordance with their terms during the periods presented. The
following table presents the total number of shares that could
potentially dilute basic loss per common share in the future
that were not included in the computation of diluted loss per
common share during the periods presented (shares in thousands):

|                                       |  |                          |         |      |  |      |         |  |  |  |         | 
|-------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                       |  |                         
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2003                     |         | 2002 |  | 2001
|                                       |  |                          |         |      |  |     
|Options, warrants and restricted stock |  |                          | 82,267  |      |  |      | 136,147 |  |  |  | 159,058 | 
|Convertible notes                      |  |                          | 55,129  |      |  |      | 32,387  |  |  |  |        | 
|                                       |  |                          |         |      |  |      |         |  |  |  |         | 
|                                       |  |                          | 137,396 |      |  |      | 168,534 |  |  |  | 159,058 | 
|                                       |  |                          |         |      |  |      |         |  |  |  |         | 

F-14



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity (SFAS No. 150).
SFAS No. 150 requires that certain financial
instruments, which under previous guidance were accounted for as
equity, must now be accounted for as liabilities. The financial
instruments affected include mandatorily redeemable stock,
certain financial instruments that require or may require the
issuer to buy back some of its shares in exchange for cash or
other assets and certain obligations that can be settled with
shares of stock. SFAS No. 150 is effective for all
financial instruments entered into or modified after
May 31, 2003 and must be applied to the Companys
existing financial instruments effective July 1, 2003, the
beginning of the first fiscal period after June 15, 2003.
The adoption of SFAS No. 150 on June 1, 2003 did
not have any effect on the Companys consolidated financial
position or results of operations.

In November 2002, the Emerging Issues Task Force
issued a final consensus on issue 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables
(EITF 00-21) which addresses how to account for
arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets.
EITF 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15,
2003. Companies may also elect to apply the provisions of
EITF 00-21 to existing arrangements and record the
operating statement impact as the cumulative effect of a change
in accounting principle. The Company has adopted EITF 00-21
prospectively for contracts beginning after June 30, 2003.
The adoption of EITF 00-21 did not have a material impact
on the Companys consolidated financial position or results
of operations.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). The
interpretation elaborates on the disclosures to be made in the
Companys interim and annual financial statements about
obligations under certain guarantees. It also requires the
Company to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements are effective
for financial statements of interim and annual periods ending
after December 15, 2002. The initial measurement and
recognition provisions are required to be applied on a
prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have
a material impact on the Companys consolidated financial
position or results of operations.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
requires recording costs associated with exit or disposal
activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which
is generally before an actual liability has been incurred.
SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002.
SFAS No. 146 will have an impact on the timing of the
recording of any future restructuring charges.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to the
financial statements to conform with the current year
presentation.



|   |                      
|-- | ---------------------
|2. | Business Combinations



| |                  
| | -----------------
| | 2003 Acquisitions

On December 22, 2003, the Company completed
its acquisition of Medifax-EDI, Inc. (Medifax), a
privately held company based in Nashville, Tennessee. Medifax
provides real-time medical eligibility transaction services and
other claims management solutions to hospitals, medical centers,
physician practices and other medical organizations throughout
the United States. These services enable healthcare

F-15



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

providers to verify insurance coverage for their
patients on a real-time basis. The total purchase consideration
was approximately $280,065, comprised of $276,065 in cash and
$4,000 of estimated acquisition costs, for all of the
outstanding capital stock of Medifax. Prior to closing, Medifax
distributed its Pharmacy Services companies to its owner and
these companies were not included in the transaction. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $179,090 and intangible assets subject to
amortization of $92,700 were recorded. The Company does not
expect that the goodwill or intangible assets will be deductible
for tax purposes. The intangible assets are comprised of $72,600
relating to customer relationships with estimated useful lives
of fifteen years, $8,600 relating to acquired technology with an
estimated useful life of five years, $8,400 relating to
payer connections with estimated useful lives of fifteen years
and $3,100 relating to a tradename with an estimated useful life
of one year. The results of operations of Medifax will be
included in the Transaction Services segment. The results of
operations of Medifax since the closing date of the acquisition
were not material.

On September 25, 2003, the Company completed
its acquisition of a privately held dental clearinghouse based
in Hartford, Connecticut. The Company paid $5,805 in cash for
all of the outstanding capital stock of the acquired company and
agreed to pay up to an additional $4,200 beginning in 2005 if
certain revenue related milestones are achieved. The additional
payment may be made over a three-year period by issuing shares
of the Companys common stock or in cash. The additional
payment may exceed $4,200 if all or a portion of the additional
payment is made by issuing shares of the Companys stock
and if the value of the Companys stock exceeds certain
price levels. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the preliminary
allocation of the purchase price, goodwill of $3,478 and an
intangible asset subject to amortization of $2,392 were
recorded. The Company does not expect that the goodwill or
intangible assets will be deductible for tax purposes. The
intangible asset is acquired technology with an estimated useful
life of five years. The results of operations of the
acquired company have been included in the financial statements
of the Company from September 25, 2003, the closing date of
the acquisition, and are included in the Transaction Services
segment.

On July 17, 2003, the Company completed its
acquisition of Advanced Business Fulfillment, Inc.
(ABF), a privately held company based in
St. Louis, Missouri. ABF provides healthcare paid-claims
communications services for third-party administrators and
health insurers. ABFs services allow its customers to
outsource print-and-mail activities for the distribution of
checks, remittance advice and explanations of benefits. The
total purchase consideration for ABF was approximately $113,268,
comprised of $108,368 in cash and $4,900 of estimated
acquisition costs for all of the outstanding capital stock of
ABF. Additionally, the Company will pay up to an additional
$150,000 beginning in April 2004 if certain financial milestones
are achieved. The additional payment may be made over a
three-year period by issuing shares of the Companys common
stock or, at the Companys option in certain circumstances,
in cash. The additional payment may exceed $150,000 if all or a
portion of the additional payment is made by issuing shares of
the Companys stock and if the value of the Companys
stock exceeds certain price levels at the time of payment. The
acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values. In
connection with the preliminary allocation of the purchase
price, goodwill of $61,453 and intangible assets subject to
amortization of $47,000 were recorded. The Company expects that
substantially all of the goodwill recorded will be deductible
for tax purposes. The intangible assets are comprised of $41,000
relating to customer relationships with estimated useful lives
of ten years, $4,900 relating to acquired unpatented
technologies with estimated useful lives of

F-16



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

nine months to six years and $1,100 relating to a
trade name with an estimated useful life of three years. The
results of operations of the acquired company have been included
in the financial statements of the Company from July 17,
2003, the closing date of the acquisition, and are included in
the Transaction Services segment.

On May 29, 2003, the Company acquired The
Little Blue Book (LBB), a company which maintains a
database containing practice information for over 380,000
physicians, and publishes a pocket-sized reference book
containing physician information. The total purchase
consideration for LBB was approximately $10,550, comprised of
$10,400 in cash and estimated acquisition costs of $150.
Additionally, the Company will pay up to $2,500 if LBB meets
certain financial milestones during the years ending
December 31, 2003 and 2004. The acquisition was accounted
for using the purchase method of accounting and, accordingly,
the purchase price was allocated to the tangible and intangible
assets acquired and the liabilities assumed on the basis of
their respective fair values. In connection with the preliminary
allocation of the purchase price, goodwill of $8,661 and
intangible assets subject to amortization of $2,815 were
recorded. The Company expects that substantially all of the
goodwill recorded will be deductible for tax purposes. The
intangible assets are comprised of $1,787 relating to a trade
name with an estimated useful life of seven years, $761 relating
to customer relationships with estimated useful lives of five
years and $267 relating to acquired technology with an estimated
useful life of three years. The results of operations of LBB
have been included in the financial statements of the Company
from May 29, 2003, the closing date of the acquisition, and
are included in the Portal Services segment.

On April 30, 2003, the Company acquired the
assets and assumed certain liabilities of a company which
provides healthcare benefit decision support tools and solutions
to its clients through online technology. The total purchase
consideration for this acquisition was approximately $4,062,
comprised of $4,000 in cash and estimated acquisition costs of
$62. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the purchase price was allocated
to the tangible and intangible assets acquired and the
liabilities assumed on the basis of their respective fair
values. In connection with the allocation of the purchase price,
goodwill of $4,070 and an intangible asset subject to
amortization of $710 were recorded. The Company expects that
substantially all of the goodwill recorded will be deductible
for tax purposes. The intangible asset represents the fair value
of customer relationships with estimated useful lives of five
years. The results of operations of the acquired business have
been included in the financial statements of the Company from
April 30, 2003, the closing date of the acquisition, and
are included in the Portal Services segment.

In 2003, the Company acquired seven practice
services companies for an aggregate cost of $2,182, which was
paid in cash. Additionally, the Company will pay up to $675
beginning in 2004 if some of the acquired companies meet certain
financial milestones. These acquisitions were accounted for
using the purchase method of accounting and, accordingly, the
purchase prices were allocated to assets acquired and
liabilities assumed based on their respective fair values. In
connection with the preliminary allocation of the purchase
prices, goodwill of $1,469 and intangible assets subject to
amortization of $1,054 were recorded. The Company expects that
substantially all of the goodwill recorded will be deductible
for tax purposes. The intangible assets are comprised of $351
related to non-compete agreements with estimated useful lives of
three to five years and $703 related to customer relationships
with estimated useful lives of nine years. The results of
operations of these companies have been included in the
financial statements of the Company from the respective
acquisition closing dates and are included in the Physician
Services segment.



| |                  
| | -----------------
| | 2002 Acquisitions

On October 31, 2002, the Company acquired
WellMed, Inc. (WellMed), which develops and markets
healthcare information technology applications, including online
healthcare decision support and

F-17



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

health management tools for use by consumers. The
total purchase consideration for WellMed was approximately
$19,031, comprised of $18,781 in cash and estimated acquisition
costs of $250. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase
price was allocated to the tangible and intangible assets
acquired and the liabilities assumed on the basis of their
respective fair values. In connection with the allocation of the
purchase price, goodwill of $18,380 and an intangible asset
subject to amortization of $2,700 were recorded. The Company
expects that substantially all of the goodwill recorded will be
deductible for tax purposes. The intangible asset represents the
fair value of acquired unpatented technology and has a useful
life of three years. The results of operations of WellMed have
been included in the financial statements of the Company from
October 31, 2002, the closing date of the acquisition.
WellMeds results of operations are included in the Portal
Services segment.

In 2002, the Company acquired 21 physician
services companies for a total cost of $14,400, which was paid
in cash. These acquisitions were accounted for using the
purchase method of accounting with the purchase price being
allocated to assets acquired and liabilities assumed based on
their fair values. In connection with the preliminary allocation
of the purchase price, goodwill of $11,784 and intangible assets
subject to amortization of $4,049 were recorded. The Company
expects that substantially all of the goodwill recorded will be
deductible for tax purposes. The intangible assets are comprised
of $1,281 related to non-compete agreements with estimated
useful lives of one to five years and $2,768 related to customer
relationships with estimated useful lives of nine years. The
results of operations of these companies have been included in
the financial statements of the Company from the respective
acquisition closing dates and are included in the Physician
Services segment.



| |                  
| | -----------------
| | 2001 Acquisitions

On December 26, 2001, the Company completed
its acquisition of the portal assets of MedicaLogic/ Medscape,
Inc. (Medscape). Medscape operates both consumer and
professional websites. The total purchase consideration for
these assets was approximately $9,852, comprised of $9,242 in
cash and acquisition costs of $610. The acquisition was
accounted for using the purchase method of accounting and,
accordingly, the purchase price was allocated to the tangible
and intangible assets acquired and the liabilities assumed on
the basis of their respective fair values. In connection with
the allocation of the purchase price, goodwill of $5,732 and
intangible assets subject to amortization totaling $2,420 were
recorded. The Company expects that substantially all of the
goodwill recorded will be deductible for tax purposes. The
intangible assets are comprised of $800 related to a tradename
and $1,620 related to customer relationships with useful lives
of three and five years, respectively. The results of operations
of Medscape have been included in the financial statements of
the Company from December 26, 2001, the closing date of the
acquisition. Medscapes results of operations are included
in the Portal Services segment.

In 2001, the Company acquired ten physician
services companies for a total cost of $8,159, which was paid
primarily in cash. These acquisitions were accounted for using
the purchase method of accounting with the purchase price being
allocated to assets acquired and liabilities assumed based on
their fair values. In connection with the allocation of the
purchase price, goodwill of $9,879 and intangible assets subject
to amortization of $3,453 were recorded. The Company expects
that substantially all of the goodwill recorded will be
deductible for tax purposes. Amortization of goodwill related to
business combinations completed prior to June 30, 2001 has
been provided based on an estimated useful life of three years.
The intangible assets are comprised of $886 related to
non-compete agreements with estimated useful lives of one to
five years and $2,567 related to customer relationships with
estimated useful lives of nine years. The results of operations
of these companies have been included in the financial
statements of the Company from the respective acquisition
closing dates and are included in the Physician Services segment.

F-18



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



| |                                
| | -------------------------------
| | Unaudited Pro Forma Information

The following unaudited pro forma financial
information for the years ended December 31, 2003 and 2002
gives effect to the acquisitions of ABF and Medifax, including
the amortization of intangible assets, as if they had occurred
as of the beginning of the earliest period presented. The
information is provided for illustrative purposes only and is
not necessarily indicative of the operating results that would
have occurred if the transactions had been consummated at the
dates indicated, nor is it necessarily indicative of future
operating results of the consolidated companies, and should not
be construed as representative of these results for any future
period. The remaining acquisitions in 2003, 2002 and 2001 have
been excluded as the pro forma impact of such acquisitions was
not significant in any of the periods presented.

|                                         |                                          |                          |           |       |   |   |         |       |  
|---------------------------------------- | ---------------------------------------- | ------------------------ | --------- | ----- | - | - | ------- | ----- | -
|                                         |                                          |                         
|                                         |                                          | Years Ended December 31,
|                                         |                                          |                         
|                                         |                                          | 2003                     |           | 2002 
|                                         |                                          |                          |           |      
|Revenue                                  |                                          | $                        | 1,067,936 |       |   | $ | 981,168 |      
|Income (loss) from continuing operations |                                          |                          | 28,867    |       |   |   | (47,628 | )    
|Net loss                                 |                                          |                          | (4,744    | )     |   |   | (44,217 | )    
|Basic loss per common share:             |                                          |                          |           |       |   |   |         |      
|                                         | Income (loss) from continuing operations |                          | $         | 0.09  |   |   | $       | (0.16 | )
|                                         |                                          |                          |           |       |   |   |         |      
|                                         | Net loss                                 |                          | $         | (0.02 | ) |   | $       | (0.15 | )
|                                         |                                          |                          |           |       |   |   |         |      
|Diluted loss per common share:           |                                          |                          |           |       |   |   |         |      
|                                         | Income (loss) from continuing operations |                          | $         | 0.09  |   |   | $       | (0.16 | )
|                                         |                                          |                          |           |       |   |   |         |      
|                                         | Net loss                                 |                          | $         | (0.01 | ) |   | $       | (0.15 | )
|                                         |                                          |                          |           |       |   |   |         |      



|   |                         
|-- | ------------------------
|3. | Significant Transactions

Quintiles Transnational Corporation

As part of the transaction in which the Company
acquired Envoy from Quintiles Transnational Corp. in May 2000,
Quintiles and the Company entered into a Data Rights Agreement
and an Internet Product Development and Marketing Agreement. In
February 2000, Quintiles filed an action for breach of the Data
Rights Agreement against the Company. On October 12, 2001,
the Company and Quintiles entered into an agreement to settle
this litigation (Settlement Agreement). Pursuant to
the Settlement Agreement, the Company and Quintiles terminated
the Data Rights Agreement and the Internet Product Development
and Marketing Agreement and all other agreements between
them. Pursuant to the court order in the litigation, Quintiles
continued to receive de-identified data from the Company until
February 28, 2002. The Company and Envoy have no further
obligation to provide, and no longer provide, any data to
Quintiles.

In accordance with the terms of the Settlement
Agreement, the Company purchased from Quintiles all
35,000,000 shares of WebMD common stock held by Quintiles
for $185,000 in cash. The fair market value of the repurchased
shares on the date of settlement was $126,000 and has been
recorded as treasury stock. The excess of the purchase price of
the shares over their fair market value was $59,000 and has been
recorded as a component of restructuring and integration charges
along with a benefit of $7,000 related to the release from
certain obligations in relation to the Companys
acquisition of Envoy.

The Settlement Agreement also provides that
Quintiles will have the right to receive a payment (payable at
the Companys option in cash, stock, or a combination of
cash and stock) in the event that, on or before June 30,
2004, a transaction closes in which the Company is acquired at a
price per the Companys common share greater than $4.00 or
in which Envoy is sold at an aggregate price of greater

F-19



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

than $500,000. The Company is under no obligation
to pursue either of these types of transactions. In the event an
acquisition of the Company closes on or before June 30,
2004, the payment to Quintiles will equal 80% of the amount by
which the price paid in the acquisition exceeds $4.00 per
share, multiplied by 35,000,000. In the event a sale of Envoy
closes on or before June 30, 2004, the payment to Quintiles
will equal 80% of the amount by which the price received in the
sale exceeds $500,000.

