Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM S-1

QUALITY CARE SOLUTIONS, INC.

5030 East Sunrise Drive

Gregory S. Anderson

Copies To:

      Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

      If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  [   ]

      If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]                  

      If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]                  

      If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  [   ]                  

      If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  [   ]

CALCULATION OF REGISTRATION FEE

(1)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

      The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED FEBRUARY   , 2000

PROSPECTUS

                   Shares

[QUALITY CARE LOGO]

Quality Care Solutions, Inc.

Common Stock

          We are selling           shares of our common stock. We have granted the underwriters a 30-day option to purchase up to an additional  shares to cover over-allotments, if any.

      This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $          and $          per share. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol “QCSI.”

       Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.

       Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      The underwriters expect to deliver the shares to purchasers on or about             , 2000.

Salomon Smith Barney

	Warburg Dillon Read LLC

	CIBC World Markets

            , 2000

Table of Contents

Inside Front Cover

      Centered horizontally across the top of the page is the caption, “Internet-enabling Healthcare Claims, Increasing Efficiency and Reducing Cost.”

      Below the caption is a screen shot of the aQHealth product. Surrounding the screen shot is text describing attributes of aQHealth’s interactive services, including, “Customized reporting only a click away”; “One-touch access to information”; “Secure Transactions”; and “aQHealth brings our proven QMACS/aQDEN claims adjudication software engine to the Internet.”

      Arranged below and to the left of the screen shot is the Company’s logo.

      To the direct right of the Company’s logo is the following text, “A business-to-business solution for medical payor and provider organizations.”

Inside Gatefold

      Centered horizontally across the top of the gatefold is the caption, “Internet-enabling Healthcare Claims, Increasing Speed and Reducing the Paperwork,” with an image of several sheets of paper on the right.

      Arranged to the direct left of the caption is the Company’s logo.

      The left one-third of the gatefold below the caption contains a paragraph of text and corresponding artwork. The text reads as follows:

We have recently marketed an Internet-based business-to-business solution capable of promptly adjudicating and approving for payment a majority of heathcare claims. Our Internet-based aQHealth technology platform will allow providers to quickly determine patient eligibility for healthcare benefits, calculate the payors and patients responsibility for the claim and, when necessary, authorize referrals to another provider.

      The right two-thirds of the gatefold below the caption contains artwork and corresponding text. The artwork is a comparison graphic between “Paper Based” and “aQHealth,” depicting the speed and paperwork differences of the two processes in the adjudication and payment of claims. Highlighted in the comparison graphic are the steps and actions taken by the “Providers” and “Administrator/ Payor” within each process, including “Eligibility Clarification”; “Authorization Referral”; “Claim Transmittal”; “Claim Adjudication”; and “Claim Payment Approval.”

      On the right of the comparison graphic, two shaded circles contain text that describes the results. The upper shaded circle, referring to paper based claims adjudication, indicates that this process will cost an average of “$21” and will be completed in an average of “42 Days Per Claim.” The lower shaded circle, referring to aQHealth claims adjudication, indicates that this process will cost an average of “$2-$5” and will be completed the “Same Day Per Claim” on average.

      At the bottom center of the comparison graphic is an image of a person’s hand holding a stopwatch. To the direct right of the stopwatch is text that describes the comparison graphic as follows:

	Cost and time estimates for traditional paper based process are based upon published industry averages for a routine claim, such as a standard physician office visit. Estimates for QCSI’s solution are based on what we believe it will take to process a routine claim using our aQHealth Internet-based product.

      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS

      Until                , 2000, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

      QMACS® is a registered trademark of Quality Care Solutions, Inc. QCSI™, aQDEN,™ and aQHealth™ are trademarks of Quality Care Solutions, Inc. for which registration applications are pending before the United States Patent and Trademark Office. aQServ™ is a trademark of Quality Care Solutions, Inc. Names of other companies and their products used in this prospectus are trademarks of those companies.

2

Table of Contents

PROSPECTUS SUMMARY

      This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the “Risk Factors” section.

Our Company

      We are a provider of claims and benefits administration software for the healthcare industry. We are marketing what we believe to be the only currently available Internet-based business-to-business solution capable of promptly adjudicating and approving for payment the majority of healthcare claims. Our Internet-based technology offering is based upon a proven software engine that we have marketed to the healthcare industry since 1995. Our Internet offering will allow providers to quickly determine patient eligibility for healthcare benefits, to calculate the payor’s and patient’s responsibility for the claim and, when necessary, to authorize referrals to another provider. We also act as an outsourced application service provider, or ASP, and provide other services to support our healthcare software.

      Customers for our healthcare adjudication software have included payors and providers, including health maintenance organizations, preferred provider organizations, traditional indemnity insurers, governments, unions, third-party administrators and self-funded employers. As of December 31, 1999, we had 24 customers collectively representing 3.3 million patient lives. Beginning, in 1999, we began marketing our products to companies involved in Internet-based healthcare commerce, transaction processing and connectivity and have one Internet healthcare customer, the Trizetto Group.

      Approximately 4.7 billion healthcare claims were processed in the United States in 1999, of which approximately 85% of hospital claims and 43% of physician claims were submitted through electronic data interchange, with the balance submitted in paper form. Providers typically submit these claims through a clearinghouse or third-party intermediary. After the initial sorting and processing, the clearinghouse then sends claims to the appropriate payor for completion of the adjudication process. This sequential process averages 42 days, at an industry average cost of approximately $21 per claim. The length of time and cost per claim increases significantly if any information submitted by the provider is incorrect, incomplete or inconsistent with the policies of the payor.

      Historically, most healthcare information technology vendors have not been able to offer products that adjudicate and approve for payment healthcare claims in a timely, cost effective and efficient manner. We believe our rules-based adjudication software meets this need. Our offerings streamline the claims adjudication and payment approval process by automatically determining the correct amount that should be paid to a provider for most claims. We believe most claims processed using our Internet offering can be adjudicated on a same-day basis, as opposed to days or even weeks using many current systems, at a cost we estimate will average from $2 to $5. Our Internet offering enables the effective receipt and distribution of claims data and payment authorization which we believe will ultimately result in significant and quantifiable administrative savings for both payors and providers.

