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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended September 30, 2001 or

[   ] 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: 000-29377

Landacorp, Inc.(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3346710                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification Number)

4151 Ashford Dunwoody Road, Suite 505Atlanta, Georgia 30319(Address of principal executive offices including zip code)

(404) 531-9956(Registrants telephone number, including area code)



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

Number of shares of Common stock, par value of $0.001, outstanding as of
September 30, 2001: 15,666,305



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1



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TABLE OF CONTENTS



|                                                                                              |                                                      |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                     
|                                                                                              | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                                                              | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                                                              | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II OTHER INFORMATION                                                                    
|Item 1. Legal Proceedings                                                                    
|Item 2. Changes in Securities                                                                
|Item 3. Defaults in Senior Securities                                                        
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 5. Other Information                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|Amendment to the 1998 Equity Incentive Plan                                                  



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##### Table of Contents



Landacorp, Inc.
TABLE OF CONTENTS

|           |  |                       |                                                                                       |  |    |                                                                                                                               |  |          |   | 
|---------- |  | --------------------- | ------------------------------------------------------------------------------------- |  | -- | ----------------------------------------------------------------------------------------------------------------------------- |  | -------- | - | 
|           |  |                       |                                                                                       |  |    |                                                                                                                               |  | Page No.
|           |  |                       |                                                                                       |  |    |                                                                                                                               |  |         
|PART I.    |  | Financial Information |                                                                                       |  |    |                                                                                                                              
|          
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|          
|          
|Item 1.    |  |                       | Financial Statements (unaudited):                                                     |  |    |                                                                                                                               | 
|          
|          
|          
|          
|           |  |                       |                                                                                       |  |    | Condensed Consolidated Balance Sheets
as of September 30, 2001 and December 31, 2000                                          |  |          | 3 | 
|          
|          
|          
|          
|           |  |                       |                                                                                       |  |    | Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2001 and September 30, 2000 |  |          | 4 | 
|          
|          
|          
|          
|           |  |                       |                                                                                       |  |    | Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and September 30, 2000           |  |          | 5 | 
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|          
|           |  |                       |                                                                                       |  |    | Notes to Condensed Consolidated Financial Statements                                                                          |  |          | 6 | 
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|Item 2.    |  |                       | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |    | 9                                                                                                                             | 
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|Item 3.    |  |                       | Quantitative and Qualitative Disclosures About Market Risk                            |  |    | 29                                                                                                                            | 
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|PART II.   |  |                       | Other Information                                                                     |  |    |                                                                                                                               | 
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|Item 1.    |  |                       | Legal Proceedings                                                                     |  |    | 29                                                                                                                            | 
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|Item 2:    |  |                       | Changes in Securities and Use of Proceeds                                             |  |    | 29                                                                                                                            | 
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|Item 3:    |  |                       | Defaults Upon Senior Securities                                                       |  |    | 29                                                                                                                            | 
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|Item 4:    |  |                       | Submission of Matters to a Vote of Security Holders                                   |  |    | 29                                                                                                                            | 
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|Item 5:    |  |                       | Other Information                                                                     |  |    | 29                                                                                                                            | 
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|Item 6.    |  |                       | Exhibits and Reports on Form 8-K                                                      |  |    | 30                                                                                                                            | 
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|          
|Signatures |  |                       |                                                                                       |  | 30 |                                                                                                                              

2



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##### Table of Contents









PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)




LANDACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)

|                                       |                                                                                                                       |                            |        |               |        |              |        |         |        | 
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------- | ------ | ------------ | ------ | ------- | ------ | 
|                                       |                                                                                                                       |                            |        | September 30, |        | December 31,
|                                       |                                                                                                                       |                            |        | 2001          |        | 2000        
|                                       |                                                                                                                       |                            |        |               |        |             
|                                       |                                                                                                                       |                            |        | (unaudited)   |        |              |        |        
|ASSETS                                 |                                                                                                                       |                            |        |               |        |              |        |        
|                                      
|                                      
|                                      
|                                      
|CURRENT ASSETS:                        |                                                                                                                       |                            |        |               |        |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                                                             |                            | $      | 12,943        |        |              | $      | 21,752  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable and costs
and estimated earnings in excess
of billings on uncompleted
contracts, net              |                            |        | 3,124         |        |              |        | 5,316   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Other current assets                                                                                                  |                            |        | 932           |        |              |        | 781     |       
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | Total current assets       |        |               | 16,999 |              |        |         | 27,849 | 
|                                      
|                                      
|                                      
|                                      
|PROPERTY AND EQUIPMENT, NET            |                                                                                                                       |                            | 2,206  |               |        |              | 2,626  |        
|                                      
|                                      
|                                      
|                                      
|INTANGIBLE ASSETS, NET                 |                                                                                                                       |                            | 12,701 |               |        |              | 15,210 |        
|                                      
|                                      
|                                      
|                                      
|OTHER ASSETS                           |                                                                                                                       |                            | 85     |               |        |              | 136    |        
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | $                          | 31,991 |               |        | $            | 45,821 |        
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|LIABILITIES AND STOCKHOLDERS EQUITY   |                                                                                                                       |                            |        |               |        |              |        |        
|                                      
|                                      
|                                      
|                                      
|CURRENT LIABILITIES                    |                                                                                                                       |                            |        |               |        |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                                                                                      |                            | $      | 1,005         |        |              | $      | 1,413   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued expenses                                                                                                      |                            |        | 3,599         |        |              |        | 4,273   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred revenue and billings in
excess of costs and estimated
earnings on uncompleted
contracts                      |                            |        | 4,812         |        |              |        | 4,168   |       
|                                      
|                                      
|                                      
|                                      
|                                       | Current portion of long-term debt                                                                                     |                            |        | 78            |        |              |        | 77      |       
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | Total current liabilities  |        |               | 9,494  |              |        |         | 9,931  | 
|                                      
|                                      
|                                      
|                                      
|LONG-TERM DEBT, NET OF CURRENT PORTION |                                                                                                                       |                            | 168    |               |        |              | 229    |        
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | Total liabilities          |        |               | 9,662  |              |        |         | 10,160 | 
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|STOCKHOLDERS EQUITY:                  |                                                                                                                       |                            |        |               |        |              |        |        
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock, $0.001 par value,
50,000,000 shares authorized;
15,666,305 and 14,916,000 shares
issued and outstanding |                            |        | 16            |        |              |        | 15      |       
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid-in capital                                                                                            |                            |        | 58,048        |        |              |        | 57,815  |       
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock to be issued                                                                                             |                            |        |              |        |              |        | 516     |       
|                                      
|                                      
|                                      
|                                      
|                                       | Notes receivable from officers                                                                                        |                            |        | (172          | )      |              |        | (187    | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Unearned stock-based compensation                                                                                     |                            |        | (571          | )      |              |        | (2,324  | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                                                                                   |                            |        | (34,992       | )      |              |        | (20,174 | )     
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | Total stockholders equity |        |               | 22,329 |              |        |         | 35,661 | 
|                                       |                                                                                                                       |                            |        |               |        |              |        |        
|                                       |                                                                                                                       | $                          | 31,991 |               |        | $            | 45,821 |        
|                                       |                                                                                                                       |                            |        |               |        |              |        |        

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

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##### Table of Contents






LANDACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share data)

|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |       |        | 
|----------------------------------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | ------------------- | ----- | ------------------- | ------ | ----- | ----- | ---- | ------- | ----- | ------ | - | ------ | ----- | ------ | 
|                                                                                    |                                      |                          |        | Three month period  |       | Nine month period  
|                                                                                    |                                      |                          |        | ended September 30, |       | ended September 30,
|                                                                                    |                                      |                          |        |                     |       |                    
|                                                                                    |                                      |                          |        | 2001                |       | 2000                |        | 2001  |       | 2000
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |     
|REVENUE:                                                                            |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Program revenue and maintenance fees |                          | $      | 3,480               |       |                     | $      | 597   |       |      | $       | 8,889 |        |   | $      | 1,902 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | System sales and consulting fees     |                          |        | 384                 |       |                     |        | 3,371 |       |      |         | 2,916 |        |   |        | 7,741 |       
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                    |                                      | Total revenues           |        |                     | 3,864 |                     |        |       | 3,968 |      |         |       | 11,805 |   |        |       | 9,643  | 
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|COST OF REVENUE:                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Program revenue and maintenance fees |                          |        | 1,691               |       |                     |        | 158   |       |      |         | 5,222 |        |   |        | 496   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | System sales and consulting fees     |                          |        | 568                 |       |                     |        | 1,077 |       |      |         | 2,460 |        |   |        | 3,172 |       
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                    |                                      | Total cost of revenue    |        |                     | 2,259 |                     |        |       | 1,235 |      |         |       | 7,682  |   |        |       | 3,668  | 
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|GROSS PROFIT                                                                        |                                      |                          | 1,605  |                     |       |                     | 2,733  |       |       |      | 4,123   |       |        |   | 5,975  |      
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|OPERATING EXPENSES:                                                                 |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Sales and marketing                  |                          |        | 1,115               |       |                     |        | 1,583 |       |      |         | 4,621 |        |   |        | 4,884 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Research and development             |                          |        | 1,316               |       |                     |        | 996   |       |      |         | 5,194 |        |   |        | 2,452 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | General and administrative           |                          |        | 1,959               |       |                     |        | 1,136 |       |      |         | 6,494 |        |   |        | 3,424 |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Amortization of intangible assets    |                          |        | 507                 |       |                     |        | 87    |       |      |         | 1,553 |        |   |        | 224   |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Restructuring charge                 |                          |        | 231                 |       |                     |        |      |       |      |         | 960   |        |   |        |      |       
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                    | Impairment of intangible assets      |                          |        |                    |       |                     |        |      |       |      |         | 704   |        |   |        |      |       
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|                                                                                    |                                      | Total operating expenses |        |                     | 5,128 |                     |        |       | 3,802 |      |         |       | 19,526 |   |        |       | 10,984 | 
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|LOSS FROM OPERATIONS                                                                |                                      |                          | (3,523 | )                   |       |                     | (1,069 | )     |       |      | (15,403 | )     |        |   | (5,009 | )    
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|INTEREST AND OTHER INCOME                                                           |                                      |                          | 125    |                     |       |                     | 548    |       |       |      | 603     |       |        |   | 1,331  |      
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|INTEREST EXPENSE                                                                    |                                      |                          | (5     | )                   |       |                     | (9     | )     |       |      | (18     | )     |        |   | (34    | )    
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|NET LOSS                                                                            |                                      | $                        | (3,403 | )                   |       | $                   | (530   | )     |       | $    | (14,818 | )     |        | $ | (3,712 | )    
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |      
|NET LOSS PER SHARE  BASIC AND DILUTED                                              |                                      | $                        | (0.23  | )                   |       | $                   | (0.04  | )     |       | $    | (1.00   | )     |        | $ | (0.33  | )    
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |       |       
|Weighted average common and common
equivalent shares outstanding; basic and
diluted |                                      |                          | 15,110 |                     |       |                     | 12,976 |       |       |      | 14,893  |       |        |   | 11,352 |      
|                                                                                    |                                      |                          |        |                     |       |                     |        |       |       |      |         |       |        |   |        |       |       

