TransCoastal 10K 2008 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the Fiscal Year EndedDecember 31, 2008


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

For the Transition Period from to

Commission File Number:001-14665.

CLAIMSNET.COM INC.

(Name of registrant in its charter)


Delaware		75-2649230

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

14860 Montfort Dr., Suite 250, Dallas, Texas		75254

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number: 972-458-1701

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value

Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Exchange Act of 1934. Yes o No þ

Check whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, based on the average of bid and ask price of our common stock as of June 30, 2008, was $3,233,790.

State 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, 33,353,576 shares outstanding as of February 28, 2009.

DOCUMENTS INCORPORATED BY REFERENCE None.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Claimsnet.com inc. (“Company”, “we”, “our”, or “us”) is a Delaware corporation originally formed in April 1996. We are an electronic commerce company engaged in healthcare transaction processing for the medical and dental industries by means of the Internet. Our proprietary software, which was developed over the last ten years, enables the efficient communication of data between healthcare payers and their provider networks and trading partners (claims clearinghouses, third party administrators, preferred provider organizations, health maintenance organizations, claim re-pricing organizations, independent physician associations, and managed service organizations), for the purpose of conducting administrative transactions required to effect financial reimbursement for healthcare services. Our systems, in addition to providing electronic communication between various parties, improve editing and checking of data accuracy in medical claims without the need for changes to customers IT systems. Both the ease of data exchange as well as the quality of the data being exchanged, allows users to realize increases in electronic transaction volumes compared to paper transactions. These processes improve the speed and accuracy of the transactions and enhance the auto adjudication percentage rates, thereby improving the productivity of claims adjusters and the speed of medical reimbursements to healthcare providers. Included in this process is real-time editing of the claims data for compliance with format and content requirements of payers to satisfy payers specific processing requirements, again adding to people productivity and speed of reimbursement turn around times. In addition, our software provides for secure encryption of all claims data transmitted in compliance with the regulations of the United States Centers for Medicare and Medicaid Services (formerly HCFA).

We believe that the following are significant advantages of our electronic transaction processing services:

•		the ability to easily configure the system to meet the specific needs of our clients, both in the format and content of data being exchanged;

•		the ability to accept input from a variety of sources (direct output from a provider’s practice management system, EDI files from clearinghouses and trading partners, and data conversion from scanned paper forms), pre-process the data, improve the data or reject the transaction according to client-specific business rules, and deliver the data in a consistent and client-defined format;

•		the ability to create multiple custom website formats to be promoted by partners and sponsors without modification of the server-based processing systems;

•		the ability of healthcare providers utilizing their websites to interactively process claims on the Internet and receive real time edits prior to claim submission; and

•		the minimal software and processing power required for providers to utilize our proprietary software; and

•		EHNAC certification statement.

We believe that the services offered by some of our competitors are generally based on legacy mainframe technology, proprietary networks, and proprietary file formats, which limit the ability of those competitors to offer interactive Internet-based processing services on an economical basis.

We generate recurring revenue primarily from implementation fees, development fees, license fees, support fees and transaction-based fees. We use the services of certain partners and vendors to assist with the conversion of scanned paper forms, the printing of paper forms from electronic data, and the delivery of certain electronic transactions.

ELECTRONIC CLAIMS PROCESSING MARKET

Healthcare claims are traditionally processed by clearinghouses using a similar operating structure to that which exists in the credit card industry. A merchant that accepts a credit card for payment does not send payment requests directly to the bank that issued the card, but sends the payment request to a clearinghouse. The payment request is processed and transmitted to the appropriate bank. Healthcare claim clearinghouses accept, sort, process, edit, and then forward the claims to the appropriate payers, either electronically or on paper. Many of the major healthcare clearinghouses operate in a mainframe computer environment. Furthermore, traditional clearinghouses process claims in off-line batches and return edit results to the submitters in a subsequent batch transmission. This operating configuration is both expensive and time consuming due to the source code changes required to continuously process claims correctly to meet payer requirements. In contrast, our healthcare transaction processing software system on the Internet is designed to operate in a real-time, open client-server configuration. This operating alternative offers the provider and payer a method of communicating directly in a rapid, accurate, and cost-effective manner.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) includes a section on administrative simplification requiring improved efficiency in health care delivery by standardizing electronic data interchange, and protection of confidentiality and security of health data through setting and enforcing standards. More specifically, HIPAA calls for (a) standardization of electronic patient health, administrative and financial data, (b) unique health identifiers for individuals,

employers, health plans and health care providers, and (c) security standards protecting the confidentiality and integrity of “individually identifiable health information.” All healthcare organizations are affected, including health care providers, health plans, employers, public health authorities, life insurers, clearinghouses, billing agencies, information systems vendors, service organizations, and universities. HIPAA calls for severe civil and criminal penalties for noncompliance. The provisions relating to standards for electronic transactions, including health claims and equivalent managed care encounter information, became effective in October 2003 for clearinghouse and large payer organizations with implementation by all entities no later than October 2004. The provisions relating to standards for privacy were implemented in April 2003 for large organizations and April 2004 for small organizations. The provisions relating to security were implemented by April 2005. The provisions relating to national provider identifiers were implemented by May 2007.

We believe that the convergence of HIPAA mandates and the proliferation of Internet technology will cause sweeping changes in the health care claims processing market. At a minimum, it will cause all payers to implement secure electronic transaction processing capabilities for a full menu of administrative transactions. We expect the universal availability of data exchange between healthcare organizations to generate growth in the healthcare EDI industry. If the industry evolves toward direct payer submission of claims or real-time adjudication of claims, we believe our software will be able to offer efficient access to payers and healthcare providers in a HIPAA-compliant format.

BUSINESS STRATEGY

Our business strategy is as follows:

•

to utilize our technology to help large healthcare organizations achieve more efficient and less costly administrative operations;

•		to market our services directly to the provider and payer community and its trading partners;

•		to aggressively pursue and support strategic relationships with companies that will in turn aggressively market our services to large volume healthcare organizations, including insurers, HMO’s, third party administrators, provider networks, re-pricing organizations, clinics, hospitals, laboratories, physicians and dentists;

•		to provide total claim management services to payer organizations, including Internet claim submission, paper claim conversion to electronic transactions, and receipt of EDI transmissions;

•		to continue to expand our product offerings to include additional transaction processing solutions, such as HMO encounter forms, eligibility and referral verifications, claim status inquiries, electronic remittance advices, claim attachments, and other healthcare administrative services, in order to diversify sources of revenue; and

•		to license our technology for other applications, including stand-alone purposes, Internet systems and private label use, and for original equipment manufacturers.

Our business strategies may not succeed, and we may never achieve our business objectives.

In February 2008, we acquired substantially all the assets of Acceptius, Inc. (“Acceptius”). Acceptius was engaged in the business of providing transaction processing services to the healthcare industry. We anticipate that the acquisition will expand our current revenue generating opportunities by adding paper conversion and claims repricing, extend our claims processing capabilities and increase our client base.

HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY

Our healthcare transaction processing software is designed for processing in-patient and outpatient healthcare claims and electronic remittance advice claims (ERA’s). The software is modular, providing valuable flexibility, and generally consists of the following components:

•		core processing software developed by us which provides claims review, claims editing, and a “table-based” software coding of claims variables at a payer-specific level;

•		data mapping software that allows us to accept a wide variety of data input formats;

•		data format generating software developed by us that allows us to easily create a wide variety of data output formats;

•		an integrated web-based user interface that can be easily configured to support co-branded and private-labeled deployment;

•		industry standard website management software; and

•		state-of-the-art commercial security and encryption software.

Our software replaces the expensive and time-consuming hard-coding routines required by traditional systems with a user-friendly system that is table-based. Our table-based systems makes payer-specific edits to meet the requirements of payers and avoids expensive onsite software changes. Our personnel input new edits. Once healthcare providers or trading partners connect

to our secure website, our software edits claims on-line automatically, using a database containing more than 22,000 edit variables. In the event that a particular payer cannot accept submission of claims electronically, we either print and mail hard copies of the claims to these payers and charge the provider for this additional service or allow the provider to print and mail the claims.

Our healthcare transaction processing software is a web-based system, based upon a client-server computing model, and includes a variety of different software applications. Individual applications work together to provide the extraction and encryption of claims from a submitting system to our Internet claims processing server, where editing and formatting occurs in a secure environment. Our system then delivers the claims to the payer gateway. The different software applications have been purchased, licensed, or developed by us.

Our website user interface is structured into three sections: “PUBLIC INTERNET,” “CLIENT EXTRANET” and “PRIVATE INTRANET.” The PUBLIC INTERNET site provides company background, product demonstrations, and customer enrollment forms. The CLIENT EXTRANET provides a secure individual customer area for private customer communication and encrypted claims transmission. The United States Centers for Medicare and Medicaid Services (formerly HCFA) has defined security requirements for Internet communications including healthcare data. We operate in compliance with these requirements. The PRIVATE INTRANET site is designed for internal communications, website operating reports, customer support, and reporting.

Our personnel access the web server hosting environment remotely via a secure Virtual Private Network (VPN) for technical operations support. Examples of the type of support provided include migrating website changes to production, database administration, and Claims Processing Engine monitoring and management.

With the exception of the commercial software, such as that provided by Microsoft, we have either identified back-up sources for all the software used or, in the event of a business failure by the licensing vendor, we own the source code.

TRAINING AND HARDWARE REQUIREMENTS

The training for our various products and services is included in the initial setup fee. User manuals and reference information are available online through our client extranet to the provider, seven days a week, 24 hours a day. The tutorial and other training documents are always available at our web home page, the location of which is http://www.claimsnet.com.

No significant hardware investment by the customer is required in order to take advantage of our services. We communicate with our payer gateways using our public FTP server with PGP encryption, secure FTP with SSL protocol, secure site-to-site VPN, or point-to-point asynchronous communication protocol. The client extranet system requires the provider to use a 28,800 bps or better asynchronous modem and a PC with Windows95 or higher operating system installed. An Internet Service Provider, such as SBCYahoo, America Online or Comcast/Roadrunner, offers local telecommunication to the Internet. Our customers are responsible for obtaining and maintaining their Internet Service Provider connection.

INTERNET/INTRANET

Our processing configuration requires no electronic claims processing software to reside at the level of the healthcare provider. All editing and formatting takes place at our Internet application server site. All software updates and all format changes are available instantly to all customers.

Our processing does not take place on the Internet, but rather in an extranet configuration. The main advantage of this approach is to assure that the communication between our servers and a user takes place in a highly controlled, secure, and encrypted environment.

The dual encryption utilized by us occurs at the browser software and application server level. All processing and data storage occurs behind a firewall, providing secure and controlled access to all data.

CUSTOMERS

We view our customers as (1) the payers accepting claims, (2) the strategic partners and affiliates with which we jointly operate, and (3) the healthcare providers submitting claims. Revenues received from two customers represented a significant portion of our total revenues during the last two years. Revenues received from one customer represented 36% and 40% of our revenues for 2008 and 2007, respectively; revenues received from another customer represented 8% and 11% of our revenues for 2008 and 2007, respectively.

We enter into agreements with our clients. Generally, such agreements protect our intellectual property rights and define the financial terms of our relationship. We require each healthcare provider using our services to enter into an agreement, usually by agreeing to abide by the terms of our standard license agreement via our website. We also enter into agreements with the commercial medical and dental payers or clearinghouses to which we submit processed claims. Generally, such agreements provide for setup fees, recurring flat rate fees, and transaction fees that we receive for certain transactions and transaction fees that we pay for other transactions.

MARKETING

Our marketing strategy is two-fold.

First, we created strategic partnerships with organizations that:

•

are engaged in electronic claims processing and expect to benefit by using our advanced technology; and

•

serve or are engaged in direct sales and marketing to the healthcare market and desire to expand the products and services they offer to their clients without incurring substantial costs by using our advanced technology in a co-branded or private-label arrangement.

We have established several valuable strategic relationships and are actively seeking additional partners for alliances and joint ventures, including managed care companies, Internet service and information providers, traditional healthcare information systems providers, clearinghouses, payer organizations, and consulting firms, each seeking solutions to the costly handling of healthcare claims and other administrative transactions.

We may never secure any additional alliances or joint venture relations, and if we do, such alliances or joint venture relationships may never result in material revenues or be profitable.

Second, we have rebuilt our direct sales force with a direct sales campaign to the PPO, HMO, TPA, Medical Insurance carrier, and provider marketplace. We continue to review and assess these sales and marketing policies to enable us to accelerate revenue growth. However, such efforts may not be successful.

During 2008, we rebuilt a direct sales force, focused both on the payer and provider healthcare community. This effort targets payers, third party administrators, and provider networks and has resulted in new contracts which are in various stages of implementation or production.

In support of our marketing strategy, we have been and are presently a member of the Cooperative Exchange Association, an organization seeking to expand the delivery of HIPAA-defined transactions to the nation’s healthcare payers, and whereby member and non-member organizations transmit claims to each other as required.

Additionally, we have entered into several relationships with strategic partners for the marketing of our services and use of our proprietary technology, including arrangements entered into with business-to-business healthcare transaction service providers and application service providers such as DST Health (formerly Synertech Systems, Inc.), SourceLynx and Tela Sourcing to operate or provide each a co-branded or private-labeled version of our claims processing application to be marketed by the other party either directly throughout the United States or, as part of its own Internet-based service.

COMPETITION

Several large companies such as Emdeon, RelayHealth, Availity, ENS Ingenix and MedAvant dominate the claims processing industry in which we operate. Each of these companies operates a regional or national clearinghouse of medical and dental claims. In most cases, these companies have large existing capital and software investments and focus on large healthcare providers, such as hospitals and large clinics, or act as wholesale clearinghouses for smaller electronic claims processing companies. We estimate, based on information from various trade journals, that in addition to these large competitors, there are at least 100 or more small independent electronic claims processing companies and clearinghouses which operate as local sub-clearinghouses for the processing of medical and dental claims, many of which are larger and have greater financial resources than we do.

A number of additional companies, several of which have greater financial resources and marketing capabilities than us, have announced that they intend to enter the claims processing industry. Some of these companies have indicated a desire to primarily serve the payer community and some are primarily focused on the provider community.

All of these companies are considered competitors; however, several of these companies are already our strategic partners for co-branded or private label solutions using our technology.

We believe that the flexibility, configurability, and operational efficiency of our claims processing system will allow us to compete effectively in the payer market and to partner with clearinghouses and other vendors in the provider market. We anticipate that competition will increase in the processing of claims on the Internet. No assurance can be given that any significant revenues will result or that we will successfully compete in any market in which we conduct or may conduct operations.

EMPLOYEES

As of December 31, 2008, we had a total of eighteen employees, all of which are full-time employees. Three of these employees were executive officers, two were sales executives, and thirteen were technical and service personnel. None of our employees are represented by a labor organization. Most of our employees have been granted incentive stock options or warrants, and we believe that we have a satisfactory relationship with our employees.

SIGNIFICANT SUBSEQUENT EVENTS

On January 6, 2009, we issued an unsecured promissory note upon receipt of $100,000 from a related party. The note originally bore interest at the rate of 5% per annum. The note was amended on January 31, 2009 to decrease the interest rate to 3% per annum, effective January 6, 2009. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On January 8, 2009, upon the demand of Mr. Thomas Michel, a member of our board of directors (“Michel”), we repaid principal on an outstanding convertible note in the aggregate amount of $50,000 plus accrued interest of $8,558.

On January 31, 2009, we exercised our option to convert into common stock a debt evidenced by an unsecured promissory note with Elmira United Corporation, a greater than 5% shareholder of the Company (“Elmira”). The note was issued March 20, 2008 with a maturity date of March 31, 2011, and bore interest at the rate of 4% per annum. The outstanding principal of $250,000 was converted into 1,187,500 shares of our common stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $8,712 of accrued and unpaid interest was converted into 41,383 shares of our common stock at a conversion price of 47,500 shares per $10,000 of interest.

On January 31, 2009, we exercised our option to convert into common stock a debt evidenced by an unsecured promissory note with Elmira. The note was issued May 13, 2008 with a maturity date of March 31, 2011, and bore interest at the rate of 4% per annum. The outstanding principal of $200,000 was converted into 950,000 shares of our common stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $5,786 of accrued and unpaid interest was converted into 27,485 shares of our common stock at a conversion price of 47,500 shares per $10,000 of interest.

