QUOVADX, INC.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 þ No o

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

Interim Financial Statements. The accompanying condensed consolidated financial statements of Quovadx, Inc. (the “Company” ) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements have been prepared on the same basis as our annual financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for a fair presentation in accordance with accounting principles generally accepted in the United States. The results for the three months ended March 31, 2002 are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2001.

On November 8, 2000, the Company purchased all of the outstanding common shares of United Healthscope, Inc. d/b/a Advica Health Resources (“Advica”). The purchase price totaling $2.2 million included 70,000 shares of Quovadx common stock, $830,000 in cash, and professional fees directly related to the acquisition, net of accounts receivable and the Company’s investment in Advica. The acquired intangible assets consisted of $0.6 million in customer base, $0.5 million in acquired workforce, and other acquired intangibles. The Company recorded the remaining excess purchase price of $0.6 million as goodwill. The transaction was accounted for as a purchase.

On November 29, 2000, the Company purchased all of the outstanding capital stock of Integrated Media Inc.(“Integrated Media”). The purchase price, totaling $2.1 million, consisted of cash and professional fees directly related to the acquisition. In addition to the $2.1 million purchase price, the Company paid $1.0 million to the former president of Integrated Media to assist with the transition, which was charged to sales and marketing expense over a one-year period ending on November 28, 2001. The acquired intangible assets consisted of $0.1 million in customer base, $0.2 million in acquired workforce, and other acquired intangible assets. The Company recorded the remaining excess purchase price of $1.7 million as goodwill. The transaction was accounted for as a purchase.

On June 7, 2001, the Company consummated the acquisition of Confer Software, Inc. (“Confer”), by merger of a wholly-owned subsidiary of Quovadx with Confer. The purchase price totaling $6.6 million included 592,453 shares of Quovadx common stock in exchange for the outstanding shares of Confer capital stock, the assumption of a $461,250 employee bonus plan that was paid in cash and $1.8 million in merger-related fees. The purchase price was allocated to the acquired assets and liabilities at their fair values as of June 7, 2001. The acquired intangible assets consisted of $1.0 million in developed technology, $0.4 million in acquired workforce, and $0.4 million in patents. The Company recorded the remaining excess purchase price of $3.8 million as goodwill. The transaction was accounted for as a purchase. Confer’s balance sheet included $3.2 million in current assets, $0.8 million in non-current assets and $2.6 million in liabilities upon acquisition.

On August 13, 2001, Quovadx consummated the acquisition of Healthcare.com Corporation (“Healthcare.com”). Under the terms of the merger, a wholly-owned subsidiary of Quovadx merged with Healthcare.com and Healthcare.com became a wholly-owned subsidiary of Quovadx. Healthcare.com stockholders received a fixed exchange of 0.375 shares of Quovadx’s common stock for each share of Healthcare.com common stock they owned. The purchase price totaling $93.1 million included 10,702,043 shares of Quovadx common stock issued in exchange for all outstanding shares of Healthcare.com capital stock and $4.5 million in professional fees. The purchase price was allocated to the acquired assets and liabilities at their fair values as of August 13, 2001. The acquired intangible assets consisted of $14.4 million in developed technology,

$5.7 million in acquired customer base, $1.8 million to a distribution agreement, and $0.6 million in trade name. The Company recorded the remaining excess purchase price of $82.8 million as goodwill. The transaction was accounted for as a purchase. Healthcare.com’s balance sheet included $12.1 million in current assets, $52.9 million in non-current assets and $26.7 million in liabilities upon acquisition.

On December 14, 2001, the Company consummated the acquisition of the Pixel Group (“Pixel”). The purchase price totaling $7.3 million included $5.0 million in cash and 201,794 shares of Quovadx common stock in exchange for the outstanding shares of Pixel capital stock. The preliminary estimate of goodwill and identifiable intangible assets acquired is $7.2 million. The purchase price allocation is expected to be finalized in 2002 upon the receipt of an independent appraisal. Pixel’s balance sheet included $0.9 million in current assets, $0.4 million in non-current assets and $0.9 million in liabilities upon acquisition.

On March 1, 2002, the Company completed the sale of certain assets of its Advica subsidiary to Royal Health Care of Long Island, LLC, d/b/a Royal Health Care (“Royal”) for $475,000 in cash and 4.6% of the outstanding equity in Royal. In conjunction with the sale, Quovadx and Royal signed a seven-year application service provider (“ASP”) agreement.

Under the terms of the asset sale agreement, Royal assumes Advica’s medical management services business, including personnel, property, key contracts, and equipment. Quovadx will retain Advica’s core systems and information technology, which it will operate in conjunction with its service obligations to Royal under the ASP agreement. The Company recorded a gain on the sale of assets of $87,000.

On March 27, 2002, the Company purchased all of the outstanding capital stock of Outlaw Technologies, Inc. (“Outlaw”). The purchase price, totaling $2.7 million included 138,575 shares of Quovadx common stock, $1.8 million in cash and professional fees directly related to the acquisition. The preliminary estimate of goodwill and identifiable intangible assets acquired is $2.9 million. The purchase price allocation will be finalized upon receipt of an independent appraisal. Outlaw’s balance sheet included $0.3 million in current assets and $0.6 million in liabilities upon acquisition.

The Company retained an independent appraiser to assist with the assigning of the fair values to the identifiable intangibles acquired from Advica, Integrated Media, Confer and Healthcare.com. The valuations relied on methodologies that most closely related to the fair market value assignment with the economic benefits provided by each asset and risks associated with the assets. The goodwill recognized in the Pixel, Healthcare.com and Outlaw acquisitions are not subject to amortization but will be tested annually for impairment or more frequently if events or changes in circumstances indicate the asset might be impaired. Beginning January 1, 2002, the goodwill associated with the acquisitions of Integrated Media and Confer are not subject to amortization, but are tested annually for impairment or more frequently if events or changes in circumstances indicate the asset might be impaired. SFAS No. 142 eliminates amortization of goodwill and amortization of indefinite-lived intangible assets. However, SFAS No. 142 also requires the Company to perform impairment tests at least annually on all goodwill and other intangible assets. These statements are required to be adopted by the Company on January 1, 2002 for all acquisitions and immediately for any acquisitions entered into after July 1, 2001. The identifiable intangible assets recognized in the acquisitions are being amortized over their estimated lives ranging from three to eight years. Operating results are included in the consolidated financial results from the date of acquisition.

