##### Table of Contents



SECURITIES AND 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. . . . . . . . . . . . . . . . .September 30, 2003


OR

| |      |                                                                                         
| | ---- | ----------------------------------------------------------------------------------------
| | [  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from. . . . . . . . . . . to. . . . . . . . . . .


Commission file number. . . . . . . . . . . . . . . . . . . . 0-13591

HEALTHAXIS INC.

(Exact name of registrant as specified in its charter)


|                                                                            |  |                                                
|--------------------------------------------------------------------------- |  | -----------------------------------------------
|Pennsylvania
(State or other jurisdiction of
incorporation or organization) |  | 23-2214195
(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 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: 2,767,592 shares of common
stock, par value $.10, outstanding as of November 7, 2003.

Page 1



---

TABLE OF CONTENTS



|                                                 |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1. Condensed Consolidated Financial Statements                                          
|                                                 |                                                                                               | Condensed Consolidated Balance Sheets               
|                                                 |                                                                                               | Condensed Consolidated Statements of Operations     
|                                                 |                                                                                               | Condensed Consolidated Statements of Cash Flows     
|                                                 |                                                                                               | Notes to Condensed Consolidated Financial Statements
|                                                 | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
|                                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                 | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                      
|                                                 | Item 1. Legal Proceedings                                                                    
|                                                 | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                 | Item 3. Defaults Upon Senior Securities                                                      
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                 | Item 5. Other Information                                                                    
|                                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signature                                       
|Exhibit Index                                   
|EX-3.2 Certificate of Designation-Series A Stock
|EX-10.1 Purchase Agreement                      
|EX-10.2 Promissory Note                         
|EX-31.1 Certification of CEO - Section 302      
|EX-31.2 Certification of CFO - Section 302      
|EX-32.1 Certification of CEO - Section 906      
|EX-32.2 Certification of CFO - Section 906      



---



##### Table of Contents



Healthaxis Inc.

Table of Contents

|                             |  |                                                                                       |    |                                                      |    |      |   | 
|---------------------------- |  | ------------------------------------------------------------------------------------- | -- | ---------------------------------------------------- | -- | ---- | - | 
|                             |  |                                                                                       |    |                                                      |    | Page
|                             |  |                                                                                       |    |                                                      |    |     
|PART I Financial Information |  |                                                                                       |    |                                                     
|Item 1.                      |  | Condensed Consolidated Financial Statements                                           |    |                                                      | 3  |     
|                             |  |                                                                                       |    | Condensed Consolidated Balance Sheets                |    |      | 3 | 
|                             |  |                                                                                       |    | Condensed Consolidated Statements of Operations      |    |      | 4 | 
|                             |  |                                                                                       |    | Condensed Consolidated Statements of Cash Flows      |    |      | 5 | 
|                             |  |                                                                                       |    | Notes to Condensed Consolidated Financial Statements |    |      | 6 | 
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |    |                                                      | 14 |     
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |                                                      | 24 |     
|Item 4.                      |  | Controls and Procedures                                                               |    |                                                      | 24 |     
|PART II Other Information    |  |                                                                                       |    |                                                     
|Items                        |  | 1-5                                                                                   |    |                                                      | 25 |     
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |    |                                                      | 25 |     
|Signatures                   |  |                                                                                       | 27 |                                                     
|Exhibit Index                |  |                                                                                       | 28 |                                                     

Page 2



---



##### Table of Contents






PART I. FINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




Healthaxis Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

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

|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |       |       |        | 
|---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ----- | ------------- | ------ | ------------ | ----- | ----- | ------ | 
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       | September 30, |        | December 31,
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       | 2003          |        | 2002        
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |             
|Assets                                                                                                                             |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|Cash and cash equivalents                                                                                                          |                                                                                                                                                            | $                         | 8,350                                      |       |               | $      | 11,380       |      
|Accounts receivable, net of allowance for doubtful accounts of $40 and $195, respectively                                          |                                                                                                                                                            |                           | 3,349                                      |       |               |        | 3,346        |      
|Prepaid expenses and other current assets                                                                                          |                                                                                                                                                            |                           | 762                                        |       |               |        | 648          |      
|Costs in excess of billings on contracts in progress                                                                               |                                                                                                                                                            |                           | 897                                        |       |               |        | 309          |      
|Notes receivable                                                                                                                   |                                                                                                                                                            |                           | 86                                         |       |               |        | 214          |      
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            |                           | Total current assets                       |       |               | 13,444 |              |       |       | 15,897 | 
|Property, equipment and software, less accumulated depreciation and
amortization of $11,982 and $11,174, respectively              |                                                                                                                                                            |                           | 1,293                                      |       |               |        | 1,462        |      
|Contract start-up costs, less accumulated amortization of $1,251 and $834, respectively                                            |                                                                                                                                                            |                           | 801                                        |       |               |        | 1,149        |      
|Capitalized software, less accumulated amortization of $1,984 and $1,383, respectively                                             |                                                                                                                                                            |                           | 1,203                                      |       |               |        | 1,502        |      
|Customer base, less accumulated amortization of $2,869 and $2,112, respectively                                                    |                                                                                                                                                            |                           | 1,345                                      |       |               |        | 2,102        |      
|Goodwill                                                                                                                           |                                                                                                                                                            |                           | 11,276                                     |       |               |        | 11,276       |      
|Notes receivable                                                                                                                   |                                                                                                                                                            |                           | 72                                         |       |               |        | 134          |      
|Other assets                                                                                                                       |                                                                                                                                                            |                           | 65                                         |       |               |        | 135          |      
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            |                           | Total assets                               |       | $             | 29,499 |              |       | $     | 33,657 | 
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|Liabilities and Stockholders Equity                                                                                               |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|Accounts payable                                                                                                                   |                                                                                                                                                            | $                         | 1,950                                      |       |               | $      | 1,438        |      
|Accrued liabilities                                                                                                                |                                                                                                                                                            |                           | 662                                        |       |               |        | 847          |      
|Note payable, current portion                                                                                                      |                                                                                                                                                            |                           | 523                                        |       |               |        |             |      
|Deferred revenues                                                                                                                  |                                                                                                                                                            |                           | 1,215                                      |       |               |        | 1,713        |      
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            | Total current liabilities |                                            |       | 4,350         |        |              |       | 3,998 |       
|Note payable                                                                                                                       |                                                                                                                                                            |                           | 2,877                                      |       |               |        |             |      
|Post retirement and employment liabilities                                                                                         |                                                                                                                                                            |                           | 945                                        |       |               |        | 966          |      
|Other liabilities                                                                                                                  |                                                                                                                                                            |                           | 1,320                                      |       |               |        | 1,085        |      
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            |                           | Total liabilities                          |       |               | 9,492  |              |       |       | 6,049  | 
|Commitments and contingencies                                                                                                      |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|Stockholders Equity:                                                                                                              |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|Preferred stock, par value $1.00: authorized 100,000,000 shares:                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   | Series A cumulative convertible, issued and outstanding 22,076 and 23,500 shares,
respectively,
(liquidation preference $22,076 and $23,500, respectively) |                           |                                            | 5,899 |               |        |              | 6,280 |      
|Common stock, par value $.10: authorized 1,900,000,000 shares,
issued and outstanding 2,767,592 and 5,364,530 shares, respectively |                                                                                                                                                            |                           | 277                                        |       |               |        | 536          |      
|Additional paid-in capital                                                                                                         |                                                                                                                                                            |                           | 441,560                                    |       |               |        | 445,421      |      
|Accumulated deficit                                                                                                                |                                                                                                                                                            |                           | (427,729                                   | )     |               |        | (424,629     | )    
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            |                           | Total stockholders equity                 |       |               | 20,007 |              |       |       | 27,608 | 
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      
|                                                                                                                                   |                                                                                                                                                            |                           | Total liabilities and stockholders equity |       | $             | 29,499 |              |       | $     | 33,657 | 
|                                                                                                                                   |                                                                                                                                                            |                           |                                            |       |               |        |              |      

See notes to consolidated financial statements.

