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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   FORM 10-K
(MARK ONE)

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

               FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 001-12799
                                VITALWORKS INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

<Table>
<S>                           <C>
    TITLE OF EACH CLASS       NAME OF EACH EXCHANGE ON WHICH REGISTERED
  Common Stock, par value              Nasdaq National Market
           $.001
</Table>

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

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

     The aggregate market value of the common equity held by non-affiliates of
the registrant (assuming for these purposes, but without conceding, that all
executive officers and directors are "affiliates" of the registrant) as of March
15, 2002 (based on the closing sale price of the Registrant's common stock, par
value $.001 per share, as reported on the Nasdaq National Market on such date)
was approximately $200 million. 39,418,159 shares of common stock were
outstanding as of March 15, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Proxy Statement for the 2002 Annual Meeting of
Stockholders, expected to be held on June 12, 2002, are incorporated herein by
reference.
--------------------------------------------------------------------------------
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<PAGE>

                                VITALWORKS INC.

                                   FORM 10-K

                                    CONTENTS

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I

Item 1.   Business....................................................     2
Item 2.   Properties..................................................    19
Item 3.   Legal Proceedings...........................................    20
Item 4.   Submission Of Matters To A Vote Of Security Holders.........    21

                                  PART II

Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................    22
Item 6.   Selected Financial Data.....................................    23
Item 7    Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................    24
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................    32
Item 8.   Financial Statements and Supplementary Data.................    33
Item 9.   Changes in And Disagreements With Accountants On Accounting
          and Financial Disclosure....................................    33

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant..........    33
Item 11.  Executive Compensation......................................    33
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................    33
Item 13.  Certain Relationships and Related Transactions..............    33

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................    33
Signatures............................................................    67
</Table>

VitalWorks is a registered trademark of VitalWorks Inc. All other trademarks and
      company names mentioned are the property of their respective owners.
                                        1
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     VitalWorks Inc., formerly known as InfoCure Corporation ("VitalWorks" or
the "Company"), is a leading, nationwide provider of information management
technology and services targeted to healthcare practices and organizations. The
Company provides IT-based solutions for general medical practices and has
specialty-specific products and services for practices such as radiology,
anesthesiology, ophthalmology, emergency medicine, plastic surgery, and
dermatology. VitalWorks also offers enterprise-level systems designed for large
physician groups and networks. The Company's range of software solutions, which
include workflow features related to patient encounters, automate the
administrative, financial, and clinical information management functions for
physicians and other healthcare providers. VitalWorks provides its clients with
ongoing software support, training, electronic data interchange ("EDI") services
for patient billing and claims processing, and a variety of Web-based services.

     The Company was incorporated in Delaware in November 1996. Prior to July
10, 1997, the Company conducted no significant operations and generated no
revenue. On July 10, 1997, the Company completed its initial public offering and
the acquisitions of two medical companies. During the remainder of 1997 and
1998, the Company completed acquisitions of seven additional medical companies.
In 1999, the Company acquired seven additional medical businesses, as well as
technology assets in connection with the acquisition of PhyNet EDI Solutions,
L.L.C. In addition, during the period July 10, 1997 through the end of 2000, the
Company acquired 19 companies that made up its former dental business.

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

INDUSTRY BACKGROUND

     Healthcare costs in the United States have risen dramatically over the past
two decades, amounting to approximately $1.3 trillion in 2000, according to the
Centers for Medicare and Medicaid Services, and are expected to grow to $2.2
trillion in 2008. Federal and state governments, insurance carriers and other
third-party payors have taken actions to control these rising costs. As a
result, physicians are under increasing pressure to reduce costs and operate
their practices more efficiently. One of the ways in which third-party payors
have managed rising costs has been to employ alternative reimbursement models to
replace the fee-for-service reimbursement model, which has been the traditional
basis for payment for healthcare services. Such alternative reimbursement models
include managed care, fixed-fee, and capitated models of reimbursement. The
result of these generally more restrictive reimbursement models has been a
dramatic increase in the complexity of accounting, billing, and payment
collection for healthcare services.

     To address these challenges, healthcare providers are increasingly
utilizing information technology, including practice management systems.
Practice management systems include a range of software products and services
for physicians and other providers of healthcare services. Most practice
management systems provide several common functions, including practice
administration functions such as patient scheduling and financial functions such
as patient billing and receivables management, and may include clinical
functions such as patient charting and treatment planning.