America Online, Inc.

In May 2001, the Company entered into an
agreement for a strategic alliance with Time Warner, Inc.
(Time Warner). The term of the agreement is three
years expiring May 2004. Under the agreement, the Company is the
primary provider of healthcare content, tools and services for
use on America Online (AOL) properties that include
AOL, AOL.com, CompuServe and Netscape.com. In addition, the
Company created a co-branded personalized health service for AOL
that features the Companys personalized news, health
assessment and monitoring tools, communities and newsletters,
integrated with AOLs calendaring and reminders. The
Company and AOL intend, through the co-branded services, to
provide users with the ability to communicate with their health
plans, physicians, pharmacies and other providers. The Company
and AOL share revenue from advertising (whether or not related
to healthcare), commerce and programming on the health channels
of the AOL properties and on the co-branded service, with the
Company receiving 80% of revenues up to an agreed-upon annual
threshold and 60% thereafter. In connection with the strategic
alliance, the Company issued to Time Warner a warrant to
purchase 2,408,908 shares of the Companys common
stock at an exercise price of $9.25 per share. The warrant
was valued at approximately $17,500 using the Black-Scholes
option pricing model and is being amortized over the term of the
strategic alliance as a non-cash distribution expense included
in sales, marketing, general and administrative expense.

News Corporation

Pursuant to an agreement signed and publicly
announced in December 1999 and closed in January 2000, the
Company entered into a strategic relationship with News
Corporation. On December 29, 2000, this strategic alliance
was revised by the parties. On February 15, 2001, the
Company completed all transactions related to its revised
strategic relationship with News Corporation. The original
relationship and the new relationship are each described below.



| |                      
| | ---------------------
| | Original Relationship

The financial terms of the strategic relationship
included: $700,000 in media services by News Corporation,
comprised of $400,000 domestically and $300,000 internationally
over 10 years; $100,000 cash investment commitment by News
Corporation in an international joint venture; a $60,000
five-year licensing agreement for syndication of WebMD daily
broadcast content; and the transfer to the Company of 50%
interests in The Health Network, a health-focused cable network,
and thehealthnetwork.com. The Company issued an aggregate of
155,951 shares of Series A preferred stock,
convertible into 21,282,645 shares of the Companys
common stock. In addition, affiliates of News Corporation
purchased 2,000,000 shares of the Companys common
stock for an aggregate purchase price of $100,000 in cash.



| |                     
| | --------------------
| | Current Relationship

The Company retained the right to receive
$205,000 in domestic media services from News Corporation over
ten years expiring in 2010 and will continue to license its
content for use across News Corporations media properties
for four years for cash payments totaling $12,000 annually
expiring in 2004. The remaining portion of the domestic media
services is included in prepaid content and distribution
services in the accompanying consolidated balance sheets. News
Corporation transferred its 50% interest in

F-20



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

the international joint venture to the Company
and was relieved of its commitment to provide any future capital
to the international joint venture and its commitment to provide
any international media services. The Company transferred its
interest in The Health Network to News Corporation. The Company
was also relieved of all future capital commitments to The
Health Network. In connection with the revisions to the
relationship, News Corporation surrendered 155,951 shares
of WebMDs Series A convertible preferred stock. The
Company granted to News Corporation a warrant to acquire
3,000,000 shares of its common stock at an exercise price
of $15 per share. The Company included approximately
$17,759, determined using the Black-Scholes option pricing
model, as a non-cash restructuring charge related to this
issuance.

Microsoft

The Company entered into a five-year strategic
alliance with Microsoft in May 1999. In March 2001, the Company
executed a non-binding letter of intent with Microsoft with
respect to a new relationship. In April 2001, the Company
entered into definitive agreements with Microsoft to implement
the new relationship, which was effective as of January 1,
2001. In connection with the original strategic relationship,
Microsoft acquired shares of common stock and a warrant to
purchase shares of common stock of WebMD, Inc. These securities
were converted into securities of the Company as a result of the
merger of the Company and WebMD, Inc. in November 1999. As of
December 31, 2003, Microsoft had a warrant to purchase
13,676,389 shares of the Companys common stock at an
exercise price of $30.16 per share. The warrant is fully
vested and expires on May 12, 2004. The original
relationship and the new relationship are each described below.



| |                      
| | ---------------------
| | Original Relationship

Under the terms of the original strategic
relationship, the Company developed, hosted and maintained on
its servers a health channel for MSN and was required to pay
Microsoft an aggregate of $162,000 in carriage fees for the
distribution of that content. In addition, Microsoft and the
Company each committed co-marketing funds of $50,000 over the
first two years of the term. As of December 31, 2000, the
Company had recorded $30,562 as sales, marketing, general and
administrative expense related to the carriage fees.

Microsoft was required to remit to the Company
100% of the net revenue over the term of the agreement from
banner and other advertising and e-commerce transactions
generated on the health channel or advertising that Microsoft
placed on WebMD.com each year during the term until the Company
received an amount equal to that years carriage fees,
including guaranteed minimum amounts of $22,500 in each of the
first two years of the term, and was required to share revenue
equally with the Company after that. The Company was required to
pay Microsoft a 25% commission on the portion of the revenue
received up to the annual guaranteed minimum amounts for all
advertisements placed by Microsoft. The Company recognized this
advertising revenue when Microsoft notified it that
advertisements had been placed on the health channel and billed
by Microsoft, not based on the guaranteed minimum amounts.
During 2000, the Company recognized $5,996, net of commissions,
related to health channel advertising.

Microsoft agreed to sponsor up to
5.0 million subscriber months, for $29.95 per month,
of subscriptions to the Companys physician Web site over
the term of the agreement. The Company was required to pay a
$5 per month commission on all subscriptions placed by
Microsoft. During 2000, the Company recorded $16,114 as revenue,
net of commissions, related to subscriptions sponsored by
Microsoft.

The Company was required to share with Microsoft
50% of net revenue from banner and other advertising on the
Companys physician Web site generated by sponsored
subscriptions until Microsoft received the amount it had
incurred for its sponsored subscriptions. Thereafter, the
Company was required

F-21



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

to share 25% of this revenue with Microsoft. In
addition, the Company was required to share with Microsoft 15%
of the Companys net revenue from e-commerce transactions
and additional services not included in the basic subscription
to the Companys physician Web site generated by these
sponsored subscriptions. There were no obligations to Microsoft
as of December 31, 2000 relating to this provision.



| |                     
| | --------------------
| | Current Relationship

The parties entered into two definitive
agreements to implement the new relationship. The first
agreement related to technology matters and was terminated by
the parties on September 14, 2001. No payments were made by
either party under the terminated agreement. Under the second
agreement, the Company programs the majority of the MSN health
channel, and the Company and MSN share revenues derived from
advertising, sponsorship and e-commerce on the MSN health
channel site, with the Company receiving 100% of revenues up to
an agreed upon annual threshold (or until an agreed upon maximum
for the contract period is reached) and 60% thereafter. The
Company no longer pays carriage fees to Microsoft. The term of
this agreement is scheduled to expire on June 30, 2004. In
connection with the new relationship, the parties agreed that
Microsoft would no longer be responsible for funding the
sponsorship of subscriptions to the Companys physician
portal, and the Company would no longer be required to share
with Microsoft revenue generated by physician usage of the
Companys healthcare portals.



|   |                                              
|-- | ---------------------------------------------
|4. | Impairment of Long-Lived and Other
    Assets

During 2001, the Company identified certain
indicators of possible impairment of its long-lived assets,
primarily goodwill and other acquired intangible assets. The
indicators of possible impairment that were identified included
a decline in the price of the Companys common stock to its
lowest price in the previous twelve months accompanied by a
significant decline in the volatility of the Companys
stock price, a sustained decline in valuations in the e-health,
technology and Internet sectors and the impact of recent trends
in general economic conditions. As a result of these indicators,
the Company reviewed substantially all of its long-lived assets
for impairment. The Companys long-lived assets primarily
related to goodwill and other acquired intangible assets
recorded in connection with the acquisitions of WebMD, Inc.,
MedE America and Medcast in November 1999 and the acquisitions
of Kinetra, Envoy, Medical Manager, CareInsite and OnHealth
during 2000. The Company utilized its common stock as the
primary consideration for the acquisitions. The Company
evaluated its long-lived assets for impairment by determining
identifiable cash flows of related asset groupings at the lowest
level that were largely independent of the cash flows of other
asset groupings. The projected undiscounted cash flows for each
asset grouping was compared to the related carrying value. As a
result of these comparisons, the Company determined its
long-lived assets were impaired.

The Company determined the amount of the
impairment by comparing the fair value of each asset grouping to
the related carrying value. The fair value for each asset
grouping was determined primarily using a discounted cash flow
approach. As a result of these comparisons, the Company recorded
a write-down of $3,816,115 related to its long-lived assets
reflecting the difference between the carrying value and fair
value of the asset groupings. The write-down consisted of
$3,678,950 of goodwill, $94,186 of other acquired intangibles
and $42,979 of other long-lived assets consisting of computer
equipment, leasehold improvements, office equipment and
furniture and fixtures. In addition to this write-down, the
Company recorded a write-down in 2001 of $10,778 of goodwill
related to one of the discontinued operating units of the
Companys Plastic Technologies segment. Accordingly, this
write-down has been included as a component of discontinued
operations during the year ended December 31, 2001.

During 2003 and 2002, the Company performed the
impairment tests of goodwill, as required by
SFAS No. 142. There was no impairment resulting from
these tests.

F-22



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



|   |                                          
|-- | -----------------------------------------
|5. | Restructuring and Integration
    Charges

After the mergers with Medical Manager
Corporation, CareInsite, Inc. and OnHealth Network Company in
September 2000, the Companys Board of Directors approved a
restructuring and integration plan, with the objective of
eliminating duplication and redundancies that resulted from
these and certain prior acquisitions and consolidating the
Companys operational infrastructure into a common platform
to more efficiently serve its customers.

The Companys restructuring and integration
efforts continued in 2001, and a plan to include the impact of
eliminating functions resulting from the Companys
acquisition of Medscape (Medscape Restructuring) in
December 2001 was initiated. As a result of the Medscape
Restructuring, 115 employees were notified of termination
in December 2001. In connection with the continuing
restructuring and integration efforts, a charge was recorded in
2001 of $266,755, that consisted of: (i) $123,206 primarily
relating to the restructuring of the original strategic
relationship with Microsoft, of which $133,500 represented
non-cash charges for the write-off of intangible assets
associated with the Companys original Microsoft agreement
recorded as part of the Companys acquisition of WebMD,
Inc. in 1999 offset by a $15,610 cash benefit for the settlement
of certain obligations from the original strategic relationship
with Microsoft, as well as net cash payments of $5,316 made to
exit contractual obligations, (ii) $52,000 cash charge
associated with the settlement of the original Quintiles
agreements, of which $59,000 was a cash charge recorded for the
difference between the purchase price and fair value of the
35,000,000 shares of the Companys common stock
acquired in October 2001, offset by a $7,000 cash benefit
related to the release of the Company from certain obligations
in relation to the Companys acquisition of Envoy,
(iii) personnel-related costs of $67,604, of which $51,998
primarily represented non-cash stock option compensation charges
related to the resignation or termination of certain employees
pursuant to the applicable employment and separation
arrangements, with the remaining personnel-related charge
relating to severance and outplacement services for
approximately 615 employees that the Company identified and
notified of termination during 2001, of which $2,777 related to
115 employees notified of termination as a result of the
Medscape Restructuring, (iv) $15,538 of cash charges
related to estimated future lease obligations and lease
cancellation penalties related primarily to additional
anticipated costs of exiting previously vacated facilities as a
result of declines in rental values in certain markets and
vacating additional facilities identified during 2001, and
(v) $8,407 of cash charges related to integration costs,
consisting of employee retention arrangements related to exit
activities, moving and relocation expenses, as well as outside
professional fees related to the integration of the
Companys business.

During 2002, the Company recorded a benefit of
$5,850 relating to its restructuring and integration activity
resulting from the settlements of certain contractual
obligations.

F-23



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

The Company has substantially completed its
restructuring and integration efforts related to the 2000 and
2001 restructuring plans. The balance of the restructuring and
integration accrual as of December 31, 2003 is primarily
related to remaining lease payments of previously vacated
facilities. The following table presents cash activity in the
restructuring and integration accrual:

|                             |  |           |         |            |  |       |         |       |  |   |         |   |  |   |         |  
|---------------------------- |  | --------- | ------- | ---------- |  | ----- | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                             |  | Severance |         | Facilities |  | Other |         | Total
|                             |  |           |         |            |  |       |         |      
|Balance at December 31, 2000 |  | $         | 8,599   |            |  | $     | 35,843  |       |  | $ | 8,683   |   |  | $ | 53,125  |  
|Accrual                      |  |           | 15,606  |            |  |       | 15,538  |       |  |   | 50,113  |   |  |   | 81,257  |  
|Cash payments                |  |           | (20,749 | )          |  |       | (10,484 | )     |  |   | (58,796 | ) |  |   | (90,029 | )
|                             |  |           |         |            |  |       |         |       |  |   |         |   |  |   |         |  
|Balance at December 31, 2001 |  | $         | 3,456   |            |  | $     | 40,897  |       |  | $ |        |   |  | $ | 44,353  |  
|Accrual                      |  |           |        |            |  |       |        |       |  |   | (5,850  | ) |  |   | (5,850  | )
|Cash payments                |  |           | (3,212  | )          |  |       | (7,606  | )     |  |   | 5,850   |   |  |   | (4,968  | )
|                             |  |           |         |            |  |       |         |       |  |   |         |   |  |   |         |  
|Balance at December 31, 2002 |  | $         | 244     |            |  | $     | 33,291  |       |  | $ |        |   |  | $ | 33,535  |  
|Cash payments                |  |           | (70     | )          |  |       | (7,550  | )     |  |   |        |   |  |   | (7,620  | )
|                             |  |           |         |            |  |       |         |       |  |   |         |   |  |   |         |  
|Balance at December 31, 2003 |  | $         | 174     |            |  | $     | 25,741  |       |  | $ |        |   |  | $ | 25,915  |  
|                             |  |           |         |            |  |       |         |       |  |   |         |   |  |   |         |  



|   |                        
|-- | -----------------------
|6. | Discontinued Operations

The Companys Plastic Technologies segment,
Porex, had been accounted for as an asset held for sale during
the period from September 12, 2000 to September 12,
2001, and as a discontinued operation from September 13,
2001 to September 30, 2002. During February 2003, the
Company terminated its formal divestiture plan relating to Porex
and, accordingly, the assets, liabilities and operations of
Porex were reclassified as a continuing operation from
September 12, 2000, its date of acquisition.

On August 1, 2003, the Company completed the
sale of two operating units of Porex, Porex Bio Products, Inc.
(Porex Bio) and Porex Medical Products, Inc.
(Porex Medical) to enable Porex to focus on its
porous materials businesses. Accordingly, the historical
financial information of these operating units has been
reclassified as discontinued operations in the accompanying
consolidated financial statements for all periods presented. The
operating units were sold in two separate transactions for an
aggregate sales price of $46,500. An impairment charge of
$33,113 was recorded in the results for the quarter ended
June 30, 2003 to reduce the long-lived assets of Porex Bio
and Porex Medical to fair value. The write-down consisted of
$27,564 of goodwill, $4,162 of trade name and patent intangibles
and $1,387 of other long-lived assets consisting primarily of
manufacturing equipment. The impairment charge was based on the
fair value of the divested businesses as determined by the
expected proceeds from disposition. During the three months
ended September 30, 2003, the Company recorded a loss on
disposal of $3,491, primarily representing certain costs related
to the disposition, which is included in income (loss) from
discontinued operations in the accompanying consolidated
statements of operations. Summarized operating results for the
discontinued units through August 1, 2003 were as follows:

|                                                                    |  |                 |         |                   |  |                   |        |  |  |   |        |  
|------------------------------------------------------------------- |  | --------------- | ------- | ----------------- |  | ----------------- | ------ |  |  | - | ------ | -
|                                                                    |  | For the Period  |         |                   |  |                  
|                                                                    |  | January 1, 2003 |         | For the Year      |  | For the Year     
|                                                                    |  | through         |         | Ended             |  | Ended            
|                                                                    |  | August 1, 2003  |         | December 31, 2002 |  | December 31, 2001
|                                                                    |  |                 |         |                   |  |                  
|Revenue                                                             |  | $               | 31,004  |                   |  | $                 | 54,181 |  |  | $ | 59,008 |  
|                                                                    |  |                 |         |                   |  |                   |        |  |  |   |        |  
|Income (loss) from operations                                       |  | $               | (30,120 | )                 |  | $                 | 3,411  |  |  | $ | (3,950 | )
|Loss on disposal                                                    |  |                 | (3,491  | )                 |  |                   |       |  |  |   |       |  
|                                                                    |  |                 |         |                   |  |                   |        |  |  |   |        |  
|Income (loss) from discontinued operations, net
    of income taxes |  | $               | (33,611 | )                 |  | $                 | 3,411  |  |  | $ | (3,950 | )
|                                                                    |  |                 |         |                   |  |                   |        |  |  |   |        |  

F-24



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

The following table presents summary balance
sheet information for the discontinued operations as of
December 31, 2002:

|                                        |                                       |                                              |   |        |        | 
|--------------------------------------- | ------------------------------------- | -------------------------------------------- | - | ------ | ------ | 
|Assets of discontinued operations:      |                                       |                                              |   |       
|                                        | Cash and cash equivalents             |                                              | $ | 3,945  |       
|                                        | Accounts receivable, net              |                                              |   | 7,223  |       
|                                        | Inventory, net                        |                                              |   | 8,828  |       
|                                        | Property and equipment, net           |                                              |   | 24,249 |       
|                                        | Goodwill and intangible assets, net   |                                              |   | 49,326 |       
|                                        | Other assets                          |                                              |   | 485    |       
|                                        |                                       |                                              |   |       
|                                        |                                       | Total assets of discontinued operations      |   | $      | 94,056 | 
|                                        |                                       |                                              |   |       
|Liabilities of discontinued operations: |                                       |                                              |   |       
|                                        | Accounts payable and accrued expenses |                                              | $ | 5,700  |       
|                                        | Debt                                  |                                              |   | 6,665  |       
|                                        |                                       |                                              |   |       
|                                        |                                       | Total liabilities of discontinued operations |   | $      | 12,365 | 
|                                        |                                       |                                              |   |       



|   |                               
|-- | ------------------------------
|7. | Convertible Subordinated Notes



| |                                                           
| | ----------------------------------------------------------
| | $350,000 1.75% Convertible
    Subordinated Notes due 2023

On June 25, 2003, the Company issued
$300,000 aggregate principal amount of 1.75% Convertible
Subordinated Notes due 2023 (the 1.75% Notes)
in a private offering. On July 7, 2003, the Company issued
an additional $50,000 aggregate principal amount of the
1.75% Notes. Unless previously redeemed or converted, the
1.75% Notes will mature on June 15, 2023. Interest on
the 1.75% Notes accrues at the rate of 1.75% per annum
and is payable semiannually on June 15 and
December 15, commencing December 15, 2003. The Company
will also pay contingent interest of 0.25% per annum of the
average trading price of the 1.75% Notes during specified
six month periods, commencing on June 20, 2010, if the
average trading price of the 1.75% Notes for specified
periods equals 120% or more of the principal amount of the
1.75% Notes.