The unaudited pro forma results of operations as though the Confer, Healthcare.com, Pixel and Outlaw acquisitions had been completed as of January 1, 2001 are as follows (in thousands except for per share amounts):

The pro forma results above do not include any anticipated cost savings or other effects of the integration of acquisitions into the Company and are not necessarily indicative of the results which would have occurred if the acquisition had been in effect on the date indicated, or which may result in the future.

Net income per common share is calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”. Under the provisions of SFAS No. 128, basic net income per common share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common shares outstanding including potential common shares outstanding during the period if their effect is dilutive. Potential common shares consist of incremental common shares issuable upon the exercise of stock options.

The following table sets forth the computation of the numerators and denominators in the basic and diluted net income (loss) per common share calculations for the periods indicated:

Segment information has been prepared in accordance with FASB SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company defines operating segments as components of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker or decision making group, to evaluate performance and make operating decisions. The chief operating decision-making group reviews the revenue and margin by the nature of the services provided and reviews the overall results of the Company. Accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The Company operates in three segments: professional services, software licenses and recurring revenue. The professional services segment includes revenue generated from software implementation, engineering and integration. The software license segment includes revenue from software license sales and software

subscriptions. The recurring revenue segment includes revenue generated from hosting services, maintenance services, transaction services, and other services.

Following is a breakout by segment. The margin for the segments excludes corporate expenses. The “other” category includes corporate expenses and eliminations.


(1)	Represents loss before income taxes. Adjustments that are made to the total of the segments’ income in order to arrive at income before income taxes include the following:


(2)	A breakout of assets and capital expenditures for all segments is not provided to our chief operating decision maker. The other column represents the amount to reconcile to the consolidated total.

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations completed after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria.

SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001.

SFAS No. 142 eliminates amortization of goodwill and indefinite lived intangible assets. However, SFAS No. 142 also requires the Company to perform impairment tests at least annually on all goodwill and other intangible assets. SFAS No. 142 is required to be adopted by the Company on January 1, 2002 and immediately for any acquisitions entered into after July 1, 2001. The Company has adopted these statements for all business acquisitions entered into after July 1, 2001, for which goodwill of $87.6 million was recorded and in accordance with SFAS No. 142, no amortization was recorded for the three months ended March 31, 2002. Amortization of goodwill for acquisitions completed prior to July 1, 2001 was $0.2 million for the three months ended March 31, 2001.

The following table provides information relating to the Company’s amortized and unamortized intangible assets as of March 31, 2002 (in millions):

For the three months ended March 31, 2001, the Company amortized $0.2 million of its goodwill balance. Goodwill amortization was not recorded for the three months ended March 31, 2002.

The Company will complete the transition impairment test in accordance with SFAS 142 during the second quarter of 2002. The amount of impairment charge is not yet determined but we do not expect the testing to result in any material impairment charges.

All statements, trend analysis and other information contained in this Form 10-Q of Quovadx, Inc. (“Quovadx”, the “Company”, “we” or “us”) and the information incorporated by reference which are not historical in nature are forward-looking statements within the meaning of the Private-Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect” and “intend” and other similar expressions. All statements regarding the Company’s expected financial position and operating results, business strategy, financing plans, forecast trends relating to our industry are forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” below. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission (“SEC”).

Quovadx, Inc., (the “Company”, “Quovadx”, “our” or “we”) is a provider of Total Business Integration products and services. The Company provides an end-to-end business infrastructure and integration software suite, as well as end-to-end service capabilities including consulting, transaction hosting and operations management for business-critical applications. Using our XML-based QDX Platform, the Company has assisted more than 1500 organizations in the healthcare, media and entertainment sectors streamline business processes, solve difficult process integration challenges, and leverage existing legacy system data. The Quovadx Total Integration Business Model is an end-to-end solution comprised of three component parts: the QDX Technology Platform Suite, Professional Services and Process Management Services. Our model creates value for our customers by allowing them to automate business processes, extend these processes and transact with their trading partners, while preserving the significant investments they have made in their legacy systems. Our Total Business Integration technology platform solves difficult application-to-application integration, business-to-business integration, business-to-consumer integration and business process management issues both inside and outside the enterprise.

We operate in three segments: professional services, software licenses, and recurring revenue. The professional services segment includes revenue generated from software implementation, engineering, and integration. The software license segment includes revenues from perpetual software license sales and from software subscriptions. The recurring revenue segment includes revenue generated from hosting services, maintenance services, transaction services, and other services.

On November 8, 2000, we purchased all of the outstanding common shares of United Healthscope, Inc. d/b/a Advica Health Resources (“Advica”). The purchase price totaling $2.2 million included 70,000 shares of Quovadx common stock, $830,000 in cash, and professional fees directly related to the acquisition, net of accounts receivable and the Company’s investment in Advica.

On June 7, 2001, the Company consummated the acquisition of Confer Software, Inc., (“Confer”) by merger of a wholly-owned subsidiary of Quovadx with Confer. The purchase price totaling $6.6 million included 592,453 shares of Quovadx common stock in exchange for the outstanding shares of Confer capital stock, the assumption of a $461,250 employee bonus plan that was paid in cash and $1.8 million in merger-related fees. The purchase price was allocated to the acquired assets and liabilities at their fair values as of June 7, 2001. The acquired intangible assets consisted of $1.0 million in developed technology, $0.4 million in acquired workforce, and $0.4 million in patents. The Company recorded the remaining excess purchase price of $3.8 million as goodwill.

