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                                  UNITED STATES
                       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 DECEMBER 31, 2003

                                       OR

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

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 000-25311

                                VITALWORKS INC.
             (Exact name of registrant as specified in its charter)

                  DELAWARE                              59-2248411
      (State or other jurisdiction of      (I.R.S. Employer Identification No.)
       incorporation or organization)

             239 ETHAN ALLEN HIGHWAY, RIDGEFIELD, CONNECTICUT 06877
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (203) 894-1300

        Securities registered pursuant to Section 12(b) of the Act: NONE

           Securities registered pursuant to Section 12(g) of the Act:
                          COMMON STOCK, PAR VALUE $.001
                   RIGHTS TO PURCHASE SERIES B PREFERRED STOCK

     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 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. [X]

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

     The aggregate market value of the common equity held by non-affiliates of
the registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the registrant) as of June
30, 2003 (based on the closing sale price of the registrant's common stock, par
value $.001 per share, as reported on the Nasdaq National Market on such date)
was approximately $153 million. 43,395,477 shares of common stock were
outstanding as of March 8, 2004.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Proxy Statement for the 2004 Annual Meeting of
Stockholders, expected to be held on June 9, 2004, are incorporated into Part
III herein by reference.

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                                VITALWORKS INC.

                                   FORM 10-K

                                    CONTENTS

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                                                PART I
Item 1.       Business...............................................................................      2
Item 2.       Properties.............................................................................     23
Item 3.       Legal Proceedings......................................................................     23
Item 4.       Submission of Matters to a Vote of Security Holders....................................     24

                                               PART II

Item 5.       Market for the Registrant's Common Equity and Related Stockholder Matters
                   and Issuer Purchases of Equity Securities ........................................     25
Item 6.       Selected Consolidated Financial Data...................................................     26
Item 7.       Management's Discussion and Analysis of Financial Condition
                   and Results of Operations.........................................................     27
Item 7A.      Quantitative and Qualitative Disclosures About Market Risk.............................     40
Item 8.       Financial Statements and Supplementary Data............................................     40
Item 9.       Changes in and Disagreements with Accountants on Accounting
                   and Financial Disclosure..........................................................     40
Item 9A.      Controls and Procedures................................................................     40

                                               PART III

Item 10.      Directors and Executive Officers of the Registrant.....................................     40
Item 11.      Executive Compensation.................................................................     41
Item 12.      Security Ownership of Certain Beneficial Owners and Management and Related
                   Stockholder Matters...............................................................     41
Item 13.      Certain Relationships and Related Transactions.........................................     41
Item 14.      Principal Accountant Fees and Services.................................................     41

                                               PART IV

Item 15.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................     42

Signatures    .......................................................................................     79
</TABLE>

 VitalWorks, AMICAS and RadConnect are registered trademarks of VitalWorks Inc.
   All other trademarks and company names mentioned are the property of their
                               respective owners.

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                                     PART I

ITEM 1. BUSINESS

GENERAL

         VitalWorks Inc. is a leading provider of information and image
management technology and services targeted to healthcare practices and
organizations throughout the United States. We provide IT-based,
specialty-specific solutions for imaging centers and hospital radiology
departments, and for medical practices specializing in anesthesiology,
ophthalmology, emergency medicine, plastic surgery, dermatology, and internal
medicine. We also offer enterprise-level systems designed for large physician
groups and networks. Our range of software solutions provide image management,
workflow management, and information management related to administrative,
financial, and clinical functions for physicians, radiologists and other
healthcare providers. We provide our clients with ongoing software support,
implementation, training, and electronic data interchange, or EDI, services for
patient billing and claims processing.

         We were incorporated in Delaware in November 1996 as InfoCure
Corporation. Prior to July 10, 1997, we conducted no significant operations and
generated no revenue. On July 10, 1997, we completed our initial public
offering. During the remainder of 1997 through 1999, we completed acquisitions
of 16 medical software companies. In addition, during the period July 10, 1997
through 2000, we acquired 19 companies that made up our former dental software
business.

         On March 5, 2001, we spun-off our dental software business through a
pro rata distribution to our shareholders of all the outstanding common stock
(the "Distribution") of our previously wholly-owned subsidiary, PracticeWorks,
Inc. ("PracticeWorks"). As a result of the Distribution, PracticeWorks became an
independent public company operating what was formerly our dental business,
which included the dental, orthodontic, and oral and maxillofacial surgery
business lines. Accordingly, PracticeWorks has been accounted for as
discontinued operations. All information contained in this report, unless
otherwise indicated, has been restated to reflect the Distribution. We relocated
our executive offices to Connecticut, changed our name and began doing business
as "VitalWorks Inc." following the Distribution. The material terms of the
Distribution are described herein.

         On November 25, 2003, we acquired 100% of the outstanding capital stock
of AMICAS, Inc., a developer of Web-based diagnostic image management software
solutions. The addition of AMICAS provides us with the ability to offer
radiology/imaging center clients a comprehensive, integrated information and
image management solution, incorporating the key components of a complete
radiology data management system. We expect the acquisition to position us to
achieve our goal of establishing a leadership position in the growing picture
archiving and communication systems, or PACS, market. These systems allow
radiologists and other physicians to examine, store, and distribute digitized
medical images.

INDUSTRY BACKGROUND

         Healthcare spending in the United States has risen dramatically over
the past two decades. According to the Center for Medicare and Medicaid
Services, healthcare spending amounted to approximately $1.6 trillion in 2002
and is expected to grow at an average annual rate of 7.3%. Federal and state
governments, insurance carriers, and other third-party payors have taken actions
to control these rising costs. As a result, physicians are under increasing
pressure to reduce costs and operate their practices more efficiently. One of
the ways in which third-party payors have managed rising costs has been to
employ alternative reimbursement models to replace the fee-for-service
reimbursement model, which has been the traditional basis for payment for
healthcare services. Such alternative reimbursement models include managed care,
fixed-fee, and capitated models of reimbursement. The result of these generally
more restrictive reimbursement models has been a dramatic increase in the
complexity of accounting, billing, and payment collection for healthcare
services.

         The radiology market is encountering its own set of challenges.
Radiologists' workloads are increasing as

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the number and complexity of available imaging studies are rising. In addition,
the number of images being produced from certain studies is increasing. With
this proliferation of images and the demand for greater portability of medical
information, we believe that radiologists are under pressure to find efficient
ways to manage their workflow, images and data.

         Physicians are also under increased pressure to control the quality of
the care they deliver. Coalitions such as The Leapfrog Group have been formed to
help ensure that consumers are properly informed to make the most educated
decisions about the medical care they need, and that physicians are practicing
medicine at the highest possible levels of care and safety. A key factor for a
physician to achieve this level of care is the accuracy and availability of
patient healthcare information.

         To address these challenges, healthcare providers are increasingly
using information technology, including image management, clinical information
and practice management systems. PACS systems include the ability to manage a
radiologist's work list, present images digitally for diagnosis, and archive and
distribute those images. Clinical information systems include electronic medical
records, clinical charting, electronic prescribing, patient tracking, and
patient workflow systems. Practice management systems include a range of
software products and services for physicians and other providers of healthcare
services. Most practice management systems provide several common functions,
including practice administration functions such as patient scheduling, and
financial functions such as insurance billing, patient billing and receivables
management.

         The continued evolution of information and telecommunication
technologies has led to the development of a variety of electronic tools that
can be integrated with practice management systems, helping to improve
healthcare practices' cash flow. Among these is EDI, which expedites the
submission of healthcare insurance claims to third-party payors and expedites
the receipt of reimbursement. Paper claims require more time and are
significantly more expensive to prepare, file, and process than electronically
submitted claims. EDI transactions, on the other hand, can be processed directly
with third-party payors or channeled through processing clearinghouses at
significantly lower costs to both the provider and the payor. Because of these
significant cost savings, some payors are beginning to require practitioners to
submit reimbursement claims electronically. In addition, new forms of EDI
services are emerging to enhance the providers' revenue cycles, including
electronic remittance advice, determination of eligibility, claim status checks
and referral authorizations.

PRODUCTS AND SERVICES

         We offer a wide range of clinical and practice management software
products to healthcare providers in targeted specialty markets. These products
are designed to automate image management, workflow, administrative, financial,
and clinical information management functions of radiology departments and
groups, office-based physician practices, hospital-based physician practices,
and large healthcare enterprises, clinics and organizations.

Types of Products

         Each of our products addresses the management of healthcare data in one
or more of several different areas. These areas include:

-    Image management, for the digital acquisition, storage, retrieval and
     distribution of radiology images.

-    Financial management, including patient billing, insurance processing, and
     receivables and collections management.

-    Administrative management, including appointment scheduling, patient
     registration, patient correspondence, referral analysis, and document
     imaging and management.

-    Clinical data management, including complete documentation of patient
     visits, patient medical history,

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     prescription writing, order entry, and results reporting.

-    EDI, including electronic processing of insurance claims and patient
     statements.

Targeted Specialties

         In addition to addressing the needs of primary care and general medical
    practices and clinics, many of our software products have been designed to
    address the specific needs of specialty practices. For example,
    anesthesiologists are required to bill their services on the basis of time
    units, and radiologists require specialized scheduling, film tracking, image
    management and workflow capabilities. Our targeted specialties and areas of
    focus include:

               -    Radiology

               -    Anesthesiology

               -    Ophthalmology

               -    Dermatology

               -    Plastic Surgery

               -    Podiatry

               -    Large physician groups

               -    Emergency departments

               -    Physician networks

               -    Clinics

               -    Service bureaus

               -    Management Service Organizations

               -    Independent Physician Associations

Principal Products

         Our principal products are the main image management, clinical
information and practice management products used by our clients. Each principal
product falls into one of two categories: "core" products or "classic" products.
Our core products offer advanced functionality and operate with the latest
generation of operating systems and hardware platforms offered by us. These core
products continue to be enhanced, are actively marketed to new customers and
serve as a migration path for certain of our classic product lines. Our classic
products are mature, feature-rich products that have been in the market for
several years and continue to serve as a viable solution to many of our clients,
although they are not necessarily designed on the latest technology. We actively
market nine core products and support 16 classic products. While we primarily
market our core products, we will continue to provide customer support for our
classic products until we determine that it is no longer cost effective or
practically possible to do so. We are actively promoting the migration of
certain classic product clients to newer products.

Ancillary Products

         In addition to our principal image management, clinical information and
practice management products, we offer a variety of ancillary products. While
some of these products may operate on a stand-alone basis, these are typically
add-on modules to our principal products. Ancillary products allow us to
leverage our client base for additional sales revenue, as well as generate
interest and competitive advantage for our core products. These ancillary
products include:

-    Decision support tools - We offer several different decision support tools
     designed to supplement the analytical features of our practice management
     software products. These tools enable physicians to access, sort, and
     display data according to user-selected criteria, including payor, referral
     source, reimbursement rate, time interval, and other variables.

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-    Document imaging and management - Our document imaging and management tools
     enable practices to electronically capture, store, and manage all patient
     documents, as well as automate and streamline workflow.

-    Wireless data entry - Physicians using wireless data entry can enter and
     review data from a handheld computing device via wireless transmission.

-    Palm integration - Palm integration allows physicians to download data to
     Palm-compatible handheld computing devices for easy data access while away
     from the office.

-    Web-based services - Web-based services include radiology image and report
     distribution, patient and office staff communication, appointment and
     prescription refill requests, and patient account inquiry.

-    Product interfaces - We provide connectivity between our principal products
     and a variety of third-party products, such as hospital information
     systems, lab information systems and coding systems.

EDI Services

         Our core software products offer transaction-based EDI functions,
including patient billing and insurance claims submission and remittance. The
use of EDI can improve a healthcare practice's cash flow by enabling more
accurate and rapid submission of claims to third-party payors and more rapid
receipt of corresponding reimbursements. We generate revenues by facilitating
EDI transactions, currently processing in aggregate approximately nine million
EDI transactions each month. Current EDI services include:

-    RapidBill(TM) - comprehensive, automated patient statement processing
     services.

-    RapidCollect(TM)- collection letter processing.

-    RapidReminder(TM) - appointment reminder notification processing.

-    RapidClaim(TM) - electronic submission of insurance claims, and available
     claims scrubbing.

-    RapidRemit(TM) - electronic remittance of insurance payments and
     automatically posts explanation of benefits data into the practice
     management system.

-    RapidEligibility(TM) - electronic access to insurance and managed care
     plans to determine a patient's eligibility and covered benefits.

Other Services

         We believe that a high level of customer service is important to the
successful marketing and sale of our products. We provide a comprehensive suite
of training, consulting and technical support services to implement and support
our products including:

-    Software Maintenance - Under the terms of our standard maintenance
     arrangement, customers pay a periodic (e.g. monthly, quarterly, annually)
     maintenance fee. The fee charged is generally a fixed percentage of the
     list price of the licensed software at the time of contract signing. This
     fee entitles customers to technical support and to maintenance updates for
     their software, if and when updates are released.

-    Hardware Maintenance - Similar to software maintenance, customers may
     contract with us for maintenance of their hardware. In return for periodic
     maintenance fees, the customer is provided comprehensive telephone

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     diagnostic support and on-site support. We subcontract with various
     third-party hardware maintenance firms to provide a significant amount of
     our field service.

-    Consulting and Training Services - We offer consulting, training and
     implementation services on a time and materials basis. Based on a
     customer's technical and application knowledge, the customer can customize
     a program with us that provides them with the appropriate level of upfront
     and ongoing consulting and training support. Typically, customers who
     purchase new or add-on systems will also purchase our implementation and
     installation services.

         Our services and support organization consisted of 337 employees as of
December 31, 2003.

Future Products

         We are currently developing our Ingenuity(TM) suite of products which
include Ingenuity(TM) EMR, our next-generation electronic medical records
system, and Ingenuity(TM) PM, our next-generation practice management system.
Both products are being developed on our Java and browser-based platform and are
designed to handle healthcare practices of all sizes, including enterprise-level
organizations.

         In addition, we are continuing development of our RadConnect(R) suite
of products with primary focus on our next-generation practice management system
for radiology and integration of our radiology information system, or RIS, and
PACS systems.

RESEARCH AND DEVELOPMENT

         Our development efforts are focused on new products using our Web-based
platform, as well as on maintaining the stability and competitiveness of our
current product offerings. We augment our development staff with third-party
developers. These third-party resources are focused on new, next-generation
product development. Our research and development efforts also include
researching emerging technologies in both the healthcare and technology sectors,
carefully evaluating each for its ability to enable physicians to deliver better
healthcare to their patients with greater efficiency, and establishing best
practices for our development efforts. Our research and development organization
consisted of 163 employees as of December 31, 2003. The staff is located in
Ridgefield, Connecticut and also co-located with our support staff in Daytona
Beach, Florida; Birmingham, Alabama; Minneapolis, Minnesota; and Boston,
Massachusetts. This co-location of staff helps to keep the staff focused on
industry-specific applications and to provide cross-communication between the
research and development staff and the support staff who are in regular
communication with customers, allowing us to closely monitor our customers'
needs.

         In 2003, 2002, and 2001, our research and development expenses were
$15.9 million, $13.5 million, and $10.9 million, or 14.2%, 11.8% and 10.2% of
total revenues, respectively. In addition, in 2003, 2002, and 2001, we incurred
$1.7 million, $4.8 million, and $4.6 million, respectively, of third-party
programmer fees that we capitalized in conformity with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed."

SALES AND MARKETING

         We market and sell our products in the United States primarily through
a direct sales force, composed of 91 sales and marketing personnel as of
December 31, 2003. We have sales offices located in Ridgefield, Connecticut;
Birmingham, Alabama; Daytona Beach, Florida; Minneapolis, Minnesota; Portland,
Oregon; and Boston, Massachusetts. Product support, training and implementation
services are also available through several of these offices. In addition, many
of our sales representatives are based from home offices throughout the United
States. We organize our sales force by market segment. All members of our sales
organization participate in sales training, which among other things, enables
them to understand the specialty-specific needs of our prospective customers.

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         Within our existing customer base, we promote and sell system upgrades,
product add-ons, ancillary products, maintenance services and EDI services. In
addition, we target new customers principally through direct mail campaigns,
telemarketing, live seminars, Web-based seminars, trade shows, and
advertisements in various trade publications. Moreover, our senior personnel and
members of management assist in sales and marketing initiatives to larger and
more technically advanced prospective customers. Sales cycles generally range
from an average of three to four months for small office-based physician systems
to as much as six to 18 months for clinical, image management and large scale
systems.

         For each of the past three fiscal years, no one customer has accounted
for more than 10% of total revenues.

INTELLECTUAL PROPERTY

         We rely primarily on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures, and contractual provisions to
protect our intellectual property and proprietary rights. These laws and
procedures afford only limited protection.

         Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and such problems may persist. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
competitors will not independently develop similar technology.

         Some of our programs have been delivered along with their applicable
source code, which is protected by contractual provisions. In other cases, we
have entered into source code escrow agreements with a limited number of our
customers requiring release of source code under certain limited conditions,
including any bankruptcy proceeding by or against us, cessation of our business
or our failure to meet our contractual obligations.

         We rely upon certain software that is licensed from third parties,
including software that is integrated with some of our internally developed
software and/or is used with some of our products to perform certain functions.
In some cases, we private label third-party software for re-licensing. There can
be no assurance that these third-party software licenses will continue to be
available to us on commercially reasonable terms, which could adversely affect
our business, operating results and financial condition. In addition, there can
be no assurance that third parties will not claim infringement by us with
respect to our products or enhancements thereto.

         We distribute our software under software license agreements that grant
customers a nonexclusive, nontransferable perpetual license to our products and
that contain terms and conditions prohibiting the unauthorized reproduction or
transfer of our products.

COMPETITION

         Our principal competitors include international, national and regional
clinical, practice management and image management system vendors including
medical device and film manufacturers. We believe that the larger, international
and national vendors are broadening their markets to include both small and
large healthcare providers. In addition, we compete with national and regional
providers of computerized billing, insurance processing and record management
services to healthcare practices. As the market for our products and services
expands, additional competitors are likely to enter this market. We believe that
the primary competitive factors in our markets are:

     -   product features and functionality;

     -   ongoing product enhancements;

     -   customer service, support, and satisfaction;

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     -   the reputation and stability of the vendor; and

     -   price.

         We have experienced, and we expect to continue to experience, increased
competition from current and potential competitors, many of whom have
significantly greater financial, technical, marketing, and other resources than
us. Such competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, promotion, and sale of their products than us. Also, certain
current and potential competitors have greater name recognition or more
extensive customer bases that could be leveraged, thereby gaining market share
to our detriment. We expect to face additional competition as other established
and emerging companies enter into the clinical and practice management software
markets and as new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect our business, operating results, cash flows and financial condition.

         Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing the ability of their products to address the needs of our
existing and prospective customers. Further competitive pressures, such as those
resulting from competitors' discounting of their products, may require us to
reduce the price of our software and complementary products, which would
materially and adversely affect our business, operating results, cash flows and
financial condition. There can be no assurance that we will be able to compete
successfully against current and future competitors, and the failure to do so
would have a material adverse effect upon our business, operating results, cash
flows and financial condition.

PRIVACY ISSUES

        Because our customers use our applications and services to transmit and
manage highly sensitive and confidential health information, we must address the
security and confidentiality concerns of our customers and their patients. To
enable the use of our applications and services for the transmission of
sensitive and confidential medical information, we use various methods to ensure
an appropriate level of security. These methods generally include:

     -   security that requires both user ID's and passwords to access our
         systems locally or remotely, with the potential of requiring digital
         certificates for remote, Internet-based access, should such measures be
         required;

     -   encryption of data relating to our application service provider, or
         ASP, applications transmitted over the Internet; and

     -   use of a mechanism for preventing unauthorized access to private data
         resources on our internal network and our ASP applications, commonly
         referred to as a "firewall."

        The level of data encryption used by our products is in compliance with
the encryption guidelines set forth in rules regarding security and electronic
signature standards in connection with HIPAA (see "Healthcare Regulation"
below). We also encourage our customers to implement their own firewall and
security procedures to protect the confidentiality of information being
transferred into and out of their computer networks.

        Internally, we work to ensure the safe handling of confidential data by
employees in our electronic services department by:

     -   using individual network user ID's and passwords for each employee
         handling electronic data within our internal network; and

     -   requiring each employee to sign an agreement to comply with all Company
         policies, including our policy

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         regarding the handling of confidential information.

         We monitor proposed regulations that might affect our applications and
services to ensure our compliance with such regulations when and if they are
implemented.

HEALTHCARE REGULATION

         The healthcare industry is highly regulated and is subject to changing
political, regulatory, and other influences. As a participant in the healthcare
industry, our operations and relationships are subject to regulation by federal
and state laws and regulations as well as to enforcement by federal and state
governmental agencies. Sanctions may be imposed for violation of these laws. We
review our practices in an effort to ensure compliance with all applicable laws.
However, laws governing healthcare are both broad and, in some respects, vague.
As a result, it is often difficult or impossible to determine precisely how laws
will be applied, particularly to new products or to services similar to ours.
Any determination by a state or federal regulatory agency that any of our
practices violate any of these laws could subject us to civil or criminal
penalties, require us to change or terminate some portions of our business, and
have a material adverse effect on our business.

         The healthcare laws most relevant to our business are:

         Health Insurance Portability and Accountability Act of 1996, or HIPAA.
The administrative simplification provisions of HIPAA and the various
regulations which have been proposed and enacted to implement the administrative
simplification provisions, include five healthcare-related standards governing,
among other things:

     -   electronic transactions involving healthcare information;

     -   privacy of individually identifiable health information; and

     -   security of healthcare information and electronic signatures.

         The regulations governing the electronic exchange of information
establish a standard format for the most common healthcare transactions,
including claims, remittances, eligibility, and claims status. The regulations
required compliance by October 16, 2002, unless a covered entity submitted a
compliance plan by such date requesting an extension for compliance until
October 16, 2003. We have worked to ensure our customers' compliance with the
regulations, as applicable. Many of our customers are subject to the transaction
standards and the standards will continue to affect our processing of healthcare
transactions among physicians, payors, patients, and other healthcare industry
participants.

         The regulations promulgated pursuant to HIPAA establish national
privacy standards for the protection of individually identifiable health
information by certain healthcare organizations. Most healthcare entities
covered by the rule were required to comply by April 14, 2003. A substantial
part of our activities involve the receipt or delivery of confidential health
information concerning patients of our customers in connection with the
processing of healthcare transactions and the provision of technical services to
participants in the healthcare industry. The regulations may restrict the manner
in which we transmit and use certain information. The regulations also provide
for the execution of business associate agreements with many of our customers
and vendors. Such agreements, or the failure to execute such an agreement, may
impose additional obligations and potential liability on us.

         The security regulations enacted pursuant to HIPAA establishing
security and electronic HIPAA signature standards were effective April 21, 2003,
and most covered entities will have until April 21, 2005 to comply with the
standards. The regulations require certain healthcare organizations to implement
administrative safeguards, physical safeguards, technical security services, and
technical security mechanisms with respect to information that is electronically
maintained or transmitted in order to protect the confidentiality, integrity and

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availability of individually identifiable health information. The security
standards may require us to enter into agreements with certain of our customers
and business partners restricting the dissemination of health information and
requiring implementation of specified security measures.

         Overall, HIPAA has required and may continue to require substantial
changes to many of our applications, services, policies, and procedures that
obligate us to make significant financial investments, and may require us to
charge higher prices to our customers and may also affect our customers'
purchasing practices.

         See further discussion regarding HIPAA below in "Forward-Looking
Statements and Risk Factors That May Affect Future Results."

         Other Privacy Requirements. In addition to the privacy rules under
HIPAA, most states have enacted or are considering enacting patient
confidentiality laws, which would further prohibit the disclosure of
confidential medical information. HIPAA establishes minimum standards and
preempts conflicting state laws, which are less restrictive than HIPAA regarding
health information privacy, but does not preempt conflicting state laws that are
more restrictive than HIPAA. The Federal Trade Commission and various state
attorneys general have applied federal and state consumer protection laws to
privacy issues.

         FDA. The Food and Drug Administration, or FDA, is responsible for
assuring the safety and effectiveness of medical devices under the 1976 Medical
Device Amendments to the Food, Drug and Cosmetic Act. Computer applications and
software are generally subject to regulation as medical devices, requiring
registration with the FDA, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing when
such products are intended to be used in the diagnosis, cure, mitigation,
treatment, or prevention of disease. Our PACS product is subject to FDA
regulation. If the FDA were to decide that any of our other products and
services should be subject to FDA regulation or if in the future we expanded our
application and service offerings into areas that may subject us to further FDA
regulation, the costs of complying with such FDA requirements could be
substantial. Application of the approval or clearance requirements could create
delays in marketing, and the FDA could require supplemental filings or object to
certain of these products. FDA compliance efforts with regard to our PACS
product are time consuming, burdensome, and expensive and any failure to comply
could have a material adverse effect on us.

         The Federal Anti-Kickback Law. The federal Anti-Kickback Law includes a
prohibition against the direct or indirect payment or receipt of any
remuneration in order to induce the referral of business or patients
reimbursable under Medicare, Medicaid and certain other federal healthcare
programs. Violations of the federal Anti-Kickback Law may result in criminal
liability, a felony conviction punishable by a maximum fine of $125,000,
imprisonment up to five years, or both, exclusion from the government programs,
and civil monetary sanctions. Many states also have similar anti-kickback laws
that are not limited to items or services for which payment is made by a federal
or state healthcare program, such as Medicare or Medicaid. The Federal
Anti-Kickback Law has been in effect since 1977 and applies broadly to all kinds
of providers and suppliers. If the activities of a customer of ours or other
entity with which we have a business relationship were found to violate the
Federal Anti-Kickback Law or other similar anti-kickback or anti-referral laws,
and we, as a result of the provision of products or services to such customer or
entity, were found to have knowingly and willfully participated in such
activities, we could be subject to sanction or liability under such laws.

         Stark Law. The federal Stark Law restricts referrals by physicians of
Medicare, Medicaid and other government-program patients to providers of a broad
range of designated health services with which they have ownership or certain
other financial arrangements. Many states have adopted or are considering
similar legislative proposals to prohibit the payment or receipt of remuneration
for the referral of patients and physician self-referrals, regardless of the
source of the payment for the care. These laws and regulations are extremely
complex, and little judicial or regulatory interpretation exists. If the
activities of a customer of ours or other entity with which we have a business
relationship were found to constitute a violation of anti-referral laws, and we
were found to have knowingly participated in such activities, we could be
subject to sanction or liability under such law.

