---

---



United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549




FORM 10-Q


|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|--- |  | --------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005OR


|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|---- |  | ---------------------------------------------------------------------------------------



For the transition period from  to 
 Commission file number 0-13591




HEALTHAXIS, INC.  (Exact name of registrant as specified in its charter)




|Pennsylvania                                                   |  |  |  | 23-2214195                          
|-------------------------------------------------------------- |  |  |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  |  |  | (I.R.S. Employer Identification No.)
|                                                               |  |  |  |                                     
|5215 N. OConnor Blvd., 800 Central Tower, Irving, Texas 75039
|(Address of principal executive offices) (Zip Code)           



Registrants telephone number, including area code: (972) 443-5000




Former name, former address and former fiscal year, if changed since last report: N/A




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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]




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




Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 3,766,633 shares of common stock, par value $.10, outstanding as of May 5, 2005.







---

Healthaxis Inc.

Table of Contents

|              |  |  |  |                                                                                       |  | Page
|------------- |  |  |  | ------------------------------------------------------------------------------------- |  | ----
|PART
I        |  |  |  | Financial Information                                                                 |  |     
|Item
1.       |  |  |  | Consolidated Financial Statements                                                     |  |     
|              |  |  |  | Consolidated Balance Sheets                                                           |  |     
|              |  |  |  | Consolidated Statements of Operations                                                 |  |     
|              |  |  |  | Consolidated Statements of Cash Flows                                                 |  |     
|              |  |  |  | Notes
to 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                            |  |     
|Item
4.       |  |  |  | Controls and Procedures                                                               |  |     
|             
|PART
II       |  |  |  | Other Information                                                                     |  |     
|Items
1-5.    |  |  |  |                                                                                       |  |     
|Item
6.       |  |  |  | Exhibits                                                                              |  |     
|Signatures    |  |  |  |                                                                                       |  |     
|Exhibit
Index |  |  |  |                                                                                       |  |     

2

---



PART I. FINANCIAL INFORMATION

|Item 1. |  | Consolidated Financial Statements
|------- |  | ---------------------------------

Healthaxis Inc. and SubsidiariesConsolidated Balance Sheets (In
thousands except share and per share data) (Unaudited)






|                                                                                                                                   |  |  |  | March 31,2005 |          | December 31,2004
|---------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ------------- | -------- | ----------------
|Assets                                                                                                                             |  |  |  |               |          |                 
|Current
assets:                                                                                                                    |  |  |  |               |          |                 
|Cash and
cash equivalents                                                                                                          |  |  |  | $             | 2,569    |                 
|Accounts
receivable, net of allowance for doubtful accounts of $48 and $48, respectively                                           |  |  |  |               | 2,543    |                 
|Prepaid
expenses                                                                                                                   |  |  |  |               | 918      |                 
|Total
current assets                                                                                                               |  |  |  |               | 6,030    |                 
|Property,
equipment and software, less accumulated depreciation and amortization of $6,779 and $6,661, respectively                |  |  |  |               | 1,139    |                 
|Contract
start-up costs, less accumulated amortization of $1,340 and $1,199, respectively                                          |  |  |  |               | 548      |                 
|Capitalized
software, less accumulated amortization of $2,793 and $2,760, respectively                                             |  |  |  |               | 409      |                 
|Customer
base, less accumulated amortization of $4,214 and $4,130, respectively                                                    |  |  |  |               |         |                 
|Goodwill                                                                                                                           |  |  |  |               | 11,276   |                 
|Notes
receivable                                                                                                                   |  |  |  |               | 23       |                 
|Other
assets                                                                                                                       |  |  |  |               | 54       |                 
|Total
assets                                                                                                                       |  |  |  | $             | 19,479   |                 
|                                                                                                                                  
|Liabilities and Stockholders Equity                                                                                               |  |  |  |               |          |                 
|Current
liabilities:                                                                                                               |  |  |  |               |          |                 
|Accounts
payable                                                                                                                   |  |  |  | $             | 1,408    |                 
|Accrued
liabilities                                                                                                                |  |  |  |               | 488      |                 
|Deferred
revenues                                                                                                                  |  |  |  |               | 878      |                 
|Notes
payable, current portion                                                                                                     |  |  |  |               | 646      |                 
|Current
portion, post retirement and employment liabilities                                                                        |  |  |  |               | 128      |                 
|Total
current liabilities                                                                                                          |  |  |  |               | 3,548    |                 
|                                                                                                                                   |  |  |  |               |          |                 
|Notes
payable                                                                                                                      |  |  |  |               | 1,874    |                 
|Post
retirement and employment liabilities                                                                                         |  |  |  |               | 796      |                 
|Other
liabilities                                                                                                                  |  |  |  |               | 1,397    |                 
|Total
liabilities                                                                                                                  |  |  |  |               | 7,615    |                 
|                                                                                                                                   |  |  |  |               |          |                 
|Commitments
and contingencies                                                                                                      |  |  |  |               |          |                 
|                                                                                                                                   |  |  |  |               |          |                 
|Stockholders Equity:                                                                                                              |  |  |  |               |          |                 
|Preferred
stock, par value $1.00: authorized 100,000,000 shares:                                                                   |  |  |  |               |          |                 
|Series A
Convertible, 2,851,658 and 3,100,000 shares issued and outstanding, respectively (no liquidation preference)              |  |  |  |               | 2,852    |                 
|Common
stock, par value $.10: authorized 1,900,000,000 shares, issued and outstanding 3,766,633 and 3,518,291 shares, respectively |  |  |  |               | 377      |                 
|Additional
paid-in capital                                                                                                         |  |  |  |               | 444,444  |                 
|Accumulated
deficit                                                                                                                |  |  |  |               | (435,809 | )               
|Total
stockholders equity                                                                                                         |  |  |  |               | 11,864   |                 
|Total
liabilities and stockholders equity                                                                                         |  |  |  | $             | 19,479   |                 

See notes to unaudited consolidated financial statements.

