##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|OR
|  
|o  |  | 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


AMICAS, INC.


(Exact name of registrant as specified in its charter)


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

20 Guest Street, Suite 200, Boston, Massachusetts
02135


(Address of
principal executive offices, including zip code)


Registrants telephone number, including area code:


(617) 779-7878


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


þ o


o


þ o




Documents Incorporated by Reference












---










AMICAS, INC.


Form 10-K


Contents


|                                               |  |                                                                                                                             |    |      |    |  |  | 
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|                                               |  |                                                                                                                             |    | Page |   
|                                               |  |                                                                                                                             |    |      |   
|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 |    |      | 24 | 
|Item 6.                                        |  | Selected 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                                                              |    |      | 39 | 
|Item 8.                                        |  | Financial Statements and Supplementary
    Data                                                                             |    |      | 39 | 
|Item 9.                                        |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                    |    |      | 39 | 
|Item 9A.                                       |  | Controls and Procedures                                                                                                     |    |      | 39 | 
|Item 9B.                                       |  | Other Information                                                                                                           |    |      | 44 | 
|PART III                                      
|Item 10.                                       |  | Directors and Executive Officers of the
    Registrant                                                                      |    |      | 44 | 
|Item 11.                                       |  | Executive Compensation                                                                                                      |    |      | 44 | 
|Item 12.                                       |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                          |    |      | 44 | 
|Item 13.                                       |  | Certain Relationships and Related
    Transactions                                                                          |    |      | 44 | 
|Item 14.                                       |  | Principal Accountant Fees and Services                                                                                      |    |      | 45 | 
|PART IV                                       
|Item 15.                                       |  | Exhibits and Financial Statement
    Schedules                                                                              |    |      | 45 | 
|Signatures                                     |  |                                                                                                                             | 81 |     
|Ex-4.2 Specimen Stock Certificate             
|Ex-21.1 Subsidiaries of the Registrant        
|Ex-23.1 Consent of BDO Seidman, LLP           
|Ex-31.1 Section 302 Certification of CEO      
|Ex-31.2 Section 302 Certification of CFO      
|Ex-32.1 Section 906 Certification of CEO & CFO



AMICAS is a registered trademark of AMICAS, Inc. All other
trademark and company names mentioned are the property of their
respective owners.


1



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PART I







|        |         
|------- | --------
|Item 1. | Business

General


tm tm










2



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Industry Background








3



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|                  |  |           |       |           |      |  |       |             |       |         |         |         |  |      |       |   |             |  |       |   |  |  |      |  
|----------------- |  | --------- | ----- | --------- | ---- |  | ----- | ----------- | ----- | ------- | ------- | ------- |  | ---- | ----- | - | ----------- |  | ----- | - |  |  | ---- | -
|                  |  |           |       |           |      |  |       |             |       | Imaging |         |         | 
|                  |  |           |       | Hospitals |      |  |       |             | Total |         |         | Centers |  |      |      
|                  |  | Total     |       |           | with |  |       | Penetration |       |         | Imaging |         |  | With |       |   | Penetration | 
|Year              |  | Hospitals |       |           | PACS |  |       | Rate (%)    |       |         | Centers |         |  | PACS |       |   | Rate (%)    | 
|                  |  |           |       |           |      |  |       |             |       |         |         |         |  |      |       |   |             | 
|2000              |  |           | 7,140 |           |      |  | 806   |             |       |         | 11.3    |         |  |      | 2,811 |   |             |  | 135   |   |  |  | 4.8  |  
|2001              |  |           | 7,111 |           |      |  | 916   |             |       |         | 12.9    |         |  |      | 2,926 |   |             |  | 173   |   |  |  | 5.9  |  
|2002              |  |           | 7,083 |           |      |  | 1,041 |             |       |         | 14.7    |         |  |      | 3,034 |   |             |  | 221   |   |  |  | 7.3  |  
|2003              |  |           | 7,040 |           |      |  | 1,249 |             |       |         | 17.7    |         |  |      | 3,150 |   |             |  | 280   |   |  |  | 8.9  |  
|2004              |  |           | 6,991 |           |      |  | 1,528 |             |       |         | 21.9    |         |  |      | 3,272 |   |             |  | 351   |   |  |  | 10.7 |  
|2005              |  |           | 6,942 |           |      |  | 1,829 |             |       |         | 26.3    |         |  |      | 3,407 |   |             |  | 435   |   |  |  | 12.8 |  
|2006              |  |           | 6,879 |           |      |  | 2,177 |             |       |         | 31.6    |         |  |      | 3,553 |   |             |  | 533   |   |  |  | 15.0 |  
|2007              |  |           | 6,824 |           |      |  | 2,564 |             |       |         | 37.6    |         |  |      | 3,716 |   |             |  | 647   |   |  |  | 17.4 |  
|2008              |  |           | 6,783 |           |      |  | 2,986 |             |       |         | 44.0    |         |  |      | 3,891 |   |             |  | 779   |   |  |  | 20.0 |  
|2009              |  |           | 6,742 |           |      |  | 3,472 |             |       |         | 51.5    |         |  |      | 4,074 |   |             |  | 941   |   |  |  | 23.1 |  
|2010              |  |           | 6,702 |           |      |  | 3,994 |             |       |         | 59.6    |         |  |      | 4,258 |   |             |  | 1,064 |   |  |  | 25.0 |  
|CAGR (2003-2010): |  |           | (0.7  | )%        |      |  | 18.1  | %           |       |         | 18.9    | %       |  |      | 4.4   | % |             |  | 21.0  | % |  |  | 15.9 | %

Hospital and Imaging Center PACS Penetration 2000 to 2010






Business Strategy








tm






4



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Products and Services






Vision Series Products


Vision Series RIS.


Vision Series PACS.


Vision Series Document Management.


Vision Series Financials.


5



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EDI Services.




| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automated patient statement and collection letter processing
    services;                                                                                                                                
|
| |  | Automated appointment reminder notification;                                                                                                                                                              
|
| |  | Automated electronic submission of insurance claims and claims
    editing to include electronic remittance of insurance payments
    and automatic posting of explanation of benefits
    (EOB) data; and
|
| |  | Automated electronic access to insurance and managed care plans
    to determine a patients eligibility and covered benefits.                                                                            

Professional Services: AMICAS Insight
Servicestm




Insight Technical Support


Software Support.


Hardware Support.




Future Products






| |   |                                                 
| | - | ------------------------------------------------
| |  | Extended functionality for referring physicians;
|
| |  | Cardiology PACS;                                

6



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| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | Integrated 3D visualization;                                    
|
| |  | Primary interpretation of full field digital mammography (FFDM);
|
| |  | Paperless operations; and                                       
|
| |  | Portable, handheld device access.                               

Research and Development






Sales and Marketing








Intellectual Property










7



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Competition






| |   |                                                
| | - | -----------------------------------------------
| |  | Product features and functionality;            
|
| |  | Ongoing product enhancements;                  
|
| |  | Customer service, support, and satisfaction;   
|
| |  | The reputation and stability of the vendor; and
|
| |  | Price.                                         





Privacy Issues




8



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| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security that requires both user IDs 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.                                                    







| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Using individual network user IDs 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 regarding the handling of
    confidential information.



Healthcare Regulation






Health Insurance Portability and Accountability Act of
1996, or HIPAA.




| |   |                                                              
| | - | -------------------------------------------------------------
| |  | Electronic transactions involving healthcare information;    
|
| |  | Privacy of individually identifiable health information; and 
|
| |  | Security of healthcare information and electronic signatures.



9



---



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Other Privacy Requirements.


FDA.


The Federal Anti-Kickback Law.


10



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Stark Law.


The Federal Civil False Claims Act and the Medicare/
Medicaid Civil Money Penalties.


Employees








| |                  
| | -----------------
| | Stephen N. Kahane



11



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| |               
| | --------------
| | Joseph D. Hill





| |                 
| | ----------------
| | Hamid Tabatabaie





| |              
| | -------------
| | Stephen Hicks



Medical Division Sale






12



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PracticeWorks Distribution and Tax Disaffiliation
Agreement








13



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Forward-Looking Statements and Risk Factors That May Affect
Future Results










| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results will vary from period to period. In
    addition, we have experienced losses in the past and may never
    achieve consistent profitability.







| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                              

14



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| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                                               

tm tm




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Our future success is dependent in large part on the
    success of our current products.



15



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| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We may fail to realize the long-term financial benefits
    that we anticipate will result from our acquisition of Amicas
    PACS.





| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to retain Amicas PACS key personnel or integrate
    them into our operations. In particular, the loss of these
    employees would compromise the value of the Amicas PACS 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 PACS 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
    PACS; and                                                                                                                                                                                    
|
| |  | continued compliance with all government laws, rules and
    regulations for all applicable products.                                                                                                                                                 



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | new products and services, such as our medical image management
    systems and our radiology information system, or RIS, existing
    products and services; and
|
| |  | enhancements to our existing products and services.                                                                                                              







16



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| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our competitive position could be significantly harmed if
    we fail to protect our intellectual property rights from
    third-party challenges.









| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Intellectual property infringement claims against us could
    be costly to defend and could divert our managements
    attention away from our business.



17



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| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.                                                                                                                                                   





| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.     





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The nature of our products and services exposes us to
    product liability claims that may not be adequately covered by
    insurance or contractual indemnification.



18



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| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | We may be subject to claims resulting from the activities
    of our strategic partners.





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to government regulation and legal
    uncertainties, the compliance with which could have a material
    adverse effect on our business.



| |      
| | -----
| | HIPAA







| |                             
| | ----------------------------
| | Other E-Commerce Regulations



19



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| |    
| | ---
| | FDA





| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in state and federal laws relating to
    confidentiality of patient medical records could limit our
    customers ability to use our services.





| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Larger competitors and consolidation of competitors could
    cause us to lower our prices or to lose customers.



20



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| |   |                                            
| | - | -------------------------------------------
| |  | product features and functionality;        
|
| |  | customer service, support and satisfaction;
|
| |  | price;                                     
|
| |  | ongoing product enhancements; and          
|
| |  | vendor reputation and stability.           







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, third-party software or software or
    hardware components of our offerings, and sales lead generation.
    Any failure, inability or unwillingness of these suppliers to
    perform these services or provide their products could
    negatively impact customer satisfaction and revenues.





| |                                                                    
| | -------------------------------------------------------------------
| | Our systems may be vulnerable to security breaches and
    viruses.



21



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| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the marketplace demands subscription pricing and/or
    application service provider, or ASP, delivered offerings, our
    revenues may be adversely impacted.





| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Our growth could be limited if we are unable to attract
    and retain qualified personnel.





| |                                                             
| | ------------------------------------------------------------
| | We may be subject to product related liability
    lawsuits.





| |                                                    
| | ---------------------------------------------------
| | We may be exposed to credit risks of our customers.





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our future success depends on our ability to successfully
    develop new products and adapt to new technology change.



22



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Access to Our Filings with the Securities and Exchange
Commission


www.amicas.com









|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





23



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|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders






PART II





Item 5. Market for the Registrants Common
Equity and Related Stockholder Matters and Issuer Purchases of
Equity Securities




24



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|                             |  |      |      |  |     |   |      | 
|---------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|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 | 

|                             |  |      |      |  |     |   |      | 
|---------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|Year Ended December 31, 2004 |  | High |      |  | Low |  
|                             |  |      |      |  |     |  
|First Quarter                |  | $    | 5.16 |  |     | $ | 3.40 | 
|Second Quarter               |  |      | 4.45 |  |     |   | 3.20 | 
|Third Quarter                |  |      | 3.94 |  |     |   | 2.91 | 
|Fourth Quarter               |  |      | 4.50 |  |     |   | 3.36 | 

|                                 |  |      |      |  |     |   |      | 
|-------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|2005                             |  | High |      |  | Low |  
|                                 |  |      |      |  |     |  
|First Quarter (through March 23) |  | $    | 4.60 |  |     | $ | 3.65 | 

Dividend Policies.


Sales of Unregistered Shares.


