U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

PRECIS, INC.

(Name of business issuer in its Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.    Yes  o  No  o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of issuer’s classes of common equity, as of the latest practicable date:  As of November 4, 2004, 12,199,292 shares of the issuer’s common stock, $.01 par value, were outstanding.

PRECIS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2004

TABLE OF CONTENTS

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PART I.                                                    FINANCIAL INFORMATION

Item 1.           Financial Statements (Unaudited)

Our financial statements which are prepared in accordance with Regulation S-X are set forth in this report beginning on page 16.

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

The following discussion is qualified in its entirety by the more detailed information in our Form 10-K and the financial statements contained in this report, including the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission since December 31, 2003 (collectively referred to as the “Disclosure Documents”). Certain forward-looking statements contained herein and in such Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements.  Our ability to achieve such results is subject to the risks and uncertainties discussed in our Form 10-K.  Any forward-looking statements contained in this report represent our judgment as of the date hereof.  We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements.

Overview

Consumer Healthcare Savings Solution

We offer savings on healthcare services throughout the United States to persons who are under-insured. These savings are offered by accessing the same preferred provider organizations (PPOs) that are utilized by many insurance companies. These programs are sold primarily through a network marketing strategy under the name Care Entrée™. We design these programs to benefit healthcare providers as well as the network members. Providers commonly give reduced or preferred rates to PPO networks in exchange for steerage of patients. However, the providers must still file claim forms and wait 30 to 60 days to be paid for their services. Our programs utilize these same networks to obtain the same savings for the Care Entrée™ program members. Additionally, we collect monthly payments from program members that are held in escrow accounts and utilized to help assure prompt payment to the healthcare provider. We also provide transaction facilitation services to both the program member and the healthcare provider.

Independent Marketing Representatives (IMRs) may enroll as representatives by paying an enrollment fee and signing a standard representative agreement. We pay independent marketing representatives commissions equal to 20% of the membership fees of members they enroll for the life of that members’ enrollment. Independent marketing representatives can also recruit other representatives and earn override commissions on sales made by those recruited representatives. We pay a total of 35% in override commissions down through seven levels. We have also established bonus pools that allow independent marketing representatives who have achieved certain levels to receive bonuses of up to 5% of our incremental revenues in these programs. Independent marketing representatives can also earn a commission equal to the membership fees if three or more program members are enrolled in a month. In the month of membership sales, no override commissions are paid to the representatives' upline.

Affordable Healthcare Insurance and Financial Products

In September 2003, we organized a new subsidiary under the name Care Financial of Texas, L.L.C. Through Care Financial, we offer our high deductible and scheduled benefit insurance policies. In addition, we have recently added a suite of products including life insurance from Lion’s Share (Allianz), along with Healthcare Reimbursement Arrangements (HRAs) and medical and dependent care Flexible Spending Accounts (FSAs) offered through Care125, a division of Care Financial. The high deductible and scheduled benefit insurance policies, HRAs and medical and dependent care FSAs, when combined with the Care Entrée™ program, offer affordable, well-rounded solutions for individuals and employers who are no longer able to afford or obtain traditional health insurance policies. The HRAs and medical and dependent care FSAs are also sold by our independent marketing representatives who, from a regulatory standpoint, are not required to be licensed to sell these products. The life insurance products serve to complement our healthcare product offerings by addressing our members’ overall financial condition. The insurance policies are sold through our independent marketing representatives who are licensed insurance agents.

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Repricing for Governments and Third Party Administration Services

For governments and other large, self-funded employers seeking to reduce the cost of offering healthcare benefits to their employees, we can also offer a more streamlined version of our product. In these cases, we offer access to healthcare through our network of providers and the efficient repricing of bills through our proprietary systems. We can offer these services on a price based on either the number of participants per month or as a percentage of savings on healthcare costs actually realized.

On June 18, 2004, we acquired Access HealthSource, Inc. (“Access”), a full-service third party administrator, for a purchase price of $3.4 million, consisting of $2,000,000 of cash and $1,400,000 of the Company’s stock.  Through the acquisition of Access, we now provide a wide range of healthcare claims administration services and other cost containment procedures that are frequently required by governments and other employers who have chosen to self fund their healthcare benefits requirements. Access helps us offer a more complete suite of healthcare services. We are now able to provide individuals and employee groups access to preferred provider networks, medical escrow accounts and full third party administration capabilities to adjudicate and pay medical claims.  From a sales distribution standpoint, we have the ability to grow Access’ regional business through our numerous independent marketing representatives who sell both to individuals and employer groups throughout the United States.  Our acquisition of Access serves to complement our most recent entry into the public sector market through our agreement with the State of Louisiana.  Access’ primary area of expertise is in the public sector market.