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

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##### Table of Contents






LANDACORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |        |       |        |        |  
|---------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ----------------------------------------- | ----- | ------------------- | ------ | ------ | ----- | ------ | ------ | -
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       | Nine month period  
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       | ended September 30,
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                    
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       | 2001                |        | 2000  
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Net loss                                                                         |                                                   | $                                                                                                   | (14,818                                   | )     |                     | $      | (3,712 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile net loss to net cash used in operating activities:      |                                                   |                                                                                                     |                                           |       |                     |        |        |      
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Depreciation and amortization                     |                                                                                                     |                                           | 2,573 |                     |        |        | 745   |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Provision of doubtful accounts                    |                                                                                                     |                                           | 689   |                     |        |        | 126   |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Amortization of unearned stock-based compensation |                                                                                                     |                                           | 1,260 |                     |        |        | 1,406 |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Impairment of intangible assets                   |                                                                                                     |                                           | 704   |                     |        |        |      |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Loss on sale of equipment                         |                                                                                                     |                                           | 59    |                     |        |        |      |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  | Changes in operating assets and liabilities:      |                                                                                                     |                                           |       |                     |        |        |       |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  |                                                   | Accounts receivable and costs and estimated
billings in excess of billings on uncompleted
contracts |                                           |       | 1,503               |        |        |       | (2,120 | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  |                                                   | Other assets                                                                                        |                                           |       | (151                | )      |        |       | (185   | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  |                                                   | Accounts payable                                                                                    |                                           |       | (408                | )      |        |       | (96    | )     
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  |                                                   | Accrued expenses                                                                                    |                                           |       | (333                | )      |        |       | 272    |       
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                  |                                                   | Deferred revenue and billings in excess of
costs and estimated earnings on uncompleted
contracts    |                                           |       | 644                 |        |        |       | 40     |       
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                               |                                                                                  |                                                   |                                                                                                     | Net cash used in operating activities     |       |                     | (8,278 | )      |       |        | (3,524 | )
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Capitalized software development costs                                           |                                                   |                                                                                                     | (126                                      | )     |                     |        | (89    | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from the sale of equipment                                              |                                                   |                                                                                                     | 4                                         |       |                     |        |       |      
|                                              
|                                              
|                                              
|                                              
|                                               | Purchases of property and equipment                                              |                                                   |                                                                                                     | (576                                      | )     |                     |        | (694   | )    
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                               |                                                                                  |                                                   |                                                                                                     | Net cash used in investing activities     |       |                     | (698   | )      |       |        | (783   | )
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from borrowing on line of credit                                        |                                                   |                                                                                                     |                                          |       |                     |        | 217    |      
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from borrowing on long-term debt                                        |                                                   |                                                                                                     |                                          |       |                     |        | 15     |      
|                                              
|                                              
|                                              
|                                              
|                                               | Payments on long-term debt                                                       |                                                   |                                                                                                     | (60                                       | )     |                     |        | (1,518 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Collection on note receivable from officers                                      |                                                   |                                                                                                     | 43                                        |       |                     |        | 2      |      
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from issuance of common stock and exercise of common stock options, net |                                                   |                                                                                                     | 184                                       |       |                     |        | 35,778 |      
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|                                               |                                                                                  |                                                   |                                                                                                     | Net cash provided by financing activities |       |                     | 167    |        |       |        | 34,494 |  
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|INCREASE IN CASH AND CASH EQUIVALENTS          |                                                                                  |                                                   | (8,809                                                                                              | )                                         |       |                     | 30,187 |       
|                                              
|                                              
|                                              
|                                              
|CASH AND CASH EQUIVALENTS, beginning of period |                                                                                  |                                                   | 21,752                                                                                              |                                           |       |                     | 1,884  |       
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       
|CASH AND CASH EQUIVALENTS, end of period       |                                                                                  | $                                                 | 12,943                                                                                              |                                           |       | $                   | 32,071 |       
|                                               |                                                                                  |                                                   |                                                                                                     |                                           |       |                     |        |       

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

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LANDACORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | The Company and Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Landacorp, Inc. was established in 1982 and, along with its subsidiaries
(collectively referred to herein as the Company), offers population health
management solutions to healthcare payer and delivery organizations. Our
products and services, which include unique predictive targeting
applications, intervention software, and member-driven disease management
programs, are marketed along with comprehensive Internet- and Windows®-based
medical management software. These solutions help manage and prevent
healthcare cost, while improving quality in the continuum of care. The
Companys corporate headquarters and sales and marketing offices are located
in Atlanta, Georgia, with operations located in Raleigh, North Carolina,
Chico, California and Montclair, New Jersey.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The accompanying unaudited financial statements of the Company have been
prepared pursuant to the rules of the Securities and Exchange Commission
(the SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. These unaudited financial statements should be read in
conjunction with the audited financial statements and notes thereto included
in the Companys Annual Report on Form 10-K (as amended) for the year ended
December 31, 2000, as amended. The balance sheet at December 31, 2000 is
derived from the audited financial statements included in the Form 10-K (as
amended) for the year ended December 31, 2000. However, this Form 10-Q does
not include all Form 10-K and other disclosures required by generally
accepted accounting principles in the United States for the balance sheet as
presented herein. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the results for the
periods presented.
|  
|   |  | The consolidated results of operations presented for the three and
nine-month periods ended September 30, 2001 are not necessarily indicative
of the results to be expected for any other interim period or any future
fiscal year. Certain prior period balances have been reclassified in order
to conform with current period presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|2. |  | Revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Program revenues and maintenance fees represent repeat and recurring revenue
streams, such as per member per month licensing and servicing revenues, per
participant per year fees and support charges for maintaining software.
System sales and consulting fees represent one-off or non-recurring and
non-repeat revenue, such as sales of perpetual licenses, implementation and
ad-hoc consulting or training services. The revenues and costs for 2000
have been re-categorized into these groups for comparison purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|3. |  | Net loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of
common and potential common shares outstanding during the period if their
effect is dilutive. Potential common shares include common stock subject to
repurchase and incremental common shares issuable upon the exercise of stock
options. The potential common shares, which are excluded from the
determination of diluted net loss per share as the effect of such shares is
anti-dilutive, were 4,027,000 and 1,699,000 at September 30, 2001 and
September 30, 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|4. |  | Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | In March 2001, the Company increased the number of its authorized shares of
Common Stock from 15,000,000 to 50,000,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|5. |  | Restructuring and Impairment of Asset Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In May 2001, the Company announced a reduction in work force representing
approximately 16%, or 40 employees of the Companys total work force. During
May 2001, the Company also announced its plan to discontinue operations of
its Portland, Oregon-based Interactive Media Group (IMG). In July 2001, the
Company discontinued operations of IMG. On August 8, 2001, the Company
announced an additional reduction in work force of approximately 18%, or 36
employees. The Company recorded a restructuring charge of $231,000 in the
three-month period ended September 30, 2001 relating to severance costs and
additional lease obligations related to unoccupied office space that the
Company had committed to. The Company recorded a restructuring charge of
$960,000 in the nine-month period ended September 30, 2001 relating to
severance costs, the closing of the IMG operations and additional lease
obligations related to unoccupied office space that the Company had
committed to. The balance of the accrued restructuring charge on September
30, 2001 was $376,000. During the nine-month period ended September 30,
2001, the Company recorded an impairment charge of $704,000 on the
intangible assets related to IMG in operating expenses.
|  
|6. |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In June 2001, the Financial Accounting Standards Board FASB issued
Financial Accounting Standard No. 141 - Business Combinations (SFAS 141).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Additionally, the use
of the pooling-of-interests method will be prohibited. Our adoption of SFAS
141 is not expected to have a material effect on our results of operations
or financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | In June 2001, the Financial Accounting Standards Board FASB issued
Financial Accounting Standard No. 142 - Goodwill and Other Intangible Assets
(SFAS 142).SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of SFAS 142. SFAS 142 will be effective for the
Companys fiscal year beginning January 1, 2002. Upon the effective date of
this statement,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|   |  | amortization of goodwill recorded in conjunction with our acquisition of
ProMedex and PatientCentrix will cease. We are currently evaluating this
standard and the impact it will have on the consolidated financial
statements, however we expect it will have the impact of reducing
amortization of intangible assets commencing January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In August 2001, the Financial Accounting Standards Board FASB issued
Statement of Financial Accounting Standards (SFAS) No. 144 -
Accounting for the Impairment or Disposal of Long- Lived Assets. SFAS No.
144 establishes accounting and reporting standards for the impairment
and disposition of long- lived assets. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15,
2001. We will be required to adopt SFAS No. 144 for the fiscal year
beginning January 1, 2002, and we are currently evaluating this standard
and the impact it will have on the consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|7. |  | Additional Purchase Consideration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | On November 2, 2000 the Company acquired 100% of the outstanding capital
stock of PatientCentrix, Inc. (PatientCentrix). The majority shareholder
of PatientCentrix became an employee and Director of the Company. During the
nine months ended September 30, 2001, the Company and the majority
shareholder entered into a Settlement Agreement and Mutual Release
(Agreement) whereby the Company and majority shareholder mutually agreed
to terminate the employment relationship and to release each other from any
claims arising from or related to the employment relationship. As part of
the Agreement, the majority shareholder also resigned from his position as a
member of the Companys Board of Directors. The majority shareholder
released the Company from any and all claims that the termination of
employment in and of itself violates the Merger Agreement or interferes with
or negatively impacts the payment of any earnout under the Merger Agreement
or achievement of any related milestone event. The agreement requires the
Company to make payments to the majority shareholder of approximately
$800,000 and to allow the vesting of the majority shareholders options and
allow the options to be immediately exercisable. The amount related to this
accelerated vesting is approximately $277,000. As of September 30, 2001,
accrued acquisition costs relating to this acquisition were approximately
$733,000. In accordance with the purchase accounting described in the
Companys Form 10-K (as amended) for the year ended December 31, 2000, the
Settlement and Mutual Release amount of $1,077,000 has been recorded as
goodwill.

