**United States**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**                                                                                         | ** ** |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                                                                                           | ** ** |
|       |                                                                                                                                                          |       |
|       | **For the quarterly period ended March 31, 2008**                                                                                                        |       |
|       |                                                                                                                                                          |       |
|       | **OR**                                                                                                                                                        |       |
|       |                                                                                                                                                          |       |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE**                                                                                        | ** ** |
| ** ** | **SECURITIES EXCHANGE ACT  OF 1934**                                                                                                                          | ** ** |
|       |                                                                                                                                                          |       |
|       | **For the transition period  from           to         ** |       |
|       |                                                                                                                                                          |       |
|       | **Commission file  number 0-13591**                                                                                                                      |       |

 

**HEALTHAXISINC.**

(Exact name of registrant as specified in itscharter)

 

| **Pennsylvania**                 | ** ** | **23-2214195**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**7301 N. State Highway 161, Suite 300, 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, ifchanged since last report:  **N/A**

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file
| such  reports), and (2) has been subject to such filing requirements for the past  90 days. | xYes | o  No |
|---------------------------------------------------------------------------------------------|------|-------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
|   |   |   | oYes | x  No |
|--------|--------|--------|------|-------|

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 8,836,588 shares of common stock, parvalue $.10, outstanding as of May 4, 2008.

 

 

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Healthaxis Inc.

 

Table of Contents

 
| ** **                        | ** **                                                                                  | **Page** |
|-----------------------------------|---------------------------------------------------------------------------------------------|----------|
|                              |                                                                                        |     |
| PART I Financial Information |                                                                                        |
|                              |                                                                                        |     |
| Item 1.                           | Financial  Statements                                                                       | 3        |
|                              | Consolidated Balance Sheets                                                                 | 3        |
|                              | Consolidated Statements of Operations                                                       | 4        |
|                              | Consolidated Statements of Cash Flows                                                       | 5        |
|                              | Notes to Unaudited Consolidated Financial Statements                                        | 6        |
|                              |                                                                                        |     |
| Item 2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9        |
|                              |                                                                                        |     |
| Item 3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 12       |
|                              |                                                                                        |     |
| Item 4T. Controls and Procedures  | 12                                                                                          |
|                              |                                                                                        |     |
| PART II  Other Information   |                                                                                        |
|                              |                                                                                        |     |
| Items  1-5                        | 13                                                                                          |
|                              |                                                                                        |     |
| Item 6                            | 14                                                                                          |
|                              |                                                                                        |     |
| Signatures                        | 15                                                                                          |
|                              |                                                                                        |     |
| Exhibit Index                | 16                                                                                          |

 

2

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# **PART I.FINANCIAL INFORMATION**

#  

**Item1.   Consolidated Financial Statements**

 

**Healthaxis Inc. and Subsidiaries**

#### **Consolidated Balance Sheets**

#### ** **

(In thousands except share and per share data) (Unaudited)

