<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 ---------------

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the fiscal year ended September 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                         COMMISSION FILE NUMBER 0-28182

                            TRANSITION SYSTEMS, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

    MASSACHUSETTS                                         04-2887598
    ---------------------------------                     ----------------------
    (State or Other Jurisdiction                          (I.R.S. Employer
    of Incorporation or Organization)                     Identification Number)
    
    ONE BOSTON PLACE, BOSTON, MASSACHUSETTS               02108
    ----------------------------------------              ----------
    (Address of Principal Executive Offices)              (Zip Code)
    
    Registrant's Telephone Number, including Area Code:   (617) 723-4222
                                                          --------------

Securities registered pursuant to Section 12(b) of the Act:

                                      None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, $.01 par value per share

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

   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. [ ]

   As of December 15, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately 133,934,685, based on the
last sale price of such stock on such date, as reported by the Nasdaq National
Market. For purposes of the foregoing calculation, the Company has assumed that
each director, executive officer and beneficial owner of 5% or more of the
voting stock of the Company is an affiliate. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.

   As of December 15, 1998, there were 18,047,762 outstanding shares of common 
stock, $.01 par value per share (the "Common Stock"), and 356,262 shares of
non-voting common stock, $.01 par value per share (the "Non-Voting Common
Stock").

                     DOCUMENTS INCORPORATED BY REFERENCE

   Certain portions of the registrant's Definitive Proxy Statement for its 1999 
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Annual Report on Form 10-K.


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                                    PART I

ITEM 1A.   RISK FACTORS

   THIS FORM 10-K CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING STATEMENTS REPRESENT THE
COMPANY'S BELIEFS, EXPECTATIONS AND INTENTIONS CONCERNING FUTURE EVENTS,
INCLUDING, WITHOUT LIMITATION, FINANCIAL MATTERS, PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS, PRODUCTS AND SERVICES, THE FUTURE ECONOMIC
PERFORMANCE OF THE COMPANY, AND THE ASSUMPTIONS UNDERLYING SUCH BELIEFS,
EXPECTATIONS AND INTENTIONS. THE WORDS "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"BELIEVE," "SEEK," "ESTIMATE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. THIS FORM 10-K ALSO CONTAINS OTHER
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE NOT GUARANTIES OF FUTURE
PERFORMANCE, AND INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE THE
COMPANY'S FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY. MANY OF SUCH
FACTORS ARE BEYOND THE COMPANY'S ABILITY TO CONTROL OR PREDICT. READERS ARE
ACCORDINGLY CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS.
THE COMPANY DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS WHETHER IN RESPONSE TO NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE. THESE FORWARD-LOOKING STATEMENTS ARE FURTHER QUALIFIED BY
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE
DISCUSSED IN THE FOLLOWING RISK FACTORS.

   RISK OF NONCONSUMMATION OF ECLIPSYS MERGER. On October 29, 1998 the Company 
entered into an Agreement and Plan of Merger with Eclipsys Corporation 
("Eclipsys") pursuant to which the Company is expected to merge with a 
wholly-owned subsidiary of Eclipsys (the "Merger"). Special meetings of the 
stockholders of the Company and of Eclipsys to approve the Merger have been 
scheduled for December 30, 1998. Assuming the Merger is approved by the 
stockholders of the Company and of Eclipsys, it is expected to be consummated 
on December 31, 1998 or as soon as practicable thereafter. Although the Company 
believes that the stockholders of the Company and of Eclipsys will approve the 
Merger, there can be no assurance that this will be the case. The Company has 
invested substantial effort and resources in preparing for the Merger. Failure 
of the Merger to occur as planned for any reason would have a material adverse 
effect on the business, prospects and financial condition and results of 
operations of the Company. In addition, if the Merger were not to proceed as 
planned, the Company and its business would be subject to a number of 
additional risks and uncertainties, including those described in the following 
paragraphs. 

   FLUCTUATIONS IN ANNUAL AND QUARTERLY PERFORMANCE. The Company has experienced
a seasonal pattern in its operating results, in which the first quarter of each
fiscal year typically has the lowest revenue and net income, frequently lower
than the last quarter of the previous fiscal year, and the fourth quarter of
each fiscal year typically has the highest revenue and net income. The Company
believes that this seasonal pattern is attributable in part to its sales
compensation programs, which historically have been based on the attainment of
fiscal year goals. The Company's revenue can be expected to vary significantly
as a result of changes in order backlog, cancellation or postponement of product
deliveries, fluctuations in demand for existing products and delays in the
implementation of the Company's products, whether caused by the Company or the
customer. The Company relies on sales under large contracts of a small number of
products to a small number of customers, and the sales cycles for most of the
Company's products are long and difficult to predict, resulting in variability
of its revenues. The unpredictability of revenues could in any quarter result in
a shortfall relative to quarterly expectations. A significant portion of the
Company's expenses are relatively fixed and are based in large part on the
Company's forecasts of future sales. If revenues are below expectations in any
given period, the Company's inability to adjust spending to compensate fully for
the lower revenues may magnify the adverse effect of such a shortfall on the
Company's operating results. Other factors which may contribute to fluctuations
in operating results include: the Company's ability to develop, introduce and
market new products and product enhancements and the timing and extent of any
market acceptance of such products; the Company's ability to respond to new
product introductions and price reductions by its competitors; the timing,
cancellation or rescheduling of significant orders; the availability of
third-party software provided in conjunction with the Company's products and
changes in the cost of such third-party software; the Company's ability to
attract, retain and motivate qualified personnel; the timing and amount of
research and development and other expenditures by the Company; and general
economic conditions. Delays in material payments under customer contracts could
adversely affect the availability of funds for the Company and could result in
the need for additional borrowing to fund current operations. Additionally, any
delays in the Company's performance under these 






<PAGE>   3

contracts could have a material adverse effect on period-to-period earnings.
Accordingly, the Company believes that period-to-period comparisons of results
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance.

   LONG SALES AND IMPLEMENTATION CYCLES. The Company's sales process is often
subject to delays associated with the lengthy approval process that typically
accompanies a customer's significant capital expenditures. The sales cycle for
new accounts typically ranges from six to 12 months or more. During this
process, the Company expends substantial time, effort and funds demonstrating
the product, preparing a contract proposal and negotiating the contract. Any
failures by the Company to procure a signed agreement after expending
significant time, effort and funds could have a material adverse effect on the
Company's business, financial condition and results of operations. Even after an
agreement has been signed, the implementation of the Company's software products
generally requires a significant commitment of resources by the Company and by
the customer. Full implementation of the Company's software system at a customer
site typically takes from three to twelve months.

   The length of time required to complete an implementation depends on many
factors, some of which are outside the control of the Company, including the
state of the customer's existing information systems and the customer's ability
to commit the personnel and other resources necessary to complete elements of
the implementation process for which the customer is responsible. In certain
instances, the implementation process has been prolonged substantially as a
result of delays attributable to the customer. The Company's agreements with
certain of its customers provide for a reduction in the implementation fee if,
among other things, the Company fails to meet certain implementation milestones
on a timely basis. Delays in implementation of substantial contracts have in the
past contributed, and may in the future contribute, to the Company's failure to
achieve expected revenue levels in a given quarter. The failure of the Company
to maintain timely and cost-efficient implementation procedures could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1B. Business -- Sales and Marketing" and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."

   DEPENDENCE ON KEY PERSONNEL. The Company's future success depends to a
significant extent on its executive officers, including Robert F. Raco, Donald
C. Cook and Christine Shapleigh, M.D., who have been with the Company since its
inception, and certain other senior operational, technical and sales and
marketing personnel. The loss of the services of any of these individuals could
have a material adverse effect on the Company's business, financial condition
and results of operations. Although each of the three named individuals has
signed an employment agreement with the Company which includes non-competition
covenants, there can be no assurance that any of these individuals or any other
key employee will not voluntarily terminate his or her employment with the
Company. The Company believes that its future success will also depend
significantly on its ability to attract, motivate and retain additional
highly-skilled operational, technical and sales and marketing personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting, assimilating and retaining the
personnel required to grow and operate profitably.

   DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS. The Company derived a
significant portion of its revenues in fiscal 1998 from a limited number of
products and services and expects this pattern to continue in future years. Most
of this revenue is expected to derive from licenses of the Company's core
Transition II system, a limited number of other add-on products and services
related to Transition II, and the Company's new Transition IV product. As a
result, the reduction, delay or cancellation of orders for this product would
have a material adverse effect on the Company's business, financial condition
and results of operations.

   DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL OBSOLESCENCE. The Company's success
has depended and will continue to depend on its ability to develop and introduce
new products and enhanced versions of existing products in response to rapidly
changing demand for technologically-advanced decision support systems for the
health care industry. The development of new and enhanced products for this
market is a complex and uncertain process requiring high levels of innovation
and accurate anticipation of technological and market trends. There can be no
assurance that the Company will be able to innovate, develop or market new
products and product enhancements successfully, that any new 







<PAGE>   4

products or product enhancements will gain market acceptance or that the Company
will be able to respond effectively to technological changes or product
announcements by competitors. The Company's failure to do any of these things
could have a material adverse effect on the Company's business, financial
condition and results of operations.

   INTENSELY COMPETITIVE MARKET. The market for health care information systems
and services is intensely competitive and rapidly evolving. The Company competes
directly with vendors of decision support systems for health care providers, a
number of which are larger than the Company. Other vendors of health care
information systems, including vendors currently targeting decision support
systems for payors, may enter the markets in which the Company competes. The
Company also faces competition from internal management information systems
departments of large hospital networks, some of which have developed or may
develop financial and clinical outcomes management systems or other cost control
solutions. The Company believes that the principal competitive factors
influencing the market for its products include vendor and product reputation,
product architecture, functionality and features, ease of use, rapidity of
implementation, quality of customer support, product performance and price.
There can be no assurance that the Company will be able to compete successfully
with respect to any of these factors. Moreover, many of the Company's current
and prospective competitors have substantially greater financial, technical,
managerial, sales, marketing and other resources than the Company and may be
able to respond more effectively to new or emerging technologies and changes in
customer requirements, initiate or withstand significant price decreases or
devote greater resources to the development, promotion and sale of their
products than the Company. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase their ability to offer products that address the needs
of the Company's customers. New competitors or new alliances among competitors
may emerge and quickly acquire market share. Competition may result in
significant price reductions, decreased gross margins, loss of market share and
reduced acceptance of the Company's products. The Company has on occasion
experienced price pressure attributable to competition. There can be no
assurance that the Company will be able to compete successfully in the future or
that competition will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1B. Business
-- Research and Product Development" and "-- Competition."

   CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY. Many health care
providers are consolidating to create larger health care delivery enterprises
with greater regional market power. Such consolidation could erode the Company's
target market. In addition, the resulting enterprises could have greater
bargaining power, which could erode the price of the Company's products and
services. The reduction in the size of the Company's target market or the
failure of the Company to maintain adequate price levels could have a material
adverse effect on the Company's business, financial condition and results of
operations. The health care industry is also subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of participants in the health care industry. During the past several
years, the United States health care industry has been subject to an increase in
governmental regulation and reform proposals. These reforms, if enacted, may
increase governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's customers. Health
care industry participants may react to these proposals and the uncertainty
surrounding them by curtailing or deferring investments, including those for the
Company's products and services. The Company cannot predict with any certainty
what impact, if any, such legislative or market-driven reforms could have on its
business, financial condition and results of operations. See "Item 1B. Business
-- Industry Background."

   RISKS ASSOCIATED WITH SIGNIFICANT GOVERNMENT CONTRACT. The Company derived
approximately 7.0%, 5.2%, 5.1% of its revenues in fiscal 1996,1997, and 1998
respectively, from a single contract, with subsequent modifications, entered
into with the United States Department of Veterans Affairs (the "VA"). There can
be no assurance that the VA will continue to purchase the Company's products and
services in similar amounts. Changes in the VA's procurement priorities or
significant reductions or delays in procurement of the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, the VA cannot make all the payments
required under the contract without the appropriation of the necessary funds
through the Congressional budget process. Shutdowns of the United States
government could lead to delays in the 



<PAGE>   5

procurement process and could contribute to a failure to appropriate funds.
There can be no assurance that the VA will not exercise its contractual right to
terminate the contract at will or that the necessary funds will be appropriated.

   QUALITY ASSURANCE AND PRODUCT ACCEPTANCE. Although the Company devotes
substantial resources to producing highly reliable software, the Company's
software and third-party software offered by the Company may from time to time
contain errors. Any such error could result in a loss of valid data, delay in
installation or delay in product releases. Because the reliability of the
Company's products is important to its customers, such errors or delays could
have a material adverse effect on the continued market acceptance of the
Company's products, could expose the Company to claims from customers and third
parties and could result in a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company's license
agreements with customers contain contractual limitations on liability, there
can be no assurance that such contractual provisions will provide adequate
protection against claims that may be asserted against the Company.

   DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT. The Company's
ability to compete effectively depends to a significant extent on its ability to
protect its proprietary information. The Company relies primarily on copyright
and trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. The Company has not filed any patent
applications with respect to its intellectual property. The Company generally
enters into confidentiality agreements with its consultants and employees and
generally limits access to and distribution of its technology, software and
other proprietary information. Although the Company intends to defend its
intellectual property, there can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology or that the Company's competitors will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology. The Company is also subject to the risk of alleged
infringement by it of intellectual property rights of others. Although the
Company is not currently aware of any material infringement claims with respect
to the Company's current or future products, there can be no assurance that
third parties will not assert such claims. Any such claims could require the
Company to enter into license arrangements or could result in protracted and
costly litigation, regardless of the merits of such claims. No assurance can be
given that any necessary licenses will be available or that, if available, such
licenses can be obtained on commercially reasonable terms. Furthermore,
litigation may be necessary to enforce the Company's intellectual property
rights, to protect the Company's trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims of
infringement. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1B. Business
Intellectual Property."

   DEPENDENCE ON THIRD-PARTY TECHNOLOGY LICENSES. The Company's products are
dependent upon licenses for certain technology from a number of third-party
vendors, including Computer Corporation of America (CCA), Oracle Corporation,
Sterling Software (United States of America), Inc., HealthVISION, Inc. The
Company also has licences from HCIA Inc. ("HCIA") and Premier, Inc. for certain
database management systems ("DBMSs"), other software components and clinical
benchmarking data. Most of these licenses expire within one to four years, can
be renewed only by mutual consent and may be terminated if the Company breaches
the terms of the license and fails to cure the breach within a specified period
of time. There can be no assurance that such licenses will continue to be
available to the Company on commercially reasonable terms, if at all. The loss
of or inability to maintain any of these licenses could result in the
discontinuation of, or delays or reductions in, product shipments unless and
until equivalent technology is identified, licensed and integrated with the
Company's software. Any such discontinuation, delay or reduction would have a
material adverse effect on the Company's business, financial condition and
results of operations. Most of the Company's third-party licenses, including its
license from New England Medical Center, Inc. ("NEMC") for the original version
of the Transition I software, are non-exclusive, and there can be no assurance
that the Company's competitors will not obtain licenses to and utilize such
technology in competition with the Company. There can be no assurance that the
vendors of technology utilized in the Company's products will continue to
support such technology in its current form, nor can there be any assurance that
the Company will be able to modify its own products 




<PAGE>   6

to adapt to changes in such technology. In addition, there can be no assurance
that financial or other difficulties that may be experienced by such third-party
vendors will not have a material adverse effect upon the technologies
incorporated in the Company's products, or that, if such technologies become
unavailable, the Company will be able to find suitable alternatives.