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         The Federal Civil False Claims Act and the Medicare/Medicaid Civil
Money Penalties. Federal regulations prohibit, among other things, the filing of
claims for services that were not provided as claimed, were not medically
necessary, or which were otherwise false or fraudulent. Violations of these laws
may result in civil penalties, including treble damages. In addition, Medicare,
Medicaid and federal statutes provide for criminal penalties for such false
claims. If, during the course of providing services to our customers, we provide
assistance with the filing of such claims, and if we were found to have
knowingly participated, or participated with reckless disregard in such
activities, we could be subject to sanction or liability under such laws.

EMPLOYEES

         As of December 31, 2003, we employed 687 persons, including 91 in sales
and marketing, 337 in customer support and services, 163 in research and
development and 96 in administration, human resources, information technology,
finance and senior management. None of our employees is subject to a collective
bargaining arrangement. We consider our relations with our employees to be
satisfactory.

         Our executive officers are:

Joseph M. Walsh

         Joseph M. Walsh, age 44, has served as our President and Chief
Executive Officer and as a director since March 2001 and as Chairman since June
2001. From April 2000 until March 2001, Mr. Walsh served as president of our
medical software division. From 1987 until April 2000, Mr. Walsh served as
president and chief executive officer of Micro-Designs Software Corporation, a
healthcare practice management company specializing in oral and maxillofacial,
and plastic surgery practices. We acquired Micro-Designs in 1998.

Stephen N. Kahane

         Stephen N. Kahane, M.D., M.S., age 46, has served as our Vice Chairman
and Chief Strategy Officer and as a director since March 2001. From November
1999 until March 2001, Dr. Kahane served as President of E-Health and then as
Chief Strategy Officer of our medical software division. From October 1996 until
November 1999, he served as president and chief executive officer of Datamedic
Holding Corp., a practice management and clinical software company specializing
in ophthalmology and general medical practices. We acquired Datamedic in 1999.
Prior to joining Datamedic, Dr. Kahane was a co-founder and senior executive at
a clinical software company, Clinical Information Advantages, Inc. Dr. Kahane
also trained and served on the faculty at The Johns Hopkins Medical Center.

Michael A. Manto

         Michael A. Manto, age 45, has served as our Executive Vice President
and as a director since March 2001 and as our Chief Financial Officer since
April 2001. From July 2000 until March 2001, he served as Executive Vice
President of our medical software division. From 1991 until 2000, Mr. Manto was
with Hyperion Solutions Corporation, a multinational business software company,
where he served as vice president and corporate controller. Mr. Manto also
served as interim chief financial officer of Hyperion Software Corporation.
Prior to joining Hyperion, Mr. Manto was a certified public accountant with
Ernst & Young LLP.

Kevin M. Silk

         Kevin M. Silk, age 40, has served as our Vice President of Finance and
Business Development since March 2001, and he was Vice President of Finance of
our medical software division between October 2000 and March 2001. From 1995 to
2000, Mr. Silk was with Hyperion Solutions Corporation, a multinational business
software company, where he served in the capacities of Director of Business
Development and Senior Director of Financial Planning and Analysis. Prior to
joining Hyperion, Mr. Silk was a certified public accountant with

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Seavex LTD and with Ernst & Young LLP.

C. Daren McCormick

         C. Daren McCormick, age 42, has served as our Chief Operations Officer
since March 2001. He was Chief Operations Officer of our medical software
division between April 2000 and March 2001. From July 1999 until April 2000, he
served as our Vice President of Systems Engineering and from October 1998 until
July 1999, he served as our Vice President of Business Development. From 1995
until October 1998, he served as Senior Manager of Research and Development of
the Healthcare Systems Division of Reynolds and Reynolds, a healthcare practice
management company. We acquired the Healthcare Systems Division of Reynolds and
Reynolds in October 1998.

Stephen Hicks

         Stephen Hicks, age 45, has served as our Vice President and General
Counsel since March 2001. He was Vice President of our medical software division
between August 2000 and March 2001. Prior to joining us, he was First Deputy
Commissioner at the New York State Division of Housing from January 1999, and
worked from February 1995 to December 1998 on the executive staff of Dennis C.
Vacco, the New York State Attorney General. From 1983 until 1995, Mr. Hicks
worked for McCullough, Goldberger and Staudt, a New York law firm.

Eric A. Montgomery

         Eric A. Montgomery, age 49, has served as our Corporate Vice President
of Sales since November 2002. From 1999 to 2002, he acted as Vice President of
Sales and Business Development for OutlookSoft Corporation, a venture-backed
software company specializing in the area of business intelligence. From 1997 to
1999, he served as Vice President of Sales at Information Management Associates.
Prior positions included Senior Sales Director at Hyperion Software Corporation,
as well as various sales and marketing positions at Citicorp's Information
Division and Comshare, Inc.

THE DISTRIBUTION

         On March 5, 2001, or the Distribution Date, we completed the
Distribution of PracticeWorks to our stockholders in a tax-free distribution.
The spin-off of PracticeWorks was effected by way of a pro rata dividend of all
of the issued and outstanding shares of common stock of PracticeWorks to our
stockholders of record as of February 21, 2001. This resulted in PracticeWorks
becoming an independent, publicly-traded company. Immediately prior to the
Distribution, we effectively transferred to PracticeWorks the division's assets
and liabilities and, thereby, distributed $28.5 million of net assets, as
adjusted, in connection with the spin-off. Our stockholders received one share
of PracticeWorks common stock for every four shares of our common stock owned as
of the record date. No proceeds were received by us in connection with the
Distribution.

         For purposes of governing certain of the ongoing relationships between
PracticeWorks and us, and to provide for an orderly transition to the status of
two independent companies, we and PracticeWorks entered into various agreements.
Among other things, these agreements continue to define the ongoing relationship
between the parties since the Distribution. Because these agreements were
negotiated while PracticeWorks was a wholly-owned subsidiary of ours, they are
not the result of negotiations between independent parties, although we and
PracticeWorks set pricing terms for interim services believed to be comparable
to what would have been achieved through arm's-length negotiations. Following
the Distribution, additional or modified agreements, arrangements and
transactions were entered into between PracticeWorks and us and such agreements
and transactions were determined through arm's-length negotiations. In
connection with the Distribution, each company has indemnified the other, and
either may incur obligations with respect to certain representations,
warranties, commitments, and/or contingencies of the other entered into on or
prior to the Distribution Date. A brief description of certain of the material
agreements follows:

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<PAGE>

Distribution Agreement

         Prior to the Distribution Date, we and PracticeWorks entered into the
Distribution Agreement, which provided for, among other things, the principal
corporate transactions required to effect the Distribution and other agreements
relating to the continuing relationship between PracticeWorks and us after the
Distribution. Pursuant to the Distribution Agreement, we transferred to
PracticeWorks all of the assets and liabilities relating to our information
management technology business for dentists, orthodontists and oral and
maxillofacial surgeons.

         Pursuant to the Distribution Agreement and effective as of the
Distribution Date, PracticeWorks or its successors assumed, and agreed to
indemnify us against, all liabilities, litigation, and claims, including related
insurance costs, arising out of PracticeWorks' business. We retained, and agreed
to indemnify PracticeWorks against, all liabilities, litigation, and claims,
including related insurance costs, arising out of our business. The foregoing
obligations do not entitle an indemnified party to recovery to the extent any
such liability is covered by proceeds received by such party from any third
party insurance policies.

         The Distribution Agreement provides that each of PracticeWorks and us
will be granted access to certain records and information in the possession of
the other, and will require the retention by each of PracticeWorks and us for a
period of eight years following the Distribution Date of all of this information
in its possession. Also, the Distribution Agreement provides for a three-year
period during which neither PracticeWorks nor we may solicit pre-existing
customers or employees of the other party.

Transition Services Agreement

         We and PracticeWorks entered into the Transition Services Agreement on
the Distribution Date. Pursuant to this agreement, in exchange for specified
fees, we provided to PracticeWorks services including insurance-related services
and employee benefit services, and PracticeWorks provided to us services
including the preparation of tax returns, maintenance of the general ledger,
preparation of financial statements, corporate record-keeping, and payroll for a
fee of $.4 million in 2001. The fees paid pursuant to the Transition Services
Agreement were agreed upon between the parties. This agreement terminated on
December 31, 2001. Management believes that the terms and conditions were as
favorable to us as those available from unrelated parties for a comparable
arrangement.

Tax Disaffiliation Agreement

         We and PracticeWorks entered into the Tax Disaffiliation Agreement on
the Distribution Date which identifies each party's rights and obligations with
respect to deficiencies and refunds, if any, of federal, state, local, or
foreign taxes for periods before and after the Distribution and related matters
such as the filing of tax returns and the handling of Internal Revenue Service
matters and other audits. Under the Tax Disaffiliation Agreement, PracticeWorks
or its successors will indemnify us for any tax liability attributable to
PracticeWorks or its affiliates for any period. PracticeWorks or its successors
will also indemnify us for all taxes and liabilities incurred solely because (i)
PracticeWorks breaches a representation or covenant given to the law firm King &
Spalding LLP in connection with rendering its tax opinion in the Distribution,
which breach contributes to an Internal Revenue Service determination that the
Distribution was not tax-free, or (ii) a post-Distribution action or omission by
PracticeWorks or any affiliate of PracticeWorks contributes to an Internal
Revenue Service determination that the Distribution was not tax-free. We will
indemnify PracticeWorks for all taxes and liabilities incurred solely because
(i) we breach a representation or covenant given to King & Spalding LLP in
connection with rendering its tax opinion in the Distribution, which breach
contributes to an Internal Revenue Service determination that the Distribution
was not tax-free, or (ii) a post-Distribution action or omission by us or any
affiliate contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. If the Internal Revenue Service determines that
the Distribution was not tax-free for any other reason, we, and PracticeWorks or
its successors will indemnify each other against 50% of all taxes and
liabilities.

         PracticeWorks or its successors will also indemnify us for any taxes
resulting from any internal

                                       13

<PAGE>

realignment undertaken to facilitate the Distribution on or before the
Distribution Date.

Employee Benefits and Compensation Allocation Agreement

         We and PracticeWorks entered into the Employee Benefits and
Compensation Allocation Agreement on the Distribution Date, which contains
provisions relating to employee compensation, benefits and labor matters and the
treatment of options to purchase our common stock held by our employees who
became PracticeWorks employees. This agreement provides that our options held by
our employees who became PracticeWorks employees immediately following the
Distribution may be replaced by PracticeWorks options. PracticeWorks employees
whose VitalWorks options were fully vested as of the Distribution Date had the
right to surrender their vested VitalWorks options for options to purchase
PracticeWorks common stock for a period of 30 days following the Distribution
Date, or April 4, 2001. Any of our employees who became PracticeWorks employees
who chose not to surrender their vested VitalWorks options during this time
period continued to hold VitalWorks options which expired generally within 30 to
90 days from the Distribution Date. PracticeWorks employees who were not fully
vested in VitalWorks options as of the Distribution Date had their VitalWorks
options exchanged for PracticeWorks options as of the Distribution Date (see
Note K of the accompanying financial statements for further discussion).

FORWARD-LOOKING STATEMENTS AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

         Except for the historical information contained in this Annual Report
on Form 10-K, the matters discussed herein contain "forward-looking statements"
within the meaning of the federal securities laws. Statements regarding future
events and developments and our future performance, as well as our management's
expectations, beliefs, intentions, plans, estimates or projections relating to
the future, are forward-looking statements within the meaning of these laws. Our
management believes that these forward-looking statements are reasonable and are
based on reasonable assumptions and forecasts. However, these forward-looking
statements are subject to a number of risks and uncertainties. As a result,
actual results may vary materially from those anticipated by the forward-looking
statements.

         Among the important factors that could cause actual results to differ
materially are the risk factors described below. You should read these risk
factors and the other cautionary statements made in this document as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-K.

         You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this report. Except as required
by law, we undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.

         You should carefully consider the following risk factors. Any of the
following risks could seriously harm our business, financial condition, cash
flows and results of operations and cause the value of our common stock to
decline. The risks and uncertainties described below are those that we currently
believe may materially affect us. Additional risks and uncertainties that we are
currently unaware of or that we currently consider to be immaterial may also
become important factors that affect us.

OUR OPERATING RESULTS WILL VARY FROM PERIOD TO PERIOD. IN ADDITION, WE HAVE
EXPERIENCED LOSSES IN THE PAST AND MAY NEVER ACHIEVE CONSISTENT PROFITABILITY.

         Our operating results will vary significantly from quarter to quarter
and from year to year. Although we had net income of $8.0 million and $24.2
million for the years 2003 and 2002, we incurred a net loss of $(2.0) million
for the December 2003 quarter. Prior to 2002, we had consistently experienced
net losses. Our net loss was $(27.8) million for the year ended December 31,
2001 and $(78.1) million for the year ended December 31, 2000.

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<PAGE>

         Our operating results have been and/or may be influenced significantly
         by factors such as:

     -   release of new products, product upgrades and services, and the rate of
         adoption of these products and services by new and existing customers;

     -   timing, cost and success or failure of our new product and service
         introductions and upgrade releases;

     -   length of sales and delivery cycles;

     -   size and timing of orders for our products and services;

     -   changes in the mix of products and/or services sold;

     -   availability of specified computer hardware for resale;

     -   deferral and/or realization of deferred software license and system
         revenues according to contract terms;

     -   interpretations of accounting regulations, principles or concepts that
         are or may be considered relevant to our business arrangements and
         practices;

     -   changes in customer purchasing patterns;

     -   changing economic, political and regulatory conditions, particularly
         with respect to the IT-spending environment;

     -   competition, including alternative product and service offerings, and
         price pressure;

     -   customer attrition;

     -   timing of and charges or costs associated with mergers, acquisitions
         or other strategic events or transactions, completed or not completed;

     -   timing, cost and level of advertising and promotional programs;

     -   changes of accounting estimates and assumptions used to prepare the
         prior periods' financial statements and accompanying notes, and
         management's discussion and analysis of financial condition and results
         of operations (e.g., our valuation of assets and estimation of
         liabilities); and

     -   uncertainties concerning threatened, pending and new litigation against
         us, including related professional services fees.

         In addition, we operate with a minimal amount of software licensing and
system sales backlog. Therefore, quarterly and annual revenues and operating
results are highly dependent on the volume and timing of the signing of license
agreements and product deliveries during each quarter, which are very difficult
to forecast. A significant portion of our quarterly sales of software product
licenses and computer hardware is concluded in the last month of the fiscal
quarter, generally with a concentration of our quarterly revenues earned in the
final ten business days of that month. Also, our projections for revenues and
operating results include significant sales of new product and service
offerings, including our new image management systems, AMICAS(R) Vision Series
PACS, our new radiology information system, RadConnect(R) RIS, and our
Intuition(TM) product line of practice management and electronic medical records
systems, which may not be realized. Due to these and other factors, our revenues
and operating results are very difficult to forecast. A major portion of our
costs and expenses, such as personnel and facilities, is of a fixed nature and,
accordingly, a shortfall or decline in quarterly and/or annual revenues
typically results in lower profitability or losses. As a result, comparison of
our period-to-period financial performance is not necessarily meaningful and
should not be relied upon as an indicator of future performance. Due to the many
variables in forecasting our revenues and operating results, it is likely that
our results for a particular reporting period(s) will not meet our expectations
or the expectations of public market analysts or investors. Failure to attain
these expectations would likely cause the price of our common stock to decline.

WE MAY FAIL TO REALIZE THE LONG-TERM FINANCIAL BENEFITS THAT WE ANTICIPATE WILL
RESULT FROM OUR ACQUISITION OF AMICAS.

         Although we expect the 2004 operating results of AMICAS to dilute our
consolidated results of operations for 2004, we anticipate that in 2005 AMICAS
will contribute positive results of operations. Our expectations are subject to
significant risks and uncertainties including:

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     -   our ability to retain AMICAS' key personnel or integrate them into our
         operations. In particular, the loss of these employees would compromise
         the value of the AMICAS client base and/or its software products and
         technologies;

     -   our ability to integrate the RIS and PACS products as may be, and/or to
         the extent, required by the marketplace, including our ability to
         deliver the related professional services;

     -   our ability to sell AMICAS products and services into the imaging
         center market, including to our existing radiology customers;

     -   our ability to execute on our strategy and realize our revenue goals
         and control costs and expenses relating to the acquisition;

     -   our ability to coordinate the business cultures of the two
         organizations;

     -   the integrity of the intellectual property of AMICAS;

     -   continued compliance with all government laws, rules and regulations
         for all applicable products;

     -   dilution to existing stockholders if we issue equity securities in
         order to satisfy the payment of earn-out related consideration, if any;
         and

     -   our ability to satisfy earn-out obligations or a portion thereof, if
         any, through the use of cash on hand and/or, subject to availability,
         borrowed funds.

IF OUR NEW PRODUCTS, INCLUDING PRODUCT UPGRADES, AND SERVICES DO NOT ACHIEVE
SUFFICIENT MARKET ACCEPTANCE, OUR BUSINESS, FINANCIAL CONDITION, CASH FLOWS,
REVENUES AND OPERATING RESULTS WILL SUFFER.

         The success of our business will depend in large part on the market
acceptance of:

     -   new products and services, such as our medical image management
         systems, our radiology information system, or RIS, and our
         Intuition(TM) product line, existing products and services; and

     -   enhancements to our existing products and services.

         There can be no assurance that our clients will accept any of these
products, product upgrades, or services. In addition, there can be no assurance
that any pricing strategy that we implement for any of our new products, product
upgrades, or services will be economically viable or acceptable to our target
markets. Failure to achieve significant penetration in our target markets with
respect to any of our new products, product upgrades, or services could have a
material adverse effect on our business.

         Achieving market acceptance for our new products, product upgrades and
services is likely to require substantial marketing and service efforts and the
expenditure of significant funds to create awareness and demand by participants
in the healthcare industry. In addition, deployment of new or newly integrated
products or product upgrades may require the use of additional resources for
training our existing sales force and customer service personnel and for hiring
and training additional sales and customer service personnel. There can be no
assurance that the revenue opportunities for our new products, product upgrades
and services will justify the amounts that we spend for their development,
marketing and rollout.

         If we are unable to sell our new and next-generation software products
to healthcare providers that are in the market for healthcare information and/or
image management systems, such inability will likely have a material adverse
effect on our business, revenues, operating results, cash flows and financial
condition. If new software sales do not materialize, our maintenance and
electronic data interchange, or EDI, services revenues can be expected to
decrease over time due to the combined effects of attrition of existing clients
and a shortfall in new client additions.

OUR BUSINESS COULD SUFFER IF OUR PRODUCTS AND SERVICES CONTAIN ERRORS,
EXPERIENCE FAILURES, RESULT IN LOSS OF OUR CUSTOMERS' DATA OR DO NOT MEET
CUSTOMER EXPECTATIONS.

         The products and services that we offer are inherently complex. Despite
testing and quality control, we cannot be certain that errors will not be found
in prior, current or future versions, or enhancements of our products

                                       16

<PAGE>

and services. We also cannot assure you that our products and services will not
experience partial or complete failure, especially with respect to our new
product or service offerings. It is also possible that as a result of any of
these errors and/or failures, our customers may suffer loss of data. The loss of
business, medical, diagnostic, or patient data or the loss of the ability to
process data for any length of time may be a significant problem for some of our
customers who have time-sensitive or mission-critical practices. We could face
breach of warranty or other claims or additional development costs if our
software contains errors, if our customers suffer loss of data or are unable to
process their data, if our products and/or services experience failures, do not
perform in accordance with their documentation, or do not meet the expectations
that our customers have for them. Even if these claims do not result in
liability to us, investigating and defending against them could be expensive and
time-consuming and could divert management's attention away from our operations.
In addition, negative publicity caused by these events may delay or reduce
market acceptance of our products and services, including unrelated products and
services. Such errors, failures or claims could materially adversely affect our
business, revenues, operating results, cash flows and financial condition.

OUR COMPETITIVE POSITION COULD BE SIGNIFICANTLY HARMED IF WE FAIL TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES.

         Our ability to compete depends in part on our ability to protect our
intellectual property rights. We rely on a combination of copyright, trademark,
and trade secret laws and restrictions on disclosure to protect the intellectual
property rights related to our software applications. Most of our software
technology is not patented and existing copyright laws offer only limited
practical protection. In addition, prior to 2002 we did not generally enter into
confidentiality agreements with our employees. Although current practices
require all new employees to sign confidentiality agreements, not all existing
employees have signed agreements. We cannot assure you that the legal
protections that we rely on will be adequate to prevent misappropriation of our
technology.

         Further, we may need to bring lawsuits or pursue other legal or
administrative proceedings to enforce our intellectual property rights.
Generally, lawsuits and proceedings of this type, even if successful, are
costly, time consuming and could divert our personnel and other resources away
from our business, which could harm our business.

         Moreover, these protections do not prevent independent third-party
development of competitive technology or services. Unauthorized parties may
attempt to copy or otherwise obtain and use our technology. Monitoring use of
our technology is difficult, and we cannot assure you that the steps we have
taken will prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States.

INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US COULD BE COSTLY TO DEFEND
AND COULD DIVERT OUR MANAGEMENT'S ATTENTION AWAY FROM OUR BUSINESS.

         As the number of software products and services in our target markets
increases and as the functionality of these products and services overlaps, we
may become increasingly subject to the threat of intellectual property
infringement claims. Any infringement claims alleged against us, regardless of
their merit, can be time consuming and expensive to defend. Infringement claims
may also divert our management's attention and resources and could also cause
delays in the delivery of our applications to our customers. Settlement of any
infringement claims could require us to enter into royalty or licensing
agreements on terms that are costly or cost-prohibitive. If a claim of
infringement against us were to be successful and if we were unable to license
the infringing or similar technology or redesign our products and services to
avoid infringement, our business, financial condition, cash flows, and results
of operations could be harmed.

                                       17

<PAGE>

WE MAY UNDERTAKE ADDITIONAL ACQUISITIONS, WHICH MAY INVOLVE SIGNIFICANT
UNCERTAINTIES AND MAY INCREASE COSTS, DIVERT MANAGEMENT RESOURCES FROM OUR CORE
BUSINESS ACTIVITIES, OR WE MAY FAIL TO REALIZE ANTICIPATED BENEFITS OF SUCH
ACQUISITIONS.

         We may undertake additional acquisitions if we identify companies with
desirable applications, services, businesses or technologies. We may not achieve
any of the anticipated synergies and other benefits that we expected to realize
from these acquisitions. In addition, software companies depend heavily on their
employees to maintain the quality of their software offerings and related
customer services. If we are unable to retain acquired companies' personnel or
integrate them into our operations, the value of the acquired products,
technology, and/or client base could be compromised. The amount and timing of
the expected benefits of any acquisition are also subject to other significant
risks and uncertainties. These risks and uncertainties include:

     -   our ability to cross-sell products and services to customers with which
         we have established relationships and those with which the acquired
         business had established relationships;

     -   diversion of our management's attention from our existing business;

     -   potential conflicts in customer and supplier relationships;

     -   our ability to coordinate organizations that are geographically diverse
         and may have different business cultures;

     -   dilution to existing stockholders if we issue equity securities in
         connection with acquisitions;

     -   assumption of liabilities or other obligations in connection with the
         acquisition; and

     -   compliance with regulatory requirements.

         Further, our profitability may also suffer because of
acquisition-related costs and/or amortization or impairment of intangible
assets.

TECHNOLOGY SOLUTIONS MAY CHANGE FASTER THAN WE ARE ABLE TO UPDATE OUR
TECHNOLOGIES, WHICH COULD CAUSE A LOSS OF CUSTOMERS AND HAVE A NEGATIVE IMPACT
ON OUR REVENUES.

         The information management technology market in which we compete is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and the frequent introduction of new services, software and
other products. Our success depends partly on our ability to:

     -   develop new or enhance existing products and services to meet our
         customers' changing needs in a timely and cost-effective way; and

     -   respond effectively to technological changes, new product offerings,
         product enhancements and new services of our competitors.

         We cannot be sure that we will be able to accomplish these goals. Our
development of new and enhanced products and services may take longer than
originally expected, require more testing than originally anticipated and
require the acquisition of additional personnel and other resources. In
addition, there can be no assurance that the products and/or services we develop
or license will be able to compete with the alternatives available to our
customers. Our competitors may develop products or technologies that are better
or more attractive than our products or technologies, or that may render our
products or technologies obsolete. If we do not succeed in adapting our
products, technology and services or developing new products, technologies and
services, our business could be harmed.

THE NATURE OF OUR PRODUCTS AND SERVICES EXPOSES US TO PRODUCT LIABILITY CLAIMS
THAT MAY NOT BE ADEQUATELY COVERED BY INSURANCE OR CONTRACTUAL INDEMNIFICATION.

         As a product and service provider in the healthcare industry, we
operate under the continual threat of product liability claims being brought
against us. Errors or malfunctions with respect to our products or services
could result in product liability claims. In addition, certain agreements
require us to indemnify and hold others

                                       18

<PAGE>

harmless against certain matters. Although we believe that we carry adequate
insurance coverage against product liability claims, we cannot assure you that
claims in excess of our insurance coverage will not arise. In addition, our
insurance policies must be renewed annually. Although we have been able to
obtain what we believe to be adequate insurance coverage at an acceptable cost
in the past, we cannot assure you that we will continue to be able to obtain
adequate insurance coverage at an acceptable cost.

         In many instances, agreements which we enter into contain provisions
requiring the other party to the agreement to indemnify us against certain
liabilities. However, any indemnification of this type is limited, as a
practical matter, to the creditworthiness of the indemnifying party. If the
contractual indemnification rights available under such agreements are not
adequate, or inapplicable to the product liability claims that may be brought
against us, then, to the extent not covered by our insurance, our business,
operating results, cash flows and financial condition could be materially
adversely affected.

WE MAY BE SUBJECT TO CLAIMS RESULTING FROM THE ACTIVITIES OF OUR STRATEGIC
PARTNERS.

         We rely on third parties to provide services and products critical to
our business. For example, we use national clearinghouses in the processing of
insurance claims and we outsource some of our hardware maintenance services and
the printing and delivery of patient billings for our customers. We also have
relationships with certain third parties where these third parties serve as
sales channels through which we generate a portion of our revenues. Due to these
third-party relationships, we could be subject to claims as a result of the
activities, products, or services of these third-party service providers even
though we were not directly involved in the circumstances leading to those
claims. Even if these claims do not result in liability to us, defending against
and investigating these claims could be expensive and time-consuming, divert
personnel and other resources from our business and result in adverse publicity
that could harm our business.