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

This quarterly report contains forward-looking statements for purposes of the
Securities Litigation Reform Act of 1995 and it is Landacorps intention that
such statements be protected by the safe harbor . Examples of such forward
looking statements include, without limitation statements regarding Landacorps
anticipated expenses, revenues and financial results and business performance
for 2001, the expected impact of our adoption of SFAS 142 on future
amortization on intangible assets, severance charges related to work force
reductions, support for our Maxsys I product, future strategic acquisitions and
relationships, the potential operating cost savings resulting from our work
force reductions, and the sufficiency of cash and cash equivalents and stock
offering proceeds for our working capital and operating expense requirements.
Actual results may differ materially from those projected in such
forward-looking statements due to various known and unknown risks and
uncertainties, including the risk that a slowdown in the economy generally or
the market for our products and services will adversely affect our business,
our dependence on a limited number of products with limited market acceptance,
the risk that the market for our strategic healthcare management solutions does
not develop as anticipated, and the risk that we are unable to successfully
integrate the products and service offerings of our recent acquisitions and
successfully capitalize on anticipated synergies and growth opportunities. For
further information regarding these and the other risks related to our
business, investors should consult the discussion set forth herein under the
section Additional Factors That May Effect our Future Results our filings
with the Securities and Exchange Commission, including its Form 10-K for the
year ended December 31, 2000, as amended.

OVERVIEW

Landacorp provides population health management solutions to healthcare
payer and delivery organizations. Our products and services, which include
unique predictive targeting applications, intervention software, and member-driven
disease management programs, are marketed along with comprehensive
Internet- and Windows®-based medical management software to help manage and prevent
healthcare cost, while improving quality in the continuum of care. Our disease
management solutions help our clients identify health plan members with chronic
illnesses or potentially high-predicted expenditure outcomes associated with
their condition, and deliver consistent and appropriate educational,
motivational and monitoring information. Our medical management software
automates and streamlines administrative, business and clinical processes. As
of September 30, 2001, approximately 30 payers who claim to have a combined
membership of approximately 30 million participants were using our payer
solutions, and approximately 140 healthcare delivery organizations were using
our provider solutions.

We have historically derived revenues from the installation and licensing of
our maxMC and Maxsys medical management software solutions, sublicensing
third-party software applications as part of system implementations and
delivery of post-contract customer support, training and consulting services.
We are currently focusing our primary development, sales and marketing efforts
on our DSSeries of predictive modeling and intervention software; our Managing
for Tomorrow member-driven disease management products and services; and our
maxMC, e-maxMC and Maxsys II medical management software products. Although we
do not anticipate future system sales or enhancements of Maxsys I, we continue
to provide maintenance services

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to, and receive maintenance fees from, customers who purchased this product in
the past. We plan to continue to support Maxsys I for the foreseeable future as
a service to such customers and pursuant to ongoing contractual obligations.

Traditionally, we have recognized system sales revenues and associated costs
using the percentage-of-completion method, with labor hours incurred relative
to total estimated contract hours as the measure of progress towards
completion. We recognize revenues from sublicensing of third-party software
upon installation of such software. We recognize revenues from support services
ratably over the support period. We recognize revenues from training and
consulting as such services are delivered.

We introduced a new subscription-based fee structure for our e-maxMC and maxMC
solutions during 2000 that provides for implementation services at a fixed
hourly rate and the licensing of installed systems and post customer contract
support through a monthly subscription fee based upon the number of members
covered by the payer organization. Subscription-based contracts allow us to
recognize the fair value of the implementation services as such services are
delivered and recognize subscription fees on a monthly basis. With the
acquisition of DSSeries and Managing for Tomorrow population health and disease
management products in November 2000, we now have additional products for which
revenue is recognized on a subscription fee based methodology. The majority of
DSSeries revenue is recorded on a per member per month basis. Revenue received
from our Managing for Tomorrow member-driven disease management program is
invoiced on a participant per year basis.

To accelerate the implementation of elements of our strategy, we intend to
target and pursue strategic acquisitions and relationships, such as marketing
alliances with vendors of complementary products and services and partnerships
with providers of healthcare content, disease management and health-related
e-commerce services. Investigating or entering into any such strategic
relationships could lead to additional expenditures.

On May 9, 2001 we announced an impairment charge in the amount of $704,000 in
the first quarter 2001 for intangible assets acquired in connection with the
acquisition of the Portland, Oregon-based Interactive Media Group (IMG). In
May 2001, management determined that the operations of IMG should be
discontinued due to the slowdown in the web design and consulting industry.
The IMG operations were discontinued on July 9, 2001. The employees of IMG are
included in the description of the reduction in workforce below.

We also announced on May 9, 2001 a reduction in our work force of approximately
16%, or 40 employees. This included the closing of our IMG operation, as well
as the elimination of a number of positions in our medical management
operations. On August 8, 2001, we announced an additional reduction in our work
force of approximately 18%, or 36 employees.

RECENT ACQUISITIONS

On January 31, 2000, we purchased from High Technology Solutions, Inc. assets
related to its business of providing Web site services to healthcare payers
(this business is also referred to as Interactive Media Group or IMG). The
purchase price for the assets was $1,268,000 (including an estimated $18,000 in
assumed liabilities) of which we paid $250,000 at the closing. We paid the
remaining balance in April 2000. The acquired assets included equipment, know
how, trademarks and other intangible rights used by High Technology Solutions,
Inc. in the operation

10



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of its business of providing Web site services to healthcare payers, as well as
contracts, none of which were material to our business. In connection with the
acquisition we hired a number of former employees of High Technology Solutions,
Inc.

The purchase price was allocated to the various tangible and intangible assets
acquired. The acquired intangible assets were amortized over their estimated
useful lives of twenty-four to thirty-nine months. On May 9, 2001 we announced
an impairment charge in the amount of $704,000 in the first quarter 2001 on
intangible assets acquired in connection with the acquisition of IMG. In May
2001, management determined that the operations of IMG should be discontinued
due to the slowdown in the web design and consulting industry. The IMG
operations were discontinued on July 9, 2001.

On October 27, 2000 we completed the acquisition of assets and liabilities of
the ProMedex business from PMX Holdings, Inc., or ProMedex, a provider of
population and disease management programs and services. The total purchase
price of $4,632,000 consisted of $585,000 cash, $516,000 in our common stock
(250,000 shares), other acquisition related expenses of approximately $319,000,
consisting primarily of payment for legal and financial advisory services and
the assumption of liabilities in the amount of $3,212,000. The purchase price
was allocated to intangible assets, including existing technology ($1,600,000),
customer base ($510,000), assembled work force ($430,000), and goodwill
($2,092,000).

On November 2, 2000 we completed the acquisition of PatientCentrix, Inc., a
provider of population management targeting and intervention programs and
services. The Company acquired 100% of the shares and assumed all outstanding
options of PatientCentrix in return for cash of $5,850,000 paid to the
stockholders and option holders, and issued 1,157,000 shares to the
stockholders of PatientCentrix. The price of the shares issued was $1.777
based on the average price during the 20 trading days prior to the date of the
definitive agreement, which was October 31, 2000. We also assumed all of the
incentive stock options issued by PatientCentrix prior to the acquisition.
These are now options to purchase up to 1,582,532 shares of our Common Stock
with an average exercise price of $1.525. The total purchase price of
$11,188,000 consisted of $5,850,000 cash, $2,056,000 in our Common Stock
(1,157,000 shares), assumed stock options with a fair value of $2,970,000, and
other acquisition related expenses of approximately $312,000, consisting
primarily of payment for legal and financial advisory services. Of the total
purchase price, approximately $191,000 was allocated to the net tangible
assets, approximately $961,000 was allocated to unearned compensation related
to our right to repurchase 30% of the shares of the Companys Common Stock and
options to purchase our Common Stock issued to employees of PatientCentrix
pursuant to the purchase agreement in the event of such employees termination
under certain circumstances, and the remainder was allocated to intangible
assets, including existing technology ($3,600,000), customer base ($640,000),
assembled work force ($280,000), and goodwill ($5,516,000). Additionally, based
on the total contract value of sales for PatientCentrix software and services,
capped at $50 million in orders for the twelve months from the closing of the
acquisition; up to $6 million in additional cash will be paid to the
shareholders and option holders of PatientCentrix, based on their pro rata
ownership of PatientCentrix stock. As of September 30, 2001, we have recorded
$1,077,000 as additional purchase consideration.