On January 31, 2009, we issued amendments to two unsecured promissory notes with Michel. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, we issued an amendment to an unsecured promissory note with National Financial Corporation, a related party (“NFC”). The note originally bore interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, we issued an amendment to an unsecured promissory note with NFC. The note originally bore interest at the rate of 7% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, we issued amendments to three unsecured promissory notes with NFC. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, we issued an amendment to an unsecured promissory note with Mr. J.R. Schellenberg, a related party (“Schellenberg”). The note originally bore interest at the rate of 9.5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, we issued an amendment to an unsecured promissory note with Schellenberg. The note originally bore interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

ITEM 1A. RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING OUR BUSINESS AND PROSPECTS.

CONDITIONS EXIST WHICH CAUSE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.

The report of our independent registered public accounting firm with respect to our financial statements as of December 31, 2008 and for the year then ended contains a qualification with respect to our ability to continue as a going concern.

Management believes that available cash resources, together with anticipated revenues from operations and the proceeds of recently completed financing activities and funding commitments may not be sufficient to satisfy our capital requirements through December 31, 2009. Necessary additional capital may not be available on a timely basis or on acceptable terms, if at all. If we are unable to maintain or obtain sufficient capital, we may be unable to repay debt obligations as they become due, may be forced to significantly reduce operating expenses to a point which would be detrimental to business operations, curtail research and development activities, sell certain business assets or discontinue some or all of our business operations, take other actions which could be detrimental to business prospects and result in charges which could be material to our operations and financial position, or cease operations altogether. In the event that any future financing is affected, to the extent it includes equity securities, the holders of the common stock and preferred stock may experience additional dilution. In the event of a cessation of operations, there may not be sufficient assets to fully satisfy all creditors, in which case the holders of equity securities will be unable to recoup any of their investment.

WE HAVE A HISTORY OF NET LOSSES AND LIMITED REVENUES, WE ANTICIPATE FURTHER LOSSES AND WE HAVE A WORKING CAPITAL DEFICIT.

We have incurred net losses since inception and expect to continue to operate at a loss for the foreseeable future. For the years ended December 31, 2004, 2005, 2006, 2007, and 2008, we incurred net losses of $657,000, $279,000, $389,000, $457,000, and $650,000, respectively. As of December 31, 2004, 2005, 2006, 2007, and 2008, we had working capital deficits of $279,000, $305,000, $514,000, $1,164,000, and $789,000, respectively. We generated revenues of $1,046,000, $1,266,000, $1,464,000, $1,648,000, and $2,080,000 for the years ended December 31, 2004, 2005, 2006, 2007, and 2008, respectively, which have not allowed us to become a viable, stable participant in our industry. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

If we continue to operate at a loss and are unable to increase our working capital, we may be unable to continue to operate our business.

TWO CUSTOMERS GENERATED A SIGNIFICANT PORTION OF OUR REVENUES AND THE LOSS OF ANY ONE OF THEM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS PROSPECTS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenues received from two customers represented a significant portion of our total revenues during the last two years. Revenues received from one customer represented 36% and 40% of our revenues for 2008 and 2007, respectively; revenues received from another customer represented 8% and 11% of our revenues for 2008 and 2007, respectively. The loss of either of these customers could have a material adverse effect on our business, prospects, financial condition, and results of operations

WE ACQUIRED SUBSTANTIALLY ALL THE ASSETS OF ACCEPTIUS IN EARLY 2008, AND HAVE NOT YET FULLY INTEGRATED IT INTO OUR BUSINESS, WHICH SUBJECTS US TO ADDITIONAL RISKS AND WILL LIKELY CAUSE US TO INCUR ADDITIONAL COSTS.

The Company recently acquired substantially all the assets of Acceptius. The acquisition subjects us to a number of risks that may adversely affect our business, including:

•		inability to realize the expected synergies and benefits of the acquisition;

•		difficulties and costs incurred integrating the business of the Company with that of Acceptius;

•		exposure to unknown liabilities of Acceptius;

•		the consequences and significant costs of our management’s attention having been diverted from our day-to-day business over an extended period of time; and

•		the expenses that we have incurred relating to the acquisition.

BECAUSE WE HAVE NOT BEEN ABLE TO ACHIEVE PROFITABLE OPERATIONS OR OBTAIN A MEANINGFUL POSITION WITHIN OUR INDUSTRY, OUR BUSINESS REMAINS LIMITED AND WE ARE THEREFORE PRONE TO ALL OF THE RISKS INHERENT IN THE ESTABLISHMENT OF A NEW BUSINESS VENTURE AND OUR SUCCESS IS HIGHLY SPECULATIVE.

Although we have been operating since April 1997, we are prone to all of the risks inherent to the establishment of a new business venture. Organized in April 1996, we were a development stage company through March 31, 1997. From March 1997 until September 2002, we operated as a full service clearinghouse serving primarily healthcare providers. In September 2002, we sold our healthcare provider clearinghouse service contracts to a strategic partner to generate cash, simplify our operations, and focus our attention on the payer market. We endeavored to diversify our business during the year ended December 31, 2000, through an asset acquisition, which, due to delay in market readiness, resulted in a large non-recurring loss. As a result of this loss, we changed our sales and marketing strategy and therefore should be viewed as having initiated our current operations in 2003. Consequently, you should consider the likelihood of our future success to be highly speculative in light of our operating history, our limited resources and problems, expenses, risks, and complications frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets, such as electronic commerce. To address these risks, we must, among other things:

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maintain and increase our strategic partnerships,

•

maintain and increase our customer base,

•

implement and successfully execute our business and marketing strategy,

•

continue to develop and upgrade our technology and transaction-processing systems,

•

continually update and improve our website,

•

provide superior customer service,

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respond to competitive developments,

•

appropriately evaluate merger and acquisition opportunities, and

•

attract, retain, and motivate qualified personnel.

We may not be successful in addressing all or some of these risks, and our failure to do so could have a material adverse effect on our business, prospects, financial condition, and results of operations.

WE EXPECT TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS DUE TO A VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OUR CONTROL.

In comparison with our principal competitors, we are a relatively young company in the rapidly evolving and highly competitive Internet-based medical claims processing industry. Our ability to achieve operating results in this industry will depend on several factors, including:

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our ability to satisfy capital requirements in an investment climate that may be somewhat more reluctant generally to invest in Internet companies,

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our ability to retain existing customers, attract new customers at a steady rate, and maintain customer satisfaction in an industry in which significant changes are occurring,

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our ability to introduce new sites, services and products,

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our ability to effectively develop, implement and reposition our products, services and marketing efforts,

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the effect of announcements or introductions of new sites, services, and products by our competitors in a rapidly evolving industry,

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price competition or price increases in our industry,

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the level of use of the Internet and online services and the rate of market acceptance of the Internet and other online services for the purchase and delivery of health claims processing services,

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our ability to upgrade and develop our systems and infrastructure in a timely and effective manner,

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the amount of traffic on our website,

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the occurrence of technical difficulties, system downtime, or Internet brownouts to which we are acutely sensitive insofar as our medical claims processing service is Internet-based,

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the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure which cannot be predicted with any large degree of accuracy in light of the rapidly evolving nature of the medical claims processing industry,

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our ability to comply with existing and added government regulations such as HIPAA, and

•

general economic conditions and economic conditions specific to the Internet, electronic commerce, and the medical claims processing industry.

If we are unable to handle or satisfactorily respond to these factors, we may be unable to achieve the operating results we aim to achieve and the market price of our common stock would likely be materially adversely affected.

OUR MARKETING STRATEGY HAS NOT BEEN SUFFICIENTLY TESTED AND MAY NOT RESULT IN SUCCESS.

To penetrate our target market, we will have to exert significant efforts and devote material resources to create awareness of and demand for our products and services. We may never experience material sales of our products and services. Our strategy may never be successful and we may never have adequate resources to support direct marketing of our products and services. Our failure to develop our marketing capabilities, successfully market our products or services, or recover the cost of our services would have a material adverse effect on our business, prospects, financial condition, and results of operations.

IF WE ARE UNABLE TO UPGRADE OUR SYSTEMS, AS WE BELIEVE IS CURRENTLY REQUIRED, WE MAY BE UNABLE TO PROCESS AN INCREASED VOLUME OF CLAIMS OR MAINTAIN COMPLIANCE WITH REGULATORY REQUIREMENTS.

A key element of our strategy is to generate a high volume of traffic on, and use of, our website and processing system. We are currently processing less than 10 million medical claims per year in an industry that processes approximately 4.7 billion claims annually. If the volume of traffic on our website or the number of claims submitted by customers substantially increases, as we hope to achieve, we will have to expand and further upgrade our technology, claims processing systems, and network infrastructure to accommodate these increases or our systems may suffer from unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and speed of claims processing, and delays in reporting accurate financial information, all of which will cause our customers to suffer by receiving payments later than otherwise. We operate in an industry that is undergoing change due to increasing regulatory requirements, some of which require us to upgrade our systems. We may be unable to effectively upgrade and expand our claims processing system or to integrate smoothly any newly developed or purchased modules with our existing systems, which could have a material adverse effect on our business, prospects, financial condition, and results of operations.

BECAUSE WE DEPEND UPON ONLY TWO SITES FOR OUR COMPUTER SYSTEMS WE ARE VULNERABLE TO THE EFFECTS OF NATURAL DISASTERS, COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS.

Our ability to successfully receive and process claims and provide high-quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Our proprietary software serving the majority of our customers currently resides solely on our servers, most of which are currently located in a monitored server facility in Dallas, Texas. Our systems and operations are in a secured facility with hospital-grade electrical power, redundant telecommunications connections to the Internet backbone, uninterruptible power supplies, and generator back-up power facilities. Furthermore, we maintain copies of our system and backup copies of our data at off-site locations for backup and disaster recovery. Despite such safeguards, we remain vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, tornadoes, earthquake, terrorist attacks, and similar events. In addition, we may not, and may not in the future, carry sufficient business interruption insurance to compensate us for losses that may occur. Despite our implementation of network security measures, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, which could lead to interruptions, delays, loss of data, or the inability to accept and process customer claims. The occurrence of any of these events could have a material adverse effect on our business, prospects, financial condition, and results of operations.

WE RELY ON INTERNALLY DEVELOPED ADMINISTRATIVE SYSTEMS THAT ARE INEFFICIENT, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE.

Some of the systems and processes used by our business office to prepare information for financial, accounting, billing, and reporting, may be less efficient than our competitors. These inefficiencies may place us at a competitive disadvantage when compared to competitors with more efficient systems. We intend to continue our ongoing efforts to upgrade and expand our administrative systems and to integrate newly-developed and purchased modules with our existing systems in order to improve the efficiency of our reporting methods, although we are unable to predict if or when these upgrades will improve our competitive position or whether we will have sufficient resources to implement these upgrades.

WE HAVE LIMITED SENIOR MANAGEMENT RESOURCES, AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR LIMITED RESOURCES.

Our senior management currently consists of Don Crosbie, our Chief Executive Officer, Laura Bray, our Chief Financial Officer, and Gary Austin, our President and Chief Operating Officer. We have limited staff, requiring employees to handle a large and diverse amount of responsibility. Expansion of our business would place a significant additional strain on our limited managerial, operational, and financial resources. In such event, we will be required to expand our operational and financial systems and to expand, train, and manage our work force in order to manage the expansion of our operations. Our failure to fully integrate our new employees into our operations could have a material adverse effect on our business, prospects, financial condition, and results of operations. Our ability to attract and retain highly skilled personnel is critical to our operations and expansion. We face competition for these types of personnel from other technology companies and more established organizations, many of which have significantly larger operations and greater financial, marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel, our business, prospects, financial condition, and results of operations will be materially adversely affected. In addition, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 has and will continue to place additional strain on our limited managerial, operational, and financial resources which we believe will be very significant and could have a material adverse effect on our business, prospects, financial condition and results of operations.

BECAUSE OF THEIR SPECIALIZED KNOWLEDGE OF OUR PROPRIETARY TECHNOLOGY AND THE MEDICAL CLAIMS PROCESSING INDUSTRY, WE DEPEND UPON OUR SENIOR MANAGEMENT AND CERTAIN KEY PERSONNEL; THE LOSS OR UNAVAILABILITY OF ANY OF THEM COULD PUT US AT A COMPETITIVE DISADVANTAGE; OUR LIMITED RESOURCES WILL ADVERSELY AFFECT OUR ABILITY TO HIRE ADDITIONAL MANAGEMENT PERSONNEL.

We currently depend upon the efforts and abilities of our senior executives and key employees, currently comprised of Don Crosbie, our Chief Executive Officer, Laura Bray, our Chief Financial Officer, Gary Austin, our President and Chief Operating Officer, and Scott Spurlock, our Vice President of Development, each of whom has a distinctive body of knowledge regarding electronic claims submissions and related technologies, the medical claims processing industry and our services. We may be unable to retain and motivate remaining personnel for an extended period of time in this environment. The additional loss or unavailability of the services of any senior management or such key personnel for any significant period of time could have a material adverse effect on our business, prospects, financial condition, and results of operations. We have not obtained key-person life insurance on any of our senior executives or key personnel. In addition, we do not have employment agreements with any of our senior executives or key personnel.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

Our business is based in large part upon the proprietary nature of our services and technologies. Accordingly, our ability to compete effectively will depend on our ability to maintain the proprietary nature of these services and technologies, including our proprietary software and the proprietary software of others with which we have entered into software licensing agreements. We hold no patents and rely on a combination of trade secrets and copyright laws, nondisclosure, and other contractual agreements and technical measures to protect our rights in our technological know-how and proprietary services. In addition, we have been advised that trademark and service mark protection of our corporate name is not available. We depend upon confidentiality agreements with our officers, directors, employees, consultants, and subcontractors to maintain the proprietary nature of our technology. These measures may not afford us sufficient or complete protection, and others may independently develop know-how and services similar to ours, otherwise avoid our confidentiality agreements, or produce patents and copyrights that would materially and adversely affect our business, prospects, financial condition, and results of operations. We believe that our services

are not subject to any infringement actions based upon the patents or copyrights of any third parties; however, our know-how and technology may in the future be found to infringe upon the rights of others. Others may assert infringement claims against us, and if we should be found to infringe upon their patents or copyrights, or otherwise impermissibly utilize their intellectual property, our ability to continue to use our technology could be materially restricted or prohibited. If this event occurs, we may be required to obtain licenses from the holders of their intellectual property, enter into royalty agreements, or redesign our products so as not to utilize their intellectual property, each of which may prove to be uneconomical or otherwise impossible. Licenses or royalty agreements required in order for us to use this technology may not be available on terms acceptable to us, or at all. These claims could result in litigation, which could materially adversely affect our business, prospects, financial condition, and results of operations.

BECAUSE WE ARE NOT CURRENTLY PAYING CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL OUR SHARES IN ORDER TO REALIZE THEIR INVESTMENT.

Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factor that the board of directors decides is relevant. In view of our losses and substantial financial requirements, we will not be in a position to pay cash dividends at any time in the reasonable future. Holders of our common stock may have to sell all or a part of their shares in order to recover all or a part of their investment.

WE HAVE A LIMITED NUMBER OF SHARES OF OUR COMMON STOCK REMAINING AVAILABLE FOR ISSUANCE.

Although our articles of incorporation authorize the issuance 40,000,000 shares of common stock, we have issued or reserved for issuance a total of 39,954,xxx shares. To the extent we need to sell common stock to raise capital or desire to issue common stock for any other reason, such as a merger, acquisition, or settlement of debt, we may not have a sufficient quantity of common stock to do so. In this event, we may be forced to abandon such plans or consider utilizing preferred stock or debt securities, among other things.

SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER OUR ACQUISITION.

A number of provisions of our certificate of incorporation, as amended, and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation and by-laws provide that our board of directors is divided into two classes serving staggered two-year terms, resulting in approximately one-half of the directors being elected each year and contain other provisions relating to voting and the removal of the officers and directors. Further, our by-laws contain provisions which regulate the introduction of business at annual meetings of our stockholders by other than the board of directors. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, this statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

In addition, our certificate of incorporation, as amended, authorizes our board of directors to issue up to 4,000,000 shares of preferred stock, which may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors, without further action by stockholders, and may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion, and redemption rights, and sinking fund provisions that are unfavorable to the holders of our outstanding securities.