 
| ** **                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                           |       |               |       |                  |       |
| Current assets:                                                                                                                      |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                           |       | $                  | 2,583      |                  | $          | 2,621 |   |
| Accounts and  note receivable, net of allowance for doubtful accounts of $106 and 109,  respectively                                 |       | 2,597              |       | 2,630                 |       |
| Prepaid expenses                                                                                                                     |       | 591                |       | 510                   |       |
| Total current  assets                                                                                                                |       | 5,771              |       | 5,761                 |       |
|                                                                                                                                 |       |               |       |                  |       |
| Property,  equipment and software, less accumulated depreciation and amortization of  $7,375 and $7,213, respectively                |       | 1,228              |       | 1,361                 |       |
| Contract  start-up costs, less accumulated amortization of $2,719 and $2,599,  respectively                                          |       | 1,113              |       | 1,214                 |       |
| Goodwill                                                                                                                             |       | 11,276             |       | 11,276                |       |
| Other assets                                                                                                                         |       | 80                 |       | 80                    |       |
| Total assets                                                                                                                         |       | $                  | 19,468     |                  | $          | 19,692 |   |
|                                                                                                                                 |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                       |       |               |       |                  |       |
| Current  liabilities:                                                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                                                     |       | $                  | 1,388      |                  | $          | 1,215 |   |
| Accounts payable  to related parties                                                                                                 |       | 86                 |       | 84                    |       |
| Accrued  liabilities                                                                                                                 |       | 777                |       | 640                   |       |
| Deferred  revenues                                                                                                                   |       | 1,161              |       | 1,309                 |       |
| Notes payable,  current portion                                                                                                      |       | —             |       | 93                    |       |
| Working capital  and equipment lines of credit, current portion                                                                      |       | 317                |       | 313                   |       |
| Current portion,  post retirement and employment liabilities                                                                         |       | 121                |       | 121                   |       |
| Total current  liabilities                                                                                                           |       | 3,850              |       | 3,775                 |       |
|                                                                                                                                 |       |               |       |                  |       |
| Post retirement  and employment liabilities                                                                                          |       | 685                |       | 704                   |       |
| Working capital  and equipment lines of credit                                                                                       |       | 1,417              |       | 1,192                 |       |
| Deferred rent                                                                                                                        |       | 240                |       | 267                   |       |
| Other  liabilities                                                                                                                   |       | 202                |       | 202                   |       |
| Total liabilities                                                                                                                    |       | 6,394              |       | 6,140                 |       |
|                                                                                                                                 |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                       |       |               |       |                  |       |
|                                                                                                                                 |       |               |       |                  |       |
| Stockholders’  Equity:                                                                                                          |       |               |       |                  |       |
| Preferred stock,  par value $1.00: authorized 100,000,000 shares:                                                                    |       |               |       |                  |       |
| Series A  Convertible 740,401 shares issued and outstanding, for both periods (no liquidation  preference)                      |       | 740                |       | 740                   |       |
| Common stock,  par value $.10: authorized 1,900,000,000 shares, issued and outstanding  8,360,424 and 8,319,805 shares, respectively |       | 836                |       | 832                   |       |
| Note receivable  from employees                                                                                                      |       | —             |       | (5                    | )          |
| Additional  paid-in capital                                                                                                          |       | 450,673            |       | 450,618               |       |
| Accumulated  deficit                                                                                                                 |       | (439,175           | )          | (438,633              | )          |
| Total  stockholders’ equity                                                                                                     |       | 13,074             |       | 13,552                |       |
| Total  liabilities and stockholders’ equity                                                                                     |       | $                  | 19,468     |                  | $          | 19,692 |   |

 

Seenotes to unaudited consolidated financial statements.

 

3

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**Healthaxis Inc. and Subsidiaries**

#### **Consolidated Statementsof Operations**

#### ** **

#### **(In thousands, except share and per share data) (Unaudited)**

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **March 31,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                                                                                                |       |                             |       |   |   |
| Revenue                                                                                             |       | $                                | 4,004      |   | $ | 4,211 |   |
|                                                                                                |       |                             |       |   |   |
| Expenses:                                                                                           |       |                             |       |   |   |
| Cost of revenues                                                                                    |       | 3,538                            |       | 3,438 |   |
| Sales and  marketing                                                                                |       | 385                              |       | 248 |   |
| General and  administrative                                                                         |       | 586                              |       | 559 |   |
| Total expenses                                                                                      |       | 4,509                            |       | 4,245 |   |
|                                                                                                |       |                             |       |   |   |
| Operating loss                                                                                      |       | (505                             | )          | (34 | ) |
|                                                                                                |       |                             |       |   |   |
| Interest and  other income, net                                                                     |       | 11                               |       | 33 |   |
| Interest expense                                                                                    |       | (42                              | )          | (58 | ) |
| Loss before  income taxes                                                                           |       | (536                             | )          | (59 | ) |
| Provision for  income taxes                                                                         |       | (6                               | )          | (3 | ) |
| Net loss                                                                                            |       | $                                | (542       | ) | $ | (62 | ) |
|                                                                                                |       |                             |       |   |   |
| Net loss per  share of common stock (basic and diluted)                                             |       | $                                | (0.07      | ) | $ | (0.01 | ) |
|                                                                                                |       |                             |       |   |   |
| Weighted average  common shares and equivalents used in computing basic and diluted loss per  share |       | 8,325,857                        |       | 8,171,551 |   |

 

See notes to unauditedconsolidated financial statements.