WE ARE SUBJECT TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES, THE COMPLIANCE
WITH WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

       HIPAA

         Federal regulations impact the manner in which we conduct our business.
We have been, and may continue to be, required to expend additional resources to
comply with regulations under HIPAA. The total extent and amount of resources to
be expended is not yet known. Because some of these regulations are new and some
are not yet effective, there is uncertainty as to how they will be interpreted
and enforced.

         Although we have made, and will continue to make, a good faith effort
to ensure that we comply with, and that our go-forward products enable
compliance with, applicable HIPAA requirements, we may not be able to conform
all of our operations and products to such requirements in a timely manner, or
at all. The failure to do so could subject us to penalties and damages, as well
as civil liability and criminal sanctions to the extent we are a business
associate of a covered entity or regulated directly as a covered entity. In
addition, any delay in developing or failure to develop products and or deliver
services that would enable HIPAA compliance for our current and prospective
customers could put us at a significant disadvantage in the marketplace.
Accordingly, our business, and the sale of our products and services, could be
materially harmed by failures with respect to our implementation of HIPAA
regulations.

       Other E-Commerce Regulations

         We may be subject to additional federal and state statutes and
regulations in connection with offering services and products via the Internet.
On an increasingly frequent basis, federal and state legislators are proposing
laws and regulations that apply to Internet commerce and communications. Areas
being affected by these regulations include user privacy, pricing, content,
taxation, copyright protection, distribution, and quality of

                                       19

<PAGE>

products and services. To the extent that our products and services are subject
to these laws and regulations, the sale of our products and services could be
harmed.

         FDA

         The Food and Drug Administration, or FDA, is responsible for ensuring
the safety and effectiveness of medical devices under the 1976 Medical Device
Amendments to the Food, Drug and Cosmetic Act. Computer applications and
software are generally subject to regulation as medical devices, requiring
registration with the FDA, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing when
such products are intended to be used in the diagnosis, cure, mitigation,
treatment, or prevention of disease. Our PACS product is subject to FDA
regulation. If the FDA were to decide that any of our other products and
services should be subject to FDA regulation or, if in the future we were to
expand our application and service offerings into areas that may subject us to
further FDA regulation, the costs of complying with FDA requirements could be
substantial. Application of the approval or clearance requirements could create
delays in marketing, and the FDA could require supplemental filings or object to
certain of these products. FDA compliance efforts with regard to our PACS
product are time consuming, burdensome, and expensive, and any failure to comply
could have a material adverse effect on our business, revenues, operating
results, cash flows and financial condition.

CHANGES IN STATE AND FEDERAL LAWS RELATING TO CONFIDENTIALITY OF PATIENT MEDICAL
RECORDS COULD LIMIT OUR CUSTOMERS' ABILITY TO USE OUR SERVICES.

         The confidentiality of patient records and the circumstances under
which records may be released are already subject to substantial governmental
regulation. Although compliance with these laws and regulations is principally
the responsibility of the healthcare provider, under these current laws and
regulations patient confidentiality rights are evolving rapidly. In addition to
the obligations being imposed at the state level, there is also legislation
governing the dissemination of medical information at the federal level. The
federal regulations may require holders of this information to implement
security measures, which could entail substantial expenditures on our part.
Adoption of these types of legislation or other changes to state or federal laws
could materially affect or restrict the ability of healthcare providers to
submit information from patient records using our products and services. These
kinds of restrictions would likely decrease the value of our applications to our
customers, which could materially harm our business.

CHANGES IN THE REGULATORY AND ECONOMIC ENVIRONMENT IN THE HEALTHCARE INDUSTRY
COULD CAUSE US TO LOSE REVENUE AND INCUR SUBSTANTIAL COSTS TO COMPLY WITH NEW
REGULATIONS.

         The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operations of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could require us to make
unplanned enhancements of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our services by
our strategic partners and others. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level. These programs may contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in our
applications and services.

LARGER COMPETITORS AND CONSOLIDATION OF COMPETITORS COULD CAUSE US TO LOWER OUR
PRICES OR TO LOSE CUSTOMERS.

         Our principal competitors include both national and regional practice
management and clinical systems vendors. Until recently, larger, national
vendors have targeted primarily large healthcare providers. We believe

                                       20

<PAGE>

that the larger, national vendors may broaden their markets to include both
small and large healthcare providers. In addition, we compete with national and
regional providers of computerized billing, insurance processing and record
management services to healthcare practices. As the market for our products and
services expands, additional competitors are likely to enter this market. We
believe that the primary competitive factors in our markets are:

     -   product features and functionality;

     -   customer service, support and satisfaction;

     -   price;

     -   ongoing product enhancements; and

     -   vendor reputation and stability.

         We have experienced, and we expect to continue to experience, increased
competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
us. Such competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote greater resources to
the development, promotion and sale of their products than us. Also, certain
current and potential competitors have greater name recognition or more
extensive customer bases that could be leveraged, thereby gaining market share
to our detriment. We expect additional competition as other established and
emerging companies enter into the practice management and clinical software
markets and as new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer orders, reduced
gross margins and loss of market share, any of which would materially adversely
affect our business, operating results, cash flows and financial condition.

         Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their abilities to address the needs of our existing and
prospective customers. Further competitive pressures, such as those resulting
from competitors' discounting of their products, may require us to reduce the
price of our software and complementary products, which would materially
adversely affect our business, operating results, cash flows and financial
condition. There can be no assurance that we will be able to compete
successfully against current and future competitors, and our failure to do so
would have a material adverse effect upon our business, operating results, cash
flows and financial condition.

WE DEPEND ON PARTNERS/SUPPLIERS FOR DELIVERY OF ELECTRONIC DATA INTERCHANGE
(E.G., INSURANCE CLAIMS PROCESSING AND INVOICE PRINTING SERVICES), COMMONLY
REFERRED TO AS EDI, HARDWARE MAINTENANCE SERVICES AND SALES LEAD GENERATION. ANY
FAILURE, INABILITY OR UNWILLINGNESS OF THESE SUPPLIERS TO PERFORM THESE SERVICES
COULD NEGATIVELY IMPACT CUSTOMER SATISFACTION AND REVENUES.

         We use various third-party suppliers to provide our customers with EDI
transactions and on-site hardware maintenance. EDI revenues would be
particularly vulnerable to a supplier failure because EDI revenues are earned on
a daily basis. Although other vendors are available in the marketplace to
provide these services, it would take time to switch suppliers. If these
suppliers were unable to perform such services or if the quality of these
services declined, it could have a negative impact on customer satisfaction and
ultimately result in a decrease in our revenues.

OUR SYSTEMS MAY BE VULNERABLE TO SECURITY BREACHES AND VIRUSES.

         The success of our strategy to offer our EDI services and Internet
solutions depends on the confidence of our customers in our ability to securely
transmit confidential information. Our EDI services and Internet solutions rely
on encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. We may not
be able to stop unauthorized attempts to gain access to or disrupt the
transmission of communications by our customers. Anyone who is able to
circumvent our security measures could misappropriate confidential user
information or interrupt our, or our customers', operations. In

                                       21

<PAGE>

addition, our EDI and Internet solutions may be vulnerable to viruses, physical
or electronic break-ins, and similar disruptions. Any failure to provide secure
electronic communication services could result in a lack of trust by our
customers causing them to seek out other vendors, and/or damage our reputation
in the market making it difficult to obtain new customers.

IF THE MARKETPLACE DEMANDS SUBSCRIPTION PRICING AND/OR APPLICATION SERVICE
PROVIDER, OR ASP, DELIVERED OFFERINGS, OUR REVENUES MAY BE ADVERSELY IMPACTED.

         We currently derive substantially all of our revenues from traditional
software license, maintenance and service fees, as well as from the resale of
computer hardware. Today, customers pay an initial license fee for the use of
our products, in addition to a periodic maintenance fee. If the marketplace
demands subscription pricing and/or ASP-delivered offerings, we may be forced to
adjust our strategy accordingly, by offering a higher percentage of our products
and services through these means. Shifting to subscription pricing and/or
ASP-delivered offerings could materially adversely impact our financial
condition, cash flows and quarterly and annual revenues and results of
operations, as our revenues would initially decrease substantially. We cannot
assure you that the marketplace will not embrace subscription pricing and/or
ASP-delivered offerings.

WE STRUCTURED THE SPIN-OFF OF PRACTICEWORKS AS A TAX-FREE TRANSACTION AND
PRACTICEWORKS AGREED TO INDEMNIFY US FOR ANY TAX LIABILITIES ARISING OUT OF THE
TRANSACTION THAT ARE ATTRIBUTABLE TO ITS ACTIONS. IF THE SPIN-OFF DOES NOT
QUALIFY AS A TAX-FREE TRANSACTION, WE MAY BE SUBJECT TO LIABILITIES AND WE
CANNOT ASSURE YOU THAT PRACTICEWORKS OR ITS SUCCESSORS WILL HONOR ITS
INDEMNIFICATION OBLIGATIONS.

         In March 2001, we spun-off our former dental practice management
software business, PracticeWorks, Inc. The spin-off of PracticeWorks was
structured to qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code of 1986. Section 355 contains certain requirements that
must be complied with in order for the spin-off to qualify for tax-free
treatment. Failure to comply with those restrictions could cause us to incur
significant liabilities. PracticeWorks or its successors has generally agreed to
indemnify us under certain circumstances to the extent any action or omission on
its part contributes to a determination by the Internal Revenue Service that the
spin-off was not a tax-free transaction. However, we cannot assure you that
PracticeWorks or its successors will have sufficient resources to fulfill its
indemnification obligations and even if it had the resources, we cannot assure
you that PracticeWorks or its successors will not refute its indemnifications
altogether. In either case, if we are not indemnified, we may incur substantial
liabilities, which could have a material adverse effect on our business,
financial condition, cash flows and results of operations.

OUR GROWTH COULD BE LIMITED IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL.

         We believe that our success depends largely on our ability to attract
and retain highly skilled technical, managerial and sales personnel to develop,
sell and implement our products and services. Individuals with the information
technology, managerial and selling skills we need to further develop, sell and
implement our products and services are in short supply and competition for
qualified personnel is particularly intense. We may not be able to hire the
necessary personnel to implement our business strategy, or we may need to pay
higher compensation for employees than we currently expect. We cannot assure you
that we will succeed in attracting and retaining the personnel we need to
continue to grow and to implement our business strategy. In addition, we depend
on the performance of our executive officers and other key employees. The loss
of any member of our senior management team could negatively impact our ability
to execute our business strategy.

IF OUR INTERPRETATION OF THE ACCOUNTING PRONOUNCEMENTS REGARDING REVENUE
RECOGNITION IS NOT CORRECT OR IF THE REGULATORS OF ACCOUNTING STANDARDS MODIFY
OR ISSUE NEW PRONOUNCEMENTS, THEN OUR BUSINESS AND FINANCIAL STATEMENTS COULD BE
ADVERSELY AFFECTED.

         Based on our reading and interpretations of Statement of Positions
81-1, 97-2 and 98-9 and related or relevant guidance, principles or concepts,
issued by, among other authorities, the American Institute of Certified

                                       22

<PAGE>

Public Accountants, the Financial Accounting Standards Board, and the United
States Securities and Exchange Commission (e.g., Staff Accounting Bulletin Nos.
101 and 104), we believe our current sales and licensing contract terms and
business arrangements have been properly reported. However, there continue to be
issued interpretations and guidance for applying the relevant standards to a
wide range of sales and licensing contract terms and business arrangements that
are prevalent in the software industry. Future interpretations or changes by the
regulators of existing accounting standards or changes in our business practices
could result in future changes in our revenue recognition accounting policies
and practices that could have a material adverse effect on our business,
financial condition, cash flows, revenues and results of operations.

                                   * * * * * *

ACCESS TO OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

         Our Internet address is www.vitalworks.com. The information on our
website is not a part of, or incorporated into, this Annual Report on Form 10-K.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports, filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
available, without charge, on our website as soon as reasonably practicable
after they are filed electronically with, or otherwise furnished to, the
Securities and Exchange Commission.

ITEM 2. PROPERTIES

         We currently occupy and lease nine facilities. These facilities are
located in: Alpharetta, Georgia; Beaverton, Oregon; Birmingham, Alabama;
Minneapolis and Rochester, Minnesota; Daytona Beach, Florida; Carlsbad,
California; Ridgefield, Connecticut; and Boston, Massachusetts. We believe that
our existing facilities are adequate for our current needs; however, if
additional space is needed in the future, we believe that suitable additional or
alternative space will be available on commercially reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS

         From time to time, in the normal course of business, various claims are
made against us. Except for proceedings described below, there are no material
proceedings to which we are a party, and management is unaware of any material
contemplated actions against us.

         In August 2003, we were served with a summons and complaint as part of
a bankruptcy proceeding relating to a former business associate of ours. The
complaint alleges that in 2001, we received a preference payment from the
business associate and seeks to avoid and recover the $.8 million payment made
to us.

         On or about July 31, 2003, a Consolidated Class Action Complaint was
filed in the United States District Court for the District of Connecticut on
behalf of purchasers of the common stock of VitalWorks Inc. during the class
period of January 24, 2002 to October 23, 2002. The defendants are VitalWorks
and three of our individual officers and directors. Plaintiffs have asserted
claims against the defendants under Section 10(b) of the Securities Exchange Act
of 1934 and against the individual defendants under Section 20(a) of the
Exchange Act. According to the Consolidated Complaint, the defendants made
materially false and misleading statements during the Class Period concerning
our products and financial forecasts. In addition, the Consolidated Complaint
alleges that the individual defendants acted as controlling persons in
connection with our alleged securities law violations. Compensatory damages in
an unspecified amount, pre-judgment and post-judgment interest, costs and
expenses, including reasonable attorneys' fees and experts' fees and other
costs, as well as other relief the Court may deem just and proper are sought. On
November 14, 2003, the defendants filed with the Court a motion to dismiss the
Consolidated Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and
(9)(b). The motion has been

                                       23

<PAGE>

fully briefed and is awaiting disposition by the Court. At this time, discovery
is automatically stayed under the Private Securities Litigation Reform Act and
no class has been certified.

         On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana and the case was subsequently transferred to the
Northern District Court of Georgia. The complaint alleges state securities law
violations, breach of contract, and fraud claims against the defendants. The
complaint does not specify the amount of damages sought by plaintiffs, but seeks
rescission of a transaction that the plaintiffs value at $5 million, as well as
punitive damages and reimbursement for the plaintiffs' attorneys' fees and
associated costs and expenses of the lawsuit. On October 15, 2001, the
plaintiffs' request for a preliminary injunction to preserve their remedy of
rescission was denied and part of their complaint was dismissed. The plaintiffs'
subsequent appeal of this decision was denied. The plaintiffs have retained new
counsel and have served a second amended complaint upon the Company which added,
among other things, a claim for Georgia RICO violations. On August 18, 2003, we
filed with the Court a partial motion to dismiss the second amended complaint
which motion was granted in part and denied in part on January 9, 2004.
Subsequent to year-end, we served an answer to the second amended complaint.

         While management believes that we have meritorious defenses in each of
the foregoing matters and we intend to pursue our positions vigorously,
litigation is inherently subject to many uncertainties. Thus, the outcome of
these matters is uncertain and could be adverse to us. Depending on the amount
and timing of an unfavorable resolution(s) of the contingencies, it is possible
that our financial position, future results of operations or cash flows could be
materially affected in a particular reporting period(s).

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

         In the fourth quarter of the year covered by this report, no matter was
submitted to a vote of security holders through the solicitation of proxies or
otherwise.

                                       24

<PAGE>

                                     PART II

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

         On March 6, 2001, we changed our trading symbol on the Nasdaq National
Market to "VWKS." From January 29, 1999 until March 5, 2001, our common stock
was traded on the Nasdaq National Market under the trading symbol "INCX." From
July 10, 1997 until January 29, 1999, our common stock was traded on the
American Stock Exchange under the symbol "INC." On March 8, 2004, the last
reported sale price of our common stock on the Nasdaq National Market was $4.13
and there were 1,235 record holders of our common stock. The following table
sets forth the high and low sales price per share of our common stock for the
periods indicated, as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002                         HIGH       LOW
---------------------------------------------------------------------
<S>                                                 <C>       <C>
First Quarter..................................     $ 6.45    $  4.25
Second Quarter.................................       9.00       5.31
Third Quarter..................................       8.55       5.68
Fourth Quarter.................................       8.20       2.82
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003                         HIGH       LOW
---------------------------------------------------------------------
First Quarter..................................     $ 4.39    $  3.60
Second Quarter.................................       4.02       3.26
Third Quarter..................................       5.73       3.56
Fourth Quarter.................................       5.89       4.21
---------------------------------------------------------------------
2004                                                 HIGH       LOW
---------------------------------------------------------------------
First Quarter (through March 8)                     $ 5.16    $  3.40
</TABLE>

         Dividend Policies. We have never declared or paid any cash dividends on
our common stock. We currently intend to retain all available funds and any
future earnings for use in the operation and expansion of our business and do
not anticipate declaring or paying any cash dividends in the foreseeable future.
Any future determination as to the declaration and payment of dividends will be
at the discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other
factors that our board of directors considers relevant. In addition, our credit
agreement with Wells Fargo Foothill, Inc., a wholly-owned subsidiary of Wells
Fargo & Company, prohibits payment of dividends.

         Sales of Unregistered Shares. In 2003, we did not issue any
unregistered shares of our common stock.

                                       25

<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------------------------------
                                                               2003          2002          2001          2000          1999
                                                             ---------     ---------     ---------     ---------     ---------
                                                                           (in thousands, except per share data)
<S>                                                          <C>           <C>           <C>           <C>           <C>
STATEMENTS OF OPERATIONS DATA

REVENUES
    Maintenance and services ............................    $  87,790     $  84,808     $  85,181     $  79,984     $  87,127
    Software licenses and system sales ..................       23,729        30,003        21,872        21,682        61,916
                                                             ---------     ---------     ---------     ---------     ---------
Total revenues ..........................................      111,519       114,811       107,053       101,666       149,043
                                                             ---------     ---------     ---------     ---------     ---------

COSTS AND EXPENSES
Cost of revenues:
    Maintenance and services ............................       22,376        21,970        19,401        19,861        16,799
    Software licenses and system sales, includes
      amortization of software costs
      of $1,873 in 2003 and $911 in 2002.................        9,493         8,749         6,267         8,886        23,160
Selling, general and administrative .....................       50,682        49,716        54,371        70,688        76,104
Research and development ................................       15,891        13,535        10,871        13,833        11,470
Depreciation and amortization ...........................        2,460         2,572        26,207        27,966        11,206
Acquired in-process technology ..........................          750
Impairment charges (credits) and other nonrecurring costs          490        (6,000)        8,252         6,632         4,743
Restructuring costs (credits) ...........................          332          (501)         (425)        9,338         4,124
Loss on headquarters building held for sale .............                                    1,375
Merger costs ............................................                                                                3,105
Compensatory stock awards ...............................                                                                1,003
                                                             ---------     ---------     ---------     ---------     ---------
                                                               102,474        90,041       126,319       157,204       151,714
                                                             ---------     ---------     ---------     ---------     ---------
OPERATING INCOME (LOSS) .................................        9,045        24,770       (19,266)      (55,538)       (2,671)
Interest expense, net ...................................         (882)         (458)       (3,170)       (2,978)       (2,178)
Debt extinguishment costs (a) ...........................                                                               (4,779)
                                                             ---------     ---------     ---------     ---------     ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS,
    BEFORE INCOME TAXES .................................        8,163        24,312       (22,436)      (58,516)       (9,628)
Provision (benefit) for income taxes ....................          200           162                      (9,843)       (3,526)
                                                             ---------     ---------     ---------     ---------     ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................        7,963        24,150       (22,436)      (48,673)       (6,102)
Income (loss) from discontinued operations,
    net of (benefit) provision for income taxes .........                                   (5,384)      (29,440)        2,308
                                                             ---------     ---------     ---------     ---------     ---------
NET INCOME (LOSS) .......................................    $   7,963     $  24,150     $ (27,820)    $ (78,113)    $  (3,794)
                                                             =========     =========     =========     =========     =========

EARNINGS (LOSS) PER SHARE - BASIC
    Continuing operations ...............................    $    0.18     $    0.58     $   (0.60)    $   (1.45)    $   (0.22)
    Discontinued operations .............................                                    (0.14)        (0.88)         0.08
                                                             ---------     ---------     ---------     ---------     ---------
                                                             $    0.18     $    0.58     $   (0.74)    $   (2.33)    $   (0.14)
                                                             =========     =========     =========     =========     =========

EARNINGS (LOSS) PER SHARE - DILUTED
    Continuing operations ...............................    $    0.17     $    0.49     $   (0.60)    $   (1.45)    $   (0.22)
    Discontinued operations .............................                                    (0.14)        (0.88)         0.08
                                                             ---------     ---------     ---------     ---------     ---------
                                                             $    0.17     $    0.49     $   (0.74)    $   (2.33)    $   (0.14)
                                                             =========     =========     =========     =========     =========

CASH PROVIDED BY OPERATING ACTIVITIES ...................    $   2,180     $  20,758     $  18,230     $  12,756     $   3,421
</TABLE>

(a) In connection with the adoption of FASB Statement 145, debt extinguishment
costs have been reclassified from extraordinary item to income (loss) from
continuing operations.

                                       26

<PAGE>

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                    -------------------------------------------------------------
                                                      2003         2002         2001         2000         1999
                                                    ---------    ---------    ---------    ---------    ---------
                                                                            (in thousands)
<S>                                                 <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA

Cash and cash equivalents ......................    $  20,128    $  39,474    $  12,988    $   5,969    $  14,309
Working capital (deficit) ......................        9,548       27,220         (914)     (11,144)      25,993
Total assets ...................................      132,576      117,131       92,949      145,994      196,271
Total long-term debt ...........................       29,757       18,941       30,553       37,784       32,142
Convertible, redeemable preferred stock issuable                                              10,000
Stockholders' equity ...........................       70,662       60,433       26,060       58,450      135,339
</TABLE>

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

FORWARD-LOOKING STATEMENTS AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

         Please see Part I, Item 1 above for an important discussion about
forward-looking statements and risk factors that may affect future results.

OVERVIEW

         VitalWorks Inc. is a leading provider of information and image
management technology and services targeted to healthcare practices and
organizations throughout the United States. We provide IT-based,
specialty-specific solutions for imaging centers and hospital radiology
departments, and medical practices specializing in anesthesiology,
ophthalmology, emergency medicine, plastic surgery, dermatology, and internal
medicine. We also offer enterprise-level systems designed for large physician
groups and networks. Our range of software solutions provide image management,
workflow management, and information management related to administrative,
financial, and clinical functions for physicians, radiologists and other
healthcare providers. We provide our clients with ongoing software support,
implementation, training, and electronic data interchange, or EDI, services for
patient billing and claims processing.

         Software license fees and system revenues are derived from the sale of
software product licenses and computer hardware. Maintenance and services
revenues come from providing ongoing product support, implementation, training
and transaction processing services. Approximately 65% of our total revenues
were of a recurring nature in 2003 and 2002.

         In 2003 and 2002, approximately 70% of our total revenues were derived
from the medical practices market and 30% from the radiology market.

                                       27

<PAGE>

RESULTS OF OPERATIONS

         On November 25, 2003, we acquired 100% of the outstanding capital stock
of AMICAS, Inc., a developer of Web-based diagnostic image management software
solutions, for $31 million in cash, including direct transaction costs. Commonly
referred to in the marketplace as PACS (picture archiving and communication
systems), these software solutions allow radiologists and other physicians to
examine, store, and distribute digitized medical images. We financed $15 million
of the purchase price through the use of our credit line. The merger agreement
provides for an additional purchase payment of up to $25 million based on
attainment of specified earnings targets through 2004 which, if paid, would be
recognized as additional goodwill. In addition, we assumed incentive plans for
certain management employees of AMICAS that provide for up to $5 million of
compensation, tied to the attainment of the earnings targets for the contingent
earn-out period. The addition of AMICAS provides us with the ability to offer
radiology/imaging center clients a comprehensive, integrated information and
image management solution, incorporating the key components of a complete
radiology data management system. Our 2003 results of operations include only
one month of operating results of AMICAS. For the month of December 2003, AMICAS
had total revenues of $.7 million, and a net loss of $(1.4) million which
included a $.8 million charge for acquired in-process technology, and
depreciation and amortization expense of $.2 million.

REVENUES

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                      -----------------------------------------------------------
                                         2003        CHANGE        2002       CHANGE       2001
-------------------------------------------------------------------------------------------------
                                                            (dollars in thousands)
<S>                                   <C>          <C>          <C>          <C>         <C>
Maintenance and services              $  87,790          3.5%   $  84,808        (0.4)%  $ 85,181
Percentage of total revenues               78.7%                     73.9%                   79.6%
-------------------------------------------------------------------------------------------------
Software licenses and system sales    $  23,729        (20.9)%  $  30,003        37.2%   $ 21,872
Percentage of total revenues               21.3%                     26.1%                   20.4%
-------------------------------------------------------------------------------------------------
</TABLE>

         We recognize software license revenues and system (computer hardware)
sales upon execution of the sales contract and delivery of the software
(off-the-shelf application software) and/or hardware. In all cases, however, the
fee must be fixed or determinable, collection of any related receivable must be
considered probable, and no significant post-contract obligations of ours shall
be remaining. Otherwise, we defer the sale until all of the requirements for
revenue recognition have been satisfied. Maintenance fees for routine client
support and unspecified product updates are recognized ratably over the term of
the maintenance arrangement. Training, implementation and EDI services revenues
are recognized as the services are performed. Most of our sales and licensing
contracts involve multiple elements, in which case, we allocate the total value
of the customer arrangement to each element based on the relative fair values of
the respective elements. The residual method is used to determine revenue
recognition with respect to a multiple-element arrangement when specific
objective evidence of fair value exists for all of the undelivered elements
(e.g., implementation, training and/or maintenance services), but does not exist
for one or more of the delivered elements of the contract (e.g., computer
software or hardware). The fair value of an element is determined by the average
price charged when that element is sold separately (e.g., the fair value of
maintenance services is determined based on the average renewal price charged to
clients for continued maintenance). If evidence of fair value cannot be
established for the undelivered element(s) of an arrangement, the total value of
the customer arrangement is deferred until the undelivered element(s) is
delivered or until objective evidence of fair value is established. In our
contracts and arrangements with our customers, we generally do not include
acceptance provisions, which would give the customer the right to accept or
reject the product after we ship it. However, if an acceptance provision is
included, revenue is recognized upon the customer's acceptance of the product,
which occurs upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period. In the December 2003 quarter, we entered
into

                                       28

<PAGE>

certain contracts that include customer acceptance provisions. These orders for
products and services were derived from the high end of our markets. We provide
allowances for estimated future returns and discounts (recorded as
contra-revenue), as well as bad debts, upon recognition of revenues.