Our Opportunity

      We believe that the ability to reduce the time in which providers receive a meaningful financial benefit is critical to increasing the rate at which they will adopt Internet-based administration solutions. A key benefit of our Internet-based adjudication offering is that it affords providers improved certainty of payment through rapid claims adjudication, which we believe enables providers to better use traditional financing sources to enhance their cash flow. In addition, we believe our offerings and services will reduce erroneous claims appeals and the duplication of claims, thereby immediately reducing payors’ administration costs. We believe that these near-term financial benefits will increase the rate of adoption of our Internet-based administration solution by providers and payors.

      Our offerings effectively and efficiently manage communication, interaction and information between the provider and the payor. By applying our proprietary, rules-based software solutions, our offerings reduce

3

Table of Contents

	•	significant cost savings;
	•	increased accuracy and efficiency;
	•	accelerated financial certainty;
	•	rapid claims processing;
	•	adaptable and flexible product delivery;
	•	improved data management and reporting capability;
	•	security; and
	•	aid in government compliance.

Our Offerings

      The core of our offerings is the QMACS/aQDEN software engine which offers fully automated claims adjudication capabilities together with other administration functions for the medical and dental industries. We are marketing a new offering, aQHealth, to enable us to deliver QMACS/aQDEN through the Internet to providers, thereby increasing payors’ accessibility to providers and rendering the claims adjudication process more efficient. Additionally, we have developed an application service provider offering, aQServ, which provides payors with the benefits of our QMACS/aQDEN software engine on an outsourced basis. We also provide implementation and business rule configuration services for all of our product offerings.

Our Strategy

      Our objective is to become the leading provider of Internet-based administration systems to the healthcare industry. Our strategy is to:

	•	leverage our core systems technology;
	•	pursue strategic relationships with Internet-based healthcare participants;
	•	establish multiple revenue sources;
	•	develop and acquire additional technologies; and
	•	market through partners as an original equipment manufacturer.

      Our executive offices are located at 5030 East Sunrise Drive, Phoenix, Arizona 85284, and our telephone number is (480) 940-6432. Our World Wide Web address is www.qmacs.com. Information on our Web site is not part of this prospectus. We were incorporated on August 19, 1991 as an Arizona corporation and reincorporated as a Nevada corporation on July 14, 1997.

4

Table of Contents

The Offering

      Unless we specifically state otherwise, the information in the prospectus does not take into account the issuance of up to           shares of common stock which the underwriters have the option to purchase solely to cover over-allotments. If the underwriters exercise their over-allotment option in full,           shares of common stock will be outstanding after the offering.

      The number of shares of common stock to be outstanding immediately after the offering is based upon shares outstanding as of December 31, 1999, and does not take into account 3,133,585 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $0.59 per share, and 1,123,344 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1.09 per share. A warrant for the purchase of 666,298 shares of common stock at exercise prices ranging from $1.50 to $6.00 per share is contingently issuable based upon future performance.

5

Table of Contents

SUMMARY FINANCIAL DATA

      Pro forma basic and diluted net income (loss) per share have been calculated assuming the conversion of both the previously outstanding preferred stock to common stock and the conversion of a convertible note payable into common stock. This note automatically converts to common stock upon the completion of this offering, with the conversion ratio being the initial public offering price of the shares offered hereby.

      The pro forma as adjusted balance sheet reflects this offering and the automatic conversion into common stock of all outstanding convertible preferred stock and of a convertible note payable.

6

Table of Contents

RISK FACTORS

      An investment in our common stock involves significant risks. You should carefully consider the following risks before you decide to buy our common stock.

Our success depends largely on our ability to market our new Internet offering, which we have only recently begun to market. In addition, our Internet business model is unproven

      We have only recently begun to market our Internet-based healthcare administration solution, aQHealth, and have not received any revenue from aQHealth to date. Therefore, we have no operating history upon which you may base an evaluation of our Internet offerings for the healthcare administration industry.

      Market acceptance of aQHealth is critical to achieving our goal of delivering our QMACS/ aQDEN product over the Internet. If we are unable to successfully market aQHealth, or if this offering does not achieve widespread market acceptance, it could harm our business. In addition, should we fail to manage the risks and uncertainties associated with the development of our Internet business, our Internet-related business strategy may not be successful.

We have a history of losses, and we may not achieve or maintain profitability in the future, particularly since our sales and marketing expenses will increase substantially

      We have incurred losses since our inception in 1991 and expect to continue to incur losses on an annual basis for the foreseeable future. We had net losses of approximately $1.1 million, $2.9 million and $2.4 million for the years ended December 31, 1997, 1998 and 1999, respectively. As of December 31, 1999, our accumulated deficit was $7.6 million. We expect to incur significant development, sales and marketing and administrative expenses in connection with the continued development and expansion of our business. We may also incur expenses related to acquisitions or other strategic relationships. As a result of these expenses, we will need to generate a significant increase in revenues to achieve and maintain profitability. Although our revenue has grown, we may not be able to sustain this growth, and we may not realize sufficient revenue to achieve profitability, particularly due to our Internet product development expenses. Further, even if we achieve profitability, given the competition and the evolving nature of the healthcare information technology and Internet markets, we may not be able to sustain or increase profitability on a quarterly or annual basis.

      Many Internet companies have incurred substantial sales and marketing expenses. We may have to do the same to compete in the Internet healthcare market. Our sales and marketing expenses will exceed any growth in revenues that we are likely to generate in the near future. We may have to devote substantially more resources to the sales and marketing of our products and services than we have in the past once we are competing as an Internet healthcare company. This could make it less likely that we ever become profitable.