25



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ |  | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                            |                                                                                                                                    | For the Year Ended December 31,       |        
|                                                                                            |                                                                                                                                    |                                       |        
|                                                                                            |                                                                                                                                    | 2004                                  |         |        | 2003 |   |         | 2002   |   |   | 2001   |        |  | 2000 |        
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|                                                                                            |                                                                                                                                    | (In thousands, except per share data) |        
|Consolidated Statements of Operations Data(a)(b)                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|Revenues                                                                                    |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|                                                                                            | Maintenance and services                                                                                                           |                                       | $       | 29,543 |      |   | $       | 24,534 |   |   | $      | 25,005 |  |      | $       | 26,309 |   |   | $       | 24,552 |  
|                                                                                            | Software licenses and system sales                                                                                                 |                                       |         | 12,776 |      |   |         | 9,677  |   |   |        | 13,046 |  |      |         | 9,052  |   |   |         | 10,204 |  
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Total revenues                                                                              |                                                                                                                                    |                                       | 42,319  |        |      |   | 34,211  |        |   |   | 38,051 |        |  |      | 35,361  |        |   |   | 34,756  |       
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Costs and expenses                                                                          |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|Cost of revenues:                                                                           |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|                                                                                            | Maintenance and services                                                                                                           |                                       |         | 5,890  |      |   |         | 5,751  |   |   |        | 5,407  |  |      |         | 4,904  |   |   |         | 4,860  |  
|                                                                                            | Software licenses and system sales, includes amortization of
    software costs of $3,178 in 2004, $1,873 in 2003 and $911 in 2002 |                                       |         | 6,154  |      |   |         | 5,147  |   |   |        | 4,518  |  |      |         | 3,330  |   |   |         | 2,851  |  
|                                                                                            | Impairment of capitalized software                                                                                                 |                                       |         | 3,229  |      |   |         | 490    |   |   |        |        |  |      |         |        |   |   |         |        |  
|Selling, general and administrative                                                         |                                                                                                                                    |                                       | 32,994  |        |      |   | 22,825  |        |   |   | 22,547 |        |  |      | 28,553  |        |   |   | 34,066  |       
|Research and development                                                                    |                                                                                                                                    |                                       | 9,488   |        |      |   | 7,565   |        |   |   | 6,041  |        |  |      | 3,658   |        |   |   | 4,662   |       
|Depreciation and amortization                                                               |                                                                                                                                    |                                       | 1,968   |        |      |   | 1,331   |        |   |   | 1,439  |        |  |      | 6,717   |        |   |   | 8,157   |       
|Settlements, severance and impairment charges and charge
    (credit) for loan losses       |                                                                                                                                    |                                       | 5,730   |        |      |   |         |        |   |   | (6,000 | )      |  |      | 9,627   |        |   |   | 6,632   |       
|Acquired in-process technology                                                              |                                                                                                                                    |                                       |         |        |      |   | 750     |        |   |   |        |        |  |      |         |        |   |   |         |       
|Restructuring costs (credits)                                                               |                                                                                                                                    |                                       | (155    | )      |      |   |         |        |   |   | (501   | )      |  |      | (425    | )      |   |   | 9,338   |       
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|                                                                                            |                                                                                                                                    |                                       | 65,298  |        |      |   | 43,859  |        |   |   | 33,451 |        |  |      | 56,364  |        |   |   | 70,566  |       
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Operating income (loss)                                                                     |                                                                                                                                    |                                       | (22,979 | )      |      |   | (9,648  | )      |   |   | 4,600  |        |  |      | (21,003 | )      |   |   | (35,810 | )     
|Interest expense, net                                                                       |                                                                                                                                    |                                       | (1,336  | )      |      |   | (876    | )      |   |   | (447   | )      |  |      | (3,170  | )      |   |   | (2,973  | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Income (loss) from continuing operations, before income
    taxes                           |                                                                                                                                    |                                       | (24,315 | )      |      |   | (10,524 | )      |   |   | 4,153  |        |  |      | (24,173 | )      |   |   | (38,783 | )     
|Provision (benefit) for income taxes                                                        |                                                                                                                                    |                                       | 2,200   |        |      |   | 200     |        |   |   | 162    |        |  |      |         |        |   |   | (9,843  | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Income (loss) from continuing operations                                                    |                                                                                                                                    |                                       | (26,515 | )      |      |   | (10,724 | )      |   |   | 3,991  |        |  |      | (24,173 | )      |   |   | (28,940 | )     
|Income (loss) from discontinued operations, net of (benefit)
    provision for income taxes |                                                                                                                                    |                                       | 14,058  |        |      |   | 18,687  |        |   |   | 20,159 |        |  |      | (3,647  | )      |   |   | (49,173 | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Net income (loss)                                                                           |                                                                                                                                    | $                                     | (12,457 | )      |      | $ | 7,963   |        |   | $ | 24,150 |        |  | $    | (27,820 | )      |   | $ | (78,113 | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Earnings (loss) per share  basic                                                           |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|                                                                                            | Continuing operations                                                                                                              |                                       | $       | (0.61  | )    |   | $       | (0.25  | ) |   | $      | 0.10   |  |      | $       | (0.65  | ) |   | $       | (0.86  | )
|                                                                                            | Discontinued operations                                                                                                            |                                       |         | 0.32   |      |   |         | 0.43   |   |   |        | 0.48   |  |      |         | (0.10  | ) |   |         | (1.47  | )
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|                                                                                            |                                                                                                                                    | $                                     | (0.29   | )      |      | $ | 0.18    |        |   | $ | 0.58   |        |  | $    | (0.74   | )      |   | $ | (2.33   | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Earnings (loss) per share  diluted                                                         |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |         |        |   |   |         |       
|                                                                                            | Continuing operations                                                                                                              |                                       | $       | (0.61  | )    |   | $       | (0.25  | ) |   | $      | 0.08   |  |      | $       | (0.65  | ) |   | $       | (0.86  | )
|                                                                                            | Discontinued operations                                                                                                            |                                       |         | 0.32   |      |   |         | 0.43   |   |   |        | 0.41   |  |      |         | (0.10  | ) |   |         | (1.47  | )
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|                                                                                            |                                                                                                                                    | $                                     | (0.29   | )      |      | $ | 0.18    |        |   | $ | 0.49   |        |  | $    | (0.74   | )      |   | $ | (2.33   | )     
|                                                                                            |                                                                                                                                    |                                       |         |        |      |   |         |        |   |   |        |        |  |      |        
|Cash provided by operating activities(c)                                                    |                                                                                                                                    | $                                     | 4,735   |        |      | $ | 2,180   |        |   | $ | 20,758 |        |  | $    | 18,230  |        |   | $ | 12,756  |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On November 25, 2003, we acquired 100% of the outstanding
    capital stock of Amicas PACS, Corp., formerly Amicas, Inc., a
    developer of Web-based diagnostic image management software
    solutions. Our 2003 statement of operations include only
    one month of operating results of Amicas PACS and our 2002, 2001
    and 2000 statements of operations do not include operating
    results of Amicas PACS.

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|    |  |                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | The consolidated statement of operations for the year ended
    December 31, 2004 has been prepared and historical
    consolidated statements of operations have been reclassified to
    present the results of the Medical Division as discontinued
    operations.
|   
|(c) |  | Includes operating activities of the Medical Division for all
    periods presented.                                                                                                                                                                                  

|                                                 |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |   |  |   |         |  
|------------------------------------------------ |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------ | - |  | - | ------- | -
|                                                 |  | December 31,   |        
|                                                 |  |                |        
|                                                 |  | 2004           |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |       
|                                                 |  |                |         |  |      |   |         |      |  |   |         |  |  |      |       
|                                                 |  | (In thousands) |        
|Consolidated Balance Sheet Data                  |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |   |  |   |         |  
|Cash and cash equivalents                        |  | $              | 12,634  |  |      | $ | 20,128  |      |  | $ | 39,474  |  |  | $    | 12,988 |   |  | $ | 5,969   |  
|Working capital (deficit)                        |  |                | 19,968  |  |      |   | 9,548   |      |  |   | 27,220  |  |  |      | (914   | ) |  |   | (11,144 | )
|Total assets                                     |  |                | 133,886 |  |      |   | 132,576 |      |  |   | 117,131 |  |  |      | 92,949 |   |  |   | 145,994 |  
|Total long-term debt                             |  |                | 28,674  |  |      |   | 29,757  |      |  |   | 18,941  |  |  |      | 30,553 |   |  |   | 37,784  |  
|Convertible, redeemable preferred stock issuable |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        |   |  |   | 10,000  |  
|Stockholders equity                             |  |                | 64,655  |  |      |   | 70,662  |      |  |   | 60,433  |  |  |      | 26,060 |   |  |   | 58,450  |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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






Overview


tm tm






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RESULTS OF OPERATIONS




| |         
| | --------
| | Revenues

|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |       |    |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ------ |  | ---- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                                   |  | Year Ended December 31, |       
|                                   |  |                         |       
|                                   |  | 2004                    |        |   | Change |  |      | 2003 |  |   | Change |   |  | 2002 |      
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |      
|                                   |  | (Dollars in thousands)  |       
|Maintenance and services           |  | $                       | 29,543 |   |        |  | 20.4 | %    |  | $ | 24,534 |   |  |      | (1.9  | )% |  | $ | 25,005 |  
|Percentage of total revenues       |  |                         | 69.8   | % |        |  |      |      |  |   | 71.7   | % |  |      |       |    |  |   | 65.7   | %
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |      
|Software licenses and system sales |  | $                       | 12,776 |   |        |  | 32.0 | %    |  | $ | 9,677  |   |  |      | (25.8 | )% |  | $ | 13,046 |  
|Percentage of total revenues       |  |                         | 30.2   | % |        |  |      |      |  |   | 28.3   | % |  |      |       |    |  |   | 34.3   | %
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |      

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| |                 
| | ----------------
| | Cost of Revenues

|                                                 |  |                         |       |   |        |  |      |      |  |   |        |   |  |      |      |   |  |   |       |  
|------------------------------------------------ |  | ----------------------- | ----- | - | ------ |  | ---- | ---- |  | - | ------ | - |  | ---- | ---- | - |  | - | ----- | -
|                                                 |  | Year Ended December 31, |      
|                                                 |  |                         |      
|                                                 |  | 2004                    |       |   | Change |  |      | 2003 |  |   | Change |   |  | 2002 |     
|                                                 |  |                         |       |   |        |  |      |      |  |   |        |   |  |      |     
|                                                 |  | (Dollars in thousands)  |      
|Maintenance and services                         |  | $                       | 5,890 |   |        |  | 2.4  | %    |  | $ | 5,751  |   |  |      | 6.4  | % |  | $ | 5,407 |  
|Percentage of maintenance and services revenues  |  |                         | 19.9  | % |        |  |      |      |  |   | 23.4   | % |  |      |      |   |  |   | 21.6  | %
|                                                 |  |                         |       |   |        |  |      |      |  |   |        |   |  |      |     
|Software licenses and system sales               |  | $                       | 6,154 |   |        |  | 19.6 | %    |  | $ | 5,147  |   |  |      | 13.9 | % |  | $ | 4,518 |  
|Percentage of software licenses and system sales |  |                         | 48.2  | % |        |  |      |      |  |   | 53.2   | % |  |      |      |   |  |   | 34.6  | %
|                                                 |  |                         |       |   |        |  |      |      |  |   |        |   |  |      |     







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| |                   
| | ------------------
| | Operating Expenses

|                                    |  |                         |        |                        |        |  |      |      |  |   |        |   |  |      |      |    |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | ---------------------- | ------ |  | ---- | ---- |  | - | ------ | - |  | ---- | ---- | -- |  | - | ------ | -
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2004                    |        |                        | Change |  |      | 2003 |  |   | Change |   |  | 2002 |     
|                                    |  |                         |        |                        |        |  |      |      |  |   |        |   |  |      |     
|                                    |  |                         |        | (Dollars in thousands) |        |  |     
|Selling, general and administrative |  | $                       | 32,994 |                        |        |  | 44.6 | %    |  | $ | 22,825 |   |  |      | 1.2  | %  |  | $ | 22,547 |  
|Percentage of total revenues        |  |                         | 78.0   | %                      |        |  |      |      |  |   | 66.7   | % |  |      |      |    |  |   | 59.3   | %
|                                    |  |                         |        |                        |        |  |      |      |  |   |        |   |  |      |     
|Research and development            |  | $                       | 9,488  |                        |        |  | 25.4 | %    |  | $ | 7,565  |   |  |      | 25.2 | %  |  | $ | 6,041  |  
|Percentage of total revenues        |  |                         | 22.4   | %                      |        |  |      |      |  |   | 22.1   | % |  |      |      |    |  |   | 15.9   | %
|                                    |  |                         |        |                        |        |  |      |      |  |   |        |   |  |      |     
|Depreciation and amortization       |  | $                       | 1,968  |                        |        |  | 47.9 | %    |  | $ | 1,331  |   |  |      | (7.5 | )% |  | $ | 1,439  |  
|Percentage of total revenues        |  |                         | 4.7    | %                      |        |  |      |      |  |   | 3.9    | % |  |      |      |    |  |   | 3.8    | %
|                                    |  |                         |        |                        |        |  |      |      |  |   |        |   |  |      |     









Settlements, severance and impairment charges and credit for
loan losses.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Settlement of earn-out. In connection with the
    termination of the earn-out consideration obligations relating
    to the acquisition of Amicas PACS, we recognized
    $2.4 million of expense for amounts paid, or to be paid, to
    certain Amicas PACS employees under the Amicas PACS bonus plan.
    We expect to recognize approximately $2 million of expense
    in 2005 for additional amounts to be paid under the Amicas PACS
    bonus plan. In general, any payment to an Amicas PACS employee
    is contingent on such employees continued employment with
    us.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Severance re: corporate headquarters relocation. We
    recorded severance-related costs of $1.3 million, including
    executive-related severance costs of $.4 million. In
    December 2004, we relocated our corporate headquarters from
    Ridgefield, Connecticut to Boston, Massachusetts. On
    October 15, 2004, we notified 57 of our employees that, in
    connection with the relocation of our corporate headquarters,
    their employment would be terminated under a plan of
    termination. We expect to complete the transition by
    June 30, 2005 and to record an additional $.8 million
    for the relocation costs, primarily in the first quarter of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Other impairment charge. We recorded an impairment charge
    of $1.2 million to write-down our enterprise resource
    planning software, or ERP, relating to our decision to cease
    using a portion of our ERP. This decision was due to the
    downsizing of our business as a result of the Medical Division
    sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Settlement of litigation. We recorded costs of
    $.8 million relating to the settlement of litigation. 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 alleged that in 2001, we
    received a preference payment from the business associate and
    sought to avoid and recover the $.8 million payment made to
    us. We agreed to settle this matter in March 2004 and paid
    $.3 million to the former business associate through its
    committee of unsecured creditors. Also, in September 2004, a
    lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and
    Amicas, Inc. was filed in the United States District Court for
    the Southern District of California. The complaint alleged that
    VitalWorks and Amicas infringed the plaintiffs patent
    through the manufacture, use, importation, sale and/or offer for
    sale of automated medical imaging and archival systems. The
    plaintiff sought monetary damages, treble damages and a
    permanent injunction. On November 3, 2004, we served our
    answer. On January 26, 2005, the parties entered into a
    Settlement, Release and License agreement, and on
    February 4, 2005, a stipulation of dismissal, dismissing
    the lawsuit with prejudice, was entered. In connection with this
    agreement, we paid the plaintiff $.5 million in 2005. This
    amount was accrued at December 31, 2004.