 

4

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#### **Healthaxis Inc. and Subsidiaries**

 

#### **Consolidated Statements of Cash Flows**

#### ** **

#### **(In thousands) (Unaudited)**

** **
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,  2008**         | ** ** | **March 31,  2007** | ** ** |
| **Cash flows from operating activities**                               |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (542       | ) | $ | (62 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                             |       | 281                              |       | 276 |   |
| Non-cash equity  compensation expense                                                      |       | 94                               |       | 31 |   |
| Other                                                                                      |       | —                           |       | (2 | ) |
| Change in:                                                                                 |       |                             |       |   |   |
| Accounts and  note receivable                                                              |       | 37                               |       | (99 | ) |
| Prepaid expenses  and other current assets                                                 |       | (81                              | )          | (61 | ) |
| Accounts payable  and accrued liabilities                                                  |       | 260                              |       | 27 |   |
| Deferred  revenues                                                                         |       | (91                              | )          | (53 | ) |
| Other assets and  liabilities                                                              |       | (28                              | )          | (4 | ) |
| Net cash  provided by (used in) operating activities                                       |       | (70                              | )          | 53 |   |
|                                                                                       |       |                             |       |   |   |
| **Cash  flows from investing activities**                                                  |       |                             |       |   |   |
| Investment in  capitalized software and contract start-up costs                            |       | (19                              | )          | (287 | ) |
| Purchases of  property, equipment and software                                             |       | (85                              | )          | (33 | ) |
| Net cash used in  investing activities                                                     |       | (104                             | )          | (320 | ) |
|                                                                                       |       |                             |       |   |   |
| **Cash  flows from financing activities**                                                  |       |                             |       |   |   |
| Proceeds from  lines of credit                                                             |       | 800                              |       | — |   |
| Payments on  lines of credit and note payable                                              |       | (664                             | )          | — |   |
| Net cash  provided by financing activities                                                 |       | 136                              |       | — |   |
| Decrease in cash  and cash equivalents                                                     |       | (38                              | )          | (267 | ) |
| Cash and cash  equivalents, beginning of period                                            |       | 2,621                            |       | 3,362 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                | 2,583      |   | $ | 3,095 |   |
|                                                                                       |       |                             |       |   |   |
| Non-cash  financing activities                                                             |       |                             |       |   |   |
| Accounts  receivable applied to note and interest payable in lieu of cash                  |       | $                                | —     |   | $ | 195 |   |
| Interest paid                                                                              |       | $                                | 26         |   | $ | 25 |   |

 

Seenotes to unaudited consolidated financial statements.

 

5

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#### ** **

#### **Healthaxis Inc. and Subsidiaries**

**Notes to Unaudited ConsolidatedFinancial Statements**

**March 31, 2008**

 

**Note A –Description of business and basis of presentation**

 

*Unaudited FinancialInformation*

 

Theunaudited consolidated financial statements have been prepared by HealthaxisInc. and its subsidiaries (“Healthaxis” or the “Company”), pursuant to the rules andregulations of the Securities and Exchange Commission and reflect alladjustments consisting of normal recurring entries, which, in the opinion ofthe Company, are necessary to present fairly the results for the interimperiods. The interim financial statements do not include all disclosuresprovided in fiscal year end financial statements prepared in accordance withaccounting principles generally accepted in the United States of America,although the Company believes that the accompanying disclosures are adequate tomake the information presented not misleading. Results of operations for the three-month period ended March 31,2008, are not necessarily indicative of the results that may be expected forthe year ending December 31, 2008.

 

Thesefinancial statements should be read in conjunction with the financialstatements and notes thereto contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

*Equity Compensation*

 

TheCompany accounts for equity compensation in accordance with Statement ofFinancial Standards No. 123R, “Share Based Payment” (SFAS 123R).  On March 19, 2008, the Company granted72,500 shares of restricted stock to its directors.  The restricted stock has been valued atapproximately $65,000, which represents the trading value of the stock asquoted on NASDAQ on the date of grant. The shares of stock granted to directors vest over the calendar year of service,thus one-fourth of the shares vested in the quarter ended March 31, 2008,and the Company recognized compensation expense of approximately $16,000.  On January 16, 2007, the Company granted92,500 shares of restricted stock to the directors, valued at approximately$127,000, and the Company recognized compensation expense of approximately$31,000 for the quarter ended March 31, 2007.

 

On March 19, 2008, theCompany granted 185,000 shares of restricted stock to its officers and keyemployees with a grant date fair value of $166,500.  These shares vest over proportionately overthe three years following the date of grant. On April 20,2007, the Company granted 210,000 shares to officers and key employees with agrant date fair value of $370,000.  Theseshares vest over time, with 25% vesting immediately, and 25% on each of thethree successive anniversary dates of the grant.  For the three months ended March 31,2008, the Company recognized compensation expense of $25,000 related to thetime vesting of these grants as compared to no employee-related equitycompensation charge for the three months ended March 31, 2007.  All shares of restricted stock granted by theCompany vest upon a change of control.

