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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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

The aggregate market value of the voting and non-voting equity held by non-affiliates of the registrant as of June 30, 2003 was $81.5 million, based on the last sale price reported for such date on the NASDAQ National Market. This determination is not necessarily conclusive for other purposes.

As of March 31, 2004, there were 39,451,097 shares of Common Stock of the registrant outstanding.

This Amendment No. 3 to Quovadx, Inc.’s Annual Report on Form 10-K/ A for the fiscal year ended December 31, 2003 is being filed for the purpose of refiling corrected Items 3, 6, 7, 8, 9A and Exhibits 31.1, 31.2, 32.1 and 32.2 to reflect the restatement of our financial results for the years ended December 31 2003 and 2002. We have made no further changes to the previously filed Form 10-K/ A. All information in this Form 10-K/ A is as of December 31, 2003, and does not reflect any further subsequent information or events other than the restatement. This Amendment No. 3 to Form 10-K/ A amends our previously filed Amendment No. 2 to Form 10-K/ A that was filed on March 31, 2004.

All statements, trend analysis and other information contained in this Annual Report on Form 10-K (“Annual Report”) of Quovadx, Inc. (“Quovadx,” the “Company,” the “Registrant,” “we” or “us”) and the information incorporated by reference which are not historical in nature are forward-looking statements within the meaning of the Private-Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect” and “intend” and other similar expressions. All statements regarding the Company’s expected financial position and operating results, business strategy, financing plans, and forecast trends relating to our industry are forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” below.

ROGUE WAVE, SOURCEPRO, STINGRAY, CLOVERLEAF, HOSTACCESS, WEBACCEL and INSURENET are registered trademarks of Quovadx, Inc. in the United States and/or select foreign countries; and QDX and QUOVADX are trademarks of Quovadx, Inc. The absence of a trademark from this list does not constitute a waiver of Quovadx, Inc.’s intellectual property rights concerning that trademark. CARE DATA EXCHANGE is a registered trademark of the California Health Care Foundation in the United States. This document may contain references to other companies, brand and product names. These companies, brand and product names are used herein for identification purposes only and may be the trademarks of their respective owners.

On November 14, 2001, a shareholder class action complaint was filed in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed an amended complaint. The amended complaint asserts that the prospectus from the Company’s February 10, 2000 initial public offering (“IPO”) failed to disclose certain alleged improper actions by various underwriters for the offering in the allocation of the IPO shares. The amended complaint alleges claims against certain underwriters, the Company and certain officers and directors under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Bartula v. XCare.net, Inc., et al., Case No. 01-CV-10075). Similar complaints have been filed concerning more than 300 other IPO’s; all of these cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. In a negotiated agreement, individual defendants, including all of the individuals named in the complaint filed against the Company, were dismissed without prejudice, subject to a tolling agreement. Issuer and underwriter defendants in these cases filed motions to dismiss and, on February 19, 2003, the Court issued an opinion and order on those motions that dismissed selected claims against certain defendants, including the Section 10(b) fraud claims against the Company, leaving only the Section 11 strict liability claims under the Securities Act of 1933 against the Company. A committee of our Board of Directors has approved a settlement proposal made by the plaintiffs, but the settlement is subject to a number of conditions. If the settlement is not achieved, the Company will continue to aggressively defend the claims. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

CareScience, Inc. and certain of its present and former officers are defendants in a purported shareholder class action lawsuit litigation pending in the United States District Court for the Eastern District of Pennsylvania for alleged violations of federal securities laws. The actions seek compensatory and other damages, and costs and expenses associated with litigation. Although we cannot predict the ultimate outcome of the case or estimate the range of any potential loss that may be incurred in the litigation, we believe the lawsuits are without merit, CareScience denies all allegations of wrongdoing asserted by plaintiffs, and we believe CareScience has meritorious defenses to plaintiffs’ claims. We intend to vigorously defend the lawsuits. The class action litigation is the result of several complaints filed with the court beginning on October 17, 2001. These actions were consolidated on November 16, 2001. The court approved the selection of the lead plaintiff in the litigation on March 12, 2002. CareScience filed a motion to dismiss the consolidated complaint on August 7, 2002. These complaints purport to bring claims on behalf of all persons who allegedly purchased CareScience common stock between June 29, 2000 and November 1, 2000, for alleged violations of the federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with respect to the initial public offering of CareScience common stock. Specifically, the complaints allege, among other things, that the CareScience Prospectus and Registration Statement misrepresented and omitted to disclose material facts concerning its competitors, two of its prospective products and its contract with the California HealthCare Foundation. On July 25, 2003, the Judge granted CareScience’s motion to dismiss the claims under Section 12(a)(2) of the Securities Act, but denied its motion to dismiss the claims under Sections 11 and 15 of the Securities Act. CareScience filed an answer denying all allegations of wrongdoing. Discovery has not yet commenced. In February 2004, an agreement was reached to settle this case, subject to court approval after notice to the former shareholders. On July 28, 2004, the Court signed an order approving the form of the settlement notices, setting forth requirements for providing notice to the class and handling any objections, and scheduling a settlement fairness hearing for October 27, 2004 to determine whether the Court should approve the settlement. If the settlement is achieved, the entire settlement amount will be paid by insurance, without any contribution from the Company. If the settlement is not achieved, the Company will continue to aggressively defend the claims. The Company believes it has meritorious defenses. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

On March 18, 2004, a purported class action complaint was filed in the United States District Court for District of Colorado, entitled Smith v. Quovadx, Inc. et al, Case No. 04-M-0509, against Quovadx, Inc., its now-former Chief Executive Officer and its now-former Chief Financial Officer. The complaint alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, purportedly on behalf of all persons who purchased Quovadx common stock from October 22, 2003 through March 15, 2004. The claims are based upon allegations the Company (i) purportedly overstated its net income and earnings per share during the class period, (ii) purportedly recognized revenue from contracts between the Company and Infotech Networks Group prematurely, and (iii) purportedly lacked adequate internal controls and was therefore unable to ascertain the financial condition of the Company. Eight additional, nearly identical class action complaints were filed in the same Court based on the same facts and allegations. The actions seek damages against the defendants in an unspecified amount. On May 17 and 18, 2004, the Company filed motions to dismiss each of the complaints. Also on May 17, 2004, several potential lead plaintiffs filed motions for appointment as lead plaintiff in the cases. On May 21, 2004, the Court entered an order denying consolidation of the actions and directing that all discovery and other proceedings (including the appointment of a lead plaintiff) are stayed pending determination of the motions to dismiss. Since then, all but one of the actions, entitled Heller v. Quovadx, Inc., et al., Case No. 04-M-0665 (OES) (D. Colo.), have been dismissed. The plaintiff in Heller has filed a first amended complaint, which asserts the same claims as those asserted in the original complaint, and includes allegations regarding the Company’s accounting for certain additional transactions. On July 14, 2004, the Company filed a motion to dismiss the first amended complaint in Heller. The class actions are still in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

On March 22, 2004, a shareholder derivative action was filed in the District Court of Colorado, County of Arapahoe, entitled Marcoux v. Brown et al, against the members of the Board of Directors and certain now-former officers of Quovadx alleging breach of fiduciary duty and other violations of state law. The Company is named solely as a nominal defendant against which no recovery is sought. This complaint generally is based on the same facts and circumstances as alleged in the class action complaints discussed above, alleging that the defendants misrepresented Quovadx financial projections and that one of the defendants violated state laws relating to insider trading. The action seeks damages in an unspecified amount against the individual defendants, disgorgement of improper profits and attorney’s fees, among other forms of relief. On April 13, 2004, the Company and its nonexecutive directors filed a motion to dismiss the action. On or about April 21, 2004, a second, nearly identical shareholder derivative complaint, seeking the same relief, was filed in the United States District Court for the District of Colorado, entitled Thornton v. Brown et al. The plaintiffs in both of the shareholder derivative actions are represented by the same local counsel. On or about May 20, 2004, a third, nearly identical shareholder derivative complaint, seeking the same relief, was filed in the District Court of Colorado, County of Arapahoe, entitled Jaroslawicz v. Brown, et al. On May 21, 2004, the Court entered an order in Marcoux directing that the Company, named as a nominal defendant, be realigned as a plaintiff in the action and remanding the action back to state court. Subsequently, the plaintiff in Thornton voluntarily dismissed his action from federal court and refiled in state court. The three shareholder derivative actions are now all pending in the Colorado state court. A stipulation consolidating the three actions and setting a date for the filing of a consolidated amended complaint is currently before the state court for approval. The shareholder derivative actions are still in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

On April 12, 2004, the Company announced that the Securities and Exchange Commission (“SEC”) had notified the Company that its previously announced informal inquiry had become a formal investigation pursuant to an “Order Directing Private Investigation and Designating Officers to Take Testimony.” The SEC is investigating transactions entered into during the third quarter of 2002 and transactions entered into during 2003 including two distributor contracts totaling approximately $1 million and transactions between Quovadx and Infotech Network Group. The investigation is continuing, and the Company continues to provide documents and information to the SEC.

Quovadx, Inc., its now-former Chief Executive Officer, its now-former Chief Financial Officer and its Board of Directors. The complaint alleged violations of Section 11 and Section 15 of the Securities Act of 1933, as amended, purportedly on behalf of all former shareholders of Rogue Wave Software, Inc. who acquired Quovadx common stock in connection with the Company’s exchange offer effective December 19, 2003. The claims are based upon the same theories and allegations as asserted in the Section 10(b) class actions described above. The Court denied plaintiff’s motion to consolidate this Section 11 action with the Section 10(b) cases and authorized the two competing lead plaintiff candidates to take discovery of each other in advance of a hearing on the appointment of lead plaintiff. On July 14, 2004, the Company filed an answer to the Section 11 complaint, denying allegations of wrongdoing and asserting various affirmative defenses. The individual defendants filed a motion to dismiss the Section 11 complaint. This class action also is in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

On July 28, 2004, Ronald Renjilian, a former employee, filed a Sarbanes-Oxley whistle blower complaint against the Company with the US Department of Labor Occupational Safety and Health Administration. The complaint alleges that the Company’s April 30, 2004 termination of Mr. Renjilian’s employment was an action taken against Mr. Renjilian as a result of his engaging in protected activity. The Company denies any wrongdoing and intends to aggressively defend this claim. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

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

The consolidated statements of operations data below for the years ended December 31, 2003, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003 and 2002, are derived from and are qualified by reference to the Company’s consolidated financial statements which are included elsewhere in this Annual Report. The consolidated statements of operations data for the years ended December 31, 2000 and 1999 and the consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are derived from the Company’s consolidated financial statements, which are not included in this Annual Report, but can be derived from other filings with the Securities and Exchange Commission. The data below reflect the restatement of our consolidated financial statements for the years ended December 31, 2002 and 2003. You should read the following selected financial data with the consolidated financial statements and related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Amendment No. 3 to our Form 10-K/A. You should also read our quarterly reports on Form 10-Q for the first and second quarters of 2004 filed concurrently with this Form 10-K/A regarding subsequent events to the financial information contained in this Form 10-K/A.


	•	In 1999, we completed a sale of Series B convertible preferred stock with net proceeds totaling $13.7 million.


	•	Our registration statement on Form S-1 covering our initial public offering (the “Offering”) of 5,750,000 shares of common stock (including the underwriter’s over-allotment option of 750,000 shares of common stock) at $18.00 per share was declared effective on February 9, 2000. The net proceeds to us from the sale of shares of our common stock in the offering after deducting expenses of $2.1 million and underwriting discounts and commissions of $7.2 million, were $94.2 million.

	•	In October 2000, the Company entered into a Software License and Services Agreement (the “Agreement”) with MedUnite, Inc. (“MedUnite”) to provide software development services related to a pilot program. In connection with the Agreement, the Company issued to MedUnite warrants to purchase 1,350,000 shares of Quovadx common stock at an exercise price of $4.06. The warrants were immediately vested, exercisable and non-forfeitable for a period of eighteen months from the date of grant. The fair value of the warrants was calculated to be $3.1 million and was determined using the Black-Scholes option pricing model utilizing a volatility factor of 120%, risk-free interest rate of 6.0% and an expected life of 18 months. The amounts billed and billable to MedUnite up to the date that the first pilot was delivered (March 2001) were reduced by the fair value attributed to the warrants. For the year ended December 31, 2000, the Company allocated $2.2 million of the warrant charge to billings and amounts billable. The remaining value of the warrants of $0.9 million was allocated to billings in the first quarter of 2001. In 2001, MedUnite exercised all the warrants and purchased 1,012,167 million shares of the Company’s common stock.

	•	In 2000, the Company purchased all the outstanding stock of Advica Health Resources (“Advica”) for 70,000 shares of common stock in a transaction accounted for as a purchase. The total purchase price of Advica was $2.2 million. We also acquired all of the outstanding stock of Integrated Media Inc. (“Integrated Media”) for $2.1 million in a transaction accounted for as a purchase. The 2000 acquisitions generated goodwill and intangible assets totaling $3.5 million.