Acquired in-process technology.


Restructuring credits.




| |                          
| | -------------------------
| | Interest Income (Expense)

|                 |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |       |    |  |   |        |  
|---------------- |  | ----------------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                 |  | Year Ended December 31, |       
|                 |  |                         |       
|                 |  | 2004                    |        |   | Change |  |       | 2003 |  |   | Change |   |  | 2002 |      
|                 |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |      
|                 |  | (Dollars in thousands)  |       
|Interest income  |  | $                       | 163    |   |        |  | (40.3 | )%   |  | $ | 273    |   |  |      | (81.6 | )% |  | $ | 1,480  |  
|Interest expense |  |                         | (1,499 | ) |        |  | 30.5  | %    |  |   | (1,149 | ) |  |      | (40.4 | )% |  |   | (1,927 | )
|                 |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |      





31



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| |             
| | ------------
| | Income Taxes









| |                                    
| | -----------------------------------
| | Income from Discontinued Operations





LIQUIDITY AND CAPITAL RESOURCES




32



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33



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|                            |  |                        |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |       |  |  |   |       | 
|--------------------------- |  | ---------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---------- | - | ----- |  |  | - | ----- | 
|                            |  | Payments Due by Period |       
|                            |  |                        |       
|                            |  | Totals                 |        |  | 2005 |   |        | 2006 |  |   | 2007   |  |  | 2008 |        |  | Thereafter |  
|                            |  |                        |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |  
|                            |  | (In thousands)         |       
|Long-term debt(a)           |  | $                      | 28,588 |  |      | $ | 9,588  |      |  | $ | 4,000  |  |  | $    | 15,000 |  |            |   |       |  |  |   |       | 
|Operating leases(b)         |  |                        | 6,963  |  |      |   | 2,571  |      |  |   | 2,151  |  |  |      | 1,454  |  |            | $ | 771   |  |  | $ | 16    | 
|Other commitments(c)        |  |                        | 36,392 |  |      |   | 9,881  |      |  |   | 8,511  |  |  |      | 7,867  |  |            |   | 7,600 |  |  |   | 2,533 | 
|Other long-term liabilities |  |                        | 142    |  |      |   |        |      |  |   | 131    |  |  |      | 11     |  |            |   |       |  |  |   |       | 
|Capital leases              |  |                        | 86     |  |      |   | 68     |      |  |   | 18     |  |  |      |        |  |            |   |       |  |  |   |       | 
|                            |  |                        |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |  
|                            |  | $                      | 72,171 |  |      | $ | 22,108 |      |  | $ | 14,811 |  |  | $    | 24,332 |  |            | $ | 8,371 |  |  | $ | 2,549 | 
|                            |  |                        |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |  






|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On January 3, 2005, we repaid the entire outstanding
    balance under our credit facility of approximately
    $23.2 million and our credit facility was terminated. As a
    result, interest is excluded above.



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | In January 2005, in connection with the sale of the Medical
    Division to Cerner, our operating lease agreements relating to
    the Medical Division were assigned to Cerner. Also, in March
    2005, we entered into subleases for additional space at our
    Boston, Massachusetts corporate headquarters. As a result, our
    future payments due under our outstanding lease agreements
    decreased to a total of $4.1 million ($1.3 million due
    in 2005, $1.2 million due in 2006, $1.2 million due in
    2007 and $.4 million due in 2008).
|   
|(c) |  | Included in other commitments are the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 continued, for a
    fee, to provide printing services for our physicians under the
    subcontracting arrangement with NDC. The amended arrangement,
    which extended until April 2009, provided 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 were recognized as an offset to cost of maintenance
    and services revenues as the minimum volume commitments were
    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 approximated
    65% of our then-current aggregate transaction level. In
    connection with this arrangement, we were committed to pay a
    minimum quarterly fee of $1.9 million to NDC until April
    2009. In January 2005, we assigned the agreement with NDC to
    Cerner in connection with the Transition Services Agreement. We
    are now committed to minimum quarterly volumes and are required
    to pay a minimum quarterly fee of $.6 million to Cerner
    through March 2006. Thereafter, the minimum quarterly volume
    commitments will be reduced by 1.25% per quarter until
    April 2009.
|
| |  | 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, or a total of $3 million,
    for development services was incurred during the twelve-month
    period ended March 2004. Also, during a royalty term ending
    January 2006, we were obligated to pay royalty fees of up to
    $5 million based on related software license sales, if any.
    In May 2004, we amended the agreement with respect to the
    development services. We were obligated to pay the development
    firm $.6 million during the four-month period ending
    August 15, 2004 for such services;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | however, such payment was contingent upon certain development
    milestones being achieved. The milestones were achieved and we
    paid the amounts due under the May amendment. In August 2004 and
    in October 2004, we amended the agreement further with respect
    to the development services. We were obligated to pay the
    development firm $1.4 million during the period from
    August 16, 2004 to May 1, 2005. At the end of such
    period, we had the option to terminate the agreement or continue
    the development services arrangement by paying a minimum monthly
    fee of $.2 million for an additional twelve months. The
    terms of the royalty arrangement were amended and extended to
    March 2007. We were obligated to pay reduced royalty fees of up
    to $3 million based on related software license sales, if
    any. If we terminated the development services portion of the
    agreement for reasons other than nonperformance, we would still
    be liable for amounts due under the royalty terms of the
    agreement, if any. In connection with the sale of the Medical
    Division on January 3, 2005, the agreement was assigned to
    Cerner. We no longer have commitments under this agreement.
|
| |  | 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 and second years of the agreement, we
    incurred $.5 million and $.6 million, respectively,
    for processing services. For the twelve-month period ending May
    2005, we were committed to pay $.5 million for processing
    services. Thereafter, the annual services fee would have ranged
    from $.5 million to $.8 million based on our volume
    usage in the last month of the preceding year. In January 2005,
    we assigned the agreement to Cerner in connection with the
    Transition Services Agreement. For the four-month period ending
    April 2005, we are now committed to pay $.1 million to
    Cerner for processing services. Thereafter, the annual services
    fee will range from $.2 million to $.3 million based
    on ours and Cerners combined volume usage in the last
    month of the preceding year.                                                                                                                                                                                                                                                          
|
| |  | In connection with our employee savings plans, we have
    committed, for the 2005 plan year, to contribute to the plans.
    Our matching contribution for 2005 is estimated to be
    approximately $.5 million and will be made 75% in cash and
    25% in shares of our common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           











35



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| |                             
| | ----------------------------
| | Critical Accounting Policies



36



---



##### Table of Contents







Revenue Recognition.




Accounts Receivable.


Long-lived Assets.


37



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Goodwill Assets and Business Combinations.




Software Development Costs.




Income Taxes.




| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements





38



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING










| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the Company;                                                                                                                                                                                          
|
| |  | Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the Company are being made
    only in accordance with authorizations of management and
    directors of the Company; and
|
| |  | Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on the
    financial statements.                                                                                                                                       













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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In its February 15, 2005 press release, the Company
    announced financial information for the quarter and year ended
    December 31, 2004. That press release included an error
    related to the Companys income tax provision and deferred
    income tax asset for the year ended December 31, 2004. The
    calculation of the Companys income tax provision and
    deferred income tax asset was complex and non-routine as a
    result of the sale of the Companys Medical Division in
    January 2005. Subsequent to its February 15, 2005 press
    release, upon further research and investigation by the Company,
    and after

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| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | review by us in connection with the year-end audit, the Company
    discovered the error. Although the Company had detected the
    error prior to the filing of this Annual Report on
    Form 10-K, the Companys management concluded that a
    material weakness existed in the Companys internal control
    over financial reporting with respect to accounting for income
    taxes as of December 31, 2004.











43



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III









|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions



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|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements.


Financial Statement Schedules.


|                                                                                            |  |  |    | 
|------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public Accounting Firm on
    Financial Statement Schedule |  |  | 79 | 
|Schedule II  Valuation and Qualifying Accounts                                             |  |  | 80 | 

Exhibits.


|        |    |    |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | -- |  | - | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |   |            
|No.     |    |    |  |   | Description
|        |    |    |  |   |            
|        | 2  | .1 |  |  |             | 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  | .2 |  |  |             | 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).                                                                                                                               
|       
|        | 2  | .3 |  |  |             | First Amendment to Agreement and Plan of Merger dated as of
    December 9, 2004 by and among VitalWorks Inc., Amicas,
    Inc., and Seth Rudnick, Hamid Tabatabaie and Alexander Spiro
    solely in their representative capacity as Committee
    Members constituting 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, 2004).
|       
|        | 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.                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 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).                                                                                                                                                                                                                                                                
|       
|        | 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).                                                                                                                                                                                                                                                             

45



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|        |    |     |  |   |             |                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | --- |  | - | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |   |            
|No.     |    |     |  |   | Description
|        |    |     |  |   |            
|       
|        | 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 |  |  |             | 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 | .18 |  |  |             | 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 | .19 |  |  |             | 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 | .20 |  |  |             | 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 | .21 |  |  |             | 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 | .22 |  |  |             | 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 | .23 |  |  |             | 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).

46



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|        |     |     |  |   |             |                                                                                                                                                                                                                                                                                                                    
|------- | --- | --- |  | - | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     |  |   |            
|No.     |     |     |  |   | Description
|        |     |     |  |   |            
|       
|        | 10  | .24 |  |  |             | 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  | .25 |  |  |             | 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  | .26 |  |  |             | Form of Employment Agreement, dated April 26, 2004, by and
    between VitalWorks Inc. and our Named Executive Officers
    (incorporated by reference to Exhibit 10 to the
    Registrants Quarterly Report on Form 10-Q, filed with
    the Commission on May 10, 2004).                                        
|       
|        | 10  | .27 |  |  |             | Amended Employment Agreement, dated July 26, 2004, by and
    between VitalWorks Inc. and Stephen N. Kahane (incorporated by
    reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q, filed with the Commission on
    November 9, 2004).                                              
|       
|        | 10  | .28 |  |  |             | Form of Amended Employment Agreement, dated July 26, 2004,
    by and between VitalWorks Inc. and Joseph M. Walsh, Michael A.
    Manto and Stephen Hicks (incorporated by reference to
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q, filed with the Commission on November 9,
    2004).
|       
|        | 10  | .29 |  |  |             | Employment Agreement, dated October 1, 2004, by and between
    VitalWorks Inc. and Joseph D. Hill (incorporated by reference to
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q, filed with the Commission on November 9,
    2004).                                                       
|       
|        | 10  | .30 |  |  |             | Asset Purchase Agreement, dated as of November 15, 2004, by
    and between VitalWorks Inc. and Cerner Corporation (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on Form 8-K, filed with the Commission on
    November 18, 2004).                                         
|       
|        | 10  | .31 |  |  |             | Amicas, Inc. Amended and Restated Employee Bonus Plan dated as
    of December 9, 2004 (incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K, filed with the Commission on December 10,
    2004).                                                                     
|       
|        | *21 | .1  |  |  |             | List of Subsidiaries.                                                                                                                                                                                                                                                                                              
|       
|        | *23 | .1  |  |  |             | Consent of BDO Seidman, LLP, independent registered public
    accounting firm.                                                                                                                                                                                                                                    
|       
|        | 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.                                                                                                                                                                                                            
|       
|        | *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.                                                                                                                                                    






|  |               
|- | --------------
|* | Filed herewith

47



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AMICAS, INC.







|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

|                                                                                                             |  |      |    | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                             |  | Page |   
|                                                                                                             |  |      |   
|Financial Statements:                                                                                        |  |      |    | 
|Report of Independent Registered Public
    Accounting Firm                                                  |  |      | 49 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                             |  |      | 50 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2004, 2003 and 2002               |  |      | 51 | 
|Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2004, 2003 and 2002 |  |      | 52 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2004, 2003, and 2002              |  |      | 53 | 
|Notes to Consolidated Financial
    Statements                                                               |  |      | 54 | 

48



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















49



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AMICAS, INC.