Page 3



---



##### Table of Contents






Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations

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

|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |     |       |           |        | 
|------------------------------------------------------------------------------- | ---------------------------------------- | -------------------------------------- | ------------------------------------------ | -------------- | ----- | -------------------------------- | ------ | ------------------------------- | ---- | --------- | ------ | ---- | ----- | --------- | ------ | --- | ----- | --------- | ------ | 
|                                                                                |                                          |                                        |                                            |                |       | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                                                                |                                          |                                        |                                            |                |       | 2003                             |        | 2002                            |      | 2003      |        | 2002
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |     
|Revenues                                                                        |                                          | $                                      | 5,352                                      |                |       | $                                | 4,850  |                                 |      | $         | 16,066 |      |       | $         | 14,730 |    
|Expenses:                                                                       |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          |                                        | Costs of revenue                           |                |       | 4,797                            |        |                                 |      | 4,926     |        |      |       | 14,869    |        |     |       | 16,373    |       
|                                                                                |                                          |                                        | Sales and marketing                        |                |       | 224                              |        |                                 |      | 617       |        |      |       | 762       |        |     |       | 1,626     |       
|                                                                                |                                          |                                        | General and administrative                 |                |       | 804                              |        |                                 |      | 1,142     |        |      |       | 2,550     |        |     |       | 2,745     |       
|                                                                                |                                          |                                        | Research and development                   |                |       |                                 |        |                                 |      | 78        |        |      |       | 30        |        |     |       | 318       |       
|                                                                                |                                          |                                        | Amortization of intangibles                |                |       | 324                              |        |                                 |      | 323       |        |      |       | 972       |        |     |       | 976       |       
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          |                                        |                                            | Total expenses |       |                                  | 6,149  |                                 |      |           | 7,086  |      |       |           | 19,183 |     |       |           | 22,038 | 
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          |                                        | Loss from operations                       |                |       | (797                             | )      |                                 |      | (2,236    | )      |      |       | (3,117    | )      |     |       | (7,308    | )     
|                                                                                |                                          |                                        | Gain on extinguishment of debt             |                |       |                                 |        |                                 |      | 16,388    |        |      |       |          |        |     |       | 16,388    |       
|                                                                                |                                          |                                        | Interest income and other income (expense) |                |       | 22                               |        |                                 |      | 68        |        |      |       | 74        |        |     |       | 25        |       
|                                                                                |                                          |                                        | Interest expense                           |                |       | (19                              | )      |                                 |      | (76       | )      |      |       | (57       | )      |     |       | (439      | )     
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          |                                        | Income (loss) from continuing operations   |                |       | (794                             | )      |                                 |      | 14,144    |        |      |       | (3,100    | )      |     |       | 8,666     |       
|Gain from discontinued operations                                               |                                          |                                        |                                           |                |       |                                  | 34     |                                 |      |           |       |      |       |           | 850    |    
|Loss on disposal of discontinued operations                                     |                                          |                                        |                                           |                |       |                                  |       |                                 |      |           |       |      |       |           | (3,564 | )  
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Gain (loss) on discontinued operations                                          |                                          |                                        |                                           |                |       |                                  | 34     |                                 |      |           |       |      |       |           | (2,714 | )  
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Net income (loss) before cumulative effect of
accounting change                 |                                          |                                        | (794                                       | )              |       |                                  | 14,178 |                                 |      |           | (3,100 | )    |       |           | 5,952  |    
|Cumulative effect of accounting change                                          |                                          |                                        |                                           |                |       |                                  |       |                                 |      |           |       |      |       |           | (6,674 | )  
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Net income (loss)                                                               |                                          |                                        | (794                                       | )              |       |                                  | 14,178 |                                 |      |           | (3,100 | )    |       |           | (722   | )  
|                                                                                | Dividends on convertible preferred stock |                                        |                                            | (354           | )     |                                  |        | (79                             | )    |           |        | (586 | )     |           |        | (79 | )    
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Net income (loss) available to common shareholders                              |                                          | $                                      | (1,148                                     | )              |       | $                                | 14,099 |                                 |      | $         | (3,686 | )    |       | $         | (801   | )  
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Income (loss) per share of common stock  Basic                                 |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          | Continuing operations                  |                                            | $              | (0.22 | )                                |        | $                               | 2.62 |           |        | $    | (0.69 | )         |        | $   | 1.60  |          
|                                                                                |                                          | Discontinued operations                |                                            |                |      |                                  |        |                                 | 0.01 |           |        |      |      |           |        |     | (0.51 | )        
|                                                                                |                                          | Cumulative effect of accounting change |                                            |                |      |                                  |        |                                 |     |           |        |      |      |           |        |     | (1.24 | )        
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          | Net income (loss)                      |                                            | $              | (0.22 | )                                |        | $                               | 2.63 |           |        | $    | (0.69 | )         |        | $   | (0.15 | )        
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Income (loss) per share of common stock - Diluted                               |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          | Continuing operations                  |                                            | $              | (0.22 | )                                |        | $                               | 2.34 |           |        | $    | (0.69 | )         |        | $   | 1.55  |          
|                                                                                |                                          | Discontinued operations                |                                            |                |      |                                  |        |                                 | 0.01 |           |        |      |      |           |        |     | (0.47 | )        
|                                                                                |                                          | Cumulative effect of accounting change |                                            |                |      |                                  |        |                                 |     |           |        |      |      |           |        |     | (1.15 | )        
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          | Net income (loss)                      |                                            | $              | (0.22 | )                                |        | $                               | 2.35 |           |        | $    | (0.69 | )         |        | $   | (0.07 | )        
|                                                                                |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|Weighted average common shares and equivalents
used in computing loss per share |                                          |                                        |                                            |                |       |                                  |        |                                 |      |           |        |      |       |           |        |    
|                                                                                |                                          |                                        | Basic                                      |                |       | 5,325,794                        |        |                                 |      | 5,365,812 |        |      |       | 5,350,373 |        |     |       | 5,359,230 |       
|                                                                                |                                          |                                        | Diluted                                    |                |       | 5,325,794                        |        |                                 |      | 6,062,381 |        |      |       | 5,350,373 |        |     |       | 5,796,674 |       

See notes to consolidated financial statements.

Page 4



---



##### Table of Contents






Healthaxis Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows


(Dollars in thousands) (Unaudited)

|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |         |       |  
|------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------------ | ----------------------------------------- | ------ | ----------------- | ---- | ------------- | ------ | ------- | ----- | -
|                                     |                                                                             |                                                  |                                           |        | Nine Months Ended
|                                     |                                                                             |                                                  |                                           |        |                  
|                                     |                                                                             |                                                  |                                           |        | September 30,     |      | September 30,
|                                     |                                                                             |                                                  |                                           |        | 2003              |      | 2002         
|                                     |                                                                             |                                                  |                                           |        |                   |      |              
|Cash flows from operating activities |                                                                             |                                                  |                                           |        |                   |      |               |       
|                                     | Net loss                                                                    |                                                  | $                                         | (3,100 | )                 |      | $             | (722   | )      
|                                     | Adjustments to reconcile net loss to net cash used
in operating activities: |                                                  |                                           |        |                   |      |               |        |        
|                                     |                                                                             | Loss on disposal of discontinued operations      |                                           |        |                  |      |               |        | 3,564   |      
|                                     |                                                                             | Cumulative effect of accounting change           |                                           |        |                  |      |               |        | 6,674   |      
|                                     |                                                                             | Depreciation and amortization                    |                                           |        | 2,626             |      |               |        | 3,677   |      
|                                     |                                                                             | Amortization of unearned compensation            |                                           |        |                  |      |               |        | 103     |      
|                                     |                                                                             | Bad debt reserve                                 |                                           |        | 51                |      |               |        | 71      |      
|                                     |                                                                             | Loss on disposal of fixed assets                 |                                           |        | 8                 |      |               |        | 15      |      
|                                     |                                                                             | Gain on settlement of severance obligation       |                                           |        |                  |      |               |        | (1,345  | )    
|                                     |                                                                             | Gain on extinguishment of debt                   |                                           |        |                  |      |               |        | (16,388 | )    
|                                     |                                                                             | Stock option compensation                        |                                           |        | 26                |      |               |        | 298     |      
|                                     |                                                                             | Impairment charges                               |                                           |        |                  |      |               |        | 942     |      
|                                     |                                                                             | Stock issued in lieu of severance                |                                           |        |                  |      |               |        | 355     |      
|                                     |                                                                             | Payment of interest with common stock            |                                           |        |                  |      |               |        | 549     |      
|                                     |                                                                             | Interest on convertible debt                     |                                           |        |                  |      |               |        | 57      |      
|                                     |                                                                             | Change in:                                       |                                           |        |                   |      |               |        |         |      
|                                     |                                                                             |                                                  | Accounts receivable                       |        |                   | (54  | )             |        |         | 2,567 |  
|                                     |                                                                             |                                                  | Prepaid expenses and other current assets |        |                   | (189 | )             |        |         | (353  | )
|                                     |                                                                             |                                                  | Costs in excess of billings               |        |                   | (588 | )             |        |         |      |  
|                                     |                                                                             |                                                  | Other assets                              |        |                   | 70   |               |        |         | 12    |  
|                                     |                                                                             |                                                  | Accounts payable and accrued liabilities  |        |                   | 446  |               |        |         | (939  | )
|                                     |                                                                             |                                                  | Deferred revenues                         |        |                   | (498 | )             |        |         | (529  | )
|                                     |                                                                             |                                                  | Other liabilities                         |        |                   | 214  |               |        |         | (25   | )
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|                                     | Net cash used in operating activities                                       |                                                  |                                           | (988   | )                 |      |               | (1,417 | )      
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|Cash flows from investing activities |                                                                             |                                                  |                                           |        |                   |      |               |       
|                                     |                                                                             | Collection of notes receivable                   |                                           |        | 149               |      |               |        | 352     |      
|                                     |                                                                             | Capitalized software and contract start-up costs |                                           |        | (371              | )    |               |        | (1,374  | )    
|                                     |                                                                             | Purchases of property, equipment and software    |                                           |        | (623              | )    |               |        | (216    | )    
|                                     |                                                                             | Other                                            |                                           |        | 8                 |      |               |        |        |      
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|                                     | Net cash used in investing activities                                       |                                                  |                                           | (837   | )                 |      |               | (1,238 | )      
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|Cash flows from financing activities |                                                                             |                                                  |                                           |        |                   |      |               |       
|                                     | Costs of issuing convertible preferred stock                                |                                                  |                                           |       |                   |      |               | (212   | )      
|                                     | Payments on convertible debentures                                          |                                                  |                                           |       |                   |      |               | (4,000 | )      
|                                     | Payment to UICI for stock and warrants                                      |                                                  |                                           | (500   | )                 |      |               |       |        
|                                     | Payment of preferred stock dividends                                        |                                                  |                                           | (705   | )                 |      |               |       |        
|                                     | Termination of UICI contract                                                |                                                  |                                           |       |                   |      |               | 6,359  |        
|                                     | Payments on capital leases                                                  |                                                  |                                           |       |                   |      |               | (8     | )      
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|                                     | Net cash (used in) provided by financing activities                         |                                                  |                                           | (1,205 | )                 |      |               | 2,139  |        
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|                                     | Decrease in cash and cash equivalents                                       |                                                  |                                           | (3,030 | )                 |      |               | (516   | )      
|                                     | Cash and cash equivalents, beginning of period                              |                                                  |                                           | 11,380 |                   |      |               | 13,149 |        
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        
|                                     | Cash and cash equivalents, end of period                                    |                                                  | $                                         | 8,350  |                   |      | $             | 12,633 |        
|                                     |                                                                             |                                                  |                                           |        |                   |      |               |        |        

See notes to consolidated financial statements.

Page 5



---



##### Table of Contents






Healthaxis Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2003

Note A  Description of business and basis of presentation

Unaudited Financial Information

The unaudited condensed 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, although the Company believes that the accompanying disclosures
are adequate to make the information presented not misleading. Results of
operations for the nine-month period ended September 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.

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, 2002.

General

Healthaxis is a technology and business process services firm committed to
providing innovative and configurable applications solutions and web-based
connectivity for health benefit distribution and administration. These
solutions, which are comprised of software products and related services, are
designed to assist health insurance payers, government agencies, third party
administrators and health and welfare plans in providing enhanced services to
members, employees, employers and providers through the application of
Healthaxis flexible technology to legacy systems, either on a fully integrated
or on an Application Service Provider (ASP) basis. These technology
solutions are complimented by Healthaxis Business Process Outsourcing (BPO)
services, including mailroom, scan, data capture, and claims adjudication
services. These services are offered to its technology clients and on a
stand-alone basis.