3

---

Healthaxis Inc. and Subsidiaries Consolidated Statements of Operations
(In thousands, except share and per share data) (Unaudited)






|                                                                                |  |  |  | Three Months Ended |          
|------------------------------------------------------------------------------- |  |  |  | ------------------ | ---------
|
|Revenue                                                                         |  |  |  | $                  | 4,126    
|Expenses:                                                                       |  |  |  |                    |          
|Cost of
revenues                                                                |  |  |  |                    | 4,096    
|Sales and
marketing                                                             |  |  |  |                    | 213      
|General and
administrative                                                      |  |  |  |                    | 644      
|Amortization
of intangibles                                                     |  |  |  |                    | 84       
|Total
expenses                                                                  |  |  |  |                    | 5,037    
|Operating
loss                                                                  |  |  |  |                    | (911     
|                                                                                |  |  |  |                    |          
|Interest and
other income, net                                                  |  |  |  |                    | 8        
|Interest
expense                                                                |  |  |  |                    | (55      
|                                                                                |  |  |  |                    |          
|Net
loss                                                                        |  |  |  |                    | (958     
|                                                                                |  |  |  |                    |          
|Preferred
stock dividends                                                       |  |  |  |                    |         
|                                                                                |  |  |  |                    |          
|Net loss
attributable to common shareholders                                    |  |  |  | $                  | (958     
|                                                                                |  |  |  |                    |          
|                                                                                |  |  |  |                    |          
|Net loss per
share of common stock (basic and diluted)                          |  |  |  | $                  | (0.26    
|Weighted
average common shares and equivalents used in computing loss per share |  |  |  |                    |          
|Basic and
diluted                                                               |  |  |  |                    | 3,697,649

See notes to unaudited consolidated financial statements.

4

---

Healthaxis Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands) (Unaudited)






|                                                                            |  |  |  | Three Months Ended |       
|--------------------------------------------------------------------------- |  |  |  | ------------------ | ------
|
|Cash
flows from operating activities                                        |  |  |  |                    |       
|Net
loss                                                                    |  |  |  | $                  | (958  
|Adjustments
to reconcile net loss to net cash used in operating activities: |  |  |  |                    |       
|Depreciation
and amortization                                               |  |  |  |                    | 465   
|Bad debt
reserve                                                            |  |  |  |                    |      
|Stock option
compensation                                                   |  |  |  |                    |      
|Change
in:                                                                  |  |  |  |                    |       
|Accounts
receivable                                                         |  |  |  |                    | (175  
|Prepaid
expenses and other current assets                                   |  |  |  |                    | (281  
|Accounts
payable and accrued liabilities                                    |  |  |  |                    | (16   
|Deferred
revenues                                                           |  |  |  |                    | (45   
|Other
liabilities                                                           |  |  |  |                    | (25   
|Net cash
used in operating activities                                       |  |  |  |                    | (1,035
|                                                                            |  |  |  |                    |       
|Cash
flows from investing activities                                        |  |  |  |                    |       
|Collection
of notes receivable                                              |  |  |  |                    |      
|Investment
in capitalized software and contract start-up costs              |  |  |  |                    | (34   
|Purchases of
property, equipment and software                               |  |  |  |                    | (134  
|Net cash
used in investing activities                                       |  |  |  |                    | (168  
|                                                                            |  |  |  |                    |       
|Cash
flows from financing activities                                        |  |  |  |                    |       
|Payment of
preferred stock dividends                                        |  |  |  |                    |      
|Payments on
note payable to UICI                                            |  |  |  |                    | (158  
|Exercise of
stock options                                                   |  |  |  |                    |      
|Net cash
used in financing activities                                       |  |  |  |                    | (158  
|Decrease in
cash and cash equivalents                                       |  |  |  |                    | (1,361
|Cash and
cash equivalents, beginning of period                              |  |  |  |                    | 3,930 
|Cash and
cash equivalents, end of period                                    |  |  |  | $                  | 2,569 

See notes to unaudited consolidated financial statements.

5

---

Healthaxis Inc. and SubsidiariesNotes to Unaudited Consolidated Financial
StatementsMarch 31, 2005



Note A  Description of business and basis of presentation

Unaudited Financial Information



The unaudited consolidated financial statements have
been prepared by Healthaxis Inc. and its subsidiaries (Healthaxis or the Company), pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments consisting of normal recurring entries, which, in the opinion of the Company, are
necessary to present fairly the results for the interim periods. The interim financial statements do not include all disclosures provided in fiscal
year end financial statements prepared in accordance with accounting principles generally accepted in the United States of America, although the
Company believes that the accompanying disclosures are adequate to make the information presented not misleading. Results of operations for the
three-month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31,
2005.