CONSOLIDATED BALANCE SHEETS


|                                                                                                 |                                                                                                          |                       |         |          |      |   |         |          |  
|------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | --------------------- | ------- | -------- | ---- | - | ------- | -------- | -
|                                                                                                 |                                                                                                          | December 31,          |        
|                                                                                                 |                                                                                                          |                       |        
|                                                                                                 |                                                                                                          | 2004                  |         |          | 2003 |  
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|                                                                                                 |                                                                                                          | (In thousands, except |        
|                                                                                                 |                                                                                                          | share data)           |        
|ASSETS                                                                                          
|Current assets:                                                                                  |                                                                                                          |                       |         |          |      |   |         |         
|                                                                                                 | Cash and cash equivalents                                                                                |                       | $       | 12,634   |      |   | $       | 20,128   |  
|                                                                                                 | Accounts receivable, net of allowances of $2,200 and $2,800                                              |                       |         | 11,423   |      |   |         | 16,409   |  
|                                                                                                 | Computer hardware held for resale                                                                        |                       |         | 279      |      |   |         | 832      |  
|                                                                                                 | Deferred income taxes, net                                                                               |                       |         | 28,200   |      |   |         | 2,203    |  
|                                                                                                 | Prepaid expenses and other current assets                                                                |                       |         | 3,053    |      |   |         | 2,934    |  
|                                                                                                 | Current assets of discontinued operations                                                                |                       |         | 10,551   |      |   |         |          |  
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|Total current assets                                                                             |                                                                                                          |                       | 66,140  |          |      |   | 42,506  |         
|Property and equipment, less accumulated depreciation and
    amortization of $4,182 and $11,642 |                                                                                                          |                       | 1,988   |          |      |   | 4,681   |         
|Goodwill                                                                                         |                                                                                                          |                       | 27,313  |          |      |   | 34,472  |         
|Acquired/developed software, less accumulated amortization of
    $2,120 and $1,804              |                                                                                                          |                       | 11,580  |          |      |   | 21,469  |         
|Other intangible assets, less accumulated amortization of $462
    and $36                       |                                                                                                          |                       | 2,938   |          |      |   | 3,364   |         
|Deferred income taxes, net                                                                       |                                                                                                          |                       |         |          |      |   | 24,547  |         
|Other assets                                                                                     |                                                                                                          |                       | 1,447   |          |      |   | 1,537   |         
|Non-current assets of discontinued operations                                                    |                                                                                                          |                       | 22,480  |          |      |   |         |         
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|Total assets                                                                                     |                                                                                                          | $                     | 133,886 |          |      | $ | 132,576 |         
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                            
|Current liabilities:                                                                             |                                                                                                          |                       |         |          |      |   |         |         
|                                                                                                 | Accounts payable and accrued expenses                                                                    |                       | $       | 8,412    |      |   | $       | 11,049   |  
|                                                                                                 | Accrued employee compensation and benefits                                                               |                       |         | 3,507    |      |   |         | 2,486    |  
|                                                                                                 | Accrued restructuring costs                                                                              |                       |         | 126      |      |   |         | 923      |  
|                                                                                                 | Deferred revenue, including unearned discounts of $360 and $1,200                                        |                       |         | 10,474   |      |   |         | 11,762   |  
|                                                                                                 | Current portion of long-term debt                                                                        |                       |         | 9,657    |      |   |         | 6,738    |  
|                                                                                                 | Current liabilities of discontinued operations                                                           |                       |         | 13,996   |      |   |         |          |  
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|Total current liabilities                                                                        |                                                                                                          |                       | 46,172  |          |      |   | 32,958  |         
|Long-term debt                                                                                   |                                                                                                          |                       | 19,017  |          |      |   | 23,019  |         
|Other liabilities, primarily unearned discounts re: outsourced
    printing services             |                                                                                                          |                       | 1,229   |          |      |   | 5,937   |         
|Non-current liabilities of discontinued operations                                               |                                                                                                          |                       | 2,813   |          |      |   |         |         
|Commitments and contingencies  Note 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, 46,338,568 and 45,278,816 shares issued |                       |         | 46       |      |   |         | 45       |  
|                                                                                                 | Additional paid-in capital                                                                               |                       |         | 211,888  |      |   |         | 205,439  |  
|                                                                                                 | Accumulated deficit                                                                                      |                       |         | (140,807 | )    |   |         | (128,350 | )
|                                                                                                 | Treasury stock, at cost, 1,985,502 shares                                                                |                       |         | (6,472   | )    |   |         | (6,472   | )
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|Total stockholders equity                                                                       |                                                                                                          |                       | 64,655  |          |      |   | 70,662  |         
|                                                                                                 |                                                                                                          |                       |         |          |      |  
|Total liabilities and stockholders equity                                                       |                                                                                                          | $                     | 133,886 |          |      | $ | 132,576 |         
|                                                                                                 |                                                                                                          |                       |         |          |      |  



50



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AMICAS, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |        |      | 
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ----- | - | ------- | ------ | ----- | - | ------ | ------ | ---- | 
|                                                                              |                                                                                                            | Year Ended December 31,               |        
|                                                                              |                                                                                                            |                                       |        
|                                                                              |                                                                                                            | 2004                                  |         |        | 2003  |   |         | 2002   |      
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|                                                                              |                                                                                                            | (In thousands, except per share data) |        
|Revenues                                                                      |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |       
|                                                                              | Maintenance and services                                                                                   |                                       | $       | 29,543 |       |   | $       | 24,534 |       |   | $      | 25,005 |     
|                                                                              | Software licenses and system sales                                                                         |                                       |         | 12,776 |       |   |         | 9,677  |       |   |        | 13,046 |     
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Total revenues                                                                |                                                                                                            |                                       | 42,319  |        |       |   | 34,211  |        |       |   | 38,051 |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Costs and expenses                                                            |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |       
|Cost of revenues:                                                             |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |       
|                                                                              | Maintenance and services                                                                                   |                                       |         | 5,890  |       |   |         | 5,751  |       |   |        | 5,407  |     
|                                                                              | Software licenses and system sales, includes amortization of
    software costs of $3,178, $1,873 and $911 |                                       |         | 6,154  |       |   |         | 5,147  |       |   |        | 4,518  |     
|                                                                              | Impairment of capitalized software                                                                         |                                       |         | 3,229  |       |   |         | 490    |       |   |        |        |     
|Selling, general and administrative                                           |                                                                                                            |                                       | 32,994  |        |       |   | 22,825  |        |       |   | 22,547 |       
|Research and development                                                      |                                                                                                            |                                       | 9,488   |        |       |   | 7,565   |        |       |   | 6,041  |       
|Depreciation and amortization                                                 |                                                                                                            |                                       | 1,968   |        |       |   | 1,331   |        |       |   | 1,439  |       
|Settlements, severance and impairment charges and credit for
    loans losses |                                                                                                            |                                       | 5,730   |        |       |   |         |        |       |   | (6,000 | )     
|Acquired in-process technology                                                |                                                                                                            |                                       |         |        |       |   | 750     |        |       |   |        |       
|Restructuring credits                                                         |                                                                                                            |                                       | (155    | )      |       |   |         |        |       |   | (501   | )     
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|                                                                              |                                                                                                            |                                       | 65,298  |        |       |   | 43,859  |        |       |   | 33,451 |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Operating income (loss)                                                       |                                                                                                            |                                       | (22,979 | )      |       |   | (9,648  | )      |       |   | 4,600  |       
|Interest income                                                               |                                                                                                            |                                       | 163     |        |       |   | 273     |        |       |   | 1,480  |       
|Interest expense                                                              |                                                                                                            |                                       | (1,499  | )      |       |   | (1,149  | )      |       |   | (1,927 | )     
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Income (loss) from continuing operations, before income
    taxes             |                                                                                                            |                                       | (24,315 | )      |       |   | (10,524 | )      |       |   | 4,153  |       
|Provision for income taxes                                                    |                                                                                                            |                                       | 2,200   |        |       |   | 200     |        |       |   | 162    |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Income (loss) from continuing operations                                      |                                                                                                            |                                       | (26,515 | )      |       |   | (10,724 | )      |       |   | 3,991  |       
|Income from discontinued operations                                           |                                                                                                            |                                       | 14,058  |        |       |   | 18,687  |        |       |   | 20,159 |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Net income (loss)                                                             |                                                                                                            | $                                     | (12,457 | )      |       | $ | 7,963   |        |       | $ | 24,150 |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Earnings (loss) per share                                                     |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |       
|                                                                              | Basic:                                                                                                     |                                       |         |        |       |   |         |        |       |   |        |        |     
|                                                                              |                                                                                                            | Continuing operations                 |         | $      | (0.61 | ) |         | $      | (0.25 | ) |        | $      | 0.10 | 
|                                                                              |                                                                                                            | Discontinued operations               |         |        | 0.32  |   |         |        | 0.43  |   |        |        | 0.48 | 
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|                                                                              |                                                                                                            | $                                     | (0.29   | )      |       | $ | 0.18    |        |       | $ | 0.58   |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|                                                                              | Diluted:                                                                                                   |                                       |         |        |       |   |         |        |       |   |        |        |     
|                                                                              |                                                                                                            | Continuing operations                 |         | $      | (0.61 | ) |         | $      | (0.25 | ) |        | $      | 0.08 | 
|                                                                              |                                                                                                            | Discontinued operations               |         |        | 0.32  |   |         |        | 0.43  |   |        |        | 0.41 | 
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|                                                                              |                                                                                                            | $                                     | (0.29   | )      |       | $ | 0.18    |        |       | $ | 0.49   |       
|                                                                              |                                                                                                            |                                       |         |        |       |   |         |        |      
|Weighted average number of shares outstanding                                 |                                                                                                            |                                       |         |        |       |   |         |        |       |   |        |       
|                                                                              | Basic                                                                                                      |                                       |         | 43,563 |       |   |         | 43,052 |       |   |        | 41,592 |     
|                                                                              | Diluted                                                                                                    |                                       |         | 43,563 |       |   |         | 43,052 |       |   |        | 48,850 |     



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AMICAS, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         |        | 
|-------------------------------------------------------- | -------------------------------------- | --------------------------------- | ---------- | --------- | -------- |  | ---------- | ------ | ----- | ------------ | ------- | - |  | -------- | ------- | ------ | ----------- | - | ------ | -------- |  | - | -------- | - |  | - | ------ | - |  | - | ------- | ------ | 
|                                                         |                                        | Shares                            |            |           |          |  |            |        | Notes |              |         |   |  |          |         |       
|                                                         |                                        |                                   |            |           |          |  | Additional |        |       | Receivable - |         |   |  |          |         |        |            
|                                                         |                                        | Common                            |            |           | Treasury |  |            | Common |       |              | Paid-In |   |  | Former   |         |        | Accumulated |   |        | Treasury |  |   |         
|                                                         |                                        | Stock                             |            |           | Stock    |  |            | Stock  |       |              | Capital |   |  | Officers |         |        | Deficit     |   |        | Stock    |  |   | Total    |  
|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |  
|                                                         |                                        | (In thousands, except share data) |           
|Balance at December 31, 2001                             |                                        |                                   | 39,001,771 |           |          |  | (112,500   | )      |       | $            | 39      |   |  | $        | 191,585 |        |             | $ | (4,632 | )        |  | $ | (160,463 | ) |  | $ | (469   | ) |  | $ | 26,060  |       
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         |       
|                                                         | Matching contribution 401(k) plan      |                                   |            | 222,012   |          |  |            |        |       |              |         | 1 |  |          |         | 1,110  |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 1,111  | 
|                                                         | Exercise of stock options and warrants |                                   |            | 5,382,161 |          |  |            |        |       |              |         | 5 |  |          |         | 10,077 |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 10,082 | 
|Repurchases of common stock                              |                                        |                                   |            |           |          |  | (1,873,002 | )      |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |   |  |   | (6,003 | ) |  |   | (6,003  | )     
|Dividend of subsidiary, PracticeWorks, adjustment        |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          | 401     |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   | 401     |       
|Allowance for loan losses (reversed)                     |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   | (6,000 | )        |  |   |          |   |  |   |        |   |  |   | (6,000  | )     
|Loan payments, net                                       |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   | 10,632 |          |  |   |          |   |  |   |        |   |  |   | 10,632  |       
|Net income                                               |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   | 24,150   |   |  |   |        |   |  |   | 24,150  |       
|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |  
|Balance at December 31, 2002                             |                                        |                                   | 44,605,944 |           |          |  | (1,985,502 | )      |       |              | 45      |   |  |          | 203,173 |        |             |   |       |          |  |   | (136,313 | ) |  |   | (6,472 | ) |  |   | 60,433  |       
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         |       
|                                                         | Matching contribution 401(k) plan      |                                   |            | 276,933   |          |  |            |        |       |              |         |   |  |          |         | 1,132  |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 1,132  | 
|                                                         | Exercise of stock options              |                                   |            | 395,939   |          |  |            |        |       |              |         |   |  |          |         | 1,134  |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 1,134  | 
|Net income                                               |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   | 7,963    |   |  |   |        |   |  |   | 7,963   |       
|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |  
|Balance at December 31, 2003                             |                                        |                                   | 45,278,816 |           |          |  | (1,985,502 | )      |       |              | 45      |   |  |          | 205,439 |        |             |   |       |          |  |   | (128,350 | ) |  |   | (6,472 | ) |  |   | 70,662  |       
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         |       
|                                                         | Matching contribution 401(k) plan      |                                   |            | 64,269    |          |  |            |        |       |              |         |   |  |          |         | 252    |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 252    | 
|                                                         | Exercise of stock options and warrants |                                   |            | 995,483   |          |  |            |        |       |              |         | 1 |  |          |         | 2,320  |             |   |        |          |  |   |          |   |  |   |        |   |  |   |         | 2,321  | 
|Tax benefit from change in valuation allowance and other |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          | 3,877   |        |             |   |        |          |  |   |          |   |  |   |        |   |  |   | 3,877   |       
|Net loss                                                 |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   | (12,457  | ) |  |   |        |   |  |   | (12,457 | )     
|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |  
|Balance at December 31, 2004                             |                                        |                                   | 46,338,568 |           |          |  | (1,985,502 | )      |       | $            | 46      |   |  | $        | 211,888 |        |             | $ |       |          |  | $ | (140,807 | ) |  | $ | (6,472 | ) |  | $ | 64,655  |       
|                                                         |                                        |                                   |            |           |          |  |            |        |       |              |         |   |  |          |         |        |             |   |        |          |  |   |          |  



