UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

For the transition period from                     to                    

Commission file number: 000-22052

PROXYMED, INC.

(770) 806-9918

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.
x Yes o No

Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).
x Yes o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $.001 Par Value
12,626,182 Shares as of December 13, 2004

TABLE OF CONTENTS

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PART 1 — FINANCIAL INFORMATION

     ITEM 1 – FINANCIAL STATEMENTS

PROXYMED, INC. AND SUBSIDIARIES

See notes to the consolidated financial statements.

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PROXYMED, INC. AND SUBSIDIARIES

See notes to the consolidated financial statements.

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PROXYMED, INC. AND SUBSIDIARIES

See notes to the consolidated financial statements.

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PROXYMED, INC. AND SUBSIDIARIES

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

(1) The following ranges of assumptions were used in the calculation of pro forma compensation expense for the periods presented:

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to our consolidated financial statements on this Form 10-Q and notes thereto and those included in Part IV starting on Page F-7 of our Form 10-K/A for the year ended December 31, 2003 and to provide an understanding of our results of operations, financial condition, and changes in financial condition. Our MD&A is organized as follows:

Introduction

     We believe we are the nation’s second largest independent provider-based electronic healthcare transaction services company. We provide connectivity services and related value-added products to physicians, payers, pharmacies, medical laboratories, and other healthcare providers and suppliers. Our services support a broad range of financial, clinical and administrative transactions, and are HIPAA-certified through Claredi, an independent certification and testing services company specializing in HIPAA compliance. To facilitate these services, we operate Phoenix^TM, our secure national electronic information platform, which

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provides physicians and other healthcare providers with direct connectivity to one of the industry’s largest list of payers, the industry’s largest list of chain and independent pharmacies and the largest list of clinical laboratories. Our corporate headquarters is located in Atlanta, Georgia and our products and services are provided from various operational facilities located throughout the United States. We also operate our clinical computer network and portions of our financial and real-time production computer networks from a secure, third-party co-location site located in Atlanta, Georgia. All of our revenues are generated domestically.

     Our primary strategy is focused on leveraging our leading position as an independent back-end connectivity provider to small physician offices. Through strategic relationships and partnerships with front-end solution providers, our goal is to drive more healthcare transactions through Phoenix^TM while remaining neutral in the battle for the physician’s desktop. Additionally, we expect that there will be opportunities to increase revenues by cross-selling our existing products and services to our current customer base of physicians and other healthcare providers, as well as revenue opportunities from the development of new services from our development efforts, including Internet-based transaction services. We remain committed to developing additional capabilities and value-added products and services, and to expanding our back-end connectivity network. In conjunction with this philosophy, we have recently introduced PCAT™ and ProxyEnroll™, our new web-based service tools for support and enrollment. We have also added new services offerings for our payer customers through our acquisition of PlanVista Corporation (“PlanVista”) on March 2, 2004 for claims re-pricing services..”

Restatement of Financial Statements

     As discussed in Note 14 to the consolidated financial statements, our financial statements for the 2003 periods have been restated. The accompanying MD&A gives effect to that restatement.

Acquisitions

     On December 31, 2002, we acquired all of the outstanding stock of MedUnite, Inc. (“MedUnite”) for $10 million in cash and an aggregate of $13.4 million principal amount of 4% convertible promissory notes. In addition, we paid approximately $6.7 million in transaction and exit related costs (which were originally estimated at $8.3 million). Interest on the convertible notes is payable in cash on a quarterly basis. The convertible promissory notes (now currently payable at a maturity value of $13.1 million after a claim setoff against the escrow in December 2003) are payable in full on December 31, 2008, and are convertible into an aggregate

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of 716,968 shares (originally 731,322 shares before the claim setoff) of our common stock if the former shareholders of MedUnite achieve certain revenue-based triggers over the next three and one-half year period. The shares of our common stock issuable upon conversion of the convertible notes were to be registered by us promptly after a conversion trigger event is met. The first threshold trigger was reached during the fourth quarter of 2003 and the convertible notes were reduced to $13.1 million at December 31, 2003 as a result of a claim against the escrow. We have filed a registration statement for these shares on Form S-3 with the SEC, which has not yet gone effective as of the date of this report. The operations of MedUnite are reflected with our operations for the twelve months ended December 31, 2003. Additionally, we spent much of the 2003 year integrating the operations of MedUnite into our existing operations, and currently the organizations are run and managed as one operating unit. As a result, meaningful separate results and statistics for MedUnite are no longer available.