All of our offerings and services are based on our QMACS/aQDEN software engine, and our business would be harmed if this software engine is not accepted in the market

      We historically have depended, and expect to continue to depend, on our QMACS/ aQDEN software engine to generate revenue. QMACS/ aQDEN represents the core of all of our product offerings. While QMACS/ aQDEN is independently marketed to our customers as a stand-alone product, it also represents the software engine to our other product offerings, aQHealth and aQServ. Dependence on a single software engine makes us particularly susceptible to the successful introduction of, or changes in market preferences for, competing products. In addition, operating exclusively in the market for healthcare administration solutions makes us particularly susceptible to downturns in that market and to industry trends that may be unrelated to the quality or competitiveness of our solutions.

7

Table of Contents

Our business depends on our healthcare administration solutions achieving widespread market acceptance

      We cannot determine the extent to which the healthcare industry will accept our healthcare administration offerings as substitutes for traditional methods of processing healthcare information and managing patient care. To be successful, we must attract a significant number of both payor customers, such as managed care companies, and provider customers, such as hospitals, even though to date the healthcare industry generally has been slow to adopt new technology solutions. Our aQHealth offering will only be successful if payors purchase it and providers adopt and use it. Our QMACS and aQServ offerings have achieved only limited market acceptance to date. Only four of our current payor customers are also providers and, therefore, we have limited experience in successfully marketing to providers. In addition, our aQDEN offering was first offered in January 1998, and our aQHealth offering was first released in December 1999. To be successful, we also need to achieve greater market penetration outside of Arizona, where our headquarters are located. Approximately 29% of our revenues in 1999 were derived from contracts with payor and provider customers based in Arizona.

      Electronic information exchange and transaction processing by the healthcare industry is still developing. Complexities in the nature of the healthcare transactions that must be processed, as well as concerns about confidentiality of patient information and government regulation, may hinder the development and acceptance by the healthcare industry of information technology solutions including our offerings. We believe that widespread distribution of our products is best achieved by utilizing the Internet. Our Internet software for the healthcare administration industry, however, is still unproven in the market. Our business could suffer if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial marketplace for a variety of reasons, including:

	•	inadequate development of the necessary infrastructure for communication speed, access and server reliability;
	•	security and confidentiality concerns;
	•	delay or failure to develop complementary products, such as high-speed modems and high-speed communication lines;
	•	implementation of competing technologies;
	•	delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; and
	•	governmental regulation.

      Customers using existing information systems in which they have made significant investments may refuse to adopt our solutions if they perceive that our offerings will not complement their existing systems. Consequently, the conversion from traditional methods of communication to electronic information exchange may not occur as rapidly as we expect.

Our revenues are concentrated in a few customers and the loss of any of these customers would harm our business

      We anticipate generating a significant portion of our revenues from a small number of customers for the next few years. If we lose any of these customers or experience an unexpected change in our relationship with them, our revenue will be significantly reduced and our business would be harmed. For example, four customers accounted for approximately 56% of our total revenues during the year ended December 31, 1999. These four customers accounted for 17%, 13%, 13% and 13% of revenues. In addition, three customers accounted for 25%, 22% and 15% of accounts receivable at December 31, 1999. Our revenues are concentrated among different types of industry participants. In 1999, we had twenty-four customers, all of which were payors. Four of these payor customers are also providers.

8

Table of Contents

Our future success depends upon establishing and maintaining strategic relationships

      To be successful, we must establish and maintain strategic relationships with key healthcare participants, including Internet-based healthcare companies, in order to:

	•	extend the reach of our offerings to the various participants in the healthcare industry;
	•	obtain specialized healthcare expertise in the areas of care and disease management;
	•	develop and incorporate the ability of our software engine to address clinical issues; and
	•	generate revenues.

      We have limited experience in establishing and maintaining strategic relationships with healthcare industry participants. To date, we have established only two strategic relationships with Internet healthcare companies that are in the early stages of development. If we lose these strategic relationships, or fail to establish additional relationships, or if our strategic partners fails to actively pursue additional business relationships and partnerships, we would not be able to execute our business plans and our business would suffer significantly. We may not experience increased use of our healthcare administration solutions even if we establish and maintain these strategic relationships. If we are unable to establish and maintain successful strategic relationships, we may have to devote substantially more resources to the sales and marketing of our products and services.

      Entering into strategic relationships is complicated because some of our current and potential partners may now or in the future wish to compete with us. In addition, we may not be able to establish relationships with key participants in the healthcare industry if we have established relationships with competitors of these key participants. We may not be perceived as independent of any particular customer or partner with whom we have a strategic relationship, which could impair our ability to form relationships with competitors of that customer.

Lengthy sales and implementation cycles for our healthcare administration solutions could harm our revenue growth and profitability

      We do not control many of the factors that influence buying decisions and the implementation of our healthcare administration solutions. The sales and implementation process for our solutions is lengthy and involves a significant technical evaluation and commitment of capital and other resources by our customers. In order for our software engine to work effectively, customers must actively work with us to implement complex sets of healthcare and administrative rules. This can be a time-consuming process that could deter payors from purchasing and implementing our software. The sale and implementation of our solutions are subject to delays due to healthcare payors’ and providers’ internal budgets for the deployment of new technologies within their organizations. The sales cycle for our software products is unpredictable and has generally ranged from two to six months from initial contact to contract execution. Our implementation cycle is also difficult to predict and has typically ranged from three to nine months from contract execution to the live operation of the system. During the sales and implementation cycles, we may expend substantial time, effort and funds preparing contract proposals, negotiating the contract and implementing the solution without receiving offsetting revenue.

Our plans call for us to grow rapidly, and our inability to manage this growth would harm our business

      We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, financial, information systems and other resources. As of December 31, 1999, we had approximately 101 employees, up from approximately 76 employees as of December 31, 1998. We expect to hire a significant number of new employees in the future to support our business. If we are unable to manage our growth effectively, it could harm our business.