The 1.75% Notes are convertible into an
aggregate of 22,742,040 shares of the Companys common
stock (representing a conversion price of $15.39 per share)
if the sale price of the Companys common stock exceeds
120% of the conversion price for specified periods and in
certain other circumstances. The 1.75% Notes are redeemable
by the Company after June 15, 2008 and prior to
June 20, 2010, subject to certain conditions, including the
sale price of the Companys common stock exceeding certain
levels for specified periods. If the 1.75% Notes are
redeemed by the Company during this period, the Company will be
required to make additional interest payments. After
June 20, 2010, the 1.75% Notes are redeemable at any
time for cash at 100% of their principal amount. Holders of the
1.75% Notes may require the Company to repurchase their
1.75% Notes on June 15, 2010, June 15, 2013 and
June 15, 2018, for cash at 100% of the principal amount of
the 1.75% Notes, plus accrued interest. Upon a change in
control, holders may require the Company to repurchase their
1.75% Notes for, at the Companys option, cash or
shares of the Companys common stock, or a combination
thereof, at a price equal to 100% of the principal amount of the
1.75% Notes being repurchased.

The Company incurred issuance costs related to
the 1.75% Notes of approximately $10,875 which are included
in other assets in the accompanying consolidated balance sheets.
The issuance costs are being amortized to interest expense in
the accompanying consolidated statements of operations, using the

F-25



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

effective interest method over the period from
issuance through June 15, 2010, the earliest date on which
holders can demand redemption.



| |                                                            
| | -----------------------------------------------------------
| | $300,000 3 1/4% Convertible
    Subordinated Notes due 2007

On April 1, 2002, the Company issued
$300,000 aggregate principal amount of
3 1/4% Convertible Subordinated Notes due 2007 (the
3 1/4% Notes) in a private offering.
Interest on the 3 1/4% Notes accrues at the rate of
3 1/4% per annum and is payable semiannually on
April 1 and October 1. Unless previously redeemed or
converted, the 3 1/4% Notes will mature on
April 1, 2007. At the time of issuance, the
3 1/4% Notes were convertible into an aggregate of
approximately 32,386,916 shares of the Companys
common stock (representing a conversion price of $9.26 per
share), subject to adjustment in certain circumstances. During
the three months ended June 30, 2003, $1 principal amount
of the 3 1/4% Notes was converted into 107 shares
of the Companys common stock in accordance with the
provisions of the 3 1/4% Notes. As of
December 31, 2003, the 3 1/4% Notes were
convertible into an aggregate of approximately
32,386,808 shares of the Companys common stock. The
3 1/4% Notes are redeemable at the Companys
option, at any time on or after April 5, 2005. The
redemption price, as a percentage of principal amount, is 101.3%
beginning April 5, 2005 and 100.65% beginning April 1,
2006. The Company incurred issuance costs related to the
3 1/4% Notes of $8,000, which are included in other
assets in the accompanying consolidated balance sheets. The
issuance costs are being amortized using the effective interest
method over the term of the 3 1/4% Notes. The
amortization of the issuance costs is included in interest
expense in the accompanying consolidated statements of
operations.



|   |                    
|-- | -------------------
|8. | Segment Information

Segment information has been prepared in
accordance with the Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise
and Related Information
(SFAS No. 131). The accounting policies of
the segments are the same as the accounting policies for the
consolidated Company. Inter-segment revenues represent sales of
Transaction Services products into the Physician Services
customer base and are reflected at rates comparable to those
charged to third parties for comparable products. The
performance of the Companys business is monitored based on
income or loss before restructuring, taxes, non-cash and other
items. Non-cash and other items include depreciation,
amortization, accretion of preferred stock, impairment charges,
gain on investments, other income, costs and expenses related to
the investigation by the United States Attorney for the District
of South Carolina and the SEC (legal expense),
non-cash expenses related to content, advertising and
distribution services acquired in exchange for the
Companys equity securities in acquisitions and strategic
alliances, and stock compensation expense primarily related to
stock options issued and assumed in connection with acquisitions.

F-26



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Summarized financial information for each of the
Companys operating segments and a reconciliation to net
loss are presented below:

|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |            |  
|----------------------------------------------------------------------- | -------- | ------------------------ | ------- | ------- | - | ---- | -------- | ------- | - | - | ---------- | ---------- | -
|                                                                        |          |                         
|                                                                        |          | Years Ended December 31,
|                                                                        |          |                         
|                                                                        |          | 2003                     |         | 2002    |   | 2001
|                                                                        |          |                          |         |         |   |     
|Revenues                                                                |          |                          |         |         |   |      |          |         |   |   |            |           
|Transaction services                                                    |          | $                        | 505,729 |         |   | $    | 466,810  |         |   | $ | 457,448    |           
|Physician services                                                      |          |                          | 302,640 |         |   |      | 275,306  |         |   |   | 260,209    |           
|Portal services                                                         |          |                          | 110,665 |         |   |      | 84,296   |         |   |   | 74,626     |           
|Plastic technologies                                                    |          |                          | 71,940  |         |   |      | 65,811   |         |   |   | 62,017     |           
|Eliminations and other, net                                             |          |                          | (26,994 | )       |   |      | (20,527  | )       |   |   | (12,280    | )(a)      
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|                                                                        |          | $                        | 963,980 |         |   | $    | 871,696  |         |   | $ | 842,020    |           
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|Income (loss) before restructuring, taxes,
    non-cash and other items |          |                          |         |         |   |      |          |         |   |   |            |           
|Transaction services                                                    |          | $                        | 94,218  |         |   | $    | 85,154   |         |   | $ | 41,987     |           
|Physician services                                                      |          |                          | 20,924  |         |   |      | 26,685   |         |   |   | 20,827     |           
|Portal services                                                         |          |                          | 24,898  |         |   |      | 5,574    |         |   |   | (79,437    | )         
|Plastic technologies                                                    |          |                          | 20,532  |         |   |      | 19,891   |         |   |   | 17,406     |           
|Corporate and other                                                     |          |                          | (50,251 | )       |   |      | (51,272  | )       |   |   | (94,813    | )         
|Interest income                                                         |          |                          | 22,901  |         |   |      | 19,590   |         |   |   | 30,409     |           
|Interest expense                                                        |          |                          | (15,214 | )       |   |      | (8,491   | )       |   |   | (507       | )         
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|                                                                        |          | $                        | 118,008 |         |   | $    | 97,131   |         |   | $ | (64,128    | )         
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|Restructuring, taxes, non-cash and other
    items                      |          |                          |         |         |   |      |          |         |   |   |            |           
|Depreciation, amortization and other                                    |          | $                        | (62,434 | )       |   | $    | (125,593 | )       |   | $ | (2,394,857 | )         
|Non-cash content and distribution services and
    stock compensation   |          |                          | (36,747 | )       |   |      | (50,971  | )       |   |   | (123,925   | )         
|Impairment of long-lived and other assets                               |          |                          |        |         |   |      |         |         |   |   | (3,816,115 | )         
|Restructuring and integration benefit (charge)                          |          |                          |        |         |   |      | 5,850    |         |   |   | (266,755   | )         
|Legal expense                                                           |          |                          | (3,959  | )       |   |      |         |         |   |   |           |           
|Gain on investments                                                     |          |                          | 1,659   |         |   |      | 6,547    |         |   |   |           |           
|Other income, net                                                       |          |                          | 4,218   |         |   |      | 3,844    |         |   |   |           |           
|Income tax benefit (provision)                                          |          |                          | (4,140  | )       |   |      | 10,079   |         |   |   | (2,588     | )         
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|Income (loss) from continuing operations                                |          |                          | 16,605  |         |   |      | (53,113  | )       |   |   | (6,668,368 | )         
|Income (loss) from discontinued operations, net
    of income taxes     |          |                          | (33,611 | )       |   |      | 3,411    |         |   |   | (3,950     | )         
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           
|                                                                        | Net loss |                          | $       | (17,006 | ) |      | $        | (49,702 | ) |   | $          | (6,672,318 | )
|                                                                        |          |                          |         |         |   |      |          |         |   |   |            |           



---



|    |  |                                                                                                                                                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | In 2001, includes revenues related to technology
    outsourcing and consulting relationships and other non-core
    products that the Company decided to exit as a result of
    restructuring and integration efforts that commenced in the
    third quarter of 2000, as well as the elimination of
    inter-segment revenues of $14,061.

The Company does not disaggregate assets for
internal management reporting and, therefore, such information
is not presented.

F-27



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Revenues generated from foreign customers of the
continuing operations of the Companys Plastic Technologies
segment were $31,320, $26,674 and $24,282 in 2003, 2002 and
2001, respectively. Long-lived assets based in foreign
facilities of the Plastic Technologies segment were $13,798 and
$11,745 as of December 31, 2003 and 2002, respectively.



|   |                                              
|-- | ---------------------------------------------
|9. | Prepaid Content and Distribution
    Services

In connection with obtaining Web site content and
distribution services, the Company paid cash or issued equity
instruments to certain service providers, in conjunction with
business combinations or strategic alliances. The amount of
payments made or the fair value of equity instruments issued has
been capitalized and is being amortized over the term of the
related agreement. Prepaid content and distribution services are
summarized as follows:

|                  |              |              |        |        |  |   |        |        | 
|----------------- | ------------ | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                  |              |             
|                  |              | December 31,
|                  |              |             
|                  |              | 2003         |        | 2002  
|                  |              |              |        |       
|Current Portion   |              |              |        |        |  |   |        |       
|                  | Content      |              | $      | 479    |  |   | $      | 334    | 
|                  | Services     |              |        | 15,693 |  |   |        | 19,239 | 
|                  | Distribution |              |        | 1,944  |  |   |        | 5,833  | 
|                  |              |              |        |        |  |   |        |       
|                  |              | $            | 18,116 |        |  | $ | 25,406 |       
|                  |              |              |        |        |  |   |        |       
|Long-Term Portion |              |              |        |        |  |   |        |       
|                  | Content      |              | $      | 25     |  |   | $      | 83     | 
|                  | Services     |              |        | 31,967 |  |   |        | 46,504 | 
|                  | Distribution |              |        |       |  |   |        | 1,945  | 
|                  |              |              |        |        |  |   |        |       
|                  |              | $            | 31,992 |        |  | $ | 48,532 |       
|                  |              |              |        |        |  |   |        |       



|    |                  
|--- | -----------------
|10. | Long-Lived Assets

In 2001, the Company recorded an impairment
charge of $3,816,115 related to the write-down of the carrying
value of long-lived and other assets. See Note 4.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment consists of the following:

|                                         |                             |              |         |        |  |   |         |        | 
|---------------------------------------- | --------------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                         |                             |             
|                                         |                             | December 31,
|                                         |                             |             
|                                         |                             | 2003         |         | 2002  
|                                         |                             |              |         |       
|Computer equipment                       |                             | $            | 52,968  |        |  | $ | 42,220  |       
|Land and buildings                       |                             |              | 17,136  |        |  |   | 15,447  |       
|Office equipment, furniture and fixtures |                             |              | 38,612  |        |  |   | 26,430  |       
|Software                                 |                             |              | 27,219  |        |  |   | 17,427  |       
|Leasehold improvements                   |                             |              | 9,050   |        |  |   | 8,494   |       
|Construction in process                  |                             |              | 3,819   |        |  |   | 8,648   |       
|                                         |                             |              |         |        |  |   |         |       
|                                         |                             |              | 148,804 |        |  |   | 118,666 |       
|Less: accumulated depreciation           |                             |              | (71,526 | )      |  |   | (48,178 | )     
|                                         |                             |              |         |        |  |   |         |       
|                                         | Property and equipment, net |              | $       | 77,278 |  |   | $       | 70,488 | 
|                                         |                             |              |         |        |  |   |         |       

F-28



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Depreciation expense was $25,926, $23,255 and
$33,675 in 2003, 2002 and 2001, respectively.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

Effective July 1, 2001 and January 1,
2002, the Company adopted SFAS No. 141, Business
Combinations (SFAS No. 141) and
SFAS No. 142, respectively. SFAS No. 141
requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible
assets that are required to be recognized and reported
separately from goodwill. SFAS No. 142 requires that
goodwill and certain intangibles no longer be amortized, but
instead tested for impairment at least annually.
SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective
estimated useful lives and reviewed for impairment in accordance
with SFAS No. 144. Based on the Companys
analysis, there was no impairment of goodwill upon adoption of
SFAS No. 142 on January 1, 2002, or in connection
with the annual impairment tests that were performed during the
quarters ended December 31, 2003 and 2002.