   RISK OF PRODUCT LIABILITY CLAIMS. Certain of the Company's products provide
applications that relate to patient medical histories and treatment plans. Any
failure by the Company's products to provide accurate and timely information
could result in product liability claims against the Company by its customers or
their patients. A successful claim brought against the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the expenditure
of funds in litigation, as well as diversion of management time and resources.
To date, no product liability claims have been made against the Company.
Nonetheless, there can be no assurance that the Company will not be subject to
such claims.

   RISKS ASSOCIATED WITH IDENTIFYING AND INTEGRATING ACQUISITIONS. The Company
intends to grow, in part, through acquisitions of complementary products,
technologies and businesses. The Company's ability to expand successfully
through acquisitions depends on many factors, including the successful
identification and acquisition of products, technologies or businesses and
management's ability to integrate and operate the acquired products,
technologies or businesses effectively. There is significant competition for
acquisition opportunities in the health care information systems industry, which
may intensify due to consolidation in the industry. The Company will compete for
acquisition opportunities with other companies that have significantly greater
financial and managerial resources. There can be no assurance that the Company
will be successful in acquiring any complementary products, technologies or
businesses or that the Company will be able to integrate successfully any
acquired products, technologies or businesses into its current business and
operations. The failure to integrate successfully any significant products,
technologies or businesses could have a material adverse effect on the Company's
business, financial condition and results of operations.

   RISKS ASSOCIATED WITH GOVERNMENT REGULATORY PROPOSALS. The United States Food
and Drug Administration (the "FDA") has promulgated a draft policy for the
regulation of certain computer products as medical devices under the 1976
Medical Device Amendments to the Federal Food, Drug and Cosmetic Act (the "FDC
Act"). To the extent that particular computer software is determined to be a
medical device under the policy, developers and vendors of such software could
be required, depending on the product, to: (i) register and list their products
with the FDA; (ii) notify the FDA and demonstrate substantial equivalence to
other products on the market before marketing such products; or (iii) obtain FDA
approval by demonstrating safety and effectiveness before marketing a product.
In addition, such products would be subject to the FDC Act's general controls,
including those relating to good manufacturing practices and adverse experience
reporting. Although it is not possible to anticipate the final form of the FDA's
policy, the Company expects that, whether or not the draft is finalized, the FDA
is likely to become increasingly active in regulating computer software that is
intended for use in health care settings. The FDA, if it chooses to regulate
such software, can impose extensive requirements governing pre- and post-market
conditions such as device investigation, approval, labeling and manufacturing.
Compliance with such requirements, if imposed, could be burdensome,
time-consuming and expensive. There can be no assurance that such further
regulation, if adopted, will not have a material adverse effect on the Company's
business, financial condition and results of operations.

   POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Common Stock has
been, and could in the future be, subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, trends in, or
changes in priorities with respect to health care spending in the United States
and certain other countries and other events or factors. In addition, the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices for many high technology companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters--Price Range of Common Stock."


<PAGE>   7

   EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCES OF PREFERRED STOCK. The Company's Articles of Organization,
its By-Laws and certain Massachusetts laws contain provisions that may
discourage acquisition bids for the Company and that may reduce the temporary
fluctuations in the trading price of the Common Stock which are caused by
accumulations of stock, thereby depriving stockholders of certain opportunities
to sell their stock at temporarily higher prices. The Company's Articles of
Organization permit the issuance of shares of Preferred Stock without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding stock
of the Company. The Company has no present plans to issue any shares of
Preferred Stock.

   ABSENCE OF DIVIDENDS. The Company does not anticipate paying cash dividends
on the Common Stock in the foreseeable future. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters--Dividends."

   YEAR 2000 ISSUES. The Company's software license agreements generally contain
warranties concerning the Year 2000 compliance of the licensed product. The
Company has tested the products it has developed internally and believes that,
with the exception of its Transition for Quality product (for which the Company
expects to release a fully Year 2000 compliant version in early 1999), the
current release of each of its internally developed products is Year 2000
compliant. The Company includes in its products certain software licensed from
third-party vendors. The Company has not yet completed its evaluation of the
Year 2000 compliance of all such third-party software. For example, the Company
has not yet verified that Uniface, licensed from Compuware Corporation, is Year
2000 compliant. In order to use the Company's products customers must themselves
license software, including certain operating system and database management
system software, from third-party vendors such as Microsoft Corporation and
Oracle Corporation. Not all such third-party software may be fully Year 2000
compliant. For example, Microsoft Corporation has not certified that its Windows
NT operating system is Year 2000 compliant. The Company has also evaluated the
Year 2000 compliance of its critical internal software systems, including its
financial, payroll and human resources systems and its telephone switch, and
believes, based in part on certification from the vendors of such systems, that
such systems are Year 2000 compliant. The Company does not expect to incur
material costs in completing its Year 2000 assessment and remediation program.
However, the discovery of previously undetected Year 2000 defects in the
Company's products (including those licensed from third-party vendors), in
third-party software required for customers to use the Company's products or in
its internal software systems could damage the Company's business.

   Apprehension in the marketplace over Year 2000 compliance issues may lead
businesses, including customers of the Company, to defer significant capital
investments in information technology programs and software. They could elect to
defer those investments either because they decide to focus their capital
budgets on the expenditures necessary to bring their own existing systems into
compliance or because they wish to purchase only software with a proven ability
to process data after 1999. If these deferrals are significant, the Company may
not achieve expected revenue or earnings levels.


<PAGE>   8
 
ITEM 1B.  BUSINESS
 
Transition Systems, Inc. (the "Company" or "TSI") provides management
information technology to hospitals, integrated delivery networks, physician
groups and other healthcare organizations. Using TSI products, these
organizations are able to increase efficiency, improve quality of care and lower
the cost of care delivery. TSI product lines span the health care organization's
information technology needs, providing data integration services, master person
identifier solutions, disease management products and a clinical data repository
as well as enterprise-wide financial, operational and clinical decision support.
 
INDUSTRY BACKGROUND
 
Pressure by employers, health insurers and government payors to control health
care costs is driving a movement towards managed care and new forms of
reimbursement for health care providers. These new managed care reimbursement
models, including capitation, case rates, per diems and other fixed payment
arrangements, are shifting the financial risk of providing care from payors to
providers. Payors are also demanding that providers differentiate their services
by demonstrating quality of care. These and other pressures are leading to
industry consolidation and the formation of multi-entity provider networks,
including integrated delivery networks.
 
These changes have altered the information needs of health care providers trying
to compete in this new environment. Institutions must understand their costs in
order to manage the profitability of their clinical processes and their many
types of managed care contracts. Institutions also need to be able to compare
practice patterns and outcomes of different clinicians or affiliated providers
and to monitor utilization and outcomes on a continuous basis. Further, systems
must be put in place that help clinicians translate their new understanding of
improved care delivery into daily clinical operations. Information tools are
required at the point of care that help clinicians improve their overall
productivity as well as insure quality and cost effective care.
 
The existing information systems installed in most provider organizations were
developed to meet the needs of providers in a fee-for-service environment. These
systems are typically transaction-based departmental systems (e.g., laboratory,
pharmacy, radiology and nursing) focused on recording billing information for a
single department. They are suitable primarily for collecting financial data,
rather than for analyzing clinical and operational information. Existing
departmental systems generally have been designed to operate as stand-alone
systems and typically are limited in their ability to share data. Because these
legacy systems do not integrate clinical, operational and financial data across
the enterprise, they do not provide the information TSI believes is necessary
for managers or clinicians to evaluate the cost of care by patient, clinical
specialty or episode of care. Further, these systems were designed mainly to
capture charges in a fee-for-service environment, rather than to lower costs,
improve utilization and demonstrate quality.
 
PRODUCTS
 
TSI's initial product, Transition I, was introduced in 1985. Since 1985, TSI has
developed new products on a regular basis. All TSI products extend the core
concepts of management information, accountability and control. These products
are based on the foundation of providing information technology tools that
enable healthcare organizations to: analyze past clinical, operational and
financial practices; model new approaches for the future; transform those models
into actionable plans; and measure actual practice against those plans. Recent
additions to the TSI product lines have extended these capabilities to include
disease-specific tools that focus on improving the day-to-day efficiency and
effectiveness of care providers as well as the real-time measurement of clinical
protocols. TSI data sources have also expanded to include clinical data
repository technology.
 
     The focus of TSI products is to empower the enterprise with information
that can be used to change and improve the clinical and financial performance of
the organization. More than 1,100 healthcare organizations in the United States
and abroad have chosen TSI as their information technology solution to support
their ongoing improvement efforts.
<PAGE>   9
 
     TSI's current product offerings are as follows:
 
     Transition II.  At the core of the Transition family of products is
Transition II, an integrated decision support system designed to provide the
clinical, operational and financial information that is needed to manage and
improve the delivery of care. Together, the clinical and financial components of
Transition II enable an organization to: (i) delineate responsibility and
accountability for managing costs; (ii) control resource utilization and reduce
costs; (iii) measure variances from rules-based protocols on a daily basis; (iv)
manage a mix of complex reimbursement contracts by case or member; (v) analyze
and measure quantifiable improvements in the patient care process; and (vi)
develop clinical and departmental budgets and variance analyses that adjust for
actual volume and mix.
 
     Transition II creates a clinical and financial data repository by
integrating data from across the enterprise. The system gathers information from
the many departmental information systems within the organization through
interfaces that enable concurrent updating of distributed data. Transition II
analyzes this data in order to determine the patient-level costs of care and
identify areas for improvement. This information allows the organization to
evaluate its cost structure, make changes in clinical processes to reduce costs
and accurately price reimbursement contracts on a profitable basis. Transition
II also analyzes and measures clinical process and outcomes data, identifying
the practice patterns that most consistently result in the highest quality at
the lowest cost. In addition, the system includes capabilities for case mix,
reimbursement and utilization management, cost and profitability analysis,
strategic planning, modeling and forecasting.
 
     Enterprise Manager Series, formerly known as Transition II for Integrated
Delivery Systems, contains several different components that meet the needs of
emerging integrated delivery networks. This product incorporates the
functionality of Transition II and extends it across multiple entities. It also
adds capabilities designed to meet the special needs of integrated delivery
networks, such as analyses focusing on groups of patient-members and their
associated health care activities. Different types of members can be
categorized, for example, by disease type, age, sex, insurance product or
employer.
 
     Enterprise Manager Series includes tools to: (i) measure and monitor the
cost and quality of care longitudinally and determine where in a provider
network appropriate care can be provided most cost effectively; (ii) manage the
financial risks of capitation; (iii) provide risk pool accounting and management
both centrally and to physician groups; (iv) manage physician panels and
determine panel sizing; (v) centrally identify and consolidate multiple patient
identifiers across an enterprise and resolve them to a common master patient
index; (vi) manage populations by identifying detailed characteristics and
demographics, risk factors or chronic conditions, patient outcome status, and
HEDIS and HEDIS-like indicators; and (vii) link physician and hospital billing
information with the ability to view utilization, revenue and profitability by
physician only, hospital only, and combined physician and hospital.
 
     Enterprise Person Identifier.  This product is a vendor-neutral enterprise
master person index that uniquely identifies and cross-references patient,
person, or member identification numbers to link information stored in disparate
systems. This product is increasingly essential for an organization delivering
care at multiple sites to produce complete and accurate billing statements by
capturing and correctly linking all visits and related charges incurred by
patients throughout the network, regardless of the source of the data. This
capability is also a necessary foundation for enterprise clinical systems, such
as clinical data repositories and electronic patient records.
 
     Dictionary Manager.  Dictionary Manager enables users to input a change to
semi-static data tables or dictionaries just once, and have that change
immediately reflected in all designated systems automatically. Changes to the
charge masters, the addition of new physicians to the users staff, and the
elimination of an insurance provider are all updated and maintained accurately
and automatically by Dictionary Manager.
<PAGE>   10
 
     Transition IV.  Transition IV, TSI's next generation of decision support
solutions, extends the capabilities of Transition II by providing access to
real-time clinical information that can be used to enhance the quality of
patient care. Transition IV creates a domain of information to improve a
healthcare organization's ability to perform care analysis, care planning, care
support, and opportunity analysis. Transition IV provides a single desktop that
incorporates the HealthVISION real time clinical data repository with the
clinical and financial planning and analysis capabilities of Transition II.
Transition IV is comprised of five additive levels of packaging to enable
initial purchases or upgrades to any level. Among other benefits and features,
Transition IV:
 
     - Provides detailed clinical information to use for process improvement
 
     - Minimizes re-work through real-time alerts
 
     - Provides real-time collection of clinical data through live HL7 feeds
 
     - Improves patient outcomes through timely intervention
 
     - Incorporates financial information in analysis and alerts
 
     - Provides Web-enabled physician desktop
 
     - Provides ease of access to timely data, such as laboratory test results
 
     Transition For Quality.  TSI's Transition for Quality product offers tools
that complement the analytical power of Transition II's clinical component and
provides on-line case management. With Transition for Quality, an organization
can define a broad range of quality issues and identify cases for review and
follow up based on outcome measures and variance from critical paths. Using this
information, the organization can concurrently monitor the progress and outcomes
of cases and intervene in response to automatic alerts. In addition, Transition
for Quality provides healthcare organizations with compliance tools to comply
with the Joint Commission on Accreditation of Healthcare Organizations' Oryx
initiative.
 
     Transition Perspective and Clinical ABCs.  These benchmarking products
offered in conjunction with products of Premier Inc. and HCIA, Inc.,
respectively, enable Transition II customers to use external benchmarking data
to further support their process improvement efforts.
 
     Vital Oncology.  This product, developed by TSI's subsidiary, Vital
Software, automates the clinical processes unique to medical oncology while
enhancing the quality of care. Vital Oncology significantly increases the
productivity of physicians and nurses, reduces the likelihood of error, and
improves patient care.
 
SERVICES AND SUPPORT
 
     Implementation Assistance.  Almost all new sales of products and many sales
of add-on products include implementation assistance. Implementation is carried
out by a team of specialists overseeing the process on-site. Implementation of
Transition II typically takes from six to twelve months.
 
     Software Maintenance Contracts.  TSI offers software maintenance contracts
for all software products. Under these contracts, TSI provides ongoing support,
including updates and enhancements to the software modules and telephone access
to a Help Desk staffed by an experienced team of support professionals.
 
     Consulting Services.  TSI also offers post-implementation consulting
services intended to assist customers in maximizing the benefits available
through the use of the Transition family of products. TSI's staff can assess
performance of the customer's system and advise the customer on its growing
needs. While these services do not currently constitute a major source of
revenue, TSI believes they have the potential to grow in importance.
 