                                        2
<PAGE>

     The continued evolution of information and telecommunication technologies
has led to the development of a variety of electronic tools that can be
integrated with practice management systems, helping to improve healthcare
practices' cash flow. Among these is EDI which expedites the submission of
healthcare insurance claims to third-party payors and expedites the receipt of
reimbursement. Paper claims require more time and are significantly more
expensive to prepare, file, and process than electronically submitted claims.
According to American Health Consultants, a publisher of healthcare newsletters,
the combined costs to payors and providers of processing a manual claim total
approximately 15% of the average claim amount. EDI transactions, on the other
hand, can be processed directly with third-party payors or channeled through
processing clearinghouses at significantly lower costs to the provider and the
payor. Because of these significant cost savings, some payors are beginning to
require practitioners to submit reimbursement claims electronically. In
addition, new regulations mandated by the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") require the industry to move to a single
electronic format accepted by all payors. This will simplify the process of
electronically exchanging information and thereby enhance the utilization of
electronic claim submission and open the doors to many other types of burgeoning
EDI services, such as electronic remittance advice, eligibility checks, claim
status checks, and referral authorizations, that offer extraordinary potential
but have also been relatively slow to gain widespread acceptance and usage.

     The application service provider ("ASP") delivery model is also beginning
to gain some traction in the industry. By accessing an application over the
Internet through a common Web browser, ASP applications frequently require less
in-office hardware, minimize system administration and provide greater
scalability. With the rapid expansion of reliable broadband Internet services
and the technologies that support these services, ASP will likely become an
increasingly more popular option for healthcare information systems.

PRODUCTS AND SERVICES

     VitalWorks offers a wide range of practice management software products to
healthcare providers in targeted specialty markets. These products are designed
to automate the administrative, financial, and clinical information management
functions of office-based physician practices, hospital-based physician
practices, and large healthcare enterprises, clinics, and organizations.

  Types of Products

     Each VitalWorks' product addresses the management of healthcare data in one
or more of several different areas. These areas include:

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

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

     - Clinical data management, including complete documentation of patient
       visits, prescription writing, patient medical history, and treatment
       planning.

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

  Targeted Specialties

     In addition to addressing the needs of primary care and general medical
practices and clinics, many of the Company's software products have been
designed to address the specific needs of specialty practices, providing
competitive advantages over "general medical" products. For example,
anesthesiologists are required to bill

                                        3
<PAGE>

their services on the basis of time units, and radiologists require specialized
scheduling, film tracking, and image delivery capabilities. VitalWorks' targeted
specialties include:

     Office-based physician specialties:

     - Ophthalmology

     - Dermatology

     - Plastic Surgery

     - Oncology

     - Podiatry

     Hospital-based physician specialties:

     - Radiology

     - Anesthesiology

     - Emergency Medicine

     - Pathology

     Enterprise-level groups:

     - Large physician groups

     - Physician networks

     - Clinics

     - Service bureaus

     - Management Service Organizations

     - Independent Physician Associations

  Principal Products

     The Company's principal products are the main practice management products
used by its clients. Each principal product falls into one of two categories:
"core" products or "classic" products. VitalWorks' core products offer advanced
functionality and operate with the latest generation of operating systems and
hardware platforms offered by the Company. In addition, core products are the
primary products offered to the Company's targeted practice areas. Classic
products, while continuing to offer adequate functionality, typically lack
advanced practice management features and are not designed for the latest
generation of operating systems. The Company actively markets seven core
products and supports 22 classic products. VitalWorks believes that there is a
significant opportunity to provide system upgrades to those clients using
classic and other non-core products by providing a migration path to VitalWorks'
core products. While VitalWorks primarily markets its core products, it will
continue to provide customer support for its classic products until it
determines that it is no longer cost effective or practically possible to do so.
In addition, approximately 15% of VitalWorks' clients are currently using
products that were written for operating systems or hardware platforms that are
no longer supported by their respective vendors. The Company is actively
promoting the migration of these clients to newer products and intends to retire
these products at the earliest possible opportunity.

     The Company believes that while desktop systems will continue to be based
primarily on some version of the Microsoft Windows family of operating systems,
a significant number of physician, patient, and office functions will require
Internet connectivity and demand a more platform-neutral approach. Consequently,
the Company's research and development efforts for new products are centered
around building platform independent applications using proven technologies.