These anti-takeover provisions may make a takeover or change in control of us more difficult and therefore deprive security holders of benefits that could result from such an attempt, such as the realization of a premium over the market price. Moreover, the issuance of additional shares of common stock or preferred stock to persons friendly to the board could make it more difficult to remove incumbent management and directors from office even if such change were to be favorable to security holders generally.

ISSUANCE OF NEW SERIES OF PREFERRED STOCK COULD MATERIALLY ADVERSELY AFFECT HOLDERS OF COMMON STOCK AND ANY EXPANSION OR SALES OPPORTUNITIES.

We may be required to issue a new series of preferred stock for continued funding of operations. If so, our board of directors has the right to create and issue, without shareholder approval, a new series of preferred stock with expansive rights regarding voting and liquidation preferences superior to owners of our common stock shareholders. Therefore, any issuance of preferred stock could materially adversely affect the rights of holders of shares of our common stock and reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell our

assets to, a third party. The ability of the board of directors to issue preferred stock could have the effect of rendering more difficult, delaying, discouraging, preventing, or rendering more costly an acquisition of us or a change in control of us, thereby preserving our control by the current stockholders.

INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS.

The electronic submission of healthcare claims and other electronic healthcare transaction processing services by means of our proprietary software involves the transmission and analysis of confidential and proprietary information of the patient, the healthcare provider, or both, as well as our own confidential and proprietary information. The compromise of our security or misappropriation of proprietary information could have a material adverse effect on our business, prospects, financial condition, and results of operations. We rely on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as medical information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by us to protect customer transaction data. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. Concerns over the security of the Internet and other online transactions and the privacy of users may also inhibit the growth of the Internet and other online services generally, and the website in particular, especially as a means of conducting commercial transactions. To the extent that our activities or the activities of others involve the storage and transmission of proprietary information, such as diagnostic and treatment data, security breaches could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our security measures may not prevent security breaches. Our failure to prevent these security breaches may have a material adverse effect on our business, prospects, financial condition, and results of operations.

WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE CONTINUES TO GROW GENERALLY AND SPECIFICALLY IN THE HEALTH CARE INDUSTRY.

The public in general, and the healthcare industry in particular, may not accept the Internet and other online services as a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. To the extent that the Internet and other online “business to business” services continue to experience significant growth in the number of users, their frequency of use, or in their bandwidth requirements, the infrastructure for the Internet and online services may be unable to support the demands placed upon them. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in or insufficient availability of, telecommunications services to support the Internet or other online services also could result in slower response times and adversely affect usage of the Internet and other online services generally and our product and services in particular. If use of the Internet and other online services does not continue to grow or grows more slowly than we expect, if the infrastructure for the Internet and other online services does not effectively support the growth that may occur, or if the Internet and other online services do not become a viable commercial marketplace, our business, prospects, financial condition, and results of operations could be materially adversely affected.

WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, AND CUSTOMER DEMANDS CONTINUE TO EVOLVE.

The Internet and the medical claims processing industry are characterized by:

•

rapid technological change,

•

changes in user and customer requirements and preferences,

•

changes in federal legislation and regulation,

•

frequent new product and service introductions embodying new technologies, and

•

the emergence of new industry standards and practices that could render our existing website and proprietary technology and systems obsolete.

Our success will depend, in part, on our ability to:

•

enhance and improve the responsiveness and functionality of our online claims processing services,

•

license leading technologies useful in our business and to enhance our existing services,

•

comply with all applicable regulations regarding our industry and the Internet,

•

develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers, and

•

respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

The development of our website and other proprietary technology will involve significant technical and business risks and require material financial commitment. We may not be able to adapt successfully to such demands. Our failure to respond in a timely manner to changing market conditions or customer requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations.

WE HAVE NOT SUCCESSFULLY COMPETED AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY.

Based on total assets and annual revenues for the fiscal year ended in 2008, we are significantly smaller than the majority of our national competitors. We have not successfully competed and may not in the future successfully compete in any market in which we conduct or may conduct operations.

REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.

We are not currently subject to direct regulation by any government agency other than laws or regulations applicable to electronic commerce, but we process information which, by law, must remain confidential. The U.S. Centers for Medicare and Medicaid Services (formerly HCFA) has defined security requirements for Internet communications including healthcare data. We must operate in compliance in all material respects with these requirements. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for our services and increase our cost of doing business, or otherwise have a material adverse effect on our business, prospects, financial condition, and results of operations. Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy, and it may take time to resolve these issues definitively. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on our business, prospects, financial condition, and results of operations.

WE MAY INCUR SUBSTANTIAL COSTS IN ORDER TO COMPLY WITH THE REQUIREMENTS OF THE SARBANES-OXLEY ACT OF 2002.

The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to us regarding corporate governance and financial reporting. Among many other requirements is the requirement under Section 404(a) of the Sarbanes-Oxley Act for management to report on our internal controls over financial reporting and the requirement under Section 404(b) of the Sarbanes-Oxley Act for our registered independent public accountant to attest to this report. We are required to comply with Section 404(b) effective for the year ending December 31, 2009.

To the best of our ability, we may devote substantial time and incur substantial costs during fiscal 2009 to improve our controls and procedures with the goal of compliance. We cannot, however, be certain that we will remediate material weaknesses we discover, if any, in complying with Section 404.

THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE.

The market price of our common stock has experienced, and may continue to experience, significant volatility. Our operating results, announcements by us or our competitors regarding acquisitions or dispositions, new procedures or technology, changes in general conditions in the economy, and general market conditions have caused and could in the future cause the market price of our common stock to fluctuate substantially. The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies’ common stock and have often been unrelated to the operating performance of these companies. There are many days on which there are no trades or a low volume of trades of our common stock and the lack of trading volume may contribute to the volatility of the market price of our common stock.

OUR COMMON STOCK TRADES ON THE OTC BULLETIN BOARD; OUR COMMON STOCK IS SUBJECT TO “PENNY STOCK” RULES.

Since the opening of trading on March 6, 2002, our common stock has been trading in the over-the-counter market on the OTC Bulletin Board (“OTCBB”) established for securities that do not meet the Nasdaq Capital Market listing requirements. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, our shares.

As a result and based on the fact that our common stock trades below $5.00 per share, our common stock is subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell these securities to persons other than established customers as defined under applicable rules and institutional accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase, and must have received the purchaser’s written consent to the transaction prior to sale. As a result, the ability of broker-dealers to sell our common stock and the ability of purchasers of our stock to sell their shares in the secondary market is materially adversely affected.

FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT OUR STOCK PRICE.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

As of February 28, 2009, we had outstanding 33,353,576 shares of common stock, of which approximately 19,127,368 shares were “restricted securities” as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended. These restricted shares are eligible for sale under Rule 144 at various times. We have entered into registration rights agreements requiring us to register the resale of approximately 8,939,000 shares of our common stock, including shares of common stock issuable upon the exercise of warrants and options. No prediction can be made as to the effect, if any, that sales of shares of common stock or the availability of such shares for sale will have on the market prices of our common stock prevailing from time to time. Nevertheless, the possibility that substantial amounts of our common stock may be sold in the public market may adversely affect prevailing market prices for the common stock and could impair our ability to raise capital through the sale of our equity securities.

CAUTIONARY NOTES REGARDING THE FORWARD-LOOKING STATEMENTS.

This report contains forward-looking statements that are based on our current expectations, assumptions, beliefs, estimates and projections about our company, our industry and other related industries. The forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “should” and variations of such words or similar expressions.

We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the risk factors discussed under the heading “Risk Factors” in this report, the risk factors discussed in the documents incorporated by reference herein, and the following:

	•		our ability to raise additional capital and secure additional financing;

	•		our ability to successfully implement our revised business strategy;

	•		our ability to market our services;

	•		our ability to develop and maintain strategic partnerships or alliances;

	•		our ability to maintain and increase our customer base;

	•		our ability to protect our intellectual property rights;

	•		our ability to further develop our technology and transaction processing system;

	•		our ability to respond to competitive developments;

	•		our ability to attract and retain key employees;

	•		our ability to comply with government regulations;

	•		the effects of natural disasters, computer viruses and similar disruptions to our computer systems;

	•		threats to Internet security; and

	•		acceptance of the Internet and other online services in the healthcare industry and in general.

ITEM 2. PROPERTIES.

We currently lease 4,703 square feet of office space at a rent of approximately $6,232 per month, at 14860 Montfort Dr, Suite 250, Dallas, Texas 75254. The lease expires May 31, 2009. We believe that, in the event alternative or larger offices are required, such space is available at competitive rates. For our servers, we currently utilize at a cost of approximately $3,327 per month E-Link Systems, including a nationwide DS-3 backbone, a substantial dedicated web server management facility, and a 24-hour per day, 7 day per week Network Operations pursuant to an agreement expiring on November 30, 2009. We may obtain an extension of this arrangement, which may result in a material increase in cost.

ITEM 3. LEGAL PROCEEDINGS.

We are not currently a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock, par value $0.001 (“Common Stock”), is traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CLAI.OB”. The following table sets forth the quarterly high and low close prices, as reported by the OTCBB for the period from January 1, 2007 through December 31, 2008:


	HIGH		LOW
2007
Three months ended March 31, 2007		0.20		0.13
Three months ended June 30, 2007		0.16		0.11
Three months ended September 30, 2007		0.17		0.10
Three months ended December 31, 2007		0.16		0.11

2008
Three months ended March 31, 2008		0.16		0.07
Three months ended June 30, 2008		0.21		0.08
Three months ended September 30, 2008		0.17		0.09
Three months ended December 31, 2008		0.15		0.04

All price quotations represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of February 19, 2009, there were approximately 97 holders of record of the Common Stock.

On March 20, 2008, we converted interest in the aggregate amount of $35,642, due and payable on two earlier convertible notes held by Elmira into 89,106 shares of our common stock at the conversion price of $0.40 per share. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On May 29, 2008, we exercised our option and converted $200,000 of an outstanding note’s principal into 1,250,000 shares of our common stock at a conversion price of 62,500 shares per $10,000 of principal. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On September 1, 2008, we exercised our option and converted $50,000 of an outstanding note’s principal into 312,500 shares of our common stock at a conversion price of 62,500 shares per $10,000 of principal. In addition, $2,152 of accrued and unpaid interest was converted into 13,450 shares of our common stock at a conversion price of 62,500 shares per $10,000 of interest. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On November 2, 2008, we exercised our option and converted $100,000 of an outstanding note’s principal into 400,000 shares of our common stock at a conversion price of $0.25 per share. In addition, $22,500 of accrued and unpaid interest was converted into 90,000 shares of our common stock at a conversion price of $0.25 per share. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On December 31, 2008, we exercised our option and converted $100,000 of an outstanding note’s principal into 400,000 shares of our common stock at a conversion price of $0.25 per share. In addition, we converted $20,589 of accrued and unpaid interest into 82,356 shares of our common stock at a conversion price of $0.25 per share. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On December 31, 2008, we exercised our option and converted $50,000 of an outstanding note’s principal into 200,000 shares of our common stock at a conversion price of $0.25 per share. In addition, we converted $9,565 of accrued and unpaid interest into 38,260 shares of our common stock at a conversion price of $0.25 per share. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

On December 31, 2008, we exercised our option and converted $100,000 of an outstanding note’s principal into 400,000 shares of our common stock at a conversion price of $0.25 per share. In addition, we converted $17,589 of accrued and unpaid interest into 70,356 shares of our common stock at a conversion price of $0.25 per share. The shares were not registered under the Securities Act, by virtue of an exemption provided in Section 4(2) of the Securities Act. The issuance did not involve a public offering.

DIVIDEND POLICY

We have not paid any cash dividends on our Common Stock and, in view of net losses and our operating requirements, do not intend to pay cash dividends in the foreseeable future. If we achieve profitability, we intend to retain future earnings for reinvestment in the development and expansion of our business. Delaware law, where we are incorporated, contains certain restrictions on the payment of dividends. Any credit agreements, which we may enter into with institutional lenders but as of March 2, 2009 have not, may restrict our ability to pay dividends. Any preferred stock shareholders may receive preferential rights in the distribution of dividends, if any. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and any other factors that our board of directors determines to be relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The information required by Item 201(d) of Regulation S-K is set forth in Item 11 below.

ITEM 6. SELECTED FINANCIAL DATA.

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

As of December 31, 2008, we had a working capital deficit, defined by the excess of current liabilities over current assets, of $789,000 and stockholders’ deficit of $1,359,000. We generated revenues of $2,080,000 for the year ended December 31, 2008. We have incurred net losses since inception and had an accumulated deficit of $45,391,000 at December 31, 2008. We expect to continue to operate at a loss for the foreseeable future. We may never achieve profitability. In addition, during the year ended December 31, 2008, net cash used in operating activities was $384,000.

We have been in existence since 1996, have operated under several different business strategies. The relationships between revenue and cost of revenue, and between gross profit and operating expenses reflected in the financial information included in this report may not represent future expected financial.

We generally enter into services agreements with our customers to provide access to our software application for processing of customer transactions. We operate the software application for all customers and the customers are not entitled to ownership of our software at any time during or at the end of the agreements. The customers either host the application on their own servers or access our hosted software platform via the Internet. Our revenue is derived from customers paying implementation fees and transaction fees, both of which may be subject to monthly minimum provisions, and time and materials charges for additional services. Customer agreements may also provide for development fees related to private labeling of our software platform (i.e. access to our servers through a website which is in the name of and/or has the look and feel of the customer’s other websites) and some customization of the offering and business rules.

We have been dependent on issuances of our capital stock to meet our capital and liquidity needs. We anticipate we will continue to require similar infusions of capital for the foreseeable future. There is no assurance we will be able to obtain such funding.

PLAN OF OPERATIONS

Our business strategy is set forth in detail in ITEM 1. DESCRIPTION OF BUSINESS. We anticipate that our primary source of revenues will be revenue paid by healthcare payers and vendors for private-label or co-branded licenses and services. Historically, our primary sources of revenue were fees paid by healthcare providers for insurance claims and patient statement services and fees from medical and dental payers for processing claims electronically. We expect most of our revenues to be recurring in nature.

Our principal costs to operate are technical and customer support, transaction-based vendor services, sales and marketing, research and development, acquisition of capital equipment, and general and administrative expenses. We intend to continue to develop and upgrade our technology and transaction-processing systems and continually update and improve our website to incorporate new technologies, protocols, and industry standards. Selling, general and administrative expenses include all corporate and administrative functions that serve to support our current and future operations and provide an infrastructure to support future growth. Major items in this category include management and staff salaries and benefits, travel, professional fees, network administration, business insurance, and rent.

On February 20, 2008, the Company acquired substantially all the assets of Acceptius, Inc. (“Acceptius”). Acceptius was engaged in the business of providing transaction processing services to the healthcare industry. The Company anticipates that the acquisition will expand its current revenue generating opportunities by adding paper conversion and claims repricing, extend its claims processing capabilities and increase its client base.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

We generally enter into services agreements with our customers to provide access to our hosted software platform for processing of customer transactions. We operate the software application for all customers and the customers are not entitled to ownership of our software at any time during or at the end of the agreements. The end users of our software application access our hosted software platform or privately hosted versions of our software application via the Internet with no additional software required to be located on the customer’s systems. Customers pay implementation fees, transaction fees and time and materials charges for additional services. Revenues primarily include fees for implementation and transaction fees, which may be subject to monthly minimum provisions. Customer agreements may also provide for development fees related to private labeling of our software platform (i.e. access to our servers through a website which is in the name of and/or has the look and feel of the customer’s other websites) and some customization of the offering and business rules. We account for our service agreements by combining the contractual revenues from development, implementation, license, support and certain additional service fees and recognizing the revenue ratably over the expected period of performance. We currently use an estimated expected business arrangement term of three years which is currently the term of the typical contracts signed by our customers. We do not segment these services and use the underlying contractual terms to recognize revenue because we do not have objective and reliable evidence of fair value to allocate the arrangement consideration to the deliverables in the arrangement. To the extent that implementation fees are received in advance of recognizing the revenue, we defer these fees and record deferred revenue. We recognize service fees for transactions and some additional services as the services are performed. We expense the costs associated with our customer service agreements as those costs are incurred.