9

Table of Contents

We face intense competition in our industry and, if we are unable to compete successfully, our business will be harmed

      The market for healthcare administration products is intensely competitive, rapidly evolving and is subject to sudden technological change. Many of our competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources than we have. Some of these organizations may also have significantly greater name recognition. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products or services than we can devote. Our principal competitors in the payor market include Amisys (a subsidiary of McKesson HBOC), CSC Healthcare Group (a subsidiary of Computer Sciences Corporation), and Erisco (a subsidiary of IMS Health Inc.). Other competitors in the Internet-based healthcare information technology marketplace include CareInsite.com, Healtheon/ WebMD, Trizetto Group, VantageMed and Xcare.net. Many of these companies began developing and marketing their Internet offerings before us. We may be unable to compete successfully against these and other organizations.

      Consultants play an important role when healthcare payors select software. Until recently, we have had a difficult time selling to payors because consultants did not embrace our products. We expect that competition will continue to increase as a result of consolidation in the Internet, information technology and healthcare industries. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any one of which could harm our business.

Rapidly changing technology may impair our ability to develop and market our healthcare administration solutions

      As a technology company, our business is subject to, among other risks and uncertainties:

	•	rapid technological change;
	•	changing customer needs;
	•	frequent new product introductions; and
	•	evolving industry standards.

      As the communications, computer software and healthcare information technology industries continue to experience rapid technological change, we must be able to modify our products quickly to adapt to such changes. In particular, the Internet is rapidly evolving and the technology used in Internet related products is subject to rapid change and early obsolescence. These market characteristics are exacerbated by the emerging nature of the Internet market and the fact that many technology companies are expected to introduce new products and services in the near future. The demands of operating in such an environment may delay or prevent our development and introduction of new healthcare administration solutions that continually meet changing market demands and that keep pace with evolving industry standards.

Undetected software errors may harm our business

      Complex software products such as those included in our healthcare administration solutions frequently contain undetected errors when first introduced or as new versions are released. We have, from time to time, found errors in our products, and in the future we may find additional errors in our existing, new or enhanced solutions. In addition, our software is combined with software products from other vendors. As a result, it may be difficult to identify the source of the problem, should one occur. The occurrence of software errors, whether caused by our software or another vendor’s products, could harm sales of our software, cause us to incur significant warranty and repair costs, divert the attention of our technical personnel away from product development efforts and cause significant customer relations problems. Due to the sensitivity of patient medical information, software errors may expose us to particularly significant liability relative to other businesses offering Internet-based products.

10

Table of Contents

      Since our software is rules-based, any error in the entry of a particular payor’s rules in the software code will result in delays and adjudication errors, and could harm sales of our offerings.

      Our contracts generally seek to limit our liability to actual damages for a breach of express warranties. These provisions may not always be enforceable and may not protect us from liability. While we have general liability insurance that we believe is adequate, including coverage for errors and omissions, we may not be able to maintain this insurance on reasonable terms in the future. In addition, our insurance may not be sufficient to cover large claims, and our insurer could disclaim coverage on claims. If we are liable for an uninsured or underinsured claim or if our premiums increase significantly, our business could be harmed.

Security or performance problems with our systems or catastrophic events could harm our business

      Our business could be harmed if we or our customers experience system delays or failures or loss of data. To the extent we process our customer transactions and data at our facility, we do substantially all of it in Phoenix, Arizona. We do not have backup facilities to process information should this facility not function. The occurrence of a catastrophic event or other system failure at this facility could interrupt data processing or result in the loss of stored data. In addition, we will depend on the efficient operation of Internet connections from our payor or provider customers to our systems for our Internet product under development. These connections, in turn, will depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have experienced periodic operational problems or total system outages.

      Despite the implementation of security measures, we cannot be sure that our infrastructure will prevent physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient information in our processing centers. We rely on encryption and authentication technology licensed from third parties to secure Internet transmission of and access to confidential information. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments will not result in a compromise or breach of the methods we will use to protect customer transaction data. A party who is able to circumvent our security measures, including encryption for transmissions, could misappropriate or alter proprietary information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by security breaches. We may also be required to expend significant resources and encounter significant delays in upgrading our systems to incorporate more advanced encryption and authentication technology as it becomes available.

      We rely heavily on information provided by our customers when implementing our offerings. If any of this information is faulty, our products will not work in the manner they were intended to work and our business could be harmed.

Acquisitions could be difficult to integrate, disrupt our business, cause us to incur substantial debt and dilute stockholder value

      We may find it necessary or desirable to acquire other businesses, products or technologies in order to increase the number and variety of healthcare administration solutions that we offer and to increase our customer base. To be successful, we will need to identify applications, technologies and businesses that are complementary to ours. Once an acquisition is completed, we need to integrate disparate technologies and corporate cultures and potentially manage a geographically dispersed company. Acquisitions could divert our attention from other business concerns and expose us to unforeseen liabilities or risks associated with entering new markets. Integrating newly acquired organizations and technologies into our company could be expensive, time consuming and may strain our resources. We also may lose key employees during the integration process. In addition, we may lose our current customers if any acquired companies have relationships with competitors of our customers. Consequently, we may not be successful in integrating any acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. We

11

Table of Contents

      We may pay for some of our acquisitions by issuing additional common stock, and this could dilute our stockholders. We may also use cash to buy companies or technologies in the future. If we do use cash, we may need to incur debt to pay for these acquisitions. Acquisition financing may not be available on favorable terms, or at all. In addition, we may be required to amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which would harm our reported financial results and could reduce our stock price.

Changes in government regulation of the healthcare industry could harm our business

      In order for our healthcare administration solutions to be marketable, they must contain features and functionality that allow our customers to comply with applicable laws and regulations. Our offerings may require modification in the future to comply with new or revised laws and regulations. Any such modification could be expensive, could divert resources away from other product development efforts or could delay future releases or product enhancements. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations, our business will be harmed.

      During the past several years, the healthcare industry has been subject to increasing levels of government scrutiny and regulation on both the state and federal level, and specific proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise change the environment in which healthcare industry participants operate. Healthcare providers may react to these proposals and the uncertainty surrounding such proposals in ways that could result in a reduction or deferral in the use of our healthcare administration solutions, which would harm our business.