 

On March 10,2008, the Company entered into an Employment Separation Agreement with LawrenceF. Thompson, the Executive Vice President of Healthaxis. Under the terms of theagreement, 34,750 shares of restricted stock previously granted to Mr. Thompsonbecame fully vested.  The Companyrecorded a charge of $53,000 in March 2008 to reflect the immediatevesting of these shares.

 

Nostock options were granted or vested in 2008 or 2007.

 

6

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*Earnings Per Share*

 

Basic loss per share is computed using only the weighted average numberof common shares outstanding during the respective periods.  Diluted earnings per share is computed toshow the dilutive effect, if any, of convertible preferred stock, stock optionsand warrants using the treasury stock method based on the average market priceof the stock during the respective periods. The effect of including the convertible preferred stock, restrictedstock, stock options and warrants in the computation of diluted earnings pershare would be anti-dilutive for each of the periods presented, thus theseitems have not been included in the computation.  Following is a summary of these potentiallydilutive securities:

 
| ** **                       | ** ** | **As of March 31,** | ** ** |
|----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Options                          |       | 1,145,115                          |       | 1,181,248 |   |
| Restricted stock                 |       | 481,125                            |       | 219,375 |   |
| Warrants                         |       | 7,229,186                          |       | 7,229,186 |   |
| Preferred stock                  |       | 740,401                            |       | 740,401 |   |
| Total common shares if converted |       | 9,595,827                          |       | 9,370,210 |   |

 

**Note B –Significant Customer Concentrations**

 

For the three months ended March 31, 2008 and2007, three customers accounted for $2.5 million (64%) and $2.7 million (64%),respectively, of the Company’s total revenues. At March 31, 2008 and December 31, 2007, three customersindividually accounted for more than 10% of the Company’s accounts receivableas shown in the table below.

 
| ** ** | ** ** | **Percent of accounts and notes receivable** | ** ** |
|------------|------------|-----------------------------------------------------------------------|------------|
| ** ** | ** ** | **March 31, 2008**                                          | ** ** | **Dec. 31, 2007** | ** ** |
| Customer A |       | 25                                                                    | %          | 32 | % |
| Customer B |       | 22                                                                    | %          | 21 | % |
| Customer C |       | 14                                                                    | %          | 9 | % |

 

**Note  C – Related Party Transactions**

 

The Company is a party to a RemoteResourcing Agreement with Healthcare BPO Partners L.P., a company affiliatedwith a significant shareholder. Healthcare BPO Partners, based in Jaipur, India, provides personnel andinfrastructure that is utilized by the Company to provide business processoutsourcing services and other software development and technical supportservices to support the Company’s operations. The resources provided by Healthcare BPO Partners supplement the Company’sexisting wholly-owned operations in Utah, Texas and Jamaica.  As a part of the Resourcing Agreement,Healthcare BPO Partners also provided data center hosting services, at a ViennaVirginia facility, to Healthaxis until September 2007.  For the three months ended March 31,2008, and March 31, 2007, the Company incurred costs of approximately$125,000, and $269,000, respectively, related to the Resourcing Agreement.

 

**Note D – RecentAccounting Pronouncements**

 

In September 2006,FASB Statement 157, “Fair Value Measurements” (“SFAS 157”) was issued.  SFAS 157 establishes a framework for measuringfair value by providing a standard definition of fair value as it applies toassets and liabilities.  SFAS 157, whichdoes not require any new fair value measurements, clarifies the 

 

7

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application of otheraccounting pronouncements that require or permit fair value measurements.  On February 12, 2008, FASB StaffPosition No. FAS 157-2 “Effective Date of FASB Statement No. 157” wasreleased.  This FSP applies tononfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in an entity’s financial statements on arecurring basis (at least annually). This FSP defers the effective date ofStatement 157 to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years for items within the scope of thisFSP. The implementation of SFAS 157 for financial assets and financialliabilities effective January 1, 2008, did not have a material impact onour Consolidated Financial Statements and the adoption of SFAS 157 fornonfinancial assets and nonfinancial liabilities is not anticipated to have amaterial impact on our Consolidated Financial Statements.