         Recognition of revenues in conformity with generally accepted
accounting principles requires management to make judgments that affect the
timing and amount of reported revenues.

         If we were to adopt new, or change our current, business practices in
response to a preference from the market or otherwise, then our revenue
recognition practices may be subject to significant change to comply with the
requisite accounting principles. For example, subscription-type arrangements and
practices strictly for software services and support would result in the
recognition of revenues ratably over the term of the arrangement.

         The increase in maintenance and services revenues in 2003 is mainly
attributable to an increase in HIPAA-compliance implementation and training
services revenues of $4.8 million. This increase was partially offset by
declines in maintenance revenues of approximately $1 million relating to net
customer attrition, implementation and training services revenues of $.8 million
relating to product sales that were down 20.9% in 2003, and the loss of rental
revenue of $.8 million due to the sale of our former headquarters building in
August 2002. The HIPAA service revenues relate to the government's October 2003
compliance deadline regarding its electronic processing standards for most
healthcare transactions among physicians, payors, patients and other healthcare
industry participants. Accordingly, for the most part, these HIPAA related
services are no longer required.

         Excluding EDI services revenues of $1.6 million recognized in 2001 in
connection with the settlement of a contract dispute with an EDI supplier,
maintenance and services revenues in 2002 increased $1.2 million. The increase
is primarily attributable to (i) an increase in training and implementation
services revenues of $2.5 million, corresponding to the favorable trend in sales
of software licenses and systems, and (ii) additional EDI revenues, net of
customer attrition, of approximately $2.4 million, which reflect the conversion
of a number of customer accounts to direct billing by us for printing services
performed by certain third parties that, in the first nine months of 2001, had
been billed directly by the printing vendors. Our revised agreements with these
printers now call for us to bill our physician practices directly for printing
services and, in turn, remit a specified dollar amount per page to the printer.
Accordingly, based on the amended agreements, we recognize 100% of our direct
billings as revenue, compared to an amount that previously was net of the
printers' fees. Moreover, the increases were partly offset by (i) the loss of
revenues totaling $2.8 million earned in 2001 under agreements to promote
third-party product and services, which agreements were terminated in 2001, and
(ii) a $.9 million decline in maintenance revenues related to net customer
attrition.

         Software license and system revenues declined in 2003 primarily as a
result of a decrease in the number of license and systems sold (unit volume
versus, for example, price decreases), particularly software products marketed
to large physician group practices. The decline was partially offset by an
increase in software and system sales into the small-group market of $.8
million.

         We operate with a minimal amount of software licensing and system sales
backlog. Therefore, quarterly and annual revenues and operating results are
highly dependent on the volume and timing of the signing of license agreements
and product deliveries during each quarter, which are very difficult to
forecast. A significant portion of our quarterly sales of software product
licenses and computer hardware is concluded in the last month of the fiscal
quarter, generally with a concentration of our quarterly revenues earned in the
final ten business days of that month. Also, our projections for revenues and
operating results include significant sales of new product and service
offerings, including our new image management systems, AMICAS(R) Vision
Series PACS, our new radiology information system, RadConnect(R) RIS, and
our Intuition(TM) product line of practice management and electronic medical
records systems, which may not be realized. Due to these and other factors, our
revenues and operating results are very difficult to forecast. As a result,
comparison of our period-to-period financial

                                       29

<PAGE>

performance is not necessarily meaningful and should not be relied upon as an
indicator of future performance. Moreover, if new software sales do not
materialize, our maintenance and EDI services revenues can be expected to
decrease over time due to the combined effects of attrition of existing clients
and a shortfall in new client additions.

         In 2002, software license and system revenues rose primarily due to an
increase in the number of licenses and systems sold. This increase was led by
software sales made primarily to ambulatory imaging centers and radiology
practices.

COST OF REVENUES

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                          --------------------------------------------------------
                                            2003       CHANGE       2002       CHANGE          2001
--------------------------------------------------------------------------------------------------
                                                           (dollars in thousands)
<S>                                       <C>         <C>         <C>         <C>         <C>
Maintenance and services                  $ 22,376         1.8%   $ 21,970        13.2%   $ 19,401
Percentage of maintenance and services
revenues                                      25.5%                   25.9%                   22.8%
--------------------------------------------------------------------------------------------------
Software licenses and system sales        $  9,493         8.5%   $  8,749        39.6%   $  6,267
Percentage of software licenses and
system sales                                  40.0%                   29.2%                   28.7%
--------------------------------------------------------------------------------------------------
</TABLE>

         Cost of maintenance and services revenues consists primarily of the
cost of EDI insurance claims processing, outsourced hardware maintenance and EDI
billing and statement printing services, and postage. The increase in 2003
principally reflects the additional use of third parties for implementation and
training services.

         The increase in the cost of maintenance and services revenues in 2002
primarily reflects additional costs of EDI services incurred in connection with
the conversion of a number of customers to direct billing for printing services,
as discussed above regarding EDI revenues. In addition, in 2001 we recovered
certain EDI processing costs and recognized a credit of $.6 million in
connection with the contract settlement referred to above.

         Cost of software license and system revenues consists primarily of
costs incurred to purchase computer hardware, third-party software and other
items for resale in connection with sales of new systems and software and,
beginning in 2002, amortization of software product costs. The increase in 2003
is largely attributable to an increase in amortization of software costs of $1.0
million and $.5 million of additional software royalties. These increases were
partially offset by a decrease in computer hardware costs of $.7 million due to
a decline in computer hardware sales. In 2004, we anticipate approximately $2
million of amortization relating to software product assets from the acquisition
of AMICAS.

         In 2002, the increase in the cost of software license and systems
revenues is mainly attributable to $1.2 million in additional costs associated
with an increase in the number of computer hardware units sold, and amortization
of software product costs of $.9 million.

                                       30

<PAGE>

OPERATING EXPENSES

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                       --------------------------------------------------------
                                          2003         CHANGE     2002         CHANGE    2001
-----------------------------------------------------------------------------------------------
                                                       (dollars in thousands)
<S>                                    <C>         <C>         <C>         <C>         <C>
Selling, general and administrative    $ 50,682         1.9%   $ 49,716        (8.6)%  $ 54,371
Percentage of total revenues               45.4%                   43.3%                   50.8%
-----------------------------------------------------------------------------------------------
Research and development               $ 15,891        17.4%   $ 13,535        24.5%   $ 10,871
Percentage of total revenues               14.2%                   11.8%                   10.2%
-----------------------------------------------------------------------------------------------
Depreciation and amortization          $  2,460        (4.4)%  $  2,572       (90.2)%  $ 26,207
Percentage of total revenues                2.2%                    2.2%                   24.5%
-----------------------------------------------------------------------------------------------
</TABLE>

         Selling, general and administrative expenses include fixed and variable
compensation and benefits of all personnel (other than research and development
personnel), facilities, travel, communications, bad debt, legal, marketing,
insurance and other administrative expenses. The increase in 2003 is primarily
due to an increase in fixed compensation expense of $1.4 million ($.3 million
from AMICAS), as well as additional costs and expenses for marketing of $.6
million ($.3 million from AMICAS), for legal, travel, temporary staff and
software maintenance of $.3 million each, and charges of $.3 million relating to
merger and acquisition initiatives. The increase in fixed compensation is mainly
due to an increase in our employee base. These increases were partially offset
by decreases in variable compensation of $1.0 million and bad debt expense of
$1.2 million. Moreover, 2003 includes a credit of $.5 million that reflects the
favorable resolution of an outstanding matter involving a federally subsidized
research and development project dating back to 1997. The credit was recognized
through the reduction of certain accrued liabilities.

         In 2002, the decrease in selling, general and administrative expenses
was related to the savings that resulted from a major restructuring plan that we
initiated in August 2000. We closed 14 offices, the last five of which were
closed in March and April 2001, and our employee-base average was reduced to 639
for 2002, from 671 for 2001 and 882 for 2000. The decrease in 2002 also reflects
declines in legal fees of $2.0 million, bad debt expense of $.6 million and
contract labor costs of $.5 million.

         The increase in research and development expenses is mainly
attributable to additional personnel costs associated with our expanded research
and development activities, and additional third-party software developer fees.
In addition, for 2003, 2002 and 2001, we capitalized $1.7 million, $4.8 million,
and $4.6 million (or 9.5%, 26.1% and 29.7% of total research and development
expenditures) of third-party programmer fees, respectively, in conformity with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." The amounts
capitalized relate to our development of Web-based applications, including an
enterprise-wide electronic medical records system and a radiology information
system, or RIS, which is a workflow solution for medical imaging centers. We
amortize capitalized software development costs over the estimated economic life
of the products. Depending on the nature and success of the product, we
generally expect to amortize these deferred costs over a three- to five-year
period. Amortization commences when the product is made commercially available.
Two products under development were made commercially available in 2002. No
additional products were made commercially available in 2003. We expect three
new products to become commercially available by the end of 2004.

         The decrease in depreciation and amortization expense in 2003 reflects
the fact that certain assets became fully depreciated in 2002. The decline in
2002 was due primarily to the cessation of goodwill amortization in conformity
with Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." In 2001, the Financial Accounting Standards Board issued
Statement 142, which provides that, upon adoption, we

                                       31

<PAGE>

shall no longer amortize our goodwill assets. Rather, we are required to test
these assets for impairment of value on at least an annual basis. To date, the
results of our tests have not revealed an impairment of value. Pursuant to
Statement 142, we discontinued amortizing goodwill on January 1, 2002. In 2001,
depreciation and amortization expense consisted mainly of $23.1 million of
goodwill amortization. In 2004, we anticipate approximately $.7 million of
depreciation and amortization relating to certain intangible assets, and
property and equipment from the acquisition of AMICAS.

         Acquired in-process technology. In connection with the acquisition of
AMICAS, $.8 million of the purchase price was allocated to acquired in-process
technology based upon an independent appraisal and was charged to expense in the
December 2003 quarter.

         Impairment charges (credits) and other nonrecurring costs. In 2003, we
recognized an impairment charge of $.5 million relating to a medical image
distribution product that we abandoned in favor of a comparable solution offered
by AMICAS.

         In 2002, we received final payments from three former officers totaling
$12.1 million satisfying their outstanding loans from us, including interest.
Consequently, we recorded a credit of $6.0 million, reflecting a complete
reversal of the allowance for loan losses established in March 2001.

         In 2001, we recognized impairment charges and incurred other
nonrecurring costs of $8.3 million. These costs and expenses included the $6.0
million provision for loan losses relating to the notes receivable from former
officers, $.9 million for unused equity financing, $.8 million of executive
severance for separation benefits paid to our former chairman pursuant to the
terms of a mutual separation agreement and a pre-existing employment agreement,
and retention bonuses of $.2 million for terminated employees. As of March 31,
2001, management determined that collection was doubtful with respect to
approximately $6 million of the outstanding balance of the officer loans and,
accordingly, we recorded a valuation allowance and ceased accruing interest on
the loans.

         Restructuring costs (credits). In the fourth quarter of 2003, we
committed to restructuring our medical businesses through a plan of employee
reductions. Our work force was reduced by approximately 45 employees and, as a
result, we incurred a restructuring charge in 2003 of approximately $.3 million
associated with employee severance and other termination benefits. In 2002, we
recognized a credit of $.5 million reflecting a savings in connection with the
early termination of an office lease for a facility closed as part of a
restructuring plan announced in 2000. In 2001, we recorded credits of $.4
million resulting from changes in accounting estimates relating to facility
closure and employee severance costs incurred in 2000 in connection with the
restructuring plan.

         Loss on headquarters building held for sale. In 2001, we recorded an
impairment charge of $1.4 million relating to our former headquarters building
in Atlanta. We sold the building in August 2002 for proceeds of $6.3 million,
after closing costs. A portion of the proceeds from the sale was used to repay
the $5.5 million mortgage loan on the building.

                                       32

<PAGE>

INTEREST INCOME (EXPENSE)

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                ---------------------------------------------------
                                 2003      CHANGE      2002      CHANGE      2001
-----------------------------------------------------------------------------------
                                                 (dollars in thousands)
<S>                             <C>        <C>       <C>        <C>        <C>
Interest income                 $   273     (81.6)%  $ 1,480      163.3%   $    562

Interest expense                 (1,155)    (40.4)%   (1,938)     (48.1)%    (3,732)
-----------------------------------------------------------------------------------
</TABLE>

         The interest income comparisons primarily reflect interest recognized
in 2002 in connection with the recovery of the notes receivable from former
officers.

         Interest expense consists primarily of interest costs incurred in
connection with our outstanding term and real estate mortgage loans. As of
August 2002, the mortgage loans were repaid in full. The decrease in interest
expense is due to a decline in the average outstanding principal balance and
associated interest rate under our credit agreement. In 2004, we expect interest
expense to increase relating to the $15.0 million we borrowed in November 2003
in connection with the acquisition of AMICAS.

INCOME TAXES

         For 2003 and 2002, we recorded income tax provisions of $.2 million. No
income tax provision or benefit was recognized in 2001.

         Management has assessed the realizable value of our deferred tax assets
of $63.7 million and determined that a valuation allowance of $26.9 million was
necessary as of December 31, 2003 to, along with deferred tax liabilities of
$10.0 million, reduce the net deferred tax asset to $26.8 million, an amount
which we believe is more likely than not to be realized. In reaching this
conclusion, management noted that internal projections indicate that we will
generate sufficient taxable income to realize the net deferred tax assets within
four to five years.

         Our effective income tax rate was less than 3% for 2003 primarily due
to recognition of a portion of our deferred tax assets through changes in the
associated valuation allowance. We expect an income tax provision of
approximately $.3 million in 2004.

LOSS FROM DISCONTINUED OPERATIONS

         Discontinued operations represent the results of PracticeWorks, Inc., a
provider of practice management software for dental and oral surgery practices,
through March 5, 2001. On that date, we distributed 100% of the common stock of
PracticeWorks to our stockholders. For the period January 1, 2001 to March 5,
2001, our net loss from discontinued operations was $5.4 million. For further
details regarding the distribution of shares of PracticeWorks to our
stockholders, see Note D of the accompanying financial statements.

NET INCOME (LOSS)

         As a result of the above factors, our operating results for 2003
decreased to net income of $8.0 million from net income of $24.2 million in 2002
which had increased from a net loss of $(27.8) million in 2001.

         To date, the overall impact of inflation on us has not been material.

                                       33

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         To date, we have financed our business through positive cash flows from
operations and proceeds from the issuance of common stock and long-term
borrowings. For 2003, 2002 and 2001, we generated positive cash flows from
operating activities of $2.2 million, $20.8 million and $18.2 million,
respectively. The decline in 2003 primarily reflects the decrease in software
sales and the increases in research and development and selling, general and
administrative expenses (discussed above), as well as our payment to NDC,
discussed below. In October 2001, we expanded our August 2000 agreement with
National Data Corporation, or NDC, for outsourcing much of our patient statement
and invoice printing work. We continue, for a fee, to provide printing services
for our physicians under the subcontracting arrangement with NDC. The amended
arrangement, which extends until April 2009, provides for, among other things,
the attainment of certain quarterly transaction processing volume levels during
the term. In exchange, we received $7.9 million in cash in 2001 (in connection
with the August 2000 agreement, we had received $8.8 million), which represent
unearned discounts (see accompanying balance sheets) that are recognized as an
offset to cost of maintenance and services revenues as the minimum volume
commitments are fulfilled. In April 2003, our arrangement with NDC was amended
such that commencing in June 2003, the quarterly minimum volume commitments were
reduced. In turn, we refunded $4.3 million of unearned discounts. The new
quarterly commitment approximates 65% of our current aggregate transaction
level. These discount amounts, received and refunded, have been classified as
cash provided by and used in operating activities.

         Days sales outstanding (calculated as accounts receivable, net of
allowances, divided by annual revenues multiplied by 365 days) for 2003 was 54
days, up from 45 days for 2002 and 43 days for 2001. Assuming that we sell more
of our products and services to hospitals and large medical imaging centers, we
would expect this trend to continue.

         Investing activities for 2003 resulted in a use of cash of $33.1
million. This total includes $29.1 million used to acquire AMICAS, $2.0 million
used for software development costs, and $2.0 million used primarily for
purchases of computer equipment and software including an enterprise resource
planning, or ERP, system. Once fully implemented, the ERP system will serve all
businesses and departments of our company as an integrated information system.

         Financing activities for 2003 provided cash of $11.5 million,
consisting of proceeds of $15.0 million received under our acquisition credit
line and $1.1 million of payments received in connection with the exercise of
stock options by employees, partly offset by $4.3 million of principal payments
of long-term debt.

         As of December 31, 2003, we had cash and cash equivalents of $20.1
million and $29.8 million of total long-term debt. Cash equivalents are
comprised primarily of investment-grade commercial paper, time deposits, and
U.S. federal, state and political subdivision obligations with varying terms of
three months or less. In August 2003, we entered into an amended and restated
four-year credit agreement with Wells Fargo Foothill, Inc. The amended agreement
included our outstanding term loan of $15.8 million at an interest rate of prime
plus .5% (4.5% at December 31, 2003). Interest is payable monthly in arrears.
Principal is payable quarterly through April 1, 2004, with a balloon payment in
August 2007. Should we decide to prepay the term loan in full prior to year
three, we would incur a prepayment fee equal to 2% in year one and 1% in year
two of the then outstanding principal balance of the term loan. The prepayment
fee may be reduced should the loan be prepaid in connection with a change of
control of VitalWorks. The outstanding term loan, which is collateralized by
substantially all of our assets and intellectual property rights, subjects us to
certain restrictive covenants, including (i) the required maintenance of minimum
levels of recurring revenues and earnings, as defined, (ii) an annual limit on
the amount of capital expenditures, (iii) the required maintenance of a minimum
of $6 million in cash, and (iv) the prohibition of dividend payments to
stockholders. The amended agreement also provides for an acquisition credit line
of up to $50 million, less any amounts outstanding under term loans.
Availability of the acquisition credit line is at the discretion of Wells Fargo.
On November 25, 2003 in connection with the AMICAS acquisition, we borrowed
$15.0 million under the credit line in the form of a term loan at an interest
rate of prime plus .75% (4.75% at

                                       34

<PAGE>

December 31, 2003). Principal is payable in 15 equal quarterly installments,
which began on January 1, 2004, and interest is payable in arrears.

         The following table summarizes, as of December 31, 2003, the general
timing of future payments under our outstanding loan agreements, lease
agreements that include noncancellable terms, and other long-term contractual
obligations:

<TABLE>
<CAPTION>
                                                         PAYMENTS DUE BY PERIOD
                               ---------------------------------------------------------------------------
                                TOTALS        2004         2005          2006         2007      THEREAFTER
                               ---------    ---------    ---------    ---------    ---------    ----------
                                                            (in thousands)
<S>                            <C>          <C>          <C>          <C>          <C>          <C>
Long-term debt ............    $  29,500    $   6,500    $   4,000    $   4,000    $  15,000
Operating leases ..........        9,689        3,079        2,256        2,113        1,454    $      787
Other commitments (a) .....        6,778        4,645        1,000          800          333
Other long-term liabilities          485           24          320          130           11
Capital leases ............          257          238           19
                               ---------    ---------    ---------    ---------    ---------    ----------
                               $  46,709    $  14,486    $   7,595    $   7,043    $  16,798    $      787
                               =========    =========    =========    =========    =========    ==========
</TABLE>

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

(a) Included in other commitments are the following:

     -   In April 2003, we entered into an agreement to acquire program source
         code, object code, and engineering services from an independent
         software development firm. A monthly fee of approximately $.3 million
         ($3 million per annum) for development services will be incurred during
         the term ending January 2005. Also, during a royalty term ending
         January 2006, we are obligated to pay royalty fees of up to $5 million
         based on related software license sales, if any.

     -   In May 2002, we entered into a five-year agreement with a third-party
         provider of EDI services for patient claims processing. For the first
         year of the agreement, we incurred $.5 million for processing services.
         For the twelve-month period ending May 2004, we are committed to pay
         $.6 million for processing services. Thereafter, the annual services
         fee will range from $.5 million to $.8 million based on our volume
         usage in the last month of the preceding year.

     -   We have committed, for the 2004 plan year, to contribute to our
         employee savings plan. Our matching contribution for 2004 is expected
         to be approximately $1 million and will be made 75% in cash and 25% in
         shares of our common stock.

         Should there be any additional consideration due under the earn-out
provisions of the AMICAS merger agreement, the amount shall be satisfied by us
in cash and/or shares of VitalWorks common stock.

         We anticipate capital expenditures of approximately $6 million for
2004, including software development costs of approximately $2 million.

         From time to time, in the normal course of business, various claims are
made against us. Except for proceedings described below, there are no material
proceedings to which we are a party, and management is unaware of any material
contemplated actions against us.

         In August 2003, we were served with a summons and complaint as part of
a bankruptcy proceeding relating to a former business associate of ours. The
complaint alleges that in 2001, we received a preference payment from the
business associate and seeks to avoid and recover the $.8 million payment made
to us.

         On or about July 31, 2003, a Consolidated Class Action Complaint was
filed in the United States District Court for the District of Connecticut on
behalf of purchasers of the common stock of VitalWorks Inc. during the class
period of January 24, 2002 to October 23, 2002. The defendants are VitalWorks
and three of our individual officers and directors. Plaintiffs have asserted
claims against the defendants under Section 10(b) of the Securities Exchange Act
of 1934 and against the individual defendants under Section 20(a) of the
Exchange Act. According to the Consolidated Complaint, the defendants made
materially false and misleading statements during the Class

                                       35

<PAGE>

Period concerning our products and financial forecasts. In addition, the
Consolidated Complaint alleges that the individual defendants acted as
controlling persons in connection with our alleged securities law violations.
Compensatory damages in an unspecified amount, pre-judgment and post-judgment
interest, costs and expenses, including reasonable attorneys' fees and experts'
fees and other costs, as well as other relief the Court may deem just and proper
are sought. On November 14, 2003, the defendants filed with the Court a motion
to dismiss the Consolidated Complaint pursuant to Federal Rules of Civil
Procedure 12(b)(6) and (9)(b). The motion has been fully briefed and is awaiting
disposition by the Court. At this time, discovery is automatically stayed under
the Private Securities Litigation Reform Act and no class has been certified.

         On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana and the case was subsequently transferred to the
Northern District Court of Georgia. The complaint alleges state securities law
violations, breach of contract, and fraud claims against the defendants. The
complaint does not specify the amount of damages sought by plaintiffs, but seeks
rescission of a transaction that the plaintiffs value at $5 million, as well as
punitive damages and reimbursement for the plaintiffs' attorneys' fees and
associated costs and expenses of the lawsuit. On October 15, 2001, the
plaintiffs' request for a preliminary injunction to preserve their remedy of
rescission was denied and part of their complaint was dismissed. The plaintiffs'
subsequent appeal of this decision was denied. The plaintiffs have retained new
counsel and have served a second amended complaint upon the Company which added,
among other things, a claim for Georgia RICO violations. On August 18, 2003, we
filed with the Court a partial motion to dismiss the second amended complaint
which motion was granted in part and denied in part on January 9, 2004.
Subsequent to year-end, we served an answer to the second amended complaint.

         While management believes that we have meritorious defenses in each of
the foregoing matters and we intend to pursue our positions vigorously,
litigation is inherently subject to many uncertainties. Thus, the outcome of
these matters is uncertain and could be adverse to us. Depending on the amount
and timing of an unfavorable resolution(s) of the contingencies, it is possible
that our financial position, future results of operations or cash flows could be
materially affected in a particular reporting period(s).

         As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is or was serving at our request in such capacity. The term
of the indemnification period is for the officer's or director's lifetime. The
maximum potential amount of future payments we could be required to make under
these indemnification agreements is unlimited; however, with respect to certain
events or occurrences after March 6, 2001, we have a director and officer
insurance policy that limits our exposure and enables us to recover a portion of
any future amounts paid. Given the insurance coverage in effect, we believe the
estimated fair value of these indemnification agreements is minimal. We have no
liabilities recorded for these agreements as of December 31, 2003.

         We include standard intellectual property indemnification provisions in
our software license agreements. Pursuant to these provisions, we hold harmless
and agree to defend the indemnified party, generally our business partners and
customers, in connection with certain patent, copyright, trademark and trade
secret infringement claims by third parties with respect to our products. The
term of the indemnification provisions varies, and may be perpetual. In the
event an infringement claim against us or an indemnified party is made,
generally we, in our sole discretion, agree to do one of the following: (i)
procure for the indemnified party the right to continue use of the software,
(ii) provide a modification to the software so that its use becomes
noninfringing; (iii) replace the software with software which is substantially
similar in functionality and performance; or (iv) refund the residual value of
the software license fees paid by the indemnified party for the infringing
software. We believe the estimated fair value of these intellectual property
indemnification agreements is minimal. We have no liabilities recorded for these
agreements as of December 31, 2003.

         For 2004, we believe that our current cash and cash equivalent
balances, together with the funds we expect to generate from our operations,
will be sufficient to finance our business. This assumes that, among other
things, we attain our projected results of operations and related cash flows,
and that the earnings targets under the

                                       36

<PAGE>

earn-out provisions of the AMICAS merger agreement are not achieved. Otherwise,
we may require additional debt or equity funding which may or may not be
available.

CRITICAL ACCOUNTING POLICIES

         The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements and accompanying
notes, which we believe have been prepared in conformity with generally accepted
accounting principles. The preparation of these financial statements requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. On an ongoing
basis, we evaluate our estimates, assumptions and judgments, including those
related to revenue recognition, allowances for future returns, discounts and bad
debts, tangible and intangible assets, deferred costs, income taxes,
restructurings, commitments, contingencies, claims and litigation. We base our
judgments and estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. However, our
actual results could differ from those estimates.