      Additionally, laws and regulations may be adopted with respect to the Internet regarding issues such as user privacy, pricing, content, intellectual property, distribution and quality of products and services. As these laws and regulations evolve, we may be required to update our products accordingly. This compliance may cause product delays and added development expense. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our applications and services may be affected by additional regulation of the Internet. For example, until recently Healthcare Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. Our business may be harmed by existing or new regulatory requirements or interpretations.

Our future success depends on our ability to attract, retain and motivate senior management and other key personnel

      Our future success depends, in significant part, on the continued services of senior management and other key personnel, including sales, marketing and technical personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. The loss of the services of Gregory S. Anderson, our President and Chief Executive Officer, J. Mikel Echeverria, our founder and Chief Technology Officer, or one or more other executive officers or key employees could harm our business. Although we have Employment Agreements with some of our officers, they may terminate their employment with us at any time. They could also work for a competitor. We currently maintain a $500,000 key man life insurance policy on J. Mikel Echeverria. The loss of services of one or more of our key employees, or the inability to hire additional key personnel as needed, could harm our business. We may not achieve our targeted growth rate if we fail to hire qualified personnel, particularly sales, marketing and technical personnel.

12

Table of Contents

Our common stock price may be volatile

      You may not be able to resell your shares at or above the initial offering price due to a number of factors, including:

	•	actual or anticipated fluctuations in our operating results from various factors including the level of use of the Internet and online services, the rate of market acceptance of the Internet and other online services for the purchase of “business-to-business” solutions, such as those which we offer, our ability to upgrade and develop our systems and infrastructure in a timely and effective manner, and the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure, among others;
	•	changes in expectations of future financial performance or changes in estimates of securities analysts;
	•	changes in market valuations of other technology companies;
	•	announcements by us or our competitors of significant technological innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	•	additions or departures of key personnel; and
	•	conditions affecting the Internet or healthcare industries in general.

      Prior to this offering, there has been no public market for our common stock. We do not know the extent to which investor interest in our company will lead to the development of a trading market for the common stock or how the common stock will trade in the future. The trading price of our common stock may be volatile. The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.

      The initial public offering price for our common stock was established through negotiations between the underwriters and us and does not necessarily bear any relationship to our assets, book value, results of operations or any other generally accepted indication of value. This initial public offering price may vary from the market price of our common stock after the offering. If you purchase shares of common stock, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to factors which are beyond our control.

Our principal stockholders have significant voting power, which may limit your ability to influence the outcome of director elections and other stockholder matters

      Upon completion of this offering, our executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately           % of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent an outside party from acquiring or merging with us and may harm the market price of our common stock.

Provisions of our charter and bylaws and Nevada corporate law could prevent or delay a change in control of our company

      Provisions of our charter and bylaws, as amended and restated effective upon closing of the offering, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. For example, our charter expressly prohibits cumulative voting in the election of directors and provides for a staggered election of our board of directors in three classes, super-majority voting as to matters affecting control of the Company, the payment of a fair price in a second stage merger, and permits the issuance of preferred stock that could be used to adopt a stockholders rights plan.

13

Table of Contents

      In addition, under Nevada law, a domestic corporation that has 200 or more stockholders is generally prohibited from engaging in any merger, consolidation, sale of significant stock or assets or any other business combination with a significant stockholder or with specified affiliates unless the conditions set forth in the statute are complied with. Although Nevada law permits a corporation to elect not to be subject to these restrictions by inserting a provision to that effect in its articles of incorporation, we have not made any such election, nor do we currently anticipate doing so. Accordingly, these provisions of our charter and/or bylaws and Nevada law may discourage, delay or prevent another party from acquiring or merging with us. As a result, the market price of our common stock price may be harmed.

We may fail to protect our intellectual property which could harm our business

      Our future success will depend on our ability to protect and maintain the proprietary rights to the healthcare administration products which we develop. To protect our intellectual property rights, we currently rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure. We also expect to rely on patents to protect some of our proprietary technology and have filed several patent applications with respect to such technology. Our patent applications may not be approved or, if approved, our patents may not be effective in protecting our proprietary technology. Many of our license agreements provide that our customers may obtain access to the source code for our QMACS/aQDEN software if we, among other events, become insolvent or transfer all or substantially all of our assets to another entity. We also enter into confidentiality or license agreements with our officers, directors, employees, consultants and customers, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, however, unauthorized parties may copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our solutions is difficult, and the steps we have taken may not prevent unauthorized use of our technology. If we are unable to protect our intellectual property from infringement, other parties may be able to use our intellectual property to offer competitive products at lower prices, and we may not be able to compete effectively against these competitors.

We may be subject to substantial claims if we infringe upon the proprietary rights of third parties

      We may be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our products overlaps with competitive offerings. Although we intend to take steps to minimize the likelihood that we are infringing the proprietary rights of any third parties, intellectual property infringement claims may be asserted against us and such claims could be successful. These claims, whether or not successful, could be expensive and divert our attention from operating our company. If we become liable to third parties for infringing their intellectual property rights, we could be required to pay substantial damage awards and to develop noninfringing technology, obtain a license, or cease selling the applications that contain the infringing intellectual property. We may be unable to develop noninfringing technology or to obtain a license on commercially reasonable terms, if at all. If we are forced to take any of the foregoing actions, our ability to market and sell our healthcare administration offerings would be harmed, and our revenues would be substantially reduced.

Our need for additional capital is uncertain as is our ability to raise further capital, if required

      We believe that the net proceeds of this offering, combined with our current cash resources, and cash flow from operations, will be sufficient to meet our capital requirements for at least the next twelve months. We may, however be required, or could elect, to seek additional capital to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. In the event we elect or are required to raise additional capital, we may not be able to do so on favorable terms, if at all. Further, if we issue new equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise capital on acceptable terms, we may be unable to develop or enhance our offerings and

14

Table of Contents

New investors in our common stock will experience immediate and substantial dilution

      If you purchase shares of our common stock, you will incur immediate and substantial dilution in pro forma net tangible book value. Investors participating in the offering of our common stock will pay a price per share that substantially exceeds the value of our assets after subtracting our liabilities. These investors will contribute   % of the total amount paid to purchase our stock, but will own only   % of our outstanding shares. If the holders of outstanding options or warrants exercise those options or warrants, you would suffer further dilution.