                                        4
<PAGE>

  Auxiliary Products

     In addition to its principal practice management products, VitalWorks
offers a variety of auxiliary products. While some of these products may operate
on a stand-alone basis, these are typically add-on modules to the Company's
principal products. Auxiliary products allow the Company to leverage its large
client base for additional sales revenue, as well as generate interest and
competitive advantage for its core products. These auxiliary products include:

     - Decision support tools -- VitalWorks offers several different decision
       support tools designed to supplement the analytical features of the
       Company's practice management software products. They enable physicians
       to access, sort, and display data according to user-selected criteria,
       including payor, referral source, reimbursement rate, time interval,
       and/or many other variables.

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

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

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

     - Product interfaces -- The Company provides connectivity between its
       principal products and a variety of third-party products, such as
       hospital information systems, lab information systems, coding systems,
       picture archive and communication systems ("PACS"), and image and
       scanning systems.

  EDI Services

     The Company's core software products offer transaction-based EDI functions,
including patient billing and insurance claims submission and remittance. The
use of EDI can improve a healthcare practice's cash flow by enabling more
accurate and rapid submission of claims to third-party payors and more rapid
receipt of corresponding reimbursements. VitalWorks generates revenues by
facilitating EDI transactions, currently processing more than five million EDI
transactions each month. EDI remains a key element of the Company's recurring
revenue and the Company intends to continue expanding its overall EDI product
offering to capitalize on growth opportunities in the EDI market. Current EDI
services include:

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

     - RapidClaims(TM) electronic claims submission -- Provides electronic
       submission of insurance claims from client offices to payors, either
       directly or through independent national clearinghouses.

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

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

  Future Products

     In addition to the development of a number of auxiliary products in 2001,
the Company's research and development efforts focused largely on three primary
products: RadConnect(TM) RIS, RadConnect(TM) Results, and a Web-based
patient/practice communication product.

     - RadConnect(TM) RIS is the Company's next generation radiology information
       system. Radiology information systems (commonly referred to as RIS) are
       the primary systems used by imaging centers and radiology practices to
       manage patient processing, staff and resource scheduling, and workflow.
       By employing a familiar browser-based graphical user interface,
       platform-independent operation, and the

                                        5
<PAGE>

       flexibility of ASP or practice-hosted deployment, RadConnect(TM) RIS will
       provide technology and benefits, which the Company believes are
       unavailable with other systems in VitalWorks' market.

     - RadConnect(TM) Results is a Web-based image and report distribution
       system. By delivering images and reports via the Internet, time-consuming
       administration and delays are avoided, as well as the costs associated
       with duplicating films and delivery services. The Company believes this
       service can provide a significant benefit to referring physicians and
       enhance the level of care delivered to patients.

     - Finally, the Company's Web-based patient/practice communication product
       will offer a wide variety of Web-based patient services, including online
       registration, account review, bill payment, appointment inquiries, and
       prescription refill requests. This package can be integrated with the
       physician's VitalWorks application, and may be securely accessed directly
       through the practice's Web site. The Company believes this new offering
       can provide valuable services to the patients, while simplifying
       administrative tasks and saving staff time.

     All three of these products are expected to be commercially available in
the second half of 2002.

     In addition to these three products, VitalWorks has also begun the planning
and development of the next generation of its billing and clinical products,
which the Company believes will bring its core product offerings to the
forefront of technology, and provide a common technology platform for all its
core products.

  Services

     VitalWorks believes that a high level of customer service is important to
the successful marketing and sale of its products. The Company provides a
comprehensive suite of training, consulting, and technical support services to
implement and support its products.

     - Software Maintenance -- Under the terms of the Company's standard license
       agreement, customers pay a periodic maintenance fee (i.e., monthly,
       quarterly, annually). The fee charged to a customer is generally a fixed
       percentage of the then-current list price (at time of contract signing)
       of the licensed software used by the customer. This fee entitles
       customers to technical support and to any updates and enhancements for
       their software, if and when they are commercially released.

     - Hardware Maintenance -- Similar to software maintenance, customers can
       contract with the Company for maintenance of their hardware. In return
       for periodic maintenance fees, the customer is provided comprehensive
       telephone diagnostic support and on site field service support. The
       Company subcontracts with various third party hardware experts to provide
       a significant amount of its on site field service support.