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AMICAS, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |         |   |        |        |         |  
|---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------ | ------ | - | ------- | ------- | ------- | - | ------ | ------ | ------- | -
|                                                                                         |                                                                              | Year Ended December 31,                                       |        
|                                                                                         |                                                                              |                                                               |        
|                                                                                         |                                                                              | 2004                                                          |         |        | 2003   |   |         | 2002    |        
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|                                                                                         |                                                                              | (In thousands)                                                |        
|Operating activities                                                                     |                                                                              |                                                               |         |        |        |   |         |         |         |   |        |       
|Income (loss) from continuing operations                                                 |                                                                              | $                                                             | (26,515 | )      |        | $ | (10,724 | )       |         | $ | 3,991  |       
|Income from discontinued operations                                                      |                                                                              |                                                               | 14,058  |        |        |   | 18,687  |         |         |   | 20,159 |       
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|Net income (loss)                                                                        |                                                                              |                                                               | (12,457 | )      |        |   | 7,963   |         |         |   | 24,150 |       
|Adjustments to reconcile net income (loss) to cash provided by
    operating activities: |                                                                              |                                                               |         |        |        |   |         |         |         |   |        |       
|                                                                                         | Impairment of capitalized software                                           |                                                               |         | 3,229  |        |   |         | 490     |         |   |        |        |        
|                                                                                         | Other impairment charges                                                     |                                                               |         | 1,351  |        |   |         |         |         |   |        |        |        
|                                                                                         | Restructuring and severance charges (credits) and credit
    for loan losses |                                                               |         | 1,093  |        |   |         | 332     |         |   |        | (6,501 | )      
|                                                                                         | Depreciation and amortization                                                |                                                               |         | 3,047  |        |   |         | 2,460   |         |   |        | 2,572  |        
|                                                                                         | Acquired in-process technology                                               |                                                               |         |        |        |   |         | 750     |         |   |        |        |        
|                                                                                         | Provisions for bad debts, returns and discounts                              |                                                               |         | 2,424  |        |   |         | 1,973   |         |   |        | 2,815  |        
|                                                                                         | Amortization of deferred finance costs, charged to interest
    expense      |                                                               |         | 226    |        |   |         | 173     |         |   |        | 277    |        
|                                                                                         | Amortization of software costs                                               |                                                               |         | 3,178  |        |   |         | 1,873   |         |   |        | 911    |        
|                                                                                         | Deferred income taxes                                                        |                                                               |         | 1,950  |        |   |         |         |         |   |        |        |        
|                                                                                         | Changes in operating assets and liabilities:                                 |                                                               |         |        |        |   |         |         |         |   |        |        |        
|                                                                                         |                                                                              | Accounts receivable                                           |         |        | (7,356 | ) |         |         | (2,342  | ) |        |        | (4,252  | )
|                                                                                         |                                                                              | Computer hardware held for resale, prepaid expenses and other |         |        | (134   | ) |         |         | (1,748  | ) |        |        | (802    | )
|                                                                                         |                                                                              | Accounts payable, accrued costs and expenses                  |         |        | 3,870  |   |         |         | (3,726  | ) |        |        | 1,536   |  
|                                                                                         |                                                                              | Deferred revenue                                              |         |        | 5,514  |   |         |         | (417    | ) |        |        | 1,344   |  
|                                                                                         |                                                                              | Unearned discounts re: outsourced printing services           |         |        | (1,200 | ) |         |         | (5,601  | ) |        |        | (1,292  | )
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|                                                                                         |                                                                              | Cash provided by operating activities                         |         |        | 4,735  |   |         |         | 2,180   |   |        |        | 20,758  |  
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|Investing activities                                                                     |                                                                              |                                                               |         |        |        |   |         |         |         |   |        |       
|                                                                                         | Business acquisition, net of cash acquired                                   |                                                               |         | (3,675 | )      |   |         | (29,143 | )       |   |        |        |        
|                                                                                         | Software product development costs                                           |                                                               |         | (1,638 | )      |   |         | (2,017  | )       |   |        | (4,345 | )      
|                                                                                         | Proceeds from sale of office buildings                                       |                                                               |         |        |        |   |         | 360     |         |   |        | 7,310  |        
|                                                                                         | Purchases of property and equipment                                          |                                                               |         | (2,227 | )      |   |         | (1,954  | )       |   |        | (771   | )      
|                                                                                         | Cash received from PracticeWorks, Inc.                                       |                                                               |         |        |        |   |         |         |         |   |        | 333    |        
|                                                                                         | Security deposit                                                             |                                                               |         |        |        |   |         | (308    | )       |   |        |        |        
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|                                                                                         |                                                                              | Cash (used in) provided by investing activities               |         |        | (7,540 | ) |         |         | (33,062 | ) |        |        | 2,527   |  
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|Financing activities                                                                     |                                                                              |                                                               |         |        |        |   |         |         |         |   |        |       
|                                                                                         | Long-term debt:                                                              |                                                               |         |        |        |   |         |         |         |   |        |        |        
|                                                                                         |                                                                              | (Payments)                                                    |         |        | (6,827 | ) |         |         | (4,273  | ) |        |        | (38,597 | )
|                                                                                         |                                                                              | Proceeds                                                      |         |        |        |   |         |         | 15,000  |   |        |        | 27,450  |  
|                                                                                         | Exercise of stock options and warrants                                       |                                                               |         | 2,305  |        |   |         | 1,076   |         |   |        | 10,017 |        
|                                                                                         | Loan payments from former officers                                           |                                                               |         |        |        |   |         |         |         |   |        | 10,991 |        
|                                                                                         | Repurchases of common stock                                                  |                                                               |         |        |        |   |         |         |         |   |        | (6,003 | )      
|                                                                                         | Deferred finance costs and other                                             |                                                               |         | (167   | )      |   |         | (267    | )       |   |        | (657   | )      
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|                                                                                         |                                                                              | Cash (used in) provided by financing activities               |         |        | (4,689 | ) |         |         | 11,536  |   |        |        | 3,201   |  
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|(Decrease) increase in cash and cash equivalents                                         |                                                                              |                                                               | (7,494  | )      |        |   | (19,346 | )       |         |   | 26,486 |       
|Cash and cash equivalents at beginning of year                                           |                                                                              |                                                               | 20,128  |        |        |   | 39,474  |         |         |   | 12,988 |       
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        
|Cash and cash equivalents at end of year                                                 |                                                                              | $                                                             | 12,634  |        |        | $ | 20,128  |         |         | $ | 39,474 |       
|                                                                                         |                                                                              |                                                               |         |        |        |   |         |         |        



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AMICAS, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |         
|-- | --------
|A. | Business

tm tm








|   |                                           
|-- | ------------------------------------------
|B. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                                                 
| | ------------------------------------------------
| | Reclassification of Financial Statement Balances





| |                 
| | ----------------
| | Use of Estimates





| |                    
| | -------------------
| | Revenue Recognition



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)









| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                                                                             
| | ----------------------------------------------------------------------------
| | Accounts Receivable, Revenue Reserve and Allowance for
    Doubtful Accounts





| |           
| | ----------
| | Fair Value





| |                                  
| | ---------------------------------
| | Computer Hardware Held For Resale





| |                  
| | -----------------
| | Long-lived Assets



55



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                          
| | -----------------------------------------
| | Goodwill Assets and Business Combinations







| |                           
| | --------------------------
| | Software Development Costs







| |                       
| | ----------------------
| | Deferred Finance Costs





| |                       
| | ----------------------
| | Property and Equipment



56



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Stock-Based Compensation



(in thousands, except per share data)


|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |   |   |        |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------ | ----- | -
|                                                                                                                                                  |                       | Year Ended December 31, |        
|                                                                                                                                                  |                       |                         |        
|                                                                                                                                                  |                       | 2004                    |         |       | 2003 |   |         | 2002  |  
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|Income (loss) from continuing operations, as reported                                                                                             |                       | $                       | (26,515 | )     |      | $ | (10,724 | )     |   | $ | 3,991  |      
|Less: total stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |                       |                         | (1,425  | )     |      |   | (4,131  | )     |   |   | (5,104 | )    
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|Pro forma loss from continuing operations                                                                                                         |                       | $                       | (27,940 | )     |      | $ | (14,855 | )     |   | $ | (1,113 | )    
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|Earnings (loss) per share  continuing operations:                                                                                                |                       |                         |         |       |      |   |         |       |   |   |        |      
|                                                                                                                                                  | Basic  as reported   |                         | $       | (0.61 | )    |   | $       | (0.25 | ) |   | $      | 0.10  |  
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|                                                                                                                                                  | Basic  pro forma     |                         | $       | (0.64 | )    |   | $       | (0.35 | ) |   | $      | (0.03 | )
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|                                                                                                                                                  | Diluted  as reported |                         | $       | (0.61 | )    |   | $       | (0.25 | ) |   | $      | 0.08  |  
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  
|                                                                                                                                                  | Diluted  pro forma   |                         | $       | (0.64 | )    |   | $       | (0.35 | ) |   | $      | (0.03 | )
|                                                                                                                                                  |                       |                         |         |       |      |   |         |       |  



|                                          |  |                         |      |   |      |  |      |      |  |  |      |  
|----------------------------------------- |  | ----------------------- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                          |  | Year Ended December 31, |     
|                                          |  |                         |     
|                                          |  | 2004                    |      |   | 2003 |  |      | 2002 | 
|                                          |  |                         |      |   |      |  |      |      | 
|Risk-free interest rate                   |  |                         | 3.0  | % |      |  | 2.5  | %    |  |  | 2.6  | %
|Expected dividend yield                   |  |                         | 0.0  |   |      |  | 0.0  |      |  |  | 0.0  |  
|Expected stock price volatility           |  |                         | 72.1 | % |      |  | 76.0 | %    |  |  | 78.7 | %
|Weighted average expected life (in years) |  |                         | 4.8  |   |      |  | 4.0  |      |  |  | 4.0  |  



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |             
| | ------------
| | Income Taxes





| |                          
| | -------------------------
| | Earnings (Loss) Per Share