These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2004.


General



Healthaxis is a technology-enhanced provider of
fully integrated solutions and services for health benefit administrators and health insurance claim processors. These solutions, which are comprised
of software products and related business process services, are designed to assist health insurance payers, third party administrators
(TPA) and preferred provider organizations (PPO) provide enhanced claims related services to members, employees, employers and
providers at lower cost. These services are provided through the application of Healthaxis flexible technology on an Application Service Provider
(ASP) basis. These technology solutions are complemented by Healthaxis web-based capabilities and Business Process Outsourcing
(BPO) services, which are offered to the Companys ASP clients and on a stand-alone basis. BPO solutions include the automated
capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence, in addition to rules-based claims
pre-adjudication and editing and automated PPO routing (via electronic data interchange or EDI) and repricing. Healthaxis uses its deep
domain expertise in health insurance operations to surround the payment of a health insurance claim, to customize services to meet the specific needs
of its customers and to produce value for those customers by tapping unrealized potential in the customers operations to achieve best
results.


Earnings Per Share



Basic loss per share is computed only on the
weighted average number of common shares outstanding during the respective periods. Diluted earnings per share is computed to show the dilutive effect,
if any, of convertible preferred stock, stock options and warrants using the treasury stock method based on the average market price of the stock
during the respective periods. The effect of including the convertible preferred stock, stock options and warrants, totaling 4,979,423 and 2,359,580 as
of March 31, 2005 and 2004 respectively, into the computation of diluted earnings per share would be anti-dilutive. Accordingly, these items have not
been included in the computation. Following is a summary of these securities:


6

---

Healthaxis Inc. and SubsidiariesNotes to Unaudited Consolidated Financial
Statements  (Continued)March 31, 2005






|                                 |  |  |  | As of March 31, |          
|-------------------------------- |  |  |  | --------------- | ---------
|
|Options                          |  |  |  |                 | 1,043,694
|Warrants                         |  |  |  |                 | 1,084,071
|Preferred
stock                  |  |  |  |                 |         
|Preferred
stock  new            |  |  |  |                 | 2,851,658
|Total common
shares if converted |  |  |  |                 | 4,979,423

Stock-Based Compensation



The Company has elected to continue to utilize the
accounting method prescribed by APB Opinion No. 25 Accounting for Stock Issued to Employees (APB 25), and provide the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148). Although the Company selected an accounting policy which
requires only the excess of the market value of its common stock over the exercise price of options granted to be recorded as compensation expense
(intrinsic method), pro forma information regarding net loss is required as if the Company had accounted for its employee stock options under the fair
value method of SFAS 123. Pro forma net loss applicable to the options granted is not likely to be representative of the effects on reported net loss
for future periods. The fair value for these options is estimated at the date of grant using a Black-Scholes option pricing model. Stock compensation
determined under the intrinsic method is recognized over the vesting period using the straight-line method.




Had compensation cost for the Companys stock
option grants been determined based on the fair value at the date granted in accordance with the provisions of SFAS 123, the Companys net loss
and net loss per common share would have been increased to the following pro forma amounts (table in thousands, except per share
data):







|                                                                                |  |  |  | Three Months ended March 31, |       
|------------------------------------------------------------------------------- |  |  |  | ---------------------------- | ------
|
|Net loss, as
reported                                                           |  |  |  | $                            | (958  
|Dividends on
preferred stock                                                    |  |  |  |                              |      
|Stock based
compensation expense recorded under the intrinsic value method      |  |  |  |                              |      
|Pro forma
stock based compensation expense computed under the fair value method |  |  |  |                              | (55   
|Pro forma
net loss                                                              |  |  |  | $                            | (1,013
|Loss per
share of common stock, basic and diluted as reported                   |  |  |  | $                            | (0.26 
|Pro
forma                                                                       |  |  |  | $                            | (0.27 



The Company granted 200 options in the first quarter
2005. The fair value of the options and warrants granted are estimated on the date of grant using the Black-Scholes option pricing model. The major
assumptions used include no dividends paid, a weighted average expected life of three years, expected stock volatility of 69% and risk free interest
rates of 4.09%. The weighted-average grant-date fair value of options granted during 2005 was $1.10.


7

---

Healthaxis Inc. and SubsidiariesNotes to Unaudited Consolidated Financial
Statements  (Continued)March 31, 2005

Note B  Recently Adopted Accounting Pronouncements



In December 2005 the FASB issued a revision of
Statement of Financial Accounting Standards No. 123 (SFAS 123R), Accounting for Stock-Based Compensation. This statement supersedes APB
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Historically, the Company has accounted for employee stock based
compensation using the intrinsic method under APB 25 as further described in Note A  Stock-Based Compensation above. SFAS 123R
requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in the
financial statements. The effect of the statement will be to require entities to measure the cost of employee services received in exchange for stock
options based upon the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for
the award. The Company will be required to apply FAS 123R as of the beginning of its first fiscal year that begins after June 15, 2005, which will be
the year beginning January 1, 2006.