Wholesale Membership Solution

Healthcare Membership Programs

We also design healthcare membership programs for employer groups, retailers and association-based organizations. Memberships in these programs are offered and sold by direct marketing through direct sales or in-bound direct marketing. We believe that our clients, their members, and the vendors of the products and services offered through the programs all benefit from our membership service programs. The products and services are bundled, priced and marketed utilizing relationship marketing strategies to target the profiled needs of the clients’ particular member base. Most of our memberships are sold by third-party organizations and are generally marketed using the third-party’s name or brand. We refer to these programs and membership sales as wholesale programs or private label programs. While the services offered to consumers by these private label programs are generally similar to the services we offer through Care Entrée™, each of the private label programs can bundle our services to fit the needs of their consumers. For instance, some of our private label programs do not offer a self-funded escrow program to their members.

Rental Purchase and Club Membership Programs

We also design club membership programs for rental-purchase companies, financial institutions, employer groups, retailers and association-based organizations. Memberships in these programs are offered and sold as part of a point-of-sale transaction or by direct marketing through direct mail or as inserts. Program members are offered and provided our third-party vendors’ products and services. The products and services are bundled, priced and marketed utilizing relationship marketing strategies to target the profiled needs of the clients’ particular customer base. Most of our club membership programs are sold by third-party organizations, generally in connection with a point-of-sale transaction. We refer to these programs and membership sales as wholesale programs.

Benefits to Members of Our Programs

We believe that our programs offer members an economical, efficient and convenient method for the selection of health-related products and services. Members are entitled to savings for products and services that may not otherwise be available to them at the price levels available under our healthcare savings programs. Vendors of products and services offered and sold through the programs to members are benefited. Vendors are provided the opportunity to reach a large number of demographically targeted customers with minimal incremental marketing cost.

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Critical Accounting Policies

Revenue Recognition

Healthcare Membership Revenues

We recognize membership revenues in the month the member joins the program.  Membership revenues are reduced by the amount of refunds estimated to be incurred.  Subsequent to the initial membership month, membership revenues are recognized on each monthly anniversary date.

Member program enrollment fees, net of direct costs, are deferred and amortized over the estimated membership period, which averages seven to eight months.  Independent marketing representative enrollment fees, net of direct costs, are deferred and amortized over the term of the contract.

Rental Purchase and Club Membership Revenues

Rental purchase and club membership revenues are recognized in the month that our products and services are delivered to our clients.  We sell our rental purchase and club membership programs on a wholesale basis to our clients. The wholesale client remits a portion of the rental purchase and club membership revenues to us and retains the balance as compensation for having made the sale.

Commission Expense

Commissions are accrued when earned and paid to our independent marketing representatives in the month following the month in which a member enrolls in our Care Entrée program.  Commissions are paid in the month following the month in which the related monthly membership fees are received.  We do not pay advanced commissions on membership sales.

Intangible Assets

As of December 31, 2003 and September 30, 2004, our intangible assets of $21,077,284 and $24,273,310, respectively, represented the excess of acquisition costs over the fair value of net assets acquired.  The intangible assets at September 30, 2004 included $1,400,000 attributed to a contract acquired in the acquisition of Access.  That cost related to shares of the Company’s common stock released from escrow on September 14, 2004 upon renewal of a major contract between Access and one of its customers.  The contract carrying value will be amortized over the contract’s expected life of 10 years.  The remaining balance of intangible assets at September 30, 2004 consists of goodwill and is not amortized.  As of December 31, 2003, no impairment had been indicated.

The goodwill balance of $22,873,310 as of September 30, 2004 consisted of $19,077,284 that arose from the merger-acquisition of The Capella Group, Inc., $2,000,000 from the acquisition of Foresight, Inc., and $1,796,026 which arose from the acquisition of Access.  Our goodwill valuation is dependent primarily on the projected revenue and net earnings of our Care Entrée™ healthcare, Foresight, Inc.’s club membership business, and Access’ third party administration services. The procedures surrounding goodwill valuation are very subjective and difficult to quantify given that the projected revenue and net earnings associated with our Care Entrée™ healthcare membership business is based on a business strategy that is fairly new, innovative and evolutionary in nature. In the case of our club membership business, this business is considered relatively mature and generally has a lower expected growth rate compared to our Care Entrée™ business.  Our recent acquisition of Access serves to complement our Precis healthcare membership business particularly in the self-funded government and employer markets and forms part of our Precis business strategy.