 

In February 2007, FASB Statement159, “The Fair Value Option for Financial Statement Assets and FinancialLiabilities” (“SFAS 159”) was issued. SFAS 159 allows entities the option to measure eligible financialinstruments at fair value as of specified dates.  Such election, which may be applied on aninstrument-by-instrument basis, is typically irrevocable once elected.  The implementation of SFAS 159 effective January 1,2008, did not have a material impact on our Consolidated Financial Statements.

 

**Note E - SubsequentEvent**

 

On April 25,2008, the Company entered into an amendment to its Loan and Security Agreement(“LSA”) with Silicon Valley Bank.  As aresult of the amendment, certain covenants were modified.  Based on the calculation of the borrowingbase as of March 31, 2008, we would have been eligible to draw up toapproximately $1.7 million under the revolving line, of which $1.1 million hadbeen drawn as of that date.

 

8

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**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Forward-Looking Statements**

 

All statements other thanstatements of historical fact contained in this report, including statements inthis “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” concerning the Company’s financial position and liquidity,results of operations, prospects for future growth, and other matters areforward-looking statements.  Thesestatements 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, andconstitute forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements are subjectto known and unknown risks, uncertainties and other factors, which may causeactual results to be materially different from those contemplated by theforward-looking statements.  Such factorsinclude the risks and uncertainties identified in Healthaxis documents filedwith, or furnished to, the Securities and Exchange Commission, includingwithout limitation those identified under the caption “Risk Factors” in theCompany’s Form 10-K for the year ended December 31, 2007.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-lookingstatements.

 

**Overview**

** **

Healthaxis Inc. is a Pennsylvania corporation, whichwas organized in 1982. Healthaxis’ common stock trades on the NASDAQ CapitalMarket under the symbol “HAXS.”  Theoperations of Healthaxis are conducted through its subsidiary, Healthaxis,Ltd.  Unless otherwise indicated, or thecontext 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 atwww.healthaxis.com.  The Healthaxis Codeof Conduct can be found on the Healthaxis website.  Information found on the Healthaxis websiteis not a part of this report.

 

For the first quarter of 2008, the Company reported revenue of $4.0 million and an operating loss of $505,000.  Revenue was approximately $207,000 less than the first quarter of 2007 due primarily to the loss of a BPO services customer in mid-2007.  The operating loss for the first quarter of 2008 was $471,000 greater than the operating loss the first quarter of 2007 as a result of the combined impact of a reduced gross margin from a lower revenue base, reduced capitalization of implementation and software development costs, and a severance charge of $204,000.

 

*CriticalAccounting Policies*

 

Criticalaccounting policies are those which are most important to the financialstatement presentation and that require the most difficult, subjective complexjudgments.  There have been no changes inthe Company’s critical accounting policies as described in the Company’s Form 10-Kfor the year ended December 31, 2007, other than as described in Note D tothe Notes to Unaudited Consolidated Financial Statements.

 

9

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**Results of Operations**

 

**Threemonths ended March 31, 2008 compared to three months ended March 31,2007**

** **
| ** **       | ** ** | **(Table in thousands)**                   | ** ** | ** ** | ** ** |
|------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **       | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **Change** | ** ** |
|             |       |                                                 |       |       |       |   |   |
| Revenues         |       | $                                                    | 4,004      |       | $          | 4,211 |   | $ | (207 | ) |
| Cost of revenues |       | 3,538                                                |       | 3,438      |       | (100 | ) |
| Gross profit     |       | $                                                    | 466        |       | $          | 773 |   | $ | (307 | ) |
| % of revenue     |       | 12                                                   | %          | 18         | %          |   |   |

 

**Revenues**were approximately $207,000 lower in thethree months ended March 31, 2008 compared to the same period in2007.  BPO services revenues decreasedapproximately $239,000 due to the 2007 mid-year loss of a BPO services customerthat was acquired by a larger organization. BPO services revenue generated by our new initiative to provide BPOservices in accounts payable outsourcing more than offset other BPO servicesrevenue declines resulting from fewer paper-based healthcare claims to process,as a result of the combined impact of fewer lives on our systems from someexisting customers and a continuing shift in the healthcare industry from paperclaims to higher volumes of electronic claims. Application Service Provider (“ASP”)license fees and transaction fees increased slightly from new serviceofferings, though in total our customers experienced a net loss in the numberof lives they service.