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RESULTS OF OPERATIONS

The following tables present the statement of operations data as a percentage
of total revenues (in thousands):

|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |      |       | 
|------------------------- | ------------------------------------ | ------------------------ | ------ | ------------------------ | ----- | ---------- | ------ | ----- | ----- | ---- | ----- | ---- | ----- |  | ----- | ---- | ----- | 
|                          |                                      |                          |        | Three month period ended |       | Percent of
|                          |                                      |                          |        | September 30,            |       | Revenues  
|                          |                                      |                          |        |                          |       |           
|                          |                                      |                          |        | 2001                     |       | 2000       |        | 2001  |       | 2000
|                          |                                      |                          |        |                          |       |            |        |       |       |     
|REVENUE:                  |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Program revenue and maintenance fees |                          | $      | 3,480                    |       |            | $      | 597   |       |      |       | 90.1 | %     |  |       | 15.0 | %    
|                         
|                         
|                         
|                         
|                          | System sales and consulting fees     |                          |        | 384                      |       |            |        | 3,371 |       |      |       | 9.9  |       |  |       | 85.0 |      
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                          |                                      | Total revenues           |        |                          | 3,864 |            |        |       | 3,968 |      |       |      | 100.0 |  |       |      | 100.0 | 
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|COST OF REVENUE:          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Program revenue and maintenance fees |                          |        | 1,691                    |       |            |        | 158   |       |      |       | 43.8 |       |  |       | 4.0  |      
|                         
|                         
|                         
|                         
|                          | System sales and consulting fees     |                          |        | 568                      |       |            |        | 1,077 |       |      |       | 14.7 |       |  |       | 27.1 |      
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                          |                                      | Total cost of revenue    |        |                          | 2,259 |            |        |       | 1,235 |      |       |      | 58.5  |  |       |      | 31.1  | 
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|GROSS PROFIT              |                                      |                          | 1,605  |                          |       |            | 2,733  |       |       |      | 41.5  |      |       |  | 68.9  |     
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|OPERATING EXPENSES:       |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Sales and marketing                  |                          |        | 1,115                    |       |            |        | 1,583 |       |      |       | 28.9 |       |  |       | 39.9 |      
|                         
|                         
|                         
|                         
|                          | Research and development             |                          |        | 1,316                    |       |            |        | 996   |       |      |       | 34.1 |       |  |       | 25.1 |      
|                         
|                         
|                         
|                         
|                          | General and administrative           |                          |        | 1,959                    |       |            |        | 1,136 |       |      |       | 50.7 |       |  |       | 28.6 |      
|                         
|                         
|                         
|                         
|                          | Amortization of intangible assets    |                          |        | 507                      |       |            |        | 87    |       |      |       | 13.1 |       |  |       | 2.2  |      
|                         
|                         
|                         
|                         
|                          | Restructuring charge                 |                          |        | 231                      |       |            |        |      |       |      |       | 5.9  |       |  |       | 0.0  |      
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|                          |                                      | Total operating expenses |        |                          | 5,128 |            |        |       | 3,802 |      |       |      | 132.7 |  |       |      | 95.8  | 
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|LOSS FROM OPERATIONS      |                                      |                          | (3,523 | )                        |       |            | (1,069 | )     |       |      | (91.2 | )    |       |  | (26.9 | )   
|                         
|                         
|                         
|                         
|INTEREST AND OTHER INCOME |                                      |                          | 125    |                          |       |            | 548    |       |       |      | 3.2   |      |       |  | 13.7  |     
|                         
|                         
|                         
|                         
|INTEREST EXPENSE          |                                      |                          | (5     | )                        |       |            | (9     | )     |       |      | (0.1  | )    |       |  | (0.2  | )   
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     
|NET LOSS                  |                                      | $                        | (3,403 | )                        |       | $          | (530   | )     |       |      | (88.1 | )%   |       |  | (13.4 | )%  
|                          |                                      |                          |        |                          |       |            |        |       |       |      |       |      |       |  |       |     

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|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |      |       | 
|------------------------- | ------------------------------------ | ------------------------ | ------- | ------------------- | ------ | ---------- | ------ | ----- | ------ | ---- | ------ | ---- | ----- |  | ----- | ---- | ----- | 
|                          |                                      |                          |         | Nine month period   |        | Percent of
|                          |                                      |                          |         | ended September 30, |        | Revenues  
|                          |                                      |                          |         |                     |        |           
|                          |                                      |                          |         | 2001                |        | 2000       |        | 2001  |        | 2000
|                          |                                      |                          |         |                     |        |            |        |       |        |     
|REVENUE:                  |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Program revenue and maintenance fees |                          | $       | 8,889               |        |            | $      | 1,902 |        |      |        | 75.3 | %     |  |       | 19.7 | %    
|                         
|                         
|                         
|                         
|                          | System sales and consulting fees     |                          |         | 2,916               |        |            |        | 7,741 |        |      |        | 24.7 |       |  |       | 80.3 |      
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                          |                                      | Total revenues           |         |                     | 11,805 |            |        |       | 9,643  |      |        |      | 100.0 |  |       |      | 100.0 | 
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|COST OF REVENUE:          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Program revenue and maintenance fees |                          |         | 5,222               |        |            |        | 496   |        |      |        | 44.2 |       |  |       | 5.1  |      
|                         
|                         
|                         
|                         
|                          | System sales and consulting fees     |                          |         | 2,460               |        |            |        | 3,172 |        |      |        | 20.9 |       |  |       | 32.9 |      
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                          |                                      | Total cost of revenue    |         |                     | 7,682  |            |        |       | 3,668  |      |        |      | 65.1  |  |       |      | 38.0  | 
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|GROSS PROFIT              |                                      |                          | 4,123   |                     |        |            | 5,975  |       |        |      | 34.9   |      |       |  | 62.0  |     
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|OPERATING EXPENSES:       |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                         
|                         
|                         
|                         
|                          | Sales and marketing                  |                          |         | 4,621               |        |            |        | 4,884 |        |      |        | 39.1 |       |  |       | 50.6 |      
|                         
|                         
|                         
|                         
|                          | Research and development             |                          |         | 5,194               |        |            |        | 2,452 |        |      |        | 44.0 |       |  |       | 25.4 |      
|                         
|                         
|                         
|                         
|                          | General and administrative           |                          |         | 6,494               |        |            |        | 3,424 |        |      |        | 55.0 |       |  |       | 35.5 |      
|                         
|                         
|                         
|                         
|                          | Amortization of intangible assets    |                          |         | 1,553               |        |            |        | 224   |        |      |        | 13.2 |       |  |       | 2.4  |      
|                         
|                         
|                         
|                         
|                          | Restructuring charge                 |                          |         | 960                 |        |            |        |      |        |      |        | 8.1  |       |  |       | 0.0  |      
|                         
|                         
|                         
|                         
|                          | Asset impairment                     |                          |         | 704                 |        |            |        |      |        |      |        | 6.0  |       |  |       | 0.0  |      
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|                          |                                      | Total operating expenses |         |                     | 19,526 |            |        |       | 10,984 |      |        |      | 165.4 |  |       |      | 113.9 | 
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|LOSS FROM OPERATIONS      |                                      |                          | (15,403 | )                   |        |            | (5,009 | )     |        |      | (130.5 | )    |       |  | (51.9 | )   
|                         
|                         
|                         
|                         
|INTEREST AND OTHER INCOME |                                      |                          | 603     |                     |        |            | 1,331  |       |        |      | 5.1    |      |       |  | 13.8  |     
|                         
|                         
|                         
|                         
|INTEREST EXPENSE          |                                      |                          | (18     | )                   |        |            | (34    | )     |        |      | (0.1   | )    |       |  | (0.4  | )   
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     
|NET LOSS                  |                                      | $                        | (14,818 | )                   |        | $          | (3,712 | )     |        |      | (125.5 | )%   |       |  | (38.5 | )%  
|                          |                                      |                          |         |                     |        |            |        |       |        |      |        |      |       |  |       |     

Comparison of the three and nine-month periods ended September 30, 2001 to the three and nine-month periods ended September 30, 2000

We have reclassified our revenue into two distinct revenue streams starting
with the first quarter of 2001. Program revenues and maintenance fees
represent repeat and recurring revenue streams, such as per member per month
licensing and servicing revenues, per participant per year fees and support
charges for maintaining software. System sales and consulting fees represent
one-off or non-recurring and non-repeat revenue, such as sales of perpetual
licenses, implementation and ad-hoc consulting or training services. The
revenues and costs for 2000 have been re-categorized into these groups for
comparison purposes.

Total revenue for the three-month period ended September 30, 2001 and 2000 was
$3,864,000 and $3,968,000, respectively. Total revenue for the nine-month
period ended September 30, 2001 and 2000 was $11,805,000 and $9,643,000,
respectively. The increases in revenue were primarily due to an increase in
program revenue and maintenance fees, which was offset by a decrease in system
sales revenue.

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Program revenue and maintenance fees increased by $2,883,000 or 482.9% from
$597,000 in the three-month period ended September 30, 2000 to $3,480,000 in
the three-month period ended September 30, 2001. Program revenue and
maintenance fees increased by $6,987,000 or 367.4% from $1,902,000 in the
nine-month period ended September 30, 2000 to $8,889,000 in the nine-month
period ended September 30, 2001. The increases were due to the addition of
DSBuilder, DSManager and Managing from Tomorrow to our product mix. These
products were acquired as part of the recent acquisition of the assets of
ProMedex and the acquisition of PatientCentrix, Inc. more fully discussed in
the Overview section.