(in
thousands, except per share data):


|                           |                                                                            |                         |         |         |      |   |       |         |   |   |        |        | 
|-------------------------- | -------------------------------------------------------------------------- | ----------------------- | ------- | ------- | ---- | - | ----- | ------- | - | - | ------ | ------ | 
|                           |                                                                            | Year Ended December 31, |        
|                           |                                                                            |                         |        
|                           |                                                                            | 2004                    |         |         | 2003 |   |       | 2002    |  
|                           |                                                                            |                         |         |         |      |   |       |         |  
|Numerator  income (loss): |                                                                            |                         |         |         |      |   |       |         |   |   |        |       
|                           | Continuing operations                                                      |                         | $       | (26,515 | )    |   | $     | (10,724 | ) |   | $      | 3,991  | 
|                           | Discontinued operations                                                    |                         |         | 14,058  |      |   |       | 18,687  |   |   |        | 20,159 | 
|                           |                                                                            |                         |         |         |      |   |       |         |  
|                           |                                                                            | $                       | (12,457 | )       |      | $ | 7,963 |         |   | $ | 24,150 |       
|                           |                                                                            |                         |         |         |      |   |       |         |  
|Denominator:               |                                                                            |                         |         |         |      |   |       |         |   |   |        |       
|                           | Basic EPS  weighted-average shares                                        |                         |         | 43,563  |      |   |       | 43,052  |   |   |        | 41,592 | 
|                           | Effect of dilutive securities, stock option and warrant rights             |                         |         |         |      |   |       |         |   |   |        | 7,258  | 
|                           |                                                                            |                         |         |         |      |   |       |         |  
|                           | Diluted EPS  adjusted weighted-average shares and
    assumed conversions |                         |         | 43,563  |      |   |       | 43,052  |   |   |        | 48,850 | 
|                           |                                                                            |                         |         |         |      |   |       |         |  
|Basic EPS:                 |                                                                            |                         |         |         |      |   |       |         |   |   |        |       
|                           | Continuing operations                                                      |                         | $       | (0.61   | )    |   | $     | (0.25   | ) |   | $      | 0.10   | 
|                           | Discontinued operations                                                    |                         |         | 0.32    |      |   |       | 0.43    |   |   |        | 0.48   | 
|                           |                                                                            |                         |         |         |      |   |       |         |  
|                           |                                                                            | $                       | (0.29   | )       |      | $ | 0.18  |         |   | $ | 0.58   |       
|                           |                                                                            |                         |         |         |      |   |       |         |  
|Diluted EPS:               |                                                                            |                         |         |         |      |   |       |         |   |   |        |       
|                           | Continuing operations                                                      |                         | $       | (0.61   | )    |   | $     | (0.25   | ) |   | $      | 0.08   | 
|                           | Discontinued operations                                                    |                         |         | 0.32    |      |   |       | 0.43    |   |   |        | 0.41   | 
|                           |                                                                            |                         |         |         |      |   |       |         |  
|                           |                                                                            | $                       | (0.29   | )       |      | $ | 0.18  |         |   | $ | 0.49   |       
|                           |                                                                            |                         |         |         |      |   |       |         |  





| |                     
| | --------------------
| | Comprehensive Income



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements









|   |                        
|-- | -----------------------
|C. | Discontinued Operations





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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                             |                                                                  |   |        |        | 
|-------------------------------------------- | ---------------------------------------------------------------- | - | ------ | ------ | 
|Assets of discontinued operations:           |                                                                  |   |        |       
|                                             | Accounts receivable, net                                         |   | $      | 9,918  | 
|                                             | Other current assets                                             |   |        | 633    | 
|                                             |                                                                  |   |       
|                                             | Total current assets of discontinued operations                  |   |        | 10,551 | 
|                                             |                                                                  |   |       
|                                             | Goodwill                                                         |   |        | 15,901 | 
|                                             | Developed software                                               |   |        | 5,270  | 
|                                             | Other non-current assets of discontinued operations              |   |        | 1,309  | 
|                                             |                                                                  |   |       
|                                             | Total non-current assets of discontinued operations              |   |        | 22,480 | 
|                                             |                                                                  |   |       
|Total assets of discontinued operations      |                                                                  | $ | 33,031 |       
|                                             |                                                                  |   |       
|Liabilities of discontinued operations:      |                                                                  |   |        |       
|                                             | Accounts payable, accrued expenses and other current liabilities |   | $      | 7,733  | 
|                                             | Deferred revenue                                                 |   |        | 6,263  | 
|                                             |                                                                  |   |       
|                                             | Total current liabilities of discontinued operations             |   |        | 13,996 | 
|                                             | Total non-current liabilities of discontinued operations         |   |        | 2,813  | 
|                                             |                                                                  |   |       
|Total liabilities of discontinued operations |                                                                  | $ | 16,809 |       
|                                             |                                                                  |   |       



|                                    |  |                         |        |  |      |   |        |      |  |   |        | 
|----------------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2004                    |        |  | 2003 |   |        | 2002 | 
|                                    |  |                         |        |  |      |   |        |      | 
|Revenues                            |  | $                       | 71,093 |  |      | $ | 77,308 |      |  | $ | 76,760 | 
|Gross profit                        |  |                         | 52,360 |  |      |   | 56,337 |      |  |   | 55,966 | 
|Operating income                    |  |                         | 14,060 |  |      |   | 18,693 |      |  |   | 20,170 | 
|Income from discontinued operations |  |                         | 14,058 |  |      |   | 18,687 |      |  |   | 20,159 | 



|   |                     
|-- | --------------------
|D. | Business Combination



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








(in thousands):


|                               |                       |   |        |        | 
|------------------------------ | --------------------- | - | ------ | ------ | 
|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 |       
|                               |                       |   |       






|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The amount allocated to goodwill is not 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.

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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |  |                                                         
|--- |  | --------------------------------------------------------
|(b) |  | Amortizable identified intangible assets are as follows:

|                      |  |                |        |           |          |  |    | 
|--------------------- |  | -------------- | ------ | --------- | -------- |  | -- | 
|                      |  |                |        | Estimated |         
|                      |  | Estimated      |        |           | Economic | 
|                      |  | Fair Value     |        |           | Life     | 
|                      |  |                |        |           |          | 
|                      |  | (In thousands) |        |           | (Years)  | 
|Acquired software     |  | $              | 13,700 |           |          |  | 7  | 
|Trademarks            |  |                | 1,900  |           |          |  | 15 | 
|Noncompete agreements |  |                | 1,500  |           |          |  | 5  | 
|                      |  |                |        |           |          | 
|                      |  | $              | 17,100 |           |          |  |    | 
|                      |  |                |        |           |          | 



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







|                                              |                         |                       |         |       |      |   |        |       |  
|--------------------------------------------- | ----------------------- | --------------------- | ------- | ----- | ---- | - | ------ | ----- | -
|                                              |                         | Year Ended            |        
|                                              |                         | December 31,          |        
|                                              |                         |                       |        
|                                              |                         | 2003                  |         |       | 2002 |  
|                                              |                         |                       |         |       |      |  
|                                              |                         | (In thousands, except |        
|                                              |                         | per share data)       |        
|Combined revenues                             |                         | $                     | 38,070  |       |      | $ | 40,321 |      
|Loss from continuing operations               |                         | $                     | (22,241 | )     |      | $ | (7,746 | )    
|Income from discontinued operations           |                         |                       | 18,687  |       |      |   | 20,159 |      
|                                              |                         |                       |         |       |      |  
|Net income (loss)                             |                         | $                     | (3,554  | )     |      | $ | 12,413 |      
|                                              |                         |                       |         |       |      |  
|Earnings (loss) per share  basic and diluted |                         |                       |         |       |      |   |        |      
|                                              | Continuing operations   |                       | $       | (0.52 | )    |   | $      | (0.19 | )
|                                              | Discontinued operations |                       |         | 0.43  |      |   |        | 0.48  |  
|                                              |                         |                       |         |       |      |  
|                                              |                         | $                     | (0.08   | )     |      | $ | 0.30   |      
|                                              |                         |                       |         |       |      |  

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##### Table of Contents



AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------
|E. | Restructuring Costs (Credits) and Settlements, Severance and
    Impairment Charges and Credit for Loan Losses



| |                              
| | -----------------------------
| | Restructuring Costs (Credits)

The 2003 Plan.


The 2000 Plan.


(in thousands)


|                                                  |  |              |       |  |             |   |      |          |            |   |              |   |  |             |       |            |          |   |     |              |  |   |             |   |  |          |     |  |              |   |      |      |  |   |      |   |  |   |     |    
|------------------------------------------------- |  | ------------ | ----- |  | ----------- | - | ---- | -------- | ---------- | - | ------------ | - |  | ----------- | ----- | ---------- | -------- | - | --- | ------------ |  | - | ----------- | - |  | -------- | --- |  | ------------ | - | ---- | ---- |  | - | ---- | - |  | - | --- | ---
|                                                  |  | Balance at   |       |  |             |   |      |          | Balance at |   |              |   |  |             |       | Balance at |          |   |     |              |  |   | Balance at  |  
|                                                  |  | December 31, |       |  | Adjustments |   |      | Cash     |            |   | December 31, |   |  | Adjustments |       |            | Cash     |   |     | December 31, |  |   | Adjustments |   |  | Cash     |     |  | December 31, |  
|                                                  |  | 2001         |       |  | to Accrual  |   |      | Payments |            |   | 2002         |   |  | to Accrual  |       |            | Payments |   |     | 2003         |  |   | to Accrual  |   |  | Payments |     |  | 2004         |  
|                                                  |  |              |       |  |             |   |      |          |            |   |              |   |  |             |       |            |          |   |     |              |  |   |             |   |  |          |     |  |              |  
|Facility closure and consolidation                |  | $            | 2,786 |  |             | $ | (501 | )        |            | $ | (1,178       | ) |  | $           | 1,107 |            |          | $ | (89 | )            |  | $ | (432        | ) |  | $        | 586 |  |              | $ | (155 | )    |  | $ | (305 | ) |  | $ | 126 | (c)
|Employee severance and other termination benefits |  |              | 114   |  |             |   |      |          |            |   | (114         | ) |  |             |      |            |          |   | 421 |              |  |   | (84         | ) |  |          | 337 |  |              |   |      |      |  |   | (337 | ) |  |   |    |    
|                                                  |  |              |       |  |             |   |      |          |            |   |              |   |  |             |       |            |          |   |     |              |  |   |             |   |  |          |     |  |              |  
|2003 and 2000 Plans Total                         |  | $            | 2,900 |  |             | $ | (501 | )(a)     |            | $ | (1,292       | ) |  | $           | 1,107 |            |          | $ | 332 |              |  | $ | (516        | ) |  | $        | 923 |  |              | $ | (155 | )(b) |  | $ | (642 | ) |  | $ | 126 |    
|                                                  |  |              |       |  |             |   |      |          |            |   |              |   |  |             |       |            |          |   |     |              |  |   |             |   |  |          |     |  |              |  






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



|    |  |                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | savings in connection with the early termination of one office
    lease and the sublease of a second office lease for facilities
    closed as part of the 2000 Plan
|   
|(c) |  | primarily amounts accrued for outstanding lease commitments
    relating to the 2000 Plan                                                                            



| |                                                                             
| | ----------------------------------------------------------------------------
| | Settlements, Severance and Impairment Charges and Credit
    for Loan Losses





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As discussed in Note D, in connection with the termination
    of the earn-out consideration obligations relating to the
    acquisition of Amicas PACS, the Company recognized
    $2.4 million of expense for amounts paid, or to be paid, to
    certain Amicas PACS employees under the Amicas PACS bonus plan.                                                                                                                                                                            
|
| |  | The Company recorded $1.3 million of severance-related
    costs including executive-related severance costs of
    $.4 million. In December 2004, the Company relocated its
    corporate headquarters from Ridgefield, Connecticut to Boston,
    Massachusetts. On October 15, 2004, the Company notified 57
    of its employees that, in connection with the relocation of the
    Companys corporate headquarters, their employment would be
    terminated under a plan of termination.
|
| |  | The Company recorded an impairment charge of $1.2 million
    to write-down its enterprise resource planning software
    (ERP) relating to the Companys decision to
    cease using a portion of its ERP. This decision was due to the
    downsizing of the Company as a result of the Medical Division
    sale.                                                                                                                                                                         

63



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##### Table of Contents



AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company recorded costs of $.8 million relating to the
    settlement of litigation. In August 2003, the Company was served
    with a summons and complaint as part of a bankruptcy proceeding
    relating to a former business associate. The complaint alleged
    that in 2001, the Company received a preference payment from the
    business associate and sought to avoid and recover the
    $.8 million payment made to AMICAS. The matter was settled
    in March 2004 and the Company paid $.3 million to the
    former business associate through its committee of unsecured
    creditors. Also, in September 2004, a lawsuit styled DR Systems,
    Inc. v. VitalWorks Inc. and Amicas, Inc. was filed in the
    United States District Court for the Southern District of
    California. The complaint alleged that VitalWorks and Amicas
    infringed the plaintiffs patent through the manufacture,
    use, importation, sale and/or offer for sale of automated
    medical imaging and archival systems. The plaintiff sought
    monetary damages, treble damages and a permanent injunction. On
    November 3, 2004, the Company served its answer. On
    January 26, 2005, the parties entered into a Settlement,
    Release and License agreement, and on February 4, 2005, a
    stipulation of dismissal, dismissing the lawsuit with prejudice,
    was entered. In connection with this agreement, the Company paid
    the plaintiff $.5 million in 2005. This amount was accrued
    at December 31, 2004.





|   |                       
|-- | ----------------------
|F. | Property and Equipment



|                                               |  |               |     |                |              |   |       |      |  |   |        | 
|---------------------------------------------- |  | ------------- | --- | -------------- | ------------ | - | ----- | ---- |  | - | ------ | 
|                                               |  | Depreciation/ |     |                | December 31, |  
|                                               |  | Amortization  |     |                |              |  
|                                               |  | Period        |     |                | 2004         |   |       | 2003 | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  | (Years)       |     |                |             
|                                               |  |               |     | (In thousands) |             
|Equipment, primarily computers, and software   |  |               | 3-5 |                |              | $ | 3,333 |      |  | $ | 12,884 | 
|Equipment under capital lease obligations      |  |               | 3-5 |                |              |   | 2,608 |      |  |   | 2,904  | 
|Furniture and other                            |  |               | 3-7 |                |              |   | 229   |      |  |   | 535    | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  |               |     |                |              |   | 6,170 |      |  |   | 16,323 | 
|Less accumulated depreciation and amortization |  |               |     |                |              |   | 4,182 |      |  |   | 11,642 | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  |               |     |                |              | $ | 1,988 |      |  | $ | 4,681  | 
|                                               |  |               |     |                |              |   |       |      | 