The changes in the carrying amount of goodwill
during the years ended December 31, 2003 and 2002 are as
follows:

|                                |                                                    |             |         |           |  |          |         |              |   |       |        |        |   |   |        |     |  |   |         |         |  
|------------------------------- | -------------------------------------------------- | ----------- | ------- | --------- |  | -------- | ------- | ------------ | - | ----- | ------ | ------ | - | - | ------ | --- |  | - | ------- | ------- | -
|                                |                                                    | Transaction |         | Physician |  | Portal   |         | Plastic      |   |      
|                                |                                                    | Services    |         | Services  |  | Services |         | Technologies |   | Total
|                                |                                                    |             |         |           |  |          |         |              |   |      
|Balance as of January 1, 2002   |                                                    | $           | 333,412 |           |  | $        | 166,002 |              |   | $     | 7,347  |        |   | $ | 37,481 |     |  | $ | 544,242 |        
|                                | Adjustment for acquired workforce intangibles      |             |         | 8,555     |  |          |         | 8,089        |   |       |        |       |   |   |        |    |  |   |         | 16,644  |  
|                                | Goodwill recorded during the period                |             |         |          |  |          |         | 11,784       |   |       |        | 17,973 |   |   |        |    |  |   |         | 29,757  |  
|                                | Adjustments to finalize purchase price allocations |             |         |          |  |          |         | (3,790       | ) |       |        | (1,615 | ) |   |        | 356 |  |   |         | (5,049  | )
|                                | Effects of exchange rates                          |             |         |          |  |          |         |             |   |       |        |       |   |   |        | 449 |  |   |         | 449     |  
|                                |                                                    |             |         |           |  |          |         |              |   |       |        |        |   |   |        |     |  |   |         |        
|Balance as of January 1, 2003   |                                                    |             | 341,967 |           |  |          | 182,085 |              |   |       | 23,705 |        |   |   | 38,286 |     |  |   | 586,043 |        
|                                | Goodwill recorded during the period                |             |         | 244,021   |  |          |         | 1,469        |   |       |        | 12,731 |   |   |        |    |  |   |         | 258,221 |  
|                                | Adjustments to finalize purchase price allocations |             |         |          |  |          |         | (745         | ) |       |        | 407    |   |   |        |    |  |   |         | (338    | )
|                                | Effects of exchange rates                          |             |         |          |  |          |         |             |   |       |        |       |   |   |        | 522 |  |   |         | 522     |  
|                                |                                                    |             |         |           |  |          |         |              |   |       |        |        |   |   |        |     |  |   |         |        
|Balance as of December 31, 2003 |                                                    | $           | 585,988 |           |  | $        | 182,809 |              |   | $     | 36,843 |        |   | $ | 38,808 |     |  | $ | 844,448 |        
|                                |                                                    |             |         |           |  |          |         |              |   |       |        |        |   |   |        |     |  |   |         |        

Intangible assets subject to amortization consist
of the following:

|                                 |       |                   |         |                   |  |       |          |          |   |              |         |         |  |   |         |         |  |   |          |          |   |   |        |        | 
|-------------------------------- | ----- | ----------------- | ------- | ----------------- |  | ----- | -------- | -------- | - | ------------ | ------- | ------- |  | - | ------- | ------- |  | - | -------- | -------- | - | - | ------ | ------ | 
|                                 |       |                   |         |                  
|                                 |       | December 31, 2003 |         | December 31, 2002
|                                 |       |                   |         |                  
|                                 |       | Gross             |         |                   |  | Gross |          |         
|                                 |       | Carrying          |         | Accumulated       |  |       |          | Carrying |   | Accumulated  |         |        
|                                 |       | Amount            |         | Amortization      |  | Net   |          | Amount   |   | Amortization |         | Net    
|                                 |       |                   |         |                   |  |       |          |          |   |              |         |        
|Customer lists                   |       | $                 | 325,160 |                   |  | $     | (206,163 | )        |   | $            | 118,997 |         |  | $ | 209,386 |         |  | $ | (179,127 | )        |   | $ | 30,259 |       
|Trade names                      |       |                   | 30,316  |                   |  |       | (19,756  | )        |   |              | 10,560  |         |  |   | 24,329  |         |  |   | (14,013  | )        |   |   | 10,316 |       
|Technology and patents           |       |                   | 191,318 |                   |  |       | (146,905 | )        |   |              | 44,413  |         |  |   | 175,159 |         |  |   | (144,485 | )        |   |   | 30,674 |       
|Non-compete agreements and other |       |                   | 11,019  |                   |  |       | (859     | )        |   |              | 10,160  |         |  |   | 2,268   |         |  |   | (295     | )        |   |   | 1,973  |       
|                                 |       |                   |         |                   |  |       |          |          |   |              |         |         |  |   |         |         |  |   |          |          |   |   |        |       
|                                 | Total |                   | $       | 557,813           |  |       | $        | (373,683 | ) |              | $       | 184,130 |  |   | $       | 411,142 |  |   | $        | (337,920 | ) |   | $      | 73,222 | 
|                                 |       |                   |         |                   |  |       |          |          |   |              |         |         |  |   |         |         |  |   |          |          |   |   |        |       

F-29



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Amortization expense was $35,763, $102,338 and
$2,361,182 in 2003, 2002 and 2001, respectively. Aggregate
amortization expense for intangible assets is estimated to be:

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year ending December 31, |  |   |        | 
|2004                     |  | $ | 23,056 | 
|2005                     |  |   | 18,565 | 
|2006                     |  |   | 15,584 | 
|2007                     |  |   | 14,772 | 
|2008                     |  |   | 14,286 | 
|Thereafter               |  |   | 97,867 | 

The pro forma results of operations for 2001,
assuming the provisions of SFAS No. 142 were applied,
are as follows:

|                                             |                            |                            |            |        |           |      | 
|-------------------------------------------- | -------------------------- | -------------------------- | ---------- | ------ | --------- | ---- | 
|                                             |                            | Year Ended                
|                                             |                            | December 31,              
|                                             |                            | 2001                      
|                                             |                            |                           
|Net loss (as reported)                       |                            | $                          | (6,672,318 | )     
|                                             | Add back amortization for: |                            |            |        |          
|                                             |                            | Goodwill                   |            |        | 2,204,138 |     
|                                             |                            | Workforce                  |            |        | 14,050    |     
|                                             |                            |                            |            |       
|Adjusted net loss                            |                            | $                          | (4,454,130 | )     
|                                             |                            |                            |            |       
|Basic and diluted net loss per common share: |                            |                            |            |       
|                                             | Net loss (as reported)     |                            | $          | (19.14 | )        
|                                             |                            | Add back amortization for: |            |        |           |     
|                                             |                            |                            | Goodwill   |        |           | 6.32 | 
|                                             |                            |                            | Workforce  |        |           | .04  | 
|                                             |                            |                            |            |       
|Adjusted net loss                            |                            | $                          | (12.78     | )     
|                                             |                            |                            |            |       



|    |                 
|--- | ----------------
|11. | Accrued Expenses

Accrued expenses consist of the following:

|                            |                        |              |        |         |  |   |        |         | 
|--------------------------- | ---------------------- | ------------ | ------ | ------- |  | - | ------ | ------- | 
|                            |                        |             
|                            |                        | December 31,
|                            |                        |             
|                            |                        | 2003         |        | 2002   
|                            |                        |              |        |        
|Accrued outside services    |                        | $            | 26,841 |         |  | $ | 26,386 |        
|Accrued restructuring costs |                        |              | 25,915 |         |  |   | 33,535 |        
|Accrued compensation        |                        |              | 39,320 |         |  |   | 47,918 |        
|Accrued customer deposits   |                        |              | 16,539 |         |  |   | 5,926  |        
|Other accrued liabilities   |                        |              | 99,815 |         |  |   | 94,577 |        
|                            |                        |              |        |         |  |   |        |        
|                            | Total accrued expenses |              | $      | 208,430 |  |   | $      | 208,342 | 
|                            |                        |              |        |         |  |   |        |        

F-30



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies

Legal Matters



| |                                     
| | ------------------------------------
| | Porex Mammary Implant
    Litigation

From 1988 through 1990, Porex distributed
silicone mammary implants in the United States pursuant to a
distribution arrangement with a Japanese manufacturer. Porex
believes that, after accounting for implants returned to Porex,
the aggregate number of persons who received implants
distributed by Porex totals approximately 2,500. Since March
1991, Porex has been named as one of many co-defendants in a
number of actions brought by recipients of mammary implants. The
typical case or claim alleges that the individuals mammary
implants caused one or more of a wide range of ailments. These
implant cases and claims generally raise difficult and complex
factual and legal issues and are subject to many uncertainties
and complexities, including, but not limited to, the facts and
circumstances of each particular case or claim, the jurisdiction
in which each suit is brought, and differences in applicable
law. Porex does not have sufficient information to evaluate each
case and claim.

Certain of the actions against Porex have been
dismissed, where it was determined that the implant in question
was not distributed by Porex. In addition, as of March 10,
2003, approximately 300 actions have been settled by the
manufacturer, or by Porexs insurance carriers, without
material cost to Porex. As of March 10, 2003, no
implant-related claims were pending against Porex. During
calendar year 2003, there were no implant-related claims made
against Porex by individuals, as compared to two claims during
each of 2002, 2001 and 2000, 39 claims during 1999 and nine
claims during 1998. The majority of claims made during 1999 were
claims that were filed by individuals following a court ruling
in 1999 that cases filed in earlier years would not proceed as
class actions, as a result of which such individuals would not
be members of a class in such cases.

In 1994, Porex was notified that its insurance
carrier would not renew its then-existing insurance coverage
after December 31, 1994 with respect to actions and claims
arising out of its distribution of implants. However, Porex
exercised its right, under such policy, to purchase extended
reporting period coverage with respect to such actions and
claims. Such coverage provides insurance subject to existing
policy limits, but for an unlimited time period with respect to
actions and claims made after December 31, 1994 based on
events that occurred during the policy period. In addition,
Porex has purchased extended reporting period coverage with
respect to other excess insurance. This coverage also extends
indefinitely, replacing coverage that would, by its terms, have
otherwise expired by December 31, 1997. Porex will continue
to evaluate the need to purchase further extended reporting
period coverage from excess insurers to the extent such coverage
is reasonably available.

The Company believes that Porexs present
coverage, together with Porexs insurance policies in
effect on or before December 31, 1994, should provide
adequate coverage against liabilities that could result from
actions or claims arising out of Porexs distribution of
silicone mammary implants. However, Porex cannot be certain that
particular cases and claims will not result in liability that is
greater than expected based on Porexs prior experience. If
so, Porexs liability could exceed the amount of its
insurance coverage. Furthermore, certain actions and claims seek
punitive and compensatory damages arising out of alleged
intentional torts. If these claims are successful, such damages
may or may not be covered, in whole or in part, by Porexs
insurance policies.

Merrill Lynch
Fundamental Growth Fund, Inc. et al. v. McKesson HBOC,
Inc., et al.

The Company has been named as a defendant in the
action Merrill Lynch Fundamental Growth Fund, Inc.,
et al. v. McKesson HBOC, Inc., et al., Case
No. 405792, in the San Francisco Superior Court. The
original complaint in this matter alleged that McKesson HBOC,
HBO and Company (which the Company refers to as HBOC), certain
officers and directors of those firms, Arthur Andersen LLP, and

F-31



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Bear Stearns & Co. engaged in a number
of practices whereby HBOC and later McKesson HBOC improperly
recognized revenues. When these practices were discovered,
McKesson HBOC eliminated more than $327 million in revenues
that HBOC had recognized over the prior three years. Plaintiffs
claim to have lost more than $150 million as a result of
the decline in McKesson HBOCs share value after the
accounting practices came to light in April 1999.

On September 4, 2003, the plaintiffs filed a
fourth amended complaint, naming the Company and two other
defendants, General Electric Capital Corporation, Inc. and
Computer Associates International, Inc., for the first time. The
complaint alleges that the Company aided and abetted alleged
fraud by certain defendants and conspired with those defendants
in relation to HBOCs and McKesson HBOCs alleged
improper recognition of approximately $14 million in
revenue on two software transactions. Plaintiffs also allege
that the Company made certain negligent misrepresentations with
respect to these transactions.

Plaintiffs allege that WebMD, Inc. (then a
separate private company and now a subsidiary of the Company),
through its participation in certain transactions with HBOC and
McKesson HBOC, learned that officers of HBOC and/or McKesson
HBOC, HBOC and McKesson HBOC were breaching duties owed to
McKesson HBOC shareholders by making material misstatements and
suppressing or omitting facts with respect to HBOCs and
McKesson HBOCs financial results for the periods ending
December 31, 1998 and March 31, 1999 and that WebMD,
Inc. aided and abetted and conspired with these defendants. One
of the officers became an officer of WebMD, Inc. on
December 1, 1998, after having served as HBOCs
representative on the board of WebMD, Inc. and was dismissed by
WebMD, Inc. after the accounting fraud at HBOC was disclosed.
The other officer served as HBOCs representative on the
Board of WebMD, Inc. and ceased to be a director of WebMD, Inc.
upon dismissal by McKesson HBOC. The complaint alleges numerous
instances of improper accounting by HBOC unrelated to the
transactions between WebMD, Inc. and HBOC and/or McKesson HBOC.

The Company intends to vigorously defend against
the plaintiffs claims against the Company and WebMD, Inc.
On December 16, 2003, the Company filed a demurrer, seeking
dismissal of the two claims against it. This demurrer is pending
with the Court.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Investigations by United States Attorney
    for the District of South Carolina and the SEC

The United States Attorney for the District of
South Carolina is conducting an investigation of the Company,
which it first learned about on September 3, 2003. On that
date, Federal Bureau of Investigation and Internal Revenue
Service agents executed search warrants at the Companys
corporate headquarters in Elmwood Park, New Jersey and the
offices of Medical Manager Health Systems in Tampa, Florida and
Alachua, Florida and delivered subpoenas for documents and
financial records. Based on the information available to the
Company as of the date of this Annual Report, it believes that
the investigation relates principally to issues of financial
reporting for Medical Manager Corporation, a predecessor of
WebMD (by its merger into the Company in September 2000) and the
Companys Medical Manager Health Systems subsidiary;
however, the Company cannot be sure of the investigations
exact scope or how long it will continue. Included among the
materials removed or subject to subpoena are records relating to
a $5,532 restatement of revenue by Medical Manager Corporation
in August 1999 and to acquisitions by the Companys Medical
Manager Health Systems subsidiary of other companies, most of
which were dealers of Medical Manager products and services. In
August 1999, Medical Manager Corporation announced that it would
restate previously reported results of Medical Manager Health
Systems, which it had acquired in July 1999, for the six months
ended immediately prior to the acquisition. Medical Manager
Corporation determined at the time that the accounting treatment
previously accorded to five transactions involving the bulk
sales of software licenses entered into concurrently with
business combinations and other related transactions should be
restated to reflect the software license revenues as a reduction
of the acquisition price of the related transactions. At the
time, Medical Manager

F-32



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

Corporation also noted that the transactions
represented $5,532 of revenue and $3,502 of net income for the
six months ended June 30, 1999. The Company understands
that the SEC is also conducting a formal investigation into this
matter.

The Company intends to continue to fully
cooperate with the authorities in this matter and the
Companys Board of Directors has formed a special committee
consisting solely of independent directors to oversee this
matter. The special committee has retained independent legal
counsel to advise it.

While the Company is not able to estimate, at
this time, the amount of costs and expenses that it will incur
in connection with the investigations, it expects that they may
be significant. For the year ended December 31, 2003, those
expenses are reflected as legal expense in the
consolidated statements of operations.



| |                                                          
| | ---------------------------------------------------------
| | At Home Corporation General Unsecured
    Creditors Trust

In 1999, WebMD, Inc. entered into an agreement
with Excite Corp. concerning placing the Companys content
on Excite Corp.s consumer internet portal. In 2001, the
Company and Excite Corp.s successor, AtHome Corp., entered
into a revised agreement, which terminated the 1999 agreement
and included a release of claims under the 1999 agreement.
AtHome Corp. later filed for bankruptcy.

On December 4, 2003, the Company was served
with a complaint in an adversary proceeding in the Bankruptcy
Court for the Northern District of California brought by the
trustee for the AtHome Corporation General Unsecured Creditors
Trust. The plaintiff alleges that the 2001 agreement provided
AtHome Corp. less than reasonably equivalent value for its
rights under the 1999 agreement and that the 2001 agreement
should be avoided as a fraudulent transfer. The plaintiff also
alleges that the Company breached the 1999 agreement by failing
to make required cash payments, and failed to pay AtHome Corp.
fair and reasonable value for services that AtHome Corp.
provided. The plaintiff has claimed that its damages are in
excess of $8 million. The Company intends to vigorously
defend against the plaintiffs claims.



| |                        
| | -----------------------
| | Other Legal Proceedings

In the normal course of business, the Company is
involved in various other claims and legal proceedings. While
the ultimate resolution of these matters, and those discussed
above, has yet to be determined, the Company does not believe
that their outcome will have a material adverse effect on the
Companys consolidated financial position, results of
operations or liquidity.



| |                        
| | -----------------------
| | Strategic Relationships

The Company has agreements with various content
providers and strategic partners whereby the Company is
committed to pay certain amounts in connection with content and
distribution services obtained for use on its Web site and
certain distribution arrangements. The Companys
non-cancelable future commitments under these agreements are as
follows:

|                         |  |   |       | 
|------------------------ |  | - | ----- | 
|Year Ending December 31, |  |  
|2004                     |  | $ | 1,262 | 
|2005                     |  |   | 754   | 
|2006                     |  |   | 500   | 
|2007                     |  |   | 125   | 
|                         |  |   |       | 
|                         |  | $ | 2,641 | 
|                         |  |   |       | 

F-33



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



| |       
| | ------
| | Leases

The Company leases its offices and other
facilities under operating lease agreements that expire at
various dates through February 2013. Total rent expense for all
operating leases was approximately $19,486, $18,700 and $20,609
in 2003, 2002 and 2001, respectively. Future minimum lease
commitments under non-cancelable lease agreements (including
leases identified as part of the Companys restructuring
and integration efforts) at December 31, 2003 were as
follows:

|                         |                              |                 |        |          |  |               |      |      |   |   |        |         | 
|------------------------ | ---------------------------- | --------------- | ------ | -------- |  | ------------- | ---- | ---- | - | - | ------ | ------- | 
|                         |                              | Gross Operating |        | Sublease |  | Net Operating
|                         |                              | Leases          |        | Income   |  | Leases       
|Year Ending December 31, |                              |                 |        |          |  |              
|2004                     |                              | $               | 24,306 |          |  | $             | (224 | )    |   | $ | 24,082 |        
|2005                     |                              |                 | 20,062 |          |  |               | (175 | )    |   |   | 19,887 |        
|2006                     |                              |                 | 16,184 |          |  |               | (33  | )    |   |   | 16,151 |        
|2007                     |                              |                 | 14,166 |          |  |               |     |      |   |   | 14,166 |        
|2008                     |                              |                 | 12,381 |          |  |               |     |      |   |   | 12,381 |        
|Thereafter               |                              |                 | 32,841 |          |  |               |     |      |   |   | 32,841 |        
|                         |                              |                 |        |          |  |               |      |      |   |   |        |        
|                         | Total minimum lease payments |                 | $      | 119,940  |  |               | $    | (432 | ) |   | $      | 119,508 | 
|                         |                              |                 |        |          |  |               |      |      |   |   |        |        



|    |                
|--- | ---------------
|13. | Retirement Plan

The Company maintains various defined
contribution retirement plans covering substantially all of its
employees. Certain of these plans provide for Company matching
and discretionary contributions. The Company has recorded
expenses related to these plans of $1,531, $3,485 and $5,963 for
2003, 2002 and 2001, respectively.



|    |                     
|--- | --------------------
|14. | Stockholders Equity



| |             
| | ------------
| | Common Stock

On March 29, 2001, the Company announced a
stock repurchase program (the Program). Under the
Program, the Company was authorized to use up to $50,000 to
purchase shares of its common stock from time to time beginning
on April 2, 2001, subject to market conditions. On
November 2, 2001, the maximum aggregate amount of purchases
under the Program was increased to $100,000 and on
November 7, 2002 it was increased to $150,000. As of
December 31, 2003 and 2002, the Company has repurchased
22,313,356 and 19,991,160 shares, respectively, at a cost
of approximately $106,358 and $86,042 under the Program. These
shares are reflected as treasury shares in the accompanying
consolidated balance sheets. As of December 31, 2003, the
Company had $43,642 available to repurchase shares of its common
stock under the Program.