	•	In June 2001, the Company acquired the outstanding common stock of Confer Software, Inc., (“Confer”) by merger of a wholly owned subsidiary of Quovadx with Confer. The purchase price, totaling $6.6 million, included 592,453 shares of Quovadx common stock in exchange for the outstanding shares of Confer capital stock, the assumption of a $461,250 employee bonus plan that was paid in cash and $1.8 million in merger-related fees. In August 2001, the Company consummated the acquisition of Healthcare.com Corporation (“Healthcare.com”). The purchase price, totaling $93.1 million, included 10,702,043 shares of Quovadx common stock issued in exchange for all outstanding shares of Healthcare.com capital stock and $4.5 million in merger-related fees. In December 2001, the Company consummated the acquisition of the Pixel Group (“Pixel”). The purchase price, totaling $7.3 million, included $5.0 million in cash and 201,794 shares of Quovadx common stock in exchange for the outstanding shares of Pixel capital stock. The aforementioned business acquisitions were accounted for under the purchase method of accounting. The 2001 acquisitions generated goodwill and intangible assets totaling $118.8 million.

	•	In March 2002, the Company completed the sale of certain assets of its Advica subsidiary to Royal Health Care of Long Island, LLC, d/b/a Royal Health Care (“Royal”) for $475,000 in cash and 4.6% of the outstanding equity in Royal. In conjunction with the sale, Quovadx is providing ASP services to Royal under a seven year contract.

	•	On March 27, 2002, the Company purchased all of the outstanding capital stock of Outlaw Technologies, Inc. (“Outlaw”). The purchase price, totaling $2.7 million, included 138,575 shares of Quovadx common stock and $1.8 million in cash and professional fees directly related to the acquisition. Assets acquired included $1.7 million in goodwill, $0.8 in software and $0.7 million in other intangible assets. The transaction was accounted for as a purchase. Outlaw’s balance sheet included $0.3 million in current assets and $0.6 million in liabilities upon acquisition.

	•	In the third quarter of 2002, the Company performed an assessment of the carrying value of the Company’s goodwill recorded in connection with its various acquisitions. The assessment was performed pursuant to SFAS 142 because of the significant negative Company, industry and economic trends affecting the market value of the Company’s common stock. As a result, the Company recorded


		a charge of $93.1 million to reduce goodwill during the third quarter of 2002, based on the amount by which the carrying amount of these assets exceeded their estimated fair value.

	•	In the third quarter of 2003, Quovadx acquired the outstanding stock of CareScience, Inc. (“CareScience”) by merger of a wholly owned subsidiary of Quovadx with CareScience. CareScience, Inc. is primarily a provider of care management services to hospitals and health systems. CareScience stockholders received a fixed exchange rate of $1.40 cash and 0.1818 shares of Quovadx common stock for each share of CareScience common stock they owned. The purchase price totaling $30.1 million, included 2,415,900 shares of Quovadx common stock and $4.7 million in cash, net of acquired cash, in exchange for all outstanding shares of CareScience and $2.3 million in merger-related fees.

	•	In the fourth quarter of 2003, Quovadx acquired the outstanding stock of Rogue Wave Software, Inc. (“Rogue Wave”) by merger of a wholly owned subsidiary of Quovadx with Rogue Wave. Rogue Wave develops, markets and supports object-oriented and infrastructure software technology. Rogue Wave stockholders received a fixed exchange rate of $4.09 in cash and 0.5292 shares of Quovadx common stock for each share of Rogue Wave Common Stock they owned. The purchase price totaling $79.1 million, included 5,656,670 million shares of Quovadx common stock and $8.0 million in cash, net of acquired cash, in exchange for all outstanding shares of Rogue Wave and $3.9 million in merger-related fees.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

During the first and second quarters of 2004 a number of key events occurred that affected our business operations and business prospects and required significant senior management attention, including restatement of previously issued financial statements. Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) resigned and were replaced by Harvey A. Wagner, Acting President & CEO, effective May 1, 2004 and Melvin L. Keating, Acting CFO, effective April 13, 2004. After these appointments, other management changes have been made, primarily involving terminations and promotions in financial and sales management.

Internal Review. During the second quarter of 2004, we began an internal review of our historical accounting policies, practices and controls in preparation for our first quarter 2004 quarter-end closing and financial statement preparation under the new management team. Previously, on March 15, 2004, we had announced the need to restate and subsequently restated the third quarter of 2003 financial results. Our Audit Committee retained independent counsel to conduct a full investigation of our relationship with Infotech Network Group and the circumstances leading up to that restatement. As a result of this review, on May 13, 2004 we delayed reporting our first quarter 2004 Form 10-Q. Additionally, under the direction of our Board of Directors and with the advice of outside counsel and our independent registered public accounting firm, our new management conducted an internal review and investigation of prior periods to determine whether there

were additional revisions to be made. As a result, we are amending and refiling our 2003 annual report on Form 10-K/ A to reflect restated financial results for 2003 and 2002 simultaneously with the initial filing of our Forms 10-Q for the periods ending March 31, and June 30, 2004.

SEC Proceedings. In December 2003, we were notified by the US Securities and Exchange Commission (SEC) that it was conducting an informal inquiry into selected transactions completed in the third quarter of 2002. In March 2004, we voluntarily notified the SEC that we would restate our financial results for the unaudited third quarter of 2003; after this notification, the SEC informed us that its informal inquiry would be expanded to include our relationship with Infotech Network Group and would become a formal investigation. In April 2004, we received notice from the SEC of a formal order of investigation and subpoena. This investigation is ongoing.

Legal Proceedings. Following our March restatement announcement, various shareholder class-action and derivative lawsuits have been filed against the Company, certain former officers and, in the case of certain of the lawsuits, against our independent directors. For a further description of the nature and status of these legal proceedings, see “Item 3 — Legal Proceedings.”

Enhanced Financial Disclosure Controls. Our ongoing internal review includes an evaluation of our policies and procedures for disclosure and internal controls, corporate governance and other processes, in order to ensure the quality, consistency and timeliness of our financial information and reporting. We continue to invest financial resources in upgrading our financial reporting processes and capabilities, including hiring additional personnel, utilizing outside consultants and implementing new review processes. We plan to continue investing significant resources on this initiative and in preparation for additional reporting on internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002.

Quovadx is a global software and services firm that has helped more than 20,000 enterprise customers worldwide develop, extend and integrate applications based on open standards. Quovadx serves companies in healthcare, financial services, telecommunications, the public sector, manufacturing, and life sciences. We believe that we have the opportunity to sell additional products into this large customer base.

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

Acquisitions have historically been part of our growth strategy and we completed two acquisitions in 2003.

On September 19, 2003, Quovadx acquired the outstanding stock of CareScience, Inc. (“CareScience”). CareScience, Inc. is primarily a provider of care management services to hospitals and health systems. CareScience stockholders received a fixed exchange rate of $1.40 cash and 0.1818 shares of Quovadx common stock for each share of CareScience common stock they owned. The total purchase price for this acquisition was $30.1 million, including 2,415,900 shares of Quovadx common stock, cash of $4.7 million, net of cash acquired, and $2.3 million in merger-related costs.

On December 19, 2003, Quovadx acquired the outstanding stock of Rogue Wave Software, Inc. (“Rogue Wave”). Rogue Wave develops, markets and supports object-oriented and infrastructure software technology. The acquisition, structured as an exchange offer, resulted in Quovadx acquiring all of the outstanding stock of Rogue Wave for $4.09 in cash and 0.5292 of a share of Quovadx common stock for each share of Rogue Wave Common Stock. The total purchase price for this acquisition was $79.1 million, including 5,656,670 shares of Quovadx common stock, exchange of stock options valued at $3.4 million, cash of $8.0 million net of cash acquired and $3.9 million in merger-related costs.

On March 15, 2004, we issued a press release announcing material revisions to our previously announced unaudited financial results for the third and fourth quarters of 2003. These revisions concern shipments to Infotech Network Group (“Infotech”), an Indian company, in the third and fourth quarters of 2003. The Company believed at the time of the shipments that collection of the receivable was probable due to the establishment of a credit line by Infotech that could be used for payment. After the shipments of software product, the Company has encountered unanticipated delays in obtaining payment from Infotech. Based on further analysis of Infotech’s ability to pay for the software purchased, the accounting for the revenue recognized has been revised from an accrual to a cash basis. As a result, we have materially restated our previously announced financial results for the third and fourth quarters of 2003 by the deletion of all revenue and commissions that had been recorded related to Infotech.

On March 15, 2004, the Company announced that it was restating its 2003 third quarter financial results to reverse all previously recorded revenue associated with Infotech Network Group. Subsequently, new management undertook a review of the Company’s historical accounting policies and practices. As a result of this review, additional accounting inaccuracies were detected affecting the Company’s financial results for the years ended December 31, 2003 and 2002 and the Company commenced an internal investigation under the direction of the Board of Directors. As a result of this investigation, the Company has restated its financial results for the years ending December 31, 2003 and 2002.

The financial results for the years ended December 31, 2003 and 2002 have been restated to properly account for transactions that were previously inaccurately reflected in the Company’s financial results. The cumulative effect of these restated financial statements increased the previously reported net loss by $1,783,000 for the year ended December 31, 2003 and $655,000 for the year ended December 31, 2002. These inaccuracies (a) overstated software license revenues due to the timing of delivery of software products and the accounting for certain reseller relationships (b) overstated professional services revenues due to the timing of adjustments to estimates used in determining the recognition of revenue under the percentage of completion method and (c) understated the cost of professional services revenue due to the capitalization of software development costs without properly deducting the portion of the cost related to a professional services agreement with a customer. A detailed summary of the restatement is set forth below.

The restatement also decreased current assets by $800,000 and $0 at December 31, 2003 and 2002, respectively, and increased current liabilities by $978,000 and $330,000 at December 31, 2003 and 2002, respectively.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company relied on significant estimates in preparing the financial statements in allocating the purchase price of its acquisitions to the assets and liabilities acquired and to evaluate the adequacy of the allowance for bad debt, the percentage of completion of fixed priced professional service contracts, the recoverability of deferred tax assets and the recoverability of capitalized software costs. Actual results could differ from those estimates.

The Company recognizes revenue in accordance with the provisions of Statement of Position (“SOP”) 977-2, “Software Revenue Recognition,” as amended, and SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

Our License agreements generally provide either that customers pay a license fee based on a specified number of instances of the software on the type of software modules licensed or pay a subscription fee for a set number of years. Customers that purchase licenses, under a perpetual license agreement, generally enter into renewable one-year maintenance agreements that entitle the customer to receive unspecified updates on the licensed software, error corrections and telephone support, generally for a fixed fee.

The methodology the Company uses to recognize perpetual license software license and related services revenue is dependent on whether the Company has established vendor-specific objective evidence (“VSOE”) of fair value for the separate elements of a multiple-element agreement. If an agreement includes both license and service elements, the license fee is recognized on delivery of the software if the remaining services are not essential to the functionality of the software, the collection of the fees is probable, the fees are fixed and determinable, an agreement is signed and the Company has established VSOE of fair value for the remaining services. Revenue from the related services is recognized as the services are provided. When the related services are essential to the functionality of the base product, or when the Company has not established VSOE of fair value for the remaining services, the software license fees are deferred and the entire contract is recognized as the services are provided. Utilizing the criteria provided in SOP 97-2, we evaluate the vendor specific objective evidence for contracts to determine the fair value of elements delivered in situations where multiple element arrangements exist.

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

When revenue is recognized using the percentage-of-completion basis of accounting, the Company’s management estimates the costs to complete the services to be provided under the contract. Because the percentage-of-completion method is an estimation process, it has risks and uncertainties. The Company may encounter budget and schedule overruns caused by external factors beyond our control such as the utilization and efficiency of our consultants and the complexity of our customers’ IT environment. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become known. Estimated losses, if any, are recorded in the period in which the current estimates of the costs to complete the services exceed the revenue to be recognized under the contract.

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

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

When collection of fees is not probable, revenue is recognized as cash is collected. The Company does not require collateral from its customers.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to pay their accounts receivable balances. The Company assesses financial condition of its customers to determine if there is an impairment of their ability to make payments and additional allowances may be required if the financial condition of the Company’s customers deteriorates. A considerable amount of judgment is required in order to determine the realization of our receivables, including assessing the likelihood of collection and the creditworthiness of each customer.

In connection with acquisitions, we assess the fair value of assets acquired and liabilities assumed. Items such as accounts receivable, property and equipment, other intangible assets, certain accrued liabilities, and other reserves require a high degree of management judgment.

The Company recorded $48.0 million of goodwill resulting from its 2003 acquisitions. Effective January 1, 2002, SFAS No. 142 requires that goodwill be tested annually for impairment and more frequently if events or changes in circumstances indicate assets might be impaired. A significant decline in our stock price, projected revenue, projected earnings growth or projected cash flows are examples of such circumstances. The impairment test involves the use of estimates related to the fair value of the reporting units with which the goodwill is associated. The estimate of fair value requires significant judgment, including future cash flows and discount rates. Any loss resulting from an impairment test would be reflected in our statements of operations.

In connection with our acquisitions, we are required to recognize other intangible assets separate and apart from goodwill if such assets arise from contractual or other legal rights or if such assets are separable from the acquired businesses. Other intangible assets include, developed technology, customer-related assets such as order backlog, and trade name. Determining a fair value for such items requires a high degree of judgment, assumptions, and estimates, including future cash flows generated from the assets and discount rates. In certain situations, where deemed necessary, we may use third parties to assist us with such valuations. In addition, these intangible assets are to be amortized over the best estimate of their useful life. At December 31, 2003, we had intangible assets of $17.7, net of amortization.

We have estimated amounts for direct costs of our acquisitions, merger-related expenses, and liabilities related to our business combinations in accordance with Emerging Issues Task Force Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Combination.” We also recorded significant acquisition-related restructuring charges, in connection with our abandonment of certain leased facilities acquired through our business combinations. The lease abandonment costs were estimated to include remaining lease liabilities offset by an estimate of sublease income. Estimates related to sublease costs and incomes are based on assumptions regarding the period required to sublease the facilities and the likely sublease rates. Materially different reported results would be likely if any of the stated costs or expenses were different from our estimations.