Healthaxis is a Pennsylvania corporation organized in 1982. Healthaxis
common stock trades on the Nasdaq SmallCap Market under the symbol HAXS. The
operations of Healthaxis during 2001 were conducted primarily through its
subsidiary, Healthaxis.com, Inc. In the fourth quarter of 2001 the Company
reorganized and formed a new subsidiary, Healthaxis, Ltd., through which all
operations are now conducted. Unless otherwise indicated, or the context
otherwise requires, all references in this document to the Company or
Healthaxis include Healthaxis Inc. and all of its subsidiaries.

Reclassifications of prior period amounts

Certain prior period amounts have been reclassified to conform with the
2003 presentation or in accordance with applicable accounting requirements.

Earnings Per Share

Basic loss per share is computed only on the weighted average number of
common shares outstanding during the respective periods. Diluted loss per
share is computed to show the dilutive effect, if any, of convertible
debentures, convertible preferred stock, stock options and warrants. The
dilutive effect of stock options and warrants is calculated using the treasury
stock method based on the average market price of the stock during the

Page 6



---



##### Table of Contents



respective periods. The effect of including the stock options, warrants and
shares issuable upon conversion of the Companys convertible preferred stock in
the computation of diluted earnings per share would be anti-dilutive for the
three and nine months ended September 30, 2003. Accordingly, these items have
not been included in the computation for those periods. The following is a
reconciliation of the numerator and denominator of the basic and diluted
earnings per share computations for income from continuing operations for the
three and the nine months ended September 30, 2002:

|                                                                   |  |                                          |        |               |  |           |           |  |  |   |      | 
|------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------------- |  | --------- | --------- |  |  | - | ---- | 
|                                                                   |  | For the Three Months Ended              
|                                                                   |  | September 30, 2002                      
|                                                                   |  |                                         
|                                                                   |  | Income                                   |        | Shares        |  | Per-Share
|                                                                   |  | (Numerator)                              |        | (Denominator) |  | Amount   
|                                                                   |  |                                          |        |               |  |          
|                                                                   |  | (In thousands except for per share data)
|Basic EPS                                                          |  |                                          |        |               |  |           |           |  |  |   |      | 
|Income from continuing operations, as reported                     |  | $                                        | 14,144 |               |  |           |           |  |  |   |      | 
|Less: preferred stock dividends                                    |  |                                          | (79    | )             |  |           |           |  |  |   |      | 
|                                                                   |  |                                          |        |               |  |           |           |  |  |   |      | 
|Income from continuing operations available to
common shareholders |  |                                          | 14,065 |               |  |           | 5,365,812 |  |  | $ | 2.62 | 
|                                                                   |  |                                          |        |               |  |           |           |  |  |   |      | 
|Effect of Dilutive Securities                                      |  |                                          |        |               |  |           |           |  |  |   |      | 
|Stock options                                                      |  |                                          |       |               |  |           | 28        |  |  |   |      | 
|Convertible debentures                                             |  |                                          | 47     |               |  |           | 102,959   |  |  |   |      | 
|Convertible preferred stock                                        |  |                                          | 79     |               |  |           | 593,582   |  |  |   |      | 
|                                                                   |  |                                          |        |               |  |           |           |  |  |   |      | 
|Diluted EPS                                                        |  |                                          |        |               |  |           |           |  |  |   |      | 
|Income from continuing operations                                  |  | $                                        | 14,191 |               |  |           | 6,062,381 |  |  | $ | 2.34 | 
|                                                                   |  |                                          |        |               |  |           |           |  |  |   |      | 

|                                                                   |  |                                          |       |               |  |           |           |  |  |   |      | 
|------------------------------------------------------------------ |  | ---------------------------------------- | ----- | ------------- |  | --------- | --------- |  |  | - | ---- | 
|                                                                   |  | For the Nine Months Ended               
|                                                                   |  | September 30, 2002                      
|                                                                   |  |                                         
|                                                                   |  | Income                                   |       | Shares        |  | Per-Share
|                                                                   |  | (Numerator)                              |       | (Denominator) |  | Amount   
|                                                                   |  |                                          |       |               |  |          
|                                                                   |  | (In thousands except for per share data)
|Basic EPS                                                          |  |                                          |       |               |  |           |           |  |  |   |      | 
|Income from continuing operations, as reported                     |  | $                                        | 8,666 |               |  |           |           |  |  |   |      | 
|Less: preferred stock dividends                                    |  |                                          | (79   | )             |  |           |           |  |  |   |      | 
|                                                                   |  |                                          |       |               |  |           |           |  |  |   |      | 
|Income from continuing operations available to
common shareholders |  |                                          | 8,587 |               |  |           | 5,359,230 |  |  | $ | 1.60 | 
|                                                                   |  |                                          |       |               |  |           |           |  |  |   |      | 
|Effect of Dilutive Securities                                      |  |                                          |       |               |  |           |           |  |  |   |      | 
|Stock options                                                      |  |                                          |      |               |  |           | 127       |  |  |   |      | 
|Convertible debentures                                             |  |                                          | 319   |               |  |           | 237,282   |  |  |   |      | 
|Convertible preferred stock                                        |  |                                          | 79    |               |  |           | 200,035   |  |  |   |      | 
|                                                                   |  |                                          |       |               |  |           |           |  |  |   |      | 
|Diluted EPS                                                        |  |                                          |       |               |  |           |           |  |  |   |      | 
|Income from continuing operations                                  |  | $                                        | 8,985 |               |  |           | 5,796,674 |  |  | $ | 1.55 | 
|                                                                   |  |                                          |       |               |  |           |           |  |  |   |      | 

Stock-Based Compensation

The Company selected an accounting policy that 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. Pro forma net loss
applicable to the option granted is not likely to be

Page 7



---



##### Table of Contents



representative of the effects on reported net loss for future years. 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 of grants 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:

|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |       |  
|------------------------------------------------------------------------------- | --------------------- | - | ---------------------------------------- | ----- | ----------------- | - | ------ | ---- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                |                       |   | Three Months Ended                       |       | Nine Months Ended
|                                                                                |                       |   | September 30,                            |       | September 30,    
|                                                                                |                       |   | 2003                                     |       | 2002              |   | 2003   |      | 2002
|                                                                                |                       |   |                                          |       |                   |   |        |      |     
|                                                                                |                       |   | (In thousands except for per share data)
|Net income (loss), as reported                                                  |                       | $ | (794                                     | )     |                   | $ | 14,178 |      |      | $ | (3,100 | )     |   | $ | (722   | )    
|Stock based compensation expense recorded
under the intrinsic value method      |                       |   | 8                                        |       |                   |   | 76     |      |      |   | 26     |       |   |   | 298    |      
|Pro forma stock based compensation expense
computed under the fair value method |                       |   | (407                                     | )     |                   |   | (780   | )    |      |   | (1,243 | )     |   |   | (2,338 | )    
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|Pro forma net income (loss)                                                     |                       | $ | (1,193                                   | )     |                   | $ | 13,474 |      |      | $ | (4,317 | )     |   | $ | (2,762 | )    
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|Income (loss) per share of common stock                                         |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|                                                                                | Basic - as reported   |   | $                                        | (0.22 | )                 |   | $      | 2.63 |      |   | $      | (0.69 | ) |   | $      | (0.15 | )
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|                                                                                | Basic  pro forma     |   | $                                        | (0.29 | )                 |   | $      | 2.50 |      |   | $      | (0.92 | ) |   | $      | (0.53 | )
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|                                                                                | Diluted - as reported |   | $                                        | (0.22 | )                 |   | $      | 2.35 |      |   | $      | (0.69 | ) |   | $      | (0.07 | )
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      
|                                                                                | Diluted - pro forma   |   | $                                        | (0.29 | )                 |   | $      | 2.23 |      |   | $      | (0.92 | ) |   | $      | (0.42 | )
|                                                                                |                       |   |                                          |       |                   |   |        |      |      |   |        |       |   |   |        |      

Note B  Recently Adopted Accounting Pronouncements

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). For most companies,
SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. Upon adoption, any
gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the criteria
of Opinion 30 for such classification will be reclassified to conform with the
provisions of SFAS 145. The provisions of this statement related to the
rescission of SFAS 4 shall be applied in fiscal years beginning after May 15,
2002. The Company adopted the provisions of this statement effective January
1, 2003. As a result, the gains on extinguishments of debt that were
previously reported in prior periods as extraordinary items have been
reclassified as gains from continuing operations.

On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. This statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The adoption of SFAS
150 has not had a significant impact on the financial position or results of
operations of the Company.

Page 8



---



##### Table of Contents



Note C  Reverse Stock Split

On August 19, 2003, the Board of Directors authorized a 1-for-10 reverse
stock split of the Companys $.10 par value common stock. As a result of the
reverse split, the number of shares outstanding on that date was reduced from
53,528,557 to 5,353,361, and the par value of common stock was decreased $4.8
million. To gain the required approval of this transaction from the Series A
Preferred shareholders, the Company paid a one-time consent fee equal to 1
percent, or $235,000, of the then outstanding Series A Preferred stock
liquidation value. The payment has been included in dividends on preferred
stock.

All references in the accompanying financial statements to the number of
common shares and per-share amounts for prior periods have been restated to
reflect the reverse stock split.

Note D  Repurchase of Securities Held by UICI and Repricing of Series A
Convertible Preferred Stock

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 percent of the Companys outstanding common
stock; 1,424 shares of Series A Convertible Preferred Stock, or 6.1 percent of
the outstanding preferred stock; and warrants to purchase 22,239 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
BPO services provided by the Company to the Mega Life & Health Insurance
Company (Mega), a UICI subsidiary. The amount of the monthly payment will be
equal to the greater of one half of the Mega invoice amount for BPO 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.

To gain the required approval of this transaction from the Series A
Preferred shareholders, the Company agreed to reduce the conversion price of
the remaining preferred shares from $26.25 to $15.50. The repurchase of the
preferred shares held by UICI reduced the total liquidation value of the
outstanding Series A Preferred stock from $23.5 million to $22.1 million.

Note E  Significant Customer Concentrations

For the three months and the nine months ended September 30, 2003, four
customers (including UICI) accounted for $2.9 million (55%) and $8.8 million
(55%), respectively, of the Companys total revenues. At September 30, 2003,
one customer accounted for $1.0 million of the Companys accounts receivable.