On October 12, 2001, the Company and
Quintiles Transnational Corporation settled the litigation
between the two companies. Under the terms of the settlement,
the companies agreed to terminate all of their business
agreements and the Company agreed to purchase from Quintiles for
$185,000 in cash all 35,000,000 shares of the
Companys common stock held by Quintiles. These shares are
reflected as treasury shares in the accompanying consolidated
balance sheets. The fair market value of these shares on the
date of the settlement was $126,000 and has been recorded as
treasury stock. The excess of the purchase price of the shares
over their fair market value was $59,000 and has been recorded
as a component of restructuring and integration charges.

During 2002, the Company repurchased
14,100,000 shares of its common stock from Cerner
Corporation at a purchase price of $6.01 per share, or an
aggregate purchase price of $84,741. The

F-34



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

repurchase of the shares from Cerner Corporation
was separately approved by the Executive Committee of the
Companys Board of Directors and, accordingly, was not part
of the Stock Repurchase Program.

During 2002, the Company adopted the 2002
Restricted Stock Plan for the benefit of its employees. The
shares of restricted stock are generally granted at prices not
less than the fair market value on the date of grant and vest
25% per year over four years. At December 31, 2003,
688,669 shares of restricted stock remain reserved for
issuance under the 2002 Restricted Stock Plan. In connection
with the 2002 acquisitions, the Company recorded deferred
compensation of $2,500 related to grants of restricted stock. At
December 31, 2003, the Company had approximately $785
remaining to be amortized on a graded vesting method over a
period of three years.

Preferred Stock



| |                                         
| | ----------------------------------------
| | Series A Convertible Preferred
    Stock

In January 2000, the Board of Directors
authorized 213,000 shares of Series A Convertible
Preferred Stock (2000 Series A Preferred) with
a par value of $0.0001 per share and a face value of
$5,000 per share. The 2000 Series A Preferred was
entitled to quarterly dividends at a per annum rate of 10.5% of
the face amount plus any accrued and unpaid dividends, payable
in additional shares of 2000 Series A Preferred. With
respect to dividend rights, other than the right to receive
additional shares of 2000 Series A Preferred, rights on
liquidation, winding up or dissolution, whether voluntary or
involuntary, the Series A Preferred ranked on a parity with
the Companys common stock and junior to the Series B
Preferred. The 2000 Series A Preferred was convertible into
common stock automatically on the third anniversary of the date
of issuance. The 2000 Series A Preferred holders were
entitled to vote with common stockholders on an as converted
basis.

At December 31, 2000, there were
155,951 shares of 2000 Series A Preferred stock
outstanding, convertible into 21,282,645 shares of the
Companys common stock. In connection with the revised
strategic alliance during 2001 with News Corporation, the
155,951 shares of 2000 Series A Preferred were
surrendered to the Company and therefore at December 31,
2003 and 2002 no shares of 2000 Series A Preferred stock
were outstanding.

In November 2003, the Board of Directors
eliminated the designation of 2000 Series A Preferred and
restored all the shares to the status of authorized and unissued
shares of preferred stock.



| |                                                    
| | ---------------------------------------------------
| | Series B Convertible Redeemable
    Preferred Stock

In September 2000, the Board of Directors
authorized 200 shares of Series B Convertible
Redeemable Preferred Stock (Series B
Preferred). In connection with the acquisition of
CareInsite, the Company issued 100 shares of Series B
Preferred in exchange for all the outstanding shares of
CareInsites preferred stock. In March 2002, the Company
redeemed the outstanding Series B Preferred for $10,000 in
accordance with its terms.

In November 2003, the Board of Directors
eliminated the designation of the Series B Preferred and
restored all the shares to the status of authorized and unissued
shares of preferred stock.



| |         
| | --------
| | Warrants

The Company has warrants outstanding to purchase
25,562,697 shares of common stock at prices ranging from
$0.67 to $74.22 per share, with a weighted average exercise
price of $20.35 per share. Substantially all of the
outstanding warrants are currently vested and exercisable and
expire at various dates through January 1, 2009.

F-35



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

In January 2000, in connection with an Internet
marketing and services agreement entered into with a
distributor, the Company issued a warrant to purchase
4,376,445 shares of the Companys common stock at
$1.00 per share. The warrant vests over a four-year period,
subject to certain performance thresholds. As of
December 31, 2000, the Company estimated that the
performance thresholds were not achieved and no value was
assigned to the warrants. As of December 31, 2001, the
Company estimated the distributor was entitled to a warrant for
2,000,000 shares and recorded $13,418, determined using the
Black-Scholes option pricing model, as a non-cash distribution
services expense included in sales, marketing, general and
administrative expense. In January 2002, the Internet marketing
and services agreement was terminated and the distributor
retained the warrant to purchase 2,000,000 shares of the
Companys common stock at $1.00 per share. The warrant
is fully vested and expires on January 24, 2007. As of
December 31, 2003, 1,333,333 shares remain unexercised
as part of this warrant agreement.

During 2003 and 2002, warrants to purchase a
total of 1,729,713 shares and 1,090,121 shares,
respectively, of the Companys common stock at a weighted
average exercise price of $5.33 per share and
$3.04 per share, respectively, were exercised. Also during
2002, the Company repurchased warrants to purchase
8,419,736 shares of the Companys common stock, with a
weighted average exercise price of $38.00 per share, for a
cash payment of $10.



|    |                   
|--- | ------------------
|15. | Stock Option Plans

The Company has various stock option plans
(collectively, the Plans) for directors, officers
and key employees that provide for non-qualified and incentive
stock options and restricted stock grants. Generally, options
become exercisable ratably over a three to five year period
based on their individual grant dates. Options are generally
granted at prices not less than the fair market value on the
date of grant. Options granted under the Plans expire within
four to fifteen years from the date of grant. An aggregate of
21,579,838 shares of common stock remain reserved for
issuance under the Plans at December 31, 2003.

In addition to the Plans, the Company has granted
options to certain directors, consultants and key employees. At
December 31, 2003, there were options to purchase
6,030,500 shares of common stock outstanding to these
individuals. The terms of these grants are similar to the terms
of the options granted under the Plans.

In connection with the mergers with Medical
Manager, CareInsite and OnHealth, the Company assumed all the
outstanding options issued under the respective stock option
plans and arrangements and, after the application of the
exchange ratio, reserved 76,640,029 shares for Medical
Manager and CareInsite and 1,354,482 shares for OnHealth of
common stock for issuance upon exercise of the assumed options.
No further options can be granted under these plans. At the time
of these acquisitions, options for 21,265,330 and
1,067,796 shares, respectively, were fully vested. The
remainder of the shares vest based upon the terms of the
original plans ranging from three to five years.

In 1999, the Company assumed all outstanding
options issued under the respective stock option plans and
arrangements and, after application of the exchange ratio,
reserved the following shares of common stock per merger:
14,734,986 for WebMD, Inc., 468,584 for MedE America, and
164,036 for Medcast, for issuance upon exercise of the assumed
options. No further options can be granted under these plans. At
the time of these acquisitions, the number of fully vested
options were: 8,637,406 for WebMD, Inc., 60,136 for MedE
America, and 83,626 for Medcast. The remainder of the options
vest based upon the terms of the original plans, generally four
years.

The Company records deferred stock compensation
related to stock options as a component of stockholders
equity when the exercise price is lower than the deemed fair
value of common stock on the date stock options are granted. No
deferred stock compensation related to stock options was
recorded in

F-36



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

2003, 2002 or 2001. At December 31, 2003,
the Company had a total of approximately $3,898 remaining to be
amortized on a graded vesting method over the remaining two
years.

The Company recorded stock compensation expense,
primarily related to deferred stock compensation recorded in
connection with acquisitions, of $12,629, $25,265 and $129,268
in 2003, 2002 and 2001, respectively, of which $51,998 was
included in restructuring and integration charges in 2001. No
stock compensation expenses were included in restructuring and
integration charges for 2003 or 2002.

A summary of the status of the Companys
stock option plans for the three year period ended
December 31, 2003 is presented below:

|                                         |           |                          |             |                |   |           |       |                |  |           |             |                |   |   |       |       |  |  |             |             |   |   |       |       | 
|---------------------------------------- | --------- | ------------------------ | ----------- | -------------- | - | --------- | ----- | -------------- |  | --------- | ----------- | -------------- | - | - | ----- | ----- |  |  | ----------- | ----------- | - | - | ----- | ----- | 
|                                         |           |                         
|                                         |           | Years Ended December 31,
|                                         |           |                         
|                                         |           |                          |             |                |   |          
|                                         |           | 2003                     |             | 2002           |   | 2001     
|                                         |           |                          |             |                |   |          
|                                         |           |                          |             | Weighted       |   |           |       | Weighted       |  |           |             | Weighted      
|                                         |           |                          |             | Average        |   |           |       | Average        |  |           |             | Average       
|                                         |           | Number of                |             | Exercise Price |   | Number of |       | Exercise Price |  | Number of |             | Exercise Price
|                                         |           | Shares                   |             | per Share      |   | Shares    |       | per Share      |  | Shares    |             | per Share     
|                                         |           |                          |             |                |   |           |       |                |  |           |             |               
|Outstanding at the beginning of the year |           |                          | 108,232,050 |                |   | $         | 12.73 |                |  |           | 121,184,501 |                |   | $ | 12.99 |       |  |  | 128,045,133 |             |   | $ | 15.79 |      
|                                         | Granted   |                          |             | 12,326,350     |   |           |       | 9.88           |  |           |             | 4,946,459      |   |   |       | 6.58  |  |  |             | 23,057,311  |   |   |       | 4.39  | 
|                                         | Assumed   |                          |             |               |   |           |       |               |  |           |             |               |   |   |       |      |  |  |             |            |   |   |       |      | 
|                                         | Exercised |                          |             | (8,773,510     | ) |           |       | 4.73           |  |           |             | (5,316,668     | ) |   |       | 3.26  |  |  |             | (2,701,776  | ) |   |       | 3.17  | 
|                                         | Cancelled |                          |             | (7,024,164     | ) |           |       | 15.82          |  |           |             | (12,582,242    | ) |   |       | 16.49 |  |  |             | (27,216,167 | ) |   |       | 19.34 | 
|                                         |           |                          |             |                |   |           |       |                |  |           |             |                |   |   |       |       |  |  |             |             |   |   |       |      
|Outstanding at the end of the year       |           |                          | 104,760,726 |                |   |           | 12.86 |                |  |           | 108,232,050 |                |   |   | 12.73 |       |  |  | 121,184,501 |             |   |   | 12.99 |      
|                                         |           |                          |             |                |   |           |       |                |  |           |             |                |   |   |       |       |  |  |             |             |   |   |       |      
|Exercisable at the end of the year       |           |                          | 73,927,473  |                |   | $         | 14.03 |                |  |           | 70,764,983  |                |   | $ | 13.86 |       |  |  | 65,352,769  |             |   | $ | 14.15 |      
|                                         |           |                          |             |                |   |           |       |                |  |           |             |                |   |   |       |       |  |  |             |             |   |   |       |      

The following table summarizes information with
respect to options outstanding and options exercisable at
December 31, 2003:

|                |  |             |             |             |  |                 |       |        |  |          |      |  |  |  |            |  |  |   |       | 
|--------------- |  | ----------- | ----------- | ----------- |  | --------------- | ----- | ------ |  | -------- | ---- |  |  |  | ---------- |  |  | - | ----- | 
|                |  |             |             |            
|                |  | Outstanding |             | Exercisable
|                |  |             |             |            
|                |  |             |             | Weighted    |  |                
|                |  |             |             | Weighted    |  | Average         |       |        |  | Weighted
|                |  |             |             | Average     |  | Remaining       |       |        |  | Average 
|                |  |             |             | Exercise    |  | Contractual     |       |        |  | Exercise
|Exercise Prices |  | Shares      |             | Price       |  | Life (In Years) |       | Shares |  | Price   
|                |  |             |             |             |  |                 |       |        |  |         
|$0.25-$3.43     |  |             | 12,452,583  |             |  | $               | 3.33  |        |  |          | 7.55 |  |  |  | 6,874,423  |  |  | $ | 3.24  | 
|$3.55-$6.04     |  |             | 13,470,264  |             |  |                 | 5.11  |        |  |          | 4.96 |  |  |  | 11,327,809 |  |  |   | 5.06  | 
|$6.12-$9.56     |  |             | 13,604,017  |             |  |                 | 8.29  |        |  |          | 7.91 |  |  |  | 3,966,664  |  |  |   | 8.01  | 
|$9.57-$11.55    |  |             | 14,865,774  |             |  |                 | 11.33 |        |  |          | 6.68 |  |  |  | 10,281,298 |  |  |   | 11.49 | 
|$11.56-$13.38   |  |             | 12,712,858  |             |  |                 | 12.39 |        |  |          | 7.24 |  |  |  | 7,662,493  |  |  |   | 12.67 | 
|$13.50-$15.60   |  |             | 10,836,113  |             |  |                 | 14.10 |        |  |          | 5.89 |  |  |  | 9,967,774  |  |  |   | 14.10 | 
|$15.81-$21.69   |  |             | 13,833,019  |             |  |                 | 17.85 |        |  |          | 6.37 |  |  |  | 12,542,191 |  |  |   | 17.73 | 
|$22.12-$105.00  |  |             | 12,986,098  |             |  |                 | 30.68 |        |  |          | 5.04 |  |  |  | 11,304,821 |  |  |   | 30.76 | 
|                |  |             |             |             |  |                 |       |        |  |          |      |  |  |  |            |  |  |   |       | 
|                |  |             | 104,760,726 |             |  | $               | 12.86 |        |  |          | 6.47 |  |  |  | 73,927,473 |  |  | $ | 14.03 | 
|                |  |             |             |             |  |                 |       |        |  |          |      |  |  |  |            |  |  |   |       | 

The Company has elected to follow APB No. 25
and related interpretations in accounting for employee stock
options because the alternative fair value accounting method
provided for under SFAS No. 123 requires the use of
option valuation models that were not developed for use in
valuing

F-37



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

employee stock options. The Black-Scholes option
valuation model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and
are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Companys
employee stock options have characteristics significantly
different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair
value estimates, in managements opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of the Companys employee stock options.

The pro forma information presented in
Note 1 has been determined as if employee stock options
granted subsequent to December 31, 1994 were accounted for
under the fair value method of SFAS No. 123. The fair
value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following
weighted-average assumptions:

|                                                           |  |      |          |      |  |      |          |   |  |   |         |  
|---------------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                           |  | 2003 |          | 2002 |  | 2001
|                                                           |  |      |          |      |  |     
|Expected dividend yield                                    |  |      | 0        | %    |  |      | 0        | % |  |   | 0       | %
|Expected volatility                                        |  |      | 0.85     |      |  |      | 0.9      |   |  |   | 0.9     |  
|Risk free interest rate                                    |  |      | 1.33     | %    |  |      | 1.85     | % |  |   | 3.04    | %
|Expected option lives (years)                              |  |      | 0.75-3.0 |      |  |      | 0.75-3.0 |   |  |   | 0.5-3.5 |  
|Weighted fair value of options granted during the
    year |  | $    | 5.64     |      |  | $    | 4.06     |   |  | $ | 2.70    |  

Employee Stock Purchase Plan

The Companys 1998 Employee Stock Purchase
Plan, as amended from time to time (the 1998 Purchase
Plan), became effective upon the completion of the initial
public offering on February 10, 1999. The 1998 Purchase
Plan allows eligible employees the opportunity to purchase
shares of the Companys common stock through payroll
deductions, up to 15% of a participants annual
compensation with a maximum of 5,000 shares available per
participant during each purchase period. Prior to an amendment
to the 1998 Purchase Plan on November 1, 2002, the purchase
price of the stock was 85% of the lesser of the fair market
value on the first and last day of each purchase period.
Effective with the November 1, 2002 amendment, the purchase
price of the stock is 85% of the fair market value on the last
day of each purchase period. A total of 3,995,447 shares of
common stock remain reserved for issuance under the 1998
Purchase Plan. The 1998 Purchase Plan, as amended in connection
with the 2000 mergers, provides for annual increases equal to
the lesser of 1,500,000 shares, 0.5% of the outstanding
common shares, or a lesser amount determined by the Board of
Directors. A total of 345,575, 640,172 and 876,960 shares
were issued under this plan during 2003, 2002 and 2001,
respectively.