     On March 2, 2004, we acquired PlanVista Corporation (“PlanVista”), a company that provides medical cost containment and business process outsourcing solutions for the medical insurance and managed care industries, as well as services for health care providers, including individual providers, preferred provider organizations and other provider groups for 3,600,000 shares of our common stock issued to PlanVista shareholders valued at $59.8 million (based on the average closing price of our common stock for the day of and the two days before and after December 8, 2003, the date of the announcement of the definitive agreement). We also assumed debt and other liabilities of PlanVista, and incurred $1.3 million in acquisition-related costs. Additionally, we raised $24.1 million in a private placement sale of our common stock to General Atlantic Partners, Commonwealth Associates and other parties to partially fund repayment of certain of PlanVista’s debts and other obligations outstanding at the time of the acquisition. The merger enables us to offer a new suite of products and services, provide new end-to-end services, increase sales opportunities with payers, strengthen business ties with certain customers, expand technological capabilities, reduce operating costs and enhance our public profile.

     Upon completion of the acquisition, each share of PlanVista’s outstanding common stock was cancelled and converted into the right to receive 0.08271 shares of our common stock and each holder of PlanVista series C preferred stock received 51.5292 shares of our common stock in exchange for each share of PlanVista series C preferred stock, representing approximately 23% of our common stock on a fully converted basis, and the holders of our outstanding stock, options and warrants retained approximately 77% of ProxyMed following the transaction. PlanVista’s operations are included in our Transaction Services segment commencing March 2004.

     In connection with this acquisition, our shareholders approved (1) an amendment to our articles of incorporation to increase the total number of authorized shares of the Company’s common stock from 13,333,333-1/3 shares to 30,000,000 shares, (2) the issuance of 1,691,229 shares of our common stock at $14.25 per share in a private equity offering valued at $24.1 million (to retire a portion of debt of PlanVista and pay certain expenses associated with the merger), (3) the issuance of 3,600,000 shares of our common stock in connection with the merger, and (4) an amendment to our 2002 Stock Option Plan to increase the total number of shares available for issuance from 600,000 to 1,350,000.

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Sale of Assets

     On June 30, 2004, we sold certain assets and liabilities of our Laboratory Communications Solutions segment that were used in our non-core contract manufacturing business to a new entity owned by a former executive of ProxyMed for $4.5 million in cash. Under terms of the sale agreement, we received $3.5 million in cash at closing and received the balance of $1.0 million in cash in July and August 2004 following the presentation of the final accounting. As part of the disposition, we agreed to purchase certain component parts from the new owner for use in our Laboratory Communication Solutions business on a non-exclusive basis at a fixed price deemed to be at fair market value by management. These parts were valued at $0.4 million at June 30, 2004. As of September 30, 2004, this remaining commitment had been reduced to less than $0.1 million. Additionally, we agreed to sublease a portion of our current facilities through April 2005 and provide certain administrative services to the new entity.

     As a result of the transaction, we recorded a loss on sale of assets of $0.1 million in the three months ended June 30, 2004. This loss includes the value of options to purchase 10,000 shares of the Company’s common stock granted to the former executive at an exercise price of $16.00 in July 2004 which was accrued at June 30, 2004.

Operating Segments

     We operate in two reportable segments that are separately managed: Transaction Services (formerly known as Electronic healthcare transaction processing) and Laboratory Communication Solutions. Transaction Services includes transaction, cost containment and other value-added services principally between physicians and insurance companies (Payer Services) and physicians and pharmacies (Prescription Services); and Laboratory Communication Solutions includes the sale, lease and service of communication devices principally to laboratories and, through June 30, 2004, the contract manufacturing of printed circuit boards (Laboratory Services). Commencing in March 2004, the operations of PlanVista are included in our Transaction Services segment (Medical Cost Containment Services). As a result of a re-alignment of our Corporate overhead functions (i.e., executives, finance, legal, human resources, facilities, insurance, etc.) in the second quarter of 2004, we now report these expenses as part of our Transaction Services segment. Accordingly, our Corporate segment in the comparable periods has been combined with our Transaction Services segment to facilitate a better comparison between periods.

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Results of Operations

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003.

     Net Revenues. Consolidated net revenues for the three months ended September 30, 2004 increased by $4.4 million, or 25%, to $22.5 million from consolidated net revenues of $18.1 million for the three months ended September 30, 2003. Net revenues classified by our reportable segments are as follows:

     Net revenues in our Transaction Services segment increased by $7.2 million, or 61%, over the 2003 period. This increase is primarily due to the acquisition of PlanVista (increase of $8.0 million in net revenues) offset by declines in volumes of electronic claims, statements and real-time transactions processed (decrease of $0.9 million). While core transaction growth is up 4% compared to the 2003 period (see below), revenue dollars have grown significantly due to the higher per transaction revenue attributable to our cost containment transactions compared to our traditional core transactions.

     For the 2004 period, approximately 84% of our revenues came from our Transaction Services segment compared to 65% from this segment for the 2003 period. For the remainder of 2004 and beyond, it is anticipated that our greatest growth will come from this segment.