SOFTWARE FOR SALE OR LICENSE

We begin capitalizing costs incurred in developing a software product once technological feasibility of the product has been determined. Capitalized computer software costs include direct labor, and labor-related costs. The software is amortized over its expected useful life of 3 years or the contract term, as appropriate.

Management evaluates the recoverability, valuation, and amortization of capitalized costs of software that we sell, lease or otherwise market, whenever events or changes in circumstances indicate that the carrying valuation on the software may not be recoverable. As part of this review, management considers the expected undiscounted future net cash flows. If they are less than the stated value, capitalized software costs will be written down to fair value.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. The requirements of SFAS 157 became effective for our fiscal year 2008. However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on January 1, 2008 was limited to financial assets and liabilities and did not have a material effect on our financial condition or results of operations. We are still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.

RESULTS OF OPERATIONS

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2008 AND 2007

REVENUES

Revenues increased 26% to $2,080,000 in 2008 from to $1,648,000 in 2007. The increase in revenues was primarily due to the acquisition of substantially all the assets of Acceptius, Inc., as well as the addition of several customers combined with increased revenues from our existing customers. Revenues received from two customers represented a significant portion of our total revenues during the last two years. Revenues received from one customer represented 36% and 40% of our revenues for 2008 and 2007, respectively; revenues received from another customer represented 8% and 11% of our revenues for 2008 and 2007, respectively.

COST OF REVENUES

Cost of revenues was $1,640,000 in 2008 compared to $1,156,000 for the prior year, an increase of 42%. The four recurring components of cost of revenues are data center expenses, third party transaction processing expenses, customer support operation expenses and amortization of software. Data center expenses were $43,000 for the year ended December 31, 2008 compared with $28,000 for 2007, an increase of 54%. The increase in data center expenses was primarily attributable to an expansion of services along with an increase in equipment to support claim increases. Third party transaction processing expenses were $602,000 in 2008 compared to $397,000 in 2007, an increase of 52%. The increase in third party transaction processing expenses was primarily attributable to new contracts with clearing houses. Customer support operations expense increased by 40% to $933,000 in 2008 from $665,000 in 2007. The increase in customer support operations expenses was primarily attributable to an increase in support personnel as part of the acquisition of substantially all the assets of Acceptius, Inc. Software amortization and development project amortization expenses decreased to $62,000 in 2008 compared to $66,000 in 2007.

RESEARCH AND DEVELOPMENT

Research and development expenses were $12,000 in 2008, compared with $3,000 in 2007.

IMPAIRMENT

During 2007, $57,000 of previously capitalized software development costs was impaired. There was no software impairment in 2008.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were $973,000 in 2008, compared with $780,000 in 2007, an increase of 25%. The $193,000 increase is primarily related to an increase in personnel and personnel related expenses in the sales department.

INTEREST EXPENSE

Interest expense was $105,000 for 2008 compared with $109,000 for 2007. Included in the 2008 expense was $83,000 related to interest on notes payable to related parties compared with $73,000 for 2007. Interest expense of $11,000 in 2008 and $21,000 in 2007 related to other notes payable. Interest of $11,000 and $15,000 respectively was paid to vendors in 2008 and 2007 for financing fees.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2008, net cash used in operating activities of $384,000 was primarily attributable to a net loss of $650,000, adjusted for depreciation and amortization of $70,000, bad debt of $9,000, interest paid in shares of common stock of $30,000, and a change in other working capital accounts of $172,000, offset by a decrease in deferred revenue of $15,000.

Net cash used in investing activities was $120,000 in 2008, related to the cost of software development capitalized during the period of $98,000 and acquisition costs recognized as part of the Acceptius acquisition of $22,000.

Net cash provided by financing activities in 2008 was $406,000 as a result of proceeds of $675,000 from debt financing from related parties offset by $225,000 used to repay debt and principal payments on capital lease obligations of $44,000.

Management believes that available cash resources, together with anticipated revenues from operations and the proceeds of recently completed financing activities and funding commitments may not be sufficient to satisfy our capital requirements through December 31, 2009. Necessary additional capital may not be available on a timely basis or on acceptable terms, if at all. In any of these events, we may be unable to repay debt obligations as they become due, forced to significantly reduce operating expenses to a point that would be detrimental to business operations, curtail research and development activities, sell certain business assets or discontinue some or all of our business operations, take other actions which could be detrimental to business prospects and result in charges which could be material to our operations and financial position, or cease operations altogether. In the event that any future financing is affected, to the extent it includes equity securities, the holders of our common stock and preferred stock may experience additional dilution. In the event of a cessation of operations, there may not be sufficient assets to fully satisfy all creditors, in which case the holders of equity securities may be unable to recoup any of their investment. In addition, compliance with Sarbanes-Oxley Section 404 has placed and will continue to place additional strain on our limited managerial, operational, and financial resources which we believe will be very significant and could have a material adverse effect on our business, prospects, financial condition and results of operations.

OFF-BALANCE SHEET ARRANGEMENTS

None.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS

Below is an index of financial statements. The financial statements required by this item begin at page 22 hereof.


		Page
Report of Independent Registered Public Accounting Firm		22
Consolidated Balance Sheets — December 31, 2008 and 2007		23
Consolidated Statements of Operations for the Years Ended December 31, 2008 and 2007		24
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2008 and 2007		25
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008 and 2007		26
Notes to Consolidated Financial Statements		28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Claimsnet.com, Inc.

We have audited the accompanying consolidated balance sheets of Claimsnet.com, Inc. and subsidiaries, as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Claimsnet.com, Inc. and subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has generated losses since inception, incurred negative cash flows from operations, and has a working capital and stockholders’ deficit at December 31, 2008. Additionally, management does not believe that available cash resources, anticipated revenues from operations or proceeds from financing activities and funding commitments will be sufficient to satisfy the Company’s near term capital requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



/s/ Whitley Penn LLP
Dallas, Texas
February 27, 2009

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


	December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and equivalents	$	—		$	98
Accounts receivable, net of allowance for doubtful accounts of $3 and $2		289			255
Prepaid expenses and other current assets		44			22

Total current assets		333			375
EQUIPMENT, FIXTURES AND SOFTWARE
Total equipment, fixtures and software, net		171			109
INTANGIBLE AND OTHER ASSETS
Goodwill		138			—

TOTAL ASSETS	$	642		$	484

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	317		$	136
Accrued payroll and other current liabilities		127			103
Accrued interest — related parties		99			127
Accrued interest		14			8
Capital leases — current portion		46			40
Deferred revenues — current portion		24			30
Notes payable to related parties — current portion		445			295
Convertible notes payable to related parties — current portion		50			600
Convertible notes payable — current portion		—			200

Total current liabilities		1,122			1,539
LONG-TERM LIABILITIES
Other long-term liabilities		—			1
Capital leases — long-term portion		—			42
Deferred revenues — long-term portion		19			28
Convertible notes payable to related parties — long-term portion		760			310
Convertible notes payable — long-term portion		100			100

Total long-term liabilities		879			481

Total liabilities		2,001			2,020

COMMITMENTS & CONTINGENCIES
STOCKHOLDERS’ DEFICIT
Convertible preferred stock, $.001 par value; 4,000,000 shares authorized; 720 Shares of Series D (liquidation preference of $180) and 50 shares of Series E (liquidation preference of $15) issued and outstanding, convertible into common shares at 1,000 common shares per 1 convertible preferred share as of December 31, 2008 and December 31, 2007		—			—
Common stock, $.001 par value; 40,000,000 shares authorized; 31,147,208 shares issued and outstanding as of December 31, 2008 and 26,101,180 as of December 31, 2007		31			26
Additional capital		44,001			43,179
Accumulated deficit		(45,391	)		(44,741	)

Total stockholders’ deficit		(1,359	)		(1,536	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	642		$	484

See notes to consolidated financial statements.

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


	Year Ended
	December 31,
	2008			2007
REVENUES	$	2,080		$	1,648

COST OF REVENUES		1,640			1,156


GROSS PROFIT		440			492


OPERATING EXPENSES
Research and development		12			3
Impairment of software		—			57
Selling, general and administrative		973			780


Total operating expenses		985			840


LOSS FROM OPERATIONS		(545	)		(348	)
OTHER INCOME (EXPENSE)
Interest expense — related parties		(83	)		(73	)
Interest expense — other		(22	)		(36	)


Total other income (expense)		(105	)		(109	)


NET LOSS	$	(650	)	$	(457	)


NET LOSS PER COMMON SHARE (BASIC AND DILUTED)	$	(0.02	)	$	(0.02	)


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC AND DILUTED)		28,574			26,050

See notes to consolidated financial statements.

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(In thousands)


	Number of Preferred Shares Outstanding		Preferred Stock		Number of Common Shares Outstanding		Common Stock		Additional Capital			Accumulated Deficit			Total Stockholders’ Deficit
Balances at December 31, 2006		1	$	—		26,001	$	26	$	43,166		$	(44,284	)	$	(1,092	)

Warrants exercised for common stock		—		—		100		—		20			—			20

Stock based compensation (reversal)		—		—		—		—		(7	)		—			(7	)

Net loss		—		—		—		—		—			(457	)		(457	)


Balances at December 31, 2007		1		—		26,101		26		43,179			(44,741	)		(1,536	)


Common stock issued for asset acquisition		—		—		1,700		2		117			—			119

Issuance of common stock in payment of accrued interest — related party		—		—		384		—		108			—			108

Issuance of common stock in payment of note principal — related party		—		—		2,962		3		597			—			600

Net loss		—		—		—		—		—			(650	)		(650	)


Balances at December 31, 2008		1	$	—		31,147	$	31	$	44,001		$	(45,391	)	$	(1,359	)

See notes to consolidated financial statements.

CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)


	Year Ended December 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(650	)	$	(457	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		70			72
Impairment of software		—			57
Provision for doubtful accounts		9			2
Interest expense paid in stock		30			—
Stock based compensation (reversal)		—			(7	)
Changes in operating assets and liabilities:
Accounts receivable		(43	)		(50	)
Prepaid expenses and other current assets		(22	)		16
Accounts payable, accrued payroll, accrued interest and other liabilities		237			16
Deferred revenues		(15	)		(9	)

Net cash used in operating activities		(384	)		(360	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash received		(22	)		—
Purchases of equipment and fixtures		—			(2	)
Capitalized software development costs		(98	)		(6	)

Net cash used in investing activities		(120	)		(8	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligation		(44	)		(35	)
Proceeds from notes payable		—			100
Proceeds from notes payable — related parties		675			150
Payments of notes payable		(200	)		—
Payments of notes payable — related parties		(25	)		(20	)
Proceeds from exercise of common stock warrants		—			20

Net cash provided by financing activities		406			215

NET DECREASE IN CASH AND EQUIVALENTS		(98	)		(153	)
CASH AND EQUIVALENTS, BEGINNING OF YEAR		98			251

CASH AND EQUIVALENTS, END OF YEAR	$	—		$	98


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest	$	18		$	69

Cash paid for taxes	$	—		$	—


	Year Ended December 31,
	2008		2007
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Acquisition of equipment through capital lease	$	8	$	—

Payment of notes payable and accrued interest through issuance of common stock	$	678	$	—

Replacement note issued to pay off debt	$	250	$	—

Non-cash payments related to asset acquisition	$	124	$	—

Liabilities relieved in acquisition	$	25	$	—

See notes to consolidated financial statements.

CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007

NOTE A—ORGANIZATION, BACKGROUND AND LIQUIDITY

Claimsnet.com inc. (“Claimsnet.com” or the “Company”) is a Delaware corporation originally formed in April 1996. The Company owns, operates and licenses software used for processing medical insurance claims on the Internet. The Company completed an initial public offering in April 1999.

During 2008, the Company acquired substantially all of the assets of Acceptius. Pursuant to an Asset Purchase Agreement, the Company paid Acceptius the sum of $25,000 in cash and issued to Acceptius 1,700,000 restricted shares of its common stock, par value $0.001 per share.

During 2008, the Company entered into and repaid principal and interest on unsecured notes as detailed in NOTE E to these financial statements.

During 2007, the Company issued 50,000 shares of common stock to a director of the Company at $.20 per share upon exercise of previously issued warrants for an aggregate amount of $10,000. During 2007, the Company borrowed an aggregate of $10,000 pursuant to a convertible long-term loan agreement with a director of the Company, and repaid the director an aggregate of $30,000 plus accrued interest at 9.5%. During 2007, the Company borrowed an aggregate of $100,000 pursuant to an unsecured short-term loan agreement with a related party. During 2007, the Company borrowed an aggregate of $50,000 pursuant to an unsecured short-term loan agreement with a 5% shareholder. During 2007, the Company borrowed an aggregate of $100,000 pursuant to a convertible long-term loan agreement with a private shareholder.

The Company has generated losses since inception and has incurred negative cash flow from operations. Through 2008, the Company generated minimal revenues and relied on an initial public offering, private equity placements, secured and unsecured debt, the sale of certain assets, and funding from a related entity to fund its operations and development activities. The Company’s business strategy and organization has been modified on several occasions to improve near-term financial performance.

Management believes that available cash resources, together with anticipated revenues from operations and the proceeds of recently completed financing activities and funding commitments may not be sufficient to satisfy the Company’s capital requirements through December 31, 2009. Necessary additional capital may not be available on a timely basis or on acceptable terms, if at all. Accordingly, the Company may be unable to repay debt obligations as they become due, forced to significantly reduce operating expenses to a point which would be detrimental to business operations, curtail research and development activities, sell business assets or discontinue some or all of its business operations, take other actions which could be detrimental to business prospects and result in charges which could be material to the Company’s operations and financial position, or cease operations altogether. In the event that any future financing is affected, to the extent it includes equity securities, the holders of the common stock and preferred stock may experience additional dilution. In the event of a cessation of operations, there may not be sufficient assets to fully satisfy all creditors, in which case the holders of equity securities may be unable to recoup any of their investment.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Claimsnet.com and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

CASH AND EQUIVALENTS

Cash and equivalents include time deposits, certificates of deposits and all highly liquid debt instruments with original maturities of three months or less when purchased.

The Company maintains deposits primarily in one financial institution, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation. At December 31, 2008, the Company had no cash in excess of federally insured limits. At December 31, 2007, the Company had approximately $20,000 in cash in excess of federally insured limits. The Company has experienced no losses related to uninsured deposits.

REVENUE RECOGNITION

The Company generally enters into services agreements with its customers to provide access to its software application for processing of customer transactions. The Company operates the software application for all customers and the customers are not entitled to ownership of the Company’s software at any time during or at the end of the agreements. The customers either host the application on their own servers or access the Company’s hosted software platform via the Internet. Customers pay implementation fees, transaction fees, and time and materials charges for additional services. Revenues primarily include fees for implementation and transaction fees, which may be subject to monthly minimum provisions. Customer agreements may also provide for development fees related to private labeling of the Company’s software platform (i.e. access to the Company’s servers through a website which is in the name of and/or has the look and feel of the customer’s other websites) and some customization of the offering and business rules. The Company accounts for its service agreements by combining the contractual revenues from development, implementation, license, support and certain additional service fees and recognizing the revenue ratably over the expected period of the business arrangement. The Company currently uses an estimated expected business arrangements term of three years, which is currently the term of the typical contract signed by its customers. The Company does not segment these services and uses the underlying contractual terms to recognize revenue because it does not have objective and reliable evidence of fair value to allocate the arrangement consideration to the deliverables in the arrangement. To the extent that implementation fees are received in advance of recognizing the revenue, the Company defers these fees and records deferred revenue. The Company recognizes service fees for transactions and some additional services as the services are performed. The Company expenses the costs associated with its customer service agreements as those costs are incurred.

SOFTWARE FOR SALE OR LICENSE

The Company begins capitalizing costs incurred in developing a software product once technological feasibility of the product has been determined. Software development costs of $57,000 were impaired in 2007. Software development costs of $98,000 and $6,000 were capitalized in 2008 and 2007, respectively. Software development costs of $19,000 and $25,000 were amortized in 2008 and 2007, respectively. Capitalized computer software costs include direct labor and labor-related costs both internally and externally. The software is amortized after it is put into use over its expected useful life of 3 years.