         We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

         Revenue Recognition. We recognize software license revenues and system
(computer hardware) sales upon execution of the sales contract and delivery of
the software (off-the-shelf application software) and/or hardware. In all cases,
however, the fee must be fixed or determinable, collection of any related
receivable must be considered probable, and no significant post-contract
obligations of ours shall be remaining. Otherwise, we defer the sale until all
of the requirements for revenue recognition have been satisfied. Maintenance
fees for routine client support and unspecified product updates are recognized
ratably over the term of the maintenance arrangement. Training, implementation
and EDI services revenues are recognized as the services are performed. Most of
our sales and licensing contracts involve multiple elements, in which case, we
allocate the total value of the customer arrangement to each element based on
the relative fair values of the respective elements. The residual method is used
to determine revenue recognition with respect to a multiple-element arrangement
when specific objective evidence of fair value exists for all of the undelivered
elements (e.g., implementation, training and/or maintenance services), but does
not exist for one or more of the delivered elements of the contract (e.g.,
computer software or hardware). The fair value of an element is determined by
the average price charged when that element is sold separately (e.g., the fair
value of maintenance services is determined based on the average renewal price
charged to clients for continued maintenance). If evidence of fair value cannot
be established for the undelivered element(s) of an arrangement, the total value
of the customer arrangement is deferred until the undelivered element(s) is
delivered or until objective evidence of fair value is established. In our
contracts and arrangements with our customers, we generally do not include
acceptance provisions, which would give the customer the right to accept or
reject the product after we ship it. However, if an acceptance provision is
included, revenue is recognized upon the customer's acceptance of the product,
which occurs upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period. We provide allowances for estimated future
returns and discounts (recorded as contra-revenue), as well as bad debts, upon
recognition of revenues.

         Recognition of revenues in conformity with generally accepted
accounting principles requires management to make judgments that affect the
timing and amount of reported revenues.

         Accounts Receivable. Our accounts receivable are customer obligations
due under normal trade terms carried at their face value, less allowances for
estimated future returns and discounts, as well as bad debts. We evaluate the
carrying amount of our accounts receivable on an ongoing basis and establish a
valuation allowance based on a number of factors, including specific customer
circumstances, historical rate of write-offs and the past due status of the
accounts. At the end of each fiscal quarter, the allowance is reviewed and
analyzed for adequacy and is often adjusted based on the findings. The allowance
is increased through a reduction of revenues, an increase in bad debt expense
and/or recovery of amounts previously written-off. The allowance is reduced by

                                       37

<PAGE>

write-offs of amounts deemed uncollectible and adjustments to revenue and/or bad
debt expense, if any, based on management's determination as to the adequacy of
the recorded allowance.

         Long-lived Assets. We review our long-lived assets, such as property
and equipment, and purchased intangible assets that are subject to amortization,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is measured
by a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows it is expected to generate. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less cost
to sell, and would no longer be amortized or depreciated. The assets and
liabilities of a disposed group classified as held for sale would also be
presented separately in the appropriate asset and liability sections of the
balance sheet.

         Goodwill Assets and Business Combinations. Goodwill represents the
excess of cost over the fair value of net assets of businesses acquired and
accounted for as purchase transactions. In 2001, the Financial Accounting
Standards Board, or the FASB, issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." Statement 142 provides that,
upon adoption, we shall no longer amortize our goodwill assets. Rather, we are
required to test our goodwill for impairment of value on at least an annual
basis. To date, the results of our tests have not revealed an impairment of
value. Pursuant to Statement 142, we discontinued amortizing goodwill on January
1, 2002.

         Our acquisition of AMICAS in 2003 was accounted for as a purchase
transaction and, accordingly, the excess purchase price over the estimated fair
value of the net assets acquired was recognized as goodwill. Acquired software
and other intangible assets are being amortized through operations over their
estimated economic lives.

         Software Product Development Costs. We begin capitalizing software
product development costs, exclusively third-party programmer fees, only after
establishing commercial and technical viability. Annual amortization of these
costs represents the greater of the amount computed using (i) the ratio that
current gross revenues for the product(s) bear to the total current and
anticipated future gross revenues of the product(s), or (ii) the straight-line
method over the remaining estimated economic life of the product(s); generally,
depending on the nature and success of the product, such deferred costs are
amortized over a three to five-year period. Amortization commences when the
product is made commercially available. Two products under development were made
commercially available in 2002. No additional products were made commercially
available in 2003.

         We evaluate the recoverability of capitalized software based on
estimated future gross revenues less the estimated cost of completing the
products and of performing maintenance and product support. If our gross
revenues turn out to be significantly less than our estimates, the net
realizable value of our capitalized software intended for sale would be
impaired.

         Income Taxes. We provide for taxes based on current taxable income, and
the future tax consequences of temporary differences between the financial
reporting and income tax carrying values of our assets and liabilities (deferred
income taxes). Quarterly, management assesses the realizable value of deferred
tax assets based on, among other things, estimates of future taxable income, and
adjusts the related valuation allowance as necessary.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2003, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 104, "Revenue Recognition", which amends
SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary
purpose is to rescind accounting guidance contained in SAB 101 related to
multiple-element revenue arrangements, superseded as a result of the issuance of
EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue

                                       38

<PAGE>

Recognition in Financial Statements Frequently Asked Questions and Answers, or
FAQ, issued with SAB 101 that had been codified in SEC Topic 13, "Revenue
Recognition." Selected portions of the FAQ have been incorporated into SAB 104.
While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21,
the revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. Adoption of this standard had no material impact on our
financial statements.

         In December 2003, the Financial Accounting Standards Board, or FASB,
issued Interpretation No. 46, or FIN 46R, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51", which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity through means other than voting rights and, accordingly,
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, or
FIN 46, which was issued in January 2003. Before concluding that it is
appropriate to apply ARB 51 voting interest consolidation model to an entity, an
enterprise must first determine that the entity is not a variable interest
entity. As of the effective date of FIN 46R, an enterprise must evaluate its
involvement with all entities or legal structures created before February 1,
2003, to determine whether consolidation requirements of FIN 46R apply to those
entities. There is no grandfathering of existing entities. Public companies must
apply either FIN 46 or FIN 46R immediately to entities created after December
15, 2003 and no later than the end of the first reporting period that ends after
March 15, 2004 to entities considered to be special purpose entities. The
adoption of FIN 46R had no effect on our financial statements.

         In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" that establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Statement 150 was effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
was effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, FASB Staff Position 150-3 was issued, which
indefinitely deferred the effective date of Statement 150 for certain mandatory
redeemable noncontrolling interests. The adoption of Statement 150 had no effect
on our financial statements.

         In November 2002, the FASB Emerging Issues Task Force reached consensus
with respect to Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." EITF 00-21, as amended in May 2003, addresses the accounting for
multiple-element revenue arrangements. Specifically, EITF 00-21 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how arrangement consideration should be measured
and allocated to the separate units of accounting. EITF 00-21 is effective for
revenue arrangements entered into on or after July 1, 2003 and did not have a
material effect on our financial statements.

         In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Statement 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by Statement
146 include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, facility closing,
or other exit or disposal activity. Statement 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. Accordingly,
we adopted the provisions of Statement 146 in 2003 in connection with the
restructuring referred to in the operating expenses section above.

         In April 2002, the FASB issued Statement 145, "Rescission of FASB
Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical
Corrections." For most companies, Statement 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in Accounting Principles Board Opinion No. 30.
Statement 145 also amends Statement 13 for certain sales-leaseback and sublease
accounting. We adopted the provisions of Statement 145 in January 2003. Except
for a reclassification with respect to our 1999 statement of operations, the
adoption of Statement 145 did not have an impact on our financial statements.

                                       39
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our primary market risk consists of fluctuations in the "prime rate" of
interest announced from time to time by Wells Fargo Bank N.A. Approximately
$29.5 million of our outstanding debt at December 31, 2003 related to long-term
indebtedness under our credit agreement with Wells Fargo Foothill, Inc. We
expect interest on the outstanding balance of the loan to be charged based on a
variable rate related to the prime rate. Thus, our interest expense is subject
to market risk in the form of fluctuations in the prime rate of interest. The
effect of a hypothetical one hundred basis point increase across all maturities
of variable rate debt would result in an annual decrease of approximately $.3
million in pre-tax operating results assuming no further changes in the amount
of our borrowings subject to variable rate interest from amounts outstanding at
December 31, 2003. We do not hold derivative securities and have not entered
into contracts embedded with derivative instruments, such as foreign currency
and interest rate swaps, options, forwards, futures, collars, and warrants,
either to hedge existing risks or for speculative purposes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements listed on page 46 of this report are filed as
part of this report on the pages indicated.

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

         Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

         Our management, with the participation of our chief executive officer
and chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2003. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of December 31,
2003, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us is made known to our chief executive officer
and chief financial officer by others within our company, particularly during
the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.

         No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

                                    PART III

         Certain information required by Part III of this Annual Report on Form
10-K is omitted because the Company will file a definitive proxy statement
pursuant to Regulation 14A with respect to the 2004 Annual Meeting of
Stockholders expected to be held on June 9, 2004 (the "Proxy Statement"), not
later than 120 days after the end of the fiscal year covered by this Form 10-K,
and certain information to be included therein is incorporated herein by
reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information about our executive officers is contained under the caption
"Employees" in Part I hereof. We have adopted a Code of Business Conduct and
Ethics for our directors, officers (including our principal executive

                                       40

<PAGE>

officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions) and employees. Our Code of
Business Conduct and Ethics is available on our website at
www.vitalworks.com/investor_relations.html. We intend to disclose any amendments
to, or waivers from, our Code of Business Conduct and Ethics on our website.
Stockholders may request a free copy of the Code of Business Conduct and Ethics
by writing to Investor Relations, VitalWorks Inc., 239 Ethan Allen Highway,
Ridgefield, Connecticut 06877.

         The remainder of the response to this item is contained in the Proxy
Statement under the caption "Election of Directors", and is incorporated herein
by reference. Information relating to filings of Forms 3, 4, and 5 of the
Company is contained in the Proxy Statement under the caption "Compliance with
Section 16(a) of the Securities Exchange Act of 1934", and is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         The response to this item is contained in the Proxy Statement under the
captions "Compensation of Directors", "Executive Compensation and Related
Information", "Option Grants in Last Fiscal Year", "Aggregate Option Exercises
in Last Fiscal Year and Year-End Option Values", and "Employment Contracts and
Change of Control Arrangements", and is incorporated herein by reference.

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

         The response to this item is contained in the Proxy Statement in part
under the caption "Stock Ownership of Certain Beneficial Owners and Management"
and in part under the caption "Equity Compensation Plan Information" and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The response to this item is contained in the Proxy Statement under the
captions "Certain Transactions" and "Compensation Committee Interlocks and
Insider Participation" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The response to this item is contained in the Proxy Statement and is
incorporated herein by reference.

                                       41

<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)(1) Financial Statements. The financial statements listed on page 46
of this report are filed as part of this report on the pages indicated.

         (a)(2) Financial Statement Schedules. The applicable financial
statement schedules required under Regulation S-X have been included beginning
on page 77 of this report, as follows:

<TABLE>
<S>                                                                                                       <C>
Report of Independent Certified Public Accountants on Financial Statement Schedule............            77
Schedule II--Valuation and Qualifying Accounts................................................            78
</TABLE>

         (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K
are listed below.

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                                      DESCRIPTION
-------            ---------------------------------------------------------------------------------------------
<S>                <C>
  2.1       --     Agreement and Plan of Merger by and among Datamedic Holding Corp., Certain Principal
                   Shareholders of Datamedic Holding Corp., InfoCure Corporation and InfoCure Systems, Inc.
                   dated September 3, 1999 (incorporated by reference to Appendix A to InfoCure's  Registration
                   Statement on Form S-4 (Registration No. 333-87867) filed on September 27, 1999).

  2.2       --     Agreement and Plan of Distribution, dated as of February 21, 2001, by and between InfoCure
                   Corporation and PracticeWorks, Inc. (incorporated by reference to Exhibit 2.1 to the
                   Registrant's Current Report on Form 8-K, filed with the Commission on March 20, 2001).

  2.3       --     Agreement and Plan of Merger, dated as of November 25, 2003, by and among VitalWorks Inc.,
                   PACS Acquisition Corp., AMICAS, Inc., and the Stockholders' Representative (incorporated by
                   reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, filed with the
                   Commission on December 10, 2003).

  3.1       --     Certificate of Incorporation of InfoCure Corporation with all amendments (incorporated by
                   reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended
                   December 31, 1999).

  3.2       --     Second Amended and Restated Bylaws of InfoCure (incorporated by reference to Exhibit
                   3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999).

  4.1       --     See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation, as amended,
                   and Bylaws of InfoCure defining rights of the holders of common stock of InfoCure.

  4.2       --     Specimen Certificate for shares of common stock (incorporated by reference to Exhibit 4.2
                   to InfoCure's Registration Statement on Form SB-2) (Registration No. 333-18923).

  10.1      --     InfoCure Corporation 1996 Stock Option Plan (incorporated by reference to Exhibit 10.1
                   filed with InfoCure's Registration Statement on Form SB-2) (Registration No. 333-18923).

  10.2      --     Form of Incentive Stock Option Agreement of InfoCure Corporation (incorporated by reference
                   to Exhibit 10.2 filed with InfoCure's Registration Statement on Form SB-2) (Registration
                   No. 333-18923).

  10.3      --     InfoCure Corporation 1997 Directors' Stock Option Plan (incorporated by reference to
                   Exhibit 10.48 filed with InfoCure's Annual Report on Form 10-KSB on April 1, 1998).

  10.4      --     InfoCure Corporation Length-of-Service Nonqualified Stock Option Plan (incorporated by
                   reference to Exhibit 10.49 filed with InfoCure's Annual Report on Form 10-KSB on April 1,
                   1998).
</TABLE>

                                       42

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                                      DESCRIPTION
-------            ---------------------------------------------------------------------------------------------
<S>                <C>
  10.5      --     Amendment to InfoCure Corporation 1996 Stock Option Plan (incorporated by reference to
                   Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
                   1999).

  10.6      --     Amendment to InfoCure Corporation Length-of-Service Nonqualified Stock Option Plan
                   (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
                   for the year ended December 31, 1999).

  10.7      --     Amendment to InfoCure Corporation Employee Stock Purchase Plan (incorporated by reference
                   to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December
                   31, 1999).

  10.8      --     InfoCure Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.50
                   filed with InfoCure's Annual Report on Form 10-KSB on April 1, 1998).

  10.9      --     Form of Stock Option Grant Certificate and schedule of recipients of such options
                   (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
                   for the year ended December 31, 1999).

 10.10      --     Form of Stock Option Grant Certificate and schedule of recipients of such options
                   (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K
                   for the year ended December 31, 1999).

 10.11      --     Tax Disaffiliation Agreement, dated as of March 5, 2001, by and between InfoCure
                   Corporation and PracticeWorks, Inc. (incorporated by reference to Exhibit 10.1 to the
                   Registrant's Current Report on Form 8-K, filed with the Commission on March 20, 2001).

 10.12      --     Employee Benefits and Compensation Allocation Agreement, dated as of March 5, 2001, by and
                   between InfoCure Corporation and PracticeWorks, Inc. (incorporated by reference to Exhibit
                   10.4 to the Registrant's Current Report on Form 8-K, filed with the Commission on March 20,
                   2001).

 10.13      --     Intellectual Property License Agreement, dated as of March 5, 2001, by and between
                   InfoCure Corporation and PracticeWorks Systems, LLC (incorporated by reference to Exhibit
                   10.5(a) to the Registrant's Current Report on Form 8-K, filed with the Commission on March
                   20, 2001).

 10.14      --     Intellectual Property License Agreement, dated as of March 5, 2001, by and between
                   InfoCure Corporation and PracticeWorks Systems, LLC (incorporated by reference to Exhibit
                   10.5(b) to the Registrant's Current Report on Form 8-K, filed with the Commission on March
                   20, 2001).

 10.15      --     Assignment of Copyrights, dated as of March 5, 2001, by and between InfoCure Corporation and
                   PracticeWorks Systems, LLC (incorporated by reference to Exhibit 10.5(c) to the Registrant's
                   Current Report on Form 8-K, filed with the Commission on March 20, 2001).

 10.16      --     Assignment of Trademarks, dated as of March 5, 2001, by and between InfoCure Corporation and
                   PracticeWorks Systems, LLC (incorporated by reference to Exhibit 10.5(d) to the Registrant's
                   Current Report on Form 8-K, filed with the Commission on March 20, 2001).

 10.17      --     Employment Agreement, dated July 24, 2000, by and between InfoCure Corporation and Joseph M.
                   Walsh (incorporated by reference to Exhibit 10.6(a) to the Registrant's Current Report on
                   Form 8-K, filed with the Commission on March 20, 2001).

 10.18      --     Employment Agreement, dated July 24, 2000, by and between InfoCure Corporation and Steven N.
                   Kahane (incorporated by reference to Exhibit 10.6(c) to the Registrant's Current Report on
                   Form 8-K, filed with the Commission on March 20, 2001).

 10.19      --     Employment Agreement, dated July 24, 2000, by and between InfoCure Corporation and Michael A.
                   Manto (incorporated by reference to Exhibit 10.6(d) to the Registrant's Current Report on
                   Form 8-K, filed with the Commission on March 20, 2001).
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                                      DESCRIPTION
-------            ---------------------------------------------------------------------------------------------
<S>                <C>
 10.20      --     InfoCure Corporation 2000 Broad-Based Stock Plan (incorporated by reference to Exhibit 10.1
                   to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).

 10.21      --     Amended and Restated Warrant, originally issued to Crescent International Ltd. on
                   September 28, 1998, as amended and restated on March 6, 2001 (incorporated by reference to
                   Exhibit 10.44 to the Registrant's Annual Report on Form 10-K, filed with the Commission on
                   April 2, 2001).

 10.22      --     SubLease Agreement, dated February 28, 2001, by and between InfoCure Corporation and Southern
                   Company Services, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's
                   Quarterly Report on Form 10-Q, filed with the Commission on May 16, 2001).

 10.23      --     Lease Agreement, dated March 13, 2001, by and between InfoCure Corporation and Joseph V.
                   Fisher, LLC (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report
                   on Form 10-Q, filed with the Commission on May 16, 2001).

 10.24      --     Separation Agreement by and between InfoCure Corporation, and Frederick L. Fine, dated June
                   6, 2001 (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on
                   Form 8-K, filed with the Commission on June 6, 2001).

 10.25      --     Loan and Security Agreement by and among VitalWorks Inc. as Borrower, and Foothill
                   Capital Corporation as Lender, dated March 8, 2002 (incorporated by reference to Exhibit
                   10.32 to the Registrant's Annual Report on Form 10-K, filed with the Commission on March 29,
                   2002).

 10.26      --     VitalWorks Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.1 to
                   the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on August 13,
                   2002).

 10.27      --     VitalWorks Inc. 2002 Employee Stock Purchase Plan (incorporated by reference to Exhibit
                   10.2 to the Registrant's Quarterly Report on Form 10-Q, filed with the Commission on August
                   13, 2002).

 10.28      --     Rights Agreement, dated as of December 5, 2002 (the "Rights Agreement"), between
                   VitalWorks Inc. and StockTrans, Inc., as Rights Agent, including as Exhibit B, the form of
                   Rights Certificate and Election to Exercise (incorporated by reference to Exhibit 4 to the
                   Registrant's Current Report on Form 8-K, filed with the Commission on December 9, 2002).

 10.29      --     Form of Letter to Stockholders (incorporated by reference to Exhibit 20 to the Registrant's
                   Current Report on Form 8-K, filed with the Commission on December 9, 2002).

 10.30      --     Form of Certificate of Designations of Series B Preferred Stock, included in Exhibit C to the
                   Rights Agreement (incorporated by reference to Exhibit 3 to the Registrant's Report on Form
                   8-A12B, filed with the Commission on January 3, 2003).

 10.31      --     Amended and Restated Loan and Security Agreement by and between VitalWorks Inc. as
                   Borrower, and Wells Fargo Foothill, Inc. as Lender, dated as of March 8, 2002 and Amended
                   and Restated as of August 20, 2003 (incorporated by reference to Exhibit 10 to the
                   Registrant's Quarterly Report on Form 10-Q, filed with the Commission on November 13, 2003).

 *10.32     --     Third Amendment to, and Waiver and Consent under, Amended and Restated Loan and Security
                   Agreement made and entered into as of February 3, 2004, by and between VitalWorks Inc. and
                   Wells Fargo Foothill, Inc.

 *21.1      --     List of Subsidiaries.

 *23.1      --     Consent of BDO Seidman, LLP, independent certified public accountants.

  24.1      --     Powers of Attorney (included on signature page).

 *31.1      --     Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
                   of 2002.
</TABLE>

                                       44
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
  NO.                                                      DESCRIPTION
-------            ---------------------------------------------------------------------------------------------
<S>                <C>
 *31.2      --     Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
                   of 2002.

 *32.1      --     Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section
                   906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
</TABLE>

* Filed herewith

         (b)      Reports on Form 8-K. We filed or furnished the following
                  reports on Form 8-K during the quarter ended December 31,
                  2003:

                  (i)      Current Report on Form 8-K furnished to the
                           Securities and Exchange Commission on October 30,
                           2003 with respect to our announcement of our
                           financial results for the quarter ended September 30,
                           2003.

                  (ii)     Current Report on Form 8-K filed with the Securities
                           and Exchange Commission on November 26, 2003 with
                           respect to our announcement that on November 25,
                           2003, we entered into a definitive agreement to
                           acquire AMICAS, Inc., a developer of Web-based
                           diagnostic image management software solutions and
                           that on November 26, 2003, we closed the acquisition.

                  (iii)    Current Report on Form 8-K filed with the Securities
                           and Exchange Commission on December 10, 2003 with
                           respect to our announcement that we completed the
                           merger with AMICAS, Inc., a Delaware corporation,
                           pursuant to the Agreement and Plan of Merger, dated
                           as of November 25, 2003, by and among us, PACS
                           Acquisition Corp., AMICAS and the Stockholders'
                           Representative.

                                       45

<PAGE>

                                 VITALWORKS INC.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                                       PAGE
                                                                                                                       ----
<S>                                                                                                                    <C>
FINANCIAL STATEMENTS:

Report of Independent Certified Public Accountants..........................................................           47
Consolidated Balance Sheets as of December 31, 2003 and 2002................................................           48
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001..................           49
Consolidated Statements of Stockholders' Equity for the years ended
    December 31, 2003, 2002 and 2001........................................................................           50
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001.................           51
Notes to Consolidated Financial Statements..................................................................           52
</TABLE>

                                       46

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
VitalWorks Inc.

         We have audited the accompanying consolidated balance sheets of
VitalWorks Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VitalWorks
Inc. and Subsidiaries as of December 31, 2003 and 2002 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.

         As discussed in Note B to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

BDO Seidman, LLP
New York, New York

January 26, 2004

                                       47

<PAGE>

                                 VITALWORKS INC.

                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,
                                                                                                ------------------------
                                                                                                  2003            2002
                                                                                                ---------      ---------
<S>                                                                                             <C>            <C>
ASSETS

Current assets:

  Cash and cash equivalents..............................................................       $  20,128      $  39,474
  Accounts receivable, net of allowances of $2,800 and $1,900............................          16,409         14,130
  Computer hardware held for resale......................................................             832            629
  Deferred income taxes, net ............................................................           2,203          1,578
  Prepaid expenses and other current assets..............................................           2,934          1,660
                                                                                                ---------      ---------
 TOTAL CURRENT ASSETS....................................................................          42,506         57,471

 Property and equipment, at cost, less accumulated depreciation and
     amortization of $11,642 and $9,026..................................................           4,681          4,542
 Goodwill................................................................................          34,472         20,256
 Acquired/developed software, less accumulated amortization of $1,804 and $911 ..........          21,469          8,473
 Other intangible assets, less accumulated amortization of $36...........................           3,364
 Deferred income taxes, net .............................................................          24,547         25,172
 Other assets............................................................................           1,537          1,217
                                                                                                ---------      ---------
Total assets.............................................................................       $ 132,576      $ 117,131
                                                                                                =========      =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses..................................................       $  11,049      $  10,630
  Accrued employee compensation and benefits ............................................           2,486          4,636
  Accrued restructuring costs............................................................             923          1,107
  Deferred revenue, including unearned discounts of $1,200 and $1,478....................          11,762          9,578
  Current portion of long-term debt......................................................           6,738          4,300
                                                                                                ---------      ---------
TOTAL CURRENT LIABILITIES................................................................          32,958         30,251

Long-term debt...........................................................................          23,019         14,641
Other liabilities, primarily unearned discounts re: outsourced printing services.........           5,937         11,806

COMMITMENTS AND CONTINGENCIES - NOTES C, D AND J

Stockholders' equity:

  Preferred stock $.001 par value; 2,000,000 shares authorized; none issued..............
  Common stock $.001 par value, 200,000,000 shares authorized,
    45,278,816 and 44,605,944 shares issued .............................................              45             45
  Additional paid-in capital.............................................................         205,439        203,173
  Accumulated deficit....................................................................        (128,350)      (136,313)
  Treasury stock, at cost, 1,985,502 shares..............................................          (6,472)        (6,472)
                                                                                                ---------      ---------
TOTAL STOCKHOLDERS' EQUITY...............................................................          70,662         60,433
                                                                                                ---------      ---------
Total liabilities and stockholders' equity...............................................       $ 132,576      $ 117,131
                                                                                                =========      =========
</TABLE>

See accompanying notes.