64



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##### Table of Contents



AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                                                       
|-- | ----------------------------------------------------------------------
|G. | Goodwill, Acquired/ Developed Software and Other Intangible
    Assets



|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          |  |   |        |   |  |   |        | 
|------------------------------------------------------------- |  | --------- | --- | -------------- | -------- | - | ------ | ------------ |  | --- | -------- | - | ----- | -------- | ------ |  | ------------ | --- | ------ | -------- |  | - | ------ | - |  | - | ------ | 
|                                                              |  |           |     | December 31,   |         
|                                                              |  |           |     |                |         
|                                                              |  |           |     | 2004           |          |   | 2003   |             
|                                                              |  |           |     |                |          |   |        |             
|                                                              |  | Estimated |     |                | Gross    |   |        |              |  | Net |          |   | Gross |          |        |  |              | Net |       
|                                                              |  | Economic  |     |                | Carrying |   |        | Accumulated  |  |     | Carrying |   |       | Carrying |        |  | Accumulated  |     |        | Carrying | 
|                                                              |  | Life      |     |                | Amount   |   |        | Amortization |  |     | Value    |   |       | Amount   |        |  | Amortization |     |        | Value    | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|                                                              |  | (Years)   |     |                |         
|                                                              |  |           |     | (In thousands) |         
|Goodwill ($23.0 million and $14.2 million re Amicas
    PACS) |  |           |     |                |          | $ | 27,313 |              |  |     |         |   |       | $        | 27,313 |  |              | $   | 34,472 |          |  |   |       |   |  | $ | 34,472 | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|Acquired software                                             |  |           | 7   |                |          | $ | 13,700 |              |  | $   | (2,120   | ) |       | $        | 11,580 |  |              | $   | 13,700 |          |  | $ | (163   | ) |  | $ | 13,537 | 
|Software product development                                  |  |           | 3-5 |                |          |   |       |              |  |     |         |   |       |          |       |  |              |     | 9,573  |          |  |   | (1,641 | ) |  |   | 7,932  | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|                                                              |  |           |     |                |          | $ | 13,700 |              |  | $   | (2,120   | ) |       | $        | 11,580 |  |              | $   | 23,273 |          |  | $ | (1,804 | ) |  | $ | 21,469 | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|Trademarks                                                    |  |           | 15  |                |          | $ | 1,900  |              |  | $   | (137     | ) |       | $        | 1,763  |  |              | $   | 1,900  |          |  | $ | (11    | ) |  | $ | 1,889  | 
|Noncompete agreements                                         |  |           | 5   |                |          |   | 1,500  |              |  |     | (325     | ) |       |          | 1,175  |  |              |     | 1,500  |          |  |   | (25    | ) |  |   | 1,475  | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|                                                              |  |           |     |                |          | $ | 3,400  |              |  | $   | (462     | ) |       | $        | 2,938  |  |              | $   | 3,400  |          |  | $ | (36    | ) |  | $ | 3,364  | 
|                                                              |  |           |     |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 









(in thousands):


|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 2,384  | 
|2006       |  |   | 2,384  | 
|2007       |  |   | 2,384  | 
|2008       |  |   | 2,359  | 
|2009       |  |   | 2,084  | 
|Thereafter |  |   | 2,923  | 
|           |  |   |       
|           |  | $ | 14,518 | 
|           |  |   |       

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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                      
|-- | -------------------------------------
|H. | Accounts Payable and Accrued Expenses



|                               |  |                |       |  |      |   |        | 
|------------------------------ |  | -------------- | ----- |  | ---- | - | ------ | 
|                               |  | December 31,   |      
|                               |  |                |      
|                               |  | 2004           |       |  | 2003 |  
|                               |  |                |       |  |      |  
|                               |  | (In thousands) |      
|Trade accounts payable         |  | $              | 1,425 |  |      | $ | 2,524  | 
|Cost of providing EDI services |  |                | 691   |  |      |   | 2,025  | 
|Other accrued expenses         |  |                | 6,296 |  |      |   | 6,500  | 
|                               |  |                |       |  |      |  
|                               |  | $              | 8,412 |  |      | $ | 11,049 | 
|                               |  |                |       |  |      |  



|   |               
|-- | --------------
|I. | Long-Term Debt



|                                    |                          |                |        |        |      |   |        |        | 
|----------------------------------- | ------------------------ | -------------- | ------ | ------ | ---- | - | ------ | ------ | 
|                                    |                          | December 31,   |       
|                                    |                          |                |       
|                                    |                          | 2004           |        |        | 2003 |  
|                                    |                          |                |        |        |      |  
|                                    |                          | (In thousands) |       
|Wells Fargo Foothill, Inc.          |                          |                |        |        |      |   |        |       
|                                    | Acquisition line advance |                | $      | 11,000 |      |   | $      | 15,000 | 
|                                    | Term loan                |                |        | 12,000 |      |   |        | 14,500 | 
|Note payable re earn-out settlement |                          |                | 5,588  |        |      |   |        |       
|Capital leases (see Note J)         |                          |                | 86     |        |      |   | 257    |       
|                                    |                          |                |        |        |      |  
|                                    |                          |                | 28,674 |        |      |   | 29,757 |       
|Less current portion                |                          |                | 9,657  |        |      |   | 6,738  |       
|                                    |                          |                |        |        |      |  
|                                    |                          | $              | 19,017 |        |      | $ | 23,019 |       
|                                    |                          |                |        |        |      |  



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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                              
|-- | -----------------------------
|J. | Commitments and Contingencies





|                                                     |  |                |    |  |              |   |       | 
|---------------------------------------------------- |  | -------------- | -- |  | ------------ | - | ----- | 
|Year                                                 |  | Capital        |    |  | Operating(a) |  
|                                                     |  |                |    |  |              |  
|                                                     |  | (In thousands) |   
|2005                                                 |  | $              | 68 |  |              | $ | 2,571 | 
|2006                                                 |  |                | 18 |  |              |   | 2,151 | 
|2007                                                 |  |                |    |  |              |   | 1,454 | 
|2008                                                 |  |                |    |  |              |   | 771   | 
|2009                                                 |  |                |    |  |              |   | 16    | 
|Thereafter                                           |  |                |    |  |              |   |       | 
|                                                     |  |                |    |  |              |  
|                                                     |  |                | 86 |  |              |   | 6,963 | 
|Less amounts included in accrued restructuring costs |  |                |    |  |              |   | 91    | 
|                                                     |  |                |    |  |              |  
|                                                     |  |                | 86 |  |              | $ | 6,872 | 
|                                                     |  |                |    |  |              |  
|Less current portion                                 |  |                | 68 |  |              |   |       | 
|                                                     |  |                |    |  |              |  
|Long-term obligations under capital leases           |  | $              | 18 |  |              |   |       | 
|                                                     |  |                |    |  |              |  






|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Subsequent to December 31, 2004, certain operating leases
    were assigned to Cerner in connection with the sale of the
    Medical Division. Also, subsequent to December 31, 2004,
    the Company entered into subleases for additional office space
    at its Boston, Massachusetts corporate headquarters. See
    Note N.





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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


















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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |                     
|-- | --------------------
|K. | Stockholders Equity



| |                        
| | -----------------------
| | Stockholder Rights Plan





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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                       
| | ----------------------
| | Employee Savings Plans





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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                             
| | ----------------------------
| | Employee Stock Purchase Plan





| |                   
| | ------------------
| | Stock Option Plans











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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




shares in
thousands)


|                                         |           |         |        |          |                |   |      |      | 
|---------------------------------------- | --------- | ------- | ------ | -------- | -------------- | - | ---- | ---- | 
|                                         |           |         |        | Weighted |               
|                                         |           |         |        | Average  |               
|                                         |           | Options |        |          | Exercise Price |  
|                                         |           |         |        |          |                |  
|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 |     
|                                         | Granted   |         |        | 2,999    |                |   |      | 3.57 | 
|                                         | Exercised |         |        | (851     | )              |   |      | 2.22 | 
|                                         | Forfeited |         |        | (391     | )              |   |      | 4.18 | 
|                                         |           |         |        |          |                |  
|Outstanding at December 31, 2004         |           |         | 10,889 |          |                | $ | 2.98 |     
|                                         |           |         |        |          |                |  
|Options exercisable at December 31, 2002 |           |         | 5,503  |          |                | $ | 2.61 |     
|Options exercisable at December 31, 2003 |           |         | 8,026  |          |                | $ | 2.75 |     
|Options exercisable at December 31, 2004 |           |         | 7,882  |          |                | $ | 2.75 |     

(shares in thousands)


|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |       |  |  |   |      | 
|------------------------ |  | ------------------- | ------ | --------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ----- |  |  | - | ---- | 
|                         |  | Options Outstanding |        |           |                    
|                         |  |                     |        |           | Options Exercisable | 
|                         |  |                     |        | Weighted  |                     |  |          |          |  |  
|                         |  |                     |        | Average   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |        | Remaining |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Number              |        |           | Contractual         |  |          | Exercise |  |   | Number      |          |  | Exercise |      
|Range of Exercise Prices |  | Outstanding         |        |           | Life                |  |          | Price    |  |   | Exercisable |          |  | Price    |      
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      
|                         |  |                     |        | (Years)   |                     |  |          |          |  |   |            
|$0.79 -  2.50            |  |                     | 6,423  |           |                     |  | 5.1      |          |  | $ | 2.05        |          |  |          | 6,382 |  |  | $ | 2.05 | 
|2.51 -  5.00             |  |                     | 3,559  |           |                     |  | 7.9      |          |  |   | 3.50        |          |  |          | 657   |  |  |   | 3.26 | 
|5.01 -  7.50             |  |                     | 604    |           |                     |  | 4.5      |          |  |   | 6.74        |          |  |          | 554   |  |  |   | 6.85 | 
|7.51 - 17.50             |  |                     | 303    |           |                     |  | 1.7      |          |  |   | 9.15        |          |  |          | 289   |  |  |   | 9.20 | 
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      
|$0.79 - 17.50            |  |                     | 10,889 |           |                     |  | 5.9      |          |  | $ | 2.98        |          |  |          | 7,882 |  |  | $ | 2.75 | 
|                         |  |                     |        |           |                     |  |          |          |  |   |             |          |  |          |      

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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |         
| | --------
| | Warrants

(shares in thousands


|                         |  |           |     |           |             |  |          |          |  |   |      | 
|------------------------ |  | --------- | --- | --------- | ----------- |  | -------- | -------- |  | - | ---- | 
|                         |  |           |     | Weighted  |             |  |         
|                         |  |           |     | Average   |             |  | Weighted |         
|                         |  |           |     | Remaining |             |  | Average  |         
|                         |  | Number of |     |           | Contractual |  |          | Exercise | 
|Range of Exercise Prices |  | Warrants  |     |           | Life        |  |          | Price    | 
|                         |  |           |     |           |             |  |          |          | 
|                         |  |           |     | (Years)   |             |  |         
|$0.75 -  5.00            |  |           | 352 |           |             |  | 3.1      |          |  | $ | 4.55 | 
|5.01 - 17.90             |  |           | 203 |           |             |  | 1.2      |          |  |   | 7.05 | 
|                         |  |           |     |           |             |  |          |          | 
|$0.75 - 17.90            |  |           | 555 |           |             |  | 2.4      |          |  | $ | 5.47 | 
|                         |  |           |     |           |             |  |          |          | 





|   |             
|-- | ------------
|L. | Income Taxes





|                                 |                                                     |                          |        |        |        |   |        |        |        | 
|-------------------------------- | --------------------------------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                 |                                                     | December 31,             |       
|                                 |                                                     |                          |       
|                                 |                                                     | 2004                     |        |        | 2003   |  
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     | (In thousands)           |       
|Deferred income tax assets:      |                                                     |                          |        |        |        |   |        |       
|                                 | Allowance for doubtful accounts                     |                          | $      | 1,326  |        |   | $      | 2,022  |       
|                                 | Goodwill amortization                               |                          |        | 6,218  |        |   |        | 7,589  |       
|                                 | Accrued expenses                                    |                          |        | 1,449  |        |   |        | 1,565  |       
|                                 | Unearned discounts re: outsourced printing services |                          |        | 1,989  |        |   |        | 2,488  |       
|                                 | Net operating loss and credit carryforwards         |                          |        | 51,751 |        |   |        | 47,617 |       
|                                 | Change in Amicas PACS tax accounting method         |                          |        | 709    |        |   |        | 2,426  |       
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     |                          | 63,442 |        |        |   | 63,707 |       
|                                 |                                                     | Less valuation allowance |        |        | 27,226 |   |        |        | 26,958 | 
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     | $                        | 36,216 |        |        | $ | 36,749 |       
|                                 |                                                     |                          |        |        |        |  
|Deferred income tax liabilities: |                                                     |                          |        |        |        |   |        |       
|                                 | Acquired/developed software                         |                          | $      | 6,571  |        |   | $      | 8,480  |       
|                                 | Other intangible assets                             |                          |        | 1,146  |        |   |        | 1,329  |       
|                                 | Property and equipment                              |                          |        | 299    |        |   |        | 190    |       
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     |                          | 8,016  |        |        |   | 9,999  |       
|                                 |                                                     |                          |        |        |        |  
|Net deferred income tax asset    |                                                     | $                        | 28,200 |        |        | $ | 26,750 |       
|                                 |                                                     |                          |        |        |        |  