Note F  Contracts in Progress

The Company uses contract accounting for certain 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. If the ultimate achievement of customer billing
milestones is not reasonably assured, revenue recognition is discontinued until
those payment milestones have been achieved. The assumptions used for
recording revenue are adjusted in the period of change to reflect revisions.
Contracts with significant customer acceptance provisions are recognized using
the completed contract method upon achieving customer acceptance of the
completed project. During the nine months ended September 30, 2003, the
Company had one contract in progress under each method.

The Company has accounted for activities under the State of Washington
Health Care Authority contract on the percentage of completion method. Due to
the uncertainty of the profit margin to be achieved from the

Page 9



---



##### Table of Contents



contract, the Company previously recognized revenue only to the extent costs
were incurred under a zero margin approach. During the third quarter of 2003,
the estimated project completion date was extended from March 2004 to June
2004. In addition, significant additional resources were applied to the
project. As a result, the estimated total cost to complete the project
increased significantly. The Company now estimates that a loss of $129,000
will be incurred on the contract. The entire amount of the estimated loss was
recorded in the quarter ended September 30, 2003 as a component of costs of
revenue, and future revenue from the project will be recognized as payment
milestones are achieved. Costs associated with the project are deferred and
recognized in connection with the recognition of revenue. No revenue or costs,
other than the estimated loss, related to this contract were recognized during
the three months ended September 30, 2003.

As of September 30, 2003, costs, earnings and billings to date on the contract
are as follows:

|                                                        |  |                |        |  
|------------------------------------------------------- |  | -------------- | ------ | -
|                                                        |  | (In thousands)
|Contract costs recognized to date                       |  | $              | 2,079  |  
|Estimated loss under the contract                       |  |                | (129   | )
|                                                        |  |                |        |  
|Revenues recognized to date                             |  |                | 1,950  |  
|Costs deferred to date                                  |  |                | 120    |  
|Less billings to date                                   |  |                | (1,109 | )
|Less loss reserve as of September 30, 2003              |  |                | (64    | )
|                                                        |  |                |        |  
|Net costs in excess of billings on contract in progress |  | $              | 897    |  
|                                                        |  |                |        |  

The Company has accounted for activities under a contract with Affiliated
Computer Services (ACS) for the State of Georgia Department of Community
Health under the completed contract method. In September 2003, the Company was
notified by ACS that the portion of the prime contract that the Company was
working on had been cancelled. Accordingly, the prime contractor requested
that the Company stop work on this contract. Based on these events, management
determined that its work under the contract was complete. Previously deferred
revenues and costs totaling $550,000 and $567,000, respectively, were
recognized during the third quarter of 2003. The Company continues to work
with ACS to determine the final amount owed to the Company for the work
performed according to the terms of the contract. Any contingent amounts
received by Healthaxis as a result of this negotiation will be recorded as
revenue in the period that the amount becomes known.

Note G  Other Liabilities

Other liabilities totaled $1.3 million and $1.1 million at September 30,
2003 and December 31, 2002, respectively and consist of contingent tax
liabilities. In June 2003, the Company received a tax refund in the amount of
$324,000 that was recorded as a liability pending final resolution of the
matter.

Note H  Related Party Transactions

The Company conducts business with UICI. Prior to September 30, 2003,
UICI owned a significant portion of the Companys outstanding common stock, and
also owned preferred stock and warrants. See Note D for a discussion of the
repurchase of Healthaxis securities from UICI. The Company previously provided
services to a number of UICI subsidiaries and affiliates pursuant to the UICI
Information Technology Services Agreement. In June 2002, the Company and UICI
terminated this agreement. Revenues from UICI related to these discontinued
operations totaled $134,000, and $8.2 million, for the three months and the
nine months ended September 30, 2002, respectively (See Note J).
Notwithstanding the termination of this agreement and the repurchase of
Healthaxis securities from UICI, the Company continues to provide products and
services to UICI. For the three months ended September 30, 2003 and 2002, UICI
and its subsidiaries and affiliates accounted for $487,000 (9%) and $456,000
(9%), respectively, of the Companys revenues from continuing operations. For
the

Page 10



---



##### Table of Contents



nine months ended September 30, 2003 and 2002, UICI and its subsidiaries and
affiliates accounted for $1.4 million (9%), and $1.7 million (12%),
respectively, of the Companys revenues from continuing operations.

Note I  Cumulative Effect of Accounting Change

Effective January 1, 2002, the Company adopted Statements of Financial
Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets,
which requires companies to stop amortizing goodwill and certain intangible
assets with an indefinite useful life. Instead, SFAS No. 142 requires that
goodwill and intangible assets deemed to have an indefinite useful life be
reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002),
annually thereafter and upon the occurrence of any event that indicates
potential impairments. In the second quarter of 2002, the Company completed a
transitional goodwill impairment test. This test resulted in an impairment
charge totaling $6.7 million. The impairment charge is shown as a cumulative
effect of an accounting change as of January 1, 2002.

Note J  Discontinued Operations

On June 11, 2002, the Company entered into an agreement with UICI
terminating the amended Information Technology Services Agreement (the
Agreement) between the two parties. The Agreement was originally entered
into on January 3, 2000 in conjunction with the merger of Healthaxis.com, Inc
and Insurdata Incorporated. Under the terms of the termination agreement, UICI
made a one-time cash payment to Healthaxis in the amount of $6.5 million and
tendered 500,000 shares of Healthaxis common stock back to the Company. In
return, approximately 165 Healthaxis employees that were previously dedicated
to providing services to UICI under the Agreement were transferred to and
became employees of UICI on June 15, 2002. Due to the related party nature of
the transaction, the Company recorded the net proceeds, $6.4 million, as a
contribution of capital from a significant shareholder. A loss on disposal of
discontinued operations in the amount of $3.6 million was recorded as a result
of the termination. The loss consisted of impairment charges for goodwill and
customer base totaling $484,000 and $3.1 million, respectively. The impairment
charges result from a write off of the entire amount of goodwill and customer
base attributable to the Agreement.

The Company previously reported the revenues and expenses associated with
the Agreement as those from the UICI Outsourcing segment. As a result of the
termination of the Agreement, the Companys financial statements have been
prepared with the UICI Outsourcing segment results of operations presented as
discontinued operations. All historical financial statements presented have
been restated to conform to this presentation.

The operating results of the discontinued UICI Outsourcing segment for the
three and the nine months ended September 30, 2002 are as follows:

|                            |  |                |     |                |     |               |       |  |       | 
|--------------------------- |  | -------------- | --- | -------------- | --- | ------------- | ----- |  | ----- | 
|                            |  |                |     | Three Months   |     | Nine Months  
|                            |  |                |     | Ended          |     | Ended        
|                            |  |                |     | September 30,  |     | September 30,
|                            |  |                |     | 2002           |     | 2002         
|                            |  |                |     |                |     |              
|                            |  |                |     | (In thousands)
|Revenue                     |  | $              | 134 |                |     | $             | 8,212 | 
|Cost of revenue             |  |                | 100 |                |     |               | 6,814 | 
|Amortization of intangibles |  |                |    |                |     |               | 548   | 
|                            |  |                |     |                |     |               |       | 
|                            |  | Total expenses |     |                | 100 |               |       |  | 7,362 | 
|                            |  |                |     |                |     |               |       | 
|Net income                  |  | $              | 34  |                |     | $             | 850   | 
|                            |  |                |     |                |     |               |       | 

Page 11



---



##### Table of Contents



Note K  Gain on Extinguishment of Debt

On July 31, 2002, Healthaxis completed a transaction in which the holders
of its $27.5 million 2% convertible debentures exchanged their debentures for
23,500 shares of Series A Convertible Preferred Stock and a cash payment of
$4.0 million. The Company recorded a gain on extinguishment of debt totaling
$16.4 million related to the transaction for the difference between the
carrying value of the convertible debentures and the estimated fair value of
the cash and preferred stock exchanged.

Note L  Segment Reporting

As of January 1, 2003, the Companys operating segments were:



| |  |  | Technology & Operations - provides web-enabled systems for
enrollment, administration and processing of health insurance claims on
an ASP basis, connectivity platforms and solutions for self service
(broker, employer, employee and providers), large group enrollment and
small group enrollment, sale/distribution and post-sale administration
of group and individual insurance policies including health, life and
dental insurance.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | BPO Services Group - provides electronic data capture, imaging,
storage and retrieval of health insurance claims, attachments and other
correspondence, and claims pre-adjudication services.                                                                                                                                                                                                                                               

Prior to 2003, the Company maintained three operating business segments.
On January 1, 2003, two of the Companys three business units (formerly known
as Web Connectivity Products and Benefit Administration and Claims Processing
Systems) were consolidated into one reporting unit named Technology &
Operations. Additional segment reporting changes include a change in the
classification of sales and marketing expenses and a change in the
classification of other operating expenses. Sales and marketing is included as
a component of Corporate Overhead, not allocated to the reporting units as in
the past. Certain operating expenses that were previously allocated to all
reporting units are now included solely in Technology & Operations. These
costs are associated with operating the Healthaxis Customer Care unit and other
customer security and infrastructure issues. All segment information has been
restated for prior periods to conform with this new presentation.

Each business segment generally sells its products and services to the
same constituent users, generally located in the United States, namely
healthcare payers, which include insurance payers, government agencies, third
party administrators and health and welfare plans.

All revenue is specifically associated with a separate business unit and
therefore there are no reconciling items. Earnings before interest, income
tax, depreciation and amortization (EBITDA), as defined, is the primary
liquidity measurement used by management to make decisions regarding the
segments. EBITDA, as defined by the Company, also excludes restructuring and
impairment, severance and non-cash stock based compensation charges (EBITDA As
Defined). However, EBITDA As Defined is not a measure defined in generally
accepted accounting principles (GAAP) and should not be construed as an
alternative to operating income as determined in accordance with GAAP. EBITDA
As Defined does not consider depreciation and amortization of software and
equipment, which could be significant with increased capital expenditures.
Management does not consider these expenses significant for purposes of
evaluating separate business unit liquidity. Management believes that the
EBITDA As Defined measurement is useful in monitoring basic cash flow generated
and used in the Companys core operating activities, and in monitoring the
effects of changes made by management in the Companys operations across
different time periods. This factor alone is insufficient to measure all of
the Companys operating characteristics and is used in conjunction with GAAP
operating income to measure total operating performance. EBITDA As Defined may
not be comparable to similarly titled measures reported by other companies.
Corporate overhead includes executive management, accounting, legal, human
resources, sales,

Page 12



---



##### Table of Contents



marketing, and other expenses. Operating income does not include any cost
allocations for corporate overhead. Assets are not allocated to business units
for internal reporting purposes and are therefore not included in the segment
information below.