Management evaluates the recoverability, valuation, and amortization of capitalized software costs to be sold, leased, or otherwise marketed whenever events or changes in circumstances indicate that the carrying amount of the software may not be recoverable. As part of this review, management considers the expected undiscounted future net cash flows. If the cash flows are less than the stated value, capitalized software costs would be written down to fair value.

EQUIPMENT, FIXTURES AND INTERNAL USE SOFTWARE

Equipment and fixtures are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the depreciable assets, which range from three to seven years. Internal use software is amortized using the straight-line method over the estimated useful life of three years. Maintenance and repairs are expensed as incurred. Significant replacements and betterments are capitalized. Depreciation expense related to equipment and fixtures totaled $51,000 and $47,000 in 2008 and 2007, respectively

GOODWILL

Goodwill, totaling $138,000 or 21% of total assets at December 31, 2008, represents the remaining cost in excess of fair value of net assets acquired in the February 2008 acquisition of Acceptius, Inc. (“Acceptius”).

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets, goodwill is not being amortized; however, the Company evaluates its goodwill for impairment annually in the fourth quarter or when there is reason to believe that the value has been diminished or impaired. Evaluations for possible impairment are based upon a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit including the assigned goodwill value. The fair values used in this evaluation are estimated based on the Company’s market capitalization, which is based on the outstanding stock and market price of the stock. Impairment is deemed to exist if the net book value of the unit exceeds its estimated fair value. No impairment was deemed to exist as of December 31, 2008.

INCOME TAXES

Deferred income taxes are provided for the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation reserves are provided for the deferred tax assets when, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

As of January 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes(“FIN 48”). The adoption did not have a material impact on the Company’s consolidated financial statements or effective tax rate and did not result in any unrecognized tax benefits.

Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in the Company’s consolidated financial statements. For the years ended December 31, 2008 and 2007, the Company did not recognize any interest or penalty expense related to income taxes. It is determined not to be reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. The Company is currently subject to a three year statute of limitations by major tax jurisdictions. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction.

LOSS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for each respective year. Common stock equivalents, representing convertible Preferred Stock, convertible debt, options and warrants totaling approximately 8,939,100 and 9,301,600 shares at December 31, 2008 and 2007, respectively, are not included in the diluted loss per share as they would be antidilutive. Accordingly, diluted and basic loss per share are the same.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income” (“SFAS 130”). SFAS 130 requires that total comprehensive income (loss) be disclosed with equal prominence as net income (loss). The Company’s comprehensive net loss is equal to its net loss for both years presented.

STOCK-BASED COMPENSATION

The Company adopted SFAS No. 123R,Share-Based Payment, as of January 1, 2006, using the modified prospective application method. This statement requires the recognition of compensation expense when we obtain employee services in stock-based payment transactions.

Prior to January 1, 2006, the Company recognized compensation cost associated with stock-based awards under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. Under APB 25, the difference between the quoted market price as of the date of the grant and the contractual purchase price of shares was charged to operations over the vesting period on a straight-line basis. No compensation cost was recognized for fixed stock options with exercise prices equal to the market price of the stock on the dates of grant.

Upon the adoption of SFAS 123R, the Company began recording compensation cost related to all new stock based compensation grants after our adoption date. The compensation cost to be recorded is based on the fair value at the grant date.

SEGMENT REPORTING

The Company operated during the two years presented in a single segment when applying the management approach defined in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Revenues from two customers represented a significant portion of the Company’s total revenues during 2008 and 2007. Revenues received from one customer represented 36% and 40% of the Company’s revenues for 2008 and 2007, respectively; revenues received from another customer represented 8% and 11% of the Company’s revenues for 2008 and 2007, respectively.

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If the

financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company generally does not require collateral. At December 31, 2008, the Company had five customers that made up 81% of the outstanding accounts receivable balance. At December 31, 2007, the Company had five customers that made up 73% of the outstanding accounts receivable balance.

USE OF ESTIMATES AND ASSUMPTIONS

Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates, including those related to customer programs and incentives including expected customer business arrangement periods, bad debts, intangible assets, contingencies and litigation. Estimates are based 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. Estimates could change based on changing historical experience and changes in circumstances and assumptions. Actual results could vary from the estimates that were used.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs of $12,000 were incurred for each of the years ended December 31, 2008 and 2007.

FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS 107,Disclosure About Fair Value of Financial Instruments, requires disclosure about the fair value of all financial assets and liabilities for which it is practicable to estimate. Cash, accounts receivable, accounts payable, notes payable and other liabilities are carried at amounts that reasonably approximate their fair values.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a market-based framework or hierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures; however the application of this statement may change current practice. The requirements of SFAS 157 are first effective for the Company’s fiscal year beginning January 1, 2008. However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, the Company’s adoption of this standard on January 1, 2008 was limited to financial assets and liabilities and did not have a material effect on its financial condition or results of operations. The Company is still in the process of evaluating this standard with respect to its effect on nonfinancial assets and liabilities and therefore has not yet determined the impact that it will have on its financial statements upon full adoption.

NOTE C—PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, (in thousands):


	2008			2007
Computer hardware and software	$	395		$	1,091
Software development costs		2,103			2,053
Furniture and fixtures		31			31
Office equipment		28			28
Leasehold improvements		35			35
Equipment under capital lease		129			121

		2,721			3,359
Less accumulated depreciation and amortization		(2,550	)		(3,250	)

	$	171		$	109

The assets held under capital leases have been included in property and equipment and total $129,000 and $121,000 in 2008 and 2007, respectively, with accumulated depreciation of $87,000 and $44,000 for the years ended December 31, 2008 and 2007, respectively. Amortization expense related to capital leases is included in depreciation expense.

NOTE D—INCOME TAXES

There was no provision or benefit for federal or state income taxes during the two years ended December 31, 2008 and 2007.

The differences between the actual income tax benefit and the amount computed by applying the statutory federal tax rate to the loss before incomes taxes are as follows (in thousands):


	Year Ended December 31,
	2008			2007
Benefit computed at federal statutory rate	$	(221	)	$	(155	)
Permanent differences		4			20
Effect of change in state tax law		—			1,222
State income tax benefit, net of federal tax effect at state statutory rate		(88	)		(82	)
Increase (decrease) in valuation reserve		303			(1,012	)
Change in prior year estimate		2			7

	$	—		$	—

The components of the deferred tax assets and liabilities are as follows:


	December 31,
	2008			2007
Deferred tax assets:
Net operating loss carryforwards	$	15,031		$	14,714
Fixed assets		10			8
Allowance for doubtful accounts		1			1
Deferred revenue		15			20
Other		46			57

Total deferred tax assets		15,103			14,800
Valuation allowance for deferred tax assets		(15,103	)		(14,800	)

Deferred income tax assets, net of deferred tax liabilities	$	—		$	—

At December 31, 2008, the Company has approximately $43,703,000 of federal net operating loss carryforwards, which begin to expire in 2012 subject to certain limitations as described below. The Company has approximately $172,000 of state tax credit for unused net operating losses as of December 31, 2008.

As a result of stock issued during 2005, 2006, 2007 and 2008, the Company may have experienced an ownership change as defined in Internal Revenue Code section 382. As a result, the Company’s ability to use net operating loss carryforwards and certain other deductions to offset future taxable income may be limited. The annual limit is an amount equal to the value of the Company at the date of an ownership change multiplied by approximately 5%. In addition, as the ability to generate future taxable income is highly uncertain, the Company has recorded valuation allowance against all of its net deferred tax assets.

NOTE E—RELATED PARTY TRANSACTIONS

In March 2008, the Company entered into two unsecured notes, each in the amount of $250,000, pursuant to convertible long-term promissory notes with Elmira United Corporation (“Elmira”), a greater than 5% shareholder. The first note was issued upon receipt of $250,000. The second note was issued to repay principal on a previously issued convertible note payable to the shareholder in the aggregate amount of $250,000

In March 2008, the Company converted interest in the aggregate amount of $35,642, due and payable on two earlier convertible notes held by Elmira into 89,106 shares of its common stock at the conversion price of $0.40 per share.

In April 2008, the Company borrowed an aggregate of $25,000 pursuant to an unsecured short-term loan agreement with Thomas Michel, a director of the Company (“Mr. Michel”). In June 2008, the Company repaid the note plus accrued interest.

In May 2008, the Company borrowed an aggregate of $200,000 pursuant to an unsecured convertible note with Elmira.

In May 2008, the Company exercised its option and converted $200,000 of an outstanding note’s principal into 1,250,000 shares of its common stock at a conversion price of 62,500 shares per $10,000 of principal.

In August 2008, the Company borrowed an aggregate of $50,000 pursuant to a short-term loan agreement with National Financial Corporation, a related party (“NFC”).

In September 2008, the Company borrowed an aggregate of $30,000 pursuant to an unsecured short-term loan agreement with Mr. Michel.

In September 2008, the Company borrowed an aggregate of $20,000 pursuant to an unsecured short-term loan agreement with Mr. Michel.

In September 2008, the Company exercised its option and converted $50,000 of an outstanding note’s principal into 312,500 shares of its common stock at a conversion price of 62,500 shares per $10,000 of principal. In addition, $2,152 of accrued and unpaid interest was converted into 13,450 shares of its common stock at a conversion price of 62,500 shares per $10,000 of interest.

In October 2008, the Company borrowed an aggregate of $50,000 pursuant to a short-term loan agreement with NFC, a related party.

In November 2008, the Company exercised its option and converted $100,000 of an outstanding note’s principal into 400,000 shares of its common stock at a conversion price of $0.25 per share. In addition, $22,500 of accrued and unpaid interest was converted into 90,000 shares of its common stock at a conversion price of $0.25 per share.

In November 2008, the Company borrowed an aggregate of $50,000 pursuant to a short-term loan agreement with NFC, a related party.

In December 2008, the Company exercised its option and converted $100,000 of an outstanding note’s principal into 400,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $20,589 of accrued and unpaid interest into 82,356 shares of its common stock at a conversion price of $0.25 per share.

In December 2008, the Company exercised its option and converted $50,000 of an outstanding note’s principal into 200,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $9,565 of accrued and unpaid interest into 38,260 shares of its common stock at a conversion price of $0.25 per share.

In December 2008, the Company exercised its option and converted $100,000 of an outstanding note’s principal into 400,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $17,589 of accrued and unpaid interest into 70,356 shares of its common stock at a conversion price of $0.25 per share.

In December 2007, the Company issued 50,000 shares of common stock to a director of the Company at $.20 per share upon exercise of previously issued warrants for an aggregate amount of $10,000.

In December 2007, Company borrowed an aggregate of $100,000 pursuant to an unsecured short-term loan agreement with NFC.

In September 2007, the Company borrowed an aggregate of $50,000 pursuant to an unsecured short-term loan agreement with Elmira.

In January 2007, upon the demand of a director, the Company repaid principal on an outstanding demand note in the aggregate amount of $30,000, a portion of which was repaid by entering into an unsecured loan agreement in the amount of $10,000 pursuant to a convertible long-term loan agreement with the director.

NOTE F—STOCKHOLDERS’ DEFICIT

In February 2008, the Company acquired substantially all of the assets of Acceptius. Pursuant to an Asset Purchase Agreement, the Company paid Acceptius the sum of $25,000 in cash and issued to Acceptius 1,700,000 restricted shares of its common stock, par value $0.001 per share.

In December 2008, the Company exercised its option and converted $100,000 of an outstanding note’s principal into 400,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $20,589 of interest into 82,356 shares of its common stock at a conversion price of $0.25 per share.

In December 2008, the Company exercised its option and converted $50,000 of an outstanding note’s principal into 200,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $9,565 of interest into 38,260 shares of its common stock at a conversion price of $0.25 per share.

In December 2008, the Company exercised its option and converted $100,000 of an outstanding note’s principal into 400,000 shares of its common stock at a conversion price of $0.25 per share. In addition, the Company converted $17,589 of interest into 70,356 shares of its common stock at a conversion price of $0.25 per share.

In December 2007, a director exercised previously issued warrants to purchase 50,000 shares of common stock at $.20 per share for an aggregate amount of $10,000.

In January 2007, a shareholder exercised previously issued warrants to purchase 50,000 shares of common stock at $.20 per share for an aggregate amount of $10,000.

NOTE G —STOCK BASED COMPENSATION ARRANGEMENTS

The Company’s 1997 Plan provides for the issuance to employees, officers, directors, and consultants of incentive and/or non-qualified options to acquire 1,307,692 shares of common stock. The options are to be issued at fair market value, as defined, and generally vest 33% each anniversary of the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire on termination of employment.

The Company’s Directors’ Plan provides for the issuance to non-employee directors of options to acquire 361,538 shares of common stock. The options are to be issued at fair market value, as defined, and vest on the first anniversary from the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire one year from the date upon which the participant ceases to be a Director.

Determining Fair Value Under SFAS No. 123R

Valuation and Amortization Method.The Company estimates the fair value of share-based awards granted using the Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life.The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 110, as the Company does not have sufficient historical exercise activity.

Expected Volatility.Using the Black-Scholes option valuation model, the Company estimates the volatility of its common stock at the date of grant based on the historical volatility of our common stock.

Risk-Free Interest Rate.The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

Expected Dividend Yield.The Company has not paid any cash dividends on its common stock in the last ten years and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

Expected Forfeitures.The Company uses historical data to estimate pre-vesting option forfeitures and recorded stock-based compensation only for those awards that are expected to vest.

Share-Based Compensation Under SFAS No. 123R

The following table summarizes negative share-based compensation expense related to share-based awards under SFAS No. 123R for the year ended December 31, 2007 which is recorded in the statement of operations as follows (in thousands):


	December 31, 2007
			Warrants
			for
	Stock Options		Common Stock			Total
Selling, general and administrative expense		—		(7	)			(7	)

Total share—based compensation (reversal)	$	—	$	(7	)		$	(7	)

There was no share-based compensation expense related to share-based awards under SFAS No. 123R for the year ended December 31, 2008.

The following table summarizes the stock option activity under the two Plans related to the Company:


					WEIGHTED
					AVERAGE
	NUMBER		PER SHARE		EXERCISE
	OF SHARES		EXERCISE PRICE		PRICE
Outstanding options—December 31, 2006		956,776	$	0.15-8.00	$	1.10
Granted		—		—		—
Expired and/or Cancelled		56,000		0.15-8.00		0.29

Outstanding options—December 31, 2007		900,776	$	0.30-8.00	$	1.15
Granted		—		—		—
Expired and/or Cancelled		100,000		0.35		0.35

Outstanding options—December 31, 2008		800,776	$	0.30-8.00	$	1.25

Options exercisable—December 31, 2008		800,776	$	0.30-8.00	$	1.25

Outstanding options as of December 31, 2008, had a weighted average remaining contractual life of approximately 3.8 years. Vested options had a weighted average remaining contractual life of 3.8 years as of December 31, 2008. At December 31, 2008, options available for grant under the Company’s 1997 Plan were 531,916. There were no options available for grant under the Company’s Directors’ Plan. There was no intrinsic value for unvested and vested options at December 31, 2008.

The following table summarizes the warrant activity related to employee grants:


						WEIGHTED
	NUMBER			PER SHARE		AVERAGE
	OF SHARES			EXERCISE PRICE		EXERCISE PRICE
Outstanding warrants—December 31, 2006		3,624,324		$	0.15-0.35	$	0.20
Granted		—			—		—
Expired and/or Cancelled		(1,225,000	)		0.15-0.25		0.24

Outstanding warrants—December 31, 2007		2,399,324		$	0.15-0.35	$	0.18
Granted		—			—		—
Expired and/or Cancelled		—			—		—

Outstanding warrants—December 31, 2008		2,399,324		$	0.15-0.35	$	0.18

Warrants exercisable—December 31, 2008		2,399,324		$	0.15-0.35	$	0.18

Outstanding employee warrants as of December 31, 2008, had a weighted average remaining contractual life of approximately 4.6 years. Vested employee warrants had a weighted average remaining contractual life of 4.6 years at December 31, 2008. There was no intrinsic value for unvested and vested employee warrants at December 31, 2008.