F-38



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



|    |             
|--- | ------------
|16. | Income Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax assets (liabilities) were as
follows:

|                                        |                                      |              |          |         |   |   |          |         |  
|--------------------------------------- | ------------------------------------ | ------------ | -------- | ------- | - | - | -------- | ------- | -
|                                        |                                      |             
|                                        |                                      | December 31,
|                                        |                                      |             
|                                        |                                      | 2003         |          | 2002   
|                                        |                                      |              |          |        
|Deferred tax assets:                    |                                      |              |          |         |   |   |          |        
|                                        | Net operating loss carryforwards     |              | $        | 729,963 |   |   | $        | 691,303 |  
|                                        | Restructuring costs                  |              |          | 9,943   |   |   |          | 13,092  |  
|                                        | Research and development tax credits |              |          | 15,274  |   |   |          | 13,136  |  
|                                        | Other accrued expenses               |              |          | 33,589  |   |   |          | 38,816  |  
|                                        | Allowance for doubtful accounts      |              |          | 7,692   |   |   |          | 8,401   |  
|                                        | Depreciation                         |              |          | 4,846   |   |   |          | 8,007   |  
|                                        | Intangible assets                    |              |          | 131,979 |   |   |          | 175,824 |  
|                                        | Other                                |              |          | 2,482   |   |   |          | 1,506   |  
|                                        |                                      |              |          |         |   |   |          |        
|Total deferred tax assets               |                                      |              | 935,768  |         |   |   | 950,085  |        
|Valuation allowance                     |                                      |              | (926,767 | )       |   |   | (941,507 | )      
|                                        |                                      |              |          |         |   |   |          |        
|Net deferred tax assets                 |                                      |              | 9,001    |         |   |   | 8,578    |        
|                                        |                                      |              |          |         |   |   |          |        
|Deferred tax liabilities:               |                                      |              |          |         |   |   |          |        
|                                        | Tax basis                            |              |          | (2,582  | ) |   |          | (1,278  | )
|                                        | Other                                |              |          | (6,419  | ) |   |          | (7,300  | )
|                                        |                                      |              |          |         |   |   |          |        
|Total deferred tax liabilities          |                                      |              | (9,001   | )       |   |   | (8,578   | )      
|                                        |                                      |              |          |         |   |   |          |        
|Net deferred tax assets and liabilities |                                      | $            |         |         |   | $ |         |        
|                                        |                                      |              |          |         |   |   |          |        

The reconciliation between the federal statutory
rate and the effective income tax rate is as follows:

|                                            |  |      |       |      |  |      |       |    |  |  |       |   
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                            |  | 2003 |       | 2002 |  | 2001
|                                            |  |      |       |      |  |     
|United States federal statutory rate        |  |      | 34.0  | %    |  |      | (34.0 | )% |  |  | (34.0 | )%
|State income taxes (net of federal benefit) |  |      | 3.3   |      |  |      | (3.6  | )  |  |  | (0.8  | ) 
|Impairment and restructuring expenses       |  |      | 0.0   |      |  |      | (3.1  | )  |  |  | 16.0  |   
|Goodwill amortization                       |  |      | (12.3 | )    |  |      | 5.6   |    |  |  | 11.0  |   
|Valuation allowance                         |  |      | (2.0  | )    |  |      | 21.0  |    |  |  | 7.8   |   
|Other                                       |  |      | (3.0  | )    |  |      | (1.9  | )  |  |  | 0.0   |   
|                                            |  |      |       |      |  |      |       |    |  |  |       |   
|Effective income tax rate                   |  |      | 20.0  | %    |  |      | (16.0 | )% |  |  | 0.0   | % 
|                                            |  |      |       |      |  |      |       |    |  |  |       |   

A valuation allowance equal to 100% of the net
deferred tax assets has been established because of the
uncertainty of realization of the deferred tax assets due to the
lack of earnings history. Approximately $339,416 and $151,129 of
these deferred tax assets and related valuation allowances were
recorded through additional paid in capital and goodwill,
respectively. Therefore, if in the future the Company believes
that it is more likely than not that these deferred tax benefits
will be realized, this portion of the valuation allowances will
be reversed against additional paid in capital and goodwill,
respectively. The valuation allowance for deferred tax assets
increased (decreased) by ($14,740) and $1,743 in 2003 and 2002,
respectively.

F-39



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

At December 31, 2003, the Company had net
operating loss carryforwards for federal income tax purposes of
approximately $1,920,956, that expire in 2004 through 2023, and
federal tax credits of approximately $15,274, which expire in
2006 through 2023.

A portion of net operating loss carryforwards and
tax credit carryforwards may be subject to an annual limitation
regarding their utilization against taxable income in future
periods due to the change of ownership provisions of
the Internal Revenue Code and similar state provisions. A
portion of these carryforwards may expire before becoming
available to reduce future income tax liabilities.

The income tax provision (benefit) for 2002
included a $12,887 benefit reflecting the carryback of net
operating losses to the prior periods of certain acquired
subsidiaries, in which those subsidiaries generated taxable
income. The carryback was allowed as a result of the Job
Creation and Worker Assistance Act of 2002 that was
enacted on March 9, 2002. In addition, some of the
Companys operating companies are profitable in certain
states and foreign countries in which the Company does not have
net operating losses to offset that income. Accordingly, the
Company provided for taxes of $4,140, $2,808 and $2,588 related
to foreign, state and other jurisdictions during 2003, 2002 and
2001, respectively.

The income tax provision (benefit) for 2003, 2002
and 2001 includes $2,228, $1,756 and $1,496, respectively,
related to non-U.S. income taxes. The non-U.S. income
included in income (loss) from continuing operations before
income tax provision (benefit) was $5,879, $4,310 and $3,756 for
2003, 2002 and 2001, respectively. Accumulated net earnings of
foreign subsidiaries are intended to be permanently reinvested
in those subsidiaries. Accordingly, no federal taxes have been
provided on those earnings.



|    |                           
|--- | --------------------------
|17. | Related Party Transactions

In 2001, the Company recorded $3,000 in revenue
from related parties attributable to News Corporation (until
February 15, 2001, the date News Corporation ceased being
considered a related party when it surrendered its Series A
Convertible Preferred Stock) and Microsoft (until
October 22, 2001, the date Microsoft ceased being
considered a related party when a representative of Microsoft
resigned from the Board of Directors).



|    |                                    
|--- | -----------------------------------
|18. | Fair Value of Financial Instruments

The following disclosure of the estimated fair
value of financial instruments is made in accordance with the
requirements of SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. The estimated fair
values have been determined using available market information.
However, considerable judgment is required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.

|             |                                   |                   |   |                   |  |            |   |            |  |  |   |         |  |  |   |         | 
|------------ | --------------------------------- | ----------------- | - | ----------------- |  | ---------- | - | ---------- |  |  | - | ------- |  |  | - | ------- | 
|             |                                   |                   |   |                  
|             |                                   | December 31, 2003 |   | December 31, 2002
|             |                                   |                   |   |                  
|             |                                   | Cost Basis        |   | Fair Value        |  | Cost Basis |   | Fair Value
|             |                                   |                   |   |                   |  |            |   |           
|Assets:      |                                   |                   |   |                   |  |            |   |            |  |  |   |         |  |  |   |        
|             | Cash and cash equivalents         |                   | $ | 63,298            |  |            | $ | 63,298     |  |  | $ | 175,596 |  |  | $ | 175,596 | 
|             | Short-term investments            |                   |   | 205,962           |  |            |   | 207,383    |  |  |   | 10,865  |  |  |   | 10,897  | 
|             | Marketable securities  long term |                   |   | 447,583           |  |            |   | 456,034    |  |  |   | 448,286 |  |  |   | 464,638 | 
|Liabilities: |                                   |                   |   |                   |  |            |   |            |  |  |   |         |  |  |   |        
|             | Convertible subordinated notes    |                   | $ | 649,999           |  |            | $ | 657,812    |  |  | $ | 300,000 |  |  | $ | 348,000 | 

As of December 31, 2003, the Companys
short-term investments consisted of certificates of deposit,
municipal bonds and asset backed securities, marketable debt
securities consisted of Federal Agency Notes

F-40



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

and U.S. Treasury Notes and marketable
equity securities consisted of equity investments in publicly
traded companies. As of December 31, 2002, the
Companys short-term investments consisted principally of
U.S. Treasury Notes and certificates of deposit, marketable
debt securities consisted of municipal bonds and marketable
equity securities represented an equity investment in a publicly
traded company.

In accordance with the requirements of
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, below is a summary of the
fair value, gains and losses relating to the Companys
investments in debt and equity securities:

|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |   |         |         | 
|---------- | ------------------- | ---------------------------------------------------------- | ----- | ----------------- | ------- | ---------- |  | ---------- | ----- | --------- |  | ---------- | --- | ---------- |  | ---------- | ------- | ------- |  | - | ------- | ------- |  | - | ----- | ------ |  | - | - | - |  | - | ------- | ------- | 
|           |                     |                                                            |       |                  
|           |                     | December 31, 2003                                          |       | December 31, 2002
|           |                     |                                                            |       |                  
|           |                     | Cost or                                                    |       | Gross             |         | Gross      |  |            |       | Cost or   |  | Gross      |     | Gross      |  |           
|           |                     | Amortized                                                  |       | Unrealized        |         | Unrealized |  |            |       | Amortized |  | Unrealized |     | Unrealized |  |           
|           |                     | Cost                                                       |       | Gains             |         | Losses     |  | Fair Value |       | Cost      |  | Gains      |     | Losses     |  | Fair Value
|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |           
|Short-Term |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  
|           | Held-to-maturity:   |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |   |        
|           |                     | Certificate of deposits and marketable debt
    securities |       | $                 |        |            |  | $          |      |           |  | $          |    |            |  | $          |        |         |  | $ | 2,919   |         |  | $ | 9     |        |  | $ |  |   |  | $ | 2,928   |        
|           | Available-for-sale: |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |   |        
|           |                     | Certificate of deposits and marketable debt
    securities |       |                   | 205,962 |            |  |            | 1,421 |           |  |            |    |            |  |            | 207,383 |         |  |   | 7,946   |         |  |   | 23    |        |  |   |  |   |  |   | 7,969   |        
|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  
|           |                     |                                                            | Total |                   | $       | 205,962    |  |            | $     | 1,421     |  |            | $   |           |  |            | $       | 207,383 |  |   | $       | 10,865  |  |   | $     | 32     |  |   | $ |  |  |   | $       | 10,897  | 
|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  
|Long-Term  |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  
|           | Held-to-maturity:   |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |   |        
|           |                     | Marketable debt securities                                 |       | $                 |        |            |  | $          |      |           |  | $          |    |            |  | $          |        |         |  | $ | 243,475 |         |  | $ | 7,922 |        |  | $ |  |   |  | $ | 251,397 |        
|           | Available-for-sale: |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |   |        
|           |                     | Marketable debt securities                                 |       |                   | 445,810 |            |  |            | 6,043 |           |  |            | 563 |            |  |            | 451,290 |         |  |   | 201,641 |         |  |   | 4,173 |        |  |   |  |   |  |   | 205,814 |        
|           |                     | Equity securities                                          |       |                   | 1,773   |            |  |            | 2,971 |           |  |            |    |            |  |            | 4,744   |         |  |   | 3,170   |         |  |   | 4,257 |        |  |   |  |   |  |   | 7,427   |        
|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  
|           |                     |                                                            | Total |                   | $       | 447,583    |  |            | $     | 9,014     |  |            | $   | 563        |  |            | $       | 456,034 |  |   | $       | 448,286 |  |   | $     | 16,352 |  |   | $ |  |  |   | $       | 464,638 | 
|           |                     |                                                            |       |                   |         |            |  |            |       |           |  |            |     |            |  |            |         |         |  |   |         |         |  |   |       |        |  |   |   |   |  |  

The amortized cost and estimated fair value by
maturity of securities are shown in the following table.
Securities are classified according to their contractual
maturities without consideration of principal amortization,
potential prepayments or call options. Accordingly, actual
maturities may differ from contractual maturities. During the
quarter ended December 31, 2003, the Company reviewed the
classification of its held-to-maturity and available-for-sale
securities. The Company considered its acquisition activity in
2003, and its plan to continue to invest in acquisitions,
strategic relationships, infrastructure and product development
in the future. As a result of its review, the Company determined
it no longer had the positive intent to hold certain of its
securities to maturity, and accordingly, all remaining
held-to-maturity securities were reclassified to
available-for-sale.

|                    |                                       |                |   |            |         |  |   |         |         | 
|------------------- | ------------------------------------- | -------------- | - | ---------- | ------- |  | - | ------- | ------- | 
|                    |                                       | Cost or        |   |           
|                    |                                       | Amortized Cost |   | Fair Value
|                    |                                       |                |   |           
|Available-for-sale: |                                       |                |   |            |         |  |   |        
|                    | Due in one year or less               |                | $ | 205,962    |         |  | $ | 207,383 |        
|                    | Due after one year through five years |                |   | 445,810    |         |  |   | 451,290 |        
|                    |                                       |                |   |            |         |  |   |        
|                    |                                       | Total          |   | $          | 651,772 |  |   | $       | 658,673 | 
|                    |                                       |                |   |            |         |  |   |        

F-41



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)

During 2003, three of the Companys
investments in held-to-maturity debt securities were called for
early redemption by the issuer for net proceeds of $155,000. As
a result of the redemption, the Company realized a gain of $285
reflecting the difference between the proceeds received and the
related carrying amount of the investment. In addition, during
2003, the Company sold its investments in available-for-sale
marketable debt securities for proceeds of $242,907. The
majority of these proceeds were used to finance the Medifax
acquisition on December 22, 2003. The Company realized a
loss of $1,599 in connection with the sales. Additionally,
during 2003, the Company sold a portion of its investments in
marketable equity securities for proceeds of $4,387, which
resulted in a gain of $2,973. The proceeds from these sales have
been included in proceeds from maturities and sales of
available-for-sale securities and proceeds from
maturities and redemptions of held-to-maturity securities
in the accompanying consolidated statements of cash flows and
the gain and losses have been included in gain on
investments in the accompanying consolidated statements of
operations.

During 2002, one of the Companys
investments in Federal Agency Notes was called for early
redemption by the issuer for net proceeds of $56,000. As a
result of the redemption, the Company realized a gain of $681
reflecting the difference between the proceeds received and the
related carrying amount of the investment. The proceeds from
this redemption have been included in proceeds from
maturities and redemptions of held-to-maturity securities
in the accompanying consolidated statements of cash flows and
the gain has been included in gain on investments in
the accompanying consolidated statements of operations.
Additionally, during 2002, the Company sold one of its
investments in marketable equity securities for proceeds of
$7,026, which resulted in a gain of $5,866. The proceeds from
this sale have been included in proceeds from maturities
and sales of available-for-sale securities in the
accompanying consolidated statements of cash flows and the gain
has been included in gain on investments in the
accompanying consolidated statements of operations for 2002.



|    |                   
|--- | ------------------
|19. | Comprehensive Loss

Comprehensive loss is comprised of net loss and
other comprehensive income (loss). Other comprehensive income
(loss) includes certain changes in equity that are excluded from
net loss, such as changes in unrealized holding gains (losses)
on available-for-sale marketable securities and foreign currency
translation adjustments. The following table presents the
components of other comprehensive income (loss) for the years
ended December 31, 2003, 2002 and 2001:

|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |       | 
|------------------------------------------- | --------------------------------------------------------------------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ---------- | ----- | 
|                                            |                                                                                   | 2003 |         | 2002   |   | 2001
|                                            |                                                                                   |      |         |        |   |     
|Foreign currency translation gains (losses) |                                                                                   | $    | 3,285   |        |   | $    | 2,523   |        |   | $ | (710       | )    
|Unrealized gains (losses) on securities:    |                                                                                   |      |         |        |   |      |         |        |   |   |            |      
|                                            | Unrealized holding gains                                                          |      |         | 3,078  |   |      |         | 2,907  |   |   |            | 7,097 | 
|                                            | Less: reclassification adjustment for net gains
    realized in net income (loss) |      |         | (1,659 | ) |      |         | (6,547 | ) |   |            |      | 
|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |      
|Net unrealized gains (losses) on securities |                                                                                   |      | 1,419   |        |   |      | (3,640  | )      |   |   | 7,097      |      
|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |      
|Other comprehensive income (loss)           |                                                                                   |      | 4,704   |        |   |      | (1,117  | )      |   |   | 6,387      |      
|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |      
|Net loss                                    |                                                                                   |      | (17,006 | )      |   |      | (49,702 | )      |   |   | (6,672,318 | )    
|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |      
|Comprehensive loss                          |                                                                                   | $    | (12,302 | )      |   | $    | (50,819 | )      |   | $ | (6,665,931 | )    
|                                            |                                                                                   |      |         |        |   |      |         |        |   |   |            |      

The foreign currency translation gains (losses)
are not currently adjusted for income taxes as they relate to
permanent investments in non-U.S. subsidiaries.