The Companys financial results by business segment are as follows:

|                                      |  |                |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|------------------------------------- |  | -------------- | ------ | -------- |  | --------- | ----- | ------------ |  | - | ------ | - |  | - | ------ | -
|                                      |  | Technology     |        | BPO      |  | Corporate |       | Consolidated
|                                      |  | & Operations   |        | Services |  | Overhead  |       | Total       
|                                      |  |                |        |          |  |           |       |             
|                                      |  | (In thousands)
|Three Months Ended September 30, 2003 |  |                |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                               |  | $              | 4,203  |          |  | $         | 1,149 |              |  | $ |       |   |  | $ | 5,352  |  
|EBITDA As Defined                     |  |                | 867    |          |  |           | 181   |              |  |   | (1,007 | ) |  |   | 41     |  
|Depreciation and amortization         |  |                | 414    |          |  |           | 75    |              |  |   | 341    |   |  |   | 830    |  
|Operating income (loss)               |  |                | 454    |          |  |           | 106   |              |  |   | (1,357 | ) |  |   | (797   | )
|Three Months Ended September 30, 2002 |  |                |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                               |  | $              | 3,861  |          |  | $         | 989   |              |  | $ |       |   |  | $ | 4,850  |  
|EBITDA As Defined                     |  |                | 561    |          |  |           | (68   | )            |  |   | (1,671 | ) |  |   | (1,178 | )
|Depreciation and amortization         |  |                | 430    |          |  |           | 187   |              |  |   | 354    |   |  |   | 971    |  
|Operating income (loss)               |  |                | 131    |          |  |           | (255  | )            |  |   | (2,112 | ) |  |   | (2,236 | )
|Nine Months Ended September 30, 2003  |  |                |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                               |  | $              | 12,494 |          |  | $         | 3,572 |              |  | $ |       |   |  | $ | 16,066 |  
|EBITDA As Defined                     |  |                | 2,278  |          |  |           | 496   |              |  |   | (3,239 | ) |  |   | (465   | )
|Depreciation and amortization         |  |                | 1,311  |          |  |           | 286   |              |  |   | 1,029  |   |  |   | 2,626  |  
|Operating income (loss)               |  |                | 968    |          |  |           | 210   |              |  |   | (4,295 | ) |  |   | (3,117 | )
|Nine Months Ended September 30, 2002  |  |                |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                               |  | $              | 11,619 |          |  | $         | 3,111 |              |  | $ |       |   |  | $ | 14,730 |  
|EBITDA As Defined                     |  |                | 1,255  |          |  |           | (321  | )            |  |   | (5,342 | ) |  |   | (4,408 | )
|Depreciation and amortization         |  |                | 1,475  |          |  |           | 583   |              |  |   | 1,071  |   |  |   | 3,129  |  
|Operating income (loss)               |  |                | (936   | )        |  |           | (904  | )            |  |   | (5,468 | ) |  |   | (7,308 | )

A reconciliation of EBITDA As Defined to the most directly comparable GAAP
financial measure, Operating loss, is as follows:

|                  |                                           |   |                    |      |                   |   |        |      |      |   |        |        |   |   |        |        |  
|----------------- | ----------------------------------------- | - | ------------------ | ---- | ----------------- | - | ------ | ---- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                  |                                           |   | Three Months Ended |      | Nine Months Ended
|                  |                                           |   | September 30,      |      | September 30,    
|                  |                                           |   | 2003               |      | 2002              |   | 2003   |      | 2002
|                  |                                           |   |                    |      |                   |   |        |      |     
|                  |                                           |   | (In thousands)    
|EBITDA As Defined |                                           | $ | 41                 |      |                   | $ | (1,178 | )    |      | $ | (465   | )      |   | $ | (4,408 | )     
|                  | Depreciation and amortization             |   |                    | (830 | )                 |   |        | (971 | )    |   |        | (2,626 | ) |   |        | (3,129 | )
|                  | Stock based compensation and amortization |   |                    | (8   | )                 |   |        | (87  | )    |   |        | (26    | ) |   |        | (401   | )
|                  | Severance expense                         |   |                    |     |                   |   |        |     |      |   |        |       |   |   |        | 1,345  |  
|                  | Restructuring and impairment charges      |   |                    |     |                   |   |        |     |      |   |        |       |   |   |        | (715   | )
|                  |                                           |   |                    |      |                   |   |        |      |      |   |        |        |   |   |        |       
|Operating loss    |                                           | $ | (797               | )    |                   | $ | (2,236 | )    |      | $ | (3,117 | )      |   | $ | (7,308 | )     
|                  |                                           |   |                    |      |                   |   |        |      |      |   |        |        |   |   |        |       

Page 13



---



##### Table of Contents






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

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, 2002. 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 and business process services firm committed to
providing innovative and configurable web-based connectivity and applications
solutions for health benefit distribution and administration. These solutions,
which are comprised of software products and related services, are designed to
assist health insurance payers, government agencies, third party administrators
(TPA) and health and welfare plans in providing enhanced services to members,
employees, employers and providers through the application of Healthaxis
flexible technology to legacy systems, either on a fully integrated or on an
Application Service Provider (ASP) basis. These technology solutions are
complimented by Healthaxis Business Process Outsourcing (BPO) services,
including mailroom, scan, data capture, and claims adjudication services.
These services are offered to its technology clients and on a stand-alone
basis. Healthaxis believes that its solutions enable a client to improve their
productivity and reduce their administrative costs, enhance their customer
service, grow their revenues and improve their profitability.

Revenue Model.Healthaxis derives revenue from a number of sources. Set
forth below is a description of our revenues generated by each of our suite of
products and solutions.

Revenues generated by our benefits administration and claims processing
systems are either transaction based or derived from providing professional
services. These revenues are included in our Technology & Operations business
segment. Transaction revenue is a combination of a per-employee-per-month fee
for the use of our proprietary applications and a per document fee for the
printing and mailing of system output (benefit checks, explanations of benefits
and letters). The transaction revenue is based on an ASP model, where we host
the hardware and software and perform some print and mail services on behalf of
clients. Professional services revenue is generated from direct billing for
our staff time. These billings are generally derived from converting a
clients existing system, client training and tailoring custom solutions for a
client. Professional services generally are billed on a flat rate per hour.
In some cases, a project may be done for a fixed price.

Revenues generated by our web connectivity (WebAxis) products are derived
from licensing our proprietary software products and providing professional
services. These revenues are included in our Technology & Operations business
segment. The licensing revenue is a combination of per-member-per-month fees
and fixed price license fees. Depending upon the contract terms, the fixed
price license fees are recognized over a period of

Page 14



---



##### Table of Contents



time, or as one-time license fee agreements upon the delivery of the
product. Professional service revenue is generated from direct billing for our
staff time. These billings generally are associated with customer support.
Contracts generally include an up-front payment intended to recoup the start-up
costs incurred in setting up a new client. Such fees, along with the
associated costs, are generally deferred and recognized over the life of the
transaction-based contract.

Revenues included in our BPO Services business segment are transaction based.
Fees for mail handling, scanning and converting insurance claims from paper to
electronic format, and image storage and retrieval, are priced on a
per-document or a per-image basis. Such revenue is recognized in the month the
services are performed. Contracts generally include an up-front payment
intended to recoup the start-up costs incurred in setting up a new client.
Such fees are generally deferred and recognized over the life of the
transaction-based contract.

Significant Projects.We have two significant contracts for software
license and systems implementation. One contract is with the State of
Washington Health Care Authority (Health Care Authority). We have been
working on this project since mid 2002. We are the prime contractor in this
arrangement and we utilize the services of a development partner to perform a
significant part of the work. The contract is a fixed fee arrangement for
software licensing and implementation. Our financial obligations to our
development partner are also based on a fixed fee arrangement and do not vary,
no matter the amount of resources they expend to complete their contracted
work.

This project was originally targeted by the Health Care Authority for
completion in June 2003. Due to delays, we believe that revenue recognition on
the contract will now continue into 2004, and we estimate that the project will
be completed in June 2004. Completion by that date is subject to the adherence
to a detailed plan. If any party (Healthaxis, our development partner, or the
Health Care Authority) fails to meet its obligations under the plan, then that
date could be extended. It is also possible that the Health Care Authority, or
its governmental oversight committee, could elect to terminate the project. As
a result, to support the Health Care Authoritys efforts and those of our
development partner, during the third quarter we made a significant change in
our approach to staffing and managing this project. At this time, we believe
the Health Care Authority intends to finish the implementation.

Revenues from the Health Care Authority contract are recognized under the
percentage of completion method of contract accounting. We have previously
limited revenue recognition to the amount of cost incurred. Prior to the third
quarter we had recognized no profit or loss on the contract. In the third
quarter of 2003, we decided to apply significant additional resources to the
project to support the Health Care Authoritys own efforts and those of our
development partner and to raise the likelihood of a successful implementation
in June 2004. Therefore, our estimate of the total cost to complete the project
increased significantly in this period. We now estimate that we will incur a
loss of approximately $129,000 through the currently scheduled completion date.
We accrued this loss in the third quarter of 2003. In addition, progress to
completion and revenue under the contract will only be recognized as payment
milestones are achieved. No revenue related to this contract was recognized
during the third quarter of 2003. As of September 30, 2003, revenues totaling
$1.95 million have been recognized under the contract, and $631,000 remained to
be recognized.

Billing under the contract is contingent upon the achievement of certain
milestones and approval by the Health Care Authority. Because some of the
milestones have not been met and therefore we have not been able to bill, we
have recorded unbilled receivables (classified as costs in excess of
billings) totaling $897,000 at September 30, 2003. These amounts will be
billed and reclassified as accounts receivable based on the achievement of
contractual milestones. The most significant milestones are the commencement
of user acceptance testing and first productive use of the system. If
Healthaxis or our development partner fails to achieve the milestones in the
contract, then the Health Care Authority could terminate the contract and we
would be unable to bill these amounts. At this time, based on the progress we
are making, we believe that such an outcome is unlikely. However, if such an
event occurred, the Companys financial exposure is currently limited because
payment of

Page 15



---



##### Table of Contents



accrued expenses to our development partner are contingent on payment
collections from the Health Care Authority.