In addition to employee warrants, the Company had 1,200,000 warrants to non-employees outstanding at December 31, 2008, with an exercise price of $0.15.

NOTE H—NOTES PAYABLE TO RELATED PARTIES AND OTHER NOTES PAYABLE

The following is a summary of notes payable to related parties at December 31:


	2008		2007

Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 5%.	$	30,000	$	—
Note payable to a Director. Principal due on demand with 30 days notice; unsecured. Interest payable at 5%.		20,000		—
Note payable to a 5% shareholder. Principal due January 31, 2008; unsecured. Interest payable at 7%.		—		50,000
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 8%.		100,000		100,000
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 7%.		100,000		100,000
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 5%.		50,000		—
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 5%.		50,000		—
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 5%.		50,000		—
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 9.5%.		35,000		35,000
Note payable to a 5% shareholder. Principal due on demand; unsecured. Interest payable at 8%.		10,000		10,000

Current notes payable — related parties	$	445,000	$	295,000

The following is a summary of convertible notes payable at December 31:


	2008		2007
Convertible note to a 5% shareholder. Principal originally due September 22, 2007, Amended to January 31, 2008; unsecured. Interest payable at 7%		—		50,000
Convertible note to a 5% shareholder. Principal originally due December 28, 2007, Amended to January 31, 2008; unsecured. Interest payable at 7%		—		150,000
Convertible note to a 5% shareholder. Principal due November 2, 2008; unsecured. Interest payable at 7.5%.		—		100,000
Convertible note to a 5% shareholder. Principal due December 31, 2008; unsecured. Interest payable at 7.5%		—		100,000
Convertible note to a 5% shareholder. Principal due December 31, 2008; unsecured. Interest payable at 7.5%		—		50,000
Convertible note to a 5% shareholder. Principal due December 31, 2008; unsecured. Interest payable at 7.5%		—		100,000
Convertible note to a Director. Principal due December 31, 2008; unsecured. Interest payable at 7.5%.⁽¹⁾		50,000		50,000

Short-term convertible notes payable — related parties	$	50,000	$	600,000

Convertible note to a 5% shareholder. Principal due November 30, 2010; unsecured. Interest payable at 5%.⁽²⁾		300,000		300,000
Convertible note to a 5% shareholder. Principal due March 31, 2013; unsecured. Interest payable at 4%.⁽³⁾		250,000		—
Convertible note to a 5% shareholder. Principal due March 31, 2013; unsecured. Interest payable at 4%.⁽³⁾		200,000		—
Convertible note to a Director. Principal due November 30, 2010; unsecured. Interest payable at 5%.⁽²⁾		10,000		10,000

Long-term convertible notes payable — related parties	$	760,000	$	310,000

Convertible notes payable — related parties	$	810,000	$	910,000

Convertible note. Principal originally due September 21, 2007, Amended to January 31, 2008; unsecured. Interest payable at 7%	$	—	$	50,000
Convertible note. Principal originally due October 4, 2007, Amended to January 31, 2008; unsecured. Interest payable at 7%	$	—	$	50,000
Convertible note. Principal originally due October 5, 2007, Amended to January 31, 2008; unsecured. Interest payable at 7%	$	—	$	100,000

Short-term convertible notes payable	$	—	$	200,000

Convertible note. Principal due November 30, 2010; unsecured. Interest payable at 7%.⁽⁴⁾		100,000		100,000

Long-term convertible notes payable	$	100,000	$	100,000

Convertible notes payable	$	910,000	$	1,210,000


⁽¹⁾		Note bears interest at the rate of 7.5% per annum. Payments equal to the principal and accrued and unpaid interest on the note was due on December 31, 2008. At the option of the holder, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal and interest may be converted into a number of shares of the Company’s common stock at a conversion price of $0.25 per share.

⁽²⁾		Notes bear interest at the rate of 5.0% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due in 2010. At the option of the holder, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of the Company’s common stock at a conversion price of 36,500 per $10,000 of principal. Interest is payable on maturity.

⁽³⁾		Notes bear interest at the rate of 4.0% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due in 2013. At the option of the holder, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of the Company’s common stock at a conversion price of 47,500 per $10,000 of principal. Interest is payable on maturity.


⁽⁴⁾		Note bears interest at the rate of 7.0% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due in 2010. At the option of the holder, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of the Company’s common stock at a conversion price of 30,000 per $10,000 of principal. Interest is payable on maturity.

The following are the maturities of notes payable for years ended December 31:


2009	$	495,000
2010		410,000
2011		—
2012		—
2013		450,000

Total	$	1,355,000

NOTE I—COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space under a lease agreement that expires on May 31, 2009. Rent expense totaled $75,000 and $74,000 for each of the years ended December 31, 2008 and 2007, respectively. The Company leases servers and web server management facilities under an agreement that expires in 2009. The Company has also entered into a software license commitment related to HIPAA validation software that expires in 2009. The Company’s aggregate lease and software license commitments are shown below.

Approximate future minimum operating and capital lease obligations at December 31, 2008, are as follows:


	OPERATING		CAPITAL
	LEASES		LEASES
2009	$	83,000	$	49,000
2010		—		—
2011		—		—
2012		—		—
2013 and thereafter		—		—

Total minimum lease obligations	$	83,000		49,000

Less amounts representing interest				(3,000	)
Present value of capital lease payments				46,000
Current portion				(46,000	)

Long-term portion			$	—

Interest expense incurred under capital lease obligations was $9,000 and $13,000 for the years ended December 31, 2008, and 2007, respectively.

From time to time in the normal course of business, the Company is a party to various matters involving claims or possible litigation. Currently there are no such asserted claims.

NOTE J—RETIREMENT PLAN

The Company utilizes a third party for the processing and administration of its payroll and benefits. Under the agreement, the third party is legally a co-employer of all of the Company’s employees, which are covered by the third party’s 401(k) retirement plan. Under the plan, employer contributions are discretionary. During 2008, the Company made $7,000 in matching contributions and paid $3,000 in fees. During 2007, the Company made $6,000 in matching contributions and paid $3,000 in fees.

NOTE K—ACQUISITION

•		cash paid to the sellers in the aggregate amount of $25,000

•		an aggregate of 1,700,000 shares of common stock of the Company issued to the Sellers, valued at $0.07 per share in accordance with Emerging Issues Task Force (“EITF”) 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination”

•		an aggregate of $30,000 in direct transaction costs; and

•		cash to be paid to the sellers by August 20, 2008 in the aggregate amount of $5,000.

The Company was to pay Acceptius an additional $5,000 within the six months following February 20, 2008. Several attempts have been made to tender payment of this additional $5,000, but the Company has been unable to make contact with any Acceptius representatives since July. The obligation is recorded as a current payable by the Company, awaiting communication from Acceptius representatives concerning payment instructions.

Operating results of Acceptius have been included in the Company’s consolidated financial statements since February 1, 2008, when the Company assumed the risk of loss for Acceptius’s operations, by recording revenue and cost of revenue transactions from that date directly in the accounts of the Company.

The following table summarizes the initial fair values of the assets acquired and liabilities assumed, in thousands, at the date of acquisition based on a preliminary valuation. Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.


Cash	$	4
Accounts receivable		24
Computer hardware and software		6
Software		20
Goodwill		138
Current liabilities		(13	)

	$	179

The following unaudited pro forma information presents the 2007 and 2008 results of operations of the Company as if the acquisition had occurred on January 1, 2007. The unaudited pro forma results are not necessarily indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor are they necessarily indicative of future results.


	Twelve Months Ended
	December 31,
	2008			2007
Revenues	$	2,105		$	2,217
Net loss	$	(643	)	$	(590	)

Net loss per common share (basic and diluted)	$	(0.02	)	$	(0.02	)

Weighted average common shares outstanding (basic and diluted)		28,806			27,750

NOTE L—SUBSEQUENT EVENTS

On January 6, 2009, the Company issued an unsecured promissory note upon receipt of $100,000 from a related party. The note originally bore interest at the rate of 5% per annum. The note was amended on January 31, 2009 to decrease the interest rate to 3% per annum, effective January 6, 2009. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On January 8, 2009, upon the demand of a member of our board of directors, the Company repaid principal on an outstanding convertible note in the aggregate amount of $50,000 plus accrued interest of $8,558.

On January 31, 2009, the Company exercised its option to convert into its common stock a debt evidenced by an unsecured promissory note with a greater than 5% shareholder of the Company. The note was issued March 20, 2008 with a maturity date of March 31, 2011, and bore interest at the rate of 4% per annum. The outstanding principal of $250,000 was converted into 1,187,500 shares of the Company’s common stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $8,712 of accrued and unpaid interest was converted into 41,383 shares of the Company’s common stock at a conversion price of 47,500 shares per $10,000 of interest.

On January 31, 2009, the Company exercised its option to convert into its common stock a debt evidenced by an unsecured promissory note with a greater than 5% shareholder of the Company. The note was issued May 13, 2008 with a maturity date of March 31, 2011, and bore interest at the rate of 4% per annum. The outstanding principal of $200,000 was converted into 950,000 shares of the Company’s common stock at a conversion price of 47,500 shares per $10,000 of principal. In addition, $5,786 of accrued and unpaid interest was converted into 27,485 shares of the Company’s common stock at a conversion price of 47,500 shares per $10,000 of interest.

On January 31, 2009, the Company issued amendments to two unsecured promissory notes with a member of our board of directors. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, the Company issued an amendment to an unsecured promissory note with a related party. The note originally bore interest at the rate of 8% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, the Company issued an amendment to an unsecured promissory note with a related party. The note originally bore interest at the rate of 7% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, the Company issued amendments to three unsecured promissory notes with a related party. The notes originally bore interest at the rate of 5% per annum. The notes were amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

On January 31, 2009, the Company issued an amendment to an unsecured promissory note with a related party. The note originally bore interest at the rate of 9.5% per annum. The note was amended to decrease the interest rate to 3% per annum, effective January 1, 2009.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A(T). CONTROLS AND PROCEDURES.

DISCLOSURE CONTROLS AND PROCEDURES

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2008 and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness as discussed below. The material weakness identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our principal executive officer and principal accounting officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness relates to the monitoring and review of work performed by our Chief Financial Officer in the preparation of audit and financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. All of our financial reporting is carried out by our Chief Financial Officer, and we do not have an audit committee. This lack of accounting staff results in a lack of segregation of duties and accounting technical expertise necessary for an effective system of internal control.

In order to mitigate this material weakness to the fullest extent possible, all financial reports are reviewed by the Chief Operating Officer, the Chief Executive Officer as well as the Board of Directors for reasonableness. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

This report shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2008 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

MANAGEMENT

Our directors and executive officers, their ages, and their positions held with us are as follows:


NAME	AGE		POSITION
Don Crosbie		65	Chief Executive Officer, Chairman of the Board of Directors and Class I Director
Laura M. Bray		51	Chief Financial Officer
Gary J. Austin		64	President, Chief Operating Officer
Alfred Dubach		61	Vice Chairman of the Board of Directors and Class I Director
John C. Willems, III		53	Class II Director
Thomas Michel		57	Class II Director
K. Scott Spurlock		41	Vice President of Development

The following is certain summary information with respect to our executive officers, directors and key employees.

DON CROSBIE has served as our President, Chief Executive Officer and Chairman of the Board since October 2002. From July 2001 until October 2002, Mr. Crosbie was President and CEO of Xactimed, a claims processing and clearinghouse company serving the hospital market. In the year he was at Xactimed, it experienced a dramatic turnaround, with revenue growing 150% over the prior year and an operating profit was achieved as compared to a significant operating loss for the prior year. From September 2000 to July 2001, Mr. Crosbie served as CFO and President of North American Operations of Blue Wave Systems, a high density DSP board supplier to the telecom infrastructure market, including media gateways and 2¹/2 and 3 G wireless. He joined Blue Wave with a corporate strategic direction to identify and complete a sale of the company. This was accomplished in July 2001 with the sale of the company to Motorola for $125 million. From September 1999 to June 2000, Mr. Crosbie served as President, COO and CFO of Ypay.com, an internet start up company in the free ISP/media rich advertising space. From June 1997 to December 1998, Mr. Crosbie served as CEO of Rheumatology Research International, a Site Management Organization performing clinical trials for pharmaceutical and biotech companies in pre-FDA approval trials for new arthritis drugs. Prior to Rheumatology Research International, Mr. Crosbie served as founder, Chairman and CEO of ComVest Partners Inc., an institutional research boutique with an emphasis on networking, wireless, voice and remote access; and Executive Vice President and Chief Financial Officer of InterVoice Inc, a high technology provider of customized voice response systems.

LAURA M. BRAY, a Certified Public Accountant, was promoted to Chief Financial Officer in November 2004. Ms. Bray joined Claimsnet as Controller in January 2003 from Xactimed, where she served as Controller. Xactimed is a claims processing and clearing house company serving the hospital market. Ms. Bray has more than 20 years of financial management experience, including Accounting Manager of Blue Wave Systems, a high density DSP board supplier to the telecom infrastructure market, and Controller of EFS, a software sales and document management services firm. Ms. Bray began her career in the audit division of Alexander Grant & Co., followed by more than ten years as Business Manager and Controller in the radio broadcasting industry.

GARY J. AUSTIN joined us in March 2004 as our Chief Operating Officer. From September 2002 to December 2003, Mr. Austin served as the President and Chief Operating Officer of Gold Lake Technologies Corporation, a document management services firm. From March 1999 to September 2002, Mr. Austin served as the Senior Vice President and Chief Operating Officer of GTESS Corporation, a health claim processing service provider. Mr. Austin previously held a variety of executive and management positions with Peerless Group, Electronic Data Systems, Shared Medical Systems, and Crittenden Memorial Hospital.

ALFRED DUBACH has served as the Vice Chairman of our board of directors since January 2002. He has been an independent business consultant and financial advisor in Zurich, Switzerland for more than 10 years, working with non-food consumer goods, luxury goods, cosmetics, retail and wholesale, banking, e-banking, e-commerce, and pharmaceuticals. In 2004, he was named a board member of Orbiter, a developer and producer of special gears and gear boxes, and today he manages Orbiter’s successor organization, R.E.G. AG in Baden-Baden, Germany, as its chairman. From March 2001 to February 2002, Mr. Dubach served as the Chief Investment Officer for Swissquote Bank and a member of the Executive Management Team that developed the first pure Internet Bank in Switzerland. CASH magazine voted Swissquote Bank the best Swiss online broker in autumn 2001 and the bank reached a market share of twenty percent by the end of 2001. From June 1994 to February 2001, Mr. Dubach was a Director of Credit Suisse, where he served as a member of the project team for the legal integration of Volksbank and Credit Suisse as well as the restructuring of the Credit Suisse Group. Prior to June 1994, Mr. Dubach served in several capacities within management and executive management in the pharmaceutical industry and other leading Swiss banks (Louis Widmer Intl, Union Bank of Switzerland, Swiss Volksbank).

JOHN C. WILLEMS, III has served as a director of our Company since 1998. Mr. Willems has handled some of our Company’s legal needs since April 1996. Mr. Willems has been a solo practitioner in Dallas, Texas since November of 1998 representing a variety of business clients. From September 1993 through October of 1998, Mr. Willems was an attorney with the law firm of McKinley, Ringer & Zeiger, PC, (formerly McKinley, Hinton & Ringer, PC) in Dallas, Texas, practicing in the area of business law. From January 1982 to August 1993, Mr. Willems was employed by the law firm of Settle & Pou, PC (formerly Settle, Pou & Melton), also located in Dallas, Texas.

THOMAS MICHEL was elected as a director of our Company in February 2002. Since 1996, Mr. Michel has been a Principal of Switzerland based CIMA Consulting, AG, of which he was a founder, and which provides financial and fund raising services in the form of venture capital, private equity, and bridge loan facilities. From 1980 to 1996, he served in various capacities at Swiss Bank Corporation in Zurich, Switzerland. Mr. Michel currently serves on the Board of Directors for Best 243 AG, an automobile servicing company, R.E.G. Ag, a developer of specialized high tech gears, and Spirit of Covey AG, a manufacturer of natural skincare products.