Software development costs are required to be expensed until the point that technological feasibility of the product is established. Once technological feasibility is established, development costs are capitalized until the product has reached general availability. The establishment of technological feasibility and continuing evaluation of the recoverability of the capitalized software development costs requires management’s judgment with respect to the impact of external factors such as future revenue, estimated economic life and changes in software and hardware technologies. Capitalized software development costs are amortized on a straight-line basis over an estimated life, which is generally three years. The Company capitalizes internal and external labor costs incurred in developing the software once technological feasibility is attained. At December 31, 2003, the Company had $6.0 million of capitalized software development costs, net of amortization.

The following table sets forth financial data for the periods indicated as a percentage of revenue.

Total Revenue. Total revenue increased $6.7 million, or 11%, to $69.9 million for the year ended December 31, 2003 from $63.2 million for the year ended December 31, 2002. The Company experienced an increase of $8.8 million, or 77.4%, in revenue generated from its license segment to $20.3 million primarily due to the Company’s planned focus on software license revenue. The addition of CareScience and Rogue Wave in 2003 increased license revenue by $1.4 million and $1.9 million, respectively. We expect our license revenue to increase with our continued focus on the license segment and penetration into new vertical markets. Revenue derived from the recurring revenue segment increased $2.8 million, or 10%, to $32.2 million primarily due to the acquisitions of CareScience and Rogue Wave, which added $1.0 million and $0.5 million, respectively, for the twelve months ended December 31, 2003. Additionally, increased license sales in 2003 led to increased maintenance revenue in 2003. Revenue from the professional services segment decreased $4.9 million, or 22%, in the year ended December 31, 2003. As we complete existing contracts, we are shifting away from large, highly competitive, stand alone professional services engagements, and are concentrating on services that are associated with software license sales. Partially offsetting this decrease was the addition of CareScience, which added $1.8 million of services revenue in the year ended December 31, 2003.

Cost of revenue. Cost of revenue increased $5.3 million, or 14%, to $44.9 million for the year ended December 31, 2003 from $39.5 million in 2002. Cost of revenue for the license segment increased 80% or

$4.4 million to $9.9 million for the year ended December 31, 2003 from $5.5 million for the year ended December 31, 2002 due to an increase in software amortization of $1.4 million in 2003 over 2002 and increased royalty expenses of $3.2 million. The addition of CareScience and Rogue Wave added $667,000 and $94,000, respectively, of license-related costs in 2003. Recurring revenue costs increased 10% to $21.0 million primarily due to increased royalty expense on maintenance revenue, which, increased $900,000 from 2002 to 2003. The addition of Rogue Wave for $92,000 and CareScience for $722,000 increased costs related to recurring revenue in the year ended December 31, 2003. Cost of revenue from the professional services segment decreased $0.9 million due to a decline in headcount in the Company’s professional services segment from 78 in 2002 to 66 in 2003. Offsetting this decrease was the addition of CareScience and its services cost of revenue of $985,000 in 2003.

Sales and marketing. Sales and marketing expense increased $4.4 million, or 33%, to $17.8 million for the year ended December 31, 2003 from $13.3 million for the year ended December 31, 2002. Sales and marketing expenses increased due to an increase in the size of the Company’s sales force and marketing professionals from 62 at December 31, 2002 to 115 at December 31, 2003 resulting from an increase in the number of product offerings and increased penetration into the software market. The acquisition of CareScience and Rogue Wave increased the 2003 headcount by 14 and 17, respectively. Commission expense was also higher for the twelve months ended December 31, 2003 due to an increase in software sales and changes in the commission plan in 2003. As a percentage of revenue, sales and marketing expense increased 4% to 25% for the twelve months ended December 31, 2003 from 21% for the twelve months ended December 31, 2002.

General and administrative. General and administrative expense decreased $0.9 million, or 7%, to $12.7 million for the year ended December 31, 2003 from $13.7 million for the prior year. The decrease in general and administrative expense was primarily due to a decline in legal expenses from $1.8 million in 2002 to $1.2 million in 2003. Additionally, bad debt expense decreased $392,000 from 2002 to 2003. Partially offsetting this decrease was the addition of CareScience and Rogue Wave, which added $206,000 and $236,000, respectively, of general and administrative costs for the year ended December 31, 2003. As a percentage of revenue, general and administrative expense decreased 4% to 18% for the twelve months ended December 31, 2003 compared to 22% for the twelve months ended December 31, 2002.

Research and development. Research and development expense increased $2.8 million, or 39%, to $10 million for the year ended December 31, 2003 from $7.2 million for the year ended December 31, 2002. The increase in research and development expense is mainly due to the acquisitions of CareScience and Rogue Wave, which increased the headcount from 71 at December 31, 2002 to 115 at December 31, 2003 and added $0.9 million in research and development costs for the year ended December 31, 2003. The Company capitalized $3.3 million of software development costs in 2003. As a percentage of revenue, research and development expenses increased 3% from 11% for the twelve months ended December 31, 2002 to 14% for the twelve months ended December 31, 2003.

Amortization of acquired intangibles. The amortization of acquired intangibles results from assets purchased through our business acquisitions. Intangible assets amortization for the twelve months ended December 31, 2003 and 2002 was $1.7 million and $2.3 million, respectively. The decrease is due to the full amortization of an intangible asset acquired in the Healthcare.com purchase.

Interest income. Interest income includes interest income on cash, cash equivalents and short-term investment balances. Interest income decreased $0.3 million to $0.7 million for the year ended December 31, 2003 from $1.0 million for the prior year period. The decrease in interest income is due to the decrease in the Company’s cash and short-term investments balance used to fund operations, acquisitions, and a shift in the company’s short-term investments to investments with shorter maturities to have funds available for the acquisitions.

Income tax benefit. A provision for federal and state income taxes has not been recorded for the twelve months ended December 31, 2003 and 2002, as we have incurred a net operating loss for 2003 and 2002. We believe that, based on the history of losses and other factors, the weight of available evidence indicates that it

Total Revenue. Total revenue increased $11.0 million, or 21%, to $63.2 million for the year ended December 31, 2002 from $52.2 million for the year ended December 31, 2001. The Company experienced an increase of $5.0 million, or 78%, in revenue generated from its software license segment due to the Company’s focus of its sales and marketing efforts on increased software sales. Revenue derived from the recurring revenue segment increased $12.0 million, or 69%, to $29.3 million primarily due to an increase in the Company’s outsourcing revenue, which was acquired in the Healthcare.com acquisition. Additionally, revenue from the transaction processing and maintenance businesses increased in 2002 over 2001. Revenue from the professional services segment decreased $6.0 million, or 21%, due to certain professional services projects winding down in 2002. Professional services revenue in 2001 was offset by a $0.9 million charge from the amortization of a deferred warrant charge, which relates to the fair value of the warrants issued to MedUnite in connection with a software license and services agreement signed in the fourth quarter of 2000.

Cost of revenue. Cost of revenue, including software amortization, increased $5.6 million, or 16%, to $39.5 million for the year ended December 31, 2002 from $33.9 million in 2001. Software amortization increased $3.4 million over the twelve months ended December 31, 2002 primarily due to an increase in the Company’s capitalized software balance from the continued development of the Company’s software products and a full year of amortization in 2002 compared to a partial year in 2001 related to software acquired in the Healthcare.com and Confer acquisitions. Partially offsetting the 2002 increase in cost of revenue expense was a decrease in expenses related to Advica. Certain assets of the subsidiary were sold in March 2002. As a percentage of revenue, cost of revenue decreased from 65% for the twelve months ended December 31, 2001 to 62% for the twelve months ended December 31, 2002. Gross margins may increase over time based on the shift in revenue to higher margin software license revenue.

Sales and marketing. Sales and marketing expense increased $4.5 million, or 51%, to $13.3 million for the year ended December 31, 2002 from $8.9 million for the year ended December 31, 2001. Sales and marketing expenses increased due to an increase in the size of the Company’s sales force and product marketing professionals. The Company also expanded its marketing efforts to introduce its new software products. As a percentage of revenue, sales and marketing expense increased 4% from 17% for the twelve months ended December 31, 2001 compared to 21% for the twelve months ended December 31, 2002.

General and administrative. General and administrative expense increased $3.3 million, or 31%, to $13.7 million for the year ended December 31, 2002 from $10.4 million for the prior year. The increase in general and administrative expense was primarily due to personnel increases in the areas of human resources, accounting, legal and administration. Increased directors and officers insurance expense and outside legal services also added to the overall increase in general and administrative expense. As a percentage of revenue, general and administrative expense increased 2% from 20% for the twelve months ended December 31, 2001 compared to 22% for the twelve months ended December 31, 2002.

Research and development. Research and development expense increased $2.4 million, or 50%, to $7.2 million for the year ended December 31, 2002 from $4.8 million for the year ended December 31, 2001. The increase in research and development expense reflects an increase in headcount to support the continued development of our software and adaptive applications. As a percentage of revenue, research and development expenses increased 2% from 9% for the twelve months ended December 31, 2001 to 11% for the twelve months ended December 31, 2002. The Company capitalized $3.5 million of software development costs in 2002.

Amortization of acquired intangibles. In accordance with the adoption of Financial Accounting Standard (SFAS) No. 142 Goodwill and Other Intangible Assets, the Company did not record amortization expense related to goodwill for acquisitions entered into after July 1, 2001 and for all acquisitions as of January 1, 2002. The adoption of SFAS No. 142 had the effect of increasing amortization expense in 2002 from 2001 by $722,000. This decrease was more than offset by an increase in the amortization of intangible

Stock compensation expense. During 1999 and through February 10, 2000, the effective date of the Company’s initial public offering, in connection with stock options granted to certain employees and a consultant under the stock plan, we have recorded unearned stock compensation representing the difference between the exercise price of the options and the deemed fair value of our common stock at the date of grant. We recorded aggregate unearned compensation of $2.8 million in connection with these stock options. This stock compensation was amortized to expense over the period during which the options or common stock subject to repurchase vest, generally four years, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28. Amortization of stock compensation expense was $231,000 for the twelve months ended December 31, 2002 compared to $460,000 for the twelve months ended December 31, 2001. As of December 31, 2002, the unearned compensation balance was fully amortized.

Gain on sale of assets. The gain on the sale of assets resulted from the sale of certain assets of the Advica subsidiary to Royal for $475,000 in cash and a minority interest in Royal. The Company recorded a gain on the sale of assets of $87,000 in the first quarter of 2002.

Goodwill impairment. SFAS No. 142, requires that goodwill be tested annually for impairment and more frequently if events or changes in circumstances indicate assets might be impaired. The Company performed a transitional impairment test upon the adoption of SFAS No. 142 on January 1, 2002 and recorded no impairment as a result of this test. The Company had identified the fourth quarter as the period for its annual impairment test. However, due to significant negative Company, industry and economic trends affecting the market value of the Company’s common stock, the Company performed an interim test of goodwill impairment in the third quarter of 2002. As a result of this interim test, the Company recorded an impairment charge of $93.1 million to reduce goodwill based on the amount that the carrying value of the goodwill exceeded its fair value. This impairment charge eliminated goodwill associated with all previous acquisitions and related to each of the Company’s reportable segments.

Interest income, net. Interest income includes interest income on cash, cash equivalents and short-term investment balances. Interest income decreased $2.1 million, to $1.0 million for the year ended December 31, 2002 from $3.1 million for the prior year period. The decrease in interest income is due to a decrease in interest rates from the prior comparable period and a decrease in cash, cash equivalents and short-term investment balances to fund operations and acquisitions.

Income tax benefit. A provision for federal and state income taxes has not been recorded for the years ended December 31, 2002 and 2001, because the Company has incurred net operating losses for the year ended December 31, 2002 and 2001. We believe that, based on the history of losses and other factors, the weight of available evidence indicates that it is more likely than not that we will not be able to realize our deferred tax assets, and thus a full valuation allowance has been recorded against such assets as of December 31, 2002 and 2001.

We have historically financed our operations through a combination of private sales of common and convertible preferred stock, issuances of convertible promissory notes and public sales of common stock. Since our IPO in February 2000, we have financed our operations and acquisitions with the proceeds of that offering and cash obtained in acquisitions.

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

In the fourth quarter of 2003, the Company prepaid $0.9 million to Infotech Network Group (“Infotech”) for professional services. In March 2004, the Company paid Infotech an additional $2.0 million prepayment for professional services. Payments totaling $1.6 million were written off in the first quarter of 2004 because the recoverability of the asset is uncertain due to the deterioration of the Company’s relationship with Infotech and their inability to provide assurances that it can deliver those services in the future.

Net cash used in operating activities was $7.3 million in 2003, $10.3 million in 2002 and $4.6 million in 2001. The decrease in net cash used in operating activities in 2003 compared to 2002 is mainly due to an increase in the accounts payable balance from December 31, 2002 to December 31, 2003. The increase in net cash used in operating activities in 2002 compared to 2001 is primarily attributable to the increase in net losses.

Net cash provided by (used in) investing activities was ($1.7) million in 2003, ($14.5) million in 2002 and $20.7 million in 2001. Net cash used in investing activities in 2003 decreased primarily due to the acquisitions of CareScience and Rogue Wave partially offset by net sales of short-term investments. The decrease in net cash used in investing activities in 2002 was primarily related to net short-term securities purchases of $7.9 million and the purchase and capitalization of software of $3.5 million. The net cash provided by investing activities in 2001 is primarily attributable to the net sales of short-term investments of $32.5 million.