Even though we are now estimating a loss on this contract, it is still an
important project for us. It still achieves many of the strategic objectives
that initially made the development of this system attractive to us. This
system could potentially replace an existing software system we use for the
benefit of some of our existing customers. It could also provide the basis for
future product service offerings to other state governmental agencies and a
broader benefits administration market. However, to meet the specifications
for these opportunities, we would have to make additional development
investment to meet the particular needs of those markets. We have not made a
decision to invest our resources in this manner and may not.

Our contract with Affiliated Computer Services (ACS) on the State of Georgia
Department of Community Health (State of Georgia) project became
substantially complete in September 2003. We accounted for this project under
the completed contract method. During the third quarter of 2003, we recognized
revenue and costs totaling $550,000 and $567,000, respectively related to this
contract. In the third quarter of 2003 we were notified that the State of
Georgia had cancelled the portion of the ACS contract that we were working on.
ACS asked us to stop our work and we did. Accordingly, we concluded that our
work under the contract was completed, and, under contract accounting, we
booked all previously deferred revenue and costs in the third quarter. We are
working with ACS to determine the final amount we are owed for the work we
performed according to the terms of our subcontract with them. We currently
expect to report the results in the fourth quarter. We do not believe the
State of Georgias decision was based on any dissatisfaction with our
performance under the contract. Rather, all indications are that the State of
Georgia felt it needed to focus its limited resources in other areas at this
time.

November 2002 Cost Reduction Initiative.On November 12, 2002, we began a
cost reduction initiative designed to more closely align expenses with revenues
and to enhance the Companys operating performance. The cost reduction
initiative consisted of both a reduction in the Companys labor force and an
across-the-board reduction in salary levels, and planned reductions in certain
operating and overhead expenses. The reduction in labor force was effective in
mid-November and the reduction in salary levels was effective January 1, 2003.

Allowance for Doubtful Accounts.During the third quarter of 2003, we
wrote-off no accounts receivable balances. At September 30, 2003, our
allowance for doubtful accounts totaled $40,000. We believe that this reserve
is adequate to ensure that accounts receivable are fairly stated. At September
30, 2003, one customer accounted for $1.0 million of our accounts receivable.
This customer is current according to the terms of our contract with them and
is not considered a past due account.

Page 16



---



##### Table of Contents



Results of Operations

Three months ended September 30, 2003 compared to three months ended September
30, 2002

Technology & Operations

|                 |              |   |                    |    |      |   |        |   |   |   |     |  | 
|---------------- | ------------ | - | ------------------ | -- | ---- | - | ------ | - | - | - | --- |  | 
|                 |              |   | Three Months Ended |    |      |   |       
|                 |              |   | September 30,      |    |      |   |       
|                 |              |   | 2003               |    | 2002 |   | Change
|                 |              |   |                    |    |      |   |       
|                 |              |   | (In thousands)    
|Revenues         |              | $ | 4,203              |    |      | $ | 3,861  |   |   | $ | 342 | 
|Cost of revenues |              |   | 3,754              |    |      |   | 3,682  |   |   |   | 72  | 
|                 |              |   |                    |    |      |   |        |   |   |   |     | 
|Gross profit     |              | $ | 449                |    |      | $ | 179    |   |   | $ | 270 | 
|                 |              |   |                    |    |      |   |        |   |   |   |     | 
|                 | % of revenue |   |                    | 11 | %    |   |        | 5 | % |   |     |  | 

Revenue

Third quarter 2003 Technology & Operations revenue increased 9% or
approximately $342,000 from the third quarter of 2002. This change is a
combination of multiple factors. We have two state government related
contracts. Revenue from the State of Washington Health Care Authority contract
decreased $397,000 in this quarter compared to the same quarter last year.
During the third quarter of 2003, the projected completion date was extended
from March 2004 to June 2004. In connection with this event, we began to
recognize revenue only to the extent that customer payment milestones were
achieved. During the third quarter of 2003, no milestones were achieved under
this contract. During the third quarter of 2003, we were notified that the
State of Georgia had cancelled the portion of the ACS contract that we were
working on. ACS asked us to stop our work, and we did. Accordingly, we
concluded that our work under the contract was substantially complete and
recognized all previously deferred revenue in the quarter under the completed
contract method. This provided a revenue increase totaling $550,000.

One of our claims system customers stopped using our system earlier in 2003,
resulting in a comparative decrease in revenue totaling $245,000. However,
that decline was offset by the addition of a new customer who produced revenues
of $274,000. Revenue for the third quarter of 2003 also includes other new
revenue from two existing customers. That revenue increase amounted to
$295,000 and was related to their usage of our print and distribution services.
Prior to 2003, we did not perform print and distribution services for these
customers.

Cost of revenuesincludes 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,
and other related consumables.

Cost of revenues as a percentage of Technology & Operations revenue, decreased
from 95% in the third quarter of 2002 period to 89% in the third quarter of
2003. The improvement resulted from a reduction in personnel costs, offset by
less capitalization for new software development or contract startup and
increased costs attributable to print and distribution outsourcing. In
November 2002, we reduced cost through personnel reductions. In addition,
company-wide salary reductions went into effect on January 1, 2003.
Accordingly, personnel expenses were $822,000 lower in the third quarter of
2003 compared to the third quarter of 2002. The effects of this reduction in
personnel costs was partially offset by the fact that some employees were
reassigned to expensable projects from capitalizable development projects. The
effect of this action totaled $291,000 in the quarter.

During the fourth quarter of 2002, we began outsourcing some of our print and
distribution activities to a third party. This increased cost of revenues in
the third quarter of 2003 by approximately $661,000. However, these

Page 17



---



##### Table of Contents



additional costs are generally in lieu of costs previously associated with
in-house employees and other operating expenses.

Gross profit improved primarily as a result of the significant reduction of
personnel costs. The reduction of these fixed costs did not have a negative
impact on revenue and caused gross profit to increase. However, personnel
costs were replaced with outsourcing costs associated with new, lower-margin
revenue that served to offset some of the improvement in profit as a percentage
of revenue.

BPO Services (formerly known as Imaging Services Group)

|                |              |   |                    |   |      |   |        |     |    |   |      |   | 
|--------------- | ------------ | - | ------------------ | - | ---- | - | ------ | --- | -- | - | ---- | - | 
|                |              |   | Three Months Ended |   |      |   |       
|                |              |   | September 30,      |   |      |   |       
|                |              |   | 2003               |   | 2002 |   | Change
|                |              |   |                    |   |      |   |       
|                |              |   | (In thousands)    
|Revenue         |              | $ | 1,149              |   |      | $ | 989    |     |    | $ | 160  |  
|Cost of revenue |              |   | 1,043              |   |      |   | 1,244  |     |    |   | (201 | )
|                |              |   |                    |   |      |   |        |     |    |   |      |  
|Gross profit    |              | $ | 106                |   |      | $ | (255   | )   |    | $ | 361  |  
|                |              |   |                    |   |      |   |        |     |    |   |      |  
|                | % of revenue |   |                    | 9 | %    |   |        | (26 | %) |   |      |   | 

Revenue

BPO Services revenues increased approximately 16% from the third quarter of
2002. The increase largely resulted from the addition of a new service
offering to an existing customer. Revenue from the new services totaled
$146,000 in the third quarter of 2003.

Cost of revenues

Cost of revenues, both absolutely and as a percentage of revenue, in the third
quarter of 2003 improved from the third quarter of 2002. The positive change
resulted both from lower depreciation and amortization expense, lower personnel
costs in the BPO technical services group and better productivity in our
production centers in Utah and Jamaica. A sharp reduction in capital
expenditures during 2001 and 2002 caused a decrease in depreciation and
amortization expense totaling $106,000 compared to the third quarter of 2002.
As part of the November 2002 staff reduction, the technical support group was
reduced from a headcount of twelve to eight persons. Across-the-board salary
reductions also went into effect on January 1, 2003. Personnel cost reductions
in the BPO technical services group accounted for $48,000 of the cost decrease
from the third quarter of 2002. Finally, variable labor costs increased only
$57,000 on a revenue increase of $160,000 as result of improved production
center efficiencies.

Sales and marketing expensesconsist primarily of employee salaries and
related benefits, travel, and promotional costs like direct mailing campaigns,
trade shows and media advertising. Sales and marketing costs declined $393,000
compared to the third quarter of 2002. Five of our nine sales and marketing
personnel were terminated in November 2002. The headcount reduction, combined
with the 2003 salary reductions, accounts for a decrease in personnel costs
totaling $224,000. Other cost reductions generally associated with the smaller
sales team amounted to approximately $60,000 in the third quarter of 2003
compared to the third quarter of 2002.

General and administrative expensesinclude executive management,
accounting, legal and human resources compensation and related benefits, and
expenditures for applicable overhead costs. Compared to the third quarter of
2002, these costs decreased by $338,000. The most significant change resulted
from the November 2002 staff reductions, and the 2003 salary reductions. These
reductions account for $130,000 in lower personnel costs. Professional fees
declined $90,000 from the third quarter of 2002 primarily as a result of lower
accounting fees. The issuance of preferred stock and the termination of the
UICI Information Technology Services Agreement in the third quarter of 2002
caused accounting fees to be higher than usual in 2002.

Page 18



---



##### Table of Contents



Research and development expensesare primarily the salary and related
benefits of personnel engaged directly in the development of new products and
the enhancement of existing products, prior to the establishment of
technological feasibility. These activities were reduced in 2003 compared to
last year because of a greater emphasis on completing existing development
products and the maintenance of existing customer accounts.

Amortization of intangiblesincludes the amortization of developed
software and customer base acquired in the January 2001 Healthaxis merger. The
amount is essentially unchanged from the third quarter of 2002.

Gain on extinguishment of debtin the third quarter of 2002 totaling
$16,388,000 relates to the July 2002 transaction whereby Healthaxis issued
23,500 shares of Series A Convertible Preferred Stock and paid $4 million in
exchange for its existing convertible debentures having a face value of
$27,500,000.