The impact of this Statement will depend upon the
transition method selected by the Company and various other factors including our future compensation strategy. The pro-forma costs presented in the
table above and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of the
amount which should be expected in the future. No decisions have been made as to which option-pricing model is most appropriate for the Company for
future awards.


Note C  Post Retirement Benefits



Healthaxis has an obligation to provide certain post
retirement benefits, primarily lifetime health, dental and life insurance coverage, to a group of individuals consisting of three former executives and
17 retired employees of Provident American Corporation, which became Healthaxis, and the Companys former Chairman. The following table sets forth
the components of net postretirement benefit expense for all plans:







|                                   |  |  |  | (Table in $000s) Three Months Ended March 31, |   
|---------------------------------- |  |  |  | --------------------------------------------- | --
|
|Interest
cost                      |  |  |  | $                                             | 13
|Transition
obligation amortization |  |  |  |                                               | 14
|Net post
retirement expense        |  |  |  | $                                             | 27

Note E  Significant Customer Concentrations



For the three months ended March 31, 2005 and 2004,
four customers accounted for $2.7 million (64%) and $2.7 million (63%), respectively, of the Companys total revenues. At March 31, 2005 and
December 31, 2004, one customer accounted for $803,000 (32%) and $822,000 (35%) of the Companys accounts receivable, respectively. This customer
is making payments in accordance with the terms of its contract.


Note F  Other Liabilities and Contingencies



Other liabilities include $1.3 million of contingent
tax liabilities at March 31, 2005 and December 31, 2004.


8

---

Healthaxis Inc. and SubsidiariesNotes to Unaudited Consolidated Financial
Statements  (Continued)March 31, 2005

Note G  Subsequent Event



Following approval by the Companys common
shareholders, on May 13, 2005 the Company closed a financing transaction with Tak Investments, Inc. (the Investor), a Delaware corporation
owned by Mr. Sharad Tak. Under the terms and conditions of the Stock and Warrant Purchase Agreement with the Investor (the Purchase
Agreement), the Company issued to the Investor 2,222,222 shares of common stock at a per share purchase price of $2.25 for an aggregate initial
investment of $5.0 million. The Investor also received at the Closing three warrants (the Warrants). The first Warrant, which provides for
an exercise price of $2.25 per share of common stock and a term of two years, permits the Company to call the exercise of up to 3,333,333 shares of
common stock (for an aggregate of up to $7.5 million) under certain conditions, but only permits the Investor to exercise the Warrant for up to
2,222,222 shares of common stock (for an aggregate of $5.0 million). The Companys ability to call the exercise of the first Warrant is subject to
the satisfaction of certain conditions, including unanimous approval of such action by the Companys Board of Directors (which requires the
approval of the Investors designees to the Board, as referenced below). The Investor also received two additional warrants representing the right
to purchase additional shares of common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these two
additional Warrants is dependent upon the amount ultimately invested under the first Warrant, but could total up to an additional 2,777,778 shares of
common stock and could provide an additional cash investment in the Company of up to $8.1 million.




In connection with the Closing, the Company and the
Investor entered into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor are
subject to limited transfer restrictions, and the Investor has the right to approve certain fundamental corporate activities, the right to participate
in other Healthaxis equity financings and, depending upon the size of the Companys Board of Directors and the Investors continuing
ownership position in the Company, the right to designate one to three nominees for election to the Companys Board of Directors. The Company
expects that the Investor will be electing to invoke its right to initially designate up to two additional members to the Board of Directors, at which
point the Company will be obligated to expand its Board and add the Investors designees to the Board. The parties also entered into a
Registration Rights Agreement under which the Company agrees to file a registration statement covering the resale of the shares of common stock
purchased under the Purchase Agreement or through exercise of the Warrants.




As a part of the Closing, the Company also entered
into a five year Remote Resourcing Agreement (the Resourcing Agreement) with Healthcare BPO Partners L.P., a company affiliated with the
Investor and owned by Mr. Tak. Healthcare BPO Partners will provide India-based personnel and infrastructure that will be utilized by the Company to
provide business process outsourcing services and other software development and technical support services to support the Companys operations.
The Indian operations, which will be dedicated for the Companys exclusive use, will be managed by the Company and based in Jaipur, India. These
new Indian operations will supplement the Companys existing operations in Utah, Texas and Jamaica.


9

---



|Item 2. |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------

Forward-Looking Statements



All statements other than statements of historical
fact contained in this report, including statements in this Managements Discussion and Analysis of Financial Condition and Results of
Operations concerning the Companys financial position and liquidity, results of operations, prospects for future growth, and other matters
are forward-looking statements. These statements may be identified with words such as anticipate, believe, plan,
estimate, expect, intend, should, could, goal, target,
designed, on track, comfortable with, optimistic and other similar expressions, and constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual
results to be materially different from those contemplated by the forward-looking statements. Such factors include the risks and uncertainties
identified in Healthaxis documents filed with, or furnished to, the Securities and Exchange Commission, including without limitation those identified
under the caption Business  Risk Factors in the Companys Form 10-K for the year ended December 31, 2004, and under the caption
Proposal I  Approval of Issuance of Common Stock and Related Securities Transactions  Factors Affecting Current Common Shareholders in
the Companys Proxy Statement dated March 30, 2005. The Company undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-looking
statements.