Net cash provided by financing activities was $1.3 million in 2003 and $1.0 million in 2002 from the exercise of stock options and the sale of stock through our employee stock purchase plan. Net cash provided by financing activities was $1.7 million in 2001 from the exercise of stock options and the sale of stock through our employee stock purchase plan totaling $4.6 million, which was partially offset by a $3.0 million payment to extinguish a Healthcare.com line of credit.

Commitments. In August 2003, the Company established a line of credit with a commercial bank that allowed the Company to borrow up to $4.0 million. On December 9, 2003, the Company reduced the line of credit to $3.1 million. The line of credit was secured by the Company’s assets exclusive of intellectual property assets, and was guaranteed by two of our subsidiaries. At December 31, 2003, the Company had no outstanding borrowings under the revolving line of credit. The line of credit was subject to financial covenants, including a minimum cash requirement, restrictions on mergers and acquisitions, obtaining additional indebtedness and dividends.

The Company’s cash and cash equivalents balances are expected to be sufficient to meet its anticipated liquidity needs for working capital and capital expenditures for the next 12 months. At July 31, 2004, the Company’s cash and cash equivalents balance was $17.4 million. The Company has reduced its workforce and reducing other costs as part of a focused effort to better align total costs of doing business with a revenue stream and to preserve cash. If additional capital resources were required for working capital or to grow our business internally, we may seek other financing arrangements; however, we cannot be assured that any financing arrangements would be available in amounts or on terms acceptable to us in the future.

The following table highlights, as of December 31, 2003, our contractual obligations and commitments to make future payments by type and period:


(1)	In connection with a software purchase in September 2003, the company has minimum royalty payments of $500,000 over two years.

On December 31, 2003, the Company had $2.1 million in open purchase commitments.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity (“VIE”), the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. The consolidation requirements of FIN 46 are effective immediately for VIE’s created after January 31, 2003. The consolidation requirements for older VIE’s are effective for financial statements of interim or annual periods beginning after June 15, 2003, however in October of 2003 the FASB deferred the effective date of FIN 46 for older VIE’s to the end of the first interim or annual period ending after December 15, 2003. Certain disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. We do not have any ownership in any variable interest entities as of December 31, 2003. We will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.

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

We incurred losses for the years ended December 31, 2003, 2002 and 2001. As of December 31, 2003, we had an accumulated deficit of $157 million. Since our IPO in February of 2000, we have funded our business primarily from the cash generated from the sale of our stock and cash flow from operations. We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses that may exceed our revenue. As a result, we may experience losses and negative cash flows in the future. Failure to achieve and maintain profitability may cause our stock price to decline and impair our business and financial prospects.

We have been cooperating with the SEC with respect to a formal order of investigation and subpoena regarding certain transactions in 2002 and 2003. Cooperation with the SEC in its investigation and our own related internal investigation has required, and likely will continue to require, significant management attention and accounting and legal resources, which could adversely affect our business, results of operations and cash flows. In addition, negative developments or publicity with respect to such an investigation could cause our stock price to decline significantly. We cannot predict the outcome of the investigation. If the SEC finds wrongdoing on our part, a financial or administrative penalty may be imposed which could jeopardize our financial viability. In addition, such findings could provide basis for additional lawsuits.

Recently, certain former officers, independent directors and the Company have been named defendants in various class action and derivative lawsuits. The findings and outcome of the SEC investigations may affect these pending lawsuits. Under Delaware law, our charter and bylaws, we are generally obligated to indemnify our directors and officers who are named defendants in any of these lawsuits and advance legal fees and costs. We are unable to estimate our liability in these matters and we may be required to pay judgments or settlements and incur expenses in aggregate amounts that could have a materially adverse effect on our business, financial condition, results of operations and cash flows.

We currently have director and officer liability insurance that may pay a portion or all of the legal fees and costs incurred in defending against claims, settlement amounts, or, damages awarded. However, if the plaintiffs are successful, we may not have sufficient insurance to cover the judgment or our insurers may deny coverage.

For a further description of the nature and status of these legal proceedings see, “Item 3 — Legal Proceedings.”

Our future success depends largely upon the support of our customers, suppliers, employees, prospective employees and investors. The restatement of our historical financial statements and our inability to file on a timely basis all of our SEC filings has resulted in negative publicity about us, has resulted in The Nasdaq Stock Market investigating delisting of our stock, and may continue to have a negative impact on the market price of our common stock. The restatement of our historical financial statements and our inability to file SEC filings in a timely manner could cause some of our customers or potential customers to refrain from purchasing or defer decisions to purchase our products and services. Additionally, current or potential suppliers may re-examine their willingness to do business with us, to develop critical interfaces to our products or to supply products and services if they lose confidence in our ability to fulfill our commitments. Employees and prospective employees may factor in these uncertainties relating to our stability and the value of any equity-based incentives in their decisions regarding employment opportunities and decide to leave our employ. Any of these losses could have a material adverse effect on our financial and business prospects.

In April 2004 we replaced our chief executive officer and chief financial officer; in May we replaced our executive vice president of sales. It may take some time for this new management team to develop strong working relationships, re-establish momentum in sales efforts, and to execute our strategic plan and operating plan. In addition, new management’s ability to complete this process has been and continues to be hindered by its need to spend significant time and effort dealing with internal and external investigations, enhancing corporate governance procedures, strengthening reporting lines and reviewing internal controls. We cannot give assurance that this restructuring of the senior management team, and the accompanying distractions, will not adversely affect our results of operations.

Due to concerns related to our restatements, late SEC filings, possible Nasdaq delisting and shareholder litigation, we could encounter a significant increase in departures of key employees from the Company. While we are taking steps to support employee retention, there can be no assurances that key employees will not leave the Company for other jobs thus impairing our ability to meet commitments and sustain revenue.

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


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

	•	the capital and expense budgeting decisions of our existing and prospective customers;

	•	the loss of a major customer;

	•	the amount and timing of operating costs and capital expenditures relating to the implementation of our business strategy;

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

	•	overall economic conditions of the U.S. and the rest of the world;

	•	overall economic conditions in the software and information systems, telecommunications, financial services and defense industries;

	•	the size, type and timing of individual license transactions;

	•	the adoption of new technologies;

	•	our success in expanding our direct sales force and indirect distribution channels;

	•	levels of international sales; and

	•	obsolescence of our products or the programming languages that our products are designed to enhance.

We have invested significant financial and management resources in reorganizing and enhancing our software sales effort. These efforts have been expensive and they have required, and we expect will continue to require, considerable executive management time and oversight, thus diverting resources from other aspects of our business. If for any reason this strategy is not successful, and we do not achieve increased software sales as anticipated, then our stock price will decline, and our business prospects and financial condition will be adversely affected.

The software market in which we compete is characterized by (1) rapid technological change, (2) frequent introductions of new products, (3) changing customer needs and (4) evolving industry standards. To keep pace with technological developments, evolving industry standards and changing customer needs, we must support existing products and develop new products. We may not be successful in developing, marketing and releasing new products or new versions of our products that respond to technological developments, evolving industry standards or changing customer requirements. Further, we may face significant competition from open source software offerings, provided to users on a no-charge basis. We may also experience difficulties that could delay or prevent the successful development, introduction and sale of these enhancements. In addition, these new products or enhancements may not adequately meet the requirements of the marketplace and may not achieve any significant degree of market acceptance. If release dates of any future products or enhancements are delayed, or if these products or enhancements fail to achieve market acceptance when released, our business, operating results and financial condition could be materially adversely affected. In addition, new products or enhancements by our competitors and open source offerings may cause customers to defer or forego purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

The market for business process management and integration software is evolving. We earn a substantial portion of our revenue from sales of solutions that utilize our business process management software, application integration software, and related services. We expect to earn a large percentage of our revenue in the future from sales of these products and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for business process management and application integration, requiring information delivery, and seeking outside vendors to develop, manage and maintain this software for their critical applications. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to our products, which may substantially inhibit the growth of our software. If the market fails to grow, or grows more slowly than we expect, our sales will be adversely affected. In addition, a weakening global economy or diverted focus of information technology departments on issues related to regulatory compliance may lead to longer sales cycle and slower sales growth.

Our primary Enterprise Application Integration product offering is sold primarily to the hospital market, and this market is close to saturation, and therefore revenues may decrease within this market segment. In addition, the primary development tools sold by our Rogue Wave division target the C++ programming language, which is diminishing in usage when compared with other programming languages such as Java. We expect that the revenues for these tools may decline over time.

We failed to timely file our first quarter 2004 Form 10-Q with the SEC and Nasdaq. As a result, the Nasdaq Stock Market initiated delisting procedures. On August 9, 2004, Nasdaq informed us that we had been granted an exception to their continued listing standards. However, our continued listing depends on our ability to timely file all periodic reports for reporting periods ending on or before September 30, 2005, and we will not be able to request an automatic extension to prolong the deadline. If we are late in making any filing during that period, we may be delisted immediately with no right to a hearing or appeal. Additionally, we must continue to meet all other continued listing requirements; or failure to do so may result in a notice of delisting to which we would be able to request a hearing. Our continued delisting vulnerability may result in further loss of investor confidence, loss of analyst coverage and depression of our stock price, which could have a material adverse affect on our business and financial prospects.

Since the disclosure of our restatement of financial statements and the formal investigation by the SEC, our stock price has been trading well below the $5.00 per share minimum that many institutional investors are prohibited from buying. We have no assurance that the stock price will rise upon our successful resolution of our delayed SEC filings. These factors may have contributed to reducing the trading activity in our stock and could further reduce the investment quality of our stock.

Professional services is a very competitive market that is highly dependent on the quality of our staff and service image. We face much larger competitors in this market segment who have considerably more resources to draw from than we have. As a result, the loss of key employees is a risk factor in this business that is affected by our current restatement issues. These issues also impact our service image to present and prospective customers and could cause contract delays. Possible employee turnover, and declining revenue in

Relationships with established channel partners are critical to our success. These relationships include independent software vendor (ISV), distributor, co-marketer and system integrator relationships. To date, we have established a number of these relationships and we rely on these partners’ ability to assist us in generating increased acceptance and use of our applications, services, and product offerings. The other parties to these relationships may not view these relationships with us as significant to their own business, and they may reassess their commitment to us or decide to compete directly with us in the future. We generally do not have agreements that prohibit them from competing against us directly or from contracting with our competitors. Additionally, we cannot guarantee that any such party will perform its obligations as agreed or contemplated or that we would be able to specifically enforce any agreement with it.

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

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

Certain products include so called “open source” software. In some cases open software imposes on us certain requirements to license others both the open source software as well as software that relates to, or interacts with, or is a derivative work of open source software. These open source license terms may be ambiguous and may result in unanticipated obligations regarding our products, including the obligation to make source code available. Because open source software is generally available, it cannot be protected as a trade secret and competitors and others would have access to such software and the right to modify or distribute such software. Also, in many instances where we obtain open source software, we would not be able to determine if the provider of such code has legal right to provide such code to the company on the open source license terms.

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

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

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

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

Many of our transaction and hosting service agreements contain performance standards. If we fail to meet these standards, our customers could terminate their agreements with us. The loss of any of those service agreements would cause a decline in our revenue. Additionally, we may be unable to expand or adapt our transaction and hosting network infrastructure to meet new demands on a timely basis and at a commercially reasonable cost, or at all.

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

The healthcare market itself is highly regulated and subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operations of healthcare organizations. Changes in current healthcare financing and reimbursement systems, such as modifications which may be required by the Health Insurance Portability and Accountability Act of 1996, may cause us to make unplanned enhancements of software applications or services, result in delays or cancellations of orders, or result in the revocation of endorsement of our applications and services by healthcare participants. The effect of HIPAA is difficult to predict and there can be no assurances that we will adequately address the business risks created by HIPAA and its implementation or that we will be able to take advantage of any resulting business opportunities.

Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare market participants operate. Healthcare market participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We do not know what effect any proposals would have on our business.

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

Among other things, our core products contain strong encryption technology that is subject to export control regulation. These regulations prohibit us from selling in certain countries and to certain persons. Our inadvertent failure to properly restrict our sales could subject us and our management to fines and other sanctions and impair our financial condition and our reputation. Additionally, in the international marketplace we face increased uncertainty of enforcement of contractual provisions and enforcement of judgments in our dealings with non-U.S. persons. Our inability to properly defend or enforce our contract rights could materially impair our business prospects and financial condition.

Although both we and our customers test our applications, services and product offerings, they may contain defects or result in system failures. These defects or problems could result in the loss of or delay in generating revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation or increased insurance costs. In particular, we market software products that are designed to assist our healthcare customers in meeting their HIPAA compliance obligations. Failure

of these products to perform as intended could cause our customers to incur significant fines and penalties for non-compliance, which in turn could result in damages and claims against us. Our contracts generally limit our liability arising from our errors; however, these provisions may not be enforceable and may not protect us from liability. While we have general liability insurance that we believe is adequate, including coverage for errors and omissions, we may not be able to maintain this insurance on reasonable terms in the future. In addition, our insurance may not be sufficient to cover large claims and our insurer could disclaim coverage on claims. If we are liable for an uninsured or underinsured claim or if our premiums increase significantly, our financial condition could be materially harmed.