On December 14, 2001, the Company consummated the acquisition of the Pixel Group (“Pixel”). The purchase price totaling $7.3 million included $5.0 million in cash and 201,794 shares of Quovadx common stock in exchange for the outstanding shares of Pixel capital stock. The preliminary estimate of goodwill and identifiable intangible assets acquired is $7.2 million. The purchase price allocation will be finalized in 2002 upon receipt of the independent appraisal.

On March 1, 2002, the Company completed the sale of certain assets of its Advica Health Resources subsidiary to Royal Health Care of Long Island, LLC, d/b/a Royal Health Care (“Royal”) for $475,000 in cash and 4.6% of the outstanding equity in Royal. In conjunction with the sale, Quovadx and Royal signed a seven-year application service provider (“ASP”) agreement.

The Company retained an independent appraiser to assist with the assigning of the fair values to the identifiable intangible assets acquired from the Advica, Integrated Media, Confer, Healthcare.com, Pixel and Outlaw acquisitions. The valuations relied on methodologies that most closely related to the fair market value assignment with the economic benefits provided by each asset and risks associated with the assets. Statement of Financial Accounting Standard (SFAS) No. 142 eliminates amortization of goodwill and indefinite-lived intangible assets. However, SFAS No. 142 also requires the Company to perform impairment tests at least annually on all goodwill and other indefinite-lived intangible assets. These statements are required to be adopted by the Company on January 1, 2002 for all acquisitions and immediately for any acquisitions entered into after July 1, 2001. The identifiable intangible assets recognized in the acquisitions are being amortized over their estimated lives ranging from three to eight years. Operating results are included in the consolidated financial results from the date of acquisition.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company believes that of the significant accounting policies described in Note 1 to the consolidated financial statements, the following involve a higher degree of judgment and complexity.

The Company recognizes revenue in accordance with the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended, and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”.

License agreements generally provide that customers pay a license fee based on a specified number of instances of the software and the type of software modules licensed. Customers that purchase licenses generally enter into one-year maintenance agreements that entitle the customer to receive unspecified software upgrades, error corrections and telephone support, generally for a fixed fee.

The methodology the Company uses to recognize software license and related services revenue is dependent on whether the Company has established vendor specific objective evidence (“VSOE”) of fair value for the separate elements of the multiple-element agreement.

If an agreement includes both license and service elements, the license fee is recognized on delivery of the software if the remaining services are not essential to the functionality of the software, the collection of the fees is probable, the fees are fixed and determinable, agreement is signed and the Company has established VSOE of fair value for the remaining services. Revenue from the related services is recognized as the services are provided.

When the related services are essential to the functionality of the base product or the Company has not established VSOE of fair value for the remaining services, the fees are deferred and the entire contract is recognized as the services are provided.

Maintenance revenue is derived from agreements for providing unspecified software upgrades, error corrections and telephone support. Maintenance revenue is recognized ratably over the service period, which is generally 12 months.

Professional services revenue represents software development, implementation and consulting services. When derived from a fixed price contract and collection of fees is probable, the Company recognizes professional services revenue using the percentage of completion method of accounting. When derived from a time and materials contract and the collection of fees is probable, the Company recognizes professional services revenue as the services are provided.

Process management and services revenues represent application hosting, transaction processing and other services. When the fees are fixed and determinable and collection of the fees is probable, revenue is recognized over the service period. When the fees are on a per transaction basis and collection of the fees is probable, revenue is recognized as the transactions are processed.

When collection of the fees is not probable, revenue is recognized as cash is collected. The Company does not require collateral from its customers and an allowance for doubtful accounts is maintained for credit losses.

When revenue is recognized using the percentage of completion basis of accounting, the Company’s management estimates the costs to complete the services to be provided under the contract. The Company may encounter budget and schedule overruns caused by increased material, labor or overhead costs. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become

Cost of revenue includes personnel and related benefit costs, payments to third-party consultants who assist with implementation and support services, facilities costs, amortization of acquired and capitalized software and equipment depreciation. Sales and marketing expenses consist of personnel and related benefit costs, including commissions, travel expenses, field sales office expenses, advertising and promotion costs. General and administrative expenses include personnel and related benefit costs for our executive, legal, administrative, finance and human resources functions, as well as accounting fees, insurance expense, investor relation costs and bad debt expense. Research and development expense includes personnel and related benefit costs for product development, enhancements to existing applications and services and quality assurance activities.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to pay their accounts receivable balances. The Company assesses the financial condition of its customers to determine if there is an impairment of their ability to make payments and additional allowances may be required if the financial condition of the Company’s customers deteriorates.

Software development costs are required to be expensed until the point that technological feasibility of the product is established. Once technological feasibility is established, such costs are capitalized until general availability of the product. The establishment of technological feasibility and continuing evaluation of the recoverability of the capitalized software development costs requires management’s judgment with respect to the impact of external factors such as future revenue, estimated economic life and changes in software and hardware technologies. Capitalized software development costs are amortized on a straight-line basis over an estimated life, which is generally three to five years. The Company capitalize internal and external labor incurred in developing the software once technological feasibility is attained.

Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.

The following table sets forth, for the periods indicated, certain items from the Company’s statements of operations as a percentage of total revenue:

Comparison of the Company’s Results for the Three Months Ended March 31, 2002 and 2001

Total revenue. Total revenue increased $10.0 million, or 132%, to $17.6 million for the three months ended March 31, 2002 from $7.6 for the three months ended March 31, 2001. Amounts billed to MedUnite as of March 31, 2001 were reduced by $876,000, which relate to the amortization of the fair value of the warrants issued to MedUnite. Software license revenue increased to $3.6 million for the three months ended March 31, 2002 from $54,000 for the three months ended March 31, 2001. The increase in revenue related to software revenue was derived from higher software sales over March 31, 2001 and the amortization of deferred license revenue. Throughout 2002, the Company will focus on the sale of its higher margin products, primarily the QDX platform. Professional services revenue increased $1.7 million or 32% to $6.9 million due to a higher number of professional services contracts. Higher recurring revenue for the three months ended March 31, 2002 as compared to the three months ended March 31, 2002, also added $4.7 million to the increase in total revenue due to increased revenue generated from maintenance and hosting contracts. The company closed 259 new customer contracts with a contract value totaling $12.6 million in the first quarter of 2002.