     Laboratory Communication Solutions segment net revenues decreased by $2.7 million, or 44%, over the 2003 period. We did see a decrease in revenue from sales of our laboratory communication devices and related services compared to the 2003 period (decrease of $0.2 million), but as expected, our overall revenues in this segment declined because of the sale of certain assets and liabilities in this segment for our contract manufacturing business on June 30, 2004 (decrease of $2.5 million).

     A summary of the number of transactions we processed for the periods presented is as follows:

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          “Core” transactions represent all transactions except for encounters. As a result of a continued review of our business, we have made changes to our transaction counting process to insure that our transactions are counted on the same methodology for all purposes, whether internal or external. Previously, we had excluded certain transactions primarily associated with an outsourcing contract due to the nature of the business model for those transactions. These transactions are included above as “additional core transactions”.

          “Cost Containment” transactions represent the number of claims sent by our payer clients to be re-priced through our provider network, and are included in the core transaction count.

          “Encounters” are an administrative reporting transaction for payers but do not generate revenue for the provider who must submit them. Accordingly, rather than submitting on a routine basis, most providers choose to periodically “catch up” on their submissions, creating monthly and quarterly swings in both the number of encounters we process and what percentage of our transaction mix they represent. Since encounters are at a significantly lower price than claims, these swings make it difficult to easily analyze our quarter-over-quarter growth in our core business. In addition, we do not expect our encounter volume to grow on an annual basis, as payers are not expanding the capitated service model that is the foundation of encounters. Therefore, we believe that breaking out encounters shows more clearly our growth in core transactions.

          Cost of Sales. Consolidated cost of sales decreased as a percentage of net revenues to 35% for the three months ended September 30, 2004 from 45% for the three months ended September 30, 2003. Cost of sales classified by our reportable segments is as follows:

          Cost of sales in our Transaction Services segment consists of transaction fees, provider network outsourcing fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, revenue sharing arrangements with our business partners, third-party database licenses, and certain travel expenses. Cost of sales in the 2004 period increased $2.1 million, or 54%, from the 2003 period. As a percentage of revenues, cost of sales in this segment decreased to 31% in the 2004 period compared to 32% in the same period last year primarily due to a change in the mix of transaction types from higher cost patient statements to lower cost claim transactions (decrease of $0.4 million), the loss of business from a low margin gateway partner (i.e. another clearinghouse that routes transactions through our network because they do not have a contract with one or more specific payers) during the latter half of the 2003 year (decrease of $0.1 million), offset by the addition of higher margin medical Cost Containment services from our acquisition of PlanVista (increase of $2.7 million).

          With the filing of our financial statements for the 2003 fiscal year, we reclassified direct labor and manufacturing overhead from selling, general and administrative expenses to cost of tangible products sold to better reflect the production of tangible products. All prior periods

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have a similar reclassification. As a result, cost of sales in the Laboratory Communication Solutions segment includes hardware, third party software, consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of sales in the 2004 period decreased $2.3 million, or 54%, from the 2003 period. As a percentage of revenues, cost of sales in this segment decreased to 55% for the three months ended September 30, 2004 from 68% for three months ended September 30, 2003. These decreases are primarily due to the sale of our contract manufacturing assets (decrease of $2.5 million) offset by increased sales of Report Tracker^TM, one of our lab results reporting products (increase of $0.1 million).

          Selling, General and Administrative Expenses. Consolidated SG&A increased for the three months ended September 30, 2004 by $4.2 million, or 50%, to $12.6 million from consolidated SG&A of $8.4 million for the three months ended September 30, 2003. Consolidated SG&A expenses as a percentage of consolidated revenues increased to 56% for the 2004 period compared to 46% in the same period last year. SG&A expenses classified by our reportable segments are as follows:

          Transaction Services segment SG&A expenses for the three months ending September 30, 2004 increased $4.7 million, or 67%, over the same period last year primarily due to the addition of SG&A expenses from PlanVista for a full quarter in the 2004 period (increase of $3.0 million). Additionally, while we achieved significant reductions in expenses from our MedUnite acquisition over the course of 2003, these savings have been offset by increased expenditures related to our ongoing efforts to comply with the Sarbanes-Oxley Act of 2002 in the 2004 period (increase of $0.4 million) and finance system conversion and consolidation costs (increase of $0.1 million). As a result, segment SG&A expenses as a percentage of segment net revenues increased to 61% for the 2004 period compared to 59% for the same period last year.

          Laboratory Communication Solutions segment SG&A expenses for the three months ended September 30, 2004 decreased by $0.4 million, or 32%, over the same period last year and segment SG&A expenses as a percentage of segment net revenues increased to 27% for the 2004 period compared to 22% for the same period last year. As expected, these decreases are primarily due to the reduction in SG&A expenses related to the sale of our contract manufacturing assets on June 30, 2004.