System sales and consulting fees decreased by $2,987,000 or 88.6% from
$3,371,000 in the three-month period ended September 30, 2000 to $384,000 in
the three-month period ended September 30, 2001. The decrease in system sales
and consulting fees resulted from reduced sales of our medical management
software products.

During the three-month period ended September 30, 2001, two customers accounted
for 27.5% and 15.6% of our total revenues. Two customers accounted for 50.1%
and 11.9% of the total revenues for the three-month period ended September 30,
2000.

Cost of program revenue and maintenance fees consist principally of personnel
related expenses, product costs, related department overhead, amortization of
unearned stock-based compensation and depreciation on equipment. Cost of
program revenue and maintenance fees increased $1,533,000 or 970.3% from
$158,000 for the three-month period ended September 30, 2000 to $1,691,000 for
the three-month period ended September 30, 2001. Cost of program revenue and
maintenance fees increased by $4,726,000 or 952.8% from $496,000 for the
nine-month period ended September 30, 2000 to $5,222,000 for the nine-month
period ended September 30, 2001. The increase was primarily due to additional
salaries, benefits, other personnel-related expenses associated with the recent
acquisitions discussed in the Overview section and stock-based compensation
expense further discussed below. Additional expenses from the inclusion of
the acquired companies include the provision of certain specific direct costs
associated with the delivery of our Managing for Tomorrow programs that require
educational and other medical related supplies to be sent to participants.
None of these revenues or direct costs were part of our activities in the three
or nine-month periods ended September 30, 2000 and directly affected the gross
margins accordingly. We expect the cost of program revenues and maintenance
fees will increase in line with the increase in associated revenues as we
expand our customer base. We cannot yet determine the impact that these
anticipated increased costs or increased revenues will have on our gross margin
percentages.

Cost of system sales and consulting fees consists principally of costs incurred
in the implementation of our software products, and other consulting and
training personnel costs. The cost of system sales and consulting fees
includes personnel costs, amortization of unearned stock-based compensation,
non-reimbursed travel expenditures, related department overhead, amortization
of capitalized software development costs, costs of third party software
products, and depreciation on equipment. During the three-month period ended
September 30, 2001 these costs decreased $509,000 or 47.3% from $1,077,000 in
the three-month period ended September 30, 2000 to $568,000 for the three-month
period ended September 30, 2001. The decrease in the cost of system sales and
consulting fees was primarily due to reduced personnel related expenses due to
the 2001 reductions in force discussed above. During the nine-month period
ended September 30, 2001 these costs decreased $712,000 or 22.4% from
$3,172,000 in the nine-month period ended September 30, 2000 to $2,460,000 for
the nine-month period ended September 30,

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2001. The decrease was primarily due to reduced personnel-related expenses due
to the 2001 reductions in force discussed above

Gross profit decreased $1,128,000, or 41.3% from $2,733,000 or 68.9% of
revenues for the three-month period ended September 30, 2000 to $1,605,000 or
41.5% of revenues during the corresponding period in 2001. Gross profit
decreased $1,852,000, or 31.0% from $5,975,000 or 62.0% of revenues for the
nine-month period ended September 30, 2000 to $4,123,000 or 34.9% of revenues
during the corresponding period in 2001. The decreases in gross profit were
primarily due to the addition of DSBuilder, DSManager and Managing from
Tomorrow to our product mix and reduced sales for our medical management
software products.

Sales and marketing expenses consist principally of compensation for our sales
and marketing personnel, amortization of unearned stock-based compensation,
advertising, trade show and other promotional costs, and departmental overhead.
Sales and marketing expenses during the three-month period ended September 30,
2001 amounted to $1,115,000 representing 28.9% of total revenues, in comparison
with $1,583,000 representing 39.9% of total revenues during the corresponding
three-month period ended September 30, 2000. Sales and marketing expenses
decreased $468,000 or 29.6% from the three-month period ended September 30,
2000. The decrease was primarily due to reduced personnel-related expenses
due to the 2001 reductions mentioned above. Sales and marketing expenses
decreased $263,000 or 5.4% from the nine-month period ended September 30, 2000.
Sales and marketing expenses during the nine-month period ended September 30,
2001 were $4,621,000, representing 39.1% of total revenue as compared with
$4,884,000 representing 50.6% of total revenues during the corresponding
nine-month period ended September 30, 2000. The decrease was primarily due to
reduced personnel-related expenses due to the 2001 reductions mentioned above.

Research and development expenses consist of personnel costs, amortization of
unearned stock-based compensation, related department overhead and depreciation
on equipment. Research and development expenses increased $320,000, or 32.1%
from $996,000 in the three-month period ended September 30, 2000 to $1,316,000
in the three-month period ended September 30, 2001. Research and development
expenses increased $2,742,000, or 111.8% from $2,452,000 in the nine-month
period ended September 30, 2000 to $5,194,000 in the nine-month period ended
September 30, 2001. These increases were primarily due to increases in
salaries, benefits and other personnel-related expenses and stock-based
compensation expense arising from both of our recent acquisitions, described in
the Overview section. These costs were not present in the corresponding three
and nine-month periods of 2000. We expect these costs to decrease as a result
of the reductions in force discussed above.

General and administrative expenses consist of compensation for personnel, fees
for outside professional services, costs associated with maintaining the
company as a public corporation, amortization of unearned stock-based
compensation, occupancy costs and overhead costs. General and administrative
expenses increased $823,000 or 72.4% from $1,136,000 in the three-month period
ended September 30, 2000 to $1,959,000 in the three-month period ended
September 30, 2001. General and administrative expenses increased $3,070,000,
or 89.7% from $3,424,000 in the nine-month period ended September 30, 2000 to
$6,494,000 in the nine-month period ended September 30, 2001. Approximately
$707,000 of this increase in the nine-month period ended September 30, 2001
related to a specific increase in our bad debt reserve for a customers total
outstanding balance that is having financial difficulty in meeting their
payment obligations. Additionally, the balance of the increase in both the
three and nine-month periods

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ended September 30, 2001 was due to: additional employees arising from the
recent acquisitions; higher professional service fees, stock-based compensation
expenses, further discussed below, together with other costs associated with
operating as a public company and additional office space assumed with our
recent acquisitions associated with our population health management product
offerings.

Amortization of intangible assets increased $420,000, or 482.8% from $87,000 in
the three-month period September 30, 2000 to $507,000 in the three-month period
ended September 30, 2001. Amortization of intangible assets increased
$1,329,000, or 593.3% from $224,000 in the nine-month period ended September
30, 2000 to $1,553,000 in the nine-month period ended September 30, 2001. The
increase in the three and nine-month periods ended September 30, 2001 is due to
additional amortization expense as a result of additional goodwill related to
our acquisitions made last year. These acquisitions are all more fully
described in the Overview section.

A restructuring charge of $231,000 and $960,000 was recorded in the three and
nine-month periods ended September 30, 2001, respectively. The costs included
in the restructuring charge are primarily attributable to severance costs, the
closing of the IMG operations and additional lease obligations related to
unoccupied office space that we had committed to. In May 2001, we announced a
reduction in work force representing approximately 16%, or 40 employees of our
total work force. In July 2001, we discontinued operations of IMG. On August
8, 2001, we announced an additional reduction in our work force of
approximately 18%, or 36 employees.

On May 9, 2001 we announced and recorded an asset impairment charge of $704,000
in the three-month period ended March 31, 2001 on intangible assets acquired in
connection with the acquisition of IMG. In May 2001, management determined
that the operations of IMG should be discontinued due to the slowdown in the
web design and consulting industry. The IMG operations were discontinued on
July 9, 2001. The employees of IMG are included in the description of our
reduction in workforce found in the Overview section.

In connection with certain stock option grants and common stock issuance during
the years ended December 31, 1998, 1999 and 2000, we recognized unearned
compensation totaling $4,166,000, $1,610,000 and $1,521,000 respectively. The
2000 figure of $1,521,000 is net of a credit of $112,000 relating to employees
who have left the Company. This unearned stock based compensation is being
amortized over the vesting periods or as the Companys repurchase rights lapse
(See Note 5 of Notes to Financial Statements for year ended December 31, 2000),
as applicable, using the multiple option approach prescribed by FIN No. 28.
Amortization expense of unearned stock based compensation recognized during the
three-month period ended September 30, 2000 and 2001 was $377,000 and
$267,000, respectively. Amortization expense of unearned stock based
compensation recognized during the nine-month period ended September 30, 2000
and 2001 were $1,406,000 and $1,088,000, respectively. Amortization expense of
unearned stock based compensation was allocated to cost of sales and operating
expenses.

Interest and other income consisted primarily of earnings on our invested cash
and cash equivalents. Interest and other income decreased $423,000, or 77.2%
from $548,000 in the three-month period ended September 30, 2000 to $125,000 in
the three-month period ended September 30, 2001. Interest and other income
decreased $728,000, or 54.7% from $1,331,000 in the nine-month period ended
September 30, 2000 to $603,000 in the nine-month period ended September

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30, 2001 The decrease in interest and other income is primarily due to lower
balances of cash and cash equivalents held during the three and nine-month
periods ended September 30, 2001. Lower effective interest rates also
contributed to the decrease in interest and other income.

Interest expense decreased $4,000, or 44.4% from $9,000 in the three-month
period ended September 30, 2000 to $5,000 in the three-month period ended
September 30, 2001. Interest expense decreased $16,000, or 47.1% from $34,000
in the nine-month period ended September 30, 2000 to $18,000 in the nine-month
period ended September 30, 2001. The decrease in interest expense is due to
lower debt balances.

