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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 June 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                    |  | 23-2214195         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | 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: 53,565,815 shares of common
stock, par value $.10, outstanding as of August 4, 2003.

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TABLE OF CONTENTS



|                                                  |                                                                                               |                                                 |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                    
|                                                  | Item 1. Condensed Consolidated Financial Statements                                          
|                                                  |                                                                                               | Condensed Consolidated Statements of Operations
|                                                  |                                                                                               | Condensed Consolidated Statements of Cash Flows
|                                                  |                                                                                               | Notes to 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 1-5 Legal Proceedings                                                                   
|                                                  | Item 6. Exhibits and Reports on Form 8-K.                                                    
|Signature                                        
|Exhibit Index                                    
|EX-31.1 Certification of CEO Pursuant to Sec. 302
|EX-31.2 Certification of CFO Pursuant to Sec. 302
|EX-32.1 Certification of CEO Pursuant to Sec. 906
|EX-32.2 Certification of CFO Pursuant to Sec. 906



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##### 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 |                                                      |  | 13   |  
|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                                                      |                                                      |  | 26   |  
|Signatures                                                                                    |                                                      |  | 27   |  
|Exhibit Index                                                                                 |                                                      |  | 28   |  

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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)

|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |       |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ----- | -------- | ------ | ------------ | ----- | ------ | ------ | 
|                                                                                                                                     |                                                                                                         |                           |                                            |       | June 30, |        | December 31,
|                                                                                                                                     |                                                                                                         |                           |                                            |       | 2003     |        | 2002        
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |             
|Assets                                                                                                                               |                                                                                                         |                           |                                            |       |          |        |              |      
|Cash and cash equivalents                                                                                                            |                                                                                                         | $                         | 10,265                                     |       |          | $      | 11,380       |      
|Accounts receivable, net of allowance for doubtful accounts of $37 and $195, respectively                                            |                                                                                                         |                           | 3,324                                      |       |          |        | 3,101        |      
|Accounts receivable from affiliates                                                                                                  |                                                                                                         |                           | 137                                        |       |          |        | 245          |      
|Prepaid expenses and other current assets                                                                                            |                                                                                                         |                           | 949                                        |       |          |        | 648          |      
|Costs in excess of billings on contracts in progress                                                                                 |                                                                                                         |                           | 467                                        |       |          |        | 309          |      
|Notes receivable                                                                                                                     |                                                                                                         |                           | 84                                         |       |          |        | 214          |      
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         | Total current assets      |                                            |       | 15,226   |        |              |       | 15,897 |       
|Property, equipment and software, less accumulated depreciation and
amortization of $11,746 and $11,174, respectively                |                                                                                                         |                           | 1,126                                      |       |          |        | 1,462        |      
|Contract start-up costs, less accumulated amortization of $1,113 and $834, respectively                                              |                                                                                                         |                           | 930                                        |       |          |        | 1,149        |      
|Capitalized software, less accumulated amortization of $1,781 and $1,383, respectively                                               |                                                                                                         |                           | 1,249                                      |       |          |        | 1,502        |      
|Customer base, less accumulated amortization of $2,617 and $2,112, respectively                                                      |                                                                                                         |                           | 1,597                                      |       |          |        | 2,102        |      
|Goodwill                                                                                                                             |                                                                                                         |                           | 11,276                                     |       |          |        | 11,276       |      
|Notes receivable                                                                                                                     |                                                                                                         |                           | 144                                        |       |          |        | 134          |      
|Other assets                                                                                                                         |                                                                                                         |                           | 164                                        |       |          |        | 135          |      
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         |                           | Total assets                               |       | $        | 31,712 |              |       | $      | 33,657 | 
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|Liabilities and Stockholders Equity                                                                                                 |                                                                                                         |                           |                                            |       |          |        |              |      
|Accounts payable                                                                                                                     |                                                                                                         | $                         | 1,837                                      |       |          | $      | 1,438        |      
|Accrued liabilities                                                                                                                  |                                                                                                         |                           | 903                                        |       |          |        | 847          |      
|Deferred revenues                                                                                                                    |                                                                                                         |                           | 1,574                                      |       |          |        | 1,713        |      
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         | Total current liabilities |                                            |       | 4,314    |        |              |       | 3,998  |       
|Post retirement and employment liabilities                                                                                           |                                                                                                         |                           | 951                                        |       |          |        | 966          |      
|Other liabilities                                                                                                                    |                                                                                                         |                           | 1,387                                      |       |          |        | 1,085        |      
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         |                           | Total liabilities                          |       |          | 6,652  |              |       |        | 6,049  | 
|Commitments and contingencies                                                                                                        |                                                                                                         |                           |                                            |       |          |        |              |      
|Stockholders Equity:                                                                                                                |                                                                                                         |                           |                                            |       |          |        |              |      
|Preferred stock, par value $1.00: authorized 100,000,000 shares:                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     | Series A cumulative convertible, 23,500 shares issued and outstanding,
($23,500 liquidation preference) |                           |                                            | 6,280 |          |        |              | 6,280 |       
|Common stock, par value $.10: authorized 1,900,000,000 shares,
issued and outstanding 53,565,815 and 53,645,297 shares, respectively |                                                                                                         |                           | 5,357                                      |       |          |        | 5,364        |      
|Additional paid-in capital                                                                                                           |                                                                                                         |                           | 440,358                                    |       |          |        | 440,593      |      
|Accumulated deficit                                                                                                                  |                                                                                                         |                           | (426,935                                   | )     |          |        | (424,629     | )    
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         |                           | Total stockholders equity                 |       |          | 25,060 |              |       |        | 27,608 | 
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      
|                                                                                                                                     |                                                                                                         |                           | Total liabilities and stockholders equity |       | $        | 31,712 |              |       | $      | 33,657 | 
|                                                                                                                                     |                                                                                                         |                           |                                            |       |          |        |              |      