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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|   |                                                                
|-- | ---------------------------------------------------------------
|M. | Supplemental Disclosure of Cash Flow and Noncash
    Activities









|   |                  
|-- | -----------------
|N. | Subsequent Events





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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






















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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                            
|-- | -------------------------------------------
|O. | Quarterly Results of Operations (Unaudited)



|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |         |  
|------- | --------------------------------------------- | ------------------------------------- | ----- | ------ | ---------- | - | ---- | ------------ | ------ | - | ----------- | ------ | ------ | ----------- | ----- | ------- | ------ | ---- | ----- | ------- | ------- | -
|        |                                               | Three Months Ended                    |       |        |           
|        |                                               |                                       |       |        | Year Ended |  
|        |                                               | March 31                              |       |        | June 30    |   |      | September 30 |        |   | December 31 |        |        | December 31 |      
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        |                                               | (In thousands, except per share data) |      
|2004    |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |        
|        | Total revenues                                |                                       | $     | 9,465  |            |   | $    | 9,992        |        |   | $           | 10,750 |        |             | $     | 12,112  | (a)    |      | $     | 42,319  |        
|        | Gross profit                                  |                                       |       | 6,442  |            |   |      | 7,283        |        |   |             | 7,728  |        |             |       | 5,593   | (b)    |      |       | 27,046  |        
|        | Loss from continuing operations               |                                       |       | (5,475 | )          |   |      | (3,861       | )      |   |             | (3,930 | )      |             |       | (13,249 | )(c)   |      |       | (26,515 | )      
|        | Income from discontinued operations           |                                       |       | 3,291  |            |   |      | 3,870        |        |   |             | 3,559  |        |             |       | 3,338   |        |      |       | 14,058  |        
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        |                                               | Net income (loss)                     |       | $      | (2,184     | ) |      | $            | 9      |   |             | $      | (371   | )           |       | $       | (9,911 | )(c) |       | $       | (12,457 | )
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        | Weighted average number of shares outstanding |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|        |                                               | Basic and diluted                     |       |        | 43,371     |   |      |              | 43,438 |   |             |        | 43,552 |             |       |         | 43,887 |      |       |         | 43,563  |  
|        | Earnings (loss) per share  basic and diluted |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|        |                                               | Continuing operations                 |       | $      | (0.13      | ) |      | $            | (0.09  | ) |             | $      | (0.09  | )           |       | $       | (0.30  | )    |       | $       | (0.61   | )
|        |                                               | Discontinued operations               |       |        | 0.08       |   |      |              | 0.09   |   |             |        | 0.08   |             |       |         | 0.08   |      |       |         | 0.32    |  
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        |                                               | $                                     | (0.05 | )      |            | $ | 0.00 |              |        | $ | (0.01       | )      |        | $           | (0.23 | )       |        | $    | (0.29 | )      
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|2003(e) |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |        
|        | Total revenues                                |                                       | $     | 9,150  |            |   | $    | 8,614        |        |   | $           | 8,399  |        |             | $     | 8,048   |        |      | $     | 34,211  |        
|        | Gross profit                                  |                                       |       | 5,779  |            |   |      | 5,888        |        |   |             | 6,112  |        |             |       | 5,044   | (b)    |      |       | 22,823  |        
|        | Loss from continuing operations               |                                       |       | (1,820 | )          |   |      | (1,304       | )      |   |             | (2,303 | )      |             |       | (5,297  | )      |      |       | (10,724 | )      
|        | Income from discontinued operations           |                                       |       | 4,538  |            |   |      | 5,540        |        |   |             | 5,334  |        |             |       | 3,275   |        |      |       | 18,687  |        
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        |                                               | Net income (loss)                     |       | $      | 2,718      |   |      | $            | 4,236  |   |             | $      | 3,031  |             |       | $       | (2,022 | )(d) |       | $       | 7,963   |  
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        | Weighted average number of shares outstanding |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|        |                                               | Basic and diluted                     |       |        | 42,716     |   |      |              | 42,998 |   |             |        | 43,203 |             |       |         | 43,283 |      |       |         | 43,052  |  
|        | Earnings (loss) per share  basic and diluted |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|        |                                               | Continuing operations                 |       | $      | (0.04      | ) |      | $            | (0.03  | ) |             | $      | (0.05  | )           |       | $       | (0.12  | )    |       | $       | (0.25   | )
|        |                                               | Discontinued operations               |       |        | 0.11       |   |      |              | 0.13   |   |             |        | 0.12   |             |       |         | 0.08   |      |       |         | 0.43    |  
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|        |                                               | $                                     | 0.06  |        |            | $ | 0.10 |              |        | $ | 0.07        |        |        | $           | (0.05 | )       |        | $    | 0.18  |        
|        |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      






|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes $0.8 million of term-license arrangements that
    were converted to perpetual licenses during the quarter ended
    December 31, 2004.



|    |  |                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | In the quarters ended December 31, 2004 and 2003, the
    Company recognized charges of $3.2 million and
    $0.5 million, respectively, relating to the impairment of
    capitalized software costs.

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AMICAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) |  | In the quarter, the Company recognized additional settlement,
    severance and impairment charges and incurred other costs of
    $5.0 million consisting of $1.2 million for asset
    impairment, $2.4 million for additional earn-out
    consideration due under the provisions of the Amicas PACS merger
    agreement, $0.9 million for executive office relocation
    severance-related costs and $0.5 million for a legal
    settlement. The Company also recorded a provision for income
    taxes of $2.0 million which consisted primarily of an
    increase in the net valuation allowance for deferred tax assets.
|   
|(d) |  | In the quarter, the Company incurred a charge of
    $0.8 million for acquired in-process technology and
    $0.3 million of restructuring costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(e) |  | Reclassified to present the results of the Medical Division as
    discontinued operations (see Note C).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON FINANCIAL STATEMENT SCHEDULE
















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|               |                             
|-------------- | ----------------------------
|Item 15(a)(2). | Financial Statement Schedule

AMICAS, INC.


SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                                       |                              |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |        |    
|------------------------------------------------------ | ---------------------------- | -------------- | - | --------- | ---------- |  |  | -------- | --- |  | ---------- | ------ | ---------- | ------ | - | ------ | ---- |  | - | ------ | ---
|                                                       |                              |                |   | Additions |            |  |  |          |    
|                                                       |                              |                |   |           |            |  |  |          |    
|                                                       |                              | Balance at     |   |           | Charged to |  |  | Charged  |     |  |            |        | Balance at |       
|                                                       |                              | Beginning      |   |           | Costs and  |  |  | to Other |     |  |            |        | End of     |       
|Description                                            |                              | of Period      |   |           | Expenses   |  |  | Accounts |     |  | Deductions |        |            | Period |  
|                                                       |                              |                |   |           |            |  |  |          |     |  |            |        |            |        |  
|                                                       |                              | (In thousands) |  
|Allowance for Doubtful Accounts, Returns and Discounts |                              |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |       
|                                                       | Year ended December 31, 2004 |                | $ | 2,800     |            |  |  | 350      |     |  |            | 1,811  | (a)        |        |   | (2,761 | )(b) |  | $ | 2,200  |    
|                                                       | Year ended December 31, 2003 |                |   | 1,900     |            |  |  | 145      |     |  |            | 1,828  | (a)        |        |   | (1,273 | )(b) |  |   | 2,800  | (f)
|                                                       | Year ended December 31, 2002 |                |   | 1,800     |            |  |  | 1,371    |     |  |            | 1,444  | (a)        |        |   | (2,715 | )(b) |  |   | 1,900  |    
|Deferred Tax Asset Valuation Allowance                 |                              |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |       
|                                                       | Year ended December 31, 2004 |                | $ | 26,958    |            |  |  | 6,113    | (i) |  |            | 511    | (j)        |        |   | (6,356 | )(k) |  | $ | 27,226 |    
|                                                       | Year ended December 31, 2003 |                |   | 25,271    |            |  |  |          |     |  |            | 6,141  | (g)        |        |   | (4,454 | )(h) |  |   | 26,958 |    
|                                                       | Year ended December 31, 2002 |                |   | 23,001    |            |  |  |          |     |  |            | 11,956 | (c)        |        |   | (9,686 | )(d) |  |   | 25,271 |    
|Allowance for Notes Receivables From Former Officers   |                              |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |       
|                                                       | Year ended December 31, 2004 |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |        |    
|                                                       | Year ended December 31, 2003 |                |   |           |            |  |  |          |     |  |            |        |            |        |   |        |      |  |   |        |    
|                                                       | Year ended December 31, 2002 |                | $ | 6,000     |            |  |  |          |     |  |            |        |            |        | $ | (6,000 | )(e) |  |   |        |    






|    |                    
|--- | -------------------
|(a) | Charged to revenues



|    |  |                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Write-offs, returns and discounts, net of recoveries and, in
    2004, reclassification of the Medical Division allowance of
    $1,200 to current assets of discontinued operations                                                                                                                          
|   
|(c) |  | Net operating loss carryforwards relating to the exercise of
    employee stock options of $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                     
|   
|(d) |  | Recognition of deferred tax assets of $9,614, and other
    adjustments of $72                                                                                                                                                                                                                                
|   
|(e) |  | Credit due to change in accounting estimate                                                                                                                                                                                                                                                                   
|   
|(f) |  | Includes $200 from a business acquisition                                                                                                                                                                                                                                                                     
|   
|(g) |  | Includes $6,042 from a business acquisition and other
    adjustments of $99                                                                                                                                                                                                                                  
|   
|(h) |  | Recognition of deferred tax assets of $3,517 and correction of
    beginning of year gross deferred tax assets of $937                                                                                                                                                                                        
|   
|(i) |  | Change in judgment regarding future realization of beginning of
    year tax assets                                                                                                                                                                                                                           
|   
|(j) |  | Net operating loss carryforwards relating to the exercise of
    employee stock options                                                                                                                                                                                                                       
|   
|(k) |  | Recognition of deferred tax assets of $605, correction of
    beginning of year gross deferred tax assets of $1,831, change in
    expected effective tax rate of $341, recognition of deferred tax
    assets relating to the exercise of employee stock options of
    $3,380, and other adjustments of $199



80



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##### Table of Contents






SIGNATURES






| |             
| | ------------
| | AMICAS, Inc.



| |     |                   
| | --- | ------------------
| | By: | /s/ Joseph D. Hill

| |                                                  
| | -------------------------------------------------
| |                                                  
| | Joseph D. Hill                                   
| | Senior Vice President and Chief Financial Officer



| |     |                                 
| | --- | --------------------------------
| | By: | /s/ Stephen N. Kahane M.D., M.S.

| |                                      
| | -------------------------------------
| |                                      
| | Stephen N. Kahane M.D., M.S.         
| | President and Chief Executive Officer

POWER OF ATTORNEY




|                                                                     |  |                                                                                                    |  |                |  | 
|-------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                            |  | Title                                                                                              |  | Date          
|                                                                     |  |                                                                                                    |  |               
|                                                                    
|/s/ STEPHEN N. KAHANE
    M.D., M.S.Stephen
    N. Kahane M.D., M.S. |  | President, Chief Executive Officer and Director (Principal
    Executive Officer)                  |  | March 29, 2005
|                                                                    
|/s/ JOSEPH D. HILLJoseph
    D. Hill                                 |  | Senior Vice President and Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | March 29, 2005
|                                                                    
|Joseph
    M. Walsh                                                  |  | Chairman of the Board of Directors                                                                 |  |               
|                                                                    
|/s/ KENNETH R. ADAMSKenneth
    R. Adams                             |  | Director                                                                                           |  | March 25, 2005
|                                                                    
|/s/ STEPHEN J. DENELSKYStephen
    J. DeNelsky                       |  | Director                                                                                           |  | March 28, 2005

81



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##### Table of Contents



|                                           |  |          |  |                |  | 
|------------------------------------------ |  | -------- |  | -------------- |  | 
|Signature                                  |  | Title    |  | Date          
|                                           |  |          |  |               
|                                          
|Michael
    A. Manto                       |  | Director |  |               
|                                          
|/s/ DAVID B. SHEPHERDDavid
    B. Shepherd |  | Director |  | March 29, 2005
|                                          
|/s/ LISA W. ZAPPALALisa
    W. Zappala     |  | Director |  | March 28, 2005

82