Provision for Income Tax. We recorded no current provision or benefit for
federal or state income taxes for the three and nine-month periods ended
September 30, 2000 or 2001, as we had incurred net operating losses and had no
carry-back potential. As of September 30, 2001, we had approximately $20
million in net operating loss carry-forwards for federal tax purposes and
approximately $11 million for state tax purposes. These federal and state tax
loss carry-forwards are available to reduce future taxable income. Utilization
of such carry-forwards may be limited in certain circumstances including, but
not limited to, cumulative stock ownership changes of more than 50 percent over
a three-year period and will expire at varying amounts during the period from
December 31, 2000 to 2014. We believe that there were cumulative changes of
ownership of greater than 50 percent in February 1998. Accordingly, the amount
of loss carry-forwards that may be utilized to reduce future taxable income for
federal and state income tax purposes may be limited. The amount of the
limitation has not yet been calculated. We have not recognized a deferred tax
asset on our balance sheet.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations through net cash generated
from operating activities, and private sales of common and preferred stock. In
addition, during February 2000, we completed our initial public offering in
which we raised net proceeds of approximately $35 million. As of September 30,
2001, we had $12.9 million in cash and cash equivalents and $7.5 million in
working capital with outstanding debt totaling $0.2 million.

Net cash used in operating activities increased by $4.8 million to $8.3 million
for the nine-month period ended September 30, 2001, from $3.5 million for the
comparable period in 2000. The primary contributions to cash from operating
activities during the nine-month period ended September 30, 2001 were
depreciation and amortization of intangible assets, provision for bad and
doubtful accounts, charges for amortization of unearned stock-based
compensation and impairment of intangible assets, a decrease in net accounts
receivable and an increase in deferred revenue, offset by a decrease in other
current assets, accounts payable and accrued liabilities. We implemented new
collections procedures during the nine-month period ended September 30, 2001,
which contributed to the decrease in outstanding accounts receivable.

Net cash used in investing activities decreased $85,000 from $783,000 in the
nine-month period ended September 30, 2000 to $698,000 in the nine-month period
ended September 30, 2001. Investing activities consist primarily of purchases
of computer equipment, office furniture and leasehold improvements, and
additions to capitalized software development costs.

Net cash provided by financing activities was $167,000 for the nine-month
period ended September 30, 2001 and $34.5 million for the comparable period in
2000. Net cash provided by

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financing activities in 2001 resulted from the proceeds from the exercise of
common stock options less certain finance lease payments. Net cash provided by
financing activities in 2000 resulted from the issuance of common stock in
connection with our initial public offering that was completed during February
2000 less the initial payment for the acquisition of Interactive Media Group,
as described more fully below, and additional finance lease payments.

We purchased our Interactive Media Group assets from High Technology Solutions,
Inc. on January 31, 2000. In connection with that acquisition, we paid High
Technology Solutions, Inc. $250,000 and delivered a promissory note in the
principal amount of $1,000,000. We paid off the balance of the promissory note
in April 2000.

On October 27, 2000 we acquired the business assets and liabilities of ProMedex
from PMX Holdings, Inc. for $4,632,000, consisting of $585,000 cash, $516,000
of our common stock (250,000 shares), other acquisition related expenses of
approximately $319,000, consisting primarily of payment for legal and financial
advisory services and the assumption of liabilities of $3,212,000. It is
anticipated that there will be additional net cash expenditures required to
fund this unit before it will become cash flow neutral or cash flow positive.

On November 2, 2000 we acquired all of the shares of PatientCentrix, Inc. for
$5,850,000 in cash, the issuance of 1,157,000 shares of the Companys common
stock and assumption of all the issued and outstanding options of
PatientCentrix, Inc. The majority shareholder of PatientCentrix became an
employee and Director of the Company. During the nine months ended September
30, 2001, the Company and the majority shareholder entered into a Settlement
Agreement and Mutual Release (Agreement) whereby the Company and majority
shareholder mutually agreed to terminate the employment relationship and to
release each other from any claims arising from or related to the employment
relationship. As part of the Agreement, the majority shareholder also resigned
from his position as a member of the Companys Board of Directors. The
agreement requires the Company to make payments to the majority shareholder of
approximately $800,000 and to allow the vesting of the majority shareholders
options and allow the options to be immediately exercisable. The amount related
to this accelerated vesting is approximately $277,000. As of September 30,
2001, the accrued amount remaining to be paid to the majority shareholder was
approximately $733,000.

On May 9, 2001 and August 8, 2001 we announced a reduction in our work force of
approximately 16%, or 40 employees and 18%, or 36 employees, respectively.
This included the closing of our IMG operation on July 9, 2001, as well as the
elimination of a number of positions in our medical management operations. We
have taken these actions as a result of industry-wide slowdowns in the web
design and consulting industry and medical management software industry. We
expect these actions to save us approximately $7.1 million in annual operating
cost.

We may utilize cash resources to fund additional acquisitions or investments in
other businesses, technologies or product lines. We believe that available cash
and cash equivalents and the net proceeds from the sale of the common stock in
our February 2000 offering will be sufficient to meet our working capital and
operating expense requirements for at least the next twelve months. Thereafter,
we may require additional funds to support our working capital and operating
expense requirements or for other purposes and may seek to raise such
additional funds through public or private debt or equity financing. There can
be no assurance that additional financing, if required, will be available to us
in amounts or on terms acceptable to us.

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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

WE HAVE A LONG HISTORY OF LOSSES AND MAY NEVER BECOME PROFITABLE

We have been in business since 1982 and we have incurred significant losses
since that time. We expect to continue to incur losses on an annual basis for
the foreseeable future. As of September 30, 2001, our accumulated deficit was
$35 million. We expect to incur increased levels of product development, sales
and marketing and administrative expenses and, as a result, we will need to
increase our revenue significantly to achieve future profitability. Further,
even if we achieve profitability, due to competition and the evolving nature of
the healthcare industry, we could fail to sustain or increase profitability on
a quarterly or annual basis.

WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR REVENUE AND
OPERATING RESULTS, AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY RESULT
IN VOLATILITY IN OUR STOCK PRICE

Our quarterly and annual revenue and operating results have varied
significantly in the past and will likely vary significantly in the future due
to a number of factors, many of which we cannot control. The factors that may
cause our quarterly revenue and operating results to fluctuate include:



| |  |  | fluctuations in demand for
our population health management solutions                                                                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of customer
orders and product implementations,
particularly orders from large customers
involving substantial implementation;                                                                         
|
| |  |  | the length of our sales
cycle, which varies and is unpredictable;                                                                                                                                                 
|
| |  |  | the length of our
implementation process, which varies, is
unpredictable and often depends on matters
outside of our control such as the
customers ability to commit its resources
to the implementation process;
|
| |  |  | our ability to enroll
health plan members in our member-driven
disease management programs;                                                                                                                       
|
| |  |  | our ability to develop,
introduce, implement and support new
products and product enhancements;                                                                                                                   
|
| |  |  | the rate of adoption of our
population health management solutions,
which often require our customers to change
some aspects of the way in which they have
traditionally conducted business;                      
|
| |  |  | announcements and new
product introductions by our competitors
and deferrals of customer orders in
anticipation of new products, services or
product                                                              

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| |   |  | enhancements introduced by us or our
competitors; and                                 
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | changes in the prices at
which we can sell our population health
management solutions.

Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. In some future periods, our operating
results may not meet expectations of public market analysts or investors. If
this occurs, our stock price may decline.

OUR BUSINESS WILL SUFFER IF OUR POPULATION HEALTH MANAGEMENT SOLUTIONS DO NOT
ACHIEVE WIDESPREAD MARKET ACCEPTANCE.

Achieving our growth objectives depends on our predictive modeling, disease
interventions and medical management software achieving widespread market
acceptance, which is difficult to determine at this time. Our solutions
currently have limited market acceptance. Achieving market acceptance for our
population health management solutions will require ongoing company
repositioning, product and service improvement and enhancement, and refined
sales and marketing efforts. If we do not gain significant market share for our
population health management solutions before our competitors introduce
alternative solutions with capabilities similar to ours, our operating results
will suffer. Our operating results will also suffer if our pricing strategies,
such as our planned subscription pricing for payers, are not economically
viable or acceptable to our customers.

THE HEALTHCARE INDUSTRY MAY NOT ACCEPT OUR POPULATION HEALTH MANAGEMENT
SOLUTIONS

To be successful, we must attract a significant number of healthcare payer
customers, such as health plans, employers and the government , and continue to
attract provider customers, such as hospitals. We cannot determine the extent
to which the payer market will accept our population health management
solutions as substitutes for traditional methods of predictive modeling,
disease intervention and medical management software. To date, many healthcare
industry participants have been cautious in accepting disease management
solutions and slow to adopt new technology solutions. We believe that the
complex nature of healthcare delivery and management among healthcare industry
participants, as well as concerns about confidentiality of patient information
may hinder the development and acceptance of new solutions such as our
predictive modeling, disease interventions and medical management software
products and services.

In addition, customers using existing disease management programs and
information systems in which they have made significant investments may refuse
to adopt our solutions if they perceive that our solutions will not complement
their existing solutions.

WE CURRENTLY DEPEND ON SALES OF OUR POPULATION HEALTH MANAGEMENT SOLUTIONS TO
ONE CUSTOMER FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE LOSS OF THIS OR
ANY OTHER CUSTOMER, OR

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ANY FUTURE CUSTOMER ON WHOM WE MAY DEPEND FOR A SIGNIFICANT PORTION OF OUR
REVENUES, COULD SIGNIFICANTLY REDUCE OUR REVENUES AND HARM BUSINESS

We currently derive 28% of our revenues from sales of our Managing for Tomorrow
member-driven disease management program from a single customer. Moreover, because
we are increasingly focusing our sales and marketing efforts on sales of our
population health management products and services to a relatively small number
of selected health plans and employers, and the government, we anticipate our
operating results will continue to depend on sales to a small number of key
customers for the foreseeable future. The loss of this single customer or one or
more of our other population health management customers, a reduction in sales
to any of them or our failure to sell our population health management
solutions to additional healthcare payers would significantly reduce our future
revenues and harm our business.