In order to increase our customer base and expand our online traffic, we must establish, maintain and strengthen our brand. For us to be successful in establishing our brand, professionals in the healthcare and other targeted markets must perceive us as offering quality, cost-effective, communications, information and administrative services. Our reputation and brand name could be harmed if we experience difficulties in introducing new applications, services and product offerings, if these applications, services and product offerings are not accepted by customers, if we are required to discontinue existing applications, services and product offerings or if our products and services do not function properly.

The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules and regulations of the SEC or NASDAQ, impose duties on the Company and its executives, directors, attorneys and auditors. In order to comply with the Sarbanes-Oxley Act and any new rules promulgated by the SEC or NASDAQ, we may be required to hire additional personnel and use additional outside legal, accounting and advisory services in the future. Any of these developments could materially increase our operating expenses and, accordingly, reduce our net income.

The benefits of the merger may not be realized and could have a material adverse effect on the combined business and results of operations because of the following challenges:


	•	incorporating technology and products into Quovadx product offerings;

	•	preserving the acquired technical knowledge within the engineering organization;

	•	coordinating the efforts of the Rogue Wave and CareScience sales organizations with Quovadx sales organization;

	•	maintaining momentum in the sales growth of Rogue Wave and CareScience’s product offerings;

	•	realizing anticipated cost savings in a timely manner; and

	•	incurring unanticipated expenses related to the integration of the acquisitions and Quovadx.

Quovadx has incurred direct transaction costs in connection with the acquisitions of $6.9 million. If Quovadx does not achieve the expected benefits of the merger, the combined company’s financial results, including earnings per share, could be adversely affected.

For a discussion of the information required by this item, you should refer to pages F-1 through F-27 and S-1.

As described in Item 1, beginning in April 2004, the Company’s acting chief executive officer and acting chief financial officer have conducted a review of the Company’s accounting practices and policies and of the Company’s prior period results. This review included an evaluation of disclosure controls and procedures, and internal controls and procedures, applicable to the period covered by and existing through the filing of this periodic report. Based on that review, the Company’s acting chief executive officer and acting chief financial officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information the Company is required to disclose in its reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately. As noted below, however, in light of the restatements that new management determined were required in the periods ending on and prior to December 31, 2003, our acting chief executive officer and acting chief financial officer have identified weaknesses in our internal controls that existed during periods prior to December 31, 2003.

As more fully described elsewhere in this Form 10-K/A, we postponed the release of our financial results for the quarter ended March 31, 2004. On March 15, 2004 we announced that we would delay the filing of our annual report on Form 10-K for the year ended December 31, 2003 to restate our 2003 third quarter financial results and revise our previously announced preliminary 2003 fourth quarter and full year financial results. On April 12, 2004 we announced the resignation of the company’s President and Chief Executive Officer and of the Chief Financial Officer. On May 13, 2004, we announced that new management had identified certain issues that might further affect our 2003 financial statements. Additionally, we announced that the company was conducting a review of past accounting practices. During the course of our review, and with the assistance of our independent registered public accounting firm, we determined that the accounting with respect to certain prior period transactions required adjustments. As a result, we have restated our consolidated financial statements for the years ended December 31, 2003 and 2002.

In connection with our restatements, we and our independent registered public accounting firm identified and reported to our audit committee significant internal control matters that collectively constitute “material weaknesses.” These internal control matters, any one or more of which may individually or together constitute a material weakness, include: inadequate management level controls; inadequate credit screening procedures and controls; inadequate shipping procedures and controls; inadequate procedures for adding new products to the products available for sale; inadequate controls over the price book and inadequate procedures for establishing revenue recognition on services.

Beginning in April 2004, through the filing date of this report, we have begun to implement changes to address these internal control weaknesses. These measures include the following:


	•	We have hired a new Acting President and Chief Executive Officer and a new Acting Chief Financial Officer who have expertise in financial controls and reporting, to improve the overall quality and level of experience in our finance and accounting organization.

	•	We have implemented a Code of Business Conduct and Ethics. We have communicated to senior management and all employees the importance of these requirements, which each has acknowledged, and will be conducting training.

	•	We have implemented a formal whistle blower reporting system through a third party provider to enable employees to identify potential concerns or ethical issues on an anonymous basis. We have communicated to employees the availability of this system and are conducting training on this system.

	•	We are in the process of making changes to our shipping procedures to provide more detailed information regarding product shipments. We have completed these changes in our Rogue Wave Software division and have nearly completed them in our Integration Solution division; no changes are required in the CareScience division which licenses on an ASP basis.

	•	We are in the process of making changes in our procedures for verifying the creditworthiness of prospective customers.


	•	We have made changes to procedures for estimating fees and establishing revenue recognition on our services work.

	•	We are initiating additional training of our sales organizations regarding revenue recognition rules.

We plan to take additional steps to strengthen our internal controls, including formation of a multidisciplinary price book committee that will control new product introductions and determine legal and accounting requirements for all products; implementation of processes to improve communication among our various functional groups during the transaction approval and contract negotiation phases; and improved operating controls and reporting processes.

We also note, however, that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our control systems as we develop them may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In connection with the Company’s efforts to comply in 2004 with Section 404(a) of the Sarbanes-Oxley Act, we have retained an independent risk consulting firm to assist with the documentation, analysis and testing. We expect that in response to their findings we will implement changes in internal controls and procedures and that additional changes will be made on an ongoing basis as business needs require.

The improvements described above have all been made subsequent to the period ended December 31, 2003, and there have been no other changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. No significant changes were made in the Company’s internal controls during the quarters ended December 31, 2003 and March 31, 2004.

Appearing as exhibits to this report are the certifications of our acting chief executive officer and acting chief financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraphs 4(c) and (d) of the certifications. This Item 9A should be read in conjunction with the certifications for a more complete understanding of the topics presented.

(a) The following documents are filed as part of this Annual Report on Form 10-K:

The following consolidated financial statements of Quovadx, Inc. are filed as part of this report:


	2. Consolidated Financial Statement Schedules. The following consolidated financial statement schedule of the Company for each of the years ended December 31, 2003, 2002 and 2001, is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and the related notes thereto, of the Company.

Schedules other than the one listed above have been omitted since they are either not required, not applicable, or the information is included elsewhere in this Annual Report on Form 10-K.


	3. Exhibits. The exhibits listed on the accompanying index to exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

(b) Reports on Form 8-K. During the quarterly period ended December 31, 2003, the Company filed the following reports on Form 8-K:


	•	On October 22, 2003, the Company filed a Current Report on Form 8-K under Items 7 and 12 to furnish our press release announcing our financial results for the quarter ended September 30, 2003.

	•	On November 4, 2003, the Company filed a Current Report on Form 8-K under Item 5 regarding the announcement of the execution of the Agreement and Plan of Merger with Rogue Wave Software, Inc.

	•	On December 22, 2003, the Company filed a Current Report on Form 8-K under Item 2 to regarding the consummation of the transactions contemplated under the Agreement and Plan of Merger with Rogue Wave Software, Inc.


*	This certification is furnished to, but not filed, with the Commission. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Englewood, State of Colorado, on this 16th day of August, 2004.


	BY:	/s/ HARVEY A. WAGNER


	Harvey A. Wagner
	Acting President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harvey A. Wagner and Melvin L. Keating, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

We have audited the accompanying consolidated balance sheets of Quovadx, Inc. (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and changed its method of accounting for goodwill.

As discussed in Note 2 to the financial statements, the Company has restated its financial statements for the years ended December 31, 2003 and 2002.

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

Founded in 1989, Quovadx, Inc., (the “Company” or “Quovadx”) is a provider of software and services. The Company’s primary product is QDX Platform V, which includes integrated application development tools, integration tools, and business process management tools. The Company has also developed packaged solutions, or Adaptive Applications, using QDX Platform V. In addition, the Company provides end-to-end service capabilities including consulting, transaction hosting and operations management for business-critical applications.

The Company is incorporated under the laws of the State of Delaware. The consolidated financial statements include the accounts of Quovadx and its wholly-owned subsidiaries, Rogue Wave Software, Inc. (“Rogue Wave”), CareScience, Inc. (“CareScience”), Outlaw Technologies, Inc. (“Outlaw”), Pixel Group (“Pixel”), Healthcare.com Corporation (“Healthcare.com”), Confer Software, Inc. (“Confer”), Integrated Media, Inc. (“Integrated Media”) and Advica Health Resources, Inc. (“Advica”). All material intercompany amounts and transactions have been eliminated.

On March 15, 2004, the Company announced that it was restating its 2003 third quarter financial results to reverse all previously recorded revenue associated with Infotech Network Group (“Infotech”) as further described in Note 9. As a result of this restatement, the Audit Committee retained independent counsel to conduct a full investigation of the Infotech relationship. Additionally, the Company, in conjunction with new management and under direction of the Board of Directors, undertook a review of all historical accounting policies and practices. As a result of this subsequent review, additional accounting inaccuracies were identified affecting the Company’s financial results for the years ended December 31, 2003 and 2002. Accordingly the Company has restated its historical financial results for the years ending December 31, 2003 and 2002. This restatement is described in Note 2.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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

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

The methodology the Company uses to recognize software license and related services revenue is dependent on whether the Company has established vendor-specific objective evidence (“VSOE”) of fair value for the separate elements of a multiple-element agreement. If an agreement includes both license and service elements, the license fee is recognized on delivery of the software if the remaining services are not essential to the functionality of the software, the collection of the fees is probable, the fees are fixed and determinable, an agreement is signed and the Company has established VSOE of fair value for the remaining services. Revenue from the related services is recognized as the services are provided. When the related services are essential to the functionality of the base product or when the Company has not established VSOE of fair value for the remaining services, the software license fees are deferred and the entire contract is recognized as the services are provided.

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

When revenue is recognized using the percentage-of-completion basis of accounting, the Company’s management estimates the costs to complete the services to be provided under the contract and recognizes revenue from the percentage of costs incurred to date in comparison to the total cost of the project. The Company may encounter budget and schedule overruns caused by increased material, labor, or overhead costs. Adjustments to cost estimates are made in the period in which the facts requiring such revisions become known. Estimated losses, if any, are recorded in the period in which the current estimates of the costs to complete the services exceed the revenue to be recognized under the contract.

Maintenance, a component of recurring revenue, is derived from agreements for providing unspecified software updates, error corrections, and telephone support. Maintenance revenue is recognized ratably over the maintenance period, which is generally 12 months.

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

When collection of fees is not probable, revenue is recognized as cash is collected. The Company does not require collateral from its customers. The Company has a history of extending payment terms with customers not to exceed six months.

All liquid investments with original maturities of three months or less when purchased are considered cash equivalents. Short-term investments consist of U.S. government and U.S. government agency debt securities classified as “held to maturity” with maturities less than 12 months.

The Company’s financial instruments include cash, short-term investments, accounts receivable, accounts payable and accrued liabilities. The carrying amounts of financial instruments approximate fair value due to their short maturities.

Unbilled accounts receivable arise as revenue is recognized for time and costs incurred on time-and-material contracts, for revenue that is recognized on fixed price contracts under the percentage-of-completion method of accounting and for contracts with extended payment terms which have not been billed none of which exceed six months in term.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of certain customers to pay their accounts receivable balances. The Company assesses the financial condition of its customers to determine if there is an impairment of their ability to make payments and additional allowances may be required if the financial condition of the Company’s customers deteriorates. The Company does not require collateral from its customers.

The Company issues warranties to customers for product performance in accordance with specifications that are short term in nature, generally 90 days or less. The Company’s obligations under these warranties have not been significant and are generally covered under customer maintenance agreements. The Company also indemnifies customers against patent infringement claims. As of December 31, 2003 and 2002, there were no liabilities recorded in the financial statements related to indemnifications or warranties.

The Company had the following customers, which accounted for greater than 10% of revenue in any of the years ended December 31, 2003, 2002 and 2001:

One customer accounted for 25% of the accounts receivable balance at December 31, 2002. There were no customers that accounted for greater than 10% of accounts receivable at December 31, 2003.

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Internally used software, whether purchased or developed is capitalized and amortized over an estimated useful life of three to five years. Equipment under

capital lease arrangements as well as leasehold improvements are amortized over the shorter of their useful lives or the terms of the leases.

Capitalized software costs consist of purchased software, capitalized software development costs, and software acquired through acquisitions. Purchased software is used with the Company’s existing software as well as held for resale under exclusive license arrangements and is amortized ratably over a three-year estimated useful life. In accordance with FASB Statement No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” software development costs are required to be expensed until the point that technological feasibility of the product is established which the Company has determined to be when a detailed program design is complete. Once technological feasibility is established, such costs are capitalized until general availability of the product. The establishment of technological feasibility and continuing evaluation of the recoverability of the capitalized software development costs requires management’s judgment with respect to the impact of external factors such as future revenue, estimated economic life and changes in software and hardware technologies. Capitalized software development costs are amortized on a straight-line basis over an estimated life, which is generally three years. Capitalized software acquired through business acquisitions totaled $31.4 million, net of $9.3 million of accumulated amortization. Capitalized software acquired through business combinations is amortized on a straight line basis over an estimated useful life which is generally three to five years. The Company capitalized $3.3 million (restated), $3.5 million (restated) and $1.9 million of software development costs in 2003, 2002 and 2001, respectively. Software amortization expense, a component of cost of sales, for the years ended December 31, 2003, 2002 and 2001 was $6.9 million (restated), $5.5 million and $2.1 million, respectively.

The Company has adopted Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets.”

In accordance with SFAS No. 142, the Company did not record amortization expense related to goodwill for acquisitions entered into after July 1, 2001 and for all acquisitions as of January 1, 2002. Had this provision of SFAS No. 142 been in effect as of January 1, 2001, the Company’s net loss for the year ended December 31, 2001 would have been $2,909,000 and the Company’s net loss per common share would have been $0.14.