K. SCOTT SPURLOCK has served as our Vice President of Development since joining us in June of 1997 through our acquisition of Medica Systems, Inc., a software development company serving the healthcare industry. From September 1994 through June 1997, Mr. Spurlock served as the Vice President and acted as architect and lead developer of a majority of the software developed by Medica. Mr. Spurlock has extensive software development experience in the healthcare arena, including more than a decade developing software for medical electronic data interchange (EDI). From August 1993 to September 1994, Mr. Spurlock was a Senior Developer for Vision Software, a vendor of healthcare practice management system software. Previously, Mr. Spurlock was an independent consultant developing customized accounting, appointment and patient record programs for various hospitals and medical groups.

Messrs. Crosbie, Austin and Ms. Bray are our executive officers.

STRUCTURE OF THE BOARD OF DIRECTORS

Our board of directors is divided into two classes with each class consisting of, as nearly as possible, one-half of the total number of directors constituting the entire board of directors. The Class I directors currently are Messrs. Crosbie and Dubach, whose terms expire at the next annual meeting of stockholders, which we expect to hold in 2009. The Class II directors currently are Messrs. Willems and Michel, whose terms expire at the following annual meeting of stockholders. Each director is elected for a term of two years, except when the election is by the board to fill a vacancy, in which case, the director’s term expires at the next annual meeting of stockholders.

There are no family relationships among our directors and executive officers.

DIRECTOR INDEPENDENCE

The standards relied upon in determining whether a director is “independent” are those of the Nasdaq, which include the following objective standards: (a) a director who is an employee, or whose immediate family member (defined as a spouse, parent, child, sibling, father- and mother-in-law, son- and daughter-in-law and anyone, other than a domestic employee, sharing the director’s home) is an executive officer of the Company, would not be independent for a period of three years after termination of such relationship; (b) a director who receives, or whose immediate family member receives, compensation of more than $120,000 during any period of twelve consecutive months from the Company, except for certain permitted payments, would not be independent for a period of three years after ceasing to receive such amount; (c) a director who is or who has an immediate family member who is, a current partner of the Company’s outside auditor or who was, or who has an immediate family member who was, a partner or employee of the Company’s outside auditor who worked on the Company’s audit at any time during any of the past three years would not be independent until a period of three years after the termination of such relationship; (d) a director who is, or whose immediate family member is, employed as an executive officer of another company where any of the Company’s present executive officers serve on the other company’s compensation committee would not be independent for a period of three years after the end of such relationship; and (e) a director who is, or who has an immediate family member who is, a partner in, or a controlling shareholder or an executive officer of any organization that makes payments to, or receives payments from, the Company for property or services in an amount that, in any single fiscal year, exceeds the greater of $200,000, or 5% of such other company’s consolidated gross revenues, would not be independent until a period of three years after falling below such threshold.

In applying the above-referenced standards, we have determined that the Company’s current “independent” directors are: Alfred Dubach, John C. Willems, III, and Thomas Michel.

AUDIT COMMITTEE

At present, we do not have a separately standing audit committee and our entire board of directors acts as our audit committee. None of the members of our board of directors meet the definition of “audit committee financial expert” as defined in Item 407(d) of Regulation S-K promulgated by the Securities and Exchange Commission. We have not retained an audit committee financial expert because we do not believe that we can do so without undue cost and expense. Moreover, we believe that the present members of our board of directors, taken as a whole, have sufficient knowledge and experience in financial affairs to effectively perform their duties.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), requires officers, directors and persons who beneficially own more than 10% of a class of our equity securities registered under the Securities and Exchange Commission to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us during fiscal 2008 and Forms 5 and amendments thereto furnished to us with respect to fiscal 2008, or written representations that Form 5 was not required for fiscal 2008, we believe that all Section 16(a) filing requirements applicable to each of our officers, directors and greater-than-ten-percent stockholders were fulfilled in a timely manner. We have notified all known beneficial owners of more than 10% of our common stock of their requirement to file ownership reports with the Securities and Exchange Commission.

CODE OF ETHICS

We have adopted a code of ethics that applies to all of our employees, executive officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. The code of ethics includes provisions covering compliance with laws and regulations, insider trading practices, conflicts of interest, confidentiality, protection and proper use of our assets, accounting and record keeping, fair competition and fair dealing, business gifts and entertainment, payments to government personnel and the reporting of illegal or unethical behavior. The code of ethics is posted on our website at www.claimsnet.com. We intend to disclose any amendments to, or waivers from, our code of ethics that apply to our principal executive officer, principal financial officer, and principal accounting officer by posting such information on our website.

ITEM 11. EXECUTIVE COMPENSATION.

The following table sets forth the compensation paid or accrued by us for services rendered in all capacities during the years ended December 31, 2008 and 2007 by the chief executive officer and each of our most highly compensated executive officers whose compensation exceeded $100,000 during the year ended December 31, 2008.

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION


					ALL OTHER
NAME AND			SALARY		COMPENSATION		TOTAL
PRINCIPAL POSITION	YEAR		$		$⁽¹⁾		$
Don Crosbie		2008	$	146,000	$	1,390	$	147,390
CEO		2007	$	146,000	$	1,446	$	147,446

Gary Austin		2008		128,170		—		128,170
President and COO		2007		109,846		—		109,846

K. Scott Spurlock		2008		133,250		—		133,250
VP — Development		2007		127,000		—		127,000


⁽¹⁾		Company match on employee contributions to the Company’s 401(k) plan.

The following table provides information on the value of each of the named executive officers’ options at December 31, 2008:

2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE

Option Awards

Equity

Incentive

Plan Awards:

Number of

Securities

Underlying

Unexercised

Option

Options

Unearned

Exercise

Option

(#)

Options

Price

Expiration

Name

Exercisable

Unexercisable

(#)

($)

Date

Don Crosbie

1,500,000

⁽¹⁾

—

0.15

6/3/13

Don Crosbie

200,000

⁽¹⁾

—

0.29

9/21/14

Gary Austin

400,000

⁽¹⁾

—

0.35

3/24/14

Gary Austin

100,000

⁽¹⁾

—

0.29

9/21/14

K. Scott Spurlock

51,100

⁽¹⁾

—

7.00

4/6/09

K. Scott Spurlock

20,000

⁽¹⁾

—

1.25

1/4/11

K. Scott Spurlock

30,000

⁽¹⁾

—

0.60

1/2/12

K. Scott Spurlock

400,000

⁽¹⁾

—

0.15

6/3/13


⁽¹⁾		These are shares underlying warrants and options that originally vested over 3 years. All the shares vested prior to 2008.

All options were granted at an exercise price not less than the fair value of the common stock on the date of the grant.

DIRECTOR COMPENSATION

During the year ended December 31, 2008, directors received no compensation for their services as directors other than reimbursement of expenses relating to attending meetings of the board of directors.

DIRECTORS’ STOCK OPTION PLAN (THE “DIRECTORS’ PLAN”)

In April 1998, we adopted the Directors’ Plan to tie the compensation of outside (non-employee) directors to future potential growth in our earnings, and encourage them to remain on our board of directors, to provide them with an increased incentive to make significant and extraordinary contributions to our long-term performance and growth, and to align their interests through the opportunity for increased stock ownership, with the interests of our stockholders. Only outside directors are eligible to receive options under the Directors’ Plan.

No shares of common stock are reserved for issuance to participants under the Directors’ Plan. In the event of any changes in the common stock by reason of stock dividends, split-ups, recapitalization, mergers, consolidations, combinations, or other exchanges of shares and the like, appropriate adjustments will be made by the board of directors to the number of shares of common stock available for issuance under the Directors’ Plan, the number of shares subject to outstanding options, and the exercise price per share of outstanding options, as necessary substantially to preserve option holders’ economic interests in their options.

The period for exercising an option ends ten years from the date the option is granted. Fifty percent of the options granted become exercisable on the first anniversary of the date of grant with the remainder becoming exercisable on the second anniversary of the date of grant. During the period an option is exercisable, the option holder may pay the purchase price in cash or, under some circumstances, by surrender of shares of common stock, valued at their then fair market value on the date of exercise, or by a combination of cash and shares.

Shares subject to an option which has not been exercised at the expiration, termination, or cancellation of an option will be available for future grants under the Directors’ Plan, but shares surrendered as payment for an option, as described above will not again be available for use under the Directors’ Plan. As of December 31, 2008 there were outstanding options to purchase an aggregate of 25,000 shares at exercise prices ranging from $.30 to $8.00 per share and no shares remained available for option grants.

The Directors’ Plan terminated on December 31, 2007.

1997 STOCK OPTION PLAN

In April 1997, our board of directors and stockholders adopted the 1997 Stock Option Plan (the “1997 Plan”). The 1997 Plan provides for the grant of options to purchase up to 1,307,692 shares of common stock to our employees, officers, directors, and consultants. Options may be either “incentive stock options” or non-qualified options under the Federal tax laws. Incentive stock options may be granted only to our employees, while non-qualified options may be issued to non-employee directors, consultants, and others, as well as to our employees.

The 1997 Plan is administered by “disinterested members” of the board of directors or the compensation committee, who determine, among other things, the individuals who shall receive options, the period during which the options may be exercised, the number of shares of common stock issuable upon the exercise of each option, and the option exercise price.

Subject to some exceptions, the exercise price per share of common stock subject to an incentive option may not be less than the fair market value per share of common stock on the date the option is granted. The per share exercise price of the common stock subject to a non-qualified option may be established by the board of directors, but shall not be less than 85% of the fair market value per share of common stock on the date the option is granted. The aggregate fair market value of common stock for which any person may be granted incentive stock options which first become exercisable in any calendar year may not exceed $100,000 on the date of grant.

No stock option may be transferred by an optionee other than by will or the laws of descent and distribution, and, during the lifetime of an optionee, the option will be exercisable only by the optionee. In the event of termination of employment or engagement other than by death or disability, the optionee will have no more than three months after such termination during which the optionee shall be entitled to exercise the option to the extent exercisable at the time of termination, unless otherwise determined by the board of directors. Upon termination of employment of an optionee by reason of death or permanent and total disability, the optionee’s incentive stock options remain exercisable for one year to the extent the options were exercisable on the date of such termination. Options may not be granted under the 1997 Plan beyond a date ten years from the effective date of the 1997 Plan. Subject to some exceptions, holders of incentive stock options granted under the 1997 Plan cannot exercise these options more than ten years from the date of grant. Options granted under the 1997 Plan generally provide for the payment of the exercise price in cash and may provide for the payment of the exercise price by delivery to us of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of these methods.

Any unexercised options that expire or that terminate upon an employee’s ceasing to be employed by us become available again for issuance under the 1997 Plan. As of December 31, 2008, there were outstanding options to purchase an aggregate of 775,776 shares at exercise prices ranging from $.35 to $8.00 per share and 531,916 shares remain available for option grants.

The following table summarizes the stock option activity under the 1997 Plan and the Directors’ Plan through December 31, 2008 (none of the options granted have been exercised):


	NUMBER		PER SHARE		WEIGHTED OF
SHARES	EXERCISE PRICE		AVERAGE		EXERCISE PRICE
Outstanding options-December 31, 2006		956,776	$	0.15-8.00	$	1.10
Granted		—		—		—
Expired and/or Cancelled		56,000		0.15-8.00		0.29

Outstanding options-December 31, 2007		900,776	$	0.30-8.00	$	1.15
Granted		—		—		—
Expired and/or Cancelled		100,000		0.35		0.35

Outstanding options-December 31, 2008		800,776	$	0.30-8.00	$	1.25

Options exercisable-December 31, 2008		800,776	$	0.30-8.00	$	1.25

WARRANTS

We have from time to time issued warrants to our employees and directors.

The following table summarizes the warrant activity related to employee grants:


						WEIGHTED
	NUMBER			PER SHARE		AVERAGE
	OF SHARES			EXERCISE PRICE		EXERCISE PRICE
Outstanding warrants- December 31, 2006		3,624,324		$	0.15-0.35	$	0.20
Granted		—			—		—
Expired and/or Cancelled		(1,225,000	)		0.15-0.25		0.24

Outstanding warrants-December 31, 2007		2,399,324		$	0.15-0.35	$	0.18
Granted		—			—		—
Expired and/or Cancelled		—			—		—

Outstanding warrants-December 31, 2008		2,399,324		$	0.15-0.35	$	0.18

Warrants exercisable-December 31, 2008		2,399,324		$	0.15-0.35	$	0.18

In addition to employee warrants, the Company had 1,200,000 warrants to non-employees outstanding at December 31, 2008, with an exercise price of $0.15.

No employee options or warrants were exercised during 2008. No options or warrants were granted during 2008 to the individuals set forth in the Summary Compensation Table above.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth, as of March 2, 2009,

	•		each person who is known by us to be the beneficial owner of more than 5% of the outstanding common stock,

	•		each director and each of our named executive officers,

	•		all of our directors and executive officers as a group, and

	•		the number of shares of common stock beneficially owned by each such person and such group and the percentage of the outstanding shares owned by each such person and such group.

As used in the table below and elsewhere in this report, the term “beneficial ownership” with respect to a security is interpreted in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. Under this rule and related rules, a person is deemed to beneficially own a security if the person has sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire such power(s). Under these rules more than one person may be deemed to be a beneficial owner of the same securities. However, for purposes of computing the aggregate number of shares owned by officers and directors as a group in the following table, the same shares are not counted more than once. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. The shares of preferred stock allow the holder to vote with the holders of common stock as though one class to the extent of the number of shares issuable upon conversion of the preferred stock. Each share of preferred stock is convertible into 1000 shares of the Company’s common stock. Beneficial ownership includes shares issuable upon exercise of options and warrants exercisable within sixty days, and issuable upon conversion of the preferred stock within sixty days.

Except as otherwise noted below, the address of each of the persons in the table is c/o Claimsnet.com inc., 14860 Montfort Dr., Suite 250, Dallas, Texas 75254.

Unless otherwise noted, beneficial ownership consists of sole ownership, voting, and investment power with respect to all common stock shown as beneficially owned by them.


		SHARES BENEFICIALLY OWNED
		Amount and Nature
Name and Address of		of Beneficial				Percent of Voting
Beneficial Owner	Class of Security	Ownership		Percent of Class		Power
Don Crosbie⁽¹⁾	Common Stock		1,700,000		5.2		4.7

Gary Austin⁽²⁾	Common Stock		500,000		1.6		1.4

Scott Spurlock⁽³⁾	Common Stock		501,100		1.6		1.4

Laura Bray⁽⁴⁾	Common Stock		150,000		*		*

John C. Willems, III⁽⁵⁾	Common Stock		24,277		*		*

Thomas Michel⁽⁶⁾	Common Stock		1,757,000		5.4		4.8
	Series D Preferred Stock		720		100.0
	Series E Preferred Stock		50		100.0

Alfred Dubach⁽⁷⁾	Common Stock		1,220,000		3.8		3.4

Bo W. Lycke⁽⁸⁾	Common Stock		2,581,326		8.2		7.1
4730 Melissa Ln. Dallas, Texas 75229

Robert H. Brown, Jr.⁽⁹⁾	Common Stock		1,362,354		4.4		3.8
2626 Cole Ave, #400 Dallas, Texas 75204

McKesson Corporation	Common Stock		1,514,285		4.9		4.
One Post Street San Francisco, CA 94104

J. R. Schellenberg⁽¹⁰⁾	Common Stock		1,793,603		5.8		4.9
Kohlrainstrasse 1 Kusnacht Switzerland CH-8700

Elmira United	Common Stock		12,696,028		40.76		35.0
Corporation Swiss Tower — 16^th Floor Panama Republic of Panama

Acceptius Inc	Common Stock		1,700,000		5.5		4.7
15400 Knoll Trail, Ste 330 Dallas, TX 75248

All our directors and executive	Common Stock		5,852,377		16.3		16.1
officers as a	Series D Preferred Stock		720		100.0
group (6 persons)⁽¹¹⁾	Series E Preferred Stock		50		100.0


*		Less than one percent.

(1)		Includes 1,700,000 shares which Mr. Crosbie has the right to acquire upon exercise of options or warrants.

(2)		Includes 500,000 shares which Mr. Austin has the right to acquire upon exercise of options or warrants.

(3)		Includes 501,100 shares which Mr. Spurlock has the right to acquire upon exercise of options or warrants.