     Integration Services.  TSI offers data extraction services to develop the
conversion protocols necessary to obtain data feeds from an organization's
source systems, so as to enable data from these source systems to be integrated
with data from TSI applications. Typical extractions are from general ledger,
payroll, admission/discharge/transfer, medical records abstracting, patient
billing and various departmental systems. TSI also supports the installation of
real time HL7 interfaces.
<PAGE>   11
 
CUSTOMERS
 
     TSI's customers include a broad range of hospitals, integrated delivery
networks, managed care organizations and physician practices in the United
States and around the world. TSI's products are installed at more than 1,100
customer sites.
 
TECHNOLOGY
 
     TSI has products deployed on both two-tier client/server and three-tier
client/server/server architectures. Each of the products utilizes the
architecture strategy best suited for the data access requirements inherent to
each product. This enables TSI to provide the power and flexibility of
distributed data and processing combined with a wide range of user platforms.
For example, each of Transition II, the Enterprise Manager Series and Transition
IV comprises a broad range of integrated applications that draw from a central
repository of patient-level clinical and financial data. They feature an open,
three-tiered client/server/server architecture that includes, at the client
level, a Microsoft Windows-compliant point-and-click interface. TSI believes
these features differentiate these products from other available decision
support products.
 
     Multiple Platforms.  TSI's products are designed to operate with a variety
of hardware platforms, operating systems and database management systems. This
strategy enables TSI to provided a practical and affordable solution for small
and mid-size group health plans and community hospitals as well as large
teaching hospitals and vertically-integrated health care delivery networks.
Microsoft Windows (3.1, 95, 98 and NT) is the client standard for all products.
Transition II host tier options include IBM 370/390 mainframes running the Model
204 DBMS, IBM AS/400s with DB2/400 and UNIX servers (Hewlett-Packard HP9000 and
IBM RS/6000) running the Oracle DBMS. The application tier requires an Intel
based processor. The Enterprise Manager Series of products utilizes the
Transition II architecture with a SQL Server component for specific population
studies. Transition for Quality is offered on both the HP9000 and the RS/6000
running either Oracle or Sybase. Transition IV repository options include UNIX
servers (HP9000, RS/6000) running either the Oracle, Sybase or Informix DBMS.
The Transition IV application tier is an Intel processor running NT with the SQL
Server DBMS. Vital Oncology utilizes an Intel processor running NT with the SQL
Server DBMS.
 
     Three-Tiered Client/Server/Server Architecture.  Transition II and
Transition IV, together with the Enterprise Manager Series, employ a
three-tiered computing architecture in which workstations (clients) and
host-servers share the work of managing and processing information. This
client/server environment allows a user to realize greater processing efficiency
at a lower cost than traditional terminal/host or PC-LAN configurations.
 
     The Data Server tier pulls data from an organization's disparate
transaction system databases and other data sources and batch processes it daily
into a value-added data repository. This tier performs the processing necessary
to calculate unit costs, reimbursement, quality indicators and critical path
variances. The system incorporates a variety of communications protocols,
together with data interfaces developed during the system implementation
process, to extract data from the disparate databases throughout an organization
in which transnational cost, process and outcomes information is stored,
allowing the organization to preserve its existing investment in information
technology.
 
     The Application Server, the middle tier, performs the value-added data
integration, storage and access required to support the clinical and financial
analysis of the data. This tier runs on Windows NT and requires the SQL Server
DBMS. The Application Server relies on direct data feeds from the Data Server
tier and provides SQL-compliant database structures to integrate other data
sources and to handle ad-hoc queries among all tiers of the architecture.
 
     The Client tier performs on-line clinical and financial analysis through a
Microsoft Windows-compliant point-and-click interface. The Transition II,
Enterprise Manager Series and Transition IV applications were developed using
Microsoft's Visual Basic and Visual C++ development environments and are
compatible with Windows 3.1, 3.11, Windows '95, Windows '98, Windows NT and
other operating environments supported by the Microsoft Foundation Classes. The
architecture has been expanded to incorporate a Visual Basic rapid
<PAGE>   12
 
development strategy exploiting Microsoft's ActiveX, COM/DCOM and Web enabling
directions. With Transition II, the Enterprise Manager Series and Transition IV,
there is no need to layer a separate executive information system on top of the
application. Instead, the product includes a graphical, mouse-driven user
interface which allows even inexperienced users to navigate through intuitive
screens and windows of information, to select the information to be reviewed at
various levels of detail and to transform numerical data into charts and graphs.
The system can be customized to set user preferences, display styles and sorting
parameters, enabling users to develop their own objects and applications.
 
     The system provides tightly coupled interfaces to CCA Model 204, DB2/400,
Oracle and Microsoft SQL Server databases. Additionally, each of Transition II,
the Enterprise Manager Series and Transition IV system integrates external data
through compliance with the ODBC (Open Database Connectivity) and OLE 2.0
(Object Linking and Embedding) protocols. ODBC provides standard SQL
connectivity to a variety of SQL-compliant relational and non-relational
databases, while the OLE 2.0 protocol provides a display, update and editing
environment for Windows programs such as Microsoft Excel, Microsoft Word and PC
SAS. As a result, additional data from a customer's legacy systems can be used
in its native form without the need for data import.
 
SALES AND MARKETING
 
     At September 30, 1998, TSI had a direct sales force of 23, consisting of 19
direct sales persons and four sales management executives organized in two
geographic regions covering the United States and Canada. TSI's direct sales and
sales management personnel are compensated through salaries plus commissions
based on quarterly and annual quotas. TSI also sells through distributors based
in New Zealand, Australia and the Netherlands. Distributors provide local
support for implementations and ongoing maintenance support.
 
     TSI uses periodic newsletters and press releases, participation in trade
shows, direct mail and telemarketing to generate and pursue leads. Company
employees also speak at health care industry conferences and publish case
studies and articles. TSI sponsors annual user group conferences at which
customers can learn about TSI's new product offerings and exchange information
about their own experiences with TSI's products. TSI's May 1998 user group
conference attracted approximately 1,300 attendees.
 
BACKLOG
 
     At September 30, 1997 and 1998, the Company's backlog was $17.5 million and
$16.3 million, respectively. The Company includes in backlog all unrecognized
revenue attributable to signed contracts for software sales and implementation
and deferred revenue associated with maintenance contracts. The Company had $7.1
million and $7.9 million of deferred revenue associated with maintenance
contracts at September 30, 1997 and 1998, respectively. Of its backlog of $16.3
million at September 30, 1998, the Company estimates that approximately 90% will
be recognized as revenue during the twelve-month period following such date.
There can be no assurance, however, that orders included in backlog will
generate revenues in the amount estimated or that such revenues will be
recognized during the specified twelve-month period.
 
COMPETITION
 
     The market for health care information systems and services is intensely
competitive and rapidly evolving. TSI competes directly with other vendors of
decision support systems to health care providers. Other vendors of health care
information systems, including vendors currently targeting decision support
systems for payors, may enter the markets in which TSI competes. TSI also faces
competition from internal management information systems departments of large
hospital networks, many of which have developed or may develop financial and
clinical outcomes management systems or other cost control solutions. TSI
believes that the principal competitive factors influencing the market for its
products include vendor and product reputation, product architecture,
functionality and features, ease of use, rapidity of implementation, quality of
customer support, product performance and price. Competition may result in
significant price reductions, decreased gross margins, loss of market share and
lack of acceptance of TSI's products. There can be no assurance that
<PAGE>   13
 
TSI will be able to compete successfully in the future or that competition will
not have a material adverse effect on TSI's business, financial condition and
results of operations.
 
RESEARCH AND PRODUCT DEVELOPMENT
 
     TSI's products consist primarily of internally-developed software. In
addition, TSI has incorporated in its products DBMSs, graphical user interfaces,
and other software developed by third-party vendors. TSI believes that the
timely development of new products and enhancements to existing products is
essential to maintaining its competitive position in the market and positioning
itself as an innovator. Since TSI's inception in 1985, TSI has developed and
released functionality upgrades as well as new products on a yearly basis.
 
     TSI's current research and development efforts include expanding the
capabilities of Transition IV and extending the Vital Oncology product to
additional disease-specific applications. In addition, enhancements are planned
for the Enterprise Person Identifier, Dictionary Manager and Transition for
Quality products.
 
     TSI's research and development activities are conducted in its Boston
office. As of September 30, 1998, its research and development staff consisted
of 63 employees. TSI's total research and development expenditures were $4.6
million in fiscal 1997.
 
INTELLECTUAL PROPERTY
 
     TSI's ability to compete effectively depends to a significant extent on its
ability to protect its proprietary information. TSI relies primarily on trade
secret laws, confidentiality procedures and licensing arrangements to protect
its intellectual property rights.
 
     TSI generally enters into confidentiality agreements with its consultants,
key employees and sales representatives and generally controls access to and
distribution of its software and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use TSI's products or technology without authorization or to develop similar
technology independently. Although TSI intends to defend its intellectual
property, there can be no assurance that the steps taken by TSI to protect its
proprietary information will be adequate to prevent misappropriation of its
intellectual property or that TSI's competitors will not independently develop
software that is substantially equivalent or superior to TSI's software.
 
     TSI is subject to the risk of alleged infringement by it of the
intellectual property rights of others. Although TSI is not currently aware of
any material infringement claims with respect to TSI's current or future
products, there can be no assurance that third parties will not assert such
claims or that any such claims will not require TSI to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims. No assurance can be given that any necessary licenses
will be available or that, if available, such licenses can be obtained on
commercially reasonable terms. Furthermore, litigation may be necessary to
enforce TSI's intellectual property rights, to protect TSI's trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on TSI's business, financial condition and results of operations.
 
EMPLOYEES
 
     As of September 30, 1998, TSI had 216 full-time employees, including 98 in
operations, 63 in research and development, 36 in sales and marketing and 19 in
general administration and finance.
 
     TSI believes its future success will depend in large part upon the
continued service of its key technical and senior management personnel and upon
TSI's continuing ability to attract and retain highly-qualified technical and
managerial personnel. Competition for highly-qualified personnel is intense and
there can be no assurance that TSI will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly-qualified technical and managerial personnel in the future. None of the
Company's employees is represented by a labor union. TSI has not experienced any
work stoppage and considers its relationships with its employees to be good.
<PAGE>   14
 
ITEM 2.  PROPERTIES
 
     TSI's principal offices occupy approximately 27,000 square feet of office
space in Boston, Massachusetts under a lease expiring in August 2000. TSI also
leases space for offices in Arizona, California, Georgia, Illinois, Pennsylvania
and Texas. TSI believes that its existing facilities will be adequate to meet
its currently anticipated requirements and that, if additional space is needed,
such space will be available on acceptable terms.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     TSI is not a party to any material litigation, and is not aware of any
pending or threatened litigation that would have a material adverse effect on
TSI or its business.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended September 30, 1998.
<PAGE>   15



                                   PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

   Since April 18, 1996, the Company's Common Stock has been publicly traded on
the Nasdaq National Market under the symbol "TSIX." The following table sets
forth, for the quarterly periods indicated, the high and low sale price per
share of Common Stock as reported on the Nasdaq National Market:

                                                     HIGH      LOW
                                                    ------   ------

Fiscal Year ended September 30, 1998:

    First Quarter                                   $23.88   $17.75

    Second Quarter                                  $24.88   $17.38

    Third Quarter                                   $24.25   $ 9.94

    Fourth Quarter                                  $13.25   $ 6.38

HOLDERS OF RECORD

   As of December 15, 1998, there were 30 holders of record of the Common Stock
and one holder of record of the Non-Voting Common Stock. The number of record
holders of the Common Stock is not representative of the number of beneficial
holders because many shares are held by depositories, brokers or other nominees.

DIVIDENDS

   The Company has never declared or paid any cash dividends on its Common
Stock. The Company's bank line of credit generally prohibits the payment of cash
dividends to stockholders. Also, the Company currently intends to retain its
earnings, if any, to fund its business and therefore does not anticipate paying
cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

No securities were sold by the Company during the fiscal year ended September
30, 1998 which were not registered under the Securities Act.


<PAGE>   16



ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data of the Company set forth below have
been derived from the Company's consolidated financial statements for the
periods indicated. This selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and the notes thereto included elsewhere in this Form 10-K.

                      SELECTED CONSOLIDATED FINANCIAL DATA
                     (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 FISCAL YEAR ENDED
                                -------------------------------------------------------------------------------------
                                SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 30,     SEPTEMBER 24,     SEPTEMBER 24,
                                         1998              1997              1996              1995              1994
                                -------------------------------------------------------------------------------------

<S>                                   <C>               <C>               <C>               <C>               <C>    
Revenue                               $43,951           $44,565           $34,269           $27,386           $24,497

Income before income taxes and
  extraordinary items                  14,762            12,948            10,611             9,975             8,521

Provision for income taxes              5,905             7,629             4,324             4,349             3,407

Net income before extraordinary
  item                                  8,857             5,319             6,287             5,626             5,114

Extraordinary item:

Loss on early extinguishment of
  debt                                     --                --             2,149                --                --

Net income                              8,857             5,319             4,138             5,626             5,114

Series A non-voting preferred
  stock dividends                          --                --               593                --                --

Net income allocable to common
  stockholders                        $ 8,857           $ 5,319           $ 3,545           $ 5,626           $ 5,114
                                      -------           -------           -------           -------           -------

Total assets                          $99,864           $89,819           $74,284           $27,737           $20,274

Working capital                        73,548            63,568            55,672            14,207             8,207

Long-term debt                             --                --                21                --                --

Stockholders' equity                  $84,272           $73,519           $60,633           $16,192           $10,566
</TABLE>

(1) The Company has never declared or paid cash dividends on the Common Stock.


<PAGE>   17
 
ITEM 7
 
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
     This discussion and analysis contains certain forward-looking statements.
These forward-looking statements represent TSI's beliefs, expectations and
intentions concerning future events, including, without limitation, financial
matters, plans and objectives of management for future operations, products and
services, the future economic performance of TSI, and the assumptions underlying
such beliefs, expectations and intentions. Such statements are not guaranties of
future performance, and involve certain risks and uncertainties that could cause
TSI's future results to differ materially from those expressed in any forward-
looking statements made by or on behalf of TSI. Many of such factors are beyond
TSI's ability to control or predict. Readers are accordingly cautioned not to
place undue reliance on forward-looking statements. TSI disclaims any intent or
obligation to update publicly any forward-looking statements, whether in
response to new information, future events or otherwise. These forward-looking
statements are further qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements,
including, without limitation, those discussed above under the heading "Risk
Factors" at page 2.
 
OVERVIEW
 
     TSI provides management information technology to hospitals, integrated
delivery networks, physician groups and other health care organizations. Using
TSI products, these organizations are able to increase efficiency, improve
quality of care and lower the cost of care delivery. TSI product lines span the
health care organization's information technology needs, providing data
integration services, master person identifier solutions, disease management
products and a clinical data repository as well as enterprise-wide financial,
operational and clinical decision support. TSI was founded in 1985 and has been
profitable in each fiscal year since 1987.
 