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Results of Operations

Current and Comparative Prior Period Historical Information.  The following table sets forth selected results of operations for the three and nine months ended September 30, 2004 and 2003.

Operational Review for the Three and Nine Months Ended September 30, 2004

The year ended December 31, 2003 as well as the three and nine months ended September 30, 2004 continues to be a transitional period for us.  We implemented member escrow accounts beginning in the fourth quarter of 2002 in response to the market changes in the healthcare savings industry.   Our members are now required to establish and maintain escrow accounts to access and provide payment for hospital services.  As of September 30, 2004, our individual members who have escrowed funds with us was approximately 20.9% (13,400 members) of our total individual healthcare membership base. This excludes our private label programs, where the escrow requirements have not been mandated.

Our healthcare membership base was approximately 64,000 members as of September 30, 2004 as compared to 87,000 members as of September 30, 2003, a decrease of approximately 23,000 members or 26.4%.   This reduction in healthcare membership base was primarily due to the implementation of the escrow account requirements. As a result of the escrow healthcare program changes introduced during 2003 and 2002, our independent marketing representative base experienced a significant reduction in 2003.  This reduction continued during the three and nine months ended September 30, 2004.

Although these escrow requirements negatively impacted our membership base and consequently our revenues and net earnings in 2003 and for the three and nine months ended September 30, 2004, these changes were required to provide assurance of payment to the healthcare providers and, accordingly, their continued willingness to provide healthcare services to our members.

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Implementation of the escrow requirement was critical to our long-term operational and financial viability in the health card savings market as many healthcare providers throughout the United States will no longer accept the typical “health discount” card. The success of our new healthcare product offering has not been fully determined. Therefore, its long-term impact on both revenues and net earnings is currently unknown and may not be known until early 2005.  The increase in our members’ escrow or cash-in-trust went from $108,152 as of December 31, 2002 to $4,837,191 as of September 30, 2004 and provides preliminary, although not conclusive, evidence of the acceptance of this form of medical savings product offering.  The increase in the members escrow or cash-in-trust from September 30, 2003 to September 30, 2004 was $2,837,060.

In the fourth quarter of 2003, we began reorganizing and rebuilding our corporate sales team to be better positioned to enter into the large self-insured employer group and medical benefits market. We restructured our in-house sales team and in January 2004 hired a Vice President of Sales and Marketing to lead this area, both from a strategy and execution standpoint. Our medical savings product offering in conjunction with our Care125 medical savings account provide an alternative healthcare product offering for a growing number of companies that have chosen to move towards the self-funded and/or high deductible insurance route.   Our healthcare product offering has been expanded to the self-funded government and employer markets with our recent acquisition of Access.  This, along with the individual healthcare market, is a substantial portion of our overall business focus for the balance of 2004.

Comparison of the Three Months Ended September 30, 2004 and 2003

Product and Service Revenues.  During the three months ended September 30, 2004, revenues were $10,291,188, an increase of $22,559 or .22%, from $10,268,629 during the comparable 2003 period.   Actual revenues for the three months ended September 30, 2004, included a decrease of $2,021,781 in our Care Entrée program due to a reduction of members as a result of our implementation of member escrow account requirements.  However, revenues for the three months ended September 30, 2004 were positively impacted by our recent acquisition of Access that produced $1,752,224 in revenue and our new Care Financial division that produced $237,728.

The requirement of member escrow deposits was in response to the market changes in the healthcare savings industry.   Our individual members are now required to establish and maintain escrow accounts and provide payment for hospital, physician and other healthcare services.  We are then able to pre-certify the members’ ability to pay based upon the available escrow-account balances and to process the members’ payments directly to the healthcare providers to help assure their payment.  As a result of these changes, we believe an enhanced healthcare product offering has been created for members and the healthcare providers. The overall success and impact on revenues and net earnings of this newly restructured product offering will not be known until early 2005.  The escrowed funds referred to as cash-in-trust on our balance sheet were $4,837,191 as of September 30, 2004. The reduction in revenue in our wholesale club membership programs was due to the maturity and competitive nature of this business as compared to our healthcare membership savings business that operates in a higher growth market.

For the three months ended September 30, 2004, approximately 75% of our revenues were attributable to our healthcare membership program.