Interest and other income, netdecreased $46,000 largely as a result of
lower notes receivable balances in the third quarter of 2003 compared to the
third quarter of 2002.

Interest expensedecreased as a result of the exchange of our convertible
debentures for Series A Convertible Preferred Stock on July 31, 2002.

Discontinued operationsrelates to the disposed UICI Outsourcing business
unit. These operations were discontinued in connection with the June 2002
termination of the UICI Information Technology Services Agreement.

Nine months ended September 30, 2003 compared to Nine months ended September
30, 2002

Technology & Operations

|                 |              |   |                   |   |      |   |        |    |    |   |       |   | 
|---------------- | ------------ | - | ----------------- | - | ---- | - | ------ | -- | -- | - | ----- | - | 
|                 |              |   | Nine Months Ended |   |      |   |       
|                 |              |   | September 30,     |   |      |   |       
|                 |              |   | 2003              |   | 2002 |   | Change
|                 |              |   |                   |   |      |   |       
|                 |              |   | (In thousands)   
|Revenues         |              | $ | 12,494            |   |      | $ | 11,619 |    |    | $ | 875   |  
|Cost of revenues |              |   | 11,507            |   |      |   | 12,358 |    |    |   | (851  | )
|                 |              |   |                   |   |      |   |        |    |    |   |       |  
|Gross profit     |              | $ | 987               |   |      | $ | (739   | )  |    | $ | 1,726 |  
|                 |              |   |                   |   |      |   |        |    |    |   |       |  
|                 | % of revenue |   |                   | 8 | %    |   |        | (6 | )% |   |       |   | 

Revenues

Technology & Operations revenue for the nine months ended September 30, 2003
increased 8% from the nine months ended September 30, 2002. This change is a
combination of multiple factors. We have two state government related
contracts. Revenue from the State of Washington Health Care Authority contract
increased $608,000 during the nine months ended September 30, 2003 compared to
the same period last year. Work on this project started in June 2002. During
the third quarter of 2003, we completed work under the State of Georgia
contract, accounted for under the completed contract method. This contract
provided a revenue increase totaling $550,000. Revenue for the nine months
ended September 30, 2002 included $420,000 related to the recognition of the
final portion of the UICI web technology perpetual license fee, which did not
recur in the 2003 period.

One of our claims system customers stopped using our system in early 2003
having made a decision in 2001 to combine its claims operations. This decision
resulted in a comparative decrease in revenue totaling $1,021,000 from 2002.
However, that decline was offset by the addition of a new claims customer who
produced revenues of $764,000. Revenue from Digital Insurance continued to
decline as a result of their decreased dependence on
Healthaxis professional services. Revenue from Digital Insurance decreased by
$403,000 in the nine months ended September 30, 2003 compared to the same
period last year.

Page 19



---



##### Table of Contents



Revenue for the nine months ended September 30, 2003 includes new revenue from
two existing customers in the amount of $959,000 related to print and
distribution services. Prior to 2003, we did not perform print and
distribution services for these customers. This added revenue is the direct
result of our outsourcing of these services to a third party beginning in the
fourth quarter of 2002.

Cost of revenuesincludes 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,
and other related consumables.

Cost of revenues as a percentage of Technology & Operations revenue decreased
from 106% for the nine months ended September 30, 2002, to 92% for the nine
months ended September 30, 2003. The improvement resulted from a reduction in
personnel costs, offset by less capitalization for new software development or
contract start-up and increased costs attributable to print and distribution
outsourcing. In November 2002, we reduced costs through personnel reductions.
In addition, company-wide salary reductions went into effect on January 1,
2003. Accordingly, personnel expenses decreased $2.7 million compared to the
nine months ended September 30, 2002. The effects of this reduction on
operations was partially offset by the fact that some employees were
re-assigned to expensable projects from capitalizable development projects.
The effect of this action was to decrease the expense savings by $808,000
compared to the nine months ended September 30, 2002.

During the fourth quarter of 2002, we began outsourcing our print and
distribution capabilities to a third party. This increased costs of revenues
for the nine months ended September 30, 2003 by approximately $1.6 million.
These additional costs are generally in lieu of costs previously associated
with in-house employees and other operating expenses. Technology and
telecommunication costs decreased by $277,000 and $106,000, respectively,
during the 2003 period due largely to the outsourcing of print and distribution
functions.

Other principal factors affecting costs of revenues for Technology & Operations
included non-recurring impairment charges related to software and equipment
totaling $715,000 in the nine month period ended September 30, 2002. In
addition, the nine months ended September 30, 2003 includes increased
subcontractor fees in the amount of $787,000 related to the large amount of
outsourced work related to our two government contracts. Stock based
compensation costs also decreased by $151,000 during the nine months ended
September 30, 2003 compared to the same period in 2002 due to the run-out of
vesting periods for stock options exchanged in the 2001 Healthaxis upstream
merger.

Our November 2002 staff reductions were necessitated, in part, by the fact that
gross profit for the nine months ended September 30, 2002 was negative. Since
most of the costs of revenue in Technology & Operations relates to fixed
personnel costs, the reduction of these costs did not have a direct impact on
revenue. This reduction of personnel costs is the largest item affecting the
improved gross margin for the nine months ended September 30, 2003. This
improvement, as a percentage of revenue, was partially offset by outsourcing
costs associated with new, lower-margin revenue.

Page 20



---



##### Table of Contents



BPO Services (formerly known as Imaging Services Group)

|                |              |   |                   |   |      |   |        |     |    |   |       |   | 
|--------------- | ------------ | - | ----------------- | - | ---- | - | ------ | --- | -- | - | ----- | - | 
|                |              |   | Nine Months Ended |   |      |   |       
|                |              |   | September 30,     |   |      |   |       
|                |              |   | 2003              |   | 2002 |   | Change
|                |              |   |                   |   |      |   |       
|                |              |   | (In thousands)   
|Revenue         |              | $ | 3,572             |   |      | $ | 3,111  |     |    | $ | 461   |  
|Cost of revenue |              |   | 3,362             |   |      |   | 4,015  |     |    |   | (653  | )
|                |              |   |                   |   |      |   |        |     |    |   |       |  
|Gross profit    |              | $ | 210               |   |      | $ | (904   | )   |    | $ | 1,114 |  
|                |              |   |                   |   |      |   |        |     |    |   |       |  
|                | % of revenue |   |                   | 6 | %    |   |        | (29 | %) |   |       |   | 

Revenue

BPO services revenues are up 15% from 2002. In January 2003, we added
additional work from an existing customer, which accounted for $425,000 of the
increase.

Cost of revenue

The cost of BPO Services revenue decreased, both absolutely and as a percentage
of revenue, in the nine months ended September 30, 2003 compared to the same
period in 2002. The positive change resulted from lower depreciation and
amortization expense, lower personnel costs in the BPO technical services
group, and better productivity in our production centers in Utah and Jamaica.
A sharp reduction in capital expenditures during 2001 and 2002 caused a
decrease in depreciation and amortization expense totaling $287,000. As part
of the November 2002 staff reduction, the technical support group was reduced
from a headcount of twelve to eight persons. Across-the-board salary
reductions also went into effect on January 1, 2003. Personnel cost reductions
from the BPO technical services group accounted for $196,000 of the cost
decrease from the 2002 period.

Sales and marketing expenses.Five of our nine sales and marketing
employees were terminated in November 2002. This reduction, combined with the
January 2003 salary reductions, accounted for a decrease in costs totaling
$550,000 in the nine months ended September 30, 2003, compared with the same
period in 2002. Travel costs related to sales and marketing in the 2003 period
decreased $111,000 compared to 2002.

General and administrative expenses.The nine months ended September 30,
2002, included a reduction in expense related to the settlement of Al Clemens
severance liability in the amount of $1.3 million. Excluding this one-time
benefit, general and administrative expenses for the nine months ended
September 30, 2003, decreased $1.5 million from the comparable period in 2002.
The November 2002 staff reductions, combined with the January 2003 salary
reductions, accounts for $563,000 of the cost decrease from the 2002 period.
Professional fees decreased $465,000 compared to the first nine months of 2002.
Non-cash stock based compensation expense decreased $150,000 due to the
gradual decrease of expense resulting from the remeasurement of stock options
at the time of the 2001 Healthaxis merger.

Research and development expenses.We have significantly reduced our
research and development activities in 2003 compared to last year because of a
greater emphasis on completing existing development products, and the
maintenance of existing customer accounts.

Amortization of intangibles.This amount is essentially unchanged from
2002.

Gain on extinguishment of debtin the 2002 period totaling $16,388,000
relates to the July 2002 transaction whereby Healthaxis issued 23,500 shares of
Series A Convertible Preferred Stock and paid $4 million in exchange for its
existing convertible debentures having a face value of $27,500,000.

Page 21



---



##### Table of Contents



Interest and other income, netfor the nine months ended September 30,
2002, includes a non-recurring write down of our investment in Digital
Insurance in the amount of $227,000. Interest income was lower in the nine
months ended September 30, 2003 as a result of lower notes receivable balances
in 2003.

Interest expensedecreased as a result of the exchange of our convertible
debentures for Series A Convertible Preferred Stock on July 31, 2002.

Gain from discontinued operationsrelates to the gain from the disposal of
the UICI Outsourcing business unit. These operations were discontinued in
connection with the June 2002 termination of the UICI Information Technology
Services Agreement.

Cumulative effect of accounting changewas recorded as a result of our
adoption of SFAS No. 142 Goodwill and Other Intangible Assets. No such
charge was recorded in 2003.

Liquidity and Capital Resources

Overview of Cash Resources

One of our major objectives is to maintain sufficient liquidity to fund
growth and meet all cash requirements with cash and short-term equivalents on
hand plus funds generated from operating cash flow. We believe that our
current cash reserves and the cash generated by future operations will be
sufficient to fund operations for at least the next 12 months. Funding
operations on a longer-term basis will depend upon our ability to generate new
revenues, continue controlling costs, and maintain existing customer
relationships. Our operating cost structure is predominantly personnel and
human resource related. The November 2002 cost reduction initiative, which
consisted of a reduction in Healthaxis labor force, an across-the-board
reduction in salary levels, and reductions in certain operating and overhead
expenses, reflects our continuing drive to control costs.