     TSI's revenues are derived from sales of software licenses and related
implementation services and of software maintenance. The software and
implementation revenues associated with the licensing and installation of TSI's
products at an individual customer site typically range from $0.1 million to
$1.2 million. Software maintenance contracts are sold separately at the time of
the initial software license sale and are generally renewable annually. Annual
software maintenance fees range from 15% to 18% of the initial software license
fee for the product and provide a source of recurring revenue for TSI.
 
     Software and implementation revenues are accounted for using the percentage
of completion method, and revenue is recognized as contract milestones are
reached. The implementation process generally takes from three to twelve months.
The length of time required to complete an implementation depends on many
factors outside the control of TSI, including the state of the customer's
existing information systems and the customer's ability to commit the personnel
and other resources necessary to complete elements of the implementation process
for which the customer is responsible. Revenue attributable to a contract
milestone is recognized upon certification by the customer that the milestone
has been met. As a result, TSI may be unable to predict accurately the amount of
revenue it will recognize in any period in connection with the sale of its
products. The payment terms of a contract may provide that the amount of the
contract price that TSI is entitled to bill upon achievement of a milestone is
less than the revenue recognized by TSI in connection with the achievement of
that milestone. In such cases, the excess of the revenue recognized over the
amount billed is included in accounts receivable as an "unbilled account
receivable." Software maintenance fees, which are generally received annually in
advance, are recorded as deferred revenue on TSI's balance sheet and are
recognized as revenue ratably over the life of the contract. See Notes 2 and 3
of Notes to Consolidated Financial Statements of TSI.
 
     Cost of software and implementation revenue consists primarily of the cost
of third-party software that is resold by TSI or included in TSI's products,
personnel costs, the cost of related benefits, travel and living
<PAGE>   18
 
expenses, costs of materials and other costs related to the installation and
implementation of TSI's products, and amortization of capitalized software
development costs. Cost of maintenance revenue consists primarily of maintenance
fees payable by TSI associated with the third-party software included in TSI's
products and personnel costs incurred in providing maintenance and technical
support services to TSI's customers.
 
     TSI's research and development expenses consist primarily of
personnel-related costs, including employee salaries and benefits and payments
to consultants. TSI capitalizes certain software development costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalized software costs are amortized over the life of the product (generally
three years) and amounts amortized are included in cost of software and
implementation revenue. Capitalized software as a percentage of total research
and development expense has declined from 17.2% in fiscal 1996 to 15.3% in
fiscal 1997 and 10.6% in fiscal 1998. In each of fiscal 1996, 1997 and 1998, TSI
capitalized $0.7 million of software development costs, while amortization of
capitalized software development costs in such years amounted to $0.8 million,
$0.7 million and $0.7 million, respectively.
 
     In January 1996, TSI repurchased from New England Medical Center and the
other stockholders of TSI 87.4% of the shares of common stock then issued and
outstanding on a fully diluted basis for an aggregate purchase price of
approximately $111.4 million (the "Recapitalization"). The principal purpose of
this transaction was to provide liquidity for the existing stockholders of TSI
while permitting them to retain an ownership interest in TSI. The transaction
has been accounted for by TSI as a leveraged recapitalization. To finance the
repurchase of these shares, TSI issued to Warburg, Pincus Ventures, L.P. and
NationsBank Investment Corporation ("NIC") shares of preferred stock for an
aggregate of $55.0 million. TSI also issued to NIC Senior Subordinated Notes in
the aggregate principal amount of $10.0 million and a related warrant and made
borrowings of $40.0 million under a term loan and a revolving credit facility.
In April 1996, TSI completed an initial public offering of 6,900,000 shares of
its common stock, which generated net proceeds of $114.4 million. The
outstanding balance of these borrowings was repaid in full and all outstanding
Series A non-voting preferred stock was redeemed upon the closing of the initial
public offering.
 
     In July 1996, TSI acquired substantially all of the outstanding stock and a
note held by a selling principal of Enterprising HealthCare, Inc. ("Enterprising
HealthCare"), based in Tucson, Arizona, for a total purchase price of
approximately $1.8 million in cash. Enterprising HealthCare provides system
integration products and services for the health care market. The acquisition
was accounted for under the purchase method with the results of Enterprising
HealthCare included from the date of acquisition. Purchased technology costs of
$1.6 million are being amortized on a straight-line basis over seven years. Pro
forma results of operations have not been presented, as the effect of this
acquisition on the financial statements was not material.
 
     In January 1997, TSI acquired a 19.5% ownership interest in HealthVISION
for $6.0 million in cash. HealthVISION is a Santa Rosa, California provider of
electronic medical record software. Its products include CareVISION, a
patient-centered clinical data repository and lifetime patient record system,
which is expected to constitute an integral component of TSI's Transition IV
product. On December 3, 1998, TSI completed its acquisition of the remaining
capital stock of HealthVISION not already owned by TSI. See "-- Subsequent
Events" below.
 
     In September 1997, TSI acquired all the outstanding shares of Vital
Software Inc. ("Vital"), a privately held developer of products that automate
the clinical processes unique to medical oncology. The purchase price was
approximately $6.3 million, which was comprised of $2.7 million in cash and
252,003 shares of TSI's common stock with a value of $3.6 million. The purchase
price was allocated entirely to purchased research and development. See Note 16
of Notes to Consolidated Financial Statements of TSI.
<PAGE>   19
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain revenue and expense data as a
percentage of TSI's total revenues for each period presented:
 
<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED
                                                                  SEPTEMBER 30,
                                                              ---------------------
                                                              1996    1997    1998
                                                              -----   -----   -----
<S>                                                           <C>     <C>     <C>
Revenues:
  Software and implementation...............................   72.5%   74.1%   68.8%
  Maintenance...............................................   27.5    25.9    31.2
                                                              -----   -----   -----
          Total revenues....................................  100.0   100.0   100.0
                                                              -----   -----   -----
Cost of revenues:
  Software and implementation...............................   21.4    23.2    28.1
  Maintenance...............................................    9.2     6.4     6.7
Research and development....................................    9.7     8.7    13.5
Sales and marketing.........................................   13.2    15.5    18.0
General and administrative..................................    6.9     8.7     7.4
Compensation charge.........................................    8.8      --      --
Acquired in-process research and development................     --    14.1      --
                                                              -----   -----   -----
Total operating expenses....................................   69.2    76.6    73.7
Income from operations......................................   30.8    23.4    26.3
Net interest income.........................................    0.2     5.6     7.3
Income before income taxes and extraordinary item...........   31.0    29.0    33.6
Provision for income taxes..................................   12.6    17.1    13.4
                                                              -----   -----   -----
Net income before extraordinary item........................   18.4    11.9    20.2
Extraordinary item:
  Loss on early extinguishment of debt, net of taxes........    6.3      --      --
                                                              -----   -----   -----
Net income..................................................   12.1    11.9    20.2
Series A non-voting preferred stock dividends...............    1.7      --      --
                                                              -----   -----   -----
Net income allocable to common stockholders.................   10.4%   11.9%   20.2%
                                                              =====   =====   =====
</TABLE>
 
FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
 
     REVENUES.  TSI's total revenues decreased 1.4%, to $44.0 million in 1998
from $44.6 million in 1997. Software and implementation revenues decreased 8.5%
to $30.2 million in 1998, compared to $33.0 million in 1997. The decrease in
software and implementation revenue is primarily due to TSI's failure to achieve
planned levels of new system bookings. New system bookings were adversely
impacted by an overall lengthening of the sales cycle. TSI believes the sales
cycle was adversely affected by Year 2000 problems in healthcare legacy systems,
which caused delays in the acquisition of new systems due to resource
constraints. In addition, consolidation among healthcare providers has caused a
lengthening of the purchasing cycle of most healthcare organizations due to
management shifts and more complex approval processes. Maintenance revenue grew
18.9% to $13.7 million in 1998, compared to $11.6 million in 1997, due to
continued growth in TSI's installed base of customers.
 
     COST OF REVENUES.  Cost of software and implementation revenue increased
20.0% to $12.4 million (or 40.9% of software and implementation revenue) in
1998, from $10.3 million (or 31.2% of software and implementation revenue) in
1997. The increase is primarily due to costs associated with additional
implementation staff and professional consultants as well as increased royalty
costs for third-party software. Cost of maintenance revenue increased 3.4% to
$2.9 million (or 21.4% of maintenance revenue) in 1998 from $2.8 million (or
24.6% of maintenance revenue) in 1997. The increase in cost of maintenance
revenue is
<PAGE>   20
 
primarily due to the increase in the number of technical support staff necessary
to support the growth in TSI's installed base.
 
     RESEARCH AND DEVELOPMENT.  Research and development expenses increased
53.0% to $5.9 million in 1998 from $3.9 million in 1997. Research and
development expenses as a percent of total revenue also increased to 13.5% in
1998, compared to 8.7% in 1997. The increase is primarily due to an increase in
staff and increased professional consulting expense to support new product
development, including Transition IV and Vital Oncology, without a corresponding
increase in revenue.
 
     SALES AND MARKETING.  Sales and marketing expenses increased 14.2% to $7.9
million in 1998, from $6.9 million in 1997. Sales and marketing expenses as a
percent of total revenue also increased to 18.0% in 1998 from 15.5% in 1997. The
increase in spending is primarily associated with the growth of the sales
organization and marketing programs to support the expanding product lines.
 
     GENERAL AND ADMINISTRATIVE.  General and administrative expenses decreased
16.5% to $3.2 million in 1998, from $3.9 million in 1997. General and
administrative expenses as a percent of total revenue also decreased to 7.4% in
1998 from 8.7% in 1997. The decrease in spending is primarily due to a reduction
in performance related compensation expenses during the year as a result of the
decrease in revenue.
 
     ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.  Acquired in-process research
and development expense for 1997 includes a charge for purchased research and
development of $6.3 million relating to the acquisition of Vital.
 
     NET INTEREST INCOME.  Net interest income increased to $3.2 million in 1998
from $2.5 million in 1997. The increase in net interest income is attributable
to the interest generated on higher cash balances during fiscal 1998.
 
     PROVISION FOR INCOME TAXES.  TSI's effective income tax rate decreased to
40.0% in 1998 from 58.9% in 1997. The decrease was primarily due to the effect
of the charge for in-process research and development associated with the
acquisition of Vital, which was not deductible for tax purposes in fiscal year
1997. No such charge occurred in 1998.
 
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
 
     REVENUES.  TSI's total revenues increased 30.0% to $44.6 million in 1997,
from $34.3 million in 1996. Software and implementation revenues grew 32.8% to
$33.0 million in 1997, compared to $24.9 million in 1996. The growth in software
and implementation revenue is primarily due to sales to new TSI customers,
increased consolidation among existing customers which resulted in the sale of
additional site licenses, and the expansion of TSI's product line which resulted
in increased product sales to existing customers. Maintenance revenue grew 22.7%
to $11.5 million in 1997, compared to $9.4 million in 1996, due to continued
growth in TSI's installed base of customers.
 
     COST OF REVENUES.  Cost of software and implementation revenue increased
40.5% to $10.3 million (or 31.2% of software and implementation revenue) in
1997, from $7.3 million (or 29.5% of software and implementation revenue) in
1996. The dollar increase is primarily due to costs associated with additional
implementation staff and professional consultants as well as increased royalty
costs for third-party software. Cost of maintenance revenue decreased 10.4% to
$2.8 million (or 24.6% of maintenance revenue) in 1997 from $3.2 million (or
33.6% of maintenance revenue) in 1996. The decrease in cost of maintenance
revenue is primarily due to the reduced technical support necessary on mature
products.
 
     RESEARCH AND DEVELOPMENT.  Research and development expenses increased
17.0% to $3.9 million in 1997 from $3.3 million in 1996. The increase in
spending is primarily a result of organizational changes which resulted in a net
increase in the number of staff assigned to research and development roles.
Research and development expenses as a percent of total revenue decreased
slightly to 8.7% in 1997, compared to 9.7% in 1996. The decrease is primarily
due to increased productivity from investments in technologies made in prior
years and maturing of the core product lines. TSI expects that research and
development expenses will increase as a percentage of revenue in future periods
as new development projects are undertaken.
<PAGE>   21
 
     SALES AND MARKETING.  Sales and marketing expenses increased 53.6% to $6.9
million in 1997, from $4.5 million in 1996. Sales and marketing expenses as a
percent of total revenue also increased to 15.5% in 1997 from 13.2% in 1996. The
increase in spending is primarily due to additional staff and marketing programs
as well as increased commission expense directly related to the growth in
revenue.
 
     GENERAL AND ADMINISTRATIVE.  General and administrative expenses increased
64.2% to $3.9 million in 1997, from $2.4 million in 1996. General and
administrative expenses as a percent of total revenue also increased to 8.7% in
1997 from 6.9% in 1996. The increase in spending is primarily due to
professional services and other costs associated with becoming a publicly traded
company as well as additional administrative expenses related to Enterprising
HealthCare, which was acquired in July 1996.
 
     COMPENSATION CHARGE.  In fiscal 1996 TSI incurred a compensation charge of
$3.0 million arising from its acquisition, in connection with the January 1996
Recapitalization, of shares of common stock issued to certain executive officers
pursuant to the exercise of options.
 
     ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.  Acquired in-process research
and development expense includes a charge for purchased research and development
of $6.3 million relating to the acquisition of Vital in September 1997.
 
     NET INTEREST INCOME.  Net interest income increased to $2.5 million in 1997
from $0.1 million in 1996. The increase in net interest income is primarily due
to the repayment out of the proceeds of TSI's initial public offering in April
1996 of debt incurred in the January 1996 Recapitalization and interest earned
on cash balances generated from operations and the balance of the proceeds of
TSI's initial public offering.
 
     PROVISION FOR INCOME TAXES.  TSI's effective income tax rate increased to
58.9% in 1997 from 40.6% in 1996, primarily due to the effect of the charge for
in-process research and development associated with the acquisition of Vital,
which is not deductible for tax purposes. The tax rate for 1997 without the
effect of the charge for in-process research and development was 39.7%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At September 30, 1998, TSI had cash and cash equivalents of $38.7 million
and short term investments of $27.3 million, an increase of $7.5 million from
the amount at September 30, 1997. The increase in cash and cash equivalents and
short term investments was comprised primarily of net cash provided by operating
activities of $10.0 million. Net cash provided by operating activities in fiscal
1998 was generated primarily from net income.
 
     TSI has an unsecured revolving line of credit in the amount of $15 million.
The credit facility contains covenants setting minimum net worth, maximum
leverage ratio and minimum net income requirements for TSI. There have been no
amounts drawn on this line. Advances under the revolving line of credit bear
interest, at TSI's election, either at a "base rate" or at a "eurodollar rate."
The base rate is a floating rate equal to the greater of (a) the prime rate or
(b) the federal funds effective rate plus one-half of one percent (.50%). The
eurodollar rate is equal to the sum of (x) a rate determined by reference to the
then-current interbank offered rate for dollar-denominated eurodollar deposits,
with certain adjustments, plus (y) one percent (1.0%).
 
     TSI believes available funds, cash generated from operations and its unused
line of credit of $15 million will be sufficient to finance TSI's operations and
planned capital expenditures for at least the next twelve months. There can be
no assurance, however, that TSI will not require additional financing during
that time or thereafter.
 