Overview



Healthaxis is a technology-enhanced provider of
fully integrated solutions and services for health benefit administrators and health insurance claim processors. These solutions, which are comprised
of software products and related business process services, are designed to assist health insurance payers, third party administrators
(TPA) and preferred provider organizations (PPO) provide enhanced claims related services to members, employees, employers and
providers at lower cost. These services are provided through the application of Healthaxis flexible technology on an Application Service Provider
(ASP) basis. These technology solutions are complemented by Healthaxis web-based capabilities and Business Process Outsourcing
(BPO) services, which are offered to the Companys ASP clients and on a stand-alone basis. BPO solutions include the automated
capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence, in addition to rules-based claims
pre-adjudication and editing and automated PPO routing (via electronic data interchange or EDI) and repricing. Healthaxis uses its deep
domain expertise in health insurance operations to surround the payment of a health insurance claim, to customize services to meet the specific needs
of its customers and to produce value for those customers by tapping unrealized potential in the customers operations to achieve best
results.




Healthaxis Inc. is a Pennsylvania corporation, which
was organized in 1982. Healthaxis common stock trades on the NASDAQ SmallCap Market under the symbol HAXS. The operations of
Healthaxis are conducted through its subsidiary, Healthaxis, Ltd. Unless otherwise indicated, or the context otherwise requires, all references in this
document to the Company, Healthaxis, we, our or us include Healthaxis Inc. and all of its
subsidiaries. Healthaxis maintains a website at www.healthaxis.com. The Healthaxis Code of Conduct can be found on the Healthaxis website. Information
found on the Healthaxis website is not a part of this report.


Revenue Model



The Companys revenues consist primarily of
application service provider (ASP) fees, transaction fees and professional service fees, as further described below. The ASP services are substantially
dependent on the Companys proprietary software, and agreements with customers contain a license for the use of the relevant


10

---



software. However, the customer does not have
the contractual right to take possession of the software. The customers access to the Companys hosted software is through dedicated data
lines or the Internet. With some exceptions, the Company has not historically licensed its benefits administration and claims processing software for
installation on customers systems. No new such licenses have been granted in 2005 or 2004.




A significant portion of the Companys revenue
is based on providing ASP services to our health insurance company, third-party administrator and self-insured plan customers. The ASP service includes
a license to use our benefits administration and claims processing software, including hosting, maintenance and support, which is typically charged on
a per-employee-per-month (PEPM), or per-member-per-month (PMPM) basis. In addition, the Company surrounds these hosted software-use rights with such
BPO services as imaging, data capture and retrieval, EDI and print and mail services, as well as PPO routing and repricing services, and claims editing
services. These services are typically charged on a transaction fee basis, such as per claim, per image and per document. Due to the long-term nature
of the ASP arrangement and because all revenue elements included in the collective services are typically not sold separately, the ASP and BPO service
revenues are recognized ratably over the term of the agreement and/or as transaction services are provided.




In preparation for providing services under these
multi-year ASP contracts, the Company also usually agrees to perform certain start-up activities directly related to customizing and configuring the
licensed software and loading insurance plan data for performance under the contract. The Company defers costs and revenues relating to these start-up
activities and recognizes such costs and revenues ratably over the term of the ASP contract.




Periodically, while an ASP contract is in place, the
Company also performs professional services upon request and recognizes the related revenue on a time and materials basis as services are performed.
Such professional services are not sold in conjunction with a software license included in the original ASP contract or other revenue elements and,
therefore, are accounted for separately from the ASP contact.




The Company uses contract accounting for contracts
where significant software modification is performed or where services are performed that are essential to the functionality of the delivered software.
Generally, contracts that include significant software modification are accounted for using the percentage of completion method with progress measured
based on the cost-to-cost method. Contracts with significant customer acceptance provisions are recognized using the completed contract method upon
achieving customer acceptance of the completed project. The Company currently has no contracts in progress for which contract accounting is being
applied.


Financing Transaction:



Following approval by the Companys common
shareholders, on May 13, 2005 the Company closed a financing transaction with Tak Investments, Inc. (the Investor), a Delaware corporation
owned by Mr. Sharad Tak. Under the terms and conditions of the Stock and Warrant Purchase Agreement with the Investor (the Purchase
Agreement), the Company issued to the Investor 2,222,222 shares of common stock at a per share purchase price of $2.25 for an aggregate initial
investment of $5.0 million. The Investor also received at the Closing three warrants (the Warrants). The first Warrant, which provides for
an exercise price of $2.25 per share of common stock and a term of two years, permits the Company to call the exercise of up to 3,333,333 shares of
common stock (for an aggregate of up to $7.5 million) under certain conditions, but only permits the Investor to exercise the Warrant for up to
2,222,222 shares of common stock (for an aggregate of $5.0 million). The Companys ability to call the exercise of the first Warrant is subject to
the satisfaction of certain conditions, including unanimous approval of such action by the Companys Board of Directors (which requires the
approval of the Investors designees to the Board, as referenced below). The Investor also received two additional warrants representing the right
to purchase additional shares of common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these two
additional Warrants is dependent upon the amount ultimately


11

---



invested under the first Warrant, but could
total up to an additional 2,777,778 shares of common stock and could provide an additional cash investment in the Company of up to $8.1
million.