Cost of revenue. Cost of revenue increased $3.4 million, or 53%, to $9.7 million for the three months ended March 31, 2002 from $6.4 million from the prior comparable period. The increase in the cost of revenue is related to higher payroll and payroll-related expense to support the growth in our professional services and recurring revenue segments and the addition of software amortization costs totaling $1.1 million for the three months ended March 31, 2002. Expenses also increased due to our 2001 acquisitions. As a percentage of revenue, cost of sales decreased from 84% for the three months ended March 31, 2001 to 55% for the three months ended March 31, 2002 due to shift in the Company’s product mix to reflect a higher percentage of revenues from the higher margin software license segment and overall increased revenue. The Company expects its gross margins to increase over time based on this shift. The Company’s gross profit margins, excluding amortization of software, improved to 51% for the three months ended March 31, 2002 from 25% (excluding amortization of warrants) for the three months ended March 31, 2001.

Sales and marketing. Sales and marketing expenses increased $1.3 million, or 96%, to $2.7 million during the three months ended March 31, 2002 from $1.4 million for the three months ended March 31, 2001.

Sales and marketing expenses increased due to an increase in the size of the Company’s sales force and product marketing professionals. As a percentage of revenue, sales and marketing expense decreased to 15% from 16% (excluding amortization of warrants) from the three months ended March 31, 2001.

General and administrative. General and administrative expenses increased $0.8 million, or 30%, to $3.3 million for the three months ended March 31, 2002 from $2.6 million from the year earlier period. The increase in general and administrative expenses was primarily due to an increase in personnel in the areas of human resources, accounting, legal and administration and increased directors and officers insurance expense. As a percentage of revenue, general and administrative costs decreased from 30% (excluding amortization of warrants) for the three months ended March 31, 2001 to 19% for the three months ended March 31, 2002.

Research and development. Research and development expenses increased $0.3 million, or 26%, to $1.4 million for the three months ended March 31, 2002 from $1.1 million for the three months ended March 31, 2001. The research and development expenses reflects an increase in headcount over the three months ended March 31, 2001 to support the continued development of our adaptive applications. As a percentage of revenues, research and development expenses decreased from 13% (excluding amortization of warrants) for the three months ended March 31, 2001 to 8% for the three months ended March 31, 2002.

Amortization of goodwill and acquired intangibles. The amortization of goodwill and acquired identifiable intangible assets results from our business acquisitions. The Company retained an independent appraiser to assist with the assigning of the fair values to the identifiable intangibles acquired from our acquisitions. Statement of Financial Accounting Standard (SFAS) No. 142 eliminates amortization of goodwill and indefinite-lived intangible assets. However, SFAS No. 142 also requires the Company to perform impairment tests at least annually on all goodwill and other indefinite-lived intangible assets. These statements are required to be adopted by the Company on January 1, 2002 for all acquisitions and immediately for any acquisitions entered into after July 1, 2001. The identifiable intangible assets recognized in the acquisitions are being amortized over their estimated lives ranging from three to eight years. Goodwill and other identifiable intangible assets amortization for the three months ended March 31, 2002 and 2001 were $0.6 million and $0.3 million respectively. Amortization of goodwill for acquisitions completed prior to July 1, 2001 was $0.2 million for the three months ended March 31, 2001. Goodwill was not amortized for the three months ended March 31, 2002. The increase in the amortization of acquired identifiable intangible assets was primarily related to the acquisitions of Healthcare.com and Confer.

Stock compensation expense. During 1999 and through February 10, 2000, the effective date of the Company’s initial public offering, in connection with stock options granted to certain employees and a consultant under the stock plan, we have recorded unearned stock compensation representing the difference between the exercise price of the options and the deemed fair value of our common stock at the date of grant. We recorded aggregate unearned compensation of $2.8 million in connection with these stock options. This stock compensation will be amortized to expense over the period during which the options or common stock subject to repurchase vest, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28. Amortization of stock compensation expense amounted to $66,000 for the three months ended March 31, 2002 compared to $135,000 for the three months ended March 31, 2001. We will amortize $166,000 in the remaining three quarters of 2002.

Gain on sale of assets. Gain on the sale of assets resulted from the sale of certain assets of the Advica subsidiary to Royal for $475,000 in cash and 4.6% of the outstanding equity in Royal. The Company recorded a gain on the sale of assets of $87,000.

Interest income. Interest income includes interest income on cash, cash equivalents and short-term investment balances. Interest income decreased $0.8 million, to $0.3 million for the three months ended March 31, 2002 from interest income of $1.1 million for the three months ended March 31, 2001. The decrease in interest income is due to a decrease in interest rates from the prior comparable period and a decrease in our cash, cash equivalents and short-term investment balances to fund our operations and acquisitions.

Income tax expense. No provision for federal and state income taxes has been recorded for the three months ended March 31, 2002 and 2001, as we have used net operating loss carryforwards. We believe that, based on the history of losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able to realize our deferred tax assets, and thus a full valuation allowance has been recorded against such assets as of March 31, 2002.

Segment results. Segment results represent margins which, for segment reporting purposes, exclude certain costs and expenses, including corporate expenses, taxes other than income and other non-recurring charges. See Note 4 to the consolidated financial statements.

The increase in margin for the professional services and recurring revenue segments are primarily related to the revenue growth in 2002 over the prior year. Revenue for the professional services and recurring revenue segments increased 32% and 202%, respectively, over the prior year. The growth in the software license fees segment is primarily related to an increase software license sales of $3.6 million over the three months ended March 31, 2001. The Company’s product mix has shifted to reflect a higher percentage of revenue from the higher margin software license segment.