Operating Metrics

Our healthcare membership base consisted approximately of 64,000 members as of September 30, 2004, compared to 87,000 members as of September 30, 2003, a decrease of approximately 23,000 members or 26.4%.  The reduction in our healthcare membership base was due to the implementation of the escrow account requirements commencing in the fourth quarter of 2002.

As a result of the escrow healthcare program changes introduced during 2002 and 2003, our independent marketing representative base experienced a significant reduction in 2003 and 2004.  This reduction continued during the nine months ended September 30, 2004.

Cost of Operations.  Cost of operations for the three months ended September 30, 2004 increased $574,054 or 17.8%, to $3,795,139 from $3,221,085 during the 2003 comparable period.

Cost of operations was approximately 36.9% of revenues during the three months ended September 30, 2004, while during the comparable 2003 period cost of operations was 31.4% of revenues.  The increase was primarily attributable to the inclusion in operations for the three months ended September 30, 2004 and costs of operations for Access (for which costs of  operations were 34.4% of revenues during that period).

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Sales and Marketing Expenses.  Sales and marketing expenses decreased $1,189,873 or 30.5%, to $2,710,093 during the three months ended September 30, 2004 from $3,899,966 during the comparable 2003 period.

Sales and marketing expenses represented 26.3% and 38.0% of revenues for the three months ended September 30, 2004 and 2003, respectively.  The decrease as a percentage of revenues was primarily attributable to a shift in the mix between private label and healthcare membership business.  Our private label business has significantly lower sales and marketing expenses as a percent of revenue compared to our healthcare business which is sold to individual members.

General and Administrative Expenses.  General and administrative expenses increased $1,880,233 or 116.5%, to $3,494,494 during the three months ended September 30, 2004 from $1,614,261 during the comparable 2003 period.  General and administrative expenses represented 34.0% and 15.7% of revenues for the three months ended September 30, 2004 and 2003, respectively.

The increase in general and administrative expenses for the three months ended September 30, 2004 was primarily due to the acquisition of Access which added $842,275, legal fees of $329,760, introduction of our Care125 FSA and HRA products which added costs of $322,414, and management of the member escrow accounts for our healthcare savings products which added costs of $137,540.

Total Operating Expenses.  During the three months ended September 30, 2004, total operating expenses (consisting of cost of operations, sales and marketing expenses, and general and administrative expenses) increased $1,264,414 or 14.5%, to $9,999,726 from $8,735,312 during the comparable 2003 period.  Total operating expenses represented approximately 97.2% and 85.1% of revenues for the three months ended September 30, 2004 and 2003, respectively.  The decrease in operating margins was due to the reasons described above.

Operating Income and Net Earnings.  During the three months ended September 30, 2004, operating income was $291,462, a decrease of $1,241,855 or 81%, from $1,533,317 during the comparable 2003 period.  Net earnings were $96,283, or 0.9% of revenues, net of provision for income taxes of $188,231.  In comparison, during the three months ended September 30, 2003, net earnings were $970,970 or 9.5% of revenues, net of provision for income taxes of $522,739.  During the three months ended September 30, 2004, net earnings per common share calculated on a fully diluted basis were $.01 per share compared to $.08 from the comparable 2003 period.  Net earnings and net earnings per common share calculated on a fully diluted basis for the three months ended September 30, 2004 were impacted by net cost increases as a percent of revenue, as previously described.

Comparison of the Nine Months Ended September 30, 2004 and 2003

Product and Service Revenues.  During the nine months ended September 30, 2004, revenues were $29,640,532, a decrease of $2,354,406 or 7.4%, from $31,994,932 during the comparable 2003 period.  The reduction in revenues was primarily due to (i) reductions in the members in our Care Entrée program as a result of our implementation of member escrow account requirements of $4,430,620  and (ii) reductions in our wholesale club membership programs of $829,507.  Revenues for the nine months ended September 30, 2004, were positively impacted by the $1,960,935 revenues attributable to Access, revenues of $270,008 from Care Financial, revenues of $393,361 for the maintenance fees related to the escrow accounts and revenues of $281,423 related to the State of Louisiana contract.

The requirement of member escrow deposits was in response to the market changes in the healthcare savings industry.   Our individual members are now required to establish and maintain escrow accounts and provide payment for hospital, physician and other healthcare services.  We are then able to pre-certify the members’ ability to pay based upon the available escrow-account balances and to process the members’ payments directly to the healthcare providers to help assure their payment.  As a result of these changes, we believe an enhanced healthcare product offering has been created for members and the healthcare providers. The overall success and impact on revenues and net earnings of this newly restructured product offering will not be known until early 2005.  The escrowed funds referred to as cash-in-trust on our balance sheet were $4,837,191 as of September 30, 2004. The reduction in revenue in our wholesale club membership programs was due to the maturity and competitive nature of this business as compared to our healthcare membership savings business that operates in a higher growth market.