SFAS No. 142 requires that goodwill be tested annually for impairment and more frequently if events or changes in circumstances indicate assets might be impaired. The Company performed a transitional impairment test upon the adoption of SFAS No. 142 on January 1, 2002 and recorded no impairment because of this test. The Company has identified the fourth quarter as the period for its annual impairment test. However, due to significant negative industry and economic trends affecting the market value of the Company’s common stock, the Company performed an interim test of goodwill impairment in the third quarter of 2002. As a result of this interim test, the Company recorded an impairment charge of $93.1 million to reduce goodwill based on the amount that the carrying value of the goodwill exceeded its fair value. This impairment charge eliminated goodwill associated with all previous acquisitions and related to each of the Company’s reportable segments.

Intangible assets recognized in the Company’s acquisitions are being amortized over their estimated lives ranging from three to eight years. Amortization expense related to intangible assets was $1,720,000, $2,307,000, and $1,585,000 for the years ended December 31, 2003, 2002 and 2001, respectively. The Company expects amortization expense to be $3,276,000, $3,077,000, $3,031,000, $2,909,000, and $2,840,000 for the years ended December 31, 2004, 2005, 2006, 2007 and 2008, respectively.

The Company periodically evaluates the carrying value of long-lived assets, including, but not limited to, property and equipment, software, and intangible assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

Other current and long-term assets include deferred costs, a note receivable from a customer, and an investment in another Company. Deferred costs include direct labor incurred related to implementation activities on certain contracts where the revenue will be recognized on a straight-line basis over the term of the contract. The costs, which totaled $2.6 million and $1.7 million at December 31, 2003 and 2002, respectively, are expected to be amortized to expense over the contract periods of five to seven years. The note receivable, which had a balance at December 31, 2003 of $1.9 million is due to be paid in monthly installments through 2006. Interest income will be recognized once all principal has been paid. The investment in another Company had a balance of $2.0 million at both December 31, 2003 and 2002 and is accounted for on a cost basis as the Company does not have significant influence or control over the investee.

As of December 31, 2002, the Company had restricted cash of $0.7 million included in other assets of the Company’s balance sheet. Restricted cash represents investments that support letters of credit related to an operating lease. There was no restricted cash at December 31, 2003.

Research and development expense includes costs incurred by the Company to develop and enhance the Company’s software until the point that technological feasibility is reached. Research and development costs are charged to expense as incurred.

The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2003, 2002 and 2001 was $348,000, $312,000 and $493,000, respectively.

Deferred income taxes are recognized because of temporary timing differences between when certain income or expense items are recognized in the financial statements versus when these items are recognized for tax purposes based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. A valuation allowance is then established to reduce the net deferred tax asset to the level at which it is more likely than not that any tax benefits will be realized. Income tax expense includes (i) income taxes currently payable; (ii) income taxes deferred because of temporary timing differences between the time that certain income or expense items are recognized in the financial statements versus when these items are recognized for tax purposes; and (iii) any increase or decrease in the valuation allowance for deferred tax assets.

At December 31, 2003, the Company had four stock option plans and an employee stock purchase plan, which are described in Note 4. The Company has elected to account for stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board Opinion

No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under this method, stock compensation is recognized to the extent that the exercise price is less than the market price for the underlying stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

For the years ended December 31, 2003, 2002 and 2001 the fair value of each option on the date of grant was determined using the Black-Scholes valuation model. The following assumptions were used for grants in 2003, 2002 and 2001: risk-free rates corresponding to government securities with original maturities similar to the expected option lives of 3.9% for 2003, 3.0% for 2002 and 5.0% for 2001; expected dividend yield of 0% for all periods; volatility factor of 120% for 2003, 118% for 2002 and 118% for 2001; and expected lives of 5.0 years for 2003, 5.0 years for 2002 and 4.5 years for 2001.

Net loss per common share (“EPS”) is calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Under the provisions of SFAS No. 128, basic EPS is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options were exercised, resulting in the issuance of common stock that would share in the loss of the Company. Potential dilution of the stock options exercisable into common stock is computed using the treasury stock method based on the average fair market value of the stock. In periods where the Company has a net loss, the effect of common stock equivalents is excluded from the computation of diluted EPS since their inclusion would be anti-dilutive. Diluted EPS for the periods presented is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. In 2003, 2002 and 2001, 1,397,558, 508,109, and 1,546,010 options and warrants to purchase common stock were excluded from the calculation because their inclusion would be anti-dilutive.

SFAS No. 130, “Reporting Comprehensive Income” establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income (loss) includes all changes in equity during a period from non-owner sources. During each of the two years ended December 31, 2002, the Company did not have any significant transactions that are required to be reported as adjustments to

determine comprehensive income (loss). During the year ended December 31, 2003, comprehensive (loss) included the change in foreign currency translation.

The assets and liabilities of our foreign operations are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the period. The resulting translation adjustment is recorded as a component of other comprehensive income (loss). Foreign currency gains and losses on transactions are recorded in the results of operations and historically have not been material.

Certain prior year information has been reclassified to conform to the current year presentation.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that possess certain characteristics. FIN 46 requires that if a business enterprise has a controlling financial interest in a variable interest entity (“VIE”), the assets, liabilities, and results of the activities of the variable interest entity must be included in the consolidated financial statements with those of the business enterprise. The consolidation requirements of FIN 46 are effective immediately for VIE’s created after January 31, 2003. The consolidation requirements for older VIE’s were effective for financial statements of interim or annual periods beginning after June 15, 2003, however in October of 2003 the FASB deferred the effective date of FIN 46 for older VIE’s to the end of the first interim or annual period ending after December 15, 2003. Certain disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. We do not have any ownership in any variable interest entities as of December 31, 2003. We will apply the consolidation requirements of FIN 46 in future periods should an interest in a variable interest entity be acquired.

The financial results for the years ended December 31, 2003 and 2002 have been restated to properly account for transactions that were previously inaccurately reflected in the Company’s historical financial results. The cumulative effect of these restated financial statements increased the previously reported net loss by $1,783,000 for the year ended December 31, 2003 and $655,000 for the year ended December 31, 2002. These inaccuracies (a) overstated software license revenues due to the timing of delivery of software products and the accounting for certain reseller relationships (b) overstated professional services revenues due to the timing of adjustments to estimates used in determining the recognition of revenue under the percentage of completion method and (c) understated the cost of professional services revenue due to the capitalization of software development costs without properly deducting the portion of the cost related to a professional services agreement with a customer.

The restated unaudited pro forma results of operations as though the Rogue Wave and CareScience acquisitions (See Note 3) had been completed as of January 1, 2002 are as follows (in thousands except for per share amounts):

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

In 2001, the Company acquired Confer, Healthcare.com and Pixel for a combined purchase price of $107 million. The 2001 acquisitions generated goodwill and intangible assets totaling $118.8 million.

In March 2002, the Company completed the sale of certain assets of its Advica subsidiary to Royal Health Care of Long Island, LLC, d/b/a Royal Health Care (“Royal”) for $475,000 in cash and minority equity investment in Royal. In conjunction with the sale, Quovadx is providing ASP services to Royal under a seven-year contract.

In the first quarter of 2002, the Company acquired Outlaw. The purchase price, totaled $2.7 million and generated goodwill and intangible assets of $3.2 million.

On September 19, 2003, Quovadx consummated the acquisition of CareScience, Inc. The primary reasons for the acquisition were as follows:


	•	enhancing our ability to reach certain of our strategic objectives, which include extending our product and service offering to include CareScience products, enabling us to bring real time capabilities to care management application offerings;

	•	enabling us to leverage our customer base and brand recognition to accelerate market penetration and growth;

	•	enabling us to enhance our position in areas where Quovadx products and services are already strong by offering complementary products and services developed by CareScience; and

	•	increasing our revenue stream.

Under the terms of the merger, a wholly owned subsidiary of Quovadx merged with CareScience and CareScience became a wholly owned subsidiary of Quovadx. CareScience stockholders received a fixed exchange rate of $1.40 cash and 0.1818 shares of Quovadx common stock for each share of CareScience common stock they owned. The purchase price totaling $30.1 million included 2,415,900 shares of Quovadx common stock issued in exchange for all outstanding shares of CareScience capital stock, cash of $4.7 million, net of cash acquired, and $2.3 million in merger-related costs, including transaction fees and stock option payout. The value of the shares issued in the transaction was $9.2 million which was calculated using an average of the closing price of Quovadx stock for the five days surrounding the announcement of the acquisition. This transaction was accounted for as a purchase.

The Company recorded significant acquisition-related restructuring charges in connection with a headcount reduction of CareScience employees and the abandonment of certain leased facilities from the

CareScience acquisition. The lease abandonment cost was estimated to include remaining lease liabilities offset by an estimate of sublease income. Estimates related to sublease costs and incomes were based on the assumptions regarding the period required to sublease the facilities and the likely sublease rates. These restructuring charges are included in accrued liabilities on the accompanying balance sheet.

The Company retained an independent appraiser to assist with the assigning of the fair values to the identifiable intangibles acquired from CareScience. The acquisition generated goodwill, software and customer base intangible assets acquired of $13.3 million, $0.8 million and $8.6 million, respectively. The Company has not completed its allocation of goodwill by reporting segment. The Company expects to complete the allocation in the first half of 2004. The amount of goodwill that will be assigned to a reporting unit will be determined by allocating the purchase price to the assets and liabilities of each reporting unit. The goodwill recognized in the CareScience acquisition is not subject to amortization but will be tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. The identifiable intangible assets, consisting solely of customer base, will be amortized over their estimated lives of seven years. Operating results for CareScience after the date of acquisition are included in our consolidated financial results as of and for the twelve months ended December 31, 2003.

On December 19, 2003, Quovadx purchased the outstanding stock of Rogue Wave Software, Inc. (“Rogue Wave”). Rogue Wave develops, markets and supports object-oriented and infrastructure software technology


	•	introduce the Rogue Wave customers to the Quovadx application development platform;

	•	expand our penetration into new markets; and

	•	enhance our competitive position with the Rogue Wave brand; and.

	•	increasing our revenue stream.

The acquisition, structured as an exchange offer, provided that Quovadx acquire all of the outstanding stock of Rogue Wave for $4.09 in cash and 0.5292 of a share of Quovadx common stock for each share of Rogue Wave Common Stock. The total purchase price for this acquisition was $79.1 million, including 5,656,670 shares of Quovadx common stock, cash of $8.0 million, net of cash acquired, and $3.9 million in merger-related costs. The value of the shares issued in the transaction was $28.5 million which was calculated using an average of the closing price of Quovadx stock for the five days surrounding the announcement of the acquisition. In exchange for their outstanding options to purchase Rogue Wave common stock, employees of Rogue Wave received an option to purchase a unit consisting of 0.5292 shares of Quovadx common stock and $4.09 in cash. The $4.09 received was treated as a discount to the exercise price and to the extent this exceeded the exercise price, the Company recorded a liability totaling $1.4 million. The fair value of the vested stock options assumed in the transaction was $3.4 million and was calculated using the Black-Scholes valuation model. The fair value of the unvested stock options assumed in the Rogue Wave acquisition yielded $385,000 of deferred compensation expense using the Black-Scholes valuation model. The unearned stock

compensation will be amortized to expense on a straight-line basis over the vesting period of the stock options. This transaction was accounted for as a purchase.

In the fourth quarter of 2003, due to the acquisition, the company initiated a headcount reduction of Rogue Wave employees. As a result, we recorded a preliminary estimate of severance costs of $677,000 comprised of salary and employee-related expenses. At December 31, 2003, the balance of the accrual was $427,000. The remaining accrual for severance costs is expected to be substantially paid in 2004.

The Company will retain an independent appraiser to assist with the assigning of the fair values to the identifiable intangibles acquired from Rogue Wave. The appraisal is expected to be completed by the third quarter of 2004. The preliminary estimate of goodwill, software and identifiable intangible assets acquired is $34.7 million, $10.6 million and $4.6 million, respectively. The Company has not completed its allocation of goodwill by reporting segment. The company expects to complete the allocation in the first half of 2004. The amount of goodwill that will be assigned to a reporting unit will be determined by allocating the purchase price to the assets and liabilities of each reporting unit. The goodwill recognized in the Rogue Wave acquisition is not subject to amortization but will be tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. The identifiable intangible assets will be amortized over their estimated lives. Operating results for Rogue Wave after the date of acquisition are included in our consolidated financial results as of and for the twelve months ended December 31, 2003. The table below details the balance sheets acquired in the Rogue Wave and CareScience acquisitions:

In connection with the acquisition of Healthcare.com, the Company converted warrants to purchase 395,000 shares of Healthcare.com common stock to warrants to purchase 148,000 shares of the Company’s stock, 32,000 of which were exercised during 2001. At December 31, 2003, 116,000 warrants remain outstanding. Of the warrants outstanding at December 31, 2003, 98,000 may be exercised any time on or before March 13, 2004 at an exercise price of $11.23 per share and 18,000 may be exercised any time on or before December 31, 2004 at an exercise price of $8.51 per share. The fair value of Healthcare.com warrants was calculated to be $0.8 million using the Black-Scholes option pricing model and included in the purchase price.