We have historically financed our operations through a combination of cash flow from operations, private sales of common and convertible preferred stock, issuances of convertible promissory notes and public sales of common stock.

We expect to use our cash, cash equivalents and short-term investments for general corporate purposes, working capital and capital expenditures to fund our operations and to continue expanding our product offerings. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development efforts, marketing and sales activities, the amount of cash generated by our operations and competition. We may find it necessary or advisable to use portions of our cash and cash equivalents for other purposes. A portion of our cash, cash equivalents and short-term investments may also be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. Pending use of our cash and cash equivalents and short-term investments for the above purposes, we intend to invest such funds in short-term, interest-bearing, investment-grade securities.

Net cash used in operating activities for the three months ended March 31, 2002 and 2001 was $3.7 million and $3.0 million, respectively. The increase in net cash used in operating activities is primarily attributable to increased payments for accounts payables and accrued liabilities.

Net cash provided by investing activities for the three months ended March 31, 2002 was $3.3 million and net cash used in investing activities for the three months ended March 31, 2001 was $2.1 million. Investing activities consist of purchases of computer hardware and software, office furniture and equipment, purchase and sales of investments and cash used in the business acquisitions. We sold $17.8 million of short-term investments and purchased $12.5 million of short-term investments in the first quarter of 2002. Purchases of property and equipment for the quarter ended March 31, 2002 decreased $0.6 million from the three months ended March 31, 2001.

Net cash provided by financing activities for the three months ended March 31, 2002 of $170,000 was related to the exercise of stock options.

The Company has commitments pursuant to certain lease obligations and royalty agreements.

We expect our current cash resources will be sufficient to meet our requirements for the next 18 months. We may need to raise additional capital to support expansion, develop new or enhanced applications, services and product offerings, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. We may need to raise additional funds by selling debt or equity securities, by entering into strategic relationships or through other arrangements. We cannot assure you that we will be able to raise any additional amounts on reasonable terms, or at all, when they are needed.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121 and the accounting and reporting provisions of APB No. 30, “Reporting the Results of Operations” and provides a single accounting model for long-lived assets to be disposed of. In SFAS No. 144, the criteria for discontinued operation presentation is changed to a component of the business rather than a segment of the business. Assets to be disposed of would be classified as held for sale when management, having the authority to approve the action, commits to a plan to sell the assets meeting all required criteria. The assets must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets and the sale of the asset must be probable and its transfer expected to qualify for recognition as a completed sale within one year, with certain exceptions. If the plan of sale criteria are met after the balance sheet date but before issuance of the financial statements, the related asset would continue to be classified as held and used at the balance sheet date. Assets to be abandoned or distributed to shareholders are considered held for use until shutdown or distributed, respectively. SFAS No. 144 is effective for fiscal years beginning after January 1, 2002. The Company does not expect the impact of SFAS No. 144 to be significant on the earnings and financial position of the Company.

The following risk factors could materially and adversely affect our operating results and could cause actual events to differ materially from those predicted in any forward-looking statements related to our business.

Although we were profitable the first quarter of 2002 and the last two quarters of 2001, we incurred losses for the first two quarters of 2001 and for the years ended December 31, 2001, 2000 and 1999. As of March 31, 2002, we had an accumulated deficit of $35.8 million. Since we began developing and marketing our Internet-based healthcare products and services in early 1999, we have funded our business primarily by borrowing funds and from the sale of our stock, not from cash generated by our business. We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses. As a result, we may experience losses and negative cash flows in the future. Factors which may prevent us from achieving or maintaining profitability and cause our stock price to decline include the demand for and acceptance of our products, product enhancements and services, and our ability to attract new customers, as well as a number of other factors described elsewhere in this section.

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate in the future. Moreover, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that event, our stock price would likely decline. As a result of our limited history of profitable operations, our business strategy and the evolving nature of the markets in which we compete, we may have difficulty accurately forecasting our revenue in any given period. In addition to the factors discussed


	•	any delay in the introduction of new applications, services and products offerings and enhancements of existing solutions;

	•	the loss of a major customer;

	•	the amount and timing of operating costs and capital expenditures relating to the expansion of our operations;

	•	increased product development and engineering expenditures required to keep pace with technological changes;

	•	the capital and expense budgeting decisions of our customers;

	•	the announcement or introduction of new or enhanced products or services by our competitors.

The market for Total Business Integration software is relatively new and evolving. We earn a substantial portion of our revenue from sales of our business process management software, including application integration software, and related services. We expect to earn substantially all of our revenue in the foreseeable future from sales of these product and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for Total Business Integration, information delivery and seeking outside vendors to develop, manage and maintain this software for their critical applications. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to our products, which may substantially inhibit the growth of the market for our software. If the market fails to grow, or grows more slowly than we expect, our sales will be adversely affected. In addition, a weakening global economy may lead to slower sales growth.

Our success depends on our ability to continually enhance and broaden our products offering in response to changing technology customer demands, and competitive pressures. To this end, we may acquire new and complementary businesses, products or technologies. We do not know if we will be able to complete any acquisitions or that we will be able to successfully integrate any acquired business, operate them profitably, or retain their key employees. Integrating any newly acquired business, product or technology could be expensive and time-consuming, could disrupt our ongoing business, and could distract our management. We may face competition for acquisition targets from larger and more established companies with greater financial resources. In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private financings. In that event, we could be forced to obtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing, that results in dilution to our stockholders. If we are unable to integrate any newly acquired entity, products or technology effectively, our business, financial condition and operating results would suffer. In addition, the amortization of intangible assets or other charges resulting from the cost of acquisitions could harm our operating results.