          Depreciation and Amortization. Consolidated depreciation and amortization increased by $1.1 million to $2.6 million for the three months ended September 30, 2004 from $1.5 million for the same period last year. This increase was due to approximately $1.1 million for the amortization of intangible assets acquired in the PlanVista acquisition. Depreciation and amortization classified by our reportable segments is as follows:

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          (Gain) Loss on Disposal of Assets. In the three months ended September 30, 2004, we recorded a gain of $23,000 primarily related to the disposition of delivery vehicles and other equipment in our Laboratory Communication Solutions segment.

          Operating Income (Loss). As a result of the foregoing, the consolidated operating loss for the three months ended September 30, 2004 was $0.4 million compared to operating income of $0.2 million for the same period last year. Operating loss classified by our reportable segments is as follows:

          Interest Expense, net. Consolidated net interest expense for the three months ended September 30, 2004 was $0.5 million compared to $0.2 million for the same period last year. This increase in expense is primarily due to the assumption of debt in conjunction with the PlanVista acquisition (increase of $0.3 million). Interest expense for the 2004 year is expected to be at levels above those in the prior year due to the senior debt acquired from PlanVista.

          Net Loss. As a result of the foregoing, consolidated net loss for the three months ended September 30, 2004 was $1.0 million compared to a net loss of $33,000 for the same period last year.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003.

          Net Revenues. Consolidated net revenues for the nine months ended September 30, 2004 increased by $14.5 million, or 27%, to $67.7 million from consolidated net revenues of $53.2 million for the nine months ended September 30, 2003. Net revenues classified by our reportable segments are as follows:

          Net revenues in our Transaction Services segment for the nine months ended September 30, 2004 increased by $17.0 million, or 48%, over the comparable period in 2003. This increase is primarily due to the acquisition of PlanVista (increase of $19.1 million), offset

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by declines in volumes of electronic claims, statements and other real-time transactions processed (decrease $1.5 million) and additional revenue reserves required due to a degradation in the aging of outstanding traditional accounts (increase of $0.8 million). While core transaction transactions growth was up 3% compared to the 2003 period (see below), revenue dollars have grown significantly due to the higher per transaction revenue attributable to our cost containment transactions compared to our traditional core transactions.

          For the nine months ended September 30, 2004 period, approximately 77% of our revenues came from our Transaction Services segment compared to 66% from this segment for the same period in 2003. For the remainder of 2004 and beyond, it is anticipated that our greatest growth will come from this segment.

          Laboratory Communication Solutions segment net revenues for the nine months ended September 30, 2004 decreased by $2.5 million, or 14%, from the comparable 2003 period primarily as a result of the asset sale discussed earlier in this report (decrease of $million).

          A summary of the number of transactions we processed for the periods presented is as follows:

          “Core” transactions represent all transactions except for encounters. Additionally, as a result of a continued review of our business, we have made changes to our transaction counts to insure that our transactions are counted on the same methodology for all purposes, whether internal or external. Previously, we had excluded certain transactions primarily associated with an outsourcing contract due to the nature of the business model for those transactions. These transactions are included above as “additional core transactions”.

          “Cost Containment” transactions represent the number of claims sent by our payer clients to be re-priced through our provider network.

          “Encounters” are an administrative reporting transaction for payers but do not generate revenue for the provider who must submit them. Accordingly, rather than submitting on a routine basis, most providers choose to periodically “catch up” on their submissions, creating monthly and quarterly swings in both the number of encounters we process and what percentage of our transaction mix they represent. Since encounters are at a significantly lower price point than claims, these swings make it difficult to easily analyze our quarter-over-quarter growth in our core business. In addition, we do not expect our encounter volume to grow on an annual basis, as payers are not expanding the capitated service model that is the foundation of encounters. Therefore, we believe that breaking out encounters shows more clearly our growth in core transactions.

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          Cost of Sales. Consolidated cost of sales decreased as a percentage of net revenues to 38% for the nine months ended September 30, 2004 from 46% for the nine months ended September 30, 2003. Cost of sales classified by our reportable segments is as follows:

          Cost of sales in our Transaction Services segment consists of transaction fees, provider network outsourcing fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, revenue sharing arrangements with our business partners, third-party database licenses, and certain travel expenses. Cost of sales in this segment increased by $3.7 million, or 30%, in the 2004 period compared to the 2003 period. As a percentage of revenues, cost of sales decreased to 31% in the 2004 period compared to 35% in the same period last year primarily due to a change in the mix of transaction types from higher cost patient statements to lower cost claim transactions (decrease of $0.6 million), the loss of business from a low margin gateway partner during the latter half of the 2003 year (decrease of $0.8 million), offset by the addition of higher margin medical cost containment services from our acquisition of PlanVista (increase of $6.0 million).