For the nine months ended September 30, 2004, approximately 85.8% of our revenues were attributable to our healthcare membership program.

Operating Metrics

Our healthcare membership base consisted approximately of 64,000 members as of September 30, 2004, compared to 87,000 members as of September 30, 2003, a decrease of approximately 23,000 members or 26%.  The reduction in our healthcare membership base was due to the implementation of the escrow account requirements commencing in the fourth quarter of 2002.

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As a result of the escrow healthcare program changes introduced during 2002 and 2003, our independent marketing representative base experienced a significant reduction in 2003 and 2004.  This reduction continued during the nine months ended September 30, 2004.

Cost of Operations.  Cost of operations for the nine months ended September 30, 2004 increased $590,157 or 6.0%, to $10,383,174 from $9,793,017 during the 2003 comparable period.

Cost of operations was approximately 35.0% of revenues during the nine months ended September 30, 2004, while during the comparable 2003 period cost of operations was 30.6% of revenues.  The increase was primarily attributable to  the acquisition of Access, the additional processing costs to administer  the escrow accounts and claims processing, and to the inclusion of operations for the three and a half months ended September 30, 2004  of costs of operations for Access.   This increase was offset by a decrease in customer service costs from the reduction in our membership base

Sales and Marketing Expenses.  Sales and marketing expenses decreased $3,479,722 or 28.6%, to $8,703,678 during the nine months ended September 30, 2004 from $12,183,400 during the comparable 2003 period.

Sales and marketing expenses represented 29.4% and 38.1% of revenues for the nine months ended September 30, 2004 and 2003, respectively.  The decrease as a percentage of revenues was primarily attributable to a shift in the mix between private label and healthcare membership business.  Our private label business has significantly lower sales and marketing expenses as a percent of revenue compared to our healthcare business which is sold to individual members.

General and Administrative Expenses.  General and administrative expenses increased $3,836,588 or 81.5%, to $8,542,735 during the nine months ended September 30, 2004 from $4,706,147 during the comparable 2003 period.  General and administrative expenses represented 28.8% and 14.7% of revenues for the nine months ended September 30, 2004 and 2003, respectively.

The increase in general and administrative expenses for the nine months ended September 30, 2004 was largely due to the acquisition of Access which added $932,701. Additionally, the launch of our new suite of products for Care Financial, including annuities, life insurance, and flexible spending accounts, resulted in increased general and administrative costs of $737,598. Furthermore, litigation and other legal matters, as discussed in Legal Proceedings below, resulted in increases of $526,451. Also, the implementation of member escrow accounts for our healthcare savings customers resulted in increases to general and administrative expenses of $487,719. Finally, costs to comply with the Sarbanes-Oxley Act and other regulations for public companies increased general and administrative expenses by $306,297.

Total Operating Expenses.  During the nine months ended September 30, 2004, total operating expenses (consisting of cost of operations, sales and marketing expenses, and general and administrative expenses) increased $947,023 or 3.5%, to $27,629,587 from $26,682,564 during the comparable 2003 period.  Total operating expenses represented approximately 93.2% and 83.4% of revenues for the three months ended September 30, 2004 and 2003, respectively.  The decrease in operating margins was due to the reasons described above.

Operating Income and Net Earnings.  During the nine months ended September 30, 2004, operating income was $2,010,945, a decrease of $3,301,423 or 62.1%, from $5,312,368 during the comparable 2003 period.  Net earnings were $990,088, or 3.3% of revenues, net of provision for income taxes of $963,414.  In comparison, during the nine months ended September 30, 2003, net earnings were $3,424,109 or 10.7% of revenues, net of provision for income taxes of $1,774,743.  During the nine months ended September 30, 2004, net earnings per common share calculated on a fully diluted basis were $.08 per share compared to $.29 from the comparable 2003 period.  Net earnings and net earnings per common share calculated on a fully diluted basis for the nine months ended September 30, 2004 were impacted by net cost increases as a percent of revenue as well as the reduction in revenues, as previously described.