Analysis of Cash Flows

Cash used in operating activitiesfor the nine months ended September 30,
2003 was $988,000 as compared to cash used in operations totaling $1,417,000
for the same period in 2002. Our 2002 cash flows from operations includes cash
flows from both continuing and discontinued operations. During the first nine
months of 2002, cash flows from the discontinued UICI Outsourcing business unit
was approximately $3.6 million. Excluding the cash flow from this discontinued
business unit, our cash burn from continuing operations for the nine months
ended September 30, 2002 totaled $5 million. Our use of cash in 2003 was
greatly improved as a result of the November 2002 Cost Reduction Initiative,
combined with higher revenues in 2003.

Cash used in investing activitiesfor the nine months ended September 30,
2003 decreased $401,000 compared to the same period in 2002. A reduction in
capitalized developed software and contract start-up accounts for a decrease of
$1,003,000 between the periods. Most of the Healthaxis software products are
in a mature stage of production and sale. This is a change from prior years in
which significant development costs were incurred in an effort to get new
products to market. The amount of internal software development costs
capitalized during the third quarter of 2003 relate almost entirely to upgrades
and enhancements to the Insur-Claim software product. These upgrades and
enhancements add new functionality to our existing claim system that is
necessary to keep up with changing market and customer demands. Purchases of
property, equipment and software also increased $407,000 for the nine months
ended September 30, 2003 compared to the same period in 2002. This use of cash
was caused by our investment in storage area network equipment in 2003.

Page 22



---



##### Table of Contents



Cash used in financing activitiesfor the nine months ended September 30,
2003 was $1,205,000 and relates to the required semi-annual payment of
dividends on the Series A Convertible Preferred Stock made in January and July
2003 totaling $470,000, the one-time consent fee paid to the preferred
stockholders of $235,000 (See Note C to our Condensed Consolidated Financial
Statements), and a $500,000 payment to UICI for the repurchase of equity
securities (See Note D to our Condensed Consolidated Financial Statements).
Cash provided by financing activities for the nine months ended September 30,
2002, includes a payment from UICI related to the termination of the UICI
Information Technology Services Agreement in the amount of $6.4 million, net of
transaction costs.

Preferred Stock

The Series A Convertible Preferred Stock (Preferred Stock) has a stated
value of $22.1 million and is convertible into shares of Healthaxis common
stock at a conversion price of $15.50. The terms of the Preferred Stock
provide that cumulative dividends be paid at the rate of 2% per year, payable
semi-annually. In general, we may choose to pay the dividends either in cash
or by issuing shares of common stock, although in some circumstances we are
required to pay cash dividends. The terms of the Preferred Stock provide that
in some situations the holders of the Preferred Stock can force Healthaxis to
buy back their shares. We believe that the occurrence of the situations where
Healthaxis can be required to buy back shares of Preferred Stock is within our
control. This event might adversely affect Healthaxis, because it may not have
the cash necessary to effect the buy back or because cash that could have been
used to make investments in Healthaxis business will instead be paid to the
holders of our Preferred Stock. While we believe that, currently, there is no
cause for a forced buy back, the situations in which Healthaxis can be required
to buy back shares of Preferred Stock involve situations where specific events
or transactions are effected by Healthaxis without, generally, the affirmative
vote or consent of the holders of at least 60% of the then outstanding
Preferred Stock, or Healthaxis is found to have made an incorrect
representation or warranty in the Certificate of Designation or other documents
executed in connection with the issuance of the Preferred Stock. The Preferred
Stock also contains, among other things, provisions providing the holders a
preference in the payment of dividends and also a liquidation preference equal
to at least the stated value of the Preferred Stock plus all accrued but unpaid
dividends. The holders of the Preferred Stock do not have general voting
rights, although they do have the right to vote separately as a class in
connection with some matters.

Lease and Other Commitments

Healthaxis also has certain capital and operating lease commitments over
the next five years. These leases are primarily for office space and data
processing equipment. Healthaxis has no other significant cash commitments
other than those required by the normal day-to-day operations of the business.

Recently Adopted Accounting Pronouncements

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS 145). For most companies,
SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. Upon adoption, any
gain or loss on extinguishment of debt previously classified as an
extraordinary item in prior periods presented that does not meet the criteria
of Opinion 30 for such classification will be reclassified to conform with the
provisions of SFAS 145. The provisions of this statement related to the
rescission of SFAS 4 shall be applied in fiscal years beginning after May 15,
2002. The Company adopted the provisions of this statement effective January
1, 2003. As a result, the gains on extinguishments of debt that were
previously reported in prior periods as extraordinary items have been
reclassified as gains from continuing operations.

On May 15, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that

Page 23



---



##### Table of Contents



embody obligations of the issuer and have characteristics of both liabilities
and equity. SFAS 150 represents a significant change in practice in the
accounting for a number of financial instruments, including mandatorily
redeemable equity instruments and certain equity derivatives that frequently
are used in connection with share repurchase programs. This statement is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 has not had a
significant impact on the financial position or results of operations of the
Company.




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, management believes that there is no
material risk exposure.

Healthaxis cash equivalents and other investment instruments are exposed
to financial market risk due to fluctuation in interest rates, which may affect
its interest income. These instruments are not entered into for trading
purposes. Management does not expect the Companys interest income or expense
to be significantly affected by a sudden change in market interest rates.




Item 4. Controls and Procedures

As of September 30, 2003, 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 controls
and procedures pursuant to the applicable provisions of rules promulgated under
the Securities Exchange Act of 1934. 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 quarter covered by
this report that has materially affected, or is reasonably likely to materially
affect the Companys internal control over financial reporting.

Page 24



---



##### Table of Contents






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. Changes in Securities and Use of Proceeds.

As further described in Note D to the Companys Condensed Consolidated
Financial Statements, the conversion price at which the shares of the Companys
Series A Convertible Preferred Stock are convertible into shares of common
stock has been reduced from $26.25 to $15.50.




Item 3. Defaults Upon Senior Securities.

Not applicable




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

Healthaxis held a special meeting of the common shareholders on August 19,
2003, at which time the common shareholders voted to amend the Companys
articles of incorporation to authorize the Board of Directors to effect a
reverse stock split of the Companys common stock at a ratio of not less than 1
for 5 and not more than 1 for 15. The following table summarizes the votes
received in connection with this proposal.

|                                                 |  |           |            |            |  |         |      |           |  |        |         |  |  |  |        | 
|------------------------------------------------ |  | --------- | ---------- | ---------- |  | ------- | ---- | --------- |  | ------ | ------- |  |  |  | ------ | 
|                                                 |  |           |            |            |  |         |      |           |  | Shares |         |  |  | 
|                                                 |  | Shares    |            | Percentage |  | Voted   |      | Shares   
|Proposal                                         |  | Voted For |            | Voted For  |  | Against |      | Abstained
|                                                 |  |           |            |            |  |         |      |          
|Authorization to
amend articles of
incorporation |  |           | 44,982,081 |            |  |         | 98.1 | %         |  |        | 812,757 |  |  |  | 44,509 | 




Item 5. Other Information.

None




Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits:



| | (3.1) |  | Articles of Amendment to the Companys
Amended and Restated Articles of Incorporation,
incorporated by reference to Exhibit 3.1 of Form 8-K filed
on August 19, 2003.
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3.2) |  | Articles of Amendment to the Companys
Certificate of Designation of Series A Convertible
Preferred Stock of Healthaxis Inc., filed herewith.                        
|
| | (4.1) |  | Specimen Stock Certificate, incorporated
by reference to Exhibit 4.1 of Form 8-K filed on August
19, 2003.                                                           
|
| | (4.2) |  | Articles of Amendment to the Companys
Amended and Restated Articles of Incorporation (see
Exhibit 3.1 hereto).                                                      

Page 25



---



##### Table of Contents





| | (4.3)  |  | Articles of Amendment to the Companys
Certificate of Designation of Series A Convertible
Preferred Stock of Healthaxis Inc. (see Exhibit 3.2
hereto).
| | ------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (10.1) |  | Purchase Agreement, dated as of September 30, 2003
between the Company and UICI, filed herewith.                                                      
|
| | (10.2) |  | Promissory Note, made by the Company, payable to UICI,
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) |  | Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.                                   
|
| | (32.2) |  | Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 filed
herewith.                                    



|(b) |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company furnished a Current Report on Form 8-K on July 30,
2003, in which it disclosed, under Item 9, a press release
dated July 29, 2003 announcing the second quarter 2003
financial results.                                                                                                       
|   
|    |  | The Company filed a Current Report on Form 8-K on August 19,
2003, in which it disclosed, under Item 5, the approval by the
common shareholders of a proposal authorizing the Companys
Board of Directors to effect a reverse stock split at a ratio
of not less than 1-for-5 and not more than 1-for-15.

Page 26



---



##### Table of Contents






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: November 13, 2003 |  | By: /s/ James W. McLane                              
|                        |  |                                                      
|                        |  | James W. McLane, Chairman, President and Chief       
|                        |  | Executive Officer (Principal Executive Officer)      
|                        |  |                                                      
|                        |  | By: /s/ John M. Carradine                            
|                        |  |                                                      
|                        |  | John M. Carradine, Chief Financial Officer (Principal
|                        |  | Financial Officer) and Treasurer                     

Page 27



---



##### Table of Contents






Exhibit Index



| | (3.1)  |  | Articles of Amendment to the Companys Amended and Restated
Articles of Incorporation, incorporated by reference to Exhibit 3.1
of Form 8-K filed on August 19, 2003.
| | ------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3.2)  |  | Articles of Amendment to the Companys Certificate of
Designation of Series A Convertible Preferred Stock of Healthaxis
Inc., filed herewith.                        
|
| | (4.1)  |  | Specimen Stock Certificate, incorporated by reference to
Exhibit 4.1 of Form 8-K filed on August 19, 2003.                                                           
|
| | (4.2)  |  | Articles of Amendment to the Companys Amended and Restated
Articles of Incorporation (see Exhibit 3.1 hereto).                                                      
|
| | (4.3)  |  | Articles of Amendment to the Companys Certificate of
Designation of Series A Convertible Preferred Stock of Healthaxis
Inc. (see Exhibit 3.2 hereto).               
|
| | (10.1) |  | Purchase Agreement, dated as of September 30, 2003 between the
Company and UICI, filed herewith.                                                                     
|
| | (10.2) |  | Promissory Note, made by the Company, payable to UICI, 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) |  | Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith.                                                  
|
| | (32.2) |  | Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith.                                                  

Page 28