          Cost of sales in our Laboratory Communication Solutions segment includes hardware, third party software, consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of sales for this segment in the 2004 period decreased $2.2 million, or 18%, from the 2003 period. Cost of sales as a percentage of revenues in this segment was 64% for the 2004 period compared to 67% for the 2003 period. These decreases are primarily due to the sale of our contract manufacturing assets.

          Selling, General and Administrative Expenses. Consolidated SG&A increased for the nine months ended September 30, 2004 by $7.9 million, or 29%, to $35.4 million from consolidated SG&A of $27.5 million for the nine months ended September 30, 2003. Consolidated SG&A expenses as a percentage of consolidated revenues remained constant at 52% for both periods presented. SG&A expenses classified by our reportable segments are as follows:

          Transaction Services segment SG&A expenses for the nine months ended September 30, 2004 increased by $8.4 million, or 36% over the same period last year primarily due to the addition of SG&A expenses from PlanVista for seven months in the 2004 period (increase of $7.8 million). Additionally, while we achieved significant reductions in expenses

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from our MedUnite acquisition over the course of 2003, these savings have been offset by increased expenditures related to our ongoing efforts to comply with the Sarbanes-Oxley Act of 2002 compliance in the 2004 period (increase of $0.9 million).

          Laboratory Communication Solutions segment SG&A expenses for the nine months ended September 30, 2004 decreased by $0.5 million, or 13% from the same period last year and segment SG&A expenses as a percentage of segment net revenues remained constant at 23% for both periods presented. As expected, the decreases in dollars are primarily due to a reduction in expenses related to the sale of our contract manufacturing assets on June 30, 2004.

          Depreciation and Amortization. Consolidated depreciation and amortization increased by $2.9 million to $7.1 million for the nine months ended September 30, 2004 from $4.2 million for the same period last year. This increase was primarily due to approximately $2.5 million for the amortization of intangible assets acquired in the PlanVista acquisition. Depreciation and amortization classified by our reportable segments is as follows:

          (Gain) Loss on Disposal of Assets. In the nine months ended September 30, 2004, we recorded a loss of $68,000 primarily related to the disposition of contract manufacturing assets in our Laboratory Communication Solutions segment that were sold to a new entity formed by a former executive on September 30, 2004 offset by $26,000 in gains on vehicles and other equipment sold in the same segment. As a result of the consolidation of the ProxyMed and MedUnite offices in Atlanta in February 2003, the Company recorded $0.1 million in losses during the nine months ended September 30, 2003 primarily related to the disposition of certain assets owned and leased that were acquired in the acquisition of MDP Corporation in 2001.

          Operating Loss. As a result of the foregoing, the consolidated operating loss for the nine months ended September 30, 2004 was $0.8 million compared to an operating loss of $3.0 million for the same period last year. Operating loss classified by our reportable segments is as follows:

          Interest Expense, net. Consolidated net interest expense for the nine months ended September 30, 2004 was $1.4 million compared to $0.6 million for the same period last year. This increase in expense is primarily due to the assumption of debt in conjunction with the

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PlanVista acquisition (increase of $0.8 million). Interest expense for the 2004 year is expected to be at levels above those in the prior year due to the senior debt acquired from PlanVista.

          Other Income. During the nine months ended September 30, 2004, we settled a long-term liability assumed in the acquisition of MedUnite for $0.8 million. The liability was being carried at its present value of $0.9 million. The resulting gain of $0.1 million is reflected as other income.

          Net Loss. As a result of the foregoing, consolidated net loss for the nine months ended September 30, 2004 was $2.2 million compared to net loss of $3.6 million for the same period last year.

Liquidity and Capital Resources

          In the nine months ended September 30, 2004, net cash used in operating activities totaled $4,000, and included $4.0 million to pay certain acquisition-related expenses of PlanVista outstanding as of the effective date of the acquisition. Cash provided by investing activities totaled $1.1 million and consisted primarily of $0.8 million in net cash acquired from PlanVista and $4.5 million received from the sale of our contract manufacturing assets offset by $0.9 million in costs related to the acquisitions of PlanVista and MedUnite, and $3.5 million in capital expenditures and capitalized software. Cash provided by financing activities totaled $5.8 million and consisted of a $24.1 million private placement of our common stock, an exercise of warrants for $8.8 million, and $27.0 million in repayments of notes payable, other long-term debt, and payments related to capital leases (including $23.4 million for the retirement of debts and other obligations of PlanVista upon the consummation of the acquisition).