                                       48

<PAGE>

                                 VITALWORKS INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                      --------------------------------------
                                                                                        2003           2002           2001
                                                                                      ---------     ---------      ---------
<S>                                                                                   <C>           <C>            <C>
REVENUES
   Maintenance and services..................................................         $  87,790     $  84,808      $  85,181
   Software licenses and system sales........................................            23,729        30,003         21,872
                                                                                      ---------     ---------      ---------
Total revenues...............................................................           111,519       114,811        107,053
                                                                                      ---------     ---------      ---------
COSTS AND EXPENSES
Cost of revenues:
   Maintenance and services..................................................            22,376        21,970         19,401
   Software licenses and system sales, includes amortization of
      software costs of $1,873 in 2003 and $911 in 2002......................             9,493         8,749          6,267
Selling, general and administrative..........................................            50,682        49,716         54,371
Research and development.....................................................            15,891        13,535         10,871
Depreciation and amortization, includes $23,135 of goodwill
   amortization in 2001......................................................             2,460         2,572         26,207
Acquired in-process technology...............................................               750
Impairment charges (credits) and other nonrecurring costs....................               490        (6,000)         8,252
Restructuring costs (credits)................................................               332          (501)          (425)
Loss on headquarters building held for sale..................................                                          1,375
                                                                                      ---------     ---------      ---------
                                                                                        102,474        90,041        126,319
                                                                                      ---------     ---------      ---------
OPERATING INCOME (LOSS)......................................................             9,045        24,770        (19,266)
Interest income..............................................................               273         1,480            562
Interest expense.............................................................            (1,155)       (1,938)        (3,732)
                                                                                      ---------     ---------      ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES................             8,163        24,312        (22,436)

Provision for income taxes...................................................               200           162
                                                                                      ---------     ---------      ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS.....................................             7,963        24,150        (22,436)
Loss from discontinued operations............................................                                         (5,384)
                                                                                      ---------     ---------      ---------
NET INCOME (LOSS)............................................................         $   7,963     $  24,150      $ (27,820)
                                                                                      =========     =========      =========
EARNINGS (LOSS) PER SHARE
  Basic:
     Continuing operations...................................................         $    0.18     $    0.58      $   (0.60)
     Discontinued operations.................................................                                          (0.14)
                                                                                      ---------     ---------      ---------
                                                                                      $    0.18     $    0.58      $   (0.74)
                                                                                      =========     =========      =========
  Diluted:
     Continuing operations...................................................         $    0.17     $    0.49      $   (0.60)
     Discontinued operations.................................................                                          (0.14)
                                                                                      ---------     ---------      ---------
                                                                                      $    0.17     $    0.49      $   (0.74)
                                                                                      =========     =========      =========
AVERAGE NUMBER OF SHARES OUTSTANDING
  Basic......................................................................            43,052        41,592         37,477
  Diluted....................................................................            47,134        48,850         37,477
</TABLE>

See accompanying notes.

                                       49

<PAGE>

                                 VITALWORKS INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                 SHARES
                                                        ------------------------                          NOTES
                                                                                          ADDITIONAL   RECEIVABLE -
                                                          COMMON     TREASURY     COMMON   PAID-IN        FORMER
                                                           STOCK       STOCK      STOCK    CAPITAL       OFFICERS
                                                        ----------  -----------   ------  ----------   ------------
<S>                                                     <C>         <C>           <C>     <C>          <C>
Balance at December 31, 2000.........................   34,236,235     (112,500)   $ 34    $ 203,959     $ (12,431)
Issuance of common stock, net of related expense for:
   1998 acquisition of unit of Reynolds & Reynolds         500,000                    1          127
   Matching contribution 401(k) plan.................      462,352                             1,965
   Conversion of rights to preferred stock of
   subsidiary........................................    1,929,012                    2        9,998
   Exercise of stock options and warrants............      974,645                    1        1,882
   1999 acquisition attributed to PracticeWorks......      887,715                    1        2,327
   Other.............................................       11,812                               254
Dividend of subsidiary, PracticeWorks................                                        (28,927)
Allowance for loan losses............................                                                        6,000
Loan payments, net...................................                                                        1,799
Net loss.............................................
                                                       -----------    ---------   -----    ---------     ---------
Balance at December 31, 2001.........................   39,001,771     (112,500)     39      191,585        (4,632)
Issuance of common stock, net of related expense for:
   Matching contribution 401(k) plan.................      222,012                    1        1,110
   Exercise of stock options and warrants............    5,382,161                    5       10,077
Repurchases of common stock..........................                (1,873,002)
Dividend of subsidiary, PracticeWorks, adjustment....                                            401
Allowance for loan losses (reversed).................                                                       (6,000)
Loan payments, net...................................                                                       10,632
Net income...........................................
                                                       -----------    ---------   -----    ---------     ---------
Balance at December 31, 2002.........................   44,605,944   (1,985,502)     45      203,173            --
Issuance of common stock, net of related expense for:
   Matching contribution 401(k) plan.................      276,933                             1,132
   Exercise of stock options ........................      395,939                             1,134
Net income...........................................
                                                       -----------    ---------   -----    ---------     ---------
BALANCE AT DECEMBER 31, 2003.........................   45,278,816   (1,985,502)  $ 45     $ 205,439     $      --
                                                       ===========    =========   ====     =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                          ACCUMULATED   TREASURY
                                                            DEFICIT      STOCK         TOTAL
                                                          -----------   --------      --------
<S>                                                       <C>           <C>           <C>
Balance at December 31, 2000.........................     $  (132,643)  $  (469)      $ 58,450
Issuance of common stock, net of related expense for:
   1998 acquisition of unit of Reynolds & Reynolds                                         128
   Matching contribution 401(k) plan.................                                    1,965
   Conversion of rights to preferred stock of
   subsidiary........................................                                   10,000
   Exercise of stock options and warrants............                                    1,883
   1999 acquisition attributed to PracticeWorks                                          2,328
   Other.............................................                                      254
Dividend of subsidiary, PracticeWorks................                                  (28,927)
Allowance for loan losses............................                                    6,000
Loan payments, net...................................                                    1,799
Net loss.............................................         (27,820)                 (27,820)
                                                          -----------   -------       --------
Balance at December 31, 2001.........................        (160,463)     (469)        26,060
Issuance of common stock, net of related expense for:
   Matching contribution 401(k) plan.................                                    1,111
   Exercise of stock options and warrants............                                   10,082
Repurchases of common stock..........................                    (6,003)        (6,003)
Dividend of subsidiary, PracticeWorks, adjustment....                                      401
Allowance for loan losses (reversed).................                                   (6,000)
Loan payments, net...................................                                   10,632
Net income...........................................          24,150                   24,150
                                                          -----------   -------       --------
Balance at December 31, 2002.........................        (136,313)   (6,472)        60,433
Issuance of common stock, net of related expense for:
   Matching contribution 401(k) plan.................                                    1,132
   Exercise of stock options ........................                                    1,134
Net income...........................................           7,963                    7,963
                                                          -----------   -------       --------
BALANCE AT DECEMBER 31, 2003.........................     $  (128,350)  $(6,472)      $ 70,662
                                                          ===========   =======       ========
</TABLE>

See accompanying notes.

                                       50

<PAGE>

                                 VITALWORKS INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                 YEAR ENDED DECEMBER 31,
                                                                                           -----------------------------------
                                                                                             2003         2002         2001
                                                                                           --------     --------     ---------
<S>                                                                                        <C>          <C>          <C>
OPERATING ACTIVITIES

Income (loss) from continuing operations..............................................     $  7,963     $ 24,150     $ (22,436)
Adjustments to reconcile income (loss) from continuing operations to cash
  provided by operating activities:

   Acquired in-process technology.....................................................          750
   Restructuring and other nonrecurring costs and impairment charges (credits)........          822       (6,501)        6,903
   Loss on headquarters building held for sale........................................                                   1,375
   Depreciation and amortization, primarily goodwill in 2001..........................        2,460        2,572        26,207
   Provisions for bad debts, returns and discounts....................................        1,973        2,815         3,196
   Amortization of deferred finance costs, charged to interest expense................          173          277           638
   Amortization of software costs.....................................................        1,873          911
   Changes in operating assets and liabilities:
     Accounts receivable..............................................................       (2,342)      (4,252)       (2,031)
     Computer hardware held for resale, prepaid expenses and other....................       (1,748)        (802)          218
     Accounts payable, accrued costs and expenses.....................................       (3,726)       1,536        (1,982)
     Deferred revenue.................................................................         (417)       1,344          (971)
     Unearned discounts re:  outsourced printing services.............................       (5,601)      (1,292)        6,503
Interest payments on notes receivable from former officers............................                                     610
                                                                                           --------     --------     ---------
       CASH PROVIDED BY OPERATING ACTIVITIES .........................................        2,180       20,758        18,230
                                                                                           --------     --------     ---------
INVESTING ACTIVITIES
    Business acquisition, net of cash acquired........................................      (29,143)
    Software product development costs................................................       (2,017)      (4,345)       (4,601)
    Proceeds from sale of office buildings............................................          360        7,310           800
    Proceeds from sale of equipment...................................................                                     220
    Purchases of property and equipment...............................................       (1,954)        (771)       (1,203)
    Cash received from (advanced to) PracticeWorks, Inc...............................                       333          (344)
    Security deposit..................................................................         (308)
    Other.............................................................................                                     (17)
                                                                                           --------     --------     ---------
      CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ................................      (33,062)       2,527        (5,145)
                                                                                           --------     --------     ---------
FINANCING ACTIVITIES
    Long-term debt:
      (Payments)......................................................................       (4,273)     (38,597)       (9,154)
       Proceeds.......................................................................       15,000       27,450           194
    Exercise of stock options and warrants............................................        1,076        10,017        1,804
    Loan payments from former officers................................................                    10,991         1,215
    Repurchases of common stock.......................................................                    (6,003)
    Deferred finance costs and other..................................................         (267)        (657)         (125)
                                                                                           --------     --------     ---------
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................       11,536        3,201        (6,066)
                                                                                           --------     --------     ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................................      (19,346)      26,486         7,019
Cash and cash equivalents at beginning of year........................................       39,474       12,988         5,969
                                                                                           --------     --------     ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR..............................................     $ 20,128     $ 39,474     $  12,988
                                                                                           ========     ========     =========
</TABLE>

See accompanying notes.

                                       51

<PAGE>

                                 VITALWORKS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. BUSINESS

         VitalWorks Inc. ("VitalWorks" or the "Company") is a leading provider
of information and image management technology and services targeted to
healthcare practices and organizations throughout the United States. The Company
provides IT-based, specialty-specific solutions for imaging centers and hospital
radiology departments, and medical practices specializing in anesthesiology,
ophthalmology, emergency medicine, plastic surgery, dermatology, and internal
medicine. The Company also offers enterprise-level systems designed for large
physician groups and networks. The Company's range of software solutions provide
image management, workflow management, and information management related to
administrative, financial, and clinical functions for physicians, radiologists
and other healthcare providers. VitalWorks provides its clients with ongoing
software support, implementation, training, and electronic data interchange
("EDI") services for patient billing and claims processing.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

         The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, AMICAS, Inc. ("AMICAS"), which was
acquired on November 25, 2003. All significant intercompany accounts and
transactions have been eliminated.

Reclassification of Financial Statement Balances

         Certain amounts in the accompanying financial statements for 2001 have
been reclassified to conform to the 2002 and 2003 presentation.

Revenue Recognition

         Software license revenues and system (computer hardware) sales are
recognized upon execution of the sales contract and delivery of the software
(off-the-shelf application software) and/or hardware. In all cases, however, the
fee must be fixed or determinable, collection of any related receivable must be
considered probable, and no significant post-contract obligations of the Company
shall be remaining. Otherwise, the sale is deferred until all of the
requirements for revenue recognition have been satisfied. Maintenance fees for
routine client support and unspecified product updates are recognized ratably
over the term of the maintenance arrangement. Training, implementation and EDI
services revenues are recognized as the services are performed. Most of the
Company's sales and licensing contracts involve multiple elements, in which
case, the Company allocates the total value of the customer arrangement to each
element based on the relative fair values of the respective elements. The
residual method is used to determine revenue recognition with respect to a
multiple-element arrangement when specific objective evidence of fair value
exists for all of the undelivered elements (e.g., implementation, training
and/or maintenance services), but does not exist for one or more of the
delivered elements of the contract (e.g., computer software or hardware). The
fair value of an element is determined by the average price charged when that
element is sold separately (e.g., the fair value of maintenance services is
determined based on the average renewal price charged to clients for continued
maintenance). If evidence of fair value cannot be established for the
undelivered element(s) of an arrangement, the total value of the customer
arrangement is deferred until the undelivered element(s) is delivered or until
objective evidence of fair value is established. In the Company's contracts and
arrangements with its customers, the Company generally does not include
acceptance provisions, which would give the customer the right to accept or
reject the product after the Company ships it. However, if an acceptance
provision is included, revenue is recognized upon the customer's acceptance of
the product, which occurs upon the earlier of receipt of a written customer
acceptance or expiration

                                       52

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

of the acceptance period. Allowances for estimated future returns and discounts
(recorded as contra-revenue), as well as bad debts, are provided upon
recognition of revenues.

         Recognition of revenues in conformity with generally accepted
accounting principles requires management to make judgments that affect the
timing and amount of reported revenues.

Current Assets, and Liabilities

         The Company considers highly liquid investment instruments with varying
terms of three months or less to be cash equivalents and those with varying
terms greater than three months but no more than a year would be considered
short-term investments. Cash equivalents are comprised primarily of
investment-grade commercial paper, time deposits, and U.S. federal, state and
political subdivision obligations.

         The Company's accounts receivable are customer obligations due under
normal trade terms carried at their face value, less allowances for estimated
future returns and discounts, as well as bad debts. The Company evaluates the
carrying amount of its accounts receivable on an ongoing basis and establishes a
valuation allowance based on a number of factors, including specific customer
circumstances, historical rate of write-offs and the past due status of the
accounts. At the end of each fiscal quarter, the allowance is reviewed and
analyzed for adequacy and is often adjusted based on the findings. The allowance
is increased through a reduction of revenues, an increase in bad debt expense
and/or recovery of amounts previously written-off. The allowance is reduced by
write-offs of amounts deemed uncollectible and adjustments to revenue and/or bad
debt expense, if any, based on management's determination as to the adequacy of
the recorded allowance.

         All current assets and current liabilities, because of their short-term
nature, are stated at cost or face value, which approximates market value. The
carrying amount of the Company's long-term debt, which provides for interest at
floating rates, approximates market value (see Note I).

Computer Hardware Held For Resale

         Computer hardware held for resale includes computer equipment and
related peripherals, which are valued at the lower of cost or realizable value.
Cost is principally determined by either the first-in first-out or average cost
methods.

Long-lived Assets

         The Company reviews its long-lived assets, such as property and
equipment, and purchased intangible assets that are subject to amortization, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is measured
by a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows it is expected to generate. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less cost
to sell, and would no longer be amortized or depreciated. The assets and
liabilities of a disposed group classified as held for sale would also be
presented separately in the appropriate asset and liability sections of the
balance sheet.

Goodwill Assets and Business Combinations

         Goodwill represents the excess of cost over the fair value of net
assets of businesses acquired and accounted for as purchase transactions. In
2001, the Financial Accounting Standards Board (the "FASB") issued

                                       53

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." Statement 142 provides that, upon adoption, the Company
shall no longer amortize its goodwill assets. Rather, the Company is required to
test its goodwill for impairment of value on at least an annual basis. To date,
the results of our tests have not revealed an impairment of value. Pursuant to
Statement 142, the Company discontinued amortizing goodwill on January 1, 2002.

         Excluding goodwill amortization of $23.1 million for the year ended
December 31, 2001, the net loss would have been $(4.7) million, or $(.13) per
share, compared to net income of $24.2 million, or $.49 per diluted share, for
2002 and $8.0 million, or $.17 per diluted share, for 2003.

         Also in 2001, the FASB issued Statement 141, "Business Combinations."
Statement 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations. Statement 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. Statement 141 applies to all business combinations initiated
after June 30, 2001.

         The Company's acquisition of AMICAS in 2003 was accounted for under the
purchase method and, accordingly, the excess purchase price over the estimated
fair value of the net assets acquired was recognized as goodwill. Acquired
software and other intangible assets are being amortized through operations over
their estimated economic lives (see Notes C and G). The Company's other business
combinations were completed prior to 2000 and were accounted for using both the
pooling-of-interests and purchase methods. The pooling-of-interests method did
not result in the recognition of acquired goodwill or other intangible assets.
As a result, the adoption of Statements 141 and 142 did not affect the results
of past transactions accounted for under the pooling-of-interests method.

Software Product Development Costs

         The Company begins capitalizing software product development costs,
exclusively third-party programmer fees, only after establishing commercial and
technical viability. Annual amortization of these costs represents the greater
of the amount computed using (i) the ratio that current gross revenues for the
product(s) bear to the total current and anticipated future gross revenues of
the product(s), or (ii) the straight-line method over the remaining estimated
economic life of the product(s); generally, depending on the nature and success
of the product, such deferred costs are amortized over a three to five-year
period. Amortization commences when the product is made commercially available.
Two products under development were made commercially available in 2002. No
additional products were made commercially available in 2003.

Deferred Finance Costs

         Deferred finance costs, which include charges, fees and expenses
directly associated with loan origination and underwriting, are recognized as
interest expense over the expected life of the respective loan at an
amortization rate per annum that approximates the interest method. Deferred
finance costs ($.7 million and $.6 million, net of accumulated amortization of
$.3 million and $.1 million, as of December 31, 2003 and 2002) are included in
other assets in the accompanying balance sheets.

Depreciation/Amortization

         Depreciation and amortization are computed principally using the
straight-line method over the estimated economic or useful lives of the
applicable assets. Leasehold improvements are amortized over the lesser of the
remaining life of the lease or the useful life of the improvements.

                                       54

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Stock-Based Compensation

         Statement 123, "Accounting for Stock-Based Compensation," as amended by
Statement 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123," provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement 148
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.

         The Company accounts for stock option grants and stock awards, based on
their intrinsic value, in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under the intrinsic value method, compensation expense is recognized if the
exercise price of the employee stock option is less than the market price of the
underlying stock on the date of grant or if the number of shares is not fixed.
The weighted-average estimated grant date fair value, as defined by Statement
123, of options granted in 2003, 2002 and 2001 was $2.35, $2.34 and $1.61,
respectively, as calculated using the Black-Scholes option valuation model. The
Company prices its stock options at fair market value on the date of grant, and
therefore, under Opinion 25, no compensation expense is recognized for stock
options granted. The following table illustrates the effect on income (loss)
from continuing operations and the related earnings per share if the Company had
applied the fair value recognition provisions of Statement 123, as amended, to
stock-based employee compensation (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                            -----------------------------------------
                                                               2003          2002             2001
                                                            ---------     ----------       ----------
<S>                                                         <C>           <C>              <C>
Income (loss) from continuing operations,
  as reported                                               $   7,963     $   24,150       $  (22,436)
Less:  total stock-based employee compensation
   expense determined under fair value based
   method for all awards, net of related tax effects           (4,364)        (5,320)         (10,374)
                                                            ---------     ----------       ----------
Pro forma income (loss) from continuing operations          $   3,599     $   18,830       $  (32,810)
                                                            =========     ==========       ==========
Earnings (loss) per share - continuing operations:

   Basic-- as reported                                      $    0.18     $     0.58       $    (0.60)
                                                            =========     ==========       ==========
   Basic-- pro forma                                        $    0.08     $     0.45       $    (0.88)
                                                            =========     ==========       ==========
   Diluted-- as reported                                    $    0.17     $     0.49       $    (0.60)
                                                            =========     ==========       ==========
   Diluted-- pro forma                                      $    0.08     $     0.39       $    (0.88)
                                                            =========     ==========       ==========
</TABLE>

         The fair value of the Company's employee stock options was estimated at
the date of grant using the Black-Scholes option valuation model with the
following weighted average assumptions:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------
                                                                        2003           2002           2001
                                                                       ------         -----          -----
<S>                                                                    <C>            <C>            <C>
Risk-free interest rate.........................................        2.5%           2.6%           4.0%
Expected dividend yield.........................................        0.0            0.0            0.0
Expected stock price volatility.................................       76.0%          78.7%          75.4%
Weighted average expected life (in years).......................          4              4              4
</TABLE>

         The Black-Scholes option valuation model was not developed for use in
valuing employee stock options. Instead, this model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable, which differ significantly from the Company's stock
option awards. In

                                       55

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.

Income Taxes

         The Company provides for taxes based on current taxable income, and the
future tax consequences of temporary differences between the financial reporting
and income tax carrying values of its assets and liabilities (deferred income
taxes).

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Earnings Per Share

         The following table sets forth the computation of basic and diluted
earnings (loss) per share ("EPS") (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                       --------------------------------------
                                                         2003            2002         2001
                                                       ---------      ----------    ---------
<S>                                                    <C>            <C>           <C>
Numerator --income (loss):
   Continuing operations                               $   7,963      $   24,150    $ (22,436)
   Discontinued operations                                                             (5,384)
                                                       ---------      ----------    ---------
                                                       $   7,963      $   24,150    $ (27,820)
                                                       =========      ==========    =========
Denominator:
   Basic EPS--weighted-average shares                     43,052          41,592       37,477
      Effect of dilutive securities, stock
        option and warrant rights                          4,082           7,258
                                                       ---------      ----------    ---------
   Diluted EPS--adjusted weighted-average
        shares and assumed conversions                    47,134          48,850       37,477
                                                       =========      ==========    =========
Basic EPS:
   Continuing operations                               $    0.18      $     0.58    $   (0.60)
   Discontinued operations                                                              (0.14)
                                                       ---------      ----------    ---------
                                                       $    0.18      $     0.58    $   (0.74)
                                                       =========      ==========    =========
Diluted EPS:
   Continuing operations                               $    0.17      $     0.49    $   (0.60)
   Discontinued operations                                                              (0.14)
                                                       ---------      ----------    ---------
                                                       $    0.17      $     0.49    $   (0.74)
                                                       =========      ==========    =========
</TABLE>

         Because their effect would be antidilutive, stock option and warrant
rights for up to 1.5 million common shares (with exercise prices ranging from
$4.33 to $17.84 per share) and 1.1 million common shares (with exercise prices
ranging from $6.14 to $17.84 per share) were excluded from the diluted EPS
calculation for 2003 and 2002, respectively. For the same reason, all options
and warrants were excluded from the diluted calculation for the year 2001.

                                       56

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Comprehensive Income

         Comprehensive income is a measure of all changes in equity of an
enterprise that results from recognized transactions and other economic events
of a period other than transactions with owners in their capacity as owners. For
the Company, comprehensive income (loss) is equivalent to its consolidated net
income (loss).

Derivative Instruments and Hedging Activities

          The Company does not hold derivative instruments such as foreign
currency and interest rate swaps, options, forwards, futures, collars, and
warrants and has not entered into contracts embedded with derivative instruments
either to hedge existing risks or for speculative purposes.

C. BUSINESS COMBINATION

         On November 25, 2003, VitalWorks acquired 100% of the outstanding
capital stock of AMICAS, a developer of Web-based diagnostic image management
software solutions, for $31 million in cash, including direct transaction costs.
Commonly referred to in the marketplace as PACS (picture archiving and
communication systems), these software solutions allow radiologists and other
physicians to examine, store, and distribute digitized medical images.
VitalWorks financed $15 million of the purchase price through the use of its
credit line. The merger agreement provides for an additional purchase payment of
up to $25 million, payable in cash and/or shares of VitalWorks common stock,
based on attainment of specified earnings targets through 2004. In addition,
VitalWorks assumed incentive plans for certain management employees of AMICAS
that provide for up to $5 million of compensation, tied to the attainment of the
earnings targets for the contingent earn-out period.

         The Company examined a number of other image software businesses before
deciding to acquire AMICAS. The terms of the merger agreement were determined on
the basis of arms-length negotiations and, based on, among other things, the
opinion of an independent financial advisor, the purchase price was deemed to be
fair from a financial point of view. Prior to the execution of the merger
agreement, neither VitalWorks nor any of its affiliates, nor any director or
officer of VitalWorks or any associate of any such director or officer, had any
material relationship with AMICAS.

         The Company currently intends to continue to use the tangible and
intangible assets of AMICAS substantially in the same manner in which they were
used by AMICAS immediately prior to the merger. The addition of AMICAS provides
VitalWorks with the ability to offer radiology/imaging center clients a
comprehensive, integrated information and image management solution,
incorporating the key components of a complete radiology data management system.

                                       57

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The acquisition was accounted for as a purchase transaction and,
accordingly, the purchase price has been allocated to the assets and liabilities
of AMICAS based on their estimated fair values. Independent valuation
specialists conducted an appraisal of a significant portion of the assets,
including purchased software, in-process technology, trademarks and noncompete
agreements. Management has made an estimate of the fair value of the remaining
assets and liabilities. The estimated fair values included in the accompanying
financial statements reflect management's preliminary estimates, which are
subject to change, along with the valuation specialists' appraisal as follows
(in thousands):

<TABLE>
<S>                                               <C>
Current assets                                    $    3,908
Property and equipment                                   468
Goodwill                                              14,149 (a)
Acquired software                                     13,700 (b)
Other intangible assets                                3,400 (b)
Acquired in-process technology                           750 (c)
Other assets                                              54
                                                  ----------
  Total assets acquired                               36,429
Current liabilities                                   (5,467)
                                                  ----------
                                                  $   30,962
                                                  ==========
</TABLE>

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

(a)  The amount allocated to goodwill is not expected to be deductible for tax
     purposes. In the event that management determines that the value of
     goodwill has become impaired, the Company would then recognize a charge for
     the amount of the impairment.

(b)  Amortizable identified intangible assets are as follows:

<TABLE>
<CAPTION>
                                                          Estimated
                                     Estimated            Economic
                                     Fair Value             Life
                                   --------------         ---------
                                   (in thousands)          (years)
<S>                                <C>                    <C>
Acquired software                     $13,700                 7
Trademarks                              1,900                15
Noncompete agreements                   1,500                 5
                                      -------
                                      $17,100
                                      =======
</TABLE>

(c)   In-process technology was charged to expense upon acquisition because
      technological feasibility had not been established and no alternative
      future uses existed.

                                       58

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         Should there be any additional consideration paid under the earn-out
provisions of the merger agreement, the amount would be recognized as additional
goodwill. Amounts paid, if any, under the assumed incentive plans would be
recognized as compensation expense.

         The accompanying statements of operations include only one month of
operating results of AMICAS. For the month of December 2003, AMICAS had total
revenues of $.7 million, and a net loss of $(1.4) million which included the $.8
million charge for acquired in-process technology, and depreciation and
amortization expense of $.2 million.