F-42



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



|    |                                                      
|--- | -----------------------------------------------------
|20. | Supplemental Disclosures of Cash Flow
    Information

Supplemental information related to the
consolidated statements of cash flows is summarized below:

|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  | - | -------- | -
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | Years Ended December 31,
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | 2003                     |        | 2002 |  | 2001
|                                                                                                                                      |  |                          |        |      |  |     
|Supplemental Disclosure of Cash Flow Information:                                                                                     |  |                          |        |      |  |      |       |  |  |   |          |  
|Interest paid                                                                                                                         |  | $                        | 12,714 |      |  | $    | 5,021 |  |  | $ | 479      |  
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|Taxes paid                                                                                                                            |  | $                        | 7,215  |      |  | $    | 1,090 |  |  | $ | 1,822    |  
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|Supplemental Schedule of Non-Cash Investing and
    Financing Activities:                                                             |  |                          |        |      |  |      |       |  |  |   |          |  
|Issuance of equity securities in connection with
    business combinations, strategic alliances and services, and
    asset purchases |  | $                        | 67     |      |  | $    | 39    |  |  | $ | 24,739   |  
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|Reacquisition of convertible preferred stock and
    issuance of warrants in connection with revision of strategic
    alliances      |  | $                        |       |      |  | $    |      |  |  | $ | (151,171 | )
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|Equipment acquired under capital lease obligations                                                                                    |  | $                        |       |      |  | $    |      |  |  | $ | 168      |  
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  
|Deferred stock compensation and options granted
    in connection with acquisitions                                                   |  | $                        | 25     |      |  | $    | 2,500 |  |  | $ |         |  
|                                                                                                                                      |  |                          |        |      |  |      |       |  |  |   |          |  



|    |                                     
|--- | ------------------------------------
|21. | Quarterly Financial Data (Unaudited)

The following table summarizes the quarterly
financial data for 2003 and 2002. Net income (loss) per share
calculations for each of the quarters are based on the weighted
average number of shares for each period; therefore, the sum of
the quarters may not necessarily be equal to the full year per
share amount.

|                             |  |         |         |               |  |             |         |              |  |            |       |             |  |              |       |            |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|---------------------------- |  | ------- | ------- | ------------- |  | ----------- | ------- | ------------ |  | ---------- | ----- | ----------- |  | ------------ | ----- | ---------- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                             |  |         |         |               |  | Income      |         | Income       |  |            |       | Income      |  | Income       |       |           
|                             |  |         |         |               |  | (Loss) from |         | (Loss) from  |  | Net Income |       | (Loss) from |  | (Loss) from  |       | Net Income
|                             |  |         |         |               |  | Continuing  |         | Discontinued |  | (Loss) per |       | Continuing  |  | Discontinued |       | (Loss) per
|                             |  |         |         | Net           |  | Operations  |         | Operations   |  | Share      |       | Operations  |  | Operations   |       | Share     
|                             |  | Revenue |         | Income (Loss) |  | (Basic)     |         | (Basic)      |  | (Basic)    |       | (Diluted)   |  | (Diluted)    |       | (Diluted) 
|                             |  |         |         |               |  |             |         |              |  |            |       |             |  |              |       |           
|2003                         |  |         |         |               |  |             |         |              |  |            |       |             |  |              |       |            |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|March 31, 2003               |  | $       | 221,531 |               |  | $           | (7,358  | )            |  | $          | (0.03 | )           |  | $            | 0.01  |            |  | $ | (0.02 | ) |  | $ | (0.03 | ) |  | $ | 0.01  |   |  | $ | (0.02 | )
|June 30, 2003                |  |         | 233,418 |               |  |             | (26,270 | )            |  |            | 0.02  |             |  |              | (0.11 | )          |  |   | (0.09 | ) |  |   | 0.02  |   |  |   | (0.10 | ) |  |   | (0.08 | )
|September 30, 2003           |  |         | 250,635 |               |  |             | 6,089   |              |  |            | 0.03  |             |  |              | (0.01 | )          |  |   | 0.02  |   |  |   | 0.03  |   |  |   | (0.01 | ) |  |   | 0.02  |  
|December 31, 2003            |  |         | 258,396 |               |  |             | 10,533  |              |  |            | 0.03  |             |  |              |      |            |  |   | 0.03  |   |  |   | 0.03  |   |  |   |      |   |  |   | 0.03  |  
|Year Ended December 31, 2003 |  |         | 963,980 |               |  |             | (17,006 | )            |  |            | 0.05  |             |  |              | (0.11 | )          |  |   | (0.06 | ) |  |   | 0.05  |   |  |   | (0.10 | ) |  |   | (0.05 | )
|2002                         |  |         |         |               |  |             |         |              |  |            |       |             |  |              |       |            |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|March 31, 2002               |  | $       | 211,961 |               |  | $           | (29,602 | )            |  | $          | (0.10 | )           |  | $            | 0.01  |            |  | $ | (0.09 | ) |  | $ | (0.10 | ) |  | $ | 0.01  |   |  | $ | (0.09 | )
|June 30, 2002                |  |         | 213,255 |               |  |             | (22,209 | )            |  |            | (0.07 | )           |  |              | (0.00 | )          |  |   | (0.07 | ) |  |   | (0.07 | ) |  |   | (0.00 | ) |  |   | (0.07 | )
|September 30, 2002           |  |         | 217,004 |               |  |             | 4,538   |              |  |            | 0.01  |             |  |              | 0.01  |            |  |   | 0.01  |   |  |   | 0.01  |   |  |   | 0.00  |   |  |   | 0.01  |  
|December 31, 2002            |  |         | 229,476 |               |  |             | (2,429  | )            |  |            | (0.01 | )           |  |              | 0.00  |            |  |   | (0.01 | ) |  |   | (0.01 | ) |  |   | 0.00  |   |  |   | (0.01 | )
|Year Ended December 31, 2002 |  |         | 871,696 |               |  |             | (49,702 | )            |  |            | (0.17 | )           |  |              | 0.01  |            |  |   | (0.16 | ) |  |   | (0.17 | ) |  |   | 0.01  |   |  |   | (0.16 | )

As a result of certain reclassifications related
to the discontinued operations of our Plastic Technologies
segment, the above amounts may vary from amounts previously
reported in the Companys quarterly filings.

F-43



---



##### Table of Contents



WebMD Corporation


Notes to Consolidated
Financial Statements  (Continued)



|    |                 
|--- | ----------------
|22. | Subsequent Event

On March 4, 2004, the Company sold $100,000
of Convertible Redeemable Exchangeable Preferred Stock
(Preferred Stock) in a private transaction to
CalPERS/PCG Corporate Partners, LLC
(CalPERS/PCG). CalPERS/PCG is a private equity fund
managed by the Pacific Corporate Group and principally backed by
California Public Employees Retirement System, or CalPERS.

The Preferred Stock has a liquidation preference
of $100,000 in the aggregate and is convertible into
10,638,297 shares of the Companys common stock in the
aggregate, representing a conversion price of $9.40 per share of
common stock. The Company may not redeem the Preferred Stock
prior to March 2007. Thereafter, the Company may redeem any
portion of the Preferred Stock at 105% of its liquidation
preference; provided that any redemption by the Company prior to
March 2008 shall be subject to the condition that the average
closing sale prices of the Companys common stock is at
least $13.16 per share, subject to adjustment. The Company is
required to redeem all shares of the Preferred Stock then
outstanding in March 2012, at a redemption price equal to the
liquidation preference of the Preferred Stock, payable in cash
or, at the Companys option, in shares of the
Companys common stock.

If the average closing sales price of the
Companys common stock during the three-month period ended
on the fourth anniversary of the issuance date is less than
$7.50 per share, holders of the Preferred Stock will have a
right to exchange the Preferred Stock into the Companys
10% Subordinated Notes (10% Notes) due March
2010. The 10% Notes may be redeemed, in whole or in part,
at any time thereafter at the Companys option at a price
equal to 105% of the principal amount of the 10% Notes
being redeemed.

Holders of Preferred Stock will not receive any
dividends unless the holders of common stock do, in which case
holders of Preferred Stock will be entitled to receive ordinary
dividends in an amount equal to the ordinary dividends the
holders of Preferred Stock would have received had they
converted such Preferred Stock into common stock immediately
prior to the record date for such dividend distribution. So long
as the Preferred Stock remains outstanding, the Company is
required to pay a quarterly fee to CalPERS/PCG of 0.35% of the
face amount of the then outstanding Preferred Stock.

F-44



---



##### Table of Contents



Schedule II.     Valuation
and Qualifying Accounts

|                  |                                             |                                              |   |            |  |          |   |            |   |          |   |             |   |  |   |         |   |  |   |        |  |  |   |         | 
|----------------- | ------------------------------------------- | -------------------------------------------- | - | ---------- |  | -------- | - | ---------- | - | -------- | - | ----------- | - |  | - | ------- | - |  | - | ------ |  |  | - | ------- | 
|                  |                                             |                                             
|                  |                                             | Years Ended December 31, 2003, 2002 and 2001
|                  |                                             |                                             
|                  |                                             | Balance at                                   |   | Charged to |  |         
|                  |                                             | Beginning                                    |   | Costs and  |  |          |   | Balance at
|                  |                                             | of Year                                      |   | Expenses   |  | Acquired |   | Write-offs |   | Other(a) |   | End of Year
|                  |                                             |                                              |   |            |  |          |   |            |   |          |   |            
|                  |                                             |                                             
|                  |                                             | (In thousands)                              
|December 31, 2003 |                                             |                                              |   |            |  |          |   |            |   |          |   |             |   |  |   |         |   |  |   |        |  |  |   |        
|                  | Allowance for Doubtful Accounts             |                                              | $ | 22,417     |  |          | $ | 6,328      |   |          | $ | 768         |   |  | $ | (9,013  | ) |  | $ |       |  |  | $ | 20,500  | 
|                  | Valuation Allowance for Deferred Tax Assets |                                              |   | 941,507    |  |          |   | (1,423     | ) |          |   | (33,277     | ) |  |   |        |   |  |   | 19,960 |  |  |   | 926,767 | 
|December 31, 2002 |                                             |                                              |   |            |  |          |   |            |   |          |   |             |   |  |   |         |   |  |   |        |  |  |   |        
|                  | Allowance for Doubtful Accounts             |                                              |   | 26,972     |  |          |   | 11,305     |   |          |   | 34          |   |  |   | (15,894 | ) |  |   |       |  |  |   | 22,417  | 
|                  | Valuation Allowance for Deferred Tax Assets |                                              |   | 939,764    |  |          |   | 10,471     |   |          |   | (17,355     | ) |  |   |        |   |  |   | 8,627  |  |  |   | 941,507 | 
|December 31, 2001 |                                             |                                              |   |            |  |          |   |            |   |          |   |             |   |  |   |         |   |  |   |        |  |  |   |        
|                  | Allowance for Doubtful Accounts             |                                              |   | 26,746     |  |          |   | 26,752     |   |          |   | 484         |   |  |   | (27,010 | ) |  |   |       |  |  |   | 26,972  | 
|                  | Valuation Allowance for Deferred Tax Assets |                                              |   | 281,392    |  |          |   | 519,864    |   |          |   | 135,511     |   |  |   |        |   |  |   | 2,997  |  |  |   | 939,764 | 



---



|    |  |                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------
|(a) |  | Represents valuation allowance created through
    equity as a result of stock option and warrant exercises.

S-1



---



##### Table of Contents



INDEX TO EXHIBITS

|            |   |    |  |             |   |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | - | -- |  | ----------- | - |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |    |  | Description
|            |   |    |  |            
|            | 2 | .1 |  |             |  |  |  | Stock Purchase Agreement dated as of
    June 15, 2003 between WebMD Corporation and Joseph Q.
    DiMartini, individually and as Trustee U/A dated
    February 6, 1998 f/b/o Joseph Q. DiMartini, and as Trustee
    of the Joseph Q. DiMartini 2002 Irrevocable Trust dated
    October 14, 2002, Eric J. Schaefer, an individual, Daniel
    A. Schmitt, individually and as Trustee of the Daniel A. Schmitt
    Revocable Trust dated March 26, 1999, and as Trustee of the
    Daniel Schmitt 2002 Irrevocable Trust dated September 24,
    2002, and Dru A. Schmitt, individually and as Trustee U/A dated
    October 20, 1997 f/b/o Dru A. Schmitt (incorporated by
    reference to Exhibit 2.1 to Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2003)
|            | 2 | .2 |  |             |  |  |  | Stock Purchase Agreement dated as of
    October 21, 2003 between TPG Holding Company Limited and
    Envoy Corporation (incorporated by reference to Exhibit 2.1
    to Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            | 2 | .3 |  |             |  |  |  | Amendment No. 1, dated as of
    November 28, 2003, to the Stock Purchase Agreement dated as
    of October 21, 2003 between TPG Holding Company Limited and
    Envoy Corporation (incorporated by reference to Exhibit 2.1
    to Registrants Current Report on Form 8-K filed
    December 1, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 2 | .4 |  |             |  |  |  | Amendment No. 2, dated as of
    December 22, 2003, to the Stock Purchase Agreement dated as
    of October 21, 2003 between TPG Holding Company Limited and
    Envoy Corporation (incorporated by reference to Exhibit 2.1
    to Registrants Current Report on Form 8-K filed
    December 24, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            | 3 | .1 |  |             |  |  |  | Eleventh Amended and Restated Certificate of
    Incorporation of Registrant (incorporated by reference to
    Exhibit 3.1 to Registrants Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 3 | .2 |  |             |  |  |  | Certificate of Designations for Convertible
    Redeemable Exchangeable Preferred Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 3 | .3 |  |             |  |  |  | Amended and Restated Bylaws of Registrant, as
    currently in effect (incorporated by reference to
    Exhibit 3.2 to Registrants Quarterly Report on Form
    10-Q for the quarter ended June 30, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 4 | .1 |  |             |  |  |  | Specimen Common Stock certificate (incorporated
    by reference to Exhibit 4.1 to Registrants
    Registration Statement on Form S-1 (No. 333-70553) filed January
    14, 1999)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | 4 | .2 |  |             |  |  |  | Indenture between WebMD Corporation and The Bank
    of New York, dated as of April 1, 2002 (incorporated
    by reference to Exhibit 4.1 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            | 4 | .3 |  |             |  |  |  | Registration Rights Agreement dated as of
    April 1, 2002 between WebMD Corporation and UBS Warburg LLC
    (incorporated by reference to Exhibit 4.2 to the
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 4 | .4 |  |             |  |  |  | Form of 3 1/4% Convertible Subordinated
    Note Due 2007 (included in Exhibit 4.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 4 | .5 |  |             |  |  |  | Indenture, dated as of June 25, 2003,
    between WebMD Corporation and The Bank of New York
    (incorporated by reference to Exhibit 4.1 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 4 | .6 |  |             |  |  |  | Form of 1.75% Convertible Subordinated
    Note Due 2023 (included in Exhibit 4.5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | 4 | .7 |  |             |  |  |  | Registration Rights Agreement dated as of
    June 25, 2003 between WebMD Corporation and Banc of America
    Securities LLC (incorporated by reference to Exhibit 4.2 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