Future sales of our common stock could cause our stock price to decline

      The market price for our common stock could fall as a result of sales of a large number of shares of our common stock in the public market following this offering. These sales, or the perception that such sales could occur, could make it more difficult for us to raise capital through offerings of common stock in the future. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities laws and by “lock-up” agreements between our underwriters and our officers, directors and existing stockholders, who own an aggregate of 16,643,875 shares of our common stock prior to this offering. Our officers, directors and major stockholders who have signed lock-up agreements are restricted from selling or otherwise disposing of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Salomon Smith Barney, Inc. Salomon Smith Barney, Inc. may, however, in its sole discretion and without notice, release all or any portion of the shares from the restrictions in the lock-up agreements.   % of our stock will be freely tradeable under the securities laws before the lock-ups expire, and  % will be freely tradeable under the securities laws after the lock-ups expire.

15

Table of Contents

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements. The forward-looking statements are principally contained in the sections on “Prospectus Summary,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performances or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to:

	•	plans for implementing our Internet-based strategy, including the general development and release of, and sources of revenue from, aQHealth, our new Internet-based healthcare administration offering;
	•	business strategy;
	•	the market opportunity for our products, including the willingness of the healthcare industry to adopt Internet-based technologies;
	•	plans for hiring additional personnel;
	•	our estimates regarding our capital requirements and our needs for additional financing; and
	•	plans, objectives, expectations and intentions contained in this prospectus that are not historical facts.

      In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus.

      You should read this prospectus and the documents that we incorporate by reference in this prospectus completely and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.

16

Table of Contents

USE OF PROCEEDS

      We estimate that the net proceeds we will receive from the sale of            shares of common stock will be approximately $      million, or approximately $      million if the underwriters fully exercise their over-allotment option at the assumed offering price of $     per share, in each case after deducting the estimated underwriting discounts and estimated offering expenses.

      We expect to use the net proceeds of this offering as follows:

	•	to fund increases in our sales and marketing capabilities;
	•	to fund product development programs;
	•	for working capital;
	•	for payment of approximately $2.1 million of preferred stock cumulative dividends;
	•	to fund potential acquisitions, if any; and
	•	for general corporate purposes.

      The use of proceeds has not been specifically identified due to the flexible nature of our planning process and the constantly changing nature of our industry. The amounts we actually expend for each of the categories above other than preferred stock dividends will vary significantly depending on a number of factors, including revenue growth, if any, the amount of cash we generate from operations and whether we complete acquisitions. As a result, we will retain broad discretion in the allocation and use of the net proceeds of this offering. Pending the uses described above, we intend to invest the net proceeds from this offering in short-term, investment grade, interest bearing securities.

DIVIDEND POLICY

      We have not declared or paid dividends on our common stock in the past and do not intend to pay dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors the board of directors deems relevant.

17

Table of Contents

CAPITALIZATION

      The following table sets forth our total capitalization as of December 31, 1999:

	•	on an actual basis; and
	•	on a pro forma as adjusted basis to give effect to this offering and the automatic conversion of all of our outstanding shares of preferred stock into common stock, and the conversion of the note payable into common stock.

      The actual and pro forma as adjusted information set forth in the table excludes:

	•	an aggregate of 3,133,585 shares of common stock issuable upon the exercise of options outstanding as of December 31, 1999, with a weighted average exercise price of $.59 per share, pursuant to our employee incentive stock option plan.
	•	an aggregate of 1,123,344 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 1999, with a weighted average exercise price of $1.09 per share.
	•	up to 666,298 shares of common stock issuable under a warrant contingently issuable to Platinum Equity Holdings, with exercise prices ranging from $1.50 to $6.00 per share, depending on the date the warrant is exercised. The number of shares of common stock in respect of which the warrant is exercisable is determined by specified criteria set forth in the warrant agreement. See “Description of Capital Stock — Warrants.”

18

Table of Contents

DILUTION

      Our pro forma net tangible book value as of             , was approximately $     or $     per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the pro forma number of shares of common stock outstanding. After giving effect to the issuance and sale by us of            shares of common stock offered by this prospectus at an initial public offering price of $     per share and after deducting estimated underwriting discounts and offering expenses, our pro forma net tangible book value as of             would have been $     , or $     per share. This represents an immediate increase in the pro forma net tangible book value of $     per share to existing stockholders and an immediate dilution of $     per share to new investors in this offering illustrated by the following table:

      The following table sets forth on a pro forma basis as of                the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing and new stockholders before deducting underwriting discounts and commissions and offering expenses payable by us:

      The foregoing discussion and tables assume no exercise of any stock options or warrants outstanding. As of December 31, 1999, there were options outstanding to purchase a total of approximately 3,133,585 shares of common stock with a weighted average exercise price of $0.59 per share and warrants outstanding to purchase a total of 1,123,344 shares of common stock with a weighted average exercise price of $1.09 per share. A warrant for the purchase of up to 666,298 shares of common stock at exercise prices ranging from $1.50 to $6.00 per share is contingently issuable. To the extent that any of these options or warrants are exercised, your investment will be further diluted. In addition, we may grant more options in the future under our stock plans.

19

Table of Contents

SELECTED FINANCIAL DATA

      The following selected financial data should be read in conjunction with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The statement of operations data below for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are derived from our audited financial statements included in this prospectus as audited by Deloitte & Touche LLP. The balance sheet data as of December 31, 1997 is derived from the audited financial statements as audited by Deloitte & Touche LLP. The statement of operations data for the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1995 and 1996, are derived from our financial statements audited by other auditors and are not included in this prospectus.

20

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

      You should read the following discussion and analysis in conjunction with our financial statements and related notes thereto included elsewhere in this prospectus.