          In the nine months ended September 30, 2003, cash provided by operating activities was $0.5 million. Cash used in investing activities was $8.1 million. During this period, we paid $5.7 million in costs related to our December 2002 acquisition of MedUnite, $3.3 million for fixed assets and capitalized software, and released a net of $0.4 million from restricted cash as we terminated our MedUnite lease in San Diego. Cash used in financing activities was $1.8 million for repayments of notes payable, other long-term debt, and payments related to capital leases. These activities were principally financed through available cash resources.

          We had cash and cash equivalents totaling $12.2 million as of September 30, 2004 compared to $6.9 million at September 30, 2003. These available funds will be used for operations, strategic acquisitions, the further development of our products and services, and other general corporate purposes. We continue to evaluate other acquisition opportunities and strategic alternatives that may add synergies to our product offerings and business strategy.

          On March 2, 2004, we acquired PlanVista through the issuance of 3,600,000 shares of our common stock (valued at $59.8 million). In addition, we raised an additional $24.1 million in a private placement sale of our common stock and drew down $4.4 million on our asset-based line of credit. These funds, along with available cash resources, were used to satisfy $27.4 million of PlanVista’s debt and other obligations outstanding as of the effective time of the acquisition.

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          As part of our sale of contract manufacturing assets on June 30, 2004, we agreed to purchase certain component parts from the new owner for use in our Laboratory Communication Solutions business on a non-exclusive basis at a fixed price deemed to be at fair market value by management. These parts were valued at $0.4 million at June 30, 2004. As of September 30, 2004, this remaining commitment had been reduced to less than $0.1 million. We do not have any material commitments for any other capital expenditures.

          In the nine months ended September 30, 2004, we spent $2.6 million towards hardware and software costs related to our technical infrastructure and administrative systems. We have also spent $1.0 million towards capitalized development of our internal systems. For the balance of the 2004 year, we expect to spend an additional $0.7 million towards these projects. Furthermore, in 2004, we have incurred costs of approximately $1.0 million in connection with the implementation of our internal control procedures mandated by the Sarbanes-Oxley Act of 2002 and with our financial system consolidation efforts. For the balance of the year, we estimate that we will spend an additional $0.5 million towards these items. Our Sarbanes-Oxley compliance efforts to date have focused primarily on documentation and remediation of our financial and operational systems across our companies and to a lesser extent, testing these systems. We expect further focus testing, both internally and with our external auditor, in the fourth quarter of 2004.

          We have also spent the better part of two years on HIPAA compliance efforts, which has resulted in significant costs. We now have over 90% of our total transaction volume migrated to a HIPAA compliant connection to our payer customers. However, on our submitter customer side, the majority of our providers continue to submit their transactions to us in legacy formats and rely on us to help meet HIPAA format requirements. Our continued efforts on the submitter side for HIPAA compliance will force us to continue to spend additional funds in the future.

          In December 2003, we closed on a $12.5 million asset-based line of credit with our commercial bank. Borrowing under such facility is subject to eligible cash, accounts receivable, and inventory and other conditions. Borrowings bear interest at the prime rate plus 0.5% or at LIBOR plus 2.25% (or LIBOR plus 0.75% in the case of borrowings against eligible cash only). As a result of our acquisition of PlanVista, we drew down $4.4 million against this line at the end of February 2004 (which was repaid in early March 2004) and had a $0.5 million draw outstanding as of March 31, 2004 that we repaid in April 2004. At this time, the assets of PlanVista are not eligible collateral for this line of credit due to covenants of the senior debt in place at PlanVista. Additionally, PlanVista (as a wholly-owned subsidiary) is limited in its ability to transfer cash to ProxyMed (as the parent company) due to additional covenants under this instrument. The expiration date of this line of credit has been extended through December 31, 2004.

          As noted above, with our acquisition of PlanVista on March 2, 2004, we utilized the $24.1 million in proceeds raised from our private placement, drew $4.4 million on our line of credit and used available cash to satisfy $27.4 million of PlanVista’s debt and other obligations and expenses outstanding as of the effective time of the acquisition. As a result of the acquisition, we acquired a cash flow positive company with $20.4 million in senior debt due in May 2005 (at an interest rate of 6% until December 2004 when the interest rate increases to 10%). While it is our intent to satisfy this debt either through refinancing, obtaining a senior line of credit or by raising equity capital, we will incur substantial additional cash interest charges

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until we do so. We may be unable to raise additional funds on acceptable terms or at all. Such refinancing is expected to be completed in the first quarter of 2005.

          The following table represents our contractual cash obligations due over the next several years (including obligations of PlanVista). Operating leases are shown net of any sublease agreements.