(4)		Includes 150,000 shares which Ms. Bray has the right to acquire upon exercise of options or warrants.

(5)		Includes 15,000 shares which Mr. Willems has the right to acquire upon exercise of options or warrants.



(6)		Includes 770,000 shares which may be issued to Mr. Michel upon conversion of preferred stock, and 605,000 shares which Mr. Michel has the right to acquire upon exercise of options or warrants.

(7)		Includes 605,000 shares which Mr. Dubach has the right to acquire upon exercise of options or warrants.

(8)		Includes 1,051,603 shares of common stock owned of record by National Financial Corporation, of which Mr. Lycke is a 71.1% owner and 250,000 shares which Mr. Lycke has the right to acquire upon exercise of options or warrants.

(9)		Includes 1,051,603 shares owned of record by National Financial Corporation, of which Mr. Brown is a 17.7% owner.

(10)		Includes 1,051,603 shares owned of record by National Financial Corporation by virtue of Mr. Schellenberg serving as President and Director of MNS Enterprises, Inc, which in turn manages the activities of National Financial Corporation pursuant to a management agreement.

(11)		Includes an aggregate of 3,575,000 shares which they have a right to acquire upon exercise of options or warrants.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth, as of December 31, 2008, information regarding compensation plans under which equity securities are authorized for issuance.


	NUMBER OF	WEIGHTED-AVERAGE	NUMBER OF
	SECURITIES TO BE	EXERCISE PRICE OF	SECURITIES
	ISSUED UPON	OUTSTANDING OPTIONS	REMAINING AVAILABLE
	EXERCISE OF	AND WARRANTS	FOR FUTURE ISSUANCE
	OUTSTANDING OPTIONS		UNDER EQUITY
	AND WARRANTS		COMPENSATION PLANS*
	(a)	(b)	(c)
Equity Compensation Plans Approved By Stockholders	800,776	$1.25	531,916

Equity Compensation Plans Not Approved By Stockholders	3,599,324	0.17	—

Total	4,400,100	$0. 37	531,916


*		Excludes securities reflected in column (a).

Equity compensation plans approved by shareholders include the 1997 Stock Option Plan and the Directors’ Plan, as more fully described in Item 10.

Equity compensation plans not approved by shareholders include the following:

	•		In February 2002, we granted executive officers warrants to purchase 35,443 shares of common stock in exchange for voluntary salary reductions, of which 24,324 warrants remain outstanding. The exercise price of the warrants is $0.35 per share, they expire on the tenth anniversary of the grant, and are fully exercisable;

	•		In June 2003, we issued warrants to acquire an aggregate of 3,450,000 shares of common stock to certain employees, of which 1,975,000 warrants remain outstanding. The exercise price of these warrants is $0.15 per share, all are fully exercisable and expire in June 2013;

	•		In June 2003, we issued ten-year warrants to acquire an aggregate of 1,200,000 shares of common stock to two directors as compensation for services outside of their director duties. The exercise price of these warrants is $0.15 per share, all are fully exercisable and expire in June 2013; and

	•		In September 2004, we issued ten-year warrants to acquire an aggregate of 550,000 shares of common stock to certain employees at an exercise price of $0.29 per share, of which 400,000 warrants remain outstanding. These warrants are fully exercisable and expire in September 2014.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In January 2007, upon the demand of Mr. Thomas Michel, a member of our board of directors (“Michel”), we repaid principal on an outstanding demand note in the aggregate amount of $30,000, a portion of which was repaid by entering into an unsecured loan agreement in the amount of $10,000 pursuant to a convertible long-term loan agreement with Michel.

In December 2007, we borrowed an aggregate of $100,000 pursuant to an unsecured short-term loan agreement with National Financial Corporation, a related party (“NFC”).

In December 2007, Michel exercised previously issued warrants to purchase 50,000 shares of our common stock at $0.20 per share for an aggregate amount of $10,000.

On March 20, 2008, we entered into two unsecured notes, each in the amount of $250,000, pursuant to convertible long-term promissory notes with Elmira United Corporation, a greater than 5% shareholder (“Elmira”). The first note was issued upon our receipt of $250,000 and bears interest at the rate of 3.5% per annum. Payments equal to the principal and accrued and unpaid interest on the note is due on March 31, 2011. At the option of the Company, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of our common stock at a conversion price of 62,500 per $10,000 of principal. The second note was issued to repay principal on a previously issued convertible note payable to the shareholder in the aggregate amount of $250,000 and bears interest at the rate of 4% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on March 31, 2013. At the option of the Company, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of our common stock at a conversion price of 47,500 per $10,000 of principal.

On April 29, 2008, we entered into an unsecured note in the amount of $25,000 pursuant to a promissory note with Michel. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice. On June 17, 2008, we repaid the note plus accrued interest.

On May 13, 2008, we entered into an unsecured note in the amount of $200,000 pursuant to a convertible long-term promissory note with Elmira. The note bears interest at the rate of 4% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on March 31, 2011. At the option of the Company, at any time or from time to time prior to the maturity date, all or any portion of the outstanding principal may be converted into a number of shares of our common stock at a conversion price of 47,500 shares per $10,000 of principal.

On August 20, 2008, we entered into an unsecured note in the amount of $50,000 pursuant to a promissory note with NFC. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On September 16, 2008, we entered into an unsecured note in the amount of $30,000 pursuant to a promissory note with Michel. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On September 29, 2008, we entered into an unsecured note in the amount of $20,000 pursuant to a promissory note with Michel. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On October 28, 2008, we entered into an unsecured note in the amount of $50,000 pursuant to a promissory note with NFC. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On November 26, 2008, we entered into an unsecured note in the amount of $50,000 pursuant to a promissory note with NFC. The note bears interest at the rate of 5% per annum. Payments equal to the principal and accrued and unpaid interest on the note are due on demand, with thirty days notice.

On December 31, 2008, we exercised our option pursuant to a convertible long-term promissory note with Elmira and converted $100,000 of the outstanding note’s principal into 400,000 shares of our common stock at a conversion price of $0.25 per share. In addition, the Company converted $20,589 of accrued and unpaid interest into 82,356 shares of its common stock at a conversion price of $0.25 per share.

On December 31, 2008, we exercised our option pursuant to a convertible long-term promissory note with Elmira and converted $50,000 of the outstanding note’s principal into 200,000 shares of our common stock at a conversion price of $0.25 per share. In addition, the Company converted $9,565 of accrued and unpaid interest into 38,260 shares of its common stock at a conversion price of $0.25 per share.

On December 31, 2008, we exercised our option pursuant to a convertible long-term promissory note with Elmira and converted $100,000 of the outstanding note’s principal into 400,000 shares of our common stock at a conversion price of $0.25 per share. In addition, the Company converted $17,589 of accrued and unpaid interest into 70,356 shares of its common stock at a conversion price of $0.25 per share.

All of the foregoing transactions involving related parties were on terms believed to be at least as favorable to us as obtainable from unaffiliated third parties and approved by a majority of our independent and disinterested directors. Additionally, all future transactions with related parties will be similarly on terms believed to be at least as favorable to us as obtainable from unaffiliated third parties and approved by a majority of our independent and disinterested directors.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the fees billed to us by Whitley Penn LLP, our independent registered public accounting firm, for professional services rendered during the fiscal years ended December 31, 2008 and 2007.

Fiscal year ended December 31, 2008


FEE CATEGORY	WHITLEY PENN LLP

Audit Fees (1)	$	67,000
Audit-Related Fees (2)		—
Tax Fees (2)		—
All Other Fees (2)		—

Total	$	67,000

Fiscal year ended December 31, 2007


FEE CATEGORY	WHITLEY PENN LLP

Audit Fees (1)	$	57,600
Audit-Related Fees (2)		—
Tax Fees (2)		—
All Other Fees (2)		—

Total	$	57,600


(1)		Audit Fees consist of aggregate fees billed for professional services rendered for the audit of our annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements during the fiscal years ended December 31, 2008 and December 31, 2007.

(2)		No such services were provided in 2008 or 2007.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS

At present, our entire board of directors acts as our audit committee and approves each engagement for audit or non-audit services before we engage a firm to provide those services.

ITEM 15. EXHIBITS.

The following exhibits are filed herewith or are incorporated herein by reference:


3.1⁽²⁾		Certificate of Incorporation

3.1(a)⁽²⁾		Certificate of Amendment to Certificate of Incorporation

3.1(b)⁽⁴⁾		Certificate of Designation of Series A Preferred Stock

3.1(c)⁽⁴⁾		Certificate of Designation of Series B Preferred Stock

3.1(d)⁽⁴⁾		Certificate of Designation of Series C Preferred Stock

3.1(e)⁽⁴⁾		Certificate of Designation of Series D Preferred Stock

3.1(f)⁽¹⁾		Certificate of Designation of Series E Preferred Stock

3.2⁽²⁾		Bylaws, as amended

4.1⁽²⁾		Form of Common Stock Certificate

4.2⁽⁴⁾		Form of Warrant issued to Bo W. Lycke dated February 21, 2002

*4.3⁽⁵⁾		Form of Warrant issued to Don Crosbie dated June 3, 2003

*4.4⁽⁵⁾		Form of Warrant issued to certain employees dated June 3, 2003

*4.5⁽⁵⁾		Form of Warrant issued to Thomas Michel dated June 3, 2003

*4.6⁽⁵⁾		Form of Warrant issued to Alfred Dubach dated June 3, 2003

*4.7⁽⁶⁾		Form of Warrant issued to Thomas Michel dated June 30, 2004.

*4.8⁽⁶⁾		Form of Warrant issued to Gary J. Austin dated September 21, 2004.

*4.9⁽⁶⁾		Form of Warrant issued to Laura M. Bray dated September 21, 2004.

*4.10⁽⁶⁾		Form of Warrant issued to Don Crosbie dated September 21, 2004.

*10.1⁽²⁾		1997 Stock Option Plan, as amended through October 19, 2000

*10.2⁽³⁾		Amendment dated October 20, 2000 to 1997 Stock Option Plan

*10.3⁽²⁾		Form of Indemnification Agreement

*10.4⁽²⁾		Form of Non-Employee Director’s Plan

10.5⁽¹⁾		Note dated June 6, 2002 between Claimsnet.com and J. R. Schellenberg related to $50,000 loan.

10.6⁽¹⁾		Note dated August 1, 2002 between Claimsnet.com and J. R. Schellenberg related to $10,000 loan.

10.7⁽⁶⁾		Note dated September 21, 2004 between Claimsnet.com and R.L. Armstrong Limited Partnership related to $50,000 loan.

10.8⁽⁶⁾		Note dated September 22, 2004 between Claimsnet.com and Elmira United Corporation related to $50,000 loan.


10.9⁽⁶⁾		Note dated October 4, 2004 between Claimsnet.com and Douglas R. Urquhart related to $50,000 loan.

10.10⁽⁶⁾		Note dated October 5, 2004 between Claimsnet.com and Newman Family Trust related to $100,000 loan.

10.11⁽⁶⁾		Note dated December 28, 2004 between Claimsnet.com and Elmira United Corporation related to $150,000 loan.

10.12⁽⁶⁾		Form of Registration Rights Agreement

10. 13⁽⁷⁾		Note dated November 2, 2005 between Claimsnet.com and Elmira United Corporation related to $100,000 loan.

10.14⁽⁷⁾		Note dated April 5, 2006 between Claimsnet.com and Elmira United Corporation related to $100,000 loan.

10.15⁽⁷⁾		Note dated June 15, 2006 between Claimsnet.com and Elmira United Corporation related to $50,000 loan.

10.16⁽⁸⁾		Note dated August 29, 2006 between Claimsnet.com and Elmira United Corporation related to $100,000 loan.

*10.17⁽⁹⁾		Note dated August 29, 2006 between Claimsnet.com and Thomas Michel related to $50,000 loan.
10.18⁽¹⁰⁾		Note dated November 16, 2006 between Claimsnet.com and National Financial Corporation related to $100,000 loan.

10.19⁽¹¹⁾		Note dated November 29, 2006 between Claimsnet.com and Elmira United Corporation related to $300,000 loan.

10.20⁽¹¹⁾		Equipment Lease Agreement dated December 1, 2006 between Claimsnet.com and E-Link Systems.

10.21⁽¹²⁾		Note dated January 16, 2007 between Claimsnet.com and Eganoc Services Corp related to $100,000 loan.

*10.22⁽¹³⁾		Note dated January 24, 2007 between Claimsnet.com and Thomas Michel related to $10,000 loan.

10.23⁽¹⁴⁾		Note dated September 27, 2007 between Claimsnet.com and Elmira United Corporation related to $50,000 loan.

10.24⁽¹⁵⁾		Note dated December 13, 2007 between Claimsnet.com and National Financial Corporation related to $100,000 loan.

10.25⁽¹⁶⁾		Note dated March 20, 2008 between Claimsnet.com and Elmira United Corporation related to $250,000 loan.

10.25⁽¹⁶⁾		Note dated March 20, 2008 between Claimsnet.com and Elmira United Corporation related to $250,000 loan.

*10.26⁽¹⁷⁾		Note dated April 29, 2008 between Claimsnet.com and Thomas Michel related to $25,000 loan.

10.27⁽¹⁸⁾		Note dated May 13, 2008 between Claimsnet.com and Elmira United Corporation related to $200,000 loan.

10.29⁽¹⁹⁾		Note dated August 20, 2008 between Claimsnet.com and National Financial Corporation related to $50,000 loan.

10.30⁽²⁰⁾		Note dated September 16, 2008 between Claimsnet.com and Thomas Michel related to $30,000 loan.

10.31⁽²¹⁾		Note dated September 29, 2008 between Claimsnet.com and Thomas Michel related to $20,000 loan.


10.32⁽²²⁾		Note dated October 28, 2008 between Claimsnet.com and National Financial Corporation related to $50,000 loan.

10.33⁽²³⁾		Note dated November 26, 2008 between Claimsnet.com and National Financial Corporation related to $50,000 loan.

14		Code of Ethics

21.1		Subsidiaries of Claimsnet.com inc.

31.1		Certification of Don Crosbie

31.2		Certification of Laura M. Bray

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Don Crosbie

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Laura M. Bray


*		Contract with management or compensatory arrangement.

⁽¹⁾		Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the Year Ended December 31, 2002 filed on April 1, 2003.

⁽²⁾		Incorporated by reference to the Registrant’s registration statement on Form S-1 (Registration No. 333-36209).

⁽³⁾		Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed on April 16, 2001 and amended on October 3, 2001

⁽⁴⁾		Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 filed on April 15, 2002.

⁽⁵⁾		Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003, filed on March 29, 2004.

⁽⁶⁾		Incorporated by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2004, filed on March 16, 2005.

⁽⁷⁾		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2006, filed on July 26, 2006.

⁽⁸⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 29, 2006.

⁽⁹⁾		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006, filed on October 26, 2006.

⁽¹⁰⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 16, 2006.

⁽¹¹⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 29, 2006.

⁽¹²⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated January 16, 2007.

⁽¹³⁾		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007, filed on April 26, 2007.

⁽¹⁴⁾		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed on October 23, 2007.

⁽¹⁵⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 13, 2007.

⁽¹⁶⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated March 20, 2008.

⁽¹⁷⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 5, 2008.


⁽¹⁸⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated May 13, 2008.

⁽¹⁹⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated August 20, 2008.

⁽²⁰⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 16, 2008.

⁽²¹⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated September 29, 2008.

⁽²²⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated October 28, 2008.

⁽²³⁾		Incorporated by reference to the Registrant’s Current Report on Form 8-K dated November 27, 2008.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


CLAIMSNET.COM INC. (Registrant)
By:	/s/ Don Crosbie
	Don Crosbie Chief Executive Officer

Date: March 2, 2009

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 2, 2009



/s/ Don Crosbie
Don Crosbie
Chief Executive Officer, Class I Director and Chairman of the Board


/s/ Laura M. Bray
Laura M. Bray
Chief Financial Officer and Principal Accounting Officer


/s/ Alfred Dubach
Alfred Dubach
Class I Director and Vice Chairman of the Board


/s/ John C. Willems, III
John C. Willems, III
Class II Director


/s/ Thomas Michel
Thomas Michel
Class II Director

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