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations

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

|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |   |            |        |        | 
|------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------------ | ------------------------------------------ | -------------- | ---------- | --------------------------- | ------ | ------------------------- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------- | - | ---------- | ------ | ------ | 
|                                                                                |                                          |                                                        |                                            |                |            | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                                |                                          |                                                        |                                            |                |            | 2003                        |        | 2002                      |            | 2003   |        | 2002
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |     
|Revenues                                                                        |                                          | $                                                      | 5,483                                      |                |            | $                           | 4,588  |                           |            | $      | 10,714 |      |            | $      | 9,880   |  
|Expenses:                                                                       |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          |                                                        | Costs of revenue                           |                |            | 4,975                       |        |                           |            | 5,758  |        |      |            | 10,072 |         |   |            | 11,447 |       
|                                                                                |                                          |                                                        | Sales and marketing                        |                |            | 283                         |        |                           |            | 643    |        |      |            | 538    |         |   |            | 1,009  |       
|                                                                                |                                          |                                                        | General and administrative                 |                |            | 837                         |        |                           |            | 1,324  |        |      |            | 1,746  |         |   |            | 1,603  |       
|                                                                                |                                          |                                                        | Research and development                   |                |            |                            |        |                           |            | 123    |        |      |            | 30     |         |   |            | 240    |       
|                                                                                |                                          |                                                        | Amortization of intangibles                |                |            | 324                         |        |                           |            | 328    |        |      |            | 648    |         |   |            | 653    |       
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          |                                                        |                                            | Total expenses |            |                             | 6,419  |                           |            |        | 8,176  |      |            |        | 13,034  |   |            |        | 14,952 | 
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          |                                                        | Operating loss                             |                |            | (936                        | )      |                           |            | (3,588 | )      |      |            | (2,320 | )       |   |            | (5,072 | )     
|                                                                                |                                          |                                                        | Interest income and other income (expense) |                |            | 22                          |        |                           |            | (158   | )      |      |            | 52     |         |   |            | (43    | )     
|                                                                                |                                          |                                                        | Interest expense                           |                |            | (19                         | )      |                           |            | (184   | )      |      |            | (38    | )       |   |            | (363   | )     
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          |                                                        | Loss from continuing operations            |                |            | (933                        | )      |                           |            | (3,930 | )      |      |            | (2,306 | )       |   |            | (5,478 | )     
|Gain from discontinued operations                                               |                                          |                                                        |                                           |                |            |                             | 269    |                           |            |        |       |      |            |        | 816     |  
|Loss on disposal of discontinued operations                                     |                                          |                                                        |                                           |                |            |                             | (3,564 | )                         |            |        |       |      |            |        | (3,564  | )
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|Loss on discontinued operations                                                 |                                          |                                                        |                                           |                |            |                             | (3,295 | )                         |            |        |       |      |            |        | (2,748  | )
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          | Net loss before cumulative effect of accounting
change |                                            |                | (933       | )                           |        |                           | (7,225     | )      |        |      | (2,306     | )      |         |   | (8,226     | )     
|Cumulative effect of accounting change                                          |                                          |                                                        |                                           |                |            |                             |       |                           |            |        |       |      |            |        | (6,674  | )
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|Net loss                                                                        |                                          |                                                        | (933                                       | )              |            |                             | (7,225 | )                         |            |        | (2,306 | )    |            |        | (14,900 | )
|                                                                                | Dividends on convertible preferred stock |                                                        |                                            | (117           | )          |                             |        |                          |            |        |        | (232 | )          |        |         |  |           
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|Net loss available to common shareholders                                       |                                          | $                                                      | (1,050                                     | )              |            | $                           | (7,225 | )                         |            | $      | (2,538 | )    |            | $      | (14,900 | )
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|Loss per share of common stock (basic and diluted)
Continuing operations        |                                          | $                                                      | (.02                                       | )              |            | $                           | (0.07  | )                         |            | $      | (.05   | )    |            | $      | (0.10   | )
|                                                                                |                                          | Discontinued operations                                |                                            |                |           |                             |        |                           | (0.06      | )      |        |      |           |        |         |   | (0.05      | )     
|                                                                                |                                          | Cumulative effect of accounting change                 |                                            |                |           |                             |        |                           |           |        |        |      |           |        |         |   | (0.13      | )     
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          | Net loss                                               |                                            | $              | (.02       | )                           |        | $                         | (0.13      | )      |        | $    | (.05       | )      |         | $ | (0.28      | )     
|                                                                                |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|Weighted average common shares and equivalents
used in computing loss per share |                                          |                                                        |                                            |                |            |                             |        |                           |            |        |        |      |            |        |         |  
|                                                                                |                                          | Basic and diluted                                      |                                            |                | 53,612,000 |                             |        |                           | 53,633,000 |        |        |      | 53,629,000 |        |         |   | 53,559,000 |       

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |          |   |        |       |  
|------------------------------------------------- | --------------------------------------------------------------------------- |  | ------------------------------------------------ | ----------------------------------------- | - | ---------------- | ---- | -------- | - | ------ | ----- | -
|                                                  |                                                                             |  |                                                  |                                           |   | Six Months Ended
|                                                  |                                                                             |  |                                                  |                                           |   |                 
|                                                  |                                                                             |  |                                                  |                                           |   | June 30,         |      | June 30,
|                                                  |                                                                             |  |                                                  |                                           |   | 2003             |      | 2002    
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|Cash flows from operating activities              |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Net loss                                                                    |  | $                                                | (2,306                                    | ) |                  | $    | (14,900  | )
|                                                  | 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                    |                                           |   | 1,796            |      |          |   | 2,706  |      
|                                                  |                                                                             |  | Amortization of unearned compensation            |                                           |   |                 |      |          |   | 92     |      
|                                                  |                                                                             |  | Bad debt reserve                                 |                                           |   | 48               |      |          |   | 58     |      
|                                                  |                                                                             |  | Loss on disposal of fixed assets                 |                                           |   | 8                |      |          |   |       |      
|                                                  |                                                                             |  | Gain on settlement of severance obligation       |                                           |   |                 |      |          |   | (1,345 | )    
|                                                  |                                                                             |  | Stock option compensation                        |                                           |   | 18               |      |          |   | 222    |      
|                                                  |                                                                             |  | Impairment or restructuring charges              |                                           |   |                 |      |          |   | 942    |      
|                                                  |                                                                             |  | Stock issued in lieu of severance                |                                           |   |                 |      |          |   | 355    |      
|                                                  |                                                                             |  | Payment of interest with common stock            |                                           |   |                 |      |          |   | 277    |      
|                                                  |                                                                             |  | Interest on convertible debt                     |                                           |   |                 |      |          |   | 49     |      
|                                                  |                                                                             |  | Change in:                                       |                                           |   |                  |      |          |   |        |      
|                                                  |                                                                             |  |                                                  | Accounts receivable                       |   |                  | (163 | )        |   |        | 2,858 |  
|                                                  |                                                                             |  |                                                  | Prepaid expenses and other current assets |   |                  | (376 | )        |   |        | (718  | )
|                                                  |                                                                             |  |                                                  | Costs in excess of billings               |   |                  | (158 | )        |   |        |      |  
|                                                  |                                                                             |  |                                                  | Other assets                              |   |                  | (29  | )        |   |        |      |  
|                                                  |                                                                             |  |                                                  | Accounts payable and accrued liabilities  |   |                  | 460  |          |   |        | (366  | )
|                                                  |                                                                             |  |                                                  | Deferred revenues                         |   |                  | (139 | )        |   |        | (279  | )
|                                                  |                                                                             |  |                                                  | Other liabilities                         |   |                  | 287  |          |   |        | (17   | )
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Net cash (used in) provided by operating activities                         |  |                                                  | (554                                      | ) |                  |      | 172      |  
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|Cash flows from investing activities              |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  |                                                                             |  | Collection (advances) on notes receivable        |                                           |   | 92               |      |          |   | (6     | )    
|                                                  |                                                                             |  | Capitalized software and contract start-up costs |                                           |   | (205             | )    |          |   | (847   | )    
|                                                  |                                                                             |  | Purchases of property, equipment and software    |                                           |   | (219             | )    |          |   | (119   | )    
|                                                  |                                                                             |  | Other                                            |                                           |   | 8                |      |          |   |       |      
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Net cash used in investing activities                                       |  |                                                  | (324                                      | ) |                  |      | (972     | )
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|Cash flows from financing activities              |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Payment of preferred stock dividends                                        |  |                                                  | (237                                      | ) |                  |      |         |  
|                                                  | Termination of UICI contract                                                |  |                                                  |                                          |   |                  |      | 6,359    |  
|                                                  | Payments on capital leases                                                  |  |                                                  |                                          |   |                  |      | (8       | )
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Net cash (used in) provided by financing activities                         |  |                                                  | (237                                      | ) |                  |      | 6,351    |  
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | (Decrease) increase in cash and cash equivalents                            |  |                                                  | (1,115                                    | ) |                  |      | 5,551    |  
|                                                  | Cash and cash equivalents, beginning of period                              |  |                                                  | 11,380                                    |   |                  |      | 13,149   |  
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Cash and cash equivalents, end of period                                    |  | $                                                | 10,265                                    |   |                  | $    | 18,700   |  
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         
|Supplemental disclosure of cash flow information: |                                                                             |  |                                                  |                                           |   |                  |      |         
|                                                  | Interest paid                                                               |  | $                                                | 38                                        |   |                  | $    | 41       |  
|                                                  |                                                                             |  |                                                  |                                           |   |                  |      |         

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands except share and per share data)
June 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 six-month period ended June 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 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
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 pre-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.