(1) Remaining quarter of 2004

     We believe that we have sufficient cash and cash equivalents on hand to fund our future operational requirements and capital expenditures, and a sufficient level of capital in order to fund specific research and development projects or to pursue smaller additional strategic acquisitions. Even with the positive cash flow expected to be generated from our operations, we anticipate that we will need to refinance the PlanVista debt, by either obtaining a new senior line of credit or raising capital in order to satisfy this debt on or before maturity. If we require additional funding in the future to satisfy any of our outstanding future obligations, or further our strategic plans, there can be no assurance that any additional funding will be available to us, or if available, that it will be available on acceptable terms. If we are successful in obtaining additional financing, the terms of the financing may have the effect of significantly diluting or adversely affecting the holdings or the rights of the holders of our common stock. We believe that if we are not successful in obtaining additional financing for further product development or strategic acquisitions, such inability may adversely impact our ability to successfully execute our business plan and may put us at a competitive disadvantage.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions

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or conditions, but we believe that any variation in results would not have a material effect on our financial condition. We evaluate our estimates on an ongoing basis.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements of our Form 10-K/A for the year ended December 31, 2003.

     Revenue Recognition – Revenue is derived from our Transaction Services and Laboratory Communication Solutions segments.

     In our Transaction Services segment, we provide transaction and value-added services principally between physicians and insurance companies, and physicians and pharmacies. Such transactions and services include Electronic Data Interchange (“EDI”) claims submission and reporting, insurance eligibility verification, claims status inquiries, referral management, electronic remittance advice, patient statement processing, encounters, and cost containment transaction services including claims repricing and bill renegotiation. In our Laboratory Communication Solutions segment, we sell, rent and service intelligent remote reporting devices and provide lab order entry and results reporting through our software products.

     Transaction Services revenues are derived from insurance payers, pharmacies and submitters (physicians and other entities including billing services, practice management software vendors, and claims aggregators). Such revenues are recorded on a per transaction fee basis or a flat fee basis (per physician) and are recognized in the period the service is rendered. Agreements with payers or pharmacies are for one to three years on a non-exclusive basis. Agreements with submitters are for one year, renew automatically, and are generally terminable thereafter upon 30 to 90 days notice. Transaction fees vary according to the type of transaction and other factors, including volume level commitments primarily for payers.

     Revenue from Medical Cost Containment business in our Transaction Services segment is recognized when the services are performed and are recorded net of their estimated allowance. These revenues are primarily in the form of fees generated from the discounts we secure for the payers that access our provider network. We enter into agreements with — healthcare payer customers that require them to pay a percentage of the cost savings generated from our network discounts with participating providers. These agreements are generally terminable upon 90 days notice. Revenue from a percentage of savings contract is generally recognized when the related claims processing and administrative services have been performed. The remainder of the revenue from our Medical Cost Containment business is generated from customers that pay a monthly fee based on eligible employees enrolled in a benefit plan covered by our health benefits payers’ clients.

     Also in our Transaction Services segment, certain transaction fee revenue is subject to revenue sharing pursuant to agreements with resellers, vendors or gateway partners and is recorded as gross revenues in accordance with EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” Such revenue sharing amounts are based on a per transaction amount or a percentage of revenue basis and may involve increasing amounts or percentages based on transaction or revenue volumes achieved.

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     Revenue from certain up-front fees charged primarily for the development of EDI for payers and the implementation of services for submitters in our Transaction Services segment is amortized ratably over three years, which is the expected life of the customer in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”).

     Revenue from support and maintenance contracts on our products in both our Transaction Services and Laboratory Communications Solutions segments is recognized ratably over the contract period, which does not exceed one year. Such amounts are billed in advance and established as deferred revenue.

     In our Laboratory Communication Solutions segment, revenue from sales of inventory and manufactured goods is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is probable in accordance with SAB No. 104.

     Revenues from maintenance fees on laboratory communication devices are charged on an annual or quarterly basis and are recognized ratably over the service period. Service fees may also be charged on a per event basis and are recognized after the service has been performed.

     Revenue from the rental of laboratory communication devices is recognized ratably over the applicable period of the rental contract. Such contracts require monthly rental payments and are for a one to three year term, then renewing for a similar period after the initial term is expired. Contracts may be cancelled upon 30 days notice. A significant amount of rental revenues are derived from contracts that are no longer under the initial non-cancelable term. At the end of the rental period, the customer may return or purchase the unit for fair market value. Upon sale of the revenue earning equipment, the gross proceeds are included in net revenues and the undepreciated cost of the equipment sold is included in cost of sales.

     Goodwill – We adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. Under SFAS No. 142, goodwill is reviewed at least annually for impairment. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a “fair value” methodology versus an undiscounted cash flow method required under previous accounting rules. In accordance with our adoption of SFAS No. 142, we completed our most recent annual test at December 31, 2003 and 2002 utilizing various valuation techniques including a market value analysis. No impairment charges were recorded as a result of these tests.