During 1997, the Company adopted a stock option plan (the “1997 Plan”) that provided for the grant of up to 2,200,000 stock options to directors, key employees, and consultants. The 1997 Plan has a term of ten years, unless terminated by the board of directors. From 2000 to 2002, the Company added 3,444,414 shares to the 1997 Plan. In February 2003, 1,224,0000 shares were added to the Plan. The total number of shares authorized under the 1997 Plan was 6,868,414 at December 31, 2003. As of December 31, 2003, there were 2,438,872 options available for issuance. The 1997 Plan provides for the granting of incentive stock options to employees or nonqualified options to employees, directors, and consultants.

Stock options are granted with an exercise price not less than fair market value of the common stock on the date of the grant, as determined by the board of directors. The options generally expire ten years after the date of grant. Options granted under the 1997 Plan vest over a four year vesting period beginning on the date of grant.

In July 1999 and 2000, the board of directors amended all existing stock option agreements under the 1997 Plan. The amendment provided that all options are immediately exercisable. However, any shares acquired upon exercise are subject to repurchase by Quovadx over a reverse vesting period that entitles the optionee to exactly the same vesting schedule as the original grant. The repurchase price is equal to the exercise price of the options.

In January and February 2000, the Company granted incentive stock options to certain employees to purchase 124,700 shares of common stock with exercise prices below the deemed fair value of the Company’s common stock at the date of grant. In connection with such option grants, the Company recognized unearned compensation totaling $123,000, which was amortized over the vesting period of the related options.

During 1999, the Company issued stock options to certain employees under the 1997 Plan with exercise prices below the deemed fair value of the Company’s common stock at the date of grant. The Company recorded unearned stock compensation for the difference between the exercise price of the stock options and the deemed fair value of the Company’s common stock at the date of grant. This unearned stock compensation was amortized to expense over the vesting period, using an accelerated method as described in Financial Accounting Standards Board Interpretation No. 28. $231,000 and $460,000 were amortized to expense in the years ended December 31, 2002 and 2001, respectively. As of December 31, 2002, the unearned compensation balance was fully amortized.

The Company’s board of directors adopted a 1999 Director Option Plan in October 1999 (the “Director Plan”) and authorized 250,000 shares under the Director Plan. The Director Plan was approved by the Company’s Stockholders in January 2000, and became effective upon completion of our Initial Public Offering. From 2000 to 2002, the Company added 364,083 shares to the 1997 Plan. In February 2003, 200,000 shares were added to the Plan. The total number of shares authorized under the 1997 Plan was 814,083 at December 31, 2003.

The Director Plan has a term of ten years, unless terminated by our board of directors.

Options granted under the Director Plan vest over a one year vesting period beginning on the date of grant. Members of the board of directors who are not employees of Quovadx are eligible to participate in the Director Plan. The Director Plan provides for an automatic initial grant of an option to purchase 25,000 shares of common stock (the “Initial Grant”) upon the later of the effective date of the Director Plan or the date a person first becomes a non-employee director. After the initial grant, a non-employee director will automatically be granted options to purchase 10,000 shares of common stock each year on the date of our annual shareholder’s meeting.

In September 2000, the board of directors of the Company adopted the 2000 Nonstatutory Stock Option Plan (the “NSO Plan”) and authorized 600,000 shares under the NSO Plan. Under the NSO Plan, the board of directors may issue options to non-executive employees of the Company. The NSO Plan has a term of ten years, unless terminated by our board of directors. Options granted under the NSO Plan vest ratably at 25% per year, beginning on the date of grant. No options will be issued under the NSO Plan to directors or executive officers of the Company. From 2000 to 2002, the Company added 1,400,000 shares to the 1997 Plan. In February 2003, 1,200,000 shares were added to the Plan. The total number of shares authorized under the 1997 Plan was 3,200,000 at December 31, 2003.

In connection with the acquisition of Healthcare.com, the Company assumed the Stock Option Plans of Healthcare.com and each outstanding option to purchase shares of Healthcare.com common stock under the

Healthcare.com stock option plans. All outstanding Healthcare.com options were fully vested and exercisable upon the consummation of the acquisition. Each Healthcare.com stock option assumed by the Company was exercisable for that number of whole shares of Healthcare.com common stock multiplied by the exchange ratio of 0.375 and the per share exercise price for the Healthcare.com stock options was equal to the quotient determined by dividing the exercise price per share by the exchange ratio.

In connection with the acquisition of Rogue Wave, the Company assumed the Stock Option Plans of Rogue Wave and each outstanding option to purchase shares of Rogue Wave common stock under the Rogue Wave stock option plans. Each Rogue Wave stock option assumed by the Company was exercisable for that number of whole shares of Rogue Wave common stock multiplied by the exchange ratio of 0.5292 and the per share exercise price for the Rogue Wave stock options was equal to the quotient determined by dividing the exercise price per share by the exchange ratio. The fair value of the vested stock options assumed was $3.4 million and was calculated using the Black-Scholes valuation model. The unvested stock options assumed in the Rogue Wave acquisition yielded $385,000 of deferred compensation expense. The fair value of each option was determined using the Black-Scholes valuation model and unearned stock compensation will be amortized to expense on a straight-line basis over the vesting period of the stock options.

The weighted-average fair value of options at grant date was $2.37, $5.18 and $9.71 in 2003, 2002 and 2001, respectively.

Total stock options outstanding and exercisable under the option plans as of December 31, 2003 are as follows:

In October 1999, the board of directors adopted an employee stock purchase plan (the “ESPP”) subject to shareholder approval, which became effective immediately on the effective date of the IPO. A total of 500,000 shares of common stock were initially reserved for issuance under the ESPP. From 2000 to 2002, the Company added 828,165 shares to the 1997 Plan. In February 2003, 500,000 shares were added to the Plan. The total number of shares authorized under the 1997 Plan was 1,828,165 at December 31, 2003. The ESPP permits eligible employees to purchase common stock totaling up to 20% of an employee’s compensation through payroll deductions. The ESPP for U.S. employees is intended to qualify under Section 423 of the Internal Revenue Service Code and contains consecutive overlapping twelve-month offering periods. Each offering period includes two six-month purchase periods. The price of common stock to be purchased will be 85% of the lower of the fair market value of the common stock either at the beginning of the offering period or at the end of that purchase period. The Company issued 319,308 shares at $1.31 per share in May 2003 and 230,157 shares at $2.37 per share in October 2003. The Company issued 72,372 shares at $6.37 per share in May 2002 and 125,157 shares at $1.32 per share in October 2002. The Company issued 37,544 shares at $4.68 in May 2001 and 39,098 shares at $5.51 per share in October 2001. In connection with the acquisition of Healthcare.com, the Company assumed the employee stock purchase plan of Healthcare.com. In September 2001, the Company issued 7,256 shares at $10.25 per share related to the Healthcare.com plan.

The Company has adopted an employee savings and retirement plan (the “401(k) Plan”) covering substantially all of the Company’s employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutory prescribed limit and have the amount of such reduction contributed to the 401(k) Plan. The Company may contribute to the 401(k) Plan on behalf of eligible employees. The Company had not contributed to the 401(k) Plan prior to the acquisition of Healthcare.com on August 13, 2001. In connection with the acquisition of Healthcare.com, the Company

assumed the 401(k) plan of Healthcare.com and made contributions totaling $169,000. Healthcare.com 401(k) plan matched 50% of the first 6% contributed by each employee. The Healthcare.com 401(k) plan was merged into Company’s plan in 2002. In 2002, the Company amended its 401(k) plan to match 50% of the first 6% contributed by employees. The Company contributed $650,000 and $649,000 to its employee’s 401(k) accounts in 2003 and 2002, respectively. Company contributions vest over a two-year period.

In 2000, the Quovadx board of directors declared a dividend right of one right to purchase one one-thousandth share of Quovadx Series A participating preferred stock for each outstanding share of Quovadx common stock at an exercise price of $60.00 per right, subject to adjustment, to the holders of record at that time. The rights are exercisable in the event of a person or group purchasing 15% or more of Quovadx outstanding common stock. Each holder of a right is entitled, upon exercise, to receive Quovadx common stock having a value equal to two times the exercise price. Quovadx may redeem the rights at a price of $0.001 per right. The rights expire in August 2010.

In August 2003, the Company established a line of credit with a commercial bank thereby allowing the Company to borrow up to $4.0 million on a secured basis. On December 9, 2003, the line of credit was reduced to $3.1 million. The Company had no outstanding borrowings under the revolving line of credit, which is secured by the Company’s assets, exclusive of intellectual property assets. The line of credit is subject to financial covenants including a minimum cash balance.

A reconciliation of the expected income tax benefit (based on the U.S. Federal statutory rate of 35%) to the actual income tax (expense) benefit is as follows:

The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and liabilities at December 31, 2003 and 2002 are presented below (in thousands):

Under SFAS 109, deferred tax assets and liabilities are recognized because of temporary timing differences between when certain income or expense items are recognized in the financial statements versus when these items are recognized for tax purposes. A valuation allowance is then established to reduce the deferred tax assets to the level at which it is “more likely than not” that any tax benefits will be realized. At December 31, 2003 and 2002 the Company has determined that it is not “more likely than not” that any tax benefits will be realized and therefore a full allowance has been recorded against the net deferred tax asset. A reduction in this allowance and the recognition of a deferred tax asset depends on having sufficient evidence that the Company will generate taxable income within the carryback and carryforward periods. Sources of taxable income that may allow recognition of a net tax asset include (i) taxable income in the current year or prior years that is available through carryback; (ii) future taxable income that will result from the reversal of existing taxable temporary differences; and (iii) future taxable income generated by future operations.

The valuation allowance for deferred income tax assets at December 31, 2003 and 2002 was $48,404,000 (restated) and $29,172,000 (restated) respectively. Approximately $35,126,000 of deferred tax assets relate to acquired entities; of this amount $19,896,000 would first be used to offset non-operating items. The ordering rules for utilization of acquired deferred tax asset are (i) first to off-set additional paid-in-capital to the extent of stock option benefits then; (ii) against goodwill then; (ii) against identified intangibles resulting from purchase accounting adjustments and; (iii) finally against expense arising from operations. Approximately $9,880,000 of the December 31, 2003, net operating loss deferred tax asset relates to the exercise of stock options and warrants which would reverse against additional paid-in capital rather than recognized as an income tax benefit on the statement of operations.

The Internal Revenue Code of 1986, as amended, contains provisions that may limit the federal tax net operating loss (“NOL”) and tax credits available for use in any given year upon the occurrence of certain events, including significant changes in ownership interest. A change in ownership of a company greater than 50% within a three-year period may result in an annual limitation on the company’s ability to utilize its NOL carryforwards from tax periods prior to the ownership change. Management believes the Company’s NOL and tax credit carryforwards as of December 31, 2003 are subject to such limitations.

At December 31, 2002, an analysis of the Company’s NOLs and tax credits determined that it was likely to permanently lose the tax benefit of $62,355,000 of federal NOLs and $936,000 of tax credits as a result of the limitations imposed by the Internal Revenue Code, discussed above, and the expiration dates of the NOLs and credits. As a result, these amounts were deducted from the deferred tax asset balance as of December 31, 2002, along with a corresponding amount of the valuation allowance. No additional deferred assets related to NOLs or tax credits were removed at December 31, 2003. When the Company finalizes an analysis of the Internal Revenue Code NOL and tax credit limitation for 2003, the deferred tax asset and corresponding valuation reserve will be adjusted, if necessary.

The NOLs available to the Company at December 31, 2003 consist of two components: (i) $76,437,000 (restated) of NOLs that were generated by the Company before 2003 and which have been evaluated in light of the above limitations as of December 31, 2002. These NOLs may be further limited by ownership changes during 2003 and; (ii) $45,756,000 (restated) of NOLs, which have not yet been evaluated under the Internal Revenue Code limitations discussed above and which may be limited, either generated in 2003 by Quovadx or which relate to 2003 business acquisitions. The amount of tax credit available to the Company at December 31, 2003 also consists of two components: (i) $246,000 which has been evaluated at December 31, 2002 but which may be further limited by changes which occurred during 2003 and; (ii) $2,125,000 which has not yet been evaluated. Additionally, $6,107,000 of the December 31, 2003 NOL is available until 2006 and can only be used to offset gains recognized on the sale of certain assets acquired in the acquisition of Confer. The Company’s remaining NOLs will begin to expire in 2008.

The Company leases equipment and office space under various long-term non-cancelable operating leases that expire at various dates before October 11, 2011. The following is a schedule by year of future minimum lease payments under operating leases, at December 31, 2003 (in thousands):

Total rent expense for the years ended December 31, 2003, 2002 and 2001 was $2,859,000, $3,865,000 and $2,627,000, respectively.