Relationships with established healthcare industry participants are critical to our success. These relationships include customer, vendor, distributor and co-marketer relationships. To date, we have established a number of these relationships. Once we have established a relationship with an established healthcare industry participant, we rely on that participant’s ability to assist us in generating increased acceptance and use of our applications, services and product offerings. We have limited experience in maintaining relationships

with healthcare industry participants. Additionally, the other parties to these relationships may not view these relationships with us as significant to their own business, and they may reassess their commitment to us or decide to compete directly with us in the future. We generally do not have agreements that prohibit them from competing against us directly or from contracting with our competitors. We cannot guarantee that any such party will perform its obligations as agreed or contemplated or that we would be able to specifically enforce any agreement with it. Our arrangements generally do not establish minimum performance requirements, but instead rely on the voluntary efforts of the other party. Therefore, we cannot guarantee that these relationships will be successful. If we were to lose any of these relationships, or if the other parties were to fail to collaborate with us to pursue additional business relationships, we would not be able to execute our business plans and our business would suffer significantly. Moreover, we may not experience increased use of our applications, services and product offerings even if we establish and maintain these relationships.

In the past, our customers have experienced some interruptions with our transaction hosting services. Similar interruptions may continue to occur from time to time. These interruptions could be due to hardware and operating system failures. We currently process customer transactions and data at our facility in Albuquerque, New Mexico as well as in a third-party hosting facility in Atlanta, Georgia. Although we have safeguards for emergencies in each location, we do not have fully operational procedures for information processing facilities if either primary facility is not functioning. The occurrence of a major catastrophic event or other system failure at either facility could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of Internet connections from customers to our systems. These connections, in turn, depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages. Any system delays, failures or loss of data, whatever the cause, could reduce customer satisfaction with our applications, services and product offerings.

We expect a large portion of our revenue to be derived from customers who use our transaction hosting services. As a result, our business will suffer if we experience frequent or long system interruptions that result in the unavailability or reduced performance of our hosting. We expect to experience occasional temporary capacity constraints due to sharply increased traffic, which may cause unanticipated system disruptions, slower response times, impaired quality and degradation in levels of customer service. If this were to continue to happen, our business and reputation could be seriously harmed.

We retain confidential customer and patient information in our processing centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. If we fail to meet our clients’ expectations, we could be liable for damages and our reputation could suffer. In addition, patient care could suffer and we could be liable if our systems fail to deliver correct information in a timely manner. Our insurance may not protect us from this risk.

Many of our service agreements contain performance standards. If we fail to meet these standards, our customers could terminate their agreements with us. The loss of any of our service agreements would cause a decline in our revenues. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers’ changing needs on a timely basis and at a commercially reasonable cost, or at all.

Participants in the healthcare industry are subject to extensive and frequently changing regulation under numerous laws administered by governmental entities at the federal, state and local levels, some of which are, and others of which may be, applicable to our business. Furthermore, our healthcare service provider, payor and plan customers are also subject to a wide variety of laws and regulations that could affect the nature and scope of their relationships with us.

The healthcare market itself is highly regulated and subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operations of healthcare organizations. Changes in current healthcare financing and reimbursement systems, such as modifications which may be required by the Health Insurance Portability and Accountability Act of 1996, may cause us to make unplanned enhancements of software applications or services, result in delays or cancellations of orders, or result in the revocation of endorsement of our applications and services by healthcare participants. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare market participants operate. Healthcare market participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We do not know what effect any proposals would have on our business.

One of the functions of our applications is automatic adjudication of whether a claim for payment or service should be denied or whether existing coverage should be continued based upon particular plans, contracts and industry-standard, clinical-support criteria. Our payor customers are ultimately responsible for deciding whether to deny claims for payment or medical services. It is possible, however, that our customers may assert that we are liable for denying payment of covered medical claims or medical service. The contractual protections included in our customer contracts and our insurance coverage may not be sufficient to protect us against such liability.

Although our customers and we test our applications, services and product offerings, they may contain defects or result in system failures. These defects or problems could result in the loss of or delay in generating revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation or increased insurance costs. Our contracts limit our liability arising from our errors; however, these provisions may not be enforceable and may not protect us from liability. While we have general liability insurance that we believe is adequate, including coverage for errors and omissions, we may not be able to maintain this insurance on reasonable terms in the future. In addition, our insurance may not be sufficient to cover large claims and our insurer could disclaim coverage on claims. If we are liable for an uninsured or underinsured claim or if our premiums increase significantly, our financial condition could be materially harmed.

In order to increase our customer base and expand our online traffic, we must establish, maintain and strengthen our brand. For us to be successful in establishing our brand, professionals in the healthcare and other targeted markets must perceive us as offering quality, cost-effective, communications, information and administrative services. Our reputation and brand name could be harmed if we experience difficulties in introducing new applications, services and product offerings, if these applications, services and product

We are exposed to infringement risks. Our intellectual property is important to our business. We may be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our applications overlaps with competitive offerings. These claims, whether or not meritorious, could be expensive, divert our attention from operating our company, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could seriously harm our business, financial condition and results of operations. If we become liable to third parties for infringing on their intellectual property rights, we would be required to pay a substantial damage award and to develop non-infringing technology, obtain a license or cease selling the applications that contain the infringing intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms, or at all. In the event an intellectual property claim against us was successful and we could not obtain a license on acceptable terms, license a substitute technology or redesign to avoid infringement, our business, financial condition and results of operations would be seriously harmed. In addition, we may not be able to protect against misappropriation of our intellectual property. Third parties may infringe upon our intellectual property rights, we may not detect this unauthorized use and we may be unable to enforce our rights.

We rely on third parties for technology in our products. We depend upon third-party suppliers and licensors to provide software that is incorporated in certain of our products and the products that we distribute. We have no control over the scheduling and quality of work of these third-party software suppliers and licensors. Additionally, the third-party software may not continue to be available to us on commercially reasonable terms, if at all. Our agreements to license certain third-party software will terminate after specified dates unless they are renewed. We expect to sell multiple products to the same customers and problems with the third party technology in one product may adversely affect sales of other products to the same customer.