E-1



---



##### Table of Contents



|            |    |     |  |             |   |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | -- | --- |  | ----------- | - |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  | Description
|            |    |     |  |            
|            | 4  | .8  |  |             |  |  |  | Registration Rights Agreement dated as of
    July 17, 2003 between WebMD Corporation and Joseph Q.
    DiMartini, individually and as Trustee U/A dated
    February 6, 1998 f/b/o Joseph Q. DiMartini, and as Trustee
    of the Joseph Q. DiMartini 2002 Irrevocable Trust dated
    October 14, 2002, Eric J. Schaefer, an individual, Daniel
    A. Schmitt, individually and as Trustee of the Daniel A. Schmitt
    Revocable Trust dated March 26, 1999, and as Trustee of the
    Daniel Schmitt 2002 Irrevocable Trust dated September 24,
    2002, and Dru A. Schmitt, individually and as Trustee U/A dated
    October 20, 1997 f/b/o Dru A. Schmitt (incorporated by
    reference to Exhibit 4.3 to Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30, 2003)
|            | 4  | .9  |  |             |  |  |  | Convertible Redeemable Exchangeable Preferred
    Stock Purchase Agreement, dated as of March 4, 2004,
    between CalPERS/PCG Corporate Partners, LLC and WebMD Corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 4  | .10 |  |             |  |  |  | Form of Stock Certificate for Convertible
    Redeemable Exchangeable Preferred Stock (included in
    Exhibit 3.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 4  | .11 |  |             |  |  |  | Form of Indenture for 10% Subordinated Notes
    due 2010 (included in Exhibit 3.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 4  | .12 |  |             |  |  |  | Form of 10% Subordinated Note due 2010
    (included in Exhibit 3.2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 10 | .1  |  |             |  |  |  | Form of Indemnification Agreement to be entered
    into by Registrant with each of its directors and officers
    (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 10 | .2  |  |             |  |  |  | Domestic Assignment Agreement dated as of
    February 15, 2001 among Registrant, Healtheon/WebMD Cable
    Corporation, Healtheon/WebMD Internet Corporation, The News
    Corporation Limited, Fox Entertainment Group, Inc. AHN/FIT
    Cable, LLC and AHN/FIT Internet, LLC (incorporated by reference
    to Exhibit 10.3 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                 
|            | 10 | .3  |  |             |  |  |  | International Assignment Agreement dated as of
    February 15, 2001 among Registrant, HW International
    Holdings, Inc., The News Corporation Limited, Eastrise
    Profits Limited and IJV Holdings Inc. (incorporated by reference
    to Exhibit 10.4 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .4  |  |             |  |  |  | Healtheon/WebMD Corporation Registration Rights
    Agreement dated January 26, 2000 among Registrant, Eastrise
    Profits Limited, AHN/FIT Cable, LLC, AHN/FIT Internet, LLC, News
    America Incorporated and Fox Broadcasting Company (incorporated
    by reference to Exhibit 10.4 to Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31, 2000),
    as amended by Amendment dated February 15, 2001
    (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2001)                                                                                                                                                                                                                      
|            | 10 | .5  |  |             |  |  |  | Healtheon/WebMD Media Services Agreement dated
    January 26, 2000 among Registrant, Eastrise Profits Limited
    and Fox Entertainment Group, Inc. (incorporated by
    reference to Exhibit 10.5 to Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31, 2000),
    as amended by Amendment dated February 15, 2001
    (incorporated by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2001)                                                                                                                                                                                                                                                                                                            
|            | 10 | .6  |  |             |  |  |  | Content License Agreement dated January 26,
    2000 between The News Corporation Limited and Registrant
    (incorporated by reference to Exhibit 10.6 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 10 | .7  |  |             |  |  |  | Letter Agreement dated December 29, 2000
    between Registrant and The News Corporation Limited
    (incorporated by reference to Exhibit 10.17 to
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | 10 | .8  |  |             |  |  |  | Settlement Agreement dated October 12, 2001
    between Registrant and Quintiles Transnational Corp.
    (incorporated by reference to Exhibit 10.01 to Quintiles
    Transnational Corp.s Quarterly Report on Form 10-Q for the
    quarterly period ended September 30, 2001, filed with the
    Securities and Exchange Commission on November 1, 2001)                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 10 | .9  |  |             |  |  |  | Warrant to Purchase Shares of Common Stock of
    WebMD, Inc. dated May 12, 1999 issued to Microsoft
    Corporation (incorporated by reference to Exhibit 10.9 to
    Registrants Annual Report on Form 10-K for the year ended
    December 31, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

E-2



---



##### Table of Contents



|            |    |      |  |             |   |  |  |                                                                                                                                                                                                                                                                                                                                                                                             
|----------- | -- | ---- |  | ----------- | - |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      |  | Description
|            |    |      |  |            
|            | 10 | .10* |  |             |  |  |  | Employment Agreement dated as of February 1,
    1998 between Registrant and K. Robert Draughon (incorporated by
    reference to Exhibit 10.51 to Registrants Form 10-K
    to Annual Report on Form 10-K for the year ended
    December 31, 2000, as amended by Amendment No. 1 on
    Form 10-K/A)                                                                                     
|            | 10 | .11* |  |             |  |  |  | Letter Agreement dated as of September 12,
    2000 between Registrant and K. Robert Draughon (incorporated by
    reference to Exhibit 10.52 to Registrants Form 10-K
    to Annual Report on Form 10-K for the year ended
    December 31, 2000, as amended by Amendment No. 1 on
    Form 10-K/A)                                                                                       
|            | 10 | .12* |  |             |  |  |  | Agreement dated as of October 8, 2001
    between Registrant and Martin J. Wygod (incorporated by
    reference to Exhibit 10.55 to Registrants Form 10-K
    to Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                                                                                                      
|            | 10 | .13* |  |             |  |  |  | Amended and Restated Stock Option Agreement dated
    August 21, 2000 between the Registrant (as successor to
    Medical Manager Corporation) and Martin J. Wygod (incorporated
    by reference to Exhibit 10.21 to Registrants Annual
    Report on Form 10-K for the year ended December 31, 2000,
    as amended by Amendment No. 1 on Form 10-K/A)                                   
|            | 10 | .14* |  |             |  |  |  | Employment Agreement dated as of October 23,
    2002 between the Registrant and Roger C. Holstein (incorporated
    by reference to Exhibit 10.14 to Registrants Annual
    Report on Form 10-K for the year ended December 31, 2002)                                                                                                                                                     
|            | 10 | .15* |  |             |  |  |  | Employment Agreement dated as of May 16,
    1999 between the Registrant (as successor to Synetic, Inc.)
    and Michael A. Singer (incorporated by reference to
    Exhibit 10.26 to Medical Manager Corporations Annual
    Report on Form 10-K for the fiscal year ended June 30, 1999)                                                                                                 
|            | 10 | .16* |  |             |  |  |  | Letter Agreement dated as of September 5,
    2000 between Registrant (as successor to Medical Manager
    Corporation) and Michael A. Singer (incorporated by reference to
    Exhibit 10.50 to Registrants Annual Report on Form
    10-K for the year ended December 31, 2001, as amended by
    Amendment No. 1 on Form 10-K/A)                                                        
|            | 10 | .17* |  |             |  |  |  | Employment Agreement dated as of July 1,
    2000 between Registrant (as successor to Medical Manager
    Corporation) and Charles A. Mele, as amended (incorporated by
    reference to Exhibit 10.51 to Registrants Annual
    Report on Form 10-K for the year ended December 31, 2001,
    as amended by Amendment No. 1 on Form 10-K/A)                                               
|            | 10 | .18* |  |             |  |  |  | Employment Agreement dated as of July 1,
    2000 between Registrant (as successor to Medical Manager
    Corporation) and Anthony Vuolo, as amended (incorporated by
    reference to Exhibit 10.52 to Registrants Annual
    Report on Form 10-K for the year ended December 31, 2001,
    as amended by Amendment No. 1 on Form 10-K/A)                                                 
|            | 10 | .19* |  |             |  |  |  | Form of Amended and Restated Stock Option
    Agreement dated August 21, 2000, between Registrant (as
    successor to Medical Manager Corporation) and each of Charles A.
    Mele and Anthony Vuolo (incorporated by reference to
    Exhibit 10.54 to Registrants Annual Report on Form
    10-K for the year ended December 31, 2001, as amended by
    Amendment No. 1 on Form 10-K/A)
|            | 10 | .20* |  |             |  |  |  | WebMD Corporation 2001 Employee Non-Qualified
    Stock Option Plan, as amended (incorporated by reference to
    Exhibit 10.46 to Registrants Form 10-K for the year
    ended December 31, 2001, as amended by Amendment No. 1
    on Form 10-K/A)                                                                                                                                       
|            | 10 | .21* |  |             |  |  |  | WebMD Corporation 2002 Restricted Stock Plan and
    Form of Award Agreement (incorporated by reference to
    Exhibit 10.21 to Registrants Annual Report on Form
    10-K for the year ended December 31, 2002)                                                                                                                                                                           
|            | 10 | .22* |  |             |  |  |  | Healtheon Corporation 1996 Stock Plan and Form of
    Stock Option Agreement (incorporated by reference to
    Exhibit 10.2 to Amendment No. 2 to Registrants
    Registration Statement on Form S-1 (No. 333-70553) filed
    February 10, 1999)                                                                                                                                          
|            | 10 | .23* |  |             |  |  |  | WebMD Corporation Amended and Restated 1998
    Employee Stock Purchase Plan (incorporated by reference to
    Exhibit 99.27 to Registrants Registration Statement
    on Form S-8 (No. 333-47250) filed October 4, 2000)                                                                                                                                                                  

E-3



---



##### Table of Contents



|            |    |      |  |             |   |  |  |                                                                                                                                                                                                                                                                                                 
|----------- | -- | ---- |  | ----------- | - |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      |  | Description
|            |    |      |  |            
|            | 10 | .24* |  |             |  |  |  | WebMD Corporation 2000 Long-Term Incentive Plan
    (incorporated by reference to Exhibit 10.1 to Amendment
    No. 1 to Registrants Registration Statement on
    Form S-4 (No. 333-39592) filed August 1, 2000)                                                                              
|            | 10 | .25* |  |             |  |  |  | WebMD, Inc. Amended and Restated 1997 Stock
    Incentive Plan, as amended (incorporated by reference to
    Exhibit 10.2 to Registrants Registration Statement on
    Form S-8 (No. 33-90795) filed November 12, 1999)                                                                        
|            | 10 | .26* |  |             |  |  |  | Envoy Stock Plan (incorporated by reference to
    Exhibit 99.1 to Registrants Registration Statement on
    Form S-8 (No. 333-42616) filed July 31, 2000)                                                                                                                                     
|            | 10 | .27* |  |             |  |  |  | Amended and Restated 1989 Class A Non-Qualified
    Stock Option Plan of Synetic, Inc. (incorporated by
    reference to Exhibit 10.1 to Synetic, Inc.s
    Registration Statement on Form S-1 (No. 333-28654) filed
    May 18, 1989)                                                         
|            | 10 | .28* |  |             |  |  |  | Amended and Restated 1989 Class B Non-Qualified
    Stock Option Plan of Synetic, Inc. (incorporated by
    reference to Exhibit 10.2 to Synetic, Inc.s
    Registration Statement on Form S-1 (No. 333-28654) filed
    May 18, 1989)                                                         
|            | 10 | .29* |  |             |  |  |  | 1991 Director Stock Option Plan of
    Synetic, Inc. (incorporated by reference to
    Exhibit 4.2 to Synetic, Inc.s Registration
    Statement on Form S-8 (No. 333-46640) filed March 24,
    1992)                                                                                          
|            | 10 | .30* |  |             |  |  |  | Amended and Restated 1991 Special Non-Qualified
    Stock Option Plan of Synetic, Inc. (incorporated by
    reference to Exhibit 4.3 to Synetic, Inc.s
    Registration Statement on Form S-8 (No. 333-36041) filed
    September 19, 1997)                                                    
|            | 10 | .31* |  |             |  |  |  | Form of Stock Option Agreement made as of
    December 7, 1994 between Synetic, Inc. and certain
    individuals (incorporated by reference to Exhibit 4.5 to
    Synetic, Inc.s Registration Statement on
    Form S-8 (No. 333-21555) filed February 11, 1997)                               
|            | 10 | .32* |  |             |  |  |  | Medical Manager Corporations 1996 Amended
    and Restated Long-Term Incentive Plan (incorporated by reference
    to Exhibit 10.1 to Medical Manager Corporations
    (Commission File No. 0-29090) Quarterly Report on Form 10-Q for
    the quarter ended September 30, 1998)              
|            | 10 | .33* |  |             |  |  |  | Medical Manager Corporations 1996 Amended
    and Restated Non-Employee Directors Stock Plan
    (incorporated by reference to Exhibit 10.2 to Medical
    Manager Corporations (Commission File No. 0-29090) Annual
    Report on Form 10-K for the fiscal year ended December 31,
    1997)
|            | 10 | .34* |  |             |  |  |  | 1996 Class C Stock Option Plan of
    Synetic, Inc. (incorporated by reference to
    Exhibit 4.1 to Synetic, Inc.s Registration
    Statement on Form S-8 (No. 333-36041) filed
    September 19, 1997)                                                                                       
|            | 10 | .35* |  |             |  |  |  | 1997 Class D Stock Option Plan of
    Synetic, Inc. (incorporated by reference to
    Exhibit 4.2 to Synetic, Inc.s Registration
    Statement on Form S-8 (No. 333-36041) filed
    September 19, 1997)                                                                                       
|            | 10 | .36* |  |             |  |  |  | 1998 Class E Stock Option Plan of
    Synetic, Inc. (incorporated by reference to
    Exhibit 4.1 to Synetic, Inc.s Registration
    Statement on Form S-8 (No. 333-72517) filed
    February 17, 1999)                                                                                        
|            | 10 | .37* |  |             |  |  |  | The 1999 Medical Manager Corporation Stock Option
    Plan for Employees of Medical Manager Systems, Inc.
    (incorporated by reference to Exhibit 10.28 to Medical
    Manager Corporations Annual Report on Form 10-K for the
    year ended June 30, 1999)                                 
|            | 10 | .38* |  |             |  |  |  | Form of Stock Option Agreement between the
    Corporation and each of John H. Kang and Michael A. Singer
    (incorporated by reference to Exhibit 99.5 to Amendment
    No. 1 to Medical Manager Corporations Registration
    Statement on Form S-4 (No. 333-81123) filed June 24,
    1999)
|            | 10 | .39* |  |             |  |  |  | 1998 Porex Technologies Corp. Stock Option Plan
    of Synetic, Inc. (incorporated by reference to
    Exhibit 4.2 to Synetic, Inc.s Registration
    Statement on Form S-8 (No. 333-72517) filed
    February 17, 1999)                                                                       
|            | 10 | .40* |  |             |  |  |  | CareInsite, Inc. 1999 Officer Stock Option
    Plan (incorporated by reference to Exhibit 10.18 to
    Amendment No. 6 to CareInsite, Inc.s
    Registration Statement on Form S-1 (No. 333-75071) filed
    June 11, 1999)                                                                    

E-4



---



##### Table of Contents



|            |    |      |  |             |   |  |  |                                                                                                                                                                                                                                                      
|----------- | -- | ---- |  | ----------- | - |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |      |  | Description
|            |    |      |  |            
|            | 10 | .41* |  |             |  |  |  | CareInsite, Inc. 1999 Employee Stock Option
    Plan (incorporated by reference to Exhibit 10.17 to
    Amendment No. 6 to CareInsite, Inc.s
    Registration Statement on Form S-1 (No. 333-75071) filed
    June 11, 1999)                        
|            | 10 | .42* |  |             |  |  |  | CareInsite, Inc. 1999 Director Stock Option
    Plan (incorporated by reference to Annex G to the Proxy
    Statement/Prospectus included in Registrants Registration
    Statement on Form S-4 (No. 333-39592) filed June 19,
    2000)            
|            | 10 | .43* |  |             |  |  |  | Amendment to the Company Stock Option Plans of
    Medical Manager Corporation and CareInsite, Inc.
    (incorporated by reference to Exhibit 99.28 to
    Registrants Registration Statement on Form S-8 (No.
    333-47250) filed October 4, 2000)
|            | 10 | .44* |  |             |  |  |  | Employment Agreement, dated as of
    September 11, 2000, between the Registrant and Kirk Layman                                                                                                                                                     
|            | 10 | .45* |  |             |  |  |  | 2003 Non-Qualified Stock Option Plan for
    Employees of Advanced Business Fulfillment, Inc.
    (incorporated by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)         
|            | 10 | .46* |  |             |  |  |  | Employment Agreement, dated as of August 20,
    2001, between the Registrant and Wayne Gattinella                                                                                                                                                   
|            | 10 | .47* |  |             |  |  |  | Stock Option Agreement between the Registrant and
    Wayne Gattinella dated August 20, 2001 (incorporated by
    reference to Exhibit 4.8 to Registrants Registration
    Statement on Form S-8 (No. 333-88420) filed May 16,
    2002)            
|            | 10 | .48* |  |             |  |  |  | Employment Agreement, dated as of
    September 23, 2003, between the Registrant and Andrew
    Corbin (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-Q for the quarter
    ended September 30, 2003)    
|            | 10 | .49* |  |             |  |  |  | Employment Agreement, dated as of
    December 4, 2003, between Envoy Corporation and Tony
    Holcombe                                                                                                                                              
|            | 12 | .1   |  |             |  |  |  | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                    
|            | 14 | .1** |  |             |  |  |  | Code of Business Conduct                                                                                                                                                                                                                             
|            | 21 |      |  |             |  |  |  | Subsidiaries of Registrant                                                                                                                                                                                                                           
|            | 23 | .1   |  |             |  |  |  | Consent of Ernst & Young
    LLP, Independent Auditors                                                                                                                                                                                               
|            | 24 | .1   |  |             |  |  |  | Power of Attorney (see page 85)                                                                                                                                                                                                                      
|            | 31 | .1   |  |             |  |  |  | Rule 13a-14(a)/15d-14(a) Certification of
    Chief Executive Officer of Registrant                                                                                                                                                                  
|            | 31 | .2   |  |             |  |  |  | Rule 13a-14(a)/15d-14(a) Certification of
    Chief Financial Officer of Registrant                                                                                                                                                                  
|            | 32 | .1   |  |             |  |  |  | Statement of Chief Executive Officer of
    Registrant Pursuant to 18 U.S.C. § 1350                                                                                                                                                                  
|            | 32 | .2   |  |             |  |  |  | Statement of Chief Financial Officer of
    Registrant Pursuant to 18 U.S.C. § 1350                                                                                                                                                                  
|            | 99 | .1   |  |             |  |  |  | Amended and Restated Audit Committee Charter                                                                                                                                                                                                         
|            | 99 | .2   |  |             |  |  |  | Compensation Committee Charter                                                                                                                                                                                                                       
|            | 99 | .3   |  |             |  |  |  | Amended and Restated Nominating Committee Charter                                                                                                                                                                                                    



---



|  |                                             
|- | --------------------------------------------
|* | Agreement relates to executive compensation.



|   |                          
|-- | -------------------------
|** | To be filed by amendment.

E-5