Loss 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 stock options and
warrants using the treasury stock method based on the average market price of
the stock during the respective periods. The effect of including the stock
options, warrants and shares issuable upon conversion of the

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Companys convertible preferred stock into the computation of diluted earnings
per share would be anti-dilutive. Accordingly, these items have not been
included in the computation.

Stock-Based Compensation

The Company selected an accounting policy which requires only the excess
of the market value of its common stock over the exercise price of options
granted to be recorded as compensation expense (intrinsic method). Pro forma
information regarding net loss is required as if the Company had accounted for
its employee stock options under the fair value method. Pro forma net loss
applicable to the option granted is not likely to be 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 June 30, |       | Six Months Ended June 30,
|                                                                                |             |   | 2003                        |       | 2002                      |   | 2003   |       | 2002
|                                                                                |             |   |                             |       |                           |   |        |       |     
|Net loss, as reported                                                           |             | $ | (933                        | )     |                           | $ | (7,225 | )     |      | $ | (2,306 | )     |   | $ | (14,900 | )    
|Stock based compensation expense recorded
under the intrinsic value method      |             |   | 9                           |       |                           |   | 144    |       |      |   | 18     |       |   |   | 222     |      
|Pro forma stock based compensation expense
computed under the fair value method |             |   | (395                        | )     |                           |   | (779   | )     |      |   | (837   | )     |   |   | (1,558  | )    
|                                                                                |             |   |                             |       |                           |   |        |       |      |   |        |       |   |   |         |      
|Pro forma net loss                                                              |             | $ | (1,319                      | )     |                           | $ | (7,860 | )     |      | $ | (3,125 | )     |   | $ | (16,236 | )    
|                                                                                |             |   |                             |       |                           |   |        |       |      |   |        |       |   |   |         |      
|Loss per share of common stock, basic and
diluted                               |             |   |                             |       |                           |   |        |       |      |   |        |       |   |   |         |      
|                                                                                | As reported |   | $                           | (0.02 | )                         |   | $      | (0.13 | )    |   | $      | (0.05 | ) |   | $       | (0.28 | )
|                                                                                |             |   |                             |       |                           |   |        |       |      |   |        |       |   |   |         |      
|                                                                                | Pro forma   |   | $                           | (0.02 | )                         |   | $      | (0.15 | )    |   | $      | (0.06 | ) |   | $       | (0.30 | )
|                                                                                |             |   |                             |       |                           |   |        |       |      |   |        |       |   |   |         |      

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, and anticipates the reclassification of extraordinary gains reported
in prior periods to be included in the gain or loss from operations.

Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146) requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than at the date of commitment to an exit
or disposal plan. SFAS 146 is effective for exit and disposal activities that
are initiated after December 29, 2002. The adoption of SFAS 146 is not
expected to have a significant impact on the financial position or results of
operations of the Company.

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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 is not expected to have a significant impact on the financial position or
results of operations of the Company.

Note C   Significant Customer Concentrations

For the three months and the six months ended June 30, 2003, four
customers (including UICI) accounted for $2,963 (54%) and $5,870 (55%),
respectively, of the Companys total revenues. At June 30, 2003, one customer
accounted for $1,045 of the Companys accounts receivable.

Note D  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. Contracts with significant customer
acceptance provisions are recognized using the completed contract method upon
achieving customer acceptance of the completed project. During the six months
ended June 30, 2003, the Company had one contract in progress under each
method.

The Company has accounted for activities under a government related
contract on the percentage of completion method. Due to the relative
uncertainty of the profit margin to be achieved from the contract, the Company
has used a zero margin approach for recording revenues for this contract. As
of June 30, 2003, costs, earnings and billings to date on the contract are as
follows:

|                                                 |  |   |        |  
|------------------------------------------------ |  | - | ------ | -
|Costs incurred on contract                       |  | $ | 1,950  |  
|Estimated earnings                               |  |   |       |  
|                                                 |  |   |        |  
|Revenues recognized to date                      |  |   | 1,950  |  
|Less billings to date                            |  |   | (1,109 | )
|                                                 |  |   |        |  
|Net unbilled receivables on contract in progress |  | $ | 841    |  
|                                                 |  |   |        |  

The Company has accounted for activities under a second government related
contract under the completed contract method. As of June 30, 2003, costs and
billings to date on the contract are as follows:

|                                                    |  |   |      |  
|--------------------------------------------------- |  | - | ---- | -
|Costs incurred on contract                          |  | $ | 176  |  
|Less billings to date                               |  |   | (550 | )
|                                                    |  |   |      |  
|Billings on uncompleted contract in excess of costs |  | $ | (374 | )
|                                                    |  |   |      |  

Net unbilled receivables and billings on uncompleted contracts in excess
of costs totaling $467 are presented as costs in excess of billings.

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Note E  Other Liabilities

Other liabilities totaled $1,387 and $1,085 at June 30, 2003, and December
31, 2002, respectively and consists of contingent tax liabilities. In June
2003, the Company received a tax refund in the amount of $324 that was recorded
as a liability pending final resolution of the matter.

Note F  Related Party Transactions

The Company conducts business with a major shareholder, UICI. At June 30,
2003, UICI owned approximately 46% of the Companys outstanding common stock
and owns warrants to purchase 222,396 shares of the Companys common stock at
prices ranging from $3.01 to $12.00 per share. UICI also owns 1,424 shares of
the Companys Series A convertible preferred stock that are convertible into
542,477 common shares.

For the three months ended June 30, 2003 and 2002, UICI and its
subsidiaries and affiliates accounted for $487 (9%) and $404 (9%),
respectively, of the Companys revenues from continuing operations. For the six
months ended June 30, 2003 and 2002, UICI and its subsidiaries and affiliates
accounted for $942 (9%), and $1,247 (13%), respectively, of the Companys
revenues from continuing operations. As of June 30, 2003, Healthaxis had
accounts receivable due from UICI and its subsidiaries and affiliates totaling
$137.

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. Notwithstanding
this termination, the Company continues to provide products and services to
UICI.

Revenues from UICI related to discontinued operations totaled $3,578, and
$8,078, for the three months and the six months ended June 30, 2002,
respectively (See Note H).

Note G  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 $6,674. The impairment charge is shown as a cumulative effect
of an accounting change as of January 1, 2002.

Note H  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 $6,500 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, $6,359, as a contribution
of capital from a significant shareholder. A loss on disposal of discontinued
operations in the amount of $3,564 was recorded as a result of the termination.
The loss consisted of impairment charges for goodwill and customer base
totaling $484 and $3,080, respectively. The impairment charges result from a
write off of the entire amount of goodwill and customer base attributable to
the Agreement.