YEAR 2000 ISSUES
 
     TSI's software license agreements generally contain warranties concerning
the Year 2000 compliance of the licensed product. TSI has tested the products it
has developed internally and believes that, with the exception of its Transition
for Quality product (for which TSI expects to release a fully Year 2000
compliant version in early 1999), the current release of each of its internally
developed products is Year 2000 compliant. TSI includes in its products certain
software licensed from third-party vendors. TSI has not yet completed its
<PAGE>   22
 
evaluation of Year 2000 compliance of all such third-party software. For
example, TSI has not yet verified that Uniface, licensed from Compuware
Corporation, is Year 2000 compliant. In order to use TSI's products customers
must themselves license software, including certain operating system and
database management system software, from third-party vendors such as Microsoft
Corporation and Oracle Corporation. Not all such third-party software may be
fully Year 2000 compliant. For example, Microsoft Corporation has not certified
that its Windows NT operating system is Year 2000 compliant. TSI has also
evaluated the Year 2000 compliance of its critical internal software systems,
including its financial, payroll and human resources systems and its telephone
switch, and believes, based in part on certification from the vendors of such
systems, that such systems are Year 2000 compliant. TSI does not expect to incur
material costs in completing its Year 2000 assessment and remediation program.
However, the discovery of previously undetected Year 2000 defects in TSI's
products (including those licensed from third-party vendors), in third-party
software required for customers to use TSI's products or in its internal
software systems could damage TSI's business. Also, apprehension in the
marketplace over Year 2000 compliance issues has led and may in the future lead
businesses, including customers of TSI, to defer significant capital investments
in information technology programs and software. They could elect to defer those
investments either because they decide to focus their capital budgets on the
expenditures necessary to bring their own existing systems into compliance or
because they wish to purchase only software with a proven ability to process
data after 1999.
 
SUBSEQUENT EVENTS
 
     On October 29, 1998, TSI entered into the Merger Agreement pursuant to
which a wholly-owned subsidiary of Eclipsys will be merged into TSI, with TSI
becoming a wholly-owned subsidiary of Eclipsys.
 
     On December 3, 1998, TSI completed its acquisition of HealthVISION by
acquiring the approximately 80.5% of the outstanding capital stock of
HealthVISION not already owned by TSI for cash in the amount of $25.6 million
plus assumed liabilities of $9.3 million, net of cash acquired, plus an earn-out
of up to $10.8 million if specified financial milestones are met. The
acquisition will be accounted for as a purchase. HealthVISION's total revenues
for the year ended December 31, 1997 and for the nine-month period ended
September 30, 1998, were approximately $9.2 million and $9.4 million,
respectively. HealthVISION incurred net losses of $11.1 million and $6.0 million
for such periods, respectively. At September 30, 1998, HealthVISION employed
approximately 150 persons in seven offices in the United States, Canada and
Australia.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. TSI will be required to
adopt the standard in the first quarter of its 1999 fiscal year, and does not
believe this statement will have a material effect on TSI's financial position
or results of operations.
 
     In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." Based on the management approach to segment reporting, SFAS No.
131 establishes requirements to report selected segment information quarterly
and to report entity-wide disclosures about products and services, major
customers and the countries in which the entity holds material assets and
reports material revenue. TSI will be required to adopt the standard in the
first quarter of its 1999 fiscal year, and does not believe this statement will
have a material effect on TSI's financial disclosures.
 
     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for such
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Currently, TSI has no such derivative holdings.
<PAGE>   23
 
     On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 supersedes Statement of Position 91-1, "Software Revenue Recognition,"
and provides guidance on when and in what amounts revenue should be recognized
for the licensing, selling, leasing, or marketing of computer software. SOP 97-2
is effective for transactions beginning in the first quarter of TSI's 1999
fiscal year. TSI is analyzing the impact of the SOP which may cause a deferral
of revenue.
<PAGE>   24

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS

The Company's Consolidated Financial Statements and Notes thereto as of
September 30, 1998 and 1997 and for each of the three years in the period ended
September 30, 1998 are listed in the Index to Financial Statements in Items
14(a)(1) and 14(a)(2) of this Form 10-K and appear at pages F-1 to F-17.

QUARTERLY RESULTS

The following table presents selected quarterly statement of operations data for
each of the eight quarters in the period ended September 30, 1998. This data is
unaudited but, in the opinion of the Company's management, reflect all
adjustments that the Company considers necessary for a fair presentation of
these data in accordance with generally accepted accounting principles. The
quarterly results presented below are not necessarily indicative of future
results of operations.

                        SELECTED QUARTERLY FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED
                                                 ---------------------------------------------------
                                                 DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,
STATEMENT OF OPERATIONS DATA                             1997        1998       1998           1998
----------------------------                     ---------------------------------------------------

<S>                                                   <C>         <C>        <C>            <C>    
Revenue                                               $10,915     $12,575    $10,455        $10,005
Income before income taxes                              4,133       4,802      2,962          2,866
Provision for income taxes                              1,653       1,921      1,185          1,146
Net income (loss)                                       2,480       2,881      1,777          1,720
Basic earnings per share                              $   .14     $  0.16    $  0.10        $   .09
Diluted earnings per share                            $   .12     $  0.14    $  0.09        $   .09


<CAPTION>
                                                                 THREE MONTHS ENDED                 
                                                 ---------------------------------------------------
                                                 DECEMBER 31,   MARCH 31,   JUNE 30,   SEPTEMBER 30,
STATEMENT OF OPERATIONS DATA                             1996        1997       1997            1997
----------------------------                     ---------------------------------------------------

<S>                                                    <C>         <C>       <C>             <C>    
Revenue                                                $8,486      $9,819    $12,570         $13,690
Income before income taxes                              2,965       3,645      5,936             402
Provision for income taxes                              1,186       1,458      2,374           2,611
Net income (loss)                                       1,779       2,187      3,562          (2,209)
Basic earnings (loss) per share                        $  .10      $ 0.13    $  0.20         $ (0.12)
Diluted earnings (loss) per share                      $  .09      $ 0.11    $  0.18         $ (0.11)
</TABLE>



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

         Not applicable.


<PAGE>   25



                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information set forth under the captions "Directors and Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
(the "Definitive Proxy Statement"), is incorporated herein by reference.

ITEM 11.   EXECUTIVE COMPENSATION

   The information set forth under the caption "Remuneration of Directors and
Executive Officers" in the Company's Definitive Proxy Statement is
incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Definitive Proxy Statement is
incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information set forth under the caption "Certain Transactions" in the
Company's Definitive Proxy Statement is incorporated herein by reference.

                                   PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

   (1) Consolidated Financial Statements

                                                                           PAGE

    Report of Independent Accountants.....................................  F-1

    Consolidated Balance Sheets as of September 30, 1998 and 
      1997................................................................  F-2

    Consolidated Statements of Operations for the years ended 
      September 30, 1998, 1997 and 1996...................................  F-3
    
    Consolidated Statements of Cash Flows for the years ended 
      September 30, 1998, 1997 and 1996...................................  F-4

    Consolidated Statements of Stockholders' Equity for the 
      years ended September 30, 1998, 1997 and 1996.......................  F-5

    Notes to Consolidated Financial Statements............................  F-6

   (2) Financial Statement Schedules

   Financial statement schedules are omitted because they are not applicable or
the required information is shown in the Consolidated Financial Statements and
Notes thereto.


<PAGE>   26

   (3)Exhibits

   The documents listed below, except for documents identified by asterisks, are
being filed as exhibits herewith. Documents identified by asterisks are not
being filed herewith and, pursuant to Rule 12b-32 of the General Rules and
Regulations promulgated by the Commission under the Exchange Act, reference is
made to such documents as previously filed as exhibits with the Commission. The
Company's file number under the Exchange Act is 0-28182.

 ****2.1    Agreement and Plan of Reorganization by and among HealthVISION, 
            Inc. certain securityholders of HealthVISION, Inc., Transition
            Systems Inc. and HV Acquisition Corp. dated October 28, 1998

 ****2.2    Agreement and Plan of Merger among Eclipsys Corporation, Exercise 
            Acquisition Corp. and Transition Systems Inc. dated October 29, 1998

    *3.2    Form of Amended and Restated Articles of Organization

    *3.4    Amended and Restated By-Laws

    *3.5    Articles of Amendment to the Articles of Organization, as filed with
            the Secretary of State of the Commonwealth of Massachusetts on
            April 3, 1996

    *4.1    Specimen certificate for Common Stock

  *+10.1    Transition Systems, Inc. 1995 Incentive and Non-Statutory Stock
            Option Plan

  *+10.2    1996 Employee Stock Purchase Plan

   *10.3    Recapitalization Agreement, dated as December 8, 1995, among the
            Company, Warburg, Pincus Ventures, L.P. and the Stockholders of the
            Company

   *10.4    Amendment No. 1 to the Recapitalization Agreement dated as of
            December 8, 1995, among the Company, Warburg, Pincus Ventures, L.P.
            and the Stockholders of the Company, dated as of January 23, 1996,
            among the Company, Warburg, Pincus Ventures, L.P. and the
            Stockholders of the Company

   *10.5    Joinder Agreement, dated as of January 24, 1996, among the Company,
            Warburg, Pincus Ventures, L.P., New England Medical Center, Inc. and
            NationsBank Investment Corporation

   *10.6    Registration Rights Agreement, dated as of January 24, 1996, between
            the Company and certain Investors

  *+10.7    Employment Agreement, dated as of January 24, 1996, between the
            Company and Donald C. Cook

  *+10.8    Employment Agreement, dated as of January 24, 1996, between the
            Company and Christine Shapleigh, M.D.

  *+10.9    Employment Agreement, dated as January 24, 1996, between the Company
            and Robert F. Raco

  *+10.10   Non-Competition Agreement, dated as of January 24, 1996, between the
            Company and Jerome H. Grossman, M.D.

   *10.11   Credit Agreement, dated January 24, 1996, among the Company,
            NationsBank, N.A., as Agent and as Lender, and certain Lenders party
            thereto from time to time

   *10.13   Promissory Note (Revolving Loan) of Transition Systems, Inc., dated
            January 24, 1996, in favor of NationsBank, N.A. in the principal
            amount of $6 million
<PAGE>   27

   *10.15   Promissory Note (Revolving Loan) of Transition Systems, Inc., dated
            January 24, 1996, in favor of the First National Bank of Boston in
            the principal amount of $4.5 million

   *10.17   Promissory Note (Revolving Loan) of Transition Systems, Inc., dated
            January 24, 1996, in favor of Fleet Bank of Massachusetts, N.A. in
            the principal amount of $4.5 million

   *10.18   Subordinated Note and Warrant Purchase Agreement, dated as of
            January 24, 1996, between the Company and NationsBank Investment
            Corporation

   *10.20   Non-Voting Common Stock Purchase Warrant, dated January 24, 1996,
            granted by the Company to NationsBank Investment Corporation

   *10.21   Software License Agreement, dated as December 3, 1985, between the
            Company and New England Medical Center Hospitals, Inc.

   *10.23   OEM Software License Agreement, dated as of June 30, 1986, between
            the Company and Praxis International, Inc. (formerly Computer
            Corporation of America), as amended (confidential treatment granted
            for certain portions pursuant to Rule 406)

   *10.24   Letter Agreement, dated October 20, 1995, between the Company and
            HCIA Inc.

   *10.25   Sublease, dated as of March 17, 1992, between the Company and Ernst
            & Young, for office space in One Boston Place, Boston, Massachusetts

   *10.26   Transition Systems, Inc. Amended and Restated 1995 Incentive and
            Non-Statutory Stock Option Plan

   *10.27   First Amendment,  dated April 1, 1996, to Non-Voting  Common Stock
            Purchase Warrant granted by the Company to NationsBank  Investment
            Corporation

   *10.28   Addendum to License Agreement between Computer Corporation of
            America and the Company (confidential treatment granted for certain
            portions pursuant to Rule 406)

  **10.1    Credit Agreement dated April 26, 1996 between the Company and
            NationsBank, N.A. as Agent and the Lenders party thereto (Exhibits B
            through I and all Schedules omitted)

***+10.29   Employment Agreement, dated as of July 19, 1996, among the Company,
            Enterprising HealthCare, Inc. and Anthony R. Fonze

    21.1    List of Subsidiaries of the Company

    23.1    Consent of PricewaterhouseCoopers LLP

    27.1    Financial Data Schedule for September 30, 1998 and year then ended

*   Incorporated by reference to the similarly numbered exhibit filed with the
    Company's Registration Statement on Form S-1, File No. 333-01758.

**  Incorporated by reference to the similarly numbered exhibit filed with the
    Company's Quarterly Report on Form 10-Q for the quarter ended March 30,
    1996.

*** Incorporated by reference to the similarly numbered exhibit filed with the
    Company's Annual Report on Form 10-K for the year ended September 30, 1996.
<PAGE>   28

**** Incorporated by reference to the similarly numbered exhibit filed with the 
     Company's Current Report on Form 8-K, filed with the Securities and 
     Exchange Commission on November 10, 1998.

+    Management contract or compensatory plan, contract or arrangement in which 
     a director or Named Executive Officer participates.

   The Company will furnish a copy of any of the foregoing exhibits to any
stockholder who so requests in writing at the rate of $0.35 per page, plus
shipping and handling, upon payment of such fee by bank check or money order
payable to the Company. Please submit any such written request to Ms. Paula
Malzone, CFO and Treasurer, Transition Systems, Inc., One Boston Place, Boston,
Massachusetts 02108.