 

**Cost of revenues**includes all expenses directly associated with theproduction of revenue, and consists primarily of salaries and related benefits,rent, amortization and depreciation, system expenses such as maintenance andrepair, as well as other related consumables, and are partially reduced by thecapitalization of certain costs incurred (primarily employee compensation) fornew customer implementations and software development projects.  Cost of revenues increased $100,000 for thethree months ended March 31, 2008 compared to the same period in 2007 ascost reductions were more than offset by the impact of a $226,000 decrease incosts capitalized for implementations and development.  Since capitalized costs are a reduction toexpense, a decrease in capitalized costs has the effect of increasing cost ofrevenues.  Capitalized costs declined inthe first quarter of 2008 primarily because we spent less time on customerimplementations than in the prior year. We applied a significant amount of our resources during the firstquarter of 2007 completing the implementation of a large third partyadministrator (and a significant customer). The cost reductions achieved in 2007 included a reduction in BPOservices labor costs of $139,000 related to the decline in revenue.

 
| ** **                          | ** ** | **(Table in thousands)**                   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2008**                                             | ** ** | **2007**   | ** ** | **Change** | ** ** |
|                                |       |                                                 |       |       |       |   |   |
| Sales and  marketing expense        |       | $                                                    | 385        |       | $          | 248 |   | $ | 137 |   |
| General and  administrative expense |       | 586                                                  |       | 559        |       | 27 |   |
| Interest and  other income, net     |       | 11                                                   |       | 33         |       | (22 | ) |
| Interest expense                    |       | (42                                                  | )          | (58        | )          | 16 |   |
| Provision for  income taxes         |       | (6                                                   | )          | (3         | )          | (3 | ) |
|                                     |            |                                                      |            |            |            |  |  |  |  |  |

 

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**Sales and marketing expenses**consist primarily of employee salariesand related benefits, as well as promotional costs such as direct mailingcampaigns, trade shows and media advertising.  Sales and marketing expenses increased $137,000 in the three monthsended March 31, 2008 compared to the same quarter of 2007.  This increase resulted from a severancecharge of $204,000, partially offset by a decrease in variable marketing andtravel expenses.  Included in theseverance charge was non-cash equity compensation of $53,000 related to vestingof restricted stock related to the termination. Total non-cash equity compensation expense recorded in sales andmarketing was $56,000 for the three months ended March 31, 2008.  There was no such expense for the correspondingperiod of 2007.

 

**General and administrative expenses**include executive management, accounting,legal and human resources compensation and related benefits, as well asexpenditures for applicable overhead costs. These expenses increased $27,000 in the three months ended March 31,2008 compared to the same quarter of 2007 due primarily to an increase inprofessional fees.  Non-cash equitycompensation expense recorded in general and administrative expense was $29,000and $32,000 for the three months ended March 31, 2008, and 2007,respectively.

 

**Interest and other income, net** decreased $22,000 in the three monthsended March 31, 2008 compared to the same quarter of 2007 due to reducedcash balances and lower interest rates.

 

**Interest expense** decreased $16,000 in the three monthsended March 31, 2008 compared to the same quarter of 2007.  This decrease can be attributed to loweraverage debt balances and the decline in interest rates.

 

**Provision for income taxes** was $6,000 for the three months ended March 31,2008 compared to $3,000 in the same quarter of 2007.  Effective January 1, 2007, the Companyis accruing an estimate of the tax due under the new margin tax enacted by theState of Texas.

 

**Liquidity and Capital Resources**

** **

*Overviewof Cash Resources*

 

At March 31, 2008,our cash and cash equivalents of $2.6 million were relatively unchanged fromthe balance at December 31, 2007. The sources and uses of cash during the first quarter of 2008 aredescribed more fully in “Analysis of Cash Flows” below.  We believe that the Company will maintainsufficient liquidity to fund operations for at least the next 12 months.

 

On April 25, 2008,the Company entered into an amendment to its Loan and Security Agreement (“LSA”)with Silicon Valley Bank whereby certain covenants were modified.

 

*Analysisof Cash Flows*

 

*Cash used in operating activities*****for the three months ended March 31, 2008 wasapproximately $70,000 as compared to cash provided by operating activities of$53,000 for the same period in 2007.  Thedifference was primarily the result of the increased net loss in 2008 andchanges in various working capital accounts, primarily accounts payable andaccrued liabilities.