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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 six months ended June 30, 2002 are as follows:

|                            |            |                |       |               |       |               |       |     |       | 
|--------------------------- | ---------- | -------------- | ----- | ------------- | ----- | ------------- | ----- | --- | ----- | 
|                            |            |                |       | Three Months  |       | Six Months   
|                            |            |                |       | Ended         |       | Ended        
|                            |            |                |       | June 30, 2002 |       | June 30, 2002
|                            |            |                |       |               |       |              
|Revenue                     |            | $              | 3,578 |               |       | $             | 8,078 |    
|Cost of revenue             |            |                | 3,055 |               |       |               | 6,714 |    
|Amortization of intangibles |            |                | 254   |               |       |               | 548   |    
|                            |            |                |       |               |       |               |       |    
|                            |            | Total expenses |       |               | 3,309 |               |       |     | 7,262 | 
|                            |            |                |       |               |       |               |       |    
|                            | Net income |                | $     | 269           |       |               | $     | 816 |      
|                            |            |                |       |               |       |               |       |    

Note I  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

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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, 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       
|                                 |  |              |        |          |  |           |       |             
|Three Months Ended June 30, 2003 |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                          |  | $            | 4,273  |          |  | $         | 1,210 |              |  | $ |       |   |  | $ | 5,483  |  
|EBITDA As Defined                |  |              | 822    |          |  |           | 204   |              |  |   | (1,095 | ) |  |   | (69    | )
|Depreciation and amortization    |  |              | 430    |          |  |           | 85    |              |  |   | 343    |   |  |   | 858    |  
|Operating income (loss)          |  |              | 392    |          |  |           | 119   |              |  |   | (1,447 | ) |  |   | (936   | )
|                                 |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Three Months Ended June 30, 2002 |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                          |  | $            | 3,504  |          |  | $         | 1,084 |              |  | $ |       |   |  | $ | 4,588  |  
|EBITDA As Defined                |  |              | 251    |          |  |           | (52   | )            |  |   | (1,798 | ) |  |   | (1,599 | )
|Depreciation and amortization    |  |              | 556    |          |  |           | 191   |              |  |   | 362    |   |  |   | 1,109  |  
|Operating income (loss)          |  |              | (1,020 | )        |  |           | (243  | )            |  |   | (2,325 | ) |  |   | (3,588 | )
|                                 |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Six Months Ended June 30, 2003   |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                          |  | $            | 8,291  |          |  | $         | 2,423 |              |  | $ |       |   |  | $ | 10,714 |  
|EBITDA As Defined                |  |              | 1,411  |          |  |           | 315   |              |  |   | (2,232 | ) |  |   | (506   | )
|Depreciation and amortization    |  |              | 897    |          |  |           | 211   |              |  |   | 688    |   |  |   | 1,796  |  
|Operating income (loss)          |  |              | 514    |          |  |           | 104   |              |  |   | (2,938 | ) |  |   | (2,320 | )
|                                 |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Six Months Ended June 30, 2002   |  |              |        |          |  |           |       |              |  |   |        |   |  |   |        |  
|Revenue                          |  | $            | 7,758  |          |  | $         | 2,122 |              |  | $ |       |   |  | $ | 9,880  |  
|EBITDA As Defined                |  |              | 694    |          |  |           | (253  | )            |  |   | (3,671 | ) |  |   | (3,230 | )
|Depreciation and amortization    |  |              | 1,045  |          |  |           | 396   |              |  |   | 717    |   |  |   | 2,158  |  
|Operating income (loss)          |  |              | (1,067 | )        |  |           | (649  | )            |  |   | (3,356 | ) |  |   | (5,072 | )

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

|                  |                                           |                             |      |                           |      |   |        |        |      |   |        |        |   |   |        |        |  
|----------------- | ----------------------------------------- | --------------------------- | ---- | ------------------------- | ---- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                  |                                           | Three Months Ended June 30, |      | Six Months Ended June 30,
|                  |                                           |                             | 2003 |                           | 2002 |   | 2003   |        | 2002
|                  |                                           |                             |      |                           |      |   |        |        |     
|EBITDA As Defined |                                           | $                           | (69  | )                         |      | $ | (1,599 | )      |      | $ | (506   | )      |   | $ | (3,230 | )     
|                  | Depreciation and amortization             |                             |      | (858                      | )    |   |        | (1,109 | )    |   |        | (1,796 | ) |   |        | (2,158 | )
|                  | Stock based compensation and amortization |                             |      | (9                        | )    |   |        | (165   | )    |   |        | (18    | ) |   |        | (314   | )
|                  | Severance expense                         |                             |      |                          |      |   |        |       |      |   |        |       |   |   |        | 1,345  |  
|                  | Restructuring and impairment charges      |                             |      |                          |      |   |        | (715   | )    |   |        |       |   |   |        | (715   | )
|                  |                                           |                             |      |                           |      |   |        |        |      |   |        |        |   |   |        |       
|Operating loss    |                                           | $                           | (936 | )                         |      | $ | (3,588 | )      |      | $ | (2,320 | )      |   | $ | (5,072 | )     
|                  |                                           |                             |      |                           |      |   |        |        |      |   |        |        |   |   |        |       

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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 pre-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

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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.Our revenue for the remainder of 2003 will be
affected by the timing of the acceptance of the web-based administration
platform we have been developing for the State of Washington and for the State
of Georgia. These contracts are relatively large. Although we receive cash
for work stages completed on the State of Georgia contract, we will only
recognize revenue and profits from the contract when the contractual
obligations are completed and accepted. Revenues from the State of Washington
contract are recognized under the percentage of completion method, but we have
deferred the recognition of any profits from the contract until the contract is
complete. In both cases, it now appears that our customers schedules may
result in delays in acceptance. We believed earlier in this year that both of
these contracts would be completed by December 31, 2003. However, these delays
could push revenue and profit recognition on these contracts into 2004.

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, as well as 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.

Management believes that the cost reduction initiative serves not only the
Companys financial goals, but is also consistent with its strategic business
goals. Healthaxis has spent significant resources in the past two years
developing certain products and functionality. That development effort is now
substantially complete and the level of human resources necessary to sustain
the effort is no longer required. In addition, the Company now outsources
portions of its software development work to Satyam Computer Services Ltd., a
leading global consulting and IT services company based in India. The Company
will now focus on selling these capabilities to new customers, as well as using
them to strengthen relationships with existing customers. In addition, the
Company has, in recent periods, sharpened its focus on more specific target
markets with more specific product offerings, the effect of which has been to
reduce its human resource requirements. Hence, management believes that its
reduced labor force will be able to effectively serve its existing customer
base, while also focusing on new market opportunities.

Potential Sub-lease of Office Space in Irving, TX.Healthaxis occupies
office space in Irving, Texas under agreements that will expire in December
2005. We are currently in discussions with an unrelated third party regarding
a potential sub-lease of space subject to the smaller of the two lease
agreements (our 7th floor space). The potential sub-lease would also expire in
December 2005. The amount remaining to be paid by Healthaxis, under the
original lease for the 7th floor space, exceeds the expected amount to be
received from the potential sub-lease. We continue to occupy and use the space
that would become subject to the potential sub-lease. We currently anticipate
that a sub-lease agreement could be entered into in the third quarter of 2003.
In connection with this event, we would record an expense related to the
difference between the amounts received under the sublease and the amounts paid
under our original lease agreement. Currently, we estimate that the amount of
the charge will not exceed $225,000.