Our products may be affected by unknown software defects. Our products depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when enhancements or new versions are released. Although we conduct extensive testing, we may not discover software defects that affect our new or current products or enhancements until after they are deployed. To date, we have not experienced any material software defects, however despite continued testing, defects may occur in our software. These defects could cause performance interruptions, which could damage our reputation with existing or potential customers, increase our service costs, cause us to lose revenue, delay market acceptance or divert our development resources, any of which could cause our business to suffer.

We currently develop and market our products primarily in the United States. As a majority of sales are currently made in U.S. dollars, a strengthening of the dollar could make our product less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates. Due to the short term-term nature of our investments, we believe that there is no material interest risk exposure. Based on the foregoing, no quantitative disclosures have been provided.

On November 14, 2001, a shareholder class action complaint was filed in the United States District Court, Southern District of New York. The complaint asserts that the prospectus from the Company’s February 10, 2000 initial public offering (“IPO”) failed to disclose certain alleged improper actions by various underwriters for the offering in the allocation of the IPO shares. The complaint alleges claims against certain

underwriters, the Company and certain officers and directors under the Securities Act of 1933 and the Securities Exchange Act of 1934 (Bartula v. XCare.net, Inc., et al., Case No. 01-CV-10075). Similar complaints have been filed concerning more than 300 other IPO’s; these cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. The Company believes the claims against it are without merit and intends to defend the action vigorously. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain we can make no assurance as to the ultimate outcome or effect.

The Company is engaged from time to time in routine litigation that arises in the ordinary course of our business.


	(1)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on November 2, 1999 (File No. 333-90165).

	(2)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on December 17, 1999.

	(3)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form 8-A on July 28, 2000.

	(4)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 000-29273).

	(5)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Current Report on Form 8-K on May 18, 2001.

	(6)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-4 on July 16, 2001 (File No. 333-64285).

	(7)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on July 17, 2001.

	(8)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-3 on January 23, 2002.

	(9)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Current Report on Form 8-K on April 18, 2001.


(10)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 000-29273).

In accordance with 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 thereto duly authorized.


	By:	/s/ LORINE R. SWEENEY



	Lorine R. Sweeney
	President and Chief Executive Officer


	By:	/s/ GARY T. SCHERPING



	Gary T. Scherping
	Executive Vice President of Finance
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)


	(1)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on November 2, 1999 (File No. 333-90165).

	(2)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on December 17, 1999.

	(3)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form 8-A on July 28, 2000.

	(4)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 000-29273).


	(5)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Current Report on Form 8-K on May 18, 2001.

	(6)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-4 on July 16, 2001 (File No. 333-64285).

	(7)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-1 on July 17, 2001.

	(8)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Registration Statement on Form S-3 on January 23, 2002.

	(9)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Current Report on Form 8-K on April 18, 2001.


(10)	Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 000-29273).


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

		For the quarterly period ended March 31, 2002

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		85-0373486
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


TABLE OF CONTENTS
PART II OTHER INFORMATION
SIGNATURES
INDEX TO EXHIBITS


			Page No.

Part I — Financial Information
	Item 1 —	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001		2
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001		3
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001		4
		Notes to Condensed Consolidated Financial Statements		5
	Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3 —	Quantitative and Qualitative Disclosures About Market Risk		21
Part II — Other Information
	Item 1 —	Legal Proceedings		21
	Item 2 —	Changes in Securities and Use of Proceeds		22
	Item 3 —	Defaults Upon Senior Securities		22
	Item 4 —	Submission of Matters to a Vote of Security Holders		22
	Item 5 —	Exhibits and Reports on Form 8-K		22
Signatures				24


				March 31,			December 31,
				2002			2001


				(In thousands, except share
				and per share amounts)
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	25,137		$	25,383
	Short-term investments				32,882			38,103
	Accounts receivable, net of allowance of $1,558 and $1,932 at March 31, 2002 and December 31, 2001, respectively				9,328			10,104
	Work performed in advance of billings				7,750			7,816
	Other current assets				5,903			3,048

			Total current assets		81,000			84,454
Property and equipment, net					6,471			7,443
Software, net					17,232			18,295
Goodwill and other intangible assets					104,369			103,223
Other assets					1,534			1,289

			Total assets	$	210,606		$	214,704


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
	Accounts payable			$	726		$	1,654
	Accrued liabilities				8,598			11,646
	Unearned revenue				7,541			8,495

		Current liabilities			16,865			21,795
	Deferred revenue and other long-term liabilities				3,597			4,022

			Total liabilities		20,462			25,817

Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $.01 par value, 5,000,000 shares authorized and no shares issued and outstanding at March 31, 2002 and December 31, 2001
	Common stock, $.01 par value; 100,000,000 shares authorized and 29,902,102 and 29,688,133 shares issued and outstanding as of March 31, 2002 and December 31, 2001, respectively				299			297
	Additional paid-in capital				225,836			224,748
	Unearned compensation, net				(166	)		(231	)
	Accumulated deficit				(35,825	)		(35,927	)

		Total stockholders’ equity			190,144			188,887

			Total liabilities and stockholders’ equity	$	210,606		$	214,704

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			Three Months Ended
			March 31,

			2002			2001


			(In thousands, except
			per share amounts)
			(Unaudited)
Revenue			$	17,595		$	7,590

Costs and expenses:
	Cost of revenue			8,629			6,353
	Amortization of acquired and developed software			1,083			—
	Sales and marketing			2,724			1,389
	General and administrative			3,337			2,570
	Research and development			1,432			1,141
	Amortization of goodwill and other acquired intangibles			570			303
	Stock compensation expense			66			135

		Total costs and expenses		17,841			11,891

Loss from operations				(246	)		(4,301	)
	Gain on sale of assets			87			—
	Interest income, net			261			1,100

Net income (loss)			$	102		$	(3,201	)

Net income (loss) per common share — basic			$	0.00		$	(0.20	)