On November 14, 2001, a shareholder class action complaint was filed in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed an amended complaint. The

amended complaint asserts that the prospectus from the Company’s February 10, 2000 initial public offering (“IPO”) failed to disclose certain alleged improper actions by various underwriters for the offering in the allocation of the IPO shares. The amended complaint alleges claims against certain underwriters, the Company and certain officers and directors under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Bartula v. XCare.net, Inc., et al., Case No. 01-CV-10075). Similar complaints have been filed concerning more than 300 other IPO’s; all of these cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. In a negotiated agreement, individual defendants, including all of the individuals named in the complaint filed against the Company, were dismissed without prejudice, subject to a tolling agreement. Issuer and underwriter defendants in these cases filed motions to dismiss and, on February 19, 2003, the Court issued an opinion and order on those motions that dismissed selected claims against certain defendants, including the Section 10(b) fraud claims against the Company, leaving only the Section 11 strict liability claims under the Securities Act against the Company. A committee of our Board of Directors has approved a settlement proposal made by the plaintiffs, but the settlement is subject to a number of conditions. If the settlement is not achieved, the Company will continue to aggressively defend the claims. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

CareScience, Inc. and certain of its present and former officers are defendants in a purported shareholder class action lawsuit litigation pending in the United States District Court for the Eastern District of Pennsylvania for alleged violations of federal securities laws. The actions seek compensatory and other damages, and costs and expenses associated with litigation. The class action litigation is the result of several complaints filed with the court beginning on October 17, 2001. These actions were consolidated on November 16, 2001. The court approved the selection of the lead plaintiff in the litigation on March 12, 2002. CareScience filed a motion to dismiss the consolidated complaint on August 7, 2002. These complaints purport to bring claims on behalf of all persons who allegedly purchased CareScience common stock between June 29, 2000 and November 1, 2000, for alleged violations of the federal securities laws, including Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a materially false and misleading Prospectus and Registration Statement with respect to the initial public offering of CareScience common stock. Specifically, the complaints allege, among other things, that the CareScience Prospectus and Registration Statement misrepresented and omitted to disclose material facts concerning its competitors, two of its prospective products and its contract with the California HealthCare Foundation. On July 25, 2003, the Judge granted CareScience’s motion to dismiss the claims under Section 12(a)(2) of the Securities Act, but denied its motion to dismiss the claims under Sections 11 and 15 of the Securities Act. CareScience filed an answer denying all allegations of wrongdoing. Discovery has not yet commenced. In February 2004, an agreement was reached to settle this case, subject to court approval after notice to the former shareholders. On July 28, 2004, the Court signed an order approving the form of the settlement notices, setting forth requirements for providing notice to the class and handling any objections, and scheduling a settlement fairness hearing for October 27, 2004 to determine whether the Court should approve the settlement. If the settlement is achieved, the entire settlement amount will be paid by insurance, without any contribution from the Company. If the settlement is not achieved, the Company will continue to aggressively defend the claims. The Company believes it has meritorious defenses. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

March 15, 2004. The claims are based upon allegations the Company (i) purportedly overstated its net income and earnings per share during the class period, (ii) purportedly recognized revenue from contracts between the Company and Infotech Networks Group prematurely, and (iii) purportedly lacked adequate internal controls and was therefore unable to ascertain the financial condition of the Company. Eight additional, nearly identical class action complaints were filed in the same Court based on the same facts and allegations. The actions seek damages against the defendants in an unspecified amount. On May 17 and 18, 2004, the Company filed motions to dismiss each of the complaints. Also on May 17, 2004, several potential lead plaintiffs filed motions for appointment as lead plaintiff in the cases. On May 21, 2004, the Court entered an order denying consolidation of the actions and directing that all discovery and other proceedings (including the appointment of a lead plaintiff) are stayed pending determination of the motions to dismiss. Since then, all but one of the actions, entitled Heller v. Quovadx, Inc., et al., Case No. 04-M-0665 (OES) (D. Colo.), have been dismissed. The plaintiff in Heller has filed a first amended complaint, which asserts the same claims as those asserted in the original complaint, and includes allegations regarding the Company’s accounting for certain additional transactions. On July 14, 2004, the Company filed a motion to dismiss the first amended complaint in Heller. The class actions are still in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

On March 22, 2004, a shareholder derivative action was filed in the District Court of Colorado, County of Arapahoe, entitled Marcoux v. Brown et al, against the members of the Board of Directors and certain now-former officers of Quovadx alleging breach of fiduciary duty and other violations of state law. The Company is named solely as a nominal defendant against which no recovery is sought. This complaint generally is based on the same facts and circumstances as alleged in the class action complaints discussed above, alleging that the defendants misrepresented Quovadx financial projections and that one of the defendants violated state laws relating to insider trading. The action seeks damages in an unspecified amount against the individual defendants, disgorgement of improper profits and attorney’s fees, among other forms of relief. On April 13, 2004, the Company and its nonexecutive directors filed a motion to dismiss the action. On or about April 21, 2004, a second, nearly identical shareholder derivative complaint, seeking the same relief, was filed in the United States District Court for the District of Colorado, entitled Thornton v. Brown et al. The plaintiffs in both of the shareholder derivative actions are represented by the same local counsel. On or about May 20, 2004, a third, nearly identical shareholder derivative complaint, seeking the same relief, was filed in the District Court of Colorado, County of Arapahoe, entitled Jaroslawicz v. Brown, et al. On May 21, 2004, the Court entered an order in Marcoux directing that the Company, named as a nominal defendant, be realigned as a plaintiff in the action and remanding the action back to state court. Subsequently, the plaintiff in Thornton voluntarily dismissed his action from federal court and refiled in state court. The three shareholder derivative actions are now all pending in the Colorado state court. A stipulation consolidating the three actions and setting a date for the filing of a consolidated amended complaint is currently before the state court for approval. The shareholder derivative actions are still in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

On May 17, 2004, a purported class action complaint was filed in the United States District Court for the District of Colorado, entitled Henderson v. Quovadx, Inc. et al, Case No. 04-M-1006 (OES), against Quovadx, Inc., its now-former Chief Executive Officer, its now-former Chief Financial Officer and its Board of Directors. The complaint alleged violations of Section 11 and Section 15 of the Securities Act of 1933, as

amended, purportedly on behalf of all former shareholders of Rogue Wave Software, Inc. who acquired Quovadx common stock in connection with the Company’s exchange offer effective December 19, 2003. The claims are based upon the same theories and allegations as asserted in the Section 10(b) class actions described above. The Court denied plaintiff’s motion to consolidate this Section 11 action with the Section 10(b) cases and authorized the two competing lead plaintiff candidates to take discovery of each other in advance of a hearing on the appointment of lead plaintiff. On July 14, 2004, the Company filed an answer to the Section 11 complaint, denying allegations of wrongdoing and asserting various affirmative defenses. The individual defendants filed a motion to dismiss the Section 11 complaint. This class action also is in the preliminary stages, and it is not possible for us to quantify the extent of potential liability, if any.

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

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

The Company operates in three segments: software license, professional services, and recurring revenue. The software license segment includes revenue from software license sales and software subscriptions. The professional services segment includes revenue generated from software implementation, development, and integration. The recurring revenue segment includes revenue generated from outsourcing, hosting maintenance, transactions, and other recurring services. The segment information for the years ended December 31, 2003, 2002 and 2001 is reflected in the Consolidated Statement of Operations. A breakout of assets and capital expenditures for all segments is not prepared or provided to the chief operating decision maker. Revenue and long-term assets from our foreign operations are $3.8 million and $0.5 million, respectively.

This information has been derived from unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of this information. These unaudited quarterly results should be read in conjunction with the audited financial statements and notes thereto. Operating results are expected to vary significantly from quarter to quarter and are not necessarily indicative of results for any future period. Data relating to the results

of operations for the each quarter of the years ended December 31, 2003 and 2002 follows (in thousands except per share amounts):

The results for the third quarter of 2003 have been restated from the financial results reported in the Company’s Form 10-Q. These revisions concern shipments to Infotech Group (“Infotech”), an Indian company, in the third quarter of 2003. The Company believed at the time of the shipments that collection of the receivable was probable due to the establishment of a credit line by Infotech that could be used for payment. After the shipments of software product, however, the Company has encountered unanticipated delays in obtaining payment. Based on further analysis of Infotech’s ability to pay for the software purchased, the accounting for the revenue recognized has been revised from an accrual to a cash basis. As a result, the Company has materially restated its previously reported financial results for the third quarter of 2003 by deleting all of the revenue and commissions, $4.7 million and $0.4 million, respectively, that had been recorded related to Infotech.

The results for the quarters reflected below have also been restated due to the accounting inaccuracies described in Note 2.

Data relating to the results of operations as restated for each quarter of the years ended December 31, 2003 and 2002 follows:


*	This certification is furnished to, but not filed, with the Commission. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates it by reference.


þ		AMENDMENT NO. 3 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

		For the fiscal year ended December 31, 2003


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

6400 S. Fiddler’s Green Circle, Suite 1000, Englewood, Colorado (Address of principal executive offices)		80111 (Zip Code)


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share		NASDAQ


Item
Number		Page

PART I
3.	Legal Proceedings		3
PART II
6.	Selected Financial Data		6
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
8.	Consolidated Financial Statements and Supplementary Data		27
9A.	Controls and Procedures		28
PART IV
15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		30
Signatures			32
Consolidated Financial Statements			F-1
Schedule II — Valuation and Qualifying Accounts			S-1
Consent of Ernst & Young LLP
Certification of Acting Chief Executive Officer
Certification of Acting Chief Financial Officer
Certification of Acting Chief Executive Officer
Certification of Acting Chief Financial Officer



	Year Ended December 31,

	2003			2002			2001			2000			1999


	(In thousands, except per share data)
	(Restated)			(Restated)
Statement of Operations Data:
Total revenue	$	69,932		$	63,228		$	52,180		$	10,834		$	4,853
Total costs and expenses		87,103			76,032			59,550			33,178			7,974

Loss from operations		(17,171	)		(12,804	)		(7,370	)		(22,344	)		(3,121	)
Gain on sale of assets		—			87			—			—			—
Goodwill impairment		—			(93,085	)		—			—			—
Interest income, net		694			1,035			3,101			5,027			(67	)

Net loss	$	(16,477	)	$	(104,767	)	$	(4,269	)	$	(17,317	)	$	(3,188	)

Net loss per common share — basic and diluted	$	(0.52	)	$	(3.49	)	$	(0.20	)	$	(1.20	)	$	(6.91	)

Weighted average common shares outstanding — basic and diluted		31,407			29,987			21,308			14,399			472



	December 31, 2001

	2003		2002		2001		2000		1999


	(In thousands)
	(Restated)		(Restated)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	23,688	$	47,621	$	63,486	$	78,319	$	7,455
Working capital		6,150		50,210		62,659		82,759		8,138
Total assets		155,190		104,384		214,704		96,908		13,183
Mandatory redeemable convertible preferred stock		—		—		—		—		23,842
Stockholders’ equity (deficit)		111,975		86,293		188,887		92,839		(13,172	)


			2003			Restatement			2003
			As Previously Reported			Adjustments			As Restated


			(Amounts in thousands except per share data)
Revenues:
		Software license	$	21,228		$	(958	)	$	20,270
		Professional services		18,217			(705	)		17,512
		Recurring services		32,150						32,150

Total revenue				71,595			(1,663	)		69,932

Costs and expenses:
	Cost of revenue:
		Software license		9,941			(91	)		9,850
		Professional services		13,811			211			14,022
		Recurring services		20,989						20,989

Total cost of revenue				44,741			120			44,861

	Gross Profit			26,854			(1,783	)		25,071

Operating expenses:
	Sales and marketing			17,785						17,785
	General and administrative			12,742						12,742
	Research and development			9,995						9,995
	Amortization of acquired intangible assets			1,720						1,720

		Total operating expenses		42,242						42,242

Loss from operations				(15,388	)		(1,783	)		(17,171	)
Interest income, net				694						694

Net loss			$	(14,694	)	$	(1,783	)	$	(16,477	)

Loss per common share — basic and diluted			$	(0.47	)	$	(0.05	)	$	(0.52	)

Weighted average common shares outstanding — basic and diluted				31,407						31,407


	*Year Ended December 31, 2003 Compared to Year Ended December 31, 2002*


	*Year Ended December 31, 2002 Compared to Year Ended December 31, 2001*


					2005 &		2007 &		2009 &
	Total		2004		2006		2008		thereafter


	(Dollars in thousands)
Operating leases	$	13,141	$	5,059	$	5,253	$	1,374	$	1,455
Royalty payments(1)		416		250		166		—		—

	$	13,557	$	5,309	$	5,419	$	1,374	$	1,455


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


	*We face risks related to a formal investigation being conducted by the SEC.*


	*We face risks related to the class action and derivative lawsuits.*


	Our investors, customers, suppliers, current employees and prospective employees may react adversely to the restatement of our historical financial statements and our ability to file in a timely manner all of our SEC filings.


	*We have made changes to our senior management team, diverting attention from strategic planning and business operations that could negatively affect our results of operations.*


	*Revenue*


	*Allowance for Doubtful Accounts*


	*Purchase Accounting*


	*Software Development Costs*


	*We may encounter significant employee turnover that could reduce our ability to sell, deliver, and support future commitments.*


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


	*We have embarked on a strategy to significantly increase software sales as our principal source of revenue. If that strategy is not successful, our business may be harmed.*


	We operate in an industry with rapidly changing technology and, if we do not successfully modify our products to incorporate new technologies or introduce new products, our sales will suffer.


	The market for solutions utilizing business process management and application integration software may not grow as quickly as we anticipate, which would cause our revenue to fall below expectations.


	*We face saturated or diminishing markets for some of our key products.*


	*We may be immediately delisted from Nasdaq if we cannot meet the more stringent criteria Nasdaq recently established for our continued listing.*


	*Our public stock price has fallen substantially and may fall further, negatively impacting its investment desirability.*


	*We have risk in sustaining professional service revenue in our markets.*


	Several segments of our business rely on the effectiveness of channel partners and third-party influencers to help achieve revenue goals. If we fail to increase and maintain our channel relationships, our business may suffer.


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


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


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


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


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


	*Because we provide software used within medical management processes, we may be liable for the denial of payments for medical claims or medical services.*


	*As we continue to build our international sales, we are subject to increased regulation and uncertainties in the international marketplace.*


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


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


	*Legislative and regulatory actions may cause our operating expenses to increase.*