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Allowance for Doubtful Accounts.During the second quarter of 2003, we
wrote-off accounts receivable balances in the amount of $206,000 relating to
two former customers. Both of these accounts had been fully reserved in prior
periods. At June 30, 2003, our allowance for doubtful accounts totaled
$37,000. We believe that this reserve is adequate to ensure that accounts
receivable are fairly stated.

Results of Operations
(Tables in Thousands)

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

Revenues

|                        |  |                             |       |      |  |        |       |  |  |   |     | 
|----------------------- |  | --------------------------- | ----- | ---- |  | ------ | ----- |  |  | - | --- | 
|                        |  | Three Months Ended June 30, |       |      |  |       
|                        |  | 2003                        |       | 2002 |  | Change
|                        |  |                             |       |      |  |       
|Technology & Operations |  | $                           | 4,273 |      |  | $      | 3,504 |  |  | $ | 769 | 
|BPO Services            |  |                             | 1,210 |      |  |        | 1,084 |  |  |   | 126 | 
|                        |  |                             |       |      |  |        |       |  |  |   |     | 
|Total revenue           |  | $                           | 5,483 |      |  | $      | 4,588 |  |  | $ | 895 | 
|                        |  |                             |       |      |  |        |       |  |  |   |     | 

Technology & Operations

Our Technology & Operations revenue for the second quarter of 2003 increased
22% from the second quarter of 2002. Revenue from the State of Washington
contract, which is non-recurring, increased $515,000. Work related to the
State of Washington contract started in June 2002. As anticipated, one of our
existing customers terminated its use of our claims system in 2003, resulting
in a decrease in revenue totaling $407,000. We added another significant
claims customer replacing $271,000 of the loss.

Revenue for the three months ended June 30, 2003 includes new revenue from two
existing customers in the amount of $324,000 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.

BPO Services (formerly known as Imaging Services Group)
BPO Services revenues increased 12% from the second quarter of 2002. In
January 2003, we added additional work from an existing customer totaling
$149,000. This increase was partially offset as a result of the loss of a
smaller customer due to bankruptcy totaling $59,000.

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, as well as other related consumables.

|                        |              |   |                             |    |      |   |        |     |   |   |      |   | 
|----------------------- | ------------ | - | --------------------------- | -- | ---- | - | ------ | --- | - | - | ---- | - | 
|                        |              |   | Three Months Ended June 30, |    |      |   |       
|                        |              |   | 2003                        |    | 2002 |   | Change
|                        |              |   |                             |    |      |   |       
|Technology & Operations |              | $ | 3,884                       |    |      | $ | 4,431  |     |   | $ | (547 | )
|BPO Services            |              |   | 1,091                       |    |      |   | 1,327  |     |   |   | (236 | )
|                        |              |   |                             |    |      |   |        |     |   |   |      |  
|Total cost of revenues  |              | $ | 4,975                       |    |      | $ | 5,758  |     |   | $ | (783 | )
|                        |              |   |                             |    |      |   |        |     |   |   |      |  
|                        | % of revenue |   |                             | 91 | %    |   |        | 126 | % |   |      |   | 

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Technology & Operations

Cost of revenues for Technology & Operations decreased 12% from the second
quarter of 2002. As a percentage of Technology & Operations revenue, costs
decreased from 126% in the 2002 period to 91% in the 2003 period. The decrease
is the result of an overall reduction in personnel costs, offset by reduced
capitalization and increased costs attributable to print and distribution
outsourcing. In November 2002, we implemented a cost reduction initiative that
reduced our employee headcount significantly. Across-the-board salary
reductions also went into effect, on a company-wide basis, January 1, 2003. As
a result, personnel expenses were down $898,000 from the second quarter of
2002. However, some employees were re-assigned to expensable projects from
capitalizable development projects, which served to offset the expense savings
by $350,000. Subcontractor expenses increased $465,000 as a result of amounts
paid to Satyam in connection with our government related projects. During the
fourth quarter of 2002, we began the process of outsourcing our print and
distribution capabilities to a third party, which increased our costs of
revenues in the second quarter of 2003 by approximately $435,000. These
additional costs are in lieu of costs previously associated with in-house
employees and other operating expenses. The three months ended June 30, 2002
also includes impairment charges related to software and equipment in the
amount of $715,000 that are non-recurring.

BPO Services (formerly known as Imaging Services Group)

The cost of revenue for BPO Services decreased 18% from the second quarter of
2002, primarily as a result of an employee headcount reduction in the Imaging
Support group from twelve to eight. This reduction was part of the November
2002 staff reduction. Across-the-board salary reductions also went into
effect, on a company-wide basis, on January 1, 2003. Personnel cost reductions
from this BPO Services group accounted for $58,000 of the cost decrease from
2002. The second quarter of 2002 also includes a bad debt charge in the amount
of $50,000 that did not recur in the second quarter of 2003.

Sales and marketing expensesconsist primarily of employee salaries and
related benefits, as well as promotional costs such as direct mailing
campaigns, trade shows and media advertising.

|                    |  |                             |     |      |  |        |     |  |  |   |      |  
|------------------- |  | --------------------------- | --- | ---- |  | ------ | --- |  |  | - | ---- | -
|                    |  | Three Months Ended June 30, |     |      |  |       
|                    |  | 2003                        |     | 2002 |  | Change
|                    |  |                             |     |      |  |       
|Sales and marketing |  | $                           | 283 |      |  | $      | 643 |  |  | $ | (360 | )

Five of our nine sales and marketing employees were terminated in November
2002. This reduction, combined with the 2003 salary reductions, accounts for a
decrease in personnel costs in the amount of $262,000 from the second quarter
of 2002.

General and administrative expensesinclude executive management,
accounting, legal and human resources compensation and related benefits, as
well as expenditures for applicable overhead costs.

|                           |                             |      |     |      |  |        |       |  |  |   |      |  
|-------------------------- | --------------------------- | ---- | --- | ---- |  | ------ | ----- |  |  | - | ---- | -
|                           | Three Months Ended June 30, |      |     |      | 
|                           |                             | 2003 |     | 2002 |  | Change
|                           |                             |      |     |      |  |       
|General and
administrative |                             | $    | 837 |      |  | $      | 1,324 |  |  | $ | (487 | )

The number of corporate employees dropped from nineteen at March 31, 2002 to
twelve at June 30, 2003. This reduction, combined with the 2003 salary
reductions accounts for approximately $233,000 of the cost decrease from the
second quarter of 2002. Non-cash stock based compensation expense decreased
$88,000 due to the gradual decrease of expense resulting from the remeasurement
of stock options at the time of the 2001 Healthaxis merger.