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Income Tax Provision

SFAS 109, Accounting for Income Taxes, requires the separate recognition, measured at currently enacted tax rates, of deferred tax assets and deferred tax liabilities for the tax effect of temporary differences between the financial reporting and tax reporting bases of assets and liabilities, and net operating loss carryforwards for tax purposes. A valuation allowance must be established for deferred tax assets if it is “more likely than not” that all or a portion will not be realized. At September 30, 2004 and December 31, 2003, we had deferred tax benefits consisting primarily of net operating loss carryforwards of $693,473.  The tax benefit was attributable to net operating loss carryforwards of approximately $2,174,000, as of December 31, 2003, which, if not utilized, will expire at various dates through 2020. The cumulative net deferred tax asset as of September 30, 2004 and December 31, 2003 was $373,129 and $623,409, respectively.

Liquidity and Capital Resources

Operating Activities.  Net cash provided by operating activities for the nine months ended September 30, 2004 and 2003 was $2,786,484 and $6,095,077, respectively, a decrease of $3,308,593.   The decrease in net cash provided by operating activities for the nine months ended September 30, 2004 was due to the reduced net earnings during the period as well as certain working capital timing differences incurred during the nine months ended September 30, 2003.  These working capital timing differences primarily included accounts receivable, accounts payable and accrued liabilities, prepaid expenses offset in part by notes receivable and income taxes payable.

Investing Activities.  Net cash used in investing activities for the nine months ended September 30, 2004 and 2003 was $2,602,571 and $728,337, respectively.  On June 18, 2004, net cash of $2,000,000 was used in connection with the acquisition of Access Healthsource, Inc.  The remaining cash used in investing activities for the nine months ended September 30, 2004 and 2003 was used to purchase fixed assets necessary to accommodate and support our operations.

Financing Activities.  Net cash used in financing activities for the nine months ended September 30, 2004 and 2003, was $1,436,160 and $1,044,569, respectively.  During the nine months ended September 30, 2004 and 2003, net cash used in financing activities was used for repayments of capital leases.

At September 30, 2004 and December 31, 2003, we had working capital of $7,961,547 and $8,818,823, respectively. Other than our capital lease obligations of $789,370, we do not have any capital commitments. We do not anticipate that our capital expenditures for the remainder of  2004 will exceed the amount incurred during 2003.  We believe that our existing cash and cash equivalents, and cash provided by operations will be sufficient to fund our normal operations and capital expenditures for the next 12 months.

Because our capital requirements cannot be predicted with certainty, there is no assurance that we will not require any additional financing during the next 12 months, and if required, that any additional financing will be available on terms satisfactory to us or advantageous to our shareholders.

Stock Repurchase Plan

On July 8, 2004, our Board of Directors authorized the repurchase of up to 500,000 shares of our common stock through open market or private purchase transactions over the next year depending on prevailing market conditions.  As of the filing of this report, we have purchased 162,592 shares under this authorization for a total  consideration of $450,012 weighted average  price of $2.77 per share.  Given the current interest rate environment, the nature of other available investments and our expected cash flows, we believe that purchasing our common stock shares enhances shareholder value.  Any additional treasury stock purchases will be made at prices that we are considered attractive and at such times that we believe will not unduly impact our liquidity.

Cautionary Statement Relating to Forward Looking Information

We have included some forward-looking statements in this section and other places in this report regarding our expectations.

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These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  Some of these forward-looking statements can be identified by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategies that involve risks and uncertainties.  You should read statements that contain these words carefully because they:

•                  discuss our future expectations;

•                  contain projections of our future operating results or of our future financial condition; or

•                  state other “forward-looking” information.

We believe it is important to discuss our expectations; however, it must be recognized that events may occur in the future over which we have no control and which we are not accurately able to predict.  Readers are cautioned to consider the specific business risk factors described in our annual report on Form 10-K for the fiscal year ended December 31, 2003 and our Schedule 14A Proxy Statement for our 2004 annual shareholders meeting, and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof.  We undertake no obligation to publicly revise forward-looking statements to reflect events or circumstances that may arise after the date hereof.

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

We do not have any investments in market risk sensitive instruments.