(b)Reports on Form 8-K

     No reports on Form 8-K were filed by the Company during the fourth quarter 
     of the fiscal year ended September 30, 1998
<PAGE>   29
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Stockholders of Transition Systems, Inc.:
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
stockholders' equity present fairly, in all material respects, the financial
position of Transition Systems, Inc. at September 30, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
 
                                            PRICEWATERHOUSECOOPERS LLP
 
Boston, Massachusetts
November 16, 1998
 
                                       F-1
<PAGE>   30
 
                            TRANSITION SYSTEMS, INC.
                          CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,
                                                           ----------------------------- 
                                                               1997            1998      
                                                           -------------   ------------- 
                                                                                         
<S>                                                        <C>             <C>           
                           ASSETS                                                        
Current assets:                                                                          
  Cash and cash equivalents..............................     $58,485        $ 38,660    
  Investments (Note 4)...................................          --          27,291    
  Accounts receivable, net (Note 3)......................      19,339          18,994    
  Other current assets...................................         696           1,483    
  Deferred income taxes (Note 13)........................         853           1,960    
                                                              -------        --------    
     Total current assets................................      79,373          88,388    
                                                              -------        --------    
  Property and equipment, net (Note 5)...................       1,357           1,457    
  Capitalized software costs, net........................       1,411           1,411    
  Purchased technology (Note 16).........................       1,376           1,160    
  Intangible assets, net.................................         302           1,448    
  Investment (Note 6)....................................       6,000           6,000    
                                                              -------        --------    
     Total assets........................................     $89,819        $ 99,864    
                                                              =======        ========    
          LIABILITIES AND STOCKHOLDERS' EQUITY                                           
Current liabilities:                                                                     
  Accounts payable.......................................     $   279        $  1,168    
  Accrued expenses.......................................       6,680           4,515    
  Income taxes payable...................................       1,476           1,067    
  Deferred revenue.......................................       7,369           8,090    
                                                              -------        --------    
     Total current liabilities...........................      15,804          14,840    
                                                              -------        --------    
  Deferred income taxes (Note 13)........................         496             752    
                                                              -------        --------    
     Total liabilities...................................      16,300          15,592    
                                                              -------        --------    
Commitments (Note 15)                                                                    
Stockholders' equity (Notes 2 and 9):                                                    
  Common stock, $.01 par value; 30,000,000 shares                                        
     authorized at September 30, 1997 and 1998;                                          
     17,713,683 shares issued and outstanding at                                         
     September 30, 1997; 18,029,095 shares issued and                                    
     outstanding at September 30, 1998...................         177             180    
  Non-voting common stock, $.01 par value; 1,000,000                                     
     shares authorized at September 30, 1997 and 1998;                                   
     356,262 shares issued and outstanding at September                                  
     30, 1997 and 1998...................................           4               4    
  Non-voting common stock warrant........................         395             395    
  Additional paid-in capital.............................      46,717          48,610    
  Retained earnings......................................      26,226          35,083    
                                                              -------        --------    
     Total stockholders' equity..........................      73,519          84,272    
                                                              -------        --------    
     Total liabilities and stockholders' equity..........     $89,819        $ 99,864    
                                                              =======        ========    
</TABLE>

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

                                       F-2
<PAGE>   31
 
                            TRANSITION SYSTEMS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                   
                                                FISCAL YEAR ENDED SEPTEMBER 30,    
                                               ---------------------------------   
                                                 1996        1997        1998      
                                               ---------   ---------   ---------   
                                                                                   
<S>                                            <C>         <C>         <C>         
Revenues:
  Software and implementation................   $24,860     $33,017     $30,224    
  Maintenance................................     9,409      11,548      13,727    
                                                -------     -------     -------    
     Total revenues..........................    34,269      44,565      43,951    
                                                -------     -------     -------    
Cost of revenues:
  Software and implementation................     7,341      10,313      12,371    
  Maintenance................................     3,165       2,835       2,932    
Research and development.....................     3,310       3,872       5,925    
Sales and marketing..........................     4,506       6,922       7,907    
General and administrative...................     2,365       3,884       3,245    
Compensation charge..........................     3,024          --          --    
Acquired in-process research and development
  (Note 16)..................................        --       6,292          --    
                                                -------     -------     -------    
     Total operating expenses................    23,711      34,118      32,380    
                                                -------     -------     -------    
Income from operations.......................    10,558      10,447      11,571    
Interest income..............................     1,294       2,501       3,191    
Interest expense.............................    (1,241)         --          --    
                                                -------     -------     -------    
Income before income taxes and
  extraordinary items........................    10,611      12,948      14,762    
Provision for income taxes...................     4,324       7,629       5,905    
                                                -------     -------     -------    
Net income before extraordinary item.........     6,287       5,319       8,857    
Extraordinary item:
  Loss on early extinguishment of debt
     (net of taxes of $1,492)................     2,149          --          --    
                                                -------     -------     -------    
       Net income............................   $ 4,138     $ 5,319     $ 8,857    
                                                =======     =======     =======    
Series A non-voting preferred stock
  dividends..................................       593          --          --    
                                                -------     -------     -------    
     Net income allocable to common
       stockholders..........................   $ 3,545     $ 5,319     $ 8,857    
                                                =======     =======     =======    
Income per Share (Note 2 and 9):
  Net income allocable to common
     stockholders............................   $ 3,545     $ 5,319     $ 8,857    
     Basic income allocable per share........      0.27        0.31        0.49    
     Diluted income allocable per share......      0.22        0.27        0.43    
  Weighted average shares outstanding
     Basic...................................    13,214      17,435      18,210    
     Diluted.................................    16,137      19,977      20,394    
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-3
<PAGE>   32
 
                            TRANSITION SYSTEMS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                               
                                                              FISCAL YEAR ENDED SEPTEMBER 30,  
                                                              -------------------------------  
                                                                1996       1997       1998     
                                                              --------   --------   ---------  
                                                                                               
<S>                                                           <C>        <C>        <C>        
Cash flows from operating activities:
  Net income................................................  $  4,138   $  5,319   $   8,857  
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Extraordinary item, gross...............................     3,642         --          --  
    Write-off of in-process research and development........        --      6,292          --  
    Deferred income taxes...................................    (1,640)     2,448        (851) 
    Depreciation and amortization...........................     1,443      1,632       1,805  
    Compensation charge in connection with the
      recapitalization......................................     3,024         --          --  
    Compensation charge related to options granted..........        91        (91)         --  
  Tax benefit from stock option exercises...................        --      2,770       1,201  
  Changes in operating assets and liabilities net of effects
    from purchase of businesses:
    Accounts receivable.....................................    (1,789)    (5,921)        345  
    Other current assets....................................      (963)     1,135        (359) 
    Accounts payable........................................       (98)      (315)        889  
    Accrued expenses........................................       243      2,388      (2,165) 
    Due to affiliates.......................................        (9)        --          --  
    Deferred revenue........................................     1,220      1,114         721  
    Income taxes payable....................................       731       (539)       (409) 
                                                              --------   --------   ---------  
      Net cash provided by operating activities.............    10,033     16,232      10,034  
                                                              --------   --------   ---------  
Cash flows provided by (used by) investing activities:
  Purchase of investments...................................    (1,595)      (250)    (36,870) 
  Maturities of investments.................................     3,164        250       9,329  
  Sales of investments......................................     5,755         --         250  
  Note from related party...................................        --         --        (428) 
  Purchase of property and equipment........................      (572)      (911)       (951) 
  Additions to capitalized software costs...................      (704)      (712)       (700) 
  Additions to intangible assets............................      (124)      (217)     (1,184) 
  Investment................................................        --     (6,000)         --  
  Acquisition of businesses, net of cash acquired...........    (1,728)    (2,667)         --  
                                                              --------   --------   ---------  
      Net cash (used by) provided by investing activities...     4,196    (10,507)    (30,554) 
                                                              --------   --------   ---------  
Cash flows provided by (used by) financing activities:
  Proceeds from initial public offering.....................   114,429         --          --  
  Issuance of Series A preferred stock......................    20,000         --          --  
  Redemption of Series A preferred stock....................   (20,000)        --          --  
  Payments of Series A preferred stock dividends............      (593)        --          --  
  Proceeds from issuance of debt............................    49,605         --          --  
  Early extinguishment of debt..............................   (50,000)        --          --  
  Proceeds from issuance of Series B preferred stock........    33,612         --          --  
  Proceeds from issuance of Series C preferred stock........     1,388         --          --  
  Payment of fees related to recapitalization...............    (3,360)        --          --  
  Purchase of common stock..................................  (111,410)        --          --  
  Exercise of options.......................................       783      1,237         594  
  Payments on note payable..................................        --         (9)         --  
  Proceeds from stock purchase plan.........................        --         32         101  
  Proceeds from warrants issued.............................       394         --          --  
  Equity issuance costs.....................................    (1,416)        (5)         --  
                                                              --------   --------   ---------  
      Net cash provided by financing activities.............    33,432      1,255         695  
                                                              --------   --------   ---------  
Net increase (decrease) in cash and cash equivalents........    47,661      6,980     (19,825) 
Cash and cash equivalents -- beginning of year..............     3,844     51,505      58,485  
                                                              --------   --------   ---------  
Cash and cash equivalents -- end of year....................  $ 51,505   $ 58,485   $  38,660  
                                                              ========   ========   =========  
Supplemental information:
  Income taxes paid.........................................  $  3,063   $  2,508   $   5,631  
  Interest paid.............................................  $  1,119         --          --  
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-4
<PAGE>   33
 
                            TRANSITION SYSTEMS, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                         NON-VOTING
                                                   COMMON STOCK         COMMON STOCK      NON-VOTING        TREASURY STOCK
                                                -------------------   ----------------   COMMON STOCK   -----------------------
                                                SHARES       AMOUNT   SHARES    AMOUNT     WARRANT      SHARES         AMOUNT
                                                ------       ------   ------    ------   ------------   ------         ------
<S>                                             <C>          <C>      <C>       <C>      <C>            <C>           <C>
Balance at September 30, 1995.................  30,060,000    $301                                       (1,670,000)  $  (1,471)
 Stock options exercised......................   1,320,191      13
 Repurchase of common stock in connection with
   the recapitalization.......................                                                          (28,592,404)   (108,386)
 Retirement of treasury shares................ (30,262,404)   (303)                                      30,262,404     109,857
 Issuance of common stock warrant.............                                               $395
 Issuance of common stock in initial public
   offering...................................   6,900,000      69
 Equity issuance costs........................
 Issuance of common stock with conversion of
   Series B convertible preferred stock.......   8,627,310      86
 Issuance of non-voting common stock with
   conversion of Series C convertible
   preferred stock............................                        356,262    $  4
 Compensation expense.........................
 Dividends on Series A non-voting preferred
   stock......................................
 Net income...................................
                                                ----------    ----    -------    ----        ----       -----------   ---------
Balance at September 30, 1996.................  16,645,097     166    356,262       4         395                --          --
                                                ----------    ----    -------    ----        ----       -----------   ---------
 Stock options exercised......................     813,371       8
 Issuance of common stock related to
   acquisition of Vital Software..............     252,003       3
 Issuance of common stock in connection with
   employee stock purchase plan...............       3,212      --
 Equity issuance costs........................
 Cancellation of compensatory stock option
   grants.....................................
 Income tax benefit from stock options
   exercised..................................
 Net income...................................
                                                ----------    ----    -------    ----        ----       -----------   ---------
Balance at September 30, 1997.................  17,713,683     177    356,262       4         395                --          --
                                                ----------    ----    -------    ----        ----       -----------   ---------
 Stock options exercised......................     307,770       3
 Issuance of common stock in connection with
   employee stock purchase plan...............       7,642
 Income tax benefit from stock options
   exercised..................................
 Net income...................................
                                                ----------    ----    -------    ----        ----       -----------   ---------
Balance at September 30, 1998.................  18,029,095    $180    356,262    $  4        $395                --   $      --
                                                ==========    ====    =======    ====        ====       ===========   =========
 
<CAPTION>
 
                                                ADDITIONAL                   TOTAL
                                                 PAID-IN     RETAINED    STOCKHOLDERS'
                                                 CAPITAL     EARNINGS       EQUITY
                                                ----------   --------    -------------
<S>                                             <C>          <C>         <C>
Balance at September 30, 1995.................                $17,362       $16,192
 Stock options exercised......................   $   770                        783
 Repurchase of common stock in connection with
   the recapitalization.......................                             (108,386)
 Retirement of treasury shares................  (109,554)                        --
 Issuance of common stock warrant.............                                  395
 Issuance of common stock in initial public
   offering...................................   114,360                    114,429
 Equity issuance costs........................    (1,416)                    (1,416)
 Issuance of common stock with conversion of
   Series B convertible preferred stock.......    33,526                     33,612
 Issuance of non-voting common stock with
   conversion of Series C convertible
   preferred stock............................     1,384                      1,388
 Compensation expense.........................        91                         91
 Dividends on Series A non-voting preferred
   stock......................................                   (593)         (593)
 Net income...................................                  4,138         4,138
                                                 -------      -------       -------
Balance at September 30, 1996.................    39,161       20,907        60,633
                                                 -------      -------       -------
 Stock options exercised......................     1,229                      1,237
 Issuance of common stock related to
   acquisition of Vital Software..............     3,622                      3,625
 Issuance of common stock in connection with
   employee stock purchase plan...............        32                         32
 Equity issuance costs........................        (6)                        (6)
 Cancellation of compensatory stock option
   grants.....................................       (91)                       (91)
 Income tax benefit from stock options
   exercised..................................     2,770                      2,770
 Net income...................................                  5,319         5,319
                                                 -------      -------       -------
Balance at September 30, 1997.................    46,717       26,226        73,519
                                                 -------      -------       -------
 Stock options exercised......................       591                        594
 Issuance of common stock in connection with
   employee stock purchase plan...............       101                        101
 Income tax benefit from stock options
   exercised..................................     1,201                      1,201
 Net income...................................                  8,857         8,857
                                                 -------      -------       -------
Balance at September 30, 1998.................   $48,610      $35,083       $84,272
                                                 =======      =======       =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   34
 
                            TRANSITION SYSTEMS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1.  NATURE OF THE BUSINESS
 
     Transition Systems, Inc. (the "Company") is a leading provider of
integrated clinical and financial decision support systems for hospitals,
integrated delivery networks, physician groups and other healthcare
organizations. The Company was founded in 1985 as a for-profit, majority-owned
subsidiary of New England Medical Center, Inc. ("NEMC"). The Company was a
majority-owned subsidiary of NEMC until the January 1996 leveraged
recapitalization transaction (the "Recapitalization") described in Note 10.
 
NOTE 2.  SUMMARY OF ACCOUNTING POLICIES
 
     PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of Transition
Systems, Inc. and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
 
     CASH EQUIVALENTS
 
     For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with a maturity date of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are stated at cost plus accrued interest which approximates market.
 
     INVESTMENTS IN DEBT AND EQUITY SECURITIES
 
     Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Realized or unrealized gains or losses
applicable to the transfer of securities to the available-for-sale category and
subsequent sale of these investments were immaterial.
 
     CAPITALIZED SOFTWARE COSTS
 
     Software development costs subsequent to the establishment of technological
feasibility are capitalized. Capitalized internally developed software costs
approximated $700,000 for fiscal years 1996, 1997 and 1998. Amortization of
capitalized software costs, which begins with the general release of a product
to customers, is included in cost of software and implementation revenues and
amounted to approximately $767,000, $700,000 and $700,000 for the fiscal years
ended 1996, 1997 and 1998, respectively. Amortization of capitalized software
costs is provided on a product-by-product basis at the greater of the amount
calculated on a straight-line basis over the estimated economic life of the
products, generally three years, or the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product. Accumulated amortization of software development costs was
$4,116,000, $4,816,000 and $5,516,000 at the end of fiscal years 1996, 1997 and
1998, respectively.
 
     All other expenditures for research and development are charged to
operations when incurred.
 
     PURCHASED TECHNOLOGY COSTS
 
     Purchased technology costs are carried at cost less accumulated
amortization which is calculated on a straight-line basis over an estimated
useful life of seven years. Accumulated amortization on purchased technology
costs was $0, $275,000 and $491,000 at the end of fiscal years 1996, 1997 and
1998, respectively.
 
                                       F-6
<PAGE>   35
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     INTANGIBLE ASSETS
 
     Intangible assets include the costs incurred to register trademarks,
copyrights and related legal expenses, acquisition related costs, and debt
issuance costs. Amortization is computed using the straight-line method over
estimated useful lives ranging from three to five years.
 
     PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
 
<TABLE>
<S>                                     <C>
  Equipment...........................  3 to 5 years
  Furniture and fixtures..............  3 to 5 years
  Leasehold improvements..............  the lesser of the useful life or remaining lease term
</TABLE>
 
     Maintenance and repair costs are expensed when incurred and betterments are
capitalized. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to income.
 