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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.

|                         |  |                             |   |      |  |        |     |  |  |   |      |  
|------------------------ |  | --------------------------- | - | ---- |  | ------ | --- |  |  | - | ---- | -
|                         |  | Three Months Ended June 30, |   |      |  |       
|                         |  | 2003                        |   | 2002 |  | Change
|                         |  |                             |   |      |  |       
|Research and development |  | $                           |  |      |  | $      | 123 |  |  | $ | (123 | )

We have significantly reduced our research and development activities in 2003.
Due to the November 2002 staff reduction, emphasis has been put on the
completion of 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 2002.

|                            |  |                             |     |      |  |        |     |  |  |   |    |  
|--------------------------- |  | --------------------------- | --- | ---- |  | ------ | --- |  |  | - | -- | -
|                            |  | Three Months Ended June 30, |     |      |  |       
|                            |  | 2003                        |     | 2002 |  | Change
|                            |  |                             |     |      |  |       
|Amortization of
intangibles |  | $                           | 324 |      |  | $      | 328 |  |  | $ | (4 | )

Interest and other income, netfor the second quarter of 2002 includes a
non-recurring write down of our investment in Digital Insurance in the amount
of $227,000. Excluding this write down, interest income and other income, net
decreased $47,000 largely as a result of lower notes receivable balances in
2003.

|                          |  |                             |    |      |  |        |      |   |  |   |     | 
|------------------------- |  | --------------------------- | -- | ---- |  | ------ | ---- | - |  | - | --- | 
|                          |  | Three Months Ended June 30, |    |      |  |       
|                          |  | 2003                        |    | 2002 |  | Change
|                          |  |                             |    |      |  |       
|Interest and other income |  | $                           | 22 |      |  | $      | (158 | ) |  | $ | 180 | 

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

|                 |  |                             |     |      |  |        |      |   |  |   |     | 
|---------------- |  | --------------------------- | --- | ---- |  | ------ | ---- | - |  | - | --- | 
|                 |  | Three Months Ended June 30, |     |      |  |       
|                 |  | 2003                        |     | 2002 |  | Change
|                 |  |                             |     |      |  |       
|Interest expense |  | $                           | (19 | )    |  | $      | (184 | ) |  | $ | 165 | 

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.

|                                            |  |                             |   |      |  |        |        |   |  |   |       |  
|------------------------------------------- |  | --------------------------- | - | ---- |  | ------ | ------ | - |  | - | ----- | -
|                                            |  | Three Months Ended June 30, |   |      |  |       
|                                            |  | 2003                        |   | 2002 |  | Change
|                                            |  |                             |   |      |  |       
|Gain from discontinued
operations           |  | $                           |  |      |  | $      | 269    |   |  | $ | (269  | )
|Loss on disposal of
discontinued operations |  |                             |  |      |  |        | (3,564 | ) |  |   | 3,564 |  
|                                            |  |                             |   |      |  |        |        |   |  |   |       |  
|                                            |  | $                           |  |      |  | $      | (3,295 | ) |  | $ | 3,295 |  
|                                            |  |                             |   |      |  |        |        |   |  |   |       |  

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Six months ended June 30, 2003 compared to six months ended June 30, 2002

Revenues

|                        |  |                           |        |      |  |        |       |  |  |   |     | 
|----------------------- |  | ------------------------- | ------ | ---- |  | ------ | ----- |  |  | - | --- | 
|                        |  | Six Months Ended June 30, |        |      |  |       
|                        |  | 2003                      |        | 2002 |  | Change
|                        |  |                           |        |      |  |       
|Technology & Operations |  | $                         | 8,291  |      |  | $      | 7,758 |  |  | $ | 533 | 
|BPO Services            |  |                           | 2,423  |      |  |        | 2,122 |  |  |   | 301 | 
|                        |  |                           |        |      |  |        |       |  |  |   |     | 
|Total revenue           |  | $                         | 10,714 |      |  | $      | 9,880 |  |  | $ | 834 | 
|                        |  |                           |        |      |  |        |       |  |  |   |     | 

Technology & Operations

Our Technology & Operations revenue for the six months ended June 30, 2003
increased 7% from the six months ended June 30, 2002. Revenue for the six
months ended June 30, 2002 included $420,000 related to the recognition of the
final portion of the UICI web technology perpetual license fee, which was
non-recurring. Revenue for the six months ended June 30, 2003 includes
$884,000 related to the perpetual license fee from the State of Washington,
which is also non-recurring. As anticipated, one of our existing customers
terminated its use of our claims system in 2003, resulting in a $776,000
decrease from 2002, but we added another significant claims customer replacing
$490,000 of the revenue loss. Revenue from Digital Insurance continued to
decline, resulting in a decrease of $322,000.

Revenue for the six months ended June 30, 2003 includes new revenue from two
existing customers in the amount of $664,000 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.

BPO Services (formerly known as Imaging Services Group)

BPO services revenues are up 14% from 2002. In January 2003, we added
additional work from an existing customer, which accounts for $279,000 of the
increase.

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, as well as other related consumables.

|                        |              |   |                           |    |      |   |        |     |   |   |        |   | 
|----------------------- | ------------ | - | ------------------------- | -- | ---- | - | ------ | --- | - | - | ------ | - | 
|                        |              |   | Six Months Ended June 30, |    |      |   |       
|                        |              |   | 2003                      |    | 2002 |   | Change
|                        |              |   |                           |    |      |   |       
|Technology & Operations |              | $ | 7,753                     |    |      | $ | 8,676  |     |   | $ | (923   | )
|BPO Services            |              |   | 2,319                     |    |      |   | 2,771  |     |   |   | (452   | )
|                        |              |   |                           |    |      |   |        |     |   |   |        |  
|Total cost of revenues  |              | $ | 10,072                    |    |      | $ | 11,447 |     |   | $ | (1,375 | )
|                        |              |   |                           |    |      |   |        |     |   |   |        |  
|                        | % of revenue |   |                           | 94 | %    |   |        | 116 | % |   |        |   | 

Technology & Operations

Cost of revenues for Technology & Operations decreased 11% from 2002. As a
percentage of Technology & Operations revenue, costs decreased from 112% for
the six months ended June 30, 2002, to 94% for the six months ended June 30,
2003. The decrease is the result of an overall reduction in personnel costs,
offset by reduced capitalization and added costs attributable to print and
distribution outsourcing. In November 2002, we implemented a cost reduction
initiative which reduced the employee headcount significantly.
Across-the-board salary reductions also went into effect, on a company-wide
basis, on January 1, 2003. As a result, personnel
expenses decreased $1.9 million from the six months ended June 30, 2002.
However, some employees were re-

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assigned to expensable projects from
capitalizable development projects, which served to offset the expense savings
by $517,000. During the fourth quarter of 2002, we began outsourcing our print
and distribution capabilities to a third party. The increase in costs of
revenues for the six months ended June 30, 2003 attributable to the outsourcing
of these capabilities was approximately $904,000. These additional costs are
in lieu of costs previously associated with in-house employees and other
operating expenses. This transition necessitated part of the reduction in
force that occurred in November 2002. The six months ended June 30, 2002,
included non-recurring impairment charges related to software and equipment
totaling $715,000.

BPO Services (formerly known as Imaging Services Group)

The cost of BPO Services revenue decreased 16% from 2002 primarily as a result
of an employee headcount reduction in the Imaging Support group from twelve to
eight. This reduction was part of the November 2002 staff reduction.
Across-the-board salary reductions also went into effect, on a company-wide
basis, on January 1, 2003. Personnel cost reductions from this BPO Services
group alone accounted for $147,000 of the cost decrease from 2002.
Depreciation and amortization of fixed assets decreased $180,000 from the 2002
period due to a significant reduction of capital expenditures in 2001 and 2002.