Item 4.           Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible primarily for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission.  These controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Furthermore, our Chief Executive Officer and Chief Financial Officer are responsible for the design and supervision of our internal controls over financial reporting  that are then effected by and through our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  These policies and procedures (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our Executive Officer and Chief Financial Officer, based upon their evaluation of the effectiveness of our disclosure controls and procedures and the internal controls over financial reporting as of the last day of the period covered by this report, concluded that our disclosure controls and procedures and internal controls over financial reporting were fully effective as of the last day of the period covered by this report and reported to our auditors and the audit committee of our board of directors that no change occurred in our disclosure controls and procedures and internal control over financial reporting occurred during the period covered by this report that would materially affect or is reasonably likely to materially affect our disclosure controls and procedures or internal control over financial reporting.  In conducting their evaluation of our disclosure controls and procedures and internal controls over financial reporting, these executive officers did not discover any fraud that involved management or other employees who have a significant role in our disclosure controls and procedures and internal controls over financial reporting.  As a result of our acquisition of Access, we have made a number of significant changes to our internal controls over financial reporting beginning in the second quarter of 2004.  The changes involved combining the financial reporting process and the attendant personnel and system changes.  Because no significant deficiencies or material weaknesses were discovered, no corrective actions were necessary or taken to correct significant deficiencies and material weaknesses in our internal controls and disclosure controls and procedures.

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PART II OTHER INFORMATION

Item 1.                       Legal Proceedings

We previously reported that we are a defendant in two different cases involving facts arising from the same incident in California.  The case styled “Manuela Zermeno, individually and on behalf of the general public; and Juan A. Zermeno, individually and on behalf of the general public vs. Precis, Inc., an Oklahoma corporation and Does 1 through 100, inclusive” was filed on August 14, 2003 in the Superior Court of the State of California for the county of Los Angeles.  A second case styled “California Foundation for Business Ethics, Inc., a California non-profit corporation, v Precis, Inc., and Does 1 through 100, inclusive was filed on September 9, 2003, in the Superior Court of the State of California for the country of Los Angeles.

The two above cases were removed to the United States District Court for the Central District of California and consolidated, by order of the court, on December 4, 2003.

In both cases, allegations were made that our Care Entrée program violated consumer protection statutes in California.  The Company has entered into settlement agreements with the plaintiffs in both cases.  We settled with the Foundation for Business Ethics in the third quarter and with the Zermenos in October.  As part of those settlements, we have paid a total of $96,500 to the plaintiffs and agreed to comply with certain provisions of Section 1812 of the California Civil Code.  This is the law that governs discount buying organizations.  We do not expect that this settlement will have any material effect on our ability to do business in California.  We have not yet settled one claim brought by the Zermenos.  This remaining claim is that the Care Entrée program violates Section 445 of the California Health and Safety Code, a provision that prohibits the payment of fees for referrals made to medical providers.  Per our agreement with the Zermenos, this remaining claim will be submitted to a California state judge for proceeding by way of a summary judgment motion, without any further discovery expected.  We cannot provide any assurance regarding the outcome of this of the remaining piece of the litigation.  A finding that the Care Entrée program does violate Section 445 would have a material negative effect on our operations in California.

The other matter which we have previously reported, Kirk, et al v, Precis, Inc. and David May, remains pending in the District Court of Tarrant County, Texas, Case No. 236 201 468 03.  The Company has brought a denial of coverage lawsuit against its insurance carriers.  Our carriers have denied coverage of the claim that we submitted with respect to our potential liability from this litigation.

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Item 2.           Changes in Securities and Use of Proceeds

(a) Exhibits:

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(b) Reports on Form 8-K:

On July 2, 2004, Registrant filed a report on Form 8-K reporting the following items:

Item 2 – Acquisition or disposition of assets:

Reporting our acquisition of Access HealthSource, Inc.

Item 7 – Financial statements and exhibits:

Exhibit 2.1 - Stock Purchase Agreement

Exhibit 2.7 - Employment Agreement

Exhibit 99.1 - Press release announcing acquisition of Access HealthSource, Inc.

On July 8, 2004, Registrant filed a report on Form 8-K reporting the following items:

Item 5 – Other events and regulation FD disclosure:

Reporting the authorized repurchase by the Company of up to 500,000 shares of its common stock.

Item 7 – Financial statements and exhibits:

Exhibit 99.1 - Press release announcing repurchase program

On August 4, 2004, Registrant filed a report on Form 8-K reporting the following items:

Item 7 – Financial statements and exhibits:

Exhibit 99.1 - Press release announcing the expected results of operations for the three months and six months ended on June 30, 2004.

Item 12 – Results of operations and financial condition for a completed quarter:

Reporting our expected results of operations for the three months and six months ended on June 30, 2004.

On September 1, 2004, Registrant filed a report on Form 8-K reporting the following items:

Item 5.02 – Departure of directors or principal officers, election of directors, appointment of principal officers:

Reporting appointment of Robert L. Bintliff as our Executive Vice President and Chief Financial Officer.