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

     - Enhanced Technical Support -- Customers also have the option of paying a
       higher fee to receive preferred status for phone support along with
       packaged consulting and training services for the duration of their
       enhanced support contract.

     The customer's ability to select and customize the level of consulting,
training, and technical support services to their needs permits the Company to
provide high quality services on a profitable basis. VitalWorks' services and
support organization consisted of 357 employees as of December 31, 2001.

RESEARCH AND DEVELOPMENT

     The Company's development efforts are focused on new products including its
Internet-enabled products, as well as maintaining the stability and
competitiveness of its current product offerings. Historically, VitalWorks'
research and development efforts have principally involved the incorporation of
the best

                                        6
<PAGE>

technologies from each acquired product into its core practice management
systems. While the Company continues to incorporate the best functionality from
its acquired products, this is only one of the tasks that the development staff
is charged with. The Company's research and development department is also
responsible for coordinating the activities of developers and product managers
on all cross-specialty development efforts. These activities include researching
emerging technologies in both the healthcare and technology sectors, carefully
evaluating each for their ability to enable physicians to deliver better
healthcare to their patients more efficiently, and establishing best practices
for the Company's development efforts. The Company's research and development
organization was composed of 138 employees as of December 31, 2001 and are
currently co-located with support staff primarily in three locations: Daytona,
Florida; Birmingham, Alabama; and Minneapolis, Minnesota. This co-location of
staff helps to keep staff focused on industry specific applications and provide
cross communication between the support staff, which are in constant
communication with the customer thus providing the best quality products for the
Company's customer's needs.

     In 2001, 2000 and 1999, the Company's research and development expenses,
which are net of capitalized software development costs in 2001, were $10.9
million, $13.8 million and $11.5 million, or 10.2%, 13.7% and 7.7% of total
revenues, respectively. In 2001, the Company capitalized $4.6 million of
third-party software developer fees in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed."

SALES AND MARKETING

     VitalWorks markets and sells its products in the United States through a
direct sales force, composed of 64 sales and marketing personnel as of December
31, 2001. The Company has sales offices at its headquarters in Ridgefield,
Connecticut and in other U.S. locations, including Birmingham, Alabama; Daytona,
Florida; Minneapolis, Minnesota; Portland, Oregon; and Cincinnati, Ohio. In
addition, many of the Company's sales staff are based from home offices
throughout the United States. Product support and training are available as well
through many of these locations. The Company organizes its sales force by
specialty practice area and hardware platform. The sales force is trained to
understand the specialty-specific needs of its customers.

     Within its existing customer base, the Company promotes and sells system
upgrades, maintenance services, and EDI services. In addition, VitalWorks
targets new customers principally through direct mail campaigns, telemarketing,
seminars, trade shows and advertisements in various publications. In addition,
senior personnel and members of management assist in sales and marketing
initiatives to larger and more technically advanced potential customers. Sales
cycles generally average three to four months for small office-based systems to
as much as six to 12 months for clinical and large scale systems.

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

INTELLECTUAL PROPERTY

     The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its intellectual property and proprietary rights. The Company also
believes that various factors, including the skills of its personnel, new
product developments, product enhancements, name recognition and reliable
support services, are necessary to become and remain an industry leader. The
Company seeks to protect its software by various methods, including trade secret
and copyright laws, which afford only limited protection.

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

     The Company has entered into source code escrow agreements with a limited
number of its customers requiring release of source code under certain limited
conditions, including any bankruptcy proceeding by or

                                        7
<PAGE>

against the Company, cessation of the Company's business or the Company's
failure to meet its contractual obligations.

     The Company relies upon certain software that is licensed from third
parties, including software that is integrated with some of the Company's
internally developed software and/or is used with some of the Company's products
to perform certain functions. There can be no assurance that these third party
software licenses will continue to be available to the Company on commercially
reasonable terms and therefore could adversely affect the Company's business,
operating results and financial condition. In addition, there can be no
assurance that third parties will not claim infringement by the Company with
respect to the Company's products or enhancements thereto.

     The Company distributes its software under software license agreements that
grant customers a nonexclusive, nontransferable license to the Company's
products and contain terms and conditions prohibiting the unauthorized
reproduction or transfer of the Company's products.

COMPETITION

     VitalWorks' principal