 

*Cash used in investing activities* for the three months ended March 31,2008 was $104,000 as compared to $320,000 for the same period in 2007.  The Company’s investing activities continueto be primarily in the areas of developing software enhancements, contractstart-up activities and acquisition of property, equipment and software.

 

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*Cash provided by financing**activities* for the three months ended March 31,2008 was $136,000 compared to zero for the quarter ended March 31, 2007.  The Company paid off the existing notepayable to HealthMarkets in January 2008.

 

**Recently Adopted AccountingPronouncements**

 

SeeNote D to the Notes to Unaudited Consolidated Financial Statements herein for adiscussion of the impact on the Company’s financial statements of newaccounting standards.

 

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Not applicable under smaller reporting company scaleddisclosure requirements.

 

**Item4T. Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

As of the end ofthe period covered by this quarterly report, the Company carried out anevaluation, under the supervision and with the participation of the Companymanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15.  Based on that evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer have concluded that these disclosurecontrols and procedures were effective as of the end of the period covered bythis report to provide reasonable assurance that informationrequired to be disclosed by the Company in reports filed or submitted by itunder the Securities and Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission rules and forms, and to provide reasonable assurance that information required to bedisclosed by the Company is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding disclosure.

 

**Changes in Internal Control over Financial Reporting**

 

Therewere no changes in the Company’s internal controls over financial reportingthat occurred during the quarter ended March 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

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**PART II.OTHER INFORMATION**

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

 

We are not currently a party to any material legalproceedings and we are not aware of any pending or threatened litigation thatwould have a material adverse effect on us or our business.

 
| **Item 1A.** | **Risk Factors** |
|--------------|------------------|

 

Not applicableunder smaller reporting company scaled disclosure requirements.

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

 

(c)           First Quarter 2008 Issuer Purchasesof Equity Securities

 
| **Period**      | ** ** | **(a) Total  Number of  Shares  Purchased (1)** | ** ** | **(b) Average Price  Paid per Share** | ** ** | **(c) Total Number  of Shares  Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value) of  Shares that May  Yet Be  Purchased Under  the Plans or  Programs** | ** ** |
|-----------------|------------|----------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **      | ** ** | ** **                                                     | ** ** | ** **                                                | ** ** | ** **                                                                                                                            | ** ** | ** **                                                                                                                                                                     | ** ** |
| March 2008 |       | 10,590                                                         |       | $                                                         | 0.89       |                                                                                                                                  | —     |                                                                                                                                                                           | —     |   |
|                 |            |                                                                |            |                                                           |            |                                                                                                                                       |            |                                                                                                                                                                                |            |  |

 

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(1) These purchases were not made pursuant to a publicly announcedrepurchase plan or program. Represents 10,590 shares of common stocksurrendered to Healthaxis to pay withholding taxes on shares of restrictedstock vesting under the 2005 Stock Incentive Plan.

 
| **Item 3.** | **Defaults Upon 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** |
|-------------|--------------|

 
| (10.1) |   | 2008 Director  Compensation, filed herewith.                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.2) |   | Employment Separation  Agreement between Healthaxis, Ltd. and Lawrence F. Thompson dated  March 10, 2008 (incorporated by reference to Exhibit 10.1 to  Form 8-K filed March 11, 2008). |
| (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.                                                 |

 

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### **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 theundersigned thereunto duly authorized.

 

 
|                    | Healthaxis Inc.                                                                          |
|-------------------------|------------------------------------------------------------------------------------------|
|                    |                                                                                     |
|                    |                                                                                     |
| Date:  May 9, 2008 | By:  /s/ John M. Carradine                                                               |
|                    | John  M. Carradine, President and Chief Executive Officer  (Principal Executive Officer) |
|                    |                                                                                     |
|                    |                                                                                     |
|                    | By:  /s/ Ronald K. Herbert                                                               |
|                    | Ronald  K. Herbert, Chief Financial Officer (Principal  Financial Officer)               |

 

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#### **Exhibit Index**

#### ** **

| (10.1) |   | 2008 Director  Compensation, filed herewith.                                                                                                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.2) |   | Employment Separation  Agreement between Healthaxis, Ltd. and Lawrence F. Thompson dated  March 10, 2008 (incorporated by reference to Exhibit 10.1 to  Form 8-K filed March 11, 2008). |
| (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.                                                 |

 

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