BECAUSE WE OFFER A LIMITED NUMBER OF PRODUCTS AND OPERATE EXCLUSIVELY IN THE
MARKET FOR POPULATION HEALTH MANAGEMENT SOLUTIONS, WE ARE PARTICULARLY
SUSCEPTIBLE TO COMPETITION, PRODUCT OBSOLESCENCE AND DOWNTURNS IN THE MARKET
FOR HEALTHCARE MANAGEMENT PRODUCTS

We depend on a limited number of products and we operate exclusively in the
market for healthcare management solutions. Until recently, we have derived
substantially all of our revenue from the sale and associated support of our
Maxsys II (and its predecessor Maxsys I) and maxMC (and its web-enabling
application, e-maxMC) medical management software solutions marketed to
healthcare delivery organizations and health plans, respectively. We anticipate
that a substantial amount of our revenue in the foreseeable future will be
attributable to sales and support of our DSSeries suite of predictive modeling,
targeting and interventions tools, and our Managing for Tomorrow member-driven
disease management programs marketed to health plans, employers and the
government. Dependence on a limited product line makes us particularly
susceptible to the successful introduction of, or changes in market preferences
for, competing products. In addition, operating exclusively in the market for
population health management solutions makes us particularly susceptible to
downturns in that market that may be unrelated to the quality or
competitiveness of our solutions.

IF WE DO NOT RETAIN AND ENHANCE SALES, MARKETING AND IMPLEMENTATION PERSONNEL
WE MAY NOT SUCCEED IN IMPLEMENTING OUR GROWTH STRATEGY AND ACHIEVING OUR TARGET
REVENUE GROWTH

We believe that our success depends to a significant extent on the ability of
our key personnel to operate effectively, both individually and as a group.
Many of our employees have only recently joined us as a result of acquisitions,
and we may experience high turnover rates in some categories of personnel. If
we do not assimilate new employees in a timely and cost-effective manner, the
productivity of those employees will be low, and as a result our operating
results may decrease.

In addition, companies in our industry whose employees accept positions with
competitors

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frequently claim that their competitors have engaged in unfair hiring
practices. Competitors or other companies may make such claims against us in
the future as we seek to hire qualified personnel. Any claim of this nature
could result in material litigation. We could incur substantial costs in
defending ourselves against these claims, regardless of their merits.

OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART UPON THE CONTINUED SERVICE OF
OUR EXECUTIVE OFFICERS

Our executive officers have a great deal of experience in the population health
management industryhealthcare delivery, disease management, insurance, and
healthcare information technology, in particular. Therefore, they are uniquely
qualified to manage our business and would be difficult to replace. We do not
have employment contracts with most of these officers or many of our other key
personnel. As a result, these employees may voluntarily terminate their
employment with us at any time. The search for a replacement for any of our key
personnel could be time consuming, and could distract our management team from
the day-to-day operations of our business. This could delay the implementation
of our growth strategy and negatively impact our ability to achieve targeted
revenue growth.

THE LENGTH AND COMPLEXITY OF OUR SALES CYCLE, SOLUTIONS IMPLEMENTATION AND
MEMBER-FULFILLMENT ACTIVITIES MAY CAUSE US TO EXPEND SUBSTANTIAL TIME, EFFORT
AND FUNDS WITHOUT RECEIVING RELATED REVENUE

We do not control many of the factors that influence our customers buying
decisions and the implementation of our population health management solutions.
The sales and implementation processes for our solutions are lengthy, involving
significant evaluation and requiring our customers to commit a great deal of
time and money. The sale and implementation of our solutions are subject to
delays due to healthcare payers and providers, employers and government
internal budgets and procedures for approving large expenditures. The sales
cycle for our solutions is unpredictable and has generally ranged from six to
twenty-four months from initial contact to contract signing. The time it takes
to implement our solutions is also difficult to predict. Our predictive
modeling and disease management solutions typically require 4-6 months to
implement. Our medical management software solutions have typically ranged
from six to fifteen months from contract execution to the commencement of live
operation. During the sales cycle and the implementation period, we may expend
substantial time, effort and money preparing contract proposals, negotiating
the contract and implementing the solution without receiving any related
revenue.

OUR SOFTWARE SOLUTIONS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE ERRORS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUES

Complex software products such as those included in our software solutions
frequently contain undetected errors when first introduced or as new versions
are released. We have, from time to

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time, found errors in the software products included in our solutions, and in
the future we may find additional errors. In addition, we combine our solutions
with software and hardware products from other vendors. As a result, we may
experience difficulty in identifying the source of an error. The occurrence of
hardware and software errors, whether caused by our solutions or another
vendors products, could:



| |  |  | cause sales of our
solutions to decrease and our revenues to
decline;                     
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | cause us to incur
significant warranty and repair costs;                                  
|
| |  |  | divert the attention of our
technical personnel away from product
development efforts; and
|
| |  |  | cause significant customer
relations problems.                                            

BECAUSE OUR POPULATION HEALTH MANAGEMENT SOLUTIONS RELY ON TECHNOLOGY THAT WE
OWN, OUR BUSINESS WILL SUFFER IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY
RIGHTS TO THAT TECHNOLOGY AGAINST INFRINGEMENT BY COMPETITORS

To protect our intellectual property rights, we rely on a combination of
copyright, trademark and trade secret laws and restrictions on disclosure. We
also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy or
otherwise obtain and use our products or technology. Monitoring unauthorized
use of our solutions is difficult and the steps we have taken may not prevent
unauthorized use of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
If we fail to protect our intellectual property from infringement, other
companies may use our intellectual property to offer competitive products at
lower prices. If we fail to compete effectively against these companies we
could lose customers and sales of our solutions and our revenue could decline.

EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY OR OUR ALLEGED MISUSE OF THE
INTELLECTUAL PROPERTY OF OTHERS MAY CAUSE US TO BECOME INVOLVED IN COSTLY AND
LENGTHY LITIGATION

Although we are not currently involved in any intellectual property litigation,
we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement by us of the
intellectual property of others. These claims and any resulting litigation
could subject us to significant liability or invalidate our ownership rights in
the technology used in our solutions. Litigation, regardless of the merits of
the claim or outcome, could consume a great deal of our time and money and
would divert management time and attention away from

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our core business. Any potential intellectual property litigation could also
force us to do one or more of the following:



| |  |  | stop using the challenged intellectual
property or selling our products or services that
incorporate it;                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | obtain a license to use the challenged
intellectual property or to sell products or services that
incorporate it, which could be costly or unavailable; and                                                                           
|
| |  |  | redesign those products or services that
are based on or incorporate the challenged intellectual
property, which could be costly and time consuming or could
adversely affect the functionality and market acceptance of
our products.

If we must take any of the foregoing actions, we may be unable to manufacture
and sell our solutions, which would substantially reduce our revenue.

WE FACE SIGNIFICANT COMPETITION FROM, AMONG OTHERS, DISEASE MANAGEMENT
COMPANIES, SOFTWARE VENDORS, INTERNET COMPANIES AND CONSULTING GROUPS FOCUSED
ON THE HEALTHCARE INDUSTRY

We face intense competition in the market for our population health management
solutions. Many of our competitors have greater financial, technical, product
development, marketing and other resources than we have. Because these
organizations may be better known and have more customers than us, we may not
compete successfully against them. The principal companies we compete against
in the payer market include American Healthways, CorSolutions, Lifemasters,
Inc., Matria Healthcare, HPR (a subsidiary of McKesson HBOC), MedDecision,
PhyCom, and others. In the hospital provider market, we compete against MIDS (a
division of Affiliated Computer Systems, Inc.), SoftMed Systems and others. We
expect that competition will continue to increase as a result of consolidation
in the Internet, information technology and healthcare industries.

RAPIDLY CHANGING TECHNOLOGY MAY IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR
SOFTWARE-BASED PREDICTIVE MODELING, TARGETING, DISEASE INTERVENTION AND MEDICAL
MANAGEMENT SOLUTIONS

Because some of our business relies on technology, it is susceptible to:



| |  |  | rapid technological change;            
| | - |  | ---------------------------------------
|
| |  |  | changing customer needs;               
|
| |  |  | frequent new product introductions; and
|
| |  |  | evolving industry standards.           

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In particular, the Internet is evolving rapidly and the technology used in
Internet related products change rapidly. As the Internet, computer and
software industries continue to experience rapid technological change, we must
quickly modify our solutions to adapt to such changes. The demands of operating
in such an environment may delay or prevent our development and introduction of
new solutions and additional functions for our existing solutions that
continually meet changing market demands and that keep pace with evolving
industry standards. Moreover, competitors may develop products superior to our
solutions, which could make our products obsolete.

OUR CUSTOMERS MAY ENCOUNTER SYSTEM DELAYS, FAILURES OR LOSS OF DATA WHEN USING
OUR INTERNET-BASED POPULATION HEALTH MANAGEMENT SOLUTIONS AS A RESULT OF
DISRUPTIONS OR OTHER PROBLEMS WITH INTERNET SERVICES AND INTERNET ACCESS
PROVIDED BY THIRD PARTIES

System delays, failures or loss of data experienced by our customers could harm
our business. The success of our new Internet-based healthcare management
solution for payers will depend on the efficient operation of Internet
connections among our payer customers and their members and associated
providers. These connections, in turn, depend on the efficient operation of Web
browsers, Internet connections and Internet service providers. In the past,
Internet users have occasionally experienced difficulties with Internet
connections and services due to system failures. Any disruption in Internet
access provided by third parties could delay or disrupt the performance of our
new Internet-based solution, and consequently, make it less acceptable to
payers. Furthermore, we will depend on our customers hardware suppliers for
prompt delivery, installation and service of the equipment that runs our
applications.