         The unaudited financial information in the table below summarizes the
combined results of operations of VitalWorks and AMICAS, on a pro forma basis,
as though the companies had been combined as of January 1, 2002. Due to their
nonrecurring nature, the acquired in-process technology charge and AMICAS'
acquisition-related costs have been excluded from the information presented
below. This pro forma data is presented for informational purposes only and is
not intended to represent or be indicative of the results of operations that
would have been reported had the acquisition taken place on January 1, 2002, and
should not be taken as representative of the future results of operations of the
Company.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                           -----------------------------------
                                                               2003                    2002
                                                            ----------              ----------
                                                           (in thousands, except per share data)
<S>                                                        <C>                      <C>
Combined revenues........................................   $  115,378              $  117,081
Net income (loss).......................................    $   (3,554)             $   12,413
Earnings (loss) per share - basic .......................   $    (0.08)             $     0.30
Earnings (loss) per share - diluted .....................   $    (0.08)             $     0.25
</TABLE>

D. DISTRIBUTION OF PRACTICEWORKS COMMON STOCK

         On March 5, 2001 (the "Distribution Date"), VitalWorks completed the
distribution of the common stock of its PracticeWorks, Inc. subsidiary
("PracticeWorks" or "Division"), a provider of practice management software for
dental and oral surgery practices, to the Company's stockholders in a tax-free
distribution. The spin-off of PracticeWorks was effected by way of a pro rata
dividend (the "Distribution" or "Spin-Off") of all of the issued and outstanding
shares of common stock of PracticeWorks to VitalWorks' stockholders of record as
of February 21, 2001 (the "Record Date"). This resulted in PracticeWorks
becoming an independent, publicly-traded company. Immediately prior to the
Distribution, VitalWorks effectively transferred to PracticeWorks the Division's
assets and liabilities and, thereby, distributed $28.5 million of net assets, as
adjusted, in connection with the Spin-Off. VitalWorks' stockholders received one
share of PracticeWorks common stock for every four shares of VitalWorks common
stock owned as of the Record Date. No proceeds were received by VitalWorks in
connection with the Distribution.

         Accordingly, the accompanying 2001 consolidated statement of operations
reflects the results of operations of PracticeWorks as discontinued operations.
For the year 2001, revenues included in the loss from discontinued operations
were $6.6 million (i.e., through the Distribution Date).

         For purposes of governing certain of the ongoing relationships between
PracticeWorks and the Company, and to provide for an orderly transition to the
status of two independent companies, PracticeWorks and the Company entered into
various agreements. Among other things, these agreements continue to define the
ongoing relationship between the parties since the Distribution. Because these
agreements were negotiated while PracticeWorks was a wholly-owned subsidiary of
the Company, they are not the result of negotiations between independent
parties, although the Company and PracticeWorks set pricing terms for interim
services believed to be comparable to

                                       59

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

what would have been achieved through arm's-length negotiations. Following the
Distribution, additional or modified agreements, arrangements and transactions
were entered into between the Company and PracticeWorks and such agreements and
transactions were determined through arm's-length negotiations. In connection
with the Distribution, both companies have indemnified the other, and either may
incur obligations with respect to certain representations, warranties,
commitments, and/or contingencies of the other entered into on or prior to the
Distribution Date. A brief description of certain of the material agreements
follows:

Distribution Agreement

         Prior to the Distribution Date, the Company and PracticeWorks entered
into the Distribution Agreement, which provided for, among other things, the
principal corporate transactions required to effect the Distribution and other
agreements relating to the continuing relationship between PracticeWorks and the
Company after the Distribution. Pursuant to the Distribution Agreement, the
Company transferred to PracticeWorks all of the assets and liabilities relating
to the Company's information management technology business for dentists,
orthodontists and oral and maxillofacial surgeons.

         Pursuant to the Distribution Agreement and effective as of the
Distribution Date, PracticeWorks or its successors assumed, and agreed to
indemnify the Company against, all liabilities, litigation and claims, including
related insurance costs, arising out of PracticeWorks' business. The Company
retained, and agreed to indemnify PracticeWorks against, all liabilities,
litigation and claims, including related insurance costs, arising out of the
Company's business. The foregoing obligations do not entitle an indemnified
party to recovery to the extent any such liability is covered by proceeds
received by such party from any third party insurance policies.

         The Distribution Agreement provides that each of the Company and
PracticeWorks will be granted access to certain records and information in the
possession of the other, and will require the retention by each of the Company
and PracticeWorks for a period of eight years following the Distribution Date of
all of this information in its possession. Also, the Distribution Agreement
provides for a three-year period during which neither the Company nor
PracticeWorks may solicit pre-existing customers or employees of the other
party.

Transition Services Agreement

         The Company and PracticeWorks entered into the Transition Services
Agreement on the Distribution Date. Pursuant to this agreement, in exchange for
specified fees, the Company provided to PracticeWorks services including
insurance-related services and employee benefit services, and PracticeWorks
provided to the Company services including the preparation of tax returns,
maintenance of the general ledger, preparation of financial statements,
corporate record-keeping, and payroll for a fee of $.4 million in 2001. The fees
paid pursuant to the Transition Services Agreement were agreed upon between the
parties. This agreement terminated on December 31, 2001. Management believes
that the terms and conditions were as favorable to the Company as those
available from unrelated parties for a comparable arrangement.

Tax Disaffiliation Agreement

         The Company and PracticeWorks entered into the Tax Disaffiliation
Agreement on the Distribution Date which identifies each party's rights and
obligations with respect to deficiencies and refunds, if any, of federal, state,
local or foreign taxes for periods before and after the Distribution and related
matters such as the filing of tax returns and the handling of Internal Revenue
Service matters and other audits. Under the Tax Disaffiliation Agreement,
PracticeWorks or its successors will indemnify the Company for any tax liability
attributable to PracticeWorks or its affiliates for any period. PracticeWorks or
its successors will also indemnify the Company for all taxes and liabilities
incurred solely because (i) PracticeWorks breaches a representation or covenant
given to the law firm King & Spalding in connection with rendering its tax
opinion in the Distribution, which breach contributes to an Internal

                                       60

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Revenue Service determination that the Distribution was not tax-free, or (ii) a
post-Distribution action or omission by PracticeWorks or any affiliate of
PracticeWorks contributes to an Internal Revenue Service determination that the
Distribution was not tax-free. The Company will indemnify PracticeWorks for all
taxes and liabilities incurred solely because (i) the Company breaches a
representation or covenant given to King & Spalding in connection with rendering
its tax opinion in the Distribution, which breach contributes to an Internal
Revenue Service determination that the Distribution was not tax-free, or (ii) a
post-Distribution action or omission by the Company or any affiliate contributes
to an Internal Revenue Service determination that the Distribution was not
tax-free. If the Internal Revenue Service determines that the Distribution was
not tax-free for any other reason, the Company, and PracticeWorks or its
successors will indemnify each other against 50% of all taxes and liabilities.

         PracticeWorks or its successors will also indemnify the Company for any
taxes resulting from any internal realignment undertaken to facilitate the
Distribution on or before the Distribution Date.

Employee Benefits and Compensation Allocation Agreement

         VitalWorks and PracticeWorks entered into the Employee Benefits and
Compensation Allocation Agreement on the Distribution Date, which contains
provisions relating to employee compensation, benefits and labor matters and the
treatment of options to purchase VitalWorks common stock held by VitalWorks
employees who became PracticeWorks employees. This agreement provides that
VitalWorks options held by VitalWorks employees who became PracticeWorks
employees immediately following the Distribution may be replaced by
PracticeWorks options. PracticeWorks employees whose VitalWorks options were
fully vested as of the Distribution Date had the right to surrender their vested
VitalWorks options for options to purchase PracticeWorks common stock for a
period of 30 days following the Distribution Date, or April 4, 2001. Any
VitalWorks employees who became PracticeWorks employees who chose not to
surrender their vested VitalWorks options during this time period continued to
hold VitalWorks options which expired generally within 30 to 90 days from the
Distribution Date. PracticeWorks employees who were not fully vested in
VitalWorks options as of the Distribution Date had their VitalWorks options
exchanged for PracticeWorks options as of the Distribution Date.

                                       61

<PAGE>
                                VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


E. NONRECURRING CHARGES (CREDITS)

Restructuring Costs (Credits)

         The 2003 Plan. In the fourth quarter of 2003, the Company committed to
restructuring its medical businesses through a plan of employee reductions. The
Company's work force was reduced by approximately 45 employees.

         The 2000 Plan. In August 2000, the Company announced its intention to
restructure its operations through a plan of employee reductions and
consolidation of office facilities. Since then, the Company closed 14 facilities
and terminated approximately 400 employees. The offices that were closed are
subject to operating leases that expire at various dates through 2005.

         A description of the nature and amount of restructuring costs (credits)
and other charges incurred with respect to the 2003 and 2000 Plans is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                          COSTS                                       COSTS
                                                         APPLIED                                     APPLIED
                             BALANCE AT     ADJUSTMENTS  AGAINST      BALANCE AT       ADJUSTMENTS   AGAINST
                         DECEMBER 31, 2000  TO ACCRUAL   ACCRUAL   DECEMBER 31, 2001   TO ACCRUAL    ACCRUAL
                         -----------------  -----------  --------  -----------------   -----------  --------
<S>                      <C>                <C>          <C>       <C>                 <C>          <C>
Facility closure and
  consolidation......          $4,603         $ (205)    $ (1,612)       $ 2,786        $ (501)     $(1,178)
Employee severance and
  other termination
  benefits...........           2,231           (220)      (1,897)           114                       (114)
                              -------         ------     --------        -------        ------      -------
2003 and 2000 Plans
  Total..............         $ 6,834         $ (425)(a) $ (3,509)       $ 2,900        $ (501)(b)  $(1,292)
                              =======         ======     ========        =======        ======      =======
</TABLE>

<TABLE>
<CAPTION>
                                                             COSTS
                                                            APPLIED
                             BALANCE AT      ADJUSTMENTS    AGAINST         BALANCE AT
                         DECEMBER 31, 2002    TO ACCRUAL    ACCRUAL     DECEMBER 31, 2003
                         -----------------   -----------    --------    -----------------
<S>                      <C>                 <C>            <C>         <C>
Facility closure and
  consolidation......         $ 1,107         $    (89)     $  (432)           $  586(c)
Employee severance and
  other termination
  benefits...........              --              421          (84)              337
                              -------         --------      -------            ------
2003 and 2000 Plans
  Total..............         $ 1,107         $    332      $  (516)           $  923
                              =======         ========      =======            ======
</TABLE>

----------

(a)  credits resulting from changes in accounting estimates relating to facility
     closure and employee severance costs incurred in 2000 in connection with
     the 2000 Plan

(b)  savings in connection with the early termination of an office lease for a
     facility closed in March 2001 as part of the 2000 Plan

(c)  primarily amounts accrued for outstanding lease commitments relating to the
     2000 Plan

                                       62
<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Statement 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by Statement
146 include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, facility closing,
or other exit or disposal activity. Statement 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002. Accordingly,
the Company adopted the provisions of Statement 146 in connection with the 2003
restructuring.

Impairment Charges (Credits) and Other Nonrecurring Costs

         In 2003, the Company recognized an impairment charge of $.5 million
relating to a medical image distribution product that was abandoned in favor of
a comparable solution offered by AMICAS.

         In 2002, the Company received final payments from three former officers
totaling $12.1 million satisfying their outstanding loans from the Company,
including interest. Consequently, the Company recorded a credit of $6.0 million,
reflecting a complete reversal of the allowance for loan losses established in
March 2001, and related interest income of $1.1 million.

         In 2001, the Company recognized impairment charges and incurred other
nonrecurring costs of $8.3 million. These costs and expenses included the $6.0
million provision for loan losses relating to the notes receivable from former
officers, $.9 million for unused equity financing, $.8 million of executive
severance for separation benefits paid to the Company's former chairman pursuant
to the terms of a mutual separation agreement and a pre-existing employment
agreement, and retention bonuses of $.2 million for terminated employees.

         In 2001, the FASB issued Statement 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." The adoption of Statement 144 has not had a
negative impact on the Company's financial statements.

F. PROPERTY AND EQUIPMENT

         Major classes of property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                              DEPRECIATION/               DECEMBER 31,
                                                              AMORTIZATION          ----------------------
                                                                 PERIOD              2003            2002
                                                              -------------         -------        -------
                                                                 (years)                 (in thousands)
<S>                                                           <C>                   <C>            <C>
Equipment, primarily computers, and software......                 3-5               $12,884       $10,338
Equipment under capital lease obligations...........               3-5                 2,904         2,718
Furniture and other.......................................         3-7                   535           512
                                                                                     -------       -------
                                                                                      16,323        13,568
Less accumulated depreciation and amortization ...                                    11,642         9,026
                                                                                     -------       -------
                                                                                     $ 4,681       $ 4,542
                                                                                     =======       =======
</TABLE>

         Depreciation and amortization expense of these assets totaled $2.4
million, $2.6 million and $2.9 million for 2003, 2002 and 2001, respectively.

                                       63

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         In August 2002, the Company completed the sale of a former headquarters
building in Atlanta for proceeds of $6.3 million, after closing costs. A portion
of the proceeds from the sale was used to repay the $5.5 million mortgage loan
on the building (see Note I). Approximately $.4 million of the proceeds had been
held in escrow to partially guarantee to the new owner the monetary performance
of PracticeWorks, Inc., a tenant of the building, through December 2003 under
their lease agreement. The Company spun-off PracticeWorks in March 2001 (see
Note D). In connection with the sale, the Company entered into a market rate
lease with the new owner of the building through December 2003 for approximately
3,900 square feet of office space, or less than 5% of the building. The amount
held in escrow was returned to the Company and recognized as a gain from the
sale of the building (included in selling, general and administrative expenses).

         In January 2002, the Company completed the sale of its other office
building in Atlanta for $1.4 million, after closing costs.

G. GOODWILL, ACQUIRED/DEVELOPED SOFTWARE AND OTHER INTANGIBLE ASSETS

         Major classes of intangible assets, primarily derived from business
acquisitions including in 2003 the AMICAS acquisition, consist of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                       ----------------------------------------------------------------------------
                                                                       2003                                     2002
                                                       -------------------------------------    -----------------------------------
                                        Estimated        Gross                       Net          Gross                       Net
                                        Economic       Carrying    Accumulated    Carrying      Carrying    Accumulated    Carrying
                                          Life          Amount     Amortization     Value        Amount     Amortization     Value
                                        ---------      --------    ------------   --------      --------    ------------   --------
                                         (years)                                       (in thousands)
<S>                                     <C>           <C>          <C>            <C>          <C>          <C>            <C>
Goodwill ($14.2 million re AMICAS)...                 $  34,472            --     $ 34,472     $  20,256           --      $ 20,256
                                                      =========     ==========    ========     =========       ======      ========
Acquired software....................        7        $  13,700     $     (163)   $ 13,537
Software product development.........      3-5            9,573         (1,641)      7,932     $   9,384       $ (911)     $  8,473
                                                      ---------     ----------    --------     ---------       ------      --------
                                                      $  23,273     $   (1,804)   $ 21,469     $   9,384       $ (911)     $  8,473
                                                      =========     ==========    ========     =========       ======      ========

Trademarks..........................        15        $   1,900     $      (11)   $  1,889
Noncompete agreements...............         5            1,500            (25)      1,475
                                                      ---------     ----------    --------     ---------       ------      --------
                                                      $   3,400     $      (36)   $  3,364            --           --            --
                                                      =========     ==========    ========     =========       ======      ========
</TABLE>

         Amortization expense of the identifiable intangible assets totaled $1.9
million and $.9 million for 2003 and 2002, respectively. There was no
amortization expense in 2001. Amortization of acquired software and software
product development is recognized in the accompanying statements of operations
as a cost of software licenses and system sales. Amortization of trademarks and
noncompete agreements is included in depreciation and amortization expense.

                                       64

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Assuming no impairment charges, estimated annual amortization expense of the
identifiable intangible assets is as follows (in thousands):

<TABLE>
<S>                                          <C>
2004..........................               $  4,185
2005..........................                  4,765
2006..........................                  4,765
2007..........................                  3,753
2008..........................                  2,358
Thereafter....................                  5,007
                                             --------
                                             $ 24,833
                                             ========
</TABLE>

H. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                    --------------------------
                                                                      2003              2002
                                                                    --------          --------
                                                                         (in thousands)
<S>                                                                 <C>               <C>
Trade accounts payable.................................             $  2,524          $  1,930
Cost of providing EDI services.........................                2,025             2,894
Other accrued expenses.................................                6,500             5,806
                                                                    --------          --------
                                                                    $ 11,049          $ 10,630
                                                                    ========          ========
</TABLE>

I. LONG-TERM DEBT

         Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                     -----------------------
                                                                       2003           2002
                                                                     --------       --------
                                                                         (in thousands)
<S>                                                                  <C>            <C>
Wells Fargo Foothill, Inc.
    Acquisition line advance............................             $ 15,000
    Term loan...........................................               14,500       $ 18,250
Capital leases (see Note J).............................                  257            691
                                                                     --------       --------
                                                                       29,757         18,941
Less current portion....................................                6,738          4,300
                                                                     --------       --------
                                                                     $ 23,019       $ 14,641
                                                                     ========       ========
</TABLE>

         All loan amounts with the Company's former lender were repaid in March
2002 in connection with a new four-year credit agreement entered into by the
Company with Wells Fargo Foothill, Inc., a wholly-owned subsidiary of Wells
Fargo & Company. The new agreement included a term loan of $22.0 million at an
interest rate of prime plus 2%, and a mortgage loan of $5.5 million. The Company
repaid the mortgage loan in August 2002 in connection with the sale of the
Atlanta property (see Note F). In August 2003, the Company entered into an
amended and restated four-year credit agreement with Wells Fargo. The amended
agreement included the Company's outstanding term loan of $15.8 million at an
interest rate of prime plus .5% (4.5% at December 31, 2003). Interest is payable
monthly in arrears. Principal is payable quarterly through April 1, 2004, with a
balloon payment in August 2007. Should the Company decide to prepay the term
loan in full prior to year three, it would incur a prepayment fee equal to 2% in
year one and 1% in year two of the then outstanding principal balance of

                                       65

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

the term loan. The prepayment fee may be reduced should the loan be prepaid in
connection with a change of control of the Company. The outstanding term loan,
which is collateralized by substantially all of the Company's assets and
intellectual property rights, subjects the Company to certain restrictive
covenants, including (i) the required maintenance of minimum levels of recurring
revenues and earnings, as defined, (ii) an annual limit on the amount of capital
expenditures, (iii) the required maintenance of a minimum of $6 million in cash,
and (iv) the prohibition of dividend payments to stockholders. The amended
agreement also provides for an acquisition credit line of up to $50 million,
less any amounts outstanding under term loans. Availability of the acquisition
credit line is at the discretion of Wells Fargo. On November 25, 2003 in
connection with the AMICAS acquisition, the Company borrowed $15.0 million under
the credit line in the form of a term loan at an interest rate of prime plus
..75% (4.75% at December 31, 2003). Principal is payable in 15 equal quarterly
installments, which began on January 1, 2004, and interest is payable in
arrears.

         As of December 31, 2003, maturities of long-term debt are as follows:
$6.8 million in 2004, $4.0 million in 2005, $4.0 million in 2006 and $15.0
million in 2007.

         In April 2002, the FASB issued Statement 145, "Rescission of FASB
Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical
Corrections." For most companies, Statement 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in Accounting Principles Board Opinion No. 30.
Statement 145 also amends Statement 13 for certain sales-leaseback and sublease
accounting. The Company adopted the provisions of Statement 145 in January 2003.
The adoption of Statement 145 did not have a significant impact on its financial
statements.

J. COMMITMENTS AND CONTINGENCIES

         The Company leases office and research facilities, and certain computer
and other equipment under various operating and capital lease agreements. The
leases expire at various dates through 2009.

         Future minimum lease payments under all operating and capital leases
with noncancellable terms in excess of one year are as follows:

<TABLE>
<CAPTION>
YEAR                                                                    CAPITAL        OPERATING
                                                                        -------        ---------
                                                                            (in thousands)
<S>                                                                     <C>            <C>
2004..........................................................           $ 243         $  3,079
2005..........................................................              19            2,256
2006..........................................................                            2,113
2007..........................................................                            1,454
2008..........................................................                              771
Thereafter....................................................                               16
                                                                         -----         --------
                                                                           262            9,689
Less amounts included in accrued restructuring costs..........                              559
                                                                         -----         --------
                                                                           262         $  9,130
                                                                                       ========
Less amounts representing interest............................               5
                                                                         -----
Present value of net minimum lease payments...................             257
Less current portion..........................................             239
                                                                         -----
Long-term obligations under capital leases....................           $  18
                                                                         =====
</TABLE>

         In addition, certain of the office leases provide for contingent
payments based on building operating expenses. Rental expenses for years 2003,
2002 and 2001 under all lease agreements totaled $2.6 million, $2.6

                                       66

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

million and $2.5 million, respectively.

         In April 2003, the Company entered into an agreement to acquire program
source code, object code, and engineering services from an independent software
development firm. A monthly fee of approximately $.3 million ($3 million per
annum) for development services will be incurred during the term ending January
2005. Also, during a royalty term ending January 2006, the Company is obligated
to pay royalty fees of up to $5 million based on related software license sales,
if any.

         In May 2002, the Company entered into a five-year agreement with a
third-party provider of EDI services for patient claims processing. For the
first year of the agreement, the Company incurred $.5 million for processing
services. For the twelve-month period ending May 2004, the Company is committed
to pay $.6 million for processing services. Thereafter, the annual services fee
will range from $.5 million to $.8 million based on the Company's volume usage
in the last month of the preceding year.

         In connection with the Company's employee savings plan, the Company has
committed, for the 2004 plan year, to contribute to the plan. The matching
contribution for 2004 is estimated to be approximately $1 million and will be
made 75% in cash and 25% in shares of the Company's common stock.

         In October 2001, the Company expanded its August 2000 agreement with
National Data Corporation ("NDC") for outsourcing much of the Company's patient
statement and invoice printing work. The Company continues, for a fee, to
provide printing services for its physicians under the subcontracting
arrangement with NDC. The amended arrangement, which extends until April 2009,
provides for, among other things, the attainment of certain quarterly
transaction processing volume levels during the term. In exchange, the Company
received $7.9 million in cash in 2001 (in connection with the August 2000
agreement, the Company had received $8.8 million), which represent unearned
discounts (see accompanying balance sheets) that are recognized as an offset to
cost of maintenance and services revenues as the minimum volume commitments are
fulfilled. In April 2003, the Company's arrangement with NDC was amended such
that commencing in June 2003, the quarterly minimum volume commitments were
reduced. In turn, the Company refunded $4.3 million of unearned discounts. The
new quarterly commitment approximates 65% of the Company's current aggregate
transaction level. These discount amounts, received and refunded, have been
classified as cash provided by and used in operating activities.

         From time to time, in the normal course of business, various claims are
made against the Company. Except for proceedings described below, there are no
material proceedings to which the Company is a party, and management is unaware
of any material contemplated actions against the Company.

         In August 2003, the Company was served with a summons and complaint as
part of a bankruptcy proceeding relating to a former business associate of the
Company. The complaint alleges that in 2001, the Company received a preference
payment from the business associate and seeks to avoid and recover the $.8
million payment made to the Company.

         On or about July 31, 2003, a Consolidated Class Action Complaint was
filed in the United States District Court for the District of Connecticut on
behalf of purchasers of the common stock of VitalWorks Inc. during the class
period of January 24, 2002 to October 23, 2002. The defendants are VitalWorks
and three of its individual officers and directors. Plaintiffs have asserted
claims against the defendants under Section 10(b) of the Securities Exchange Act
of 1934 and against the individual defendants under Section 20(a) of the
Exchange Act. According to the Consolidated Complaint, the defendants made
materially false and misleading statements during the Class Period concerning
the Company's products and financial forecasts. In addition, the Consolidated
Complaint alleges that the individual defendants acted as controlling persons in
connection with the Company's alleged securities law violations. Compensatory
damages in an unspecified amount, pre-judgment and post-judgment

                                       67

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

interest, costs and expenses, including reasonable attorneys' fees and experts'
fees and other costs, as well as other relief the Court may deem just and proper
are sought. On November 14, 2003, the defendants filed with the Court a motion
to dismiss the Consolidated Complaint pursuant to Federal Rules of Civil
Procedure 12(b)(6) and (9)(b). The motion has been fully briefed and is awaiting
disposition by the Court. At this time, discovery is automatically stayed under
the Private Securities Litigation Reform Act and no class has been certified.

         On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation (now known as VitalWorks Inc.), et al., was filed in Boone County
Superior Court in Indiana and the case was subsequently transferred to the
Northern District Court of Georgia. The complaint alleges state securities law
violations, breach of contract, and fraud claims against the defendants. The
complaint does not specify the amount of damages sought by plaintiffs, but seeks
rescission of a transaction that the plaintiffs value at $5 million, as well as
punitive damages and reimbursement for the plaintiffs' attorneys' fees and
associated costs and expenses of the lawsuit. On October 15, 2001, the
plaintiffs' request for a preliminary injunction to preserve their remedy of
rescission was denied and part of their complaint was dismissed. The plaintiffs'
subsequent appeal of this decision was denied. The plaintiffs have retained new
counsel and have served a second amended complaint upon the Company which added,
among other things, a claim for Georgia RICO violations. On August 18, 2003, the
Company filed with the Court a partial motion to dismiss the second amended
complaint which motion was granted in part and denied in part on January 9,
2004. Subsequent to year-end, the Company served an answer to the second amended
complaint.

         While management believes that the Company has meritorious defenses in
each of the foregoing matters and the Company intends to pursue its positions
vigorously, litigation is inherently subject to many uncertainties. Thus, the
outcome of these matters is uncertain and could be adverse to the Company.
Depending on the amount and timing of an unfavorable resolution(s) of the
contingencies, it is possible that the Company's financial position, future
results of operations or cash flows could be materially affected in a particular
reporting period(s).

         As permitted under Delaware law, the Company has agreements whereby it
indemnifies its officers and directors for certain events or occurrences while
the officer or director is or was serving at the Company's request in such
capacity. The term of the indemnification period is for the officer's or
director's lifetime. The maximum potential amount of future payments the Company
could be required to make under these indemnification agreements is unlimited;
however, with respect to certain events or occurrences after March 6, 2001, the
Company has a director and officer insurance policy that limits its exposure and
enables it to recover a portion of any future amounts paid. Given the insurance
coverage in effect, the Company believes the estimated fair value of these
indemnification agreements is minimal. The Company has no liabilities recorded
for these agreements as of December 31, 2003.