     REVENUE RECOGNITION
 
     The percentage of completion method is used by the Company primarily in
connection with sales in which the customer is implementing the Company's core
products for the first time. Add-on sales in which an existing customer licenses
new modules or adds additional functionality generally do not involve
substantial implementation effort and are recognized upon contract execution and
shipment of the product. In fiscal 1996, the Company changed its method of
recognizing software license revenue when associated with substantial
implementation effort from percentage of completion based principally on costs
incurred to percentage of completion based principally upon progress and
performance as measured by achievement of contract milestones. The change in
method was made in accordance with Accounting Principles Board Opinion No. 20 in
contemplation of an initial public offering and in recognition of the Company's
increased focus on providing a solution that combines software and
implementation, as well as to facilitate the timely quarterly reporting
requirements as a Securities and Exchange Commission ("SEC") registrant.
 
     Revenues from maintenance contracts are recognized ratably over the life of
the service contract, generally twelve months. Deferred revenue relates
primarily to these maintenance contracts.
 
     ADVERTISING AND PROMOTION EXPENSES
 
     All advertising and promotion costs are expensed as incurred. All contract
procurement costs are included in sales and marketing expense and are expensed
as incurred.
 
     INCOME TAXES
 
     Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse.
 
     RISKS AND UNCERTAINTIES
 
     The Company sells its products primarily to hospitals and other health care
institutions. The Company performs ongoing credit evaluations of its customers.
The Company maintains reserves for potential credit losses and such losses have
been within management's expectations.
 
                                       F-7
<PAGE>   36
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company invests its daily excess cash in a money market fund with a
major bank. The Company has not experienced any material losses on its
investments.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and litigation at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and would
impact future results of operations and cash flows.
 
     BASIC AND DILUTED NET INCOME PER SHARE
 
     The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings per Share," for the period ending September 30, 1998 and
prior period amounts have been restated to conform to the provisions of this
statement.
 
     Basic earnings per share is computed using the weighted average number of
shares outstanding, and diluted earnings per share reflects the potential
dilution from assumed conversions of all dilutive securities such as stock
options. A reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation is
shown below.
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED SEPTEMBER 30,
                           --------------------------------------------------------------------------
                                           1996                                  1997
                           ------------------------------------   -----------------------------------
                                                      PER SHARE                             PER SHARE
                           INCOME         SHARES       AMOUNT       INCOME       SHARES      AMOUNT
                           ------         ------      ---------   ----------   ----------   ---------
<S>                        <C>          <C>           <C>         <C>          <C>          <C>
BASIC EPS
  Net income.............  $3,545,000    13,214,433     $0.27     $5,319,000   17,434,729     $0.31

EFFECT OF DILUTIVE
  SECURITIES
  Warrants...............                   251,781                               220,749
  Dilutive stock
    options..............                 2,670,941                             2,321,616
                                        -----------                            ----------
DILUTED EPS
  Income to common
    stockholders.........  $3,545,000    16,137,155     $0.22     $5,319,000   19,977,094     $0.27
                           ----------    ----------     -----     ----------   ----------     -----
 
<CAPTION>
                             FISCAL YEAR ENDED SEPTEMBER 30,
                           -----------------------------------
                                          1998
                           -----------------------------------
                                                     PER SHARE
                             INCOME       SHARES      AMOUNT
                           ----------   ----------   ---------
<S>                        <C>          <C>          <C>
BASIC EPS
  Net income.............  $8,857,000   18,210,050     $0.49

EFFECT OF DILUTIVE
  SECURITIES
  Warrants...............                  231,291
  Dilutive stock
    options..............                1,952,551
                                        ----------
DILUTED EPS
  Income to common
    stockholders.........  $8,857,000   20,393,892     $0.43
                           ----------   ----------     -----
</TABLE>
 
     For the fiscal year ended September 30, 1996, basic and diluted earnings
per share for income before extraordinary item were $0.37 and $0.32,
respectively, and the impact to basic and diluted earnings per share of the
extraordinary item was a reduction of $0.13 and $0.11, respectively.
 
     For the twelve months ended September 30, 1996, 1997 and 1998, 0, 330,000
and 626,000 options, respectively, were excluded from the computation of diluted
EPS. These options were excluded because the effect would have been antidilutive
for the period.
 
     NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. The Company will be required
to adopt the
 
                                       F-8
<PAGE>   37
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
standard in the first quarter of its 1999 fiscal year, and does not believe this
statement will have a material effect on the Company's financial position or
results of operations.
 
     In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related
Information." Based on the management approach to segment reporting, SFAS No.
131 establishes requirements to report selected segment information quarterly
and to report entity-wide disclosures about products and services, major
customers and the countries in which the entity holds material assets and
reports material revenue. The Company will be required to adopt the standard in
the first quarter of its 1999 fiscal year, and does not believe this statement
will have a material effect on the Company's financial disclosures.
 
     In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for such
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Currently, the Company has no such derivative holdings.
 
     On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition."
SOP 97-2 supersedes Statement of Position 91-1, "Software Revenue Recognition,"
and provides guidance on when and in what amounts revenue should be recognized
for the licensing, selling, leasing, or marketing of computer software. SOP 97-2
is effective for transactions beginning in the first quarter of the Company's
1999 fiscal year. The Company is analyzing the impact of the SOP which may cause
a deferral of revenue.
 
NOTE 3.  ACCOUNTS RECEIVABLE
 
     At September 30, accounts receivable consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1997      1998
                                                              -------   -------
<S>                                                           <C>       <C>
Billed......................................................  $11,973   $10,862
Unbilled....................................................    7,541     8,332
                                                              -------   -------
                                                               19,514    19,194
Allowance for doubtful accounts.............................     (175)     (200)
                                                              -------   -------
                                                              $19,339   $18,994
                                                              =======   =======
</TABLE>
 
     Unbilled accounts receivable arise from differences in the timing of
revenue recognition and billing under the contract terms. Write-offs for bad
debts for fiscal years 1996, 1997 and 1998 were $73,000, $102,000 and $166,000,
respectively.
 
NOTE 4.  INVESTMENTS
 
     As of September 30, 1998, the Company has classified all investments as
held to maturity. The securities totaled $27,291,000 as of September 30, 1998
and consist of federal agency obligations. The estimated fair value of each
investment approximates the amortized cost plus accrued interest. Unrealized
gains at September 30, 1998 were $71,000.
 
                                       F-9
<PAGE>   38
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5.  PROPERTY AND EQUIPMENT
 
     At September 30, property and equipment consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1997       1998
                                                              -------    -------
<S>                                                           <C>        <C>
Equipment...................................................  $ 3,537    $ 2,064
Furniture and fixtures......................................    1,079        372
Leasehold improvements......................................      355        356
                                                              -------    -------
                                                                4,971      2,792
Accumulated depreciation and amortization...................   (3,614)    (1,335)
                                                              -------    -------
                                                              $ 1,357    $ 1,457
                                                              =======    =======
</TABLE>
 
     Depreciation expense for the fiscal years 1996, 1997 and 1998 was $514,000,
$662,000 and $851,000 respectively. During fiscal 1998, the Company retired
assets of $2,911,000 which had no book value.
 
NOTE 6.  INVESTMENT IN HEALTHVISION
 
     On January 31, 1997 the Company acquired a 19.5% ownership interest in
HealthVISION, Inc. ("HealthVISION") for $6 million in cash. HealthVISION is a
provider of electronic medical record software based in Santa Rosa, California.
This investment is being accounted for on the cost basis. The Company holds an
option to purchase the remaining outstanding shares of HealthVISION. This option
expires on December 31, 1998 (See note 17.)
 
NOTE 7.  RELATED PARTY AGREEMENTS AND TRANSACTIONS
 
     The Company had an arrangement to reimburse NEMC for administrative
services provided to the Company by employees of NEMC. Under this arrangement,
the Company incurred expenses of $24,000 in fiscal year 1996. This arrangement
was terminated as of January 24, 1996. Since that date, these administrative
services have been performed internally by Company personnel. This change has
not resulted in a material increase in the Company's costs.
 
     The Company obtained certain other services through NEMC, including health
benefits for its employees, for which it incurred a total of $134,000 in
operating expenses in fiscal year 1996. The Company discontinued this
arrangement as of December 31, 1995, and arranged to provide comparable benefits
directly to its employees. This change has not resulted in a material increase
in the Company's cost of providing and administering these employee benefits.
 
     Additionally, the Company used the computer facilities of New England
Medical Center Hospitals, Inc., an affiliate of NEMC, pursuant to a data
processing agreement. This service was provided at a charge of $82,000 in fiscal
year 1996. This service was discontinued in June 1996.
 
NOTE 8.  LINE OF CREDIT -- BANK
 
     On April 26, 1996, the Company entered into a $25 million unsecured
revolving line of credit with a bank group led by NationsBank, N.A. as agent and
as lender. The credit facility contains covenants setting minimum net worth,
maximum leverage ratio and minimum net income requirements for the Company. On
 
                                      F-10
<PAGE>   39
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
September 20, 1996, the Company amended its total revolving credit commitment
from $25 million to $15 million. There have been no amounts drawn on this line.
Advances under the revolving line of credit bear interest, at the Company's
election, either at a "base rate" or at a "eurodollar rate." The base rate is a
floating rate equal to the greater of (a) the prime rate or (b) the federal
funds effective rate plus one-half of one percent (.50%). The eurodollar rate is
equal to the sum of (x) a rate determined by reference to the then-current
interbank offered rate for dollar denominated eurodollar deposits, with certain
adjustments, plus (y) one percent (1.0%). The eurodollar interest rate was 5.43%
at September 30, 1998.
 
NOTE 9.  STOCKHOLDERS' EQUITY
 
     On February 26, 1996, the Company's Board of Directors approved a 334-for-1
split of the Company's Common Stock to be effected in the form of a stock
dividend to the stockholders of record as of March 28, 1996. This stock split
has resulted in a reclassification of $112,695 and $187,003 from the Company's
additional paid-in capital and retained earnings accounts, respectively, to the
Company's Common Stock account, representing the par value of shares issued. All
share and per share amounts have been restated to retroactively reflect the
stock split. In addition, on February 26, 1996, the Board of Directors also
voted to retire and return to the status of authorized and unissued capital
stock all shares of Common Stock then held in the Company's treasury, and adopt
an amendment to the Articles of Organization of the Company to, among other
things, increase the authorized shares of Common Stock and Non-Voting Common
Stock to 30,000,000 and 1,000,000 shares, respectively, which was subsequently
approved by the stockholders of the Company.
 
     On April 18, 1996, the Company completed an initial public offering of
6,900,000 shares of its common stock which generated net proceeds of $114.4
million. A substantial part of the proceeds were used to redeem $20.6 million of
Series A preferred stock and accrued dividends, to repay the $34.7 million
outstanding principal amount and accrued interest under the secured term loan
facility, to repay the $10.3 million outstanding principal amount and accrued
interest under the senior subordinated notes and to repay the $5.1 million
outstanding principal amount and accrued interest under the Company's revolving
credit facility.
 
     STOCK OPTION PLANS
 
     In 1995, the Company's Board of Directors adopted, and the stockholders
approved, the 1995 Incentive and Nonstatutory Stock Option Plan. The Plan
provides for the grant of nonqualified and incentive stock options to employees
and others to purchase the Company's Common Stock. Options granted during fiscal
1995 provided for vesting over three years and expiration ten years after the
date of grant. Options granted during fiscal 1996, 1997 and 1998 provided for
vesting over five years and expiration ten years after the date of grant. At
September 30, 1997 and 1998, 6,070,116 shares of Common Stock were authorized
under the plan.
 
                                      F-11
<PAGE>   40
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the Company's stock option activity for the years ended
September 30 follows:
 
<TABLE>
<CAPTION>
                                                                            WEIGHTED
                                                                            AVERAGE
                                                              NUMBER OF     EXERCISE
                                                               OPTIONS       PRICE
                                                              ----------    --------
<S>                                                           <C>           <C>
Outstanding at
  September 30, 1995........................................   4,331,646     $ 1.02
     Granted................................................   1,079,564       6.74
     Exercised..............................................  (1,320,191)      0.59
     Canceled...............................................     (27,165)      1.20
                                                              ----------     ------
Outstanding at
  September 30, 1996........................................   4,063,854       2.67
     Granted................................................     802,400      15.15
     Exercised..............................................    (813,371)      1.52
     Canceled...............................................    (495,364)     13.71
                                                              ----------     ------
Outstanding at
  September 30, 1997........................................   3,557,519       4.22
                                                              ----------     ------
     Granted................................................     425,000      20.32
     Exercised..............................................    (307,770)      1.93
     Canceled...............................................     (74,821)     15.75
                                                              ----------     ------
Outstanding at
  September 30, 1998........................................   3,599,928     $ 6.08
                                                              ==========     ======
</TABLE>
 
     Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS 123 in 1997 and has applied APB
Opinion 25 and related interpretations in accounting for its stock option plans
in 1997 and 1998. Accordingly, no compensation cost has been recognized for its
stock option plans. The effects of applying SFAS 123 in this pro forma
disclosure are not likely to be representative of the effects on reported income
or loss for future years. SFAS 123 does not apply to awards prior to 1996 and
additional awards in future years are anticipated.
 
     At September 30, 1996, 1997 and 1998, respectively, options to purchase
2,195,716, 2,080,823 and 2,372,645 shares of Common Stock were exercisable with
a weighted average exercise price of $1.20, $1.80 and $2.04, respectively.
Exercise prices for options outstanding as of September 30, 1998 ranged from
$1.20 to $23.00. The weighted average remaining contractual life of those
options is 7.34 years.
 
     The weighted average fair value of the Common Stock at date of grant for
options granted in fiscal 1996, 1997 and 1998 was $3.61, $8.12 and $10.90 per
option, respectively. The fair value of these options at date of grant was
estimated using the Black-Scholes model with the following assumptions: a risk
free interest rate of 5.4% in fiscal 1996, 6.1% in fiscal 1997 and 5.7% in
fiscal 1998; a dividend yield of 0%; a volatility factor of the expected market
price of the Company's Common Stock of 55% and a weighted average expected life
of the options of 5 years.
 
                                      F-12
<PAGE>   41
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share for
the years ended September 30, 1996, 1997 and 1998 would have been reduced to the
pro forma amounts indicated as follows:
 
<TABLE>
<CAPTION>
                                                                 1996         1997          1998
                                                                 ----         ----          ----
<S>                                                           <C>          <C>           <C>
Net income as reported......................................  $3,545,000   $5,319,000    $8,857,000
    Basic earnings per share................................         .21          .31           .49
    Diluted earnings per share..............................         .18          .27           .43
Net income pro forma........................................   2,696,000    3,970,000     6,190,000
    Basic earnings per share................................         .16          .23           .34
    Diluted earnings per share..............................         .14          .20           .30
</TABLE>
 
     At September 30, 1996, 1997 and 1998, options to purchase 1,354,071,
1,047,035 and 696,856 shares of Common Stock, respectively, were available for
grant.
 