Weighted average common shares outstanding — basic				29,721			16,412

Net income (loss) per common share — diluted			$	0.00		$	(0.20	)

Weighted average common shares outstanding — diluted				30,867			16,412


	Three Months Ended		Three Months Ended
	March 31, 2002		March 31, 2001

Revenues	$	17,766	$	23,843
Net income (loss)		146		(5,903	)
Net income (loss) per share		0.00		(0.20	)


	Professional		Software		Recurring						Consolidated
	Services		Revenue		Revenue			Other			Total


	(In thousands)
March 31,
2002
Total revenues	$	6,854	$	3,640	$	7,101		$	—		$	17,595
Margin		3,230		2,557		2,096			(7,781	)(1)		102
Assets		—		—		—			210,606	(2)		210,606
Capital expenditures		—		—		—			267	(2)		267
2001
Total revenues	$	5,187	$	54	$	2,349		$	—		$	7,590
Margin		1,472		54		(289	)		(4,438	)(1)		(3,201	)
Assets		—		—		—			94,209	(2)		94,209
Capital expenditures		—		—		—			880	(2)		880


				Accumulated
Amortized Intangible Assets:		Cost		Amortization

	Customer base	$	5,725	$	447
	Distribution agreement		1,805		751
	Tradenames, patents and other		5,876		1,174

	Total	$	13,406	$	2,372

Un-amortized intangible assets:
	Goodwill	$	96,624	$	3,289


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



				Three Months
				Ended March 31,

				2002			2001

Total revenue					100.0	%		100.0	%

	Costs and expenses:
		Cost of revenue			49.0			83.7
		Amortization of acquired and developed software			6.2			—
		Sales and marketing			15.5			18.3
		General and administrative			19.0			33.9
		Research and development			8.1			15.0
		Amortization of goodwill and acquired intangibles			3.2			4.0
		Stock compensation expense			0.4			1.8

			Total costs and expenses		101.4			156.7

Loss from operations					(1.4	)		(56.7	)
	Gain on sale of assets				0.5			—
	Interest income (expense), net				1.5			14.5

Net loss					0.6	%		(42.2	)%



	Three Months Ended
	March 31,
							Increase/
	2002			2001			(Decrease)

Professional services	$	3,230		$	1,472		$	1,758
Software license fees		2,557			54			2,503
Recurring revenue		2,096			(289	)		2,385
Other		(7,781	)		(4,438	)		(3,343	)

	$	102		$	(3,201	)	$	3,303


	*We have historically incurred losses and we may not be able to sustain profitability.*


	*Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors, causing our share price to decline.*


	*The market for total business integration software may not grow as quickly as we anticipate, which would cause our revenues to fall below expectations.*


Exhibit
Number		Description of Document

	2.1(5)	Healthcare.com Merger Agreement
	3.1(1)	Amended and Restated Certificate of Incorporation.
	3.2(4)	Bylaws.
	4.1(1)	Form Common Stock Certificate.
	4.2(4)	Registration Rights Agreement by and Between XCare.net. and AHR Seller Group, LLC, the sole stockholder of United/ HealthScope, Inc. (dba Advica Health Resources), dated November 8, 2000.
	4.3(7)	Registration Rights Agreement by and among Registrant and certain Stockholders of Confer Software, Inc., dated as of June 7, 2001.
	4.4(8)	Registration Rights Agreement, dated as of December 14, 2001 by and between Quovadx, Inc., and Francis Carden.
	4.5(3)	Stockholders’ Rights Plan.
	10.1(1)	Amended and Restated 1997 Stock Option Plan.
	10.2(1)	1999 Employee Stock Purchase Plan and related agreements.
	10.3(1)	1999 Director Option Plan and related agreements.
	10.4(4)	2000 Nonstatutory Stock Option Plan and related agreements.
	10.5(6)	Amended and Restated Healthcare.com Corporation Non-Employee Director Stock Option Plan (filed as Exhibit 10 to Healthcare.com’s Quarterly Report on Form 10-Q for quarter ended June 30, 1999 (Commission file No. 0-27056) and incorporated herein by reference).
	10.6(6)	Healthcare.com Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to Healthcare.com’s Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference).
	10.7(6)	Healthcare.com Restated Stock Option Plan Two (filed as Exhibit 10.2 to Healthcare.com’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission file No. 0-27056), and incorporated herein by reference).


Exhibit
Number		Description of Document

	10.8(1)	Offer letter, dated September 22, 1997, with Lorine Sweeney.
	10.9(2)	Office Lease Agreement dated November 1, 1999, by and between the Company and Mountain States Mutual Casualty Company.
	10.10(4)	United Healthscope, Inc. purchase agreement dated November 8, 2000.
	10.11(5)	Form of Robert Murrie Employment Agreement.
	10.12(5)	Form of Severance Agreement.
	11.1(10)	Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.
	12.1(10)	SubleaseAgreement, dated August 24, 2001, between Echo Bay Management Corp. and XCare.Net, Inc.
	16.1(9)	Letter regarding change in certifying accountant.


	*Our acquisition strategy could cause financial or operational problems.*


	If we cannot execute our strategy to establish and maintain our relationships with established healthcare industry participants, our applications, services and products may not achieve market acceptance.


	*If our transaction hosting services suffer interruptions, our business and reputation could be harmed.*


	*If security of our customer and patient information is compromised, patient care could suffer, we could be liable for damages and our reputation could decline.*


	*If we fail to meet performance standards we may experience a decline in revenues.*


	*If compliance with government regulation of healthcare becomes costly and difficult for our customers, we may not be able to grow our business.*


	*Because we provide utilization review services, we may be liable for the denial of payments for medical claims or medical services.*


	*We may face product-related liabilities that could force us to pay damages, which would hurt our reputation.*


	*If we do not establish and maintain our brand, our reputation could be adversely affected.*


	*We are subjected to many risks because our business is dependent on our intellectual proprietary rights.*