Overview

      We are a provider of claims and benefits administration software for the healthcare industry. Our core product offering is the QMACS/aQDEN software engine that offers fully automated claims adjudication capabilities together with other administration functions for the medical and dental industries. Within a single software system, QMACS/aQDEN administers lines of medical insurance or risk-based business, including indemnity, managed care, Medicaid and Medicare and dental care. This system allows integration of a payor’s business rules, healthcare administration guidelines, and required patient specific information.

      aQServ is our application service provider offering that provides our QMACS/aQDEN software engine on an outsourced basis. Customers select the level of service for a substantial part or a portion of their information technology and related business service needs, including systems management, connectivity infrastructure, core transaction applications, information access and reporting. Application service providers like aQServ offer an alternative to the creation and development of an extensive in-house information technology group.

      aQHealth is our Internet-based healthcare administration solution that is designed to enable real-time healthcare transactions. aQHealth integrates and delivers the core technology of our QMACS/aQDEN software engine through an easy-to-use Internet browser interface. aQHealth is designed to allow providers secure access to a sponsoring payor’s healthcare administration information and proprietary business processes, giving them the ability to rapidly view benefit plan information and engage in real-time, Internet-based transactions. We have not generated revenue related to the aQHealth product offerings to date.

      We also provide implementation and business rule configuration services for our product offerings, including the following:

	•	consulting services for business process, system and network development;
	•	direct management and application of claims processing and adjudication;
	•	database integration and management services;
	•	hardware/server configuration and management services; and
	•	electronic data interchange and other data interfaces.

      Our customers are healthcare payor and provider organizations, including health maintenance organizations, preferred provider organizations, indemnity health insurance companies, governments, unions, third party administration and self-funded employers.

      Revenues are classified into two categories: system sales and support services. System sales consist primarily of license fees which recur monthly under contracts. Monthly billing is based on the number of members serviced and claims processed by the customer (i.e., per member per month and based on the amount of claims processed in a given month) over a contract term of typically three to five years. To a lesser extent, system sales include one-time license fees related to specific negotiated contracts. Support services primarily relate to consulting and customer support, including project management, system planning, design and implementation, custom modifications, training and other support services. Support services are billed on either a time and materials or a fixed fee basis, and are recognized as the services are performed. During the three years ended December 31, 1999, system sales revenue has represented between 65% and 75% of total revenue. As we sign multi-year application services contracts for our

21

Table of Contents

      Cost of revenues are those costs related to the offerings and services we provide to our customers and costs associated with the operation and maintenance of our customers’ operations centers that we host in our facilities. These costs are primarily salaries and related expenses for consulting personnel and customer support personnel. We anticipate that cost of revenues will continue to increase as our customer base grows and as current customers increase in size.

      Research, development and engineering expenses are salaries and related expenses associated with the development of technologies, applications and services, and include compensation paid to engineering personnel and fees to outside contractors and consultants.

      General and administrative and selling and marketing expenses consist primarily of salaries and related expenses for sales, account management, marketing, administrative, finance, legal, human resources and executive personnel, commissions, expenses for marketing programs and trade shows and fees for professional services. We anticipate that selling, general and administrative costs will increase substantially as we add sales, marketing and administrative personnel, increase our marketing and promotional activities and incur costs related to being a public company, such as directors’ and officers’ insurance premiums and professional fees.

Results of Operations

      The following table sets forth certain data expressed as a percentage of total revenues for the periods indicated.

  Years Ended December 31, 1999 and 1998

      Total revenues increased $3.6 million, or 116%, from $3.1 million in 1998 to $6.7 million in 1999. System sales represented $2.3 million and 75.2% of total revenues in 1998 as compared to $4.3 million and 64.5% of total revenues in 1999. The $2.0 million increase in system sales from 1998 to 1999 was a result

22

Table of Contents

      Cost of revenues increased approximately $1.8 million, or 92.4%, from $2.0 million in 1998 to $3.8 million in 1999. This increase was due to incremental costs required to support increasing demand for our implementation services and other service related costs, such as training, consulting and maintenance. Cost of revenues decreased as a percentage of total revenues from 64.4% in 1998 to 57.5% in 1999. This was mainly the result of our receipt of system sales revenues from customers under ongoing contracts, which generally do not have significant ongoing costs.

      Research, development and engineering expenses increased approximately $0.3 million, or 16.9%, from $1.9 million in 1998 to $2.2 million in 1999. This was the result of the increase in the engineering staff for the development of our new aQServ and aQHealth products.

      General and administrative expenses increased approximately $0.6 million, or 50.4%, from $1.0 million in 1998 to $1.6 million in 1999, but decreased as a percentage of total revenues from 33.2% in 1998 to 23.2% in 1999. Of the increase, approximately $0.2 million resulted from additional depreciation expense related to the increase in property and equipment from 1998 to 1999. Bad debt expense increased approximately $0.2 million due to the increase in support services revenues. The remaining increase resulted from additional staffing requirements in the administrative areas.

      Selling and marketing expenses increased $0.5 million, or 47.1%, from $1.0 million in 1998 to $1.5 million in 1999, while decreasing as a percentage of total revenues from 32.9% in 1998 to 22.4% in 1999. The increase was due to additional marketing personnel hired during 1999, the increase in the number of trade shows attended and the travel associated with those shows and the additional advertising and marketing research incurred during the year. The decrease as a percentage of total revenues resulted from the increase in the number of customer contracts and the receipt of licensing fees from contracts entered into in prior years.

      Interest expense results from capital lease obligations and notes payable. Interest expense did not change significantly from 1998 to 1999. Interest income decreased $48,000 from 1998 to 1999 due to the $1.1 million decrease in cash and cash equivalents from 1998 to 1999. Other income primarily represented gain on sale of assets during 1999.

      No provision for federal and state income taxes has been recorded for 1998 or 1999 as net operating losses were incurred in both years.

      Cumulative dividends provided for with regard to our Series A, B and C convertible preferred stock were $1.0 million as of December 31, 1998 and $1.9 million as of December 31, 1999. Our preferred stock will automatically convert to shares of common stock upon the completion of this offering, and we will pay accrued cumulative dividends on our preferred stock of approximately $2.1 million with a portion of the net proceeds of this offering.