Item 9.01 – Exhibits:

Exhibit 99.1 - Press release announcing appointment of Robert L. Bintliff as our Executive Vice President and Chief Financial Officer

On September 1, 2004, Registrant filed a report on Form 8-K/A reporting the following items:

Item 9.01 - Financial statements and exhibits:

Amending Form 8-K filed on June 18, 2004 and filed with the Commission on July 2, 2004 to include additional financial information.

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SIGNATURES:

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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INDEX TO FINANCIAL STATEMENTS

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PRECIS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRECIS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRECIS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRECIS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRECIS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See Accompanying Notes to Condensed Consolidated Financial Statements

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PRECIS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Interim Financial Information

The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position at such dates and of the operations and cash flows for the periods then ended. The financial information is presented in a condensed format, and it does not include all of the footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2004 and 2003 are not necessarily indicative of results that may be expected for the entire year.  The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and reported amounts of revenues and expenses during the reporting periods under consideration.  Actual results could differ materially from such assumptions and estimates.  The accompanying condensed consolidated financial statements and related footnotes should be read in conjunction with the Company’s audited financial statements, included in its December 31, 2003 Form 10-K filed with the Securities and Exchange Commission.

Note 2 – Business Acquisition

On June 18, 2004, the Company completed its acquisition of Access HealthSource, Inc. (“Access”), a third party administrator from National Center for the Employment of the Disabled.  Access’ results of operations have been included in the Company’s results of operations from that date. The terms of the transaction are such that the Company acquired all of the outstanding capital stock of Access for a purchase price of $3.4 million, consisting of 488,486 shares of common stock of the Company valued at $1.4 million ($2.87 per share), and $2 million in cash, excluding acquisition costs of investment banking, valuation and legal and accounting fees.  Investment banking, valuation and legal and accounting fees both paid and accrued were approximately $310,000 for a total purchase price consideration of $3,710,000.  In addition to the purchase price consideration, there is a contingency payout should the earnings before interest, taxes, depreciation and amortization (“EBITDA”) of Access reach certain amounts after the closing of the transaction and before December 31, 2006.  EBITDA, while not  considered a measure under  accounting principles generally accepted in the United States of America, is the financial measurement utilized for the basis of the contingency payout and additional purchase price payments are dependent on Access achieving certain EBITDA levels.  The maximum amount of the consideration that may be paid to the seller of Access, including the closing date purchase price consideration and investment banking, valuation and legal and accounting fees, is $9,773,500.  The contingency payout will be accounted for as a decrease in the Company’s cash and cash equivalents, an increase to stockholders’ equity and a corresponding increase in goodwill.

Of the closing purchase price consideration of $3,710,000, $1,796,000 has been allocated to goodwill and by $1,400,000 has been allocated to a contract acquired in the acquisition of Access.  The Company anticipates that the amortization of this goodwill will not be deductible for federal income tax purposes.  The remaining closing purchase price consideration has been allocated to working capital of $308,000 and fixed assets of $206,000.  The allocation of $1,796,000 to goodwill is considered appropriate, as Access strategically complements the Company’s healthcare service offering.  Access completes the Company’s healthcare offering which is to provide individuals and employee group markets access to preferred provider networks, medical escrow accounts and third party administration capabilities to adjudicate and pay for the medical claims.  From a sales distribution standpoint, the Company has the ability to grow Access’ regional business as the Company has numerous independent marketing representatives who sell both to the individual and employer groups throughout the United States.  The Company’s acquisition of Access serves to complement its most recent entry into the public sector market, with the State of Louisiana.  Access’ primary area of expertise is in the public sector market.  The contract carrying value of $1,400,000 will be amortized over the contract’s expected life of 10 years.

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The following financial condensed results of operations presents the Company’s acquisition of Access prepared on a pro-forma basis.

Note 3 – Common Stock Options

As of September 30, 2004, the Company has three stock-based compensation plans.  The Company applies APB 25 and related interpretations in accounting for its plans.  Under APB 25, compensation for services that a corporation receives through stock-based compensation plans should be measured by the excess, if any, of the quoted market price of the stock at the measurement date less the amount, that the individual is required to pay.  No compensation expense was recorded during the three and nine months ended September 30, 2004 and 2003 related to its stock option plans under APB 25.  If the Company had elected to recognize compensation based on the fair value of the options granted at the grant date as prescribed by “Statement of Financial Accounting Standards No. 123 (“SFAS 123”) Accounting for Stock-Based Compensation”, net earnings and net earnings per share would have decreased as shown in the pro forma amounts below for the three and nine months ended September 30, 2004 and 2003.