In connection with the Closing, the Company and the
Investor entered into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor are
subject to limited transfer restrictions, and the Investor has the right to approve certain fundamental corporate activities, the right to participate
in other Healthaxis equity financings and, depending upon the size of the Companys Board of Directors and the Investors continuing
ownership position in the Company, the right to designate one to three nominees for election to the Companys Board of Directors. The Company
expects that the Investor will be electing to invoke its right to initially designate up to two additional members to the Board of Directors, at which
point the Company will be obligated to expand its Board and add the Investors designees to the Board. The parties also entered into a
Registration Rights Agreement under which the Company agrees to file a registration statement covering the resale of the shares of common stock
purchased under the Purchase Agreement or through exercise of the Warrants.




As a part of the Closing, the Company also entered
into a five year Remote Resourcing Agreement (the Resourcing Agreement) with Healthcare BPO Partners L.P., a company affiliated with the
Investor and owned by Mr. Tak. Healthcare BPO Partners will provide India-based personnel and infrastructure that will be utilized by the Company to
provide business process outsourcing services and other software development and technical support services to support the Companys operations.
The Indian operations, which will be dedicated for the Companys exclusive use, will be managed by the Company and based in Jaipur, India. These
new Indian operations will supplement the Companys existing operations in Utah, Texas and Jamaica.


Preferred Stock:



On June 30, 2004, Healthaxis consummated a
transaction modifying the terms of its Series A Convertible preferred stock and providing for the issuance to its preferred shareholders of warrants to
purchase shares of the Companys common stock. Under the terms of the agreements with the preferred shareholders, shares of the preferred stock
are convertible into shares of the Companys common stock on a one-for-one basis. The preferred shareholders also received warrants with a term of
five years entitling them to purchase shares of common stock, on a one-for-one basis, at an exercise price of $5.50 per share (subject to a cashless
exercise feature that applies under some circumstances). As of May 16, 2005, there are 2,851,658 preferred shares and 1,000,000 warrants outstanding.
The shares of common stock into which the shares of preferred stock are convertible and with respect to which the warrants are exercisable represent
approximately 23% of our common stock on a fully diluted basis as of that date. Holders of the preferred stock have no liquidation preference, no
voting rights except as required by law, the right to receive a nominal dividend of $0.0001 per share semi-annually (aggregating less than $1,000 per
year in total) and otherwise on a pro-rata basis to the extent that dividends are paid to holders of common stock, limited anti-dilution rights in the
context of stock splits, stock dividends and similar transactions, and no redemption rights.




The shares of preferred stock are convertible into
shares of common stock at the option of a preferred shareholder at any time, and in any amount, on or after June 30, 2005, but prior to that date may
only be converted if the preferred shareholder desiring to effect the conversion will not hold as a result of the conversion more than 750,000 shares
of common stock, or if the common stock is trading on a national stock market and has had a closing price of $8.00 or more for 20 out of the 30 trading
days immediately preceding the conversion date (in which case, any number of shares may be converted). Notwithstanding the foregoing, in the event of
the transfer of shares of preferred stock in accordance with the terms of the agreements with the preferred shareholders, the preferred stock
automatically converts into shares of common stock. Healthaxis may compel conversion of the preferred stock or exercise of the warrants granted to the
preferred shareholders under some circumstances.


12

---



Under the agreements with the preferred
shareholders, Healthaxis agreed that it will not issue any equity securities in a transaction implying a pre-money valuation of Healthaxis of less than
$14.5 million or at a per share price of less than $2.15 (these restrictions do not apply to the grant of stock options to Healthaxis employees or
directors in most circumstances). Further, until June 30, 2005, the preferred shareholders have a right of first refusal to match the terms upon which
any third party proposes to purchase from Healthaxis any equity securities having an aggregate purchase price of at least $1.0 million and to match the
terms upon which Healthaxis proposes an offering of its common stock. The preferred shareholders waived this right of first refusal with respect to the
financing transaction with the Investor described above.




As required by the agreements with the preferred
shareholders, Healthaxis has registered for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the
warrants. However, these agreements also place certain restrictions on the private sale or transferability of the securities held by the preferred
shareholders, and restrict the number of shares of common stock that may be sold in the public markets below a price of $3.50 per share. These stock
transfer restrictions lapse on June 30, 2005.


Critical Accounting Policies



Critical accounting policies are those which are
most important to the financial statement presentation and that require the most difficult, subjective complex judgments. There have been no changes in
the Companys critical accounting policies as described in the Companys Form 10-K for the year ended December 31, 2004.


Results of Operations

Three months ended March 31, 2005 compared to three months ended March 31,
2004






|                 |  |  |  | (Table in thousands)Three Months Ended March 31, |      
|---------------- |  |  |  | ------------------------------------------------ | -----
|
|Revenues         |  |  |  | $                                                | 4,126
|Cost of
revenues |  |  |  |                                                  | 4,096
|Gross
profit     |  |  |  | $                                                | 30   
|% of
revenue     |  |  |  |                                                  | 1    



Revenues were down approximately $123,000
(3%) in the three months ended March 31, 2005 compared to the same period in 2004. Data capture service revenue declined $194,000 primarily as a result
of two customers in a run-off stage. This reduction was partially offset by an increase of $71,000 in recurring PEPM license fees due to ordinary rate
increases with certain existing customers, as well as the migration of more business onto our claims system by certain other customers. Smaller changes
in professional services, transaction and other revenue were offset each other.