SECURITY BREACHES AND SECURITY CONCERNS ABOUT INTERNET TRANSMISSIONS MAY CAUSE
CUSTOMERS TO REFUSE TO PURCHASE OR DISCONTINUE THE USE OF OUR HEALTHCARE
MANAGEMENT SOLUTIONS

Our customers will retain confidential customer and patient information using
our solutions. An experienced computer user who is able to access our
customers computer systems could gain access to confidential patient and
company information. Therefore, our products must remain secure and the market
must perceive them as secure. The occurrence of security breaches could cause
customers to refuse to purchase or discontinue use of our solutions. Protecting
against such security breaches or alleviating problems caused by security
breaches may require us to expend significant capital and other resources. In
addition, upgrading our systems to incorporate more advanced encryption and
authentication technology as it becomes available may cause us to spend
significant resources and encounter costly delays. Concerns over the security
of the Internet and other online transactions and the privacy of users may also
inhibit the growth of the market for our Internet-based population
healthmanagement solutions.

WE OPERATE IN AN INDUSTRY SUBJECT TO CHANGING REGULATORY

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INFLUENCES, WHICH COULD LIMIT THE USEFULNESS OF OUR SOLUTIONS OR REQUIRE US TO
MAKE EXPENSIVE AND TIME-CONSUMING MODIFICATIONS TO OUR PRODUCTS

During the past several years, federal, state and local governments have
increased their regulation of the U.S. healthcare industry and have proposed
numerous healthcare industry reforms. These reforms may increase governmental
involvement in healthcare, continue to reduce reimbursement rates and otherwise
change the operating environment for our customers. Our customers may react to
these proposals and the uncertainty surrounding the proposals by curtailing or
deferring investments, including those for our healthcare management solutions.

Existing state and federal laws regulate the confidentiality of healthcare
information and the circumstances under which such records may be released.
Congress is considering legislation and the Department of Health and Human
Services has proposed regulations that would further regulate the
confidentiality of healthcare information. In addition, the Department of
Health and Human Services has proposed regulations setting forth security
standards for all health plans, clearinghouses and providers to follow with
respect to healthcare information that is electronically transmitted, processed
or stored. While these laws and regulations may not apply to us directly, our
products must comply with existing and future laws and regulations in order to
achieve market acceptance. Such compliance may be difficult and expensive or
even impossible to achieve. These laws or regulations could restrict the
ability of our customers to obtain, use or disseminate patient information,
which in turn could limit the usefulness of our healthcare management solutions
causing a decrease in our sales.

Because of the Internets popularity and increasing use, new laws and
regulations with respect to the Internet are becoming prevalent. Such new laws
and regulations could limit the effectiveness and market acceptance of our
Internet-based healthcare management solutions or could cause us to have to
modify our solutions, which could be expensive and time consuming.

CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD LEAD TO LARGE INTEGRATED
HEALTHCARE DELIVERY SYSTEMS WHO MAY USE THEIR ENHANCED MARKET POWER TO FORCE
PRICE REDUCTIONS FOR OUR PRODUCTS AND SERVICES

Many healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry
participants will become more intense and the importance of establishing
relationships with large industry participants will become greater. These
industry participants may try to use their market power to negotiate price
reductions for our products and services. Our operating results may suffer if
we reduce our prices without achieving corresponding reductions in our
expenses.

WE MAY ENCOUNTER ACQUISITION-RELATED RISKS SUCH AS BECOMING RESPONSIBLE FOR
UNEXPECTED LIABILITIES OF ACQUIRED BUSINESSES AND DIFFICULTIES INTEGRATING
EMPLOYEES AND OPERATIONS OF ACQUIRED BUSINESSES

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In connection with acquisitions of PatientCentrix and ProMedex in the 4th
Quarter of 2000, we could encounter numerous risks, including:



| |  |  | problems integrating the
purchased operations, technologies or
products;                   
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | unanticipated costs or
unexpected liabilities;                                             
|
| |  |  | diversion of our
managements attention from our core
business;                            
|
| |  |  | interference with existing
business relationships with suppliers and
customers;            
|
| |  |  | risks associated with
entering markets in which we have no or
limited prior experience; and
|
| |  |  | potential loss of key employees of
purchased organizations.                                

We may not be able to successfully integrate any businesses, products,
technologies or personnel that we have purchased.

OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER, WHICH MAY LIMIT OUR
STOCKHOLDERS ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER
STOCKHOLDER MATTERS

Our executive officers and directors and their affiliates beneficially own, in
the aggregate, approximately 55% of our outstanding common stock. As a result,
these stockholders will be able to exercise significant control over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could delay or prevent an
outside party from acquiring or merging with us.

IF WE DO NOT HAVE ADEQUATE CAPITAL RESOURCES, WE MAY BE UNABLE TO DEVELOP OR
ENHANCE OUR POPULATION HEALTH MANAGEMENT SOLUTIONS, TAKE ADVANTAGE OF FUTURE
OPPORTUNITIES OR RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED EVENTS

We believe that the net proceeds of our initial public offering, together with
our existing cash balances, credit facilities and expected cash flow from
operations, will allow us to meet our capital requirements at least through the
next 12 months. However, we may need or want to seek additional capital prior
to that time. Such capital may not be available to us on favorable terms, or at
all. Further, if we raise capital by issuing new equity securities,
stockholders may experience additional dilution or the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of common stock. If we cannot raise capital on

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acceptable terms, we may not have the resources to develop new products or
enhance existing products, take advantage of future opportunities or respond to
competitive pressures or unanticipated events.

OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE, AND YOUR INVESTMENT COULD SUFFER A
DECLINE IN VALUE.

The trading price of our common stock has been highly volatile and could
continue to be subject to wide fluctuations in price in response to various
factors, many of which are beyond our control, including:



| |  |  | actual or anticipated
variations in quarterly operating results;                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------
|
| |  |  | failure to achieve, or
changes in, financial estimates by
securities analysts;                                 
|
| |  |  | announcements of new
products or services or technological
innovations by us or our competitors;               
|
| |  |  | conditions or trends in the
pharmaceutical, biotechnology and life
science industries;                         
|
| |  |  | announcements by us of
significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
| |  |  | additions or departures of key personnel;                                                                      
|
| |  |  | sales of our common stock; and                                                                                 
|
| |  |  | developments regarding our
patents or other intellectual property or
that of our competitors.                  

In addition, the stock market in general, and the NASDAQ National Market and
the market for technology companies in particular, have experienced significant
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further,
there has been particular volatility in the market prices of securities of life
science companies. These broad market and industry factors may seriously harm
the market price of our common stock, regardless of our operating performance.
In the past, following periods of volatility in the market price of a companys
securities, securities class action litigation has often been instituted. A
securities class action suit against us could result in substantial costs,
potential liabilities and the diversion of managements attention and
resources.

THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.

There is no guarantee that an active trading market for our common stock will
be maintained on the NASDAQ National Market. You may not be able to sell your
shares quickly or at the market

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price if trading in our stock is not active.

We are currently not in compliance with the minimum bid and public float
requirements for continued listing on the NASDAQ Stock Markets National Market
System. However, in September 2001 the NASDAQ Stock Market announced a
moratorium on de-listing companies for failure to meet these requirements until
January 2, 2002. If we are still not able to comply with the requirements after
January 2, 2002, our common stock will likely be de-listed from the NASDAQ
Stock Markets National Market System. Trading of our common stock, if any,
would thereafter be conducted through the over the counter market or on the
Electronic Bulletin Board of the National Association of Securities Dealers,
Inc. Consequently, stockholders may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of our common stock. De-listing of
our common stock may result in lower prices for our common stock than would
otherwise prevail.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve principal
while, at the same time, maximizing the yields without significantly increasing
risk. To achieve this objective, we invest in highly liquid and high-quality
money market accounts that invest in debt securities. Our investment in debt
securities is subject to interest rate risk. To minimize the exposure due to
adverse shifts in interest rates, we invest in money market accounts that
invest only in short-term securities that maintain an average maturity of less
than one year and debt securities that also have an average maturity of less
than one year. As a result, we do not believe we are subject to significant
market risk.




PART II OTHER INFORMATION




Item 1. Legal Proceedings

None




Item 2. Changes in Securities

None




Item 3. Defaults in Senior Securities

None




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

None




Item 5. Other Information

None

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Item 6. Exhibits and Reports on Form 8-K

The following documents are filed as part of this Form 10-Q:

|              |  |   |  |                                                                                      
|------------- |  | - |  | -------------------------------------------------------------------------------------
|Exhibit 10.13 |  | - |  | Amendment Number 1 to Landa Management Systems Corporation 1998 Equity Incentive Plan




SIGNATURES

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

|                         |  |                                                                   
|------------------------ |  | ------------------------------------------------------------------
|                         |  | LANDACORP, INC.                                                   
|                        
|                        
|                        
|                        
|                         |  | (Registrant)                                                      
|                        
|                        
|                        
|                        
|Dated: November 14, 2001 |  |                                                                   
|                        
|                        
|                        
|                        
|                         |  | By: /s/ Eugene Santa Cattarina                                    
|                         |  |                                                                   
|                         |  | Eugene Santa Cattarina                                            
|                        
|                        
|                        
|                        
|                         |  | President and Chief Executive Office
(principal executive officer)
|                        
|                        
|                        
|                        
|Dated: November 14, 2001 |  |                                                                   
|                        
|                        
|                        
|                        
|                         |  | By: /s/ Mark Rapoport                                             
|                         |  |                                                                   
|                         |  | Mark Rapoport                                                     
|                        
|                        
|                        
|                        
|                         |  | Chief Financial Officer                                           

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