         The Company includes standard intellectual property indemnification
provisions in its software license agreements. Pursuant to these provisions, the
Company holds harmless and agrees to defend the indemnified party, generally its
business partners and customers, in connection with certain patent, copyright,
trademark and trade secret infringement claims by third parties with respect to
the Company's products. The term of the indemnification provisions varies and
may be perpetual. In the event an infringement claim against the Company or an
indemnified party is made, generally the Company, in its sole discretion, agrees
to do one of the following: (i) procure for the indemnified party the right to
continue use of the software, (ii) provide a modification to the software so
that its use becomes noninfringing; (iii) replace the software with software
which is substantially similar in functionality and performance; or (iv) refund
the residual value of the software license fees paid by the indemnified party
for the infringing software. The Company believes the estimated fair value of
these intellectual property indemnification agreements is minimal. The Company
has no liabilities recorded for these agreements as of December 31, 2003.

                                       68

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

K. STOCKHOLDERS' EQUITY

Stockholder Rights Plan

         In December 2002, the Company adopted a stockholder rights plan (the
"Rights Plan") and declared a dividend of one right (the "Right") on each share
of VitalWorks common stock. The dividend was paid on December 27, 2002, to
stockholders of record on December 27, 2002. The Rights Plan was approved and
recommended to the Company's board of directors (the "Board") by a special
committee of the Board consisting of three outside members of the Board. The
Rights Plan is designed to enable all VitalWorks stockholders to realize the
full value of their investment and to provide for fair and equal treatment of
all VitalWorks stockholders if there is an unsolicited attempt to acquire
control of the Company. The adoption of the Rights Plan is intended as a means
to guard against abusive takeover tactics and is not in response to any specific
effort to acquire control of the Company.

         Initially, the Rights will trade with the common stock of VitalWorks
and will not be exercisable. The Rights will separate from the common stock and
become exercisable upon the occurrence of events typical of stockholder rights
plans. In general, such separation will occur when any person or group, without
the Board's approval, acquires or makes an offer to acquire 15% or more of
VitalWorks' common stock. Thereafter, separate right certificates will be
distributed and each Right will entitle its holder to purchase one
one-thousandth of a share of VitalWorks' Series B Junior Preferred Stock (the
"Preferred Stock") for an exercise price of $20.00 (the "Exercise Price"). Each
one one-thousandth of a share of Preferred Stock has economic and voting terms
equivalent to those of one share of VitalWorks' common stock.

         Subject to the specific terms of the Rights Plan, in the event that any
person or group, without the Board's approval, actually acquires 15% or more of
VitalWorks' common stock, then each holder of a Right (other than such person or
group) shall thereafter have the right to receive upon exercise of such Right
and payment of the Exercise Price, shares of Preferred Stock having a value
equal to twice the Exercise Price. Also, if the Company is involved in a merger
or sells more than 50% of its assets or earning power, each Right, unless
previously redeemed by the Board, will entitle its holder (other than the
acquiring person or group) to purchase shares of common stock of the acquiring
company having a market value of twice the Exercise Price.

         The Rights Plan is not intended to prevent a takeover of the Company at
a full and fair price. However, the Rights Plan may cause substantial dilution
to a person or group that, without prior Board approval, acquires 15% or more of
VitalWorks' common stock, or unless the Rights are first redeemed by the Board.
The Rights may be redeemed by the Board for $0.005 per Right and will otherwise
expire on December 5, 2012.

         The Rights Plan contains an independent directors review provision
whereby a committee of independent members of the Board will review the Rights
Plan at least every three years and, if a majority of the members of the
independent committee deems it appropriate, may recommend to the Board the
continued maintenance, modification or termination of the Rights Plan.

         The Rights Plan does not weaken the Company's financial strength or
interfere with its business plans. The issuance of the Rights has no dilutive
effect, will not affect reported earnings per share, is not taxable to the
Company or its stockholders and will not change the way VitalWorks' shares are
traded.

                                       69

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Stock Repurchase Program

         In 2003, the Company discontinued its stock repurchase program.

Employee Savings Plans

         The Company maintains an employee savings plan that qualifies as a cash
or deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. The Company may make matching and/or profit-sharing contributions to the
plan at its sole discretion. Effective January 1, 2003, the Company amended the
plan. In 2003, 2002 and 2001, the Company authorized matching contributions of
$.8 million, $1.1 million and $1.1 million, respectively, to the plan,
representing two-thirds of each participant's contribution, not to exceed 4% of
pre-tax compensation in 2003, and up to 6% of pre-tax compensation in 2002 and
2001, respectively. The matching contribution for the 2003 plan year was made
quarterly, half in cash and half in shares of VitalWorks common stock. Except
for a cash contribution of $.3 million made in 2003 with respect to the 2002
plan year, the contributions for the 2002 and 2001 plan years were made in
VitalWorks' common stock in the following year. The matching contribution for
2004 will be made quarterly 75% in cash and 25% in shares of VitalWorks common
stock. Employees become fully vested with respect to Company contributions after
three years of service. The vesting term had been five years. Participating
employees may now defer up to 50% of their pre-tax compensation, but not more
than $13,000 per calendar year.

         The Company also maintains an employee savings plan that qualifies as a
cash or deferred salary arrangement under Section 401(k) for its AMICAS
employees. This plan covers substantially all AMICAS employees who meet minimum
age and service requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis, but not more that $13,000 per calendar
year. The Company may make matching contributions to the plan at its sole
discretion. There was no matching contribution made for 2003.

Employee Stock Purchase Plan

         The Company's 2002 Employee Stock Purchase Plan (the "ESPP"), as
approved by the Company's shareholders in June 2002, permits eligible employees
to purchase VitalWorks common stock at a discounted price through periodic
payroll deductions of up to 15% of their cash compensation. Generally, each
offering period will have a maximum duration of six months and shares of common
stock will be purchased for each participant at the conclusion of each offering
period. The price at which the common stock is purchased under the ESPP is equal
to 85% of the lower of (i) the closing price of the common stock on the first
business day of the offering period, or (ii) the closing price on the last
business day of the offering period. Under the ESPP, .4 million shares of common
stock of the Company have been reserved and were available for issuance at
December 31, 2003. In 2003, 2002 and 2001, a total of 95,241, 56,404, and 62,948
shares, respectively, were issued under the Company's employee stock purchase
plan.

Stock Option Plans

         The Company has stock option plans that provide for the grant of
incentive and nonqualified options to purchase the Company's common stock to
selected officers, other key employees, directors and consultants. These plans
include the VitalWorks Inc. 2000 Broad Based Stock Plan, the VitalWorks Inc.
1996 Stock Option Plan, the VitalWorks Inc. Length-of-Service Nonqualified Stock
Option Plan and the VitalWorks Inc. Directors Stock Option Plan. The Company has
also assumed the stock options of six medical software businesses that merged
with VitalWorks in 1999. Such options were converted at the applicable rates
used to issue the Company's common stock in the mergers. The shares reserved
under the Company's stock option plans were adjusted in connection with the
Distribution (see Note D), using a conversion ratio of 2.11667, in accordance
with the terms of the respective plans.

                                       70

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The VitalWorks Inc. 2000 Broad Based Stock Plan (the "2000 Plan") has
21.2 million shares of common stock of the Company reserved for nonqualified
option grants, stock appreciation right grants, or stock grants to directors and
employees. The option price for each share of stock subject to an option or
stock appreciation right may not be less than the fair market value of a share
of stock on the date the option or right is granted. Options or rights granted
under this plan generally vest over a three to four-year period and expire ten
years from the date of grant. At December 31, 2003, there were 12.1 million
shares available for grant under the 2000 Plan.

         Under the VitalWorks Inc. 1996 Stock Option Plan (the "1996 Plan"),
12.7 million shares of common stock of the Company have been reserved for option
grants to directors, officers, other key employees, and consultants. Employees
of the Company may be granted incentive stock options ("ISOs") within the dollar
limitations prescribed under Section 422(d) of the Internal Revenue Code. The
exercise price of ISOs shall not be less than the fair market value of the
common stock as of the option grant date (110% of such value for 10%
stockholders). Nonqualified stock options may be granted to directors and
consultants. Options generally vest ratably over a three to four-year period and
expire ten years from the date of grant. At December 31, 2003, there were 5.1
million shares available for grant under the 1996 Plan.

         Under the VitalWorks Inc. Length-of-Service Nonqualified Stock Option
Plan (the "LOSSO Plan"), 2.1 million shares of common stock of the Company have
been reserved for issuance to employees of the Company. Employees are granted
nonqualified stock options based on years of service with the Company. The
exercise price of options issued pursuant to this plan shall be no less than the
fair market value of the common stock as of the grant date. Options granted
under the LOSSO Plan vest four years and expire ten years from the date of
grant. Effective July 1, 2002, the Company discontinued granting options under
the LOSSO Plan.

         Under the VitalWorks Inc. Directors Stock Option Plan (the "Director
Plan"), .4 million shares of common stock of the Company have been reserved for
issuance as nonqualified stock options to non-employee directors of the Company.
Upon appointment to the board of directors, a director receives an option grant
of 10,000 shares and an additional option grant of 2,500 shares on each
anniversary date. A director may also receive additional option grants from time
to time. One half of the options granted pursuant to this plan vest after one
year of service following the grant date and the other half vests after two
years of service following the grant date. At December 31, 2003, there were .3
million shares available for grant under the Director Plan.

                                       71

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         A summary of stock option activity and related information for the
years ended December 31 is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                                                            WEIGHTED
                                                                                             AVERAGE
                                                                         OPTIONS         EXERCISE PRICE
                                                                         -------         --------------
<S>                                                                      <C>             <C>
Outstanding at December 31, 2000...........................               15,894            $   6.66
  Granted..................................................                  761                2.77
  Exercised................................................                 (871)               2.14
  Forfeited or canceled....................................              (10,217)               7.31 (a)
  Conversion in order to preserve intrinsic value..........                9,271                     (a)
                                                                         -------
Outstanding at December 31, 2001...........................               14,838                2.49
  Granted..................................................                  324                3.97
  Exercised................................................               (5,153)               1.91
  Forfeited................................................                 (481)               3.95
                                                                         -------
Outstanding at December 31, 2002...........................                9,528                2.79
  Granted..................................................                   83                4.22
  Exercised................................................                 (314)               2.62
  Forfeited................................................                 (165)               4.41
                                                                         -------
Outstanding at December 31, 2003...........................                9,132            $   2.77
                                                                         =======

Options exercisable at December 31, 2001...................                6,997            $   2.24
Options exercisable at December 31, 2002...................                5,503            $   2.61
Options exercisable at December 31, 2003...................                8,026            $   2.75
</TABLE>

----------

(a) In connection with the Spin-Off of PracticeWorks in March 2001, VitalWorks
and PracticeWorks entered into an Employee Benefits and Compensation Allocation
Agreement, which contains provisions relating to employee compensation, benefits
and labor matters including the treatment of options to purchase VitalWorks
common stock as a result of the Distribution (see Note D for further
discussion). PracticeWorks employees exchanged approximately 7.4 million
VitalWorks stock options with a weighted average exercise price of $7.74 for
PracticeWorks stock options, thereby canceling the VitalWorks stock options.
Stock options of approximately 8.4 million with a weighted average exercise
price of approximately $7.20 held by VitalWorks employees prior to the
Distribution, who did not become PracticeWorks employees subsequent to the
Distribution, were converted to approximately 17.7 million options with an
average price of approximately $3.40 in order to preserve the intrinsic value of
the options.

                                       72

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

         The following table summarizes information about the Company's
outstanding stock options at December 31, 2003 (shares in thousands):

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING
                       -------------------------------------------------
                                                                                        OPTIONS EXERCISABLE
                                               WEIGHTED                            ------------------------------
                                               AVERAGE          WEIGHTED                                 WEIGHTED
                                              REMAINING          AVERAGE                                 AVERAGE
     RANGE OF            NUMBER              CONTRACTUAL        EXERCISE             NUMBER              EXERCISE
  EXERCISE PRICES      OUTSTANDING              LIFE              PRICE            EXERCISABLE            PRICE
-----------------      -----------           -----------        --------           -----------           --------
                                               (years)
<S>                    <C>                   <C>                <C>                <C>                   <C>
$  0.98 -   2.50          7,187                 6.6              $2.05                 6,550              $2.06
   2.51 -   5.00            977                 6.5               3.28                   610               3.19
   5.01 -   7.50            621                 6.1               6.72                   559               6.86
   7.51 -  17.31            347                 5.5               9.14                   307               9.05
                          -----                                                        -----
$  0.98 -  17.31          9,132                 6.5              $2.77                 8,026              $2.75
                          =====                                                        =====
</TABLE>

Warrants

         The following table summarizes information about the Company's
outstanding and exercisable warrants at December 31, 2003 (shares in thousands):

<TABLE>
<CAPTION>
                                                   WEIGHTED
                                                    AVERAGE          WEIGHTED
                                                   REMAINING          AVERAGE
    RANGE OF                  NUMBER              CONTRACTUAL        EXERCISE
 EXERCISE PRICES            OF WARRANTS              LIFE              PRICE
----------------            -----------           -----------        --------
                                                    (years)
<S>                         <C>                   <C>                <C>
$ 0.79 -   6.89                 358                   4.1              $4.49
  6.90 -  17.84                 203                   2.2               7.05
                                ---
$ 0.79 -  17.84                 561                   3.4              $5.42
                                ===
</TABLE>

         There was no significant impact on the Company's financial statements
related to warrants in 2003, 2002 and 2001.

                                       73

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

L. INCOME TAXES

         The Company's provision for income taxes of $.2 million for 2003 and
2002 consists primarily of current state income taxes and relates to continuing
operations. For 2001, the Company did not record a provision or benefit for
income taxes, due primarily to its net operating losses.

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and their tax bases. Significant components of deferred
income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                                 ------------------------
                                                                                    2003           2002
                                                                                 ---------       --------
                                                                                      (in thousands)
<S>                                                                              <C>             <C>
Deferred income tax assets:
  Allowance for doubtful accounts......................                          $   2,022       $  1,422
  Goodwill amortization................................                              7,589          8,795
  Accrued expenses.....................................                              1,565          1,030
  Unearned discounts re: outsourced printing services..                              2,488          4,700
  Net operating loss and credit carryforwards..........                             47,617         38,823
  Change in AMICAS' tax accounting method..............                              2,426
  Other................................................                                               598
                                                                                 ---------       --------
                                                                                    63,707         55,368
    Less valuation allowance...........................                             26,958         25,271
                                                                                 ---------       --------
                                                                                 $  36,749       $ 30,097
                                                                                 =========       ========
Deferred income tax liabilities:
  Acquired/developed software..........................                          $   8,480       $  3,347
  Other intangible assets...............................                             1,329
  Property and equipment...............................                                190
                                                                                 ---------       --------
                                                                                     9,999          3,347
                                                                                 ---------       --------
Net deferred income tax asset                                                    $  26,750       $ 26,750
                                                                                 =========       ========
</TABLE>

         The provision for income taxes attributed to continuing operations
differed from the amounts computed by applying the statutory U.S. federal income
tax rate as follows:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                             ------------------------------------
                                                                               2003         2002           2001
                                                                             --------     ---------     ---------
<S>                                                                          <C>          <C>           <C>
Expected taxes at federal statutory rate.......................                  35.0%         35.0%        35.0%
State income taxes, net of federal benefit.....................                   6.6           5.0          3.2
Acquired in-process technology.................................                   3.2
Nondeductible goodwill amortization............................                                            (14.2)
Retained net operating losses from discontinued operations.....                                              4.7
Other, net.....................................................                    .8            .2          (.8)
Change in valuation allowance..................................                 (43.1)        (39.5)       (27.9)
                                                                               --------     --------      --------
Provision for income taxes--continuing operations...............                  2.5%           .7%          --%
                                                                              ========     ========      ========
</TABLE>

         As of December 31, 2003, the Company has net operating loss and tax
credit carryforwards of approximately $114 million and $2.5 million,
respectively, which expire at various dates through 2023. Included in the $114
million is approximately $26 million, the benefit of which if realized, would be
recorded as a credit to additional paid-in capital, and approximately $45.3
million resulting from preacquisition tax attributes of subsidiaries,
utilization of which is subject to substantial limitations attributable to the
change in ownership provisions of the Internal Revenue Code and similar state
authority. Included in the $45.3 million is

                                       74

<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

approximately $15 million of net operating losses acquired in connection with
the AMICAS acquisition, the benefit of which if realized, would be recorded as a
credit to goodwill.

         Management has assessed the realizable value of the Company's deferred
tax assets of $63.7 million and determined that a valuation allowance of $26.9
million was necessary as of December 31, 2003 to, along with deferred tax
liabilities of $10.0 million, reduce the net deferred tax asset to $26.8
million, an amount which management believes is more likely than not to be
realized. In reaching this conclusion, management noted that internal
projections indicate that the Company will generate sufficient taxable income to
realize the net deferred tax assets within four to five years.

M. SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH ACTIVITIES

         Cash payments for interest amounted to $.9 million, $2.2 million and
$2.1 million for 2003, 2002, and 2001, respectively. The Company made cash
payments for income taxes of $.3 million and $21,000 in 2003 and 2002,
respectively. The Company received net tax refunds of $.1 million in 2001.

         In 2003, 2002, and 2001, the Company authorized contributions of $.4
million (plus $.4 million in cash), $.8 million (plus $.3 million in cash) and
$1.1 million, respectively, to the employee savings plan, which were made in
VitalWorks common stock quarterly in 2003, and in the following year for 2002
and 2001, respectively.

         In 2001, the Company distributed $28.5 million of net assets, as
adjusted, in connection with the Spin-Off of PracticeWorks (see Note D).

         In 2001, the Company acquired certain property and equipment with an
aggregate value of $.2 million in exchange for indebtedness including capital
lease obligations.

         In 2001, the Company settled a note payable and price protection
feature relating to the 1998 acquisition of the Healthcare Systems unit of the
Reynolds and Reynolds Company by issuing 500,000 shares of VitalWorks common
stock.

N. SEGMENT INFORMATION

         The Company has identified two reportable operating segments: software
licenses and system sales, and maintenance and services. Software license fees
and system revenues are derived from the sale of software product licenses and
computer hardware. Maintenance and services revenues come from providing ongoing
product support, implementation, training and transaction processing services.

         The Company's president and chief executive officer evaluates
performance regularly based on measures of segment revenues, gross profit and
company-wide operating results. Employee headcount and operating costs and
expenses are managed by functional areas, rather than by revenue segments.
Moreover, the Company does not account for or report to the president and CEO
its assets or capital expenditures by segments.

         The accompanying statements of operations and related notes disclose
the financial information of the Company's reportable segments for the three
years ended December 31, 2003.

         The Company markets its products and services primarily to two types of
physician practices: radiology practices, including hospital radiology
departments and ambulatory imaging centers, and medical practices such as
anesthesiology, ophthalmology, emergency medicine, plastic surgery, dermatology
and

                                       75
<PAGE>

                                 VITALWORKS INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

internal medicine.

O. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31, 2003:

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                        ------------------------------------------------------   YEAR ENDED
                                                        MARCH 31       JUNE 30      SEPTEMBER 30  DECEMBER 31    DECEMBER 31
                                                        ---------      --------     ------------  ------------   -----------
                                                                         (in thousands, except per share data)
<S>                                                     <C>            <C>           <C>           <C>            <C>
2003
   Total revenues..................................     $  28,573      $ 28,188      $   28,089    $  26,669      $ 111,519
   Gross profit....................................        19,648        20,616          20,640       18,746         79,650
       Net income (loss)...........................     $   2,718      $  4,236      $    3,031    $  (2,022)(a)  $   7,963
                                                        =========      ========      ==========     ========      =========
   Average number of shares outstanding
       Basic.......................................        42,716        42,998          43,203       43,283         43,052
       Diluted.....................................        46,391        46,415          47,460       43,283         47,134
   Earnings (loss) per share
       Basic.......................................     $    0.06      $   0.10      $     0.07    $   (0.05)     $    0.18
                                                        =========      ========      ==========    =========      =========
       Diluted.....................................     $    0.06      $   0.09      $     0.06    $   (0.05)     $    0.17
                                                        =========      ========      ==========    =========      =========
2002
   Total revenues..................................     $  28,208      $ 28,902      $   28,656    $  29,045      $ 114,811
   Gross profit....................................        21,070        21,319          20,899       20,804         84,092
       Net income..................................     $   7,631(b)   $  8,299(b)   $    4,135    $   4,085      $  24,150
                                                        =========      ========      ==========    =========      =========
   Average number of shares outstanding
       Basic.......................................        39,136        40,865          43,284       43,354         41,592
       Diluted.....................................        47,211        49,690          50,385       47,727         48,850
   Earnings per share
       Basic.......................................     $    0.19      $   0.20      $     0.10    $    0.09      $    0.58
                                                        =========      ========      ==========    =========      =========
       Diluted.....................................     $    0.16      $   0.17      $     0.08    $    0.09      $    0.49
                                                        =========      ========      ==========    =========      =========
</TABLE>

----------

(a)     In the quarter, the Company recognized impairment charges and incurred
        other nonrecurring costs of $1.6 million consisting of $.8 million for
        acquired in-process technology, $.5 million for asset impairment and $.3
        million of restructuring costs.

(b)     In the June 2002 quarter and in July 2002, the Company received final
        payments from three former officers satisfying their outstanding loans
        from VitalWorks, including interest. Consequently, the Company recorded
        a credit of $6.0 million ($3.0 million each in the March and June
        quarters) reflecting a complete reversal of the allowance for loan
        losses established in March 2001, and related interest income of $1.1
        million ($.5 million and $.6 million in the March and June quarters,
        respectively). The June quarter also reflects a savings of $.5 million
        in connection with the early termination of an office lease for a
        facility closed in March 2001.

                                       76

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE

Board of Directors and Stockholders
VitalWorks Inc.

         The audits referred to in our report dated January 26, 2004 relating to
the consolidated financial statements of VitalWorks Inc., and Subsidiaries,
which is contained in Item 8 of this Form 10-K, included the audits of the
schedule listed under Item 15(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

         In our opinion, such schedule presents fairly, in all material
respects, the information set forth therein.

BDO Seidman, LLP

New York, New York
January 26, 2004

                                       77

<PAGE>

ITEM 15(a)(2). FINANCIAL STATEMENT SCHEDULE

                                 VITALWORKS INC.

                                  SCHEDULE II -
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                                   ADDITIONS
                                                          ----------------------------
                                            BALANCE AT      CHARGED TO      CHARGED                     BALANCE AT
                                            BEGINNING       COSTS AND       TO OTHER                        END
            DESCRIPTION                     OF PERIOD        EXPENSES       ACCOUNTS     DEDUCTIONS      OF PERIOD
            -----------                     ----------      ----------      --------     ----------     ----------
                                                                         (in thousands)
<S>                                         <C>             <C>             <C>          <C>            <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS
AND DISCOUNTS
   Year ended December 31, 2003             $   1,900             145        1,828 (a)    (1,273) (b)   $  2,800 (g)
   Year ended December 31, 2002                 1,800           1,371        1,444 (a)    (2,715) (b)      1,900
   Year ended December 31, 2001                 1,936           2,296          900 (a)    (3,332) (b)      1,800

DEFERRED TAX ASSET VALUATION
ALLOWANCE

   Year ended December 31, 2003             $  25,271                        6,141 (h)    (4,454) (i)   $ 26,958
   Year ended December 31, 2002                23,001                       11,956 (d)    (9,686) (e)     25,271
   Year ended December 31, 2001                16,495           6,249 (c)      257 (d)                    23,001

ALLOWANCE FOR NOTES RECEIVABLES FROM
FORMER OFFICERS

   Year ended December 31, 2003
   Year ended December 31, 2002             $   6,000                                    $(6,000) (f)
   Year ended December 31, 2001                                 6,000                                      6,000
</TABLE>

----------

(a)  Charged to revenues

(b)  Write-offs, returns and discounts, net of recoveries

(c)  Net operating loss carryforwards

(d)  Net operating loss carryforwards relating to the exercise of employee stock
     options in 2001 and, in 2002, $9,942 along with adjustments to beginning of
     year gross deferred tax assets and liabilities of $1,097 for a change in
     rate and $917 for correction in amounts previously reported.

(e)  Recognition of deferred tax assets of $9,614, and other adjustments of $72

(f)  Credit due to change in accounting estimate

(g)  Includes $200 from a business acquisition

(h)  Includes $6,042 from a business acquisition and other adjustments of $99

(i)  Recognition of deferred tax assets of $3,517 and correction of beginning of
     year gross deferred tax assets of $937

         All financial statement schedules not listed are omitted because they
are inapplicable or the requested information is shown in the financial
statements of the registrant or in the accompanying notes.

                                       78

<PAGE>

                                   SIGNATURES

         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 on this 12th day of
March, 2004.

                               VitalWorks Inc.

                               By:              /s/ MICHAEL A. MANTO
                                    -------------------------------------------
                                                      Michael A. Manto
                                             Executive Vice President and Chief
                                                     Financial Officer

                               By:               /s/ JOSEPH M. WALSH
                                    -------------------------------------------
                                                      Joseph M. Walsh
                                            Chairman and Chief Executive Officer

                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Joseph M. Walsh and Michael A. Manto, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
            SIGNATURE                                           TITLE                              DATE
------------------------------------------    --------------------------------------          --------------
<S>                                           <C>                                             <C>
       /s/ JOSEPH M. WALSH                    President, Chief Executive Officer              March 12, 2004
------------------------------------------    and Chairman of the Board of Directors
         Joseph M. Walsh                      (Principal Executive Officer)

      /s/ MICHAEL A. MANTO                    Executive Vice President,                       March 12, 2004
------------------------------------------    Chief Financial Officer and Director
        Michael A. Manto                      (Principal Financial and Accounting
                                              Officer)

/s/ STEPHEN N. KAHANE M.D., M.S.              Chief Strategy Officer, Vice Chairman           March 12, 2004
------------------------------------------    and Director
  Stephen N. Kahane M.D., M.S.

      /s/ KENNETH R. ADAMS                    Director                                        March 12, 2004
------------------------------------------
        Kenneth R. Adams

     /s/ STEPHEN J. DENELSKY                  Director                                        March 11, 2004
------------------------------------------

       Stephen J. DeNelsky

      /s/ DAVID B. SHEPHERD                   Director                                        March 11, 2004
------------------------------------------
        David B. Shepherd

       /s/ LISA W. ZAPPALA                    Director                                        March 11, 2004
------------------------------------------
         Lisa W. Zappala
</TABLE>

                                       79