Sales and marketing expensesconsist primarily of employee salaries and
related benefits, as well as promotional costs such as direct mailing
campaigns, trade shows and media advertising.

|                    |                           |      |     |      |  |        |       |  |  |   |      |  
|------------------- | ------------------------- | ---- | --- | ---- |  | ------ | ----- |  |  | - | ---- | -
|                    | Six Months Ended June 30, |      |     |      | 
|                    |                           | 2003 |     | 2002 |  | Change
|                    |                           |      |     |      |  |       
|Sales and marketing |                           | $    | 538 |      |  | $      | 1,009 |  |  | $ | (471 | )

Five of our nine sales and marketing employees were terminated in November
2002. This reduction, combined with the January 2003 salary reductions,
accounts for the decrease in costs from the first quarter of 2002. Personnel
and travel costs related to sales and marketing in the 2003 period decreased
$326,000 and $51,000, respectively, from the comparable period in 2002.

General and administrative expensesinclude executive management,
accounting, legal and human resources compensation and related benefits, as
well as expenditures for applicable overhead costs.

|                           |  |                           |       |      |  |        |       |  |  |   |     | 
|-------------------------- |  | ------------------------- | ----- | ---- |  | ------ | ----- |  |  | - | --- | 
|                           |  | Six Months Ended June 30, |       |      |  |       
|                           |  | 2003                      |       | 2002 |  | Change
|                           |  |                           |       |      |  |       
|General and administrative |  | $                         | 1,746 |      |  | $      | 1,603 |  |  | $ | 143 | 

In the six months ended June 30, 2002, we booked 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 six months ended June 30, 2003, dropped by $1.2 million from the
comparable period in 2002. The number of corporate employees dropped from
nineteen at March 31, 2002 to twelve at June 30, 2003. This reduction,
combined with the January 2003 salary reductions, accounts for $435,000 of the
cost decrease from 2002. Consulting fees decreased by $382,000 from 2002.
Non-cash stock based compensation expense decreased $128,000 due to the gradual
decrease of expense resulting from the remeasurement of stock options at the
time of the 2001 Healthaxis merger.

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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.

|                         |  |                           |    |      |  |        |     |  |  |   |      |  
|------------------------ |  | ------------------------- | -- | ---- |  | ------ | --- |  |  | - | ---- | -
|                         |  | Six Months Ended June 30, |    |      |  |       
|                         |  | 2003                      |    | 2002 |  | Change
|                         |  |                           |    |      |  |       
|Research and development |  | $                         | 30 |      |  | $      | 240 |  |  | $ | (210 | )

We have significantly reduced our research and development activities in 2003.
Due to the November 2002 staff reduction, emphasis has been put on the
completion of 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 2002.

|                            |  |                           |     |      |  |        |     |  |  |   |    |  
|--------------------------- |  | ------------------------- | --- | ---- |  | ------ | --- |  |  | - | -- | -
|                            |  | Six Months Ended June 30, |     |      |  |       
|                            |  | 2003                      |     | 2002 |  | Change
|                            |  |                           |     |      |  |       
|Amortization of intangibles |  | $                         | 648 |      |  | $      | 653 |  |  | $ | (5 | )

Interest and other income, netfor the six month ended June 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 six months ended June
30, 2003 as a result of lower notes receivable balances in 2003.

|                          |  |                           |    |      |  |        |     |   |  |   |    | 
|------------------------- |  | ------------------------- | -- | ---- |  | ------ | --- | - |  | - | -- | 
|                          |  | Six Months Ended June 30, |    |      |  |       
|                          |  | 2003                      |    | 2002 |  | Change
|                          |  |                           |    |      |  |       
|Interest and other income |  | $                         | 52 |      |  | $      | (43 | ) |  | $ | 95 | 

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

|                 |  |                           |     |      |  |        |      |   |  |   |     | 
|---------------- |  | ------------------------- | --- | ---- |  | ------ | ---- | - |  | - | --- | 
|                 |  | Six Months Ended June 30, |     |      |  |       
|                 |  | 2003                      |     | 2002 |  | Change
|                 |  |                           |     |      |  |       
|Interest expense |  | $                         | (38 | )    |  | $      | (363 | ) |  | $ | 325 | 

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.

|                                            |                           |      |   |      |  |        |        |   |  |   |       |  
|------------------------------------------- | ------------------------- | ---- | - | ---- |  | ------ | ------ | - |  | - | ----- | -
|                                            | Six Months Ended June 30, |      |   |      | 
|                                            |                           | 2003 |   | 2002 |  | Change
|                                            |                           |      |   |      |  |       
|Gain from discontinued
operations           |                           | $    |  |      |  | $      | 816    |   |  | $ | (816  | )
|Loss on disposal of
discontinued operations |                           |      |  |      |  |        | (3,564 | ) |  |   | 3,564 |  
|                                            |                           |      |   |      |  |        |        |   |  |   |       |  
|                                            |                           | $    |  |      |  | $      | (2,748 | ) |  | $ | 2,748 |  
|                                            |                           |      |   |      |  |        |        |   |  |   |       |  

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Cumulative effect of accounting changewas recorded as a result of our
adoption of SFAS No. 142 Goodwill and Other Intangible Assets. In the second
quarter of 2002, the Company completed a transitional goodwill impairment test,
which resulted in an impairment charge of $6.7 million. The impairment charge
is shown as a cumulative effect of an accounting change as of January 1, 2002.
No such charge was recorded in 2003.

|                                       |  |                           |   |      |  |        |        |   |  |   |       | 
|-------------------------------------- |  | ------------------------- | - | ---- |  | ------ | ------ | - |  | - | ----- | 
|                                       |  | Six Months Ended June 30, |   |      |  |       
|                                       |  | 2003                      |   | 2002 |  | Change
|                                       |  |                           |   |      |  |       
|Cumulative effect of
accounting change |  | $                         |  |      |  | $      | (6,674 | ) |  | $ | 6,674 | 

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 six months ended June 30, 2003
was $554,000 as compared to cash provided by operations in the amount of
$172,000 for the same period in 2002. Our 2002 cash flows from operations
includes cash flows from both continuing and discontinued operations. During
the first six 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 six months ended June 30, 2002 totaled $3.4 million. Our use of cash in
2003 approximated our EBITDA As Defined loss from operations for the first six
months of 2003 (See Note I in the Notes to Consolidated Financial Statements).
This represents a significant improvement in operating cash flows, and is
primarily the result of the November 2002 Cost Reduction Initiative, combined
with higher revenues in 2003.

Cash used in investing activitiesfor the six months ended June 30, 2003
decreased $648,000 compared to the same period in 2002. A reduction in
capitalized developed software and contract start-up accounts for $642,000 of
the decrease. 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 second
quarter of 2003 ($116,000) relate almost entirely to upgrades and enhancement
to the Insur-Claim software product. These upgrades and enhancement add new
functionality to our existing claim system that are necessary to keep up with
changing market and customer demands.

Cash used in financing activitiesfor the six months ended June 30, 2003
was $237,000 and relates entirely to the required semi-annual payment of
dividends on the Series A Convertible Preferred Stock made in January

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2003. The dividend payments are due semi-annually. The next dividend payment, paid
in July 2003, was also made in cash. The figure for the six months ended
June 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

In 1999, Healthaxis issued 2% convertible debentures in the amount of
$27.5 million. These debentures, as amended, were due on September 14, 2005
and could be converted into common stock at a conversion price of $9.00 per
share at the option of the holder. On July 31, 2002 we completed a transaction
providing for the cancellation of our $27.5 million 2% convertible debentures
in exchange for issuance to the debenture holders of shares of Series A
Convertible Preferred Stock (Preferred Stock) and the payment of $4.0 million
cash. The Preferred Stock has a stated value of $23.5 million and is
convertible into shares of Healthaxis common stock at a conversion price of
$2.625. 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 redeem, or buy back, their shares.
This redemption may adversely affect Healthaxis, because it may not have the
cash necessary to effect the redemption 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 redemption, the situations in which Healthaxis can be required to
redeem 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. We believe
that the occurrence of the situations where Healthaxis can be required to
redeem shares of Preferred Stock is within our control. 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.
Some of Healthaxis applications will require modification in order to achieve
or maintain compliance with HIPAA. We do not anticipate these expenditures to
be significant, and expect to be able to pass through some of the costs to
clients.