13

---



Cost of revenues includes all expenses
directly associated with the production of revenue, and consists primarily of salaries and related benefits, rent, amortization and depreciation,
system expenses such as maintenance and repair, as well as other related consumables. Cost of revenues declined $257,000 (6%) in the three months ended
March 31, 2005 compared to the same period in 2004. Cost of revenues was 99% of revenues in the 2005 period compared to 102% in the 2004 period.
Approximately $181,000 of the decrease in costs was due to lower personnel and contractor costs resulting from staff reductions. An additional $47,000
of the decline in costs was due to reduced costs of travel and entertainment, supplies and other costs related to the staff
reductions.







|                                   |  |  |  | (Table in thousands)Three Months Ended March 31, |    
|---------------------------------- |  |  |  | ------------------------------------------------ | ---
|
|Sales and
marketing expense        |  |  |  | $                                                | 213
|General and
administrative expense |  |  |  |                                                  | 644
|Amortization
of intangibles        |  |  |  |                                                  | 84 
|Interest and
other income, net     |  |  |  |                                                  | 8  
|Interest
expense                   |  |  |  |                                                  | 55 



Sales and marketing expenses consist
primarily of employee salaries and related benefits, as well as promotional costs such as direct mailing campaigns, trade shows and media advertising.
Sales and marketing expenses decreased $80,000 (27%) in the three months ended March 31, 2005 compared to the same quarter of 2004. Approximately
$30,000 of the decrease was due to reduced consulting fees paid for product and market analysis and sales leads. The remaining decrease in expenses was
the result of lower personnel costs and the related decrease in benefits, travel and collateral material.




General and administrative expenses include
executive management, accounting, legal and human resources compensation and related benefits, as well as expenditures for applicable overhead costs.
These expenses decreased $324,000 (33%) in the three months ended March 31, 2005 compared to the same quarter of 2004. Professional fees for
accounting, legal and consulting services were reduced by $255,000 and personnel costs were reduced by $68,000. Other savings in insurance and travel
expenses were offset by increased property taxes.




Amortization of intangibles includes the
amortization of developed software and customer base acquired in the January 2001 Healthaxis merger. These expenses were reduced $192,000 (70%) in the
three months ended March 31, 2005 compared to the same quarter of 2004, as these intangible assets were fully amortized in January
2005.




Interest and other income, net decreased
$19,000 (70%) in the three months ended March 31, 2005 compared to the same quarter of 2004 due primarily to lower balances of cash and interest
bearing notes receivable.




Interest expense decreased slightly in the
three months ended March 31, 2005 compared to the same quarter of 2004. Interest payments on the note payable to UICI were lower due to the declining
principal balance.


14

---

Liquidity and Capital Resources

Overview of Cash Resources



At March 31, 2005, our cash and cash equivalents
amounted to $2.6 million compared to $3.9 million at December 31, 2004. The sources and uses of cash during the first quarter of 2005 are described
more fully in  Analysis of Cash Flows below. We have experienced repeated losses, with the result that our cash resources have
declined. The Companys focus is on positive cash generation. We have been taking measures to address our liquidity needs, including increasing
our marketing and sales efforts, implementing further productivity improvements and seeking new sources of capital. To this end, the Company entered
into a Purchase Agreement with Tak Investments, Inc., which closed on May 13, 2005, and which provided the Company with an additional source of
liquidity as more fully described in  Overview  Financing Transaction above. Upon closing, the Company received $5.0 million in
gross proceeds in exchange for 2,222,222 shares of the Companys common stock. We believe that the Company will maintain sufficient liquidity to
fund operations for at least the next 12 months.


Analysis of Cash Flows



Cash used in operating activities for the
three months ended March 31, 2005 was approximately $1.0 million as compared to $577,000 for the same period in 2004. The reduced net loss in 2005 was
offset by changes in various working capital accounts, primarily accounts receivable and prepaid expenses. Changes in working capital accounted for a
$542,000 use of cash in the 2005 period as opposed to $391,000 cash generated for the comparable period in 2004.




Cash used in investing activities for the
three months ended March 31, 2005 was $168,000 as compared to $149,000 for the same period in 2004. The Companys investing activities continue to
be primarily in the areas of developing software enhancements, contract start-up activities and acquisition of property, equipment and
software.




Cash used in financing activities for the
three months ended March 31, 2005 was $158,000 as compared to $367,000 for the same period in 2004, for a decrease of $209,000. The decreased use of
cash was due primarily to $223,000 payments on preferred stock dividends made in January of 2004. In June 2004, the terms of the preferred stock were
amended and now contain only a nominal dividend aggregating to less than $1,000 per year. See  Overview  Preferred Stock above.
Principle payments on our note payable to UICI were $158,000 during 2005 compared to $146,000 in the comparable period in 2004. See  Note
Payable to UICI below.