     Capitalized Software Development and Research and Development – Costs incurred internally and fees paid to outside contractors and consultants during the application development stage of our internally used software products are capitalized. Costs of upgrades and major enhancements that result in additional functionality are also capitalized. Costs incurred for maintenance and minor upgrades are expensed as incurred. All other costs are expensed as incurred as research and development expenses (which are included in “Selling, general and administrative expenses”). Application development stage costs generally include software configuration, coding, installation to hardware and testing. Once the project is completed, capitalized costs are amortized over their remaining estimated economic life. Our judgment is used in determining whether costs meet the criteria for immediate expense or capitalization. We periodically review projected cash flows and other criteria in assessing the impairment of any internal-use capitalized software and take impairment charges as needed.

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     Reserve for Doubtful Accounts/Bad Debt Estimates – We rely on estimates to determine the bad debt expense and the adequacy of the reserve for doubtful accounts receivable. These estimates are based on our historical experience and the industry in which we operate. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Additionally, in our Medical Cost Containment business, we evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past write-off history, average percentage of receivables written off historically, and the length of time the receivables are past due. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail, loss experience could differ significantly, resulting in either higher or lower future provision for losses.

New Accounting Pronouncements

          In September 2004, the Financial Accounting Standards Board (“FASB”) issued EITF No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share” (“EITF No. 04-8”). EITF No. 04-8 addresses when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share and requires that contingently convertible debt instruments are to be included in the computation of diluted earnings per share regardless of whether the market price or other trigger has been met. EITF No. 04-8 also requires that prior period diluted earnings per share amounts presented for comparative purposes be restated. EITF No. 04-8 is effective for reporting periods ending after December 15, 2004. As a result of the adoption of EITF No. 04-8, shares convertible from our $13.1 million convertible notes may be required to be included in the calculation of our earnings per share in periods of net income; however, the FASB has yet to reach a conclusion as to the effect of non market price triggers on earnings per share calculations in situations where the instrument contain only non-market price trigger, such as our convertible notes, and therefore the impact to the Company is not determinable at this time.

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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

          Statements contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report may contain information that includes or is based upon forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995. Forward-looking statements present our expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They frequently are accompanied by words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. In particular, these include statements relating to: our ability to identify suitable acquisition candidates; our successful integration of PlanVista, MedUnite and any other future acquisitions; our ability to successfully develop, market, sell, cross-sell, install and upgrade our clinical and financial transaction services and applications to new and current physicians, payers, medical laboratories and pharmacies; our ability to compete effectively on price and support services; our ability to increase revenues and revenue opportunities; and our ability to meet expectations regarding future capital needs and the availability of credit and other financing sources.

          All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, synergies, accretion, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of integration and restructuring plans and the anticipated timing of filings, approvals and closings relating to the merger or other planned acquisitions; any statements concerning proposed new products, services, developments or industry rankings; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.

          Actual results may differ significantly from projected results due to a number of factors, including, but not limited to, the soundness of our business strategies relative to perceived market opportunities; our assessment of the healthcare industry’s need, desire and ability to become technology efficient; market acceptance of our products and services; and our ability and that of our business associates to comply with various government rules regarding healthcare information and patient privacy. These and other risk factors are more fully discussed starting on Page 23 and elsewhere in our Form 10-K/A for the year ended December 31, 2003, which we strongly urge you to read.

          Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results and shareholder values may differ materially from those expressed in the forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Shareholders are cautioned not to put undue reliance on any forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any intent or obligation to update any forward-looking statements.

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Available Information

Our Internet address is www.proxymed.com. We make available free of charge on or through our Internet website our annual report on Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material was electronically filed with, or furnished to, the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We own no derivative financial instruments or derivative commodity instruments. Revenues derived from international sales are transacted in US dollars and therefore, we do not believe that we are exposed to material risks related to foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

     As of the end of the period covered by this report, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)), under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon such evaluation, management has concluded that the Company’s disclosure controls and procedures are effective to ensure that the information the Company is required to disclose in reports that it files or submits under the Exchange Act is communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms.

     There have not been any changes in our internal control over financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In December of 2001, Insurdata Marketing Services, Inc. (“IMS”) filed a lawsuit against HealthPlan Services, Inc. (“HPS”), a former subsidiary of the Company’s PlanVista subsidiary, for unspecified damages in excess of $75,000. The complaint alleges that HPS failed to pay commissions to IMS pursuant to an arbitration award rendered in 1996. Fiserv Health, Inc. (“Fiserv”) is a third party defendant. IMS, HPS, and Fiserv each filed a motion for summary judgment on the issue of liability only, in or around June 2004, and a decision is expected. The Company denies all liability in this case and will continue to vigorously defend itself. No trial date has been established.

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

     (a) Exhibits:

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     *Denotes management contract or compensating plan or arrangement.

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     (b) Reports on Form 8-K:

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

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