  Years Ended December 31, 1998 and 1997

      Total revenues increased $0.5 million, or 19.5%, from $2.6 million in 1997 to $3.1 million in 1998. This growth was attributable to increases in both system sales and support services. System sales represented $2.0 million of total revenues in 1997 and $2.3 million of total revenues in 1998. The $0.3 million increase was mainly the result of new contracts for our QMACS product. Support services primarily represented implementation revenue which increased by $0.1 million from 1997 to 1998 due to new customers.

23

Table of Contents

      Cost of revenues increased $0.9 million, or 77.4%, from $1.1 million in 1997 to $2.0 million in 1998. Cost of revenues increased as a percentage of total revenues from 43.4% in 1997 to 64.4% in 1998. This increase resulted from additional staffing requirements needed to support the increase in customers.

      Research, development and engineering expenses increased $0.5 million, or 35.6%, from $1.4 million in 1997 to $1.9 million in 1998. The increase was a result of the expansion of engineering staff for the development of our new products aQServ and aQHealth, as well as preparation for the release of aQDEN and a new version of QMACS during 1998.

      General and administrative expenses increased $0.3 million, or 39.9%, from $0.7 million in 1997 to $1.0 million in 1998, and as a percentage of total revenues from 28.4% in 1997 to 33.2% in 1998. The increases were due to the addition of senior management personnel without a similar increase in the revenue base.

      Selling and marketing expenses increased $0.6 million, or 141.4%, from $0.4 million in 1997 to $1.0 million in 1998, and also increased as a percentage of total revenues from 16.3% in 1997 to 32.9% in 1998. The increase was due to the expansion of marketing programs and staff. The increase as a percentage of total revenues was the result of additional advertising marketing efforts made during 1998 compared to 1997.

      Other expense increased from 1997 to 1998 due to the increase in capital lease obligations and interest on notes payable, partially offset by interest earned from cash and cash equivalents.

      No provision for federal and state income taxes has been recorded for 1997 or 1998 as net operating losses were incurred in both years.

      Cumulative dividends provided for with regard to our Series A, B and C convertible preferred stock were $0.3 million as of December 31, 1997 and $1.0 million as of December 31, 1998.

Selected Quarterly Results of Operations

      The following tables present our operating results for each of the eight quarters in the period ended December 31, 1999, as well as such data expressed as a percentage of our total revenue for the periods indicated. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited financial statements appearing elsewhere in this prospectus. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results. This data should be read in conjunction with the financial statements and the notes thereto appearing elsewhere in this prospectus. These operating results are not indicative of the results of any future period.

24

Table of Contents

				Quarter Ended
				March 31,				June 30,				Sept. 30,				Dec. 31,				March 31,				June 30,
				1998				1998				1998				1998				1999				1999
				(in thousands)
				(unaudited)
Statement of Operations Data:
Revenues:
	System sales			$	532			$	565			$	619			$	619			$	614			$	1,144
	Support services				161				126				315				169				296				631
		Total revenues			693				691				934				788				910				1,775
	Cost of revenues				354				401				551				693				709				789
	Gross profit				339				290				383				95				201				986
Expenses:
	Research, development and engineering				433				433				464				526				529				510
	General and administrative				166				235				309				322				256				297
	Selling and marketing				170				205				281				366				288				381
		Total expenses			769				873				1,054				1,214				1,073				1,188
Loss from operations					(430	)			(583	)			(671	)			(1,119	)			(872	)			(202	)
Other (expense) income:
	Interest expense				(22	)			(33	)			(20	)			(6	)			(7	)			(15	)
	Interest income				0				12				30				24				12				5
	Other				3				5				(9	)			(33	)			5				3
		Total other expense			(19	)			(16	)			1				(15	)			10				(7	)
Net loss				$	(449	)		$	(599	)		$	(670	)		$	(1,134	)		$	(862	)		$	(209	)

[Additional columns below]

[Continued from above table, first column(s) repeated]

				Quarter Ended
				Sept. 30,				Dec. 31,
				1999				1999
				(in thousands)
				(unaudited)
Statement of Operations Data:
Revenues:
	System sales			$	1,243			$	1,318
	Support services				548				899
		Total revenues			1,791				2,217
	Cost of revenues				983				1,366
	Gross profit				808				851
Expenses:
	Research, development and engineering				523				607
	General and administrative				423				575
	Selling and marketing				365				470
		Total expenses			1,311				1,652
Loss from operations					(503	)			(801	)
Other (expense) income:
	Interest expense				(23	)			(36	)
	Interest income				1				0
	Other				4				4
		Total other expense			(18	)			(32	)
Net loss				$	(521	)		$	(833	)

				Quarter Ended
				March 31,				June 30,				Sept. 30,				Dec. 31,				March 31,
				1998				1998				1998				1998				1999
				(as a percentage of revenues)
Revenues:
	System sales				76.8	%			81.8	%			66.3	%			78.5	%			67.5	%
	Support services				23.2				18.2				33.7				21.5				32.5
		Total revenues			100.0				100.0				100.0				100.0				100.0
	Cost of revenues				51.0				58.1				59.0				88.0				77.9
	Gross profit				49.0				41.9				41.0				12.0				22.1
Expenses:
	Research, development and engineering				62.5				62.6				49.7				66.8				58.1
	General and administrative				24.0				34.0				33.1				40.8				28.1
	Selling and marketing				24.6				29.7				30.0				46.5				31.7
		Total expenses			111.1				126.3				112.8				154.1				117.9
Loss from operations					(62.1	)			(84.4	)			(71.8	)			(142.1	)			(95.8	)
Other (expense) income:
	Interest expense				(3.2	)			(4.8	)			(2.2	)			(0.7	)			(0.7	)
	Interest income				0.0				1.7				3.3				3.0				1.3
	Other				0.5				0.8				(1.0	)			(4.2	)			0.5
		Total other expense			(2.7	)			(2.3	)			0.1				(1.9	)			1.1
Net loss					(64.8	)			(86.7	)			(71.7	)			(144.0	)			(94.7	)