Note Payable to UICI



On September 30, 2003, the Company purchased all
Healthaxis securities held by UICI for $3.9 million. The UICI holdings included 2,585,769 shares of Healthaxis common stock, or 48.3% of the
Companys then outstanding common stock; 1,424 shares of Series A Convertible preferred stock, or 6.1% of the then outstanding preferred stock;
and warrants to purchase 22,240 shares of common stock. The repurchased securities were retired. The total purchase price of $3.9 million included
$500,000 cash at closing, and a $3.4 million promissory note, which is due over three years and bears interest at 6%. The promissory note will be paid
through deductions from the monthly invoices for services provided by the Company to certain UICI subsidiaries. The amount of the monthly payment is
equal to the greater of one half of the invoice amount for such services or $65,000. A balloon principal payment is due at the maturity of the note if
the note has not been paid through the monthly payments. During the three-month period ended March 31, 2005, the Company paid UICI an aggregate of
$197,000 under


15

---



the promissory note, of which $158,000 was
principal and $39,000 was interest. As of March 31, 2005, the balance due under the promissory note is $2.5 million (of which $646, 000 is classified
as short-term).


Lease and Other Commitments



Healthaxis has certain capital and operating lease
commitments over the next five years. These leases are primarily for office space and data processing equipment. In April 2005, the Company entered
into a lease for approximately 20,000 square feet of office space located at 7301 North State Highway 161, Irving, Texas. The new lease was entered
into with the intent of relocating the corporate headquarters from the present location at 5215 North OConnor Blvd, Irving, Texas, where the
Company occupies approximately 31,300 square feet. Lease payments on the new lease will start on January 1, 2006, which coincides with the termination
of the North OConnor Blvd. lease on December 31, 2005. The new lease also provides terms under which ownership of certain furniture and equipment
will be conveyed to the Company in April 2007, providing that the Company has met its obligations under the lease at that time. While the Company plans
to continue to make payments on the North OConnor lease until its expiration in December 2005, the relocation of employees, equipment and related
materials is scheduled to take place in the second quarter of 2005. As such, the Company anticipates accruing a loss on the abandonment of the North
OConnor Blvd. property, based upon the future lease payment obligation as of the cease-use date plus other relocation expenses. Based upon the
reduced square footage and the lower rental rate per square foot of the new facility, the Company expects a cash savings of over $700,000 per year,
including lease expenses, utilities, parking, and property taxes, commencing in January 2006.




Healthaxis has no other significant cash commitments
other than those required by the normal day-to-day operation of its business.


Recently Adopted Accounting Pronouncements



See Note B to the Consolidated Financial Statements
herein for a discussion of the impact on the Companys financial statements of new accounting standards.


|Item 3. |  | Quantitative and Qualitative Disclosures About Market
Risk
|------- |  | ----------------------------------------------------------



Exposure to market risk for changes in interest
rates relate primarily to short-term investments. The Company does not use derivative financial instruments. The primary objective of its investment
activities is to preserve principal while maximizing yields without significantly increasing risk. Due to the nature of the Companys investments,
we believe that there is no material risk exposure.




Our cash equivalents and other investment
instruments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income. These instruments are not
entered into for trading purposes. We do not expect our interest income to be significantly affected by a sudden change in market interest
rates.




The dividend rate on our preferred stock is fixed at
a nominal rate of $0.0001 per share of the new preferred stock, payable semi-annually (aggregating less than $1,000 in dividend payments to all
preferred shareholders annually). The interest rate on our note payable is fixed at 6%. The fair value of these instruments is therefore subject to
market fluctuation as interest rates change.


|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



As of the end of the period covered by this
quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company management, including the
Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure


16

---



controls and procedures pursuant to Securities
Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure
controls and procedures are effective as of the end of the period covered by this report. There has been no change in the Companys internal
control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.


17

---

PART II. OTHER INFORMATION

|Item 1. |  | Legal Proceedings
|------- |  | -----------------



The Company is involved in litigation arising in the
ordinary course of its business. Management is of the opinion that no currently pending litigation will have a material adverse effect on the
Companys results of operations or financial position.


|Item 2. |  | Unregistered Sales of Equity Securities and Use of
Proceeds.
|------- |  | ------------------------------------------------------------



Not applicable


|Item 3. |  | Defaults Upon Senior Securities.
|------- |  | --------------------------------



Not applicable


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



Not applicable.


|Item 5. |  | Other Information.
|------- |  | ------------------



Not Applicable.


|Item 6. |  | Exhibits
|------- |  | --------






|(10.1) |  |  |  | Sublease Agreement effective April 1, 2005 between BearingPoint,Inc. and Registrant, filed herewith.                                                
|------ |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(31.1) |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                 
|(31.2) |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                 
|(32.1) |  |  |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
herewith.

18

---

Signature



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.




Healthaxis
Inc.




Date: May 16,
2005




By: /s/ James W. McLaneJames W. McLane, President and Chief Executive Officer (Principal Executive Officer)




By: /s/ Jimmy D. TaylorJimmy D. Taylor, Chief Financial Officer (Principal Financial Officer)


19

---

Exhibit Index






|(10.1) |  |  |  | Sublease Agreement effective April 1, 2005 between BearingPoint,Inc. and Registrant, filed herewith.                                                
|------ |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(31.1) |  |  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                 
|(31.2) |  |  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                                 
|(32.1) |  |  |  | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
herewith.

20

---