     The following table summarizes information about stock options outstanding
at September 30, 1998:
 
<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                                  ----------------------------------------------   -----------------------------
                                                   REMAINING        WEIGHTED-                       WEIGHTED-
RANGE OF                              NUMBER       CONTRACTUAL        AVERAGE          NUMBER         AVERAGE
EXERCISE PRICES                    OUTSTANDING        LIFE       EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
---------------                    -----------    -----------    --------------    -----------    --------------
<S>                               <C>             <C>            <C>               <C>            <C>
$ 1.20..........................    1,944,437         6.6            $ 1.20         1,944,437         $ 1.20
  3.90..........................      713,491         7.3              3.90           338,408           3.90
 10.38 -- 13.50.................      316,000         8.5             11.99            89,800          13.32
 18.50 -- 18.81.................      280,000         8.8             18.61                --             --
 19.62 -- 23.00.................      346,000         9.2                --                --             --
                                   ----------                                       ---------
                                    3,599,928         7.3            $ 6.08         2,372,645         $ 2.04
</TABLE>
 
     In connection with the Recapitalization, the Company accelerated the
vesting of options to purchase an aggregate of 2,442,208 shares of Common Stock
granted to certain executive officers during fiscal 1995, so as to make such
options exercisable in full immediately prior to the closing of the
Recapitalization. On January 24, 1996, an aggregate of 638,608 shares of Common
Stock were issued to such officers upon their exercise of such options.
 
NOTE 10.  RECAPITALIZATION
 
     In January 1996, prior to its contemplation of an initial public offering,
the Company effected a Recapitalization, in which the Company repurchased
28,592,404 shares of Common Stock then issued and outstanding from NEMC and the
other stockholders of the Company for an aggregate of approximately $111.4
million. In addition, Warburg, Pincus Ventures, L.P. ("WP Ventures") purchased
from certain executive officers of the Company an aggregate of 2,308,608 shares
of Common Stock, including an aggregate of 638,608 shares of Common Stock
acquired by such executive officers pursuant to their exercise of stock options,
for an aggregate of approximately $9.0 million. WP Ventures then contributed
such shares of Common Stock to the Company. The principal purpose of the
Recapitalization was to provide liquidity to the Company's existing stockholders
while permitting them to retain an ownership interest in the Company, and the
Company has accounted for the transaction as a leveraged recapitalization. To
finance the repurchase of these shares, the Company issued to certain
institutional investors 20,000 shares of Series A non-voting preferred stock for
an aggregate of $20.0 million, 33,512 shares of Series B convertible preferred
stock (convertible into 8,627,310 shares of Common Stock) for an aggregate of
$33.6 million and 1,388 shares of Series C non-voting convertible preferred
stock (convertible into 356,262 shares of Common Stock) for an aggregate of $1.4
million. In addition, the Company entered into a secured term loan in the amount
of $35.0 million and received an advance of $5.0 million under a secured
revolving credit facility in the maximum principal amount of $15.0 million, and
issued Senior Subordinated Notes, due 2003, in the aggregate principal amount of
$10.0 million (the "Senior Subordinated Notes"). The holder of the Senior
Subordinated Notes
 
                                      F-13
<PAGE>   42
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
also received a warrant to acquire an aggregate of 297,928 shares of non-voting
common stock at an initial exercise price of $3.90 per share, subject to
adjustment in certain circumstances. In addition, in the second quarter of
fiscal 1996 the Company incurred a non-cash compensation charge of $3.0 million.
This compensation charge arose from the purchase by the Company (both directly
and indirectly, through WP Ventures) from certain of its executive officers of
972,608 shares of Common Stock that had been acquired by such officers
immediately prior to the Recapitalization through the exercise of employee stock
options. The amount of the compensation charge is equal to the difference
between the aggregate $765,800 exercise price paid by such officers upon such
exercise and the $3,789,764 of aggregate proceeds received by the officers from
the purchase by the Company of such shares.
 
NOTE 11.  EXTRAORDINARY ITEM
 
     In fiscal 1996, the Company incurred an extraordinary loss of approximately
$2,149,000 representing the after tax effect of the write-off of approximately
$3,642,000 of unamortized capitalized financing costs. These costs were
attributable to indebtedness incurred in the Recapitalization that was repaid
out of the proceeds of the Company's initial public offering.
 
NOTE 12.  PREFERRED STOCK DIVIDEND
 
     The holders of the Series A preferred stock (issued in connection with the
Recapitalization on January 24, 1996) were entitled to receive, when and as
declared by the Board of Directors, out of funds legally available therefor,
preferential cumulative dividends at the rate of 12% per annum. The Company was
not obligated to pay dividends prior to the redemption of the Series A preferred
stock, and no dividends were declared by the Board. The Series A preferred stock
was subject to mandatory redemption, provided funds were legally available
therefor, upon the closing of an initial public offering or the sale of the
Company, but in no event later than January 2006. Upon the closing of the
Company's initial public offering, on April 23, 1996, at which time funds became
legally available for the redemption of the Series A preferred stock and payment
of dividends, the Company redeemed in full the Series A preferred stock and paid
dividends thereon from the date of the Recapitalization.
 
NOTE 13.  INCOME TAXES
 
     At September 30, provision for income taxes consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                           1996       1997      1998
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Federal:
  Current...............................................  $ 5,129    $4,535    $5,731
  Deferred..............................................   (1,413)    2,090      (723)
                                                          -------    ------    ------
                                                            3,716     6,625     5,008
State:
  Current...............................................      835       646     1,025
  Deferred..............................................     (227)      358      (128)
                                                          -------    ------    ------
                                                              608     1,004       897
                                                          -------    ------    ------
Provision for income taxes..............................  $ 4,324    $7,629    $5,905
                                                          =======    ======    ======
</TABLE>
 
                                      F-14
<PAGE>   43
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A reconciliation between the Company's effective rate and the U.S.
statutory rate is as follows:
 
<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30,
                                                              --------------------
                                                              1996    1997    1998
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
U.S. statutory rate.........................................  35.0%   35.0%   35.0%
State taxes, net of federal benefits........................   5.6     5.0     4.0
Acquired in-process research and development................    --    17.0      --
Other.......................................................    --     1.9     1.0
                                                              ----    ----    ----
Effective income tax rate...................................  40.6%   58.9%   40.0%
                                                              ====    ====    ====
</TABLE>
 
     Components of the Company's deferred tax liabilities and assets are as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                              ---------------
                                                              1997      1998
                                                              -----    ------
<S>                                                           <C>      <C>
Capitalized software........................................  $(576)   $ (576)
Depreciation................................................    103       178
Accounts receivable reserve.................................     51        82
Accrued compensation........................................    280       675
Reserves and other..........................................    499       849
                                                              -----    ------
Net deferred tax assets.....................................  $ 357    $1,208
                                                              =====    ======
</TABLE>
 
     There are no valuation allowances recorded against the Company's deferred
tax assets, since taxable income in the carryback period is sufficient to
realize the benefit of future deductions.
 
NOTE 14.  EMPLOYEE BENEFIT PLANS
 
     401(k) PLAN
 
     The Company maintains a savings plan for its eligible employees under
Section 401(k) of the Internal Revenue Code. The plan allows employees to defer
up to a percentage of their income equal to the lesser of the IRS statutory rate
or 15% on a pre-tax basis through contributions to the plan. Contributions by
the Company under this plan are discretionary. Total contributions by the
Company under the plan approximated $263,000, $306,000, and $376,000 in fiscal
years 1996, 1997 and 1998, respectively.
 
     The Company previously obtained health benefit plans through NEMC (see Note
6). Beginning January 1, 1996, the Company established independent health
benefit plans for its employees that provide a similar level of benefits.
 
     EMPLOYEE STOCK PURCHASE PLAN
 
     In 1996, the Company adopted an Employee Stock Purchase Plan (the "Stock
Purchase Plan"), under which employees may purchase up to 300,000 shares of
Common Stock.
 
     During each six-month offering period under the Stock Purchase Plan,
participating employees are entitled to purchase shares through payroll
deductions. The maximum number of shares which may be purchased is determined on
the first day of the offering period pursuant to a formula under which a
specific percentage of the employee's projected base pay for the offering period
is divided by a percentage of the market value of one share of Common Stock on
the first day of the offering period. During each offering period, the price at
which the employee will be able to purchase the Common Stock will be a specific
percentage of the last reported sale price of the Common Stock of the NASDAQ
National Market on the date on which the offering period commences or concludes,
whichever is lower.
 
     The Stock Purchase Plan is administered by the Compensation Committee. All
employees, other than certain highly-compensated employees, who meet certain
minimum criteria based on hours worked per week
 
                                      F-15
<PAGE>   44
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
and length of tenure with the Company are eligible to participate in the Stock
Purchase Plan. No employee may purchase shares pursuant to the Stock Purchase
Plan if, after such purchase such employee would own more than five percent of
the total combined voting power or value of the securities of the Company.
 
NOTE 15.  COMMITMENTS
 
     The Company leases office and office equipment under operating lease
arrangements which expire on various dates through 2002. Certain operating lease
arrangements include options to renew for additional periods or payment terms
that are subject to increases due to taxes and other operating costs of the
lessor. Future minimum lease commitments, by year and in the aggregate, under
these long-term noncancelable operating leases consist of the following at
September 30, 1998 (in thousands):
 
<TABLE>
<CAPTION>
                                                             OPERATING
FISCAL YEAR                                                    LEASES
-----------                                                  ---------
<S>                                                          <C>
1999.......................................................   $  627
2000.......................................................      495
2001.......................................................       58
2002.......................................................        2
                                                              ------
  Total minimum lease payments.............................   $1,182
                                                              ======
</TABLE>
 
     Rent expense amounted to $370,000, $553,000, and $753,000 in fiscal years
1996, 1997 and 1998, respectively.
 
     The Company has an agreement with a vendor of third-party software to pay a
fixed annual license and maintenance fees through June 2003. Aggregate annual
expenses under the agreement as renegotiated are expected to approximate
$2,500,000. The annual fees may be adjusted in the fourth and fifth year of the
amendment for changes in the number of users of the software. Aggregate license
and maintenance fees under this agreement were $2,004,000, $2,000,000 and
$2,019,000 for fiscal years 1996, 1997 and 1998, respectively.
 
NOTE 16.  CONSOLIDATION AND ACQUISITIONS
 
     On July 22, 1996, the Company acquired substantially all of the outstanding
stock and a note held by a selling principal of Enterprising HealthCare, Inc.
("Enterprising HealthCare"), based in Tucson, Arizona, for a total purchase
price of approximately $1.8 million in cash. Enterprising HealthCare provides
system integration products and services for the health care market.
 
     The acquisition was accounted for under the purchase method with the
results of Enterprising HealthCare included from July 22, 1996. Purchased
technology costs of $1.6 million are being amortized on a straight-line basis
over 7 years. Pro forma results of operations have not been presented, as the
effect of this acquisition on the financial statements was not material.
 
     On September 19, 1997, the Company acquired all outstanding shares of Vital
Software Inc. ("Vital"), a privately held developer of products that automate
the clinical processes unique to medical oncology. The purchase price was
approximately $6.3 million, which was comprised of $2.7 million in cash and
252,003 shares of the Company's common stock with a value of $3.6 million.
 
     The amount allocated to acquired in-process research and development was
based on the results of an independent appraisal. Acquired in-process research
and development represented development projects in areas that had not reached
technological feasibility and had no alternative future use. Accordingly, the
amount of $6.3 million was charged to operations at the date of the acquisition.
 
     The value of completed technologies and in-process research and development
were determined using a risk-adjusted, discounted cash flow approach. The value
of in-process research and development, specifically, was determined by
estimating the costs to develop the in-process projects into commercially viable
products,
 
                                      F-16
<PAGE>   45
                            TRANSITION SYSTEMS, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
estimating the resulting net cash flows from such projects, and discounting the
net cash flows back to their present values. This evaluation considered the
inherent difficulties and uncertainties in completing the development projects
and the risks related to the viability of and potential changes in future target
markets.
 
     In-process research and development projects identified at the acquisition
date focus primarily on a flexible architecture to accommodate multiple disease
categories, functionality including internet access, porting code to a 32 bit
environment, multi-resource scheduling capabilities, billing and HL-7
interfaces, integrating protocol modeling with financial and scheduling
modeling, clinical repository integration and development of decision support
objects. The nature of the efforts to develop the purchased in-process
technology into commercially viable products principally relates to the
following activities: (i) redesign and rewrite software code of the application
to support multiple disease category framework, (ii) add internet content
download for protocols and reference materials, (iii) write software code to
integrate multi-resource scheduling, clinical repository, billing and HL-7
interfaces, (iv) port entire application to 32 bit format, (v) enhance and
develop disease specific decision support objects.
 
NOTE 17.  SUBSEQUENT EVENTS
 
     HEALTHVISION ACQUISITION
 
     On October 28, 1998 the Company signed a definitive agreement to acquire
the approximately 80.5% of the outstanding capital stock of HealthVISION not
already owned by the Company for cash in the amount of $25.6 million, the
assumption of $9.5 million of liabilities, plus an earn-out of up to $10.8
million if specified financial milestones are met. The acquisition will be
accounted for as a purchase. HealthVISION is a provider of electronic medical
record software. HealthVISION's products include CareVISION, a patient-centered
clinical data repository and lifetime patient record system, which is expected
to constitute an integral component of the Company's Transition IV product. The
Company expects to close the aquisition in the first quarter of fiscal 1999.
 
     ECLIPSYS CORPORATION MERGER
 
     On October 29, 1998, the Company entered into a merger agreement with
Eclipsys Corporation, a healthcare information technology company delivering
solutions that enable healthcare providers to achieve improved clinical,
financial and administrative outcomes. Under the terms of the agreement, each
share of the Company's common stock will be converted to .525 shares of
Eclipsys' common stock. The transaction, which is subject to regulatory as well
as stockholder approval, is intended to be accounted for as a pooling of
interests and is expected to close by the end of January 1999.
 
                                      F-17
<PAGE>   46
                                    SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston,
Commonwealth of Massachusetts as of December 21, 1998.

                                             TRANSITION SYSTEMS, INC.


                                             By /s/ Robert F. Raco
                                                --------------------------------
                                                Robert F. Raco
                                                President and Chief Executive 
                                                  Officer


     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 and in the capacities on and on the dates indicated.

SIGNATURES                      TITLE                          DATE
----------                      -----                          ----

/s/ Robert F. Raco              President, Chief Executive     December 21, 1998
--------------------------      Officer and Director         
Robert F. Raco                  (Principal Executive Officer)
                                

/s/ Paula J. Malzone            Chief Financial Officer        December 21, 1998
---------------------------     (Principal Financial and
Paula J. Malzone                Accounting Officer)     


/s/ Patrick T. Hackett          Director                       December 21, 1998
--------------------------
Patrick T. Hackett


/s/ Robert S. Hillas            Director                       December 21, 1998
--------------------------
Robert S. Hillas


/s/ Peter Van Etten             Director                       December 21, 1998
--------------------------
Peter Van Etten


/s/ Allen F. Wise               Director                       December 21, 1998
--------------------------
Allen F. Wise