Other Liquidity Matters

On August 19, 2003, Healthaxis will hold a special meeting of its
shareholders to consider and vote upon an amendment to the Healthaxis articles
of incorporation that would permit the board of directors, at its discretion,
to effect a reverse stock split of our common stock at a ratio of not less than
1 for 5 and not more than 1 for 15. The implementation of a reverse stock
split is also subject to the affirmative vote or consent of the holders of at
least 60% of the Series A Convertible Preferred Stock. In consideration of the
affirmative vote of the holders of the requisite percentage of Series A
Preferred Stock, we have agreed to pay a consent fee of 1 % of the Series A
Preferred Stocks liquidation value. This payment will become due upon
approval of the reverse stock split by the common shareholders.

We have had limited discussions with UICI, our largest shareholder,
regarding the possibility of repurchasing all or a portion of the shares of
Healthaxis common stock held by UICI. No agreements or

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understandings have
been reached with UICI as to definitive terms, and we have not entered into any
letters of intent or written documents reflecting any such terms. While we may
continue discussions with UICI, there can be no assurance that any agreements
or understandings will be reached. We may use cash for a portion of any
potential purchase of these shares. We may also enter into a note payable for
a portion of this potential transaction. Any such note could have a
significant impact on our future cash flows. Inasmuch as the repurchase of any
shares of common stock would require the prior consent of the holders of at
least 60% of the Series A Convertible Preferred Stock, we have also had some
discussions with our largest preferred shareholder regarding the terms under
which they would be willing to provide such a consent. They have indicated
that their consent would require that we make one or more concessions to the
holders of the Series A Convertible Preferred Stock, which could include cash
payments. No agreements or understandings have been reached with the preferred
shareholders as to definitive terms, and we have not entered into any letters
of intent or written documents reflecting any such terms. While we may
continue discussions with the preferred shareholders, there can be no assurance
that any agreements or understandings will be reached. In the event that an
agreement with either party is reached, our cash balances could be negatively
affected.

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, and anticipates the reclassification of extraordinary gains reported
in prior periods to be included in the gain or loss from operations.

Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146) requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than at the date of commitment to an exit
or disposal plan. SFAS 146 is effective for exit and disposal activities that
are initiated after December 29, 2002. The adoption of SFAS 146 is not
expected to have a significant impact on the financial position or results of
operations of the Company.

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 is not expected to have a significant impact on the financial position or
results of operations of the Company.

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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 June 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. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of our evaluation.

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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.

Not applicable

Item 3. Defaults Upon Senior Securities.

Not applicable

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

Healthaxis held an Annual Meeting of Shareholders on May 15, 2003, at
which time the shareholders voted to elect eight directors to serve until the
next Annual Meeting of Shareholders, or until their successors are duly
elected, and to ratify the selection of Ernst & Young LLP as the Companys
independent accountants for the fiscal year ending December 31, 2003. The
following table summarizes the votes received in connection with these two
proposals.

|                                      |  |           |            |            |  |         |      |           |  |           |         |  |  |  |   |  |  |  |   | 
|------------------------------------- |  | --------- | ---------- | ---------- |  | ------- | ---- | --------- |  | --------- | ------- |  |  |  | - |  |  |  | - | 
|                                      |  |           |            |            |  | Shares  |      |           |  |          
|                                      |  | Shares    |            | Percentage |  | Voted   |      | Shares    |  | Broker   
|Proposal                              |  | Voted For |            | Voted For  |  | Against |      | Abstained |  | Non-Votes
|                                      |  |           |            |            |  |         |      |           |  |          
|#1 Election of Directors:             |  |           |            |            |  |         |      |           |  |           |         |  |  |  |   |  |  |  |   | 
|Michael Ashker                        |  |           | 46,464,175 |            |  |         | 99.5 | %         |  |           | 251,766 |  |  |  |  |  |  |  |  | 
|Kevin R. Brown                        |  |           | 46,663,943 |            |  |         | 99.9 | %         |  |           | 51,998  |  |  |  |  |  |  |  |  | 
|James J. Byrne                        |  |           | 46,664,243 |            |  |         | 99.9 | %         |  |           | 51,698  |  |  |  |  |  |  |  |  | 
|John W. Coyle                         |  |           | 46,664,243 |            |  |         | 99.9 | %         |  |           | 51,698  |  |  |  |  |  |  |  |  | 
|Thomas L. Cunningham                  |  |           | 46,654,243 |            |  |         | 99.9 | %         |  |           | 61,698  |  |  |  |  |  |  |  |  | 
|Adam J. Gutstein                      |  |           | 46,637,527 |            |  |         | 99.8 | %         |  |           | 78,414  |  |  |  |  |  |  |  |  | 
|Kevin F. Hickey                       |  |           | 46,664,243 |            |  |         | 99.9 | %         |  |           | 51,698  |  |  |  |  |  |  |  |  | 
|James W. McLane                       |  |           | 46,663,243 |            |  |         | 99.9 | %         |  |           | 52,698  |  |  |  |  |  |  |  |  | 
|                                      |  |           |            |            |  |         |      |           |  |           |         |  |  |  |   |  |  |  |   | 
|# 2 Ratification of
Ernst & Young LLP |  |           | 46,658,466 |            |  |         | 99.9 | %         |  |           | 39,513  |  |  |  |  |  |  |  |  | 

Item 5. Other Information.

The Company will hold a special meeting of its common shareholders at
10:00 a.m., Central Daylight Time, on August 19, 2003, to consider and vote
upon an amendment to the Companys articles of incorporation authorizing 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. For more
information, please review the Companys definitive proxy statement filed with
the Securities Exchange Commission on July 25, 2003.

The Company has been granted a hearing before a Nasdaq Listing
Qualifications Panel on August 21, 2003 regarding the continued listing of the
Companys common stock on the Nasdaq SmallCap Market.

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



| | (a) |  | Exhibits:
| | --- |  | ---------

|       |  |                                                                                                                    
|------ |  | -------------------------------------------------------------------------------------------------------------------
|(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 filed a Current Report on Form 8-K on May 9, 2003,
in which it disclosed, under Item 9, a press release dated May
9, 2003 announcing the first quarter 2003 financial results.
|
| |     |  | The Company filed a Current Report on Form 8-K on May 20, 2003,
in which it disclosed, under Item 5, the resignation of Kevin
R. Brown from the Healthaxis Inc. Board of Directors.       

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Signature

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

|                      |  |                                                                                               
|--------------------- |  | ----------------------------------------------------------------------------------------------
|                      |  | Healthaxis Inc.                                                                               
|                      |  |                                                                                               
|Date: August 12, 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        

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Exhibit Index

|       |  |                                                                                                                    
|------ |  | -------------------------------------------------------------------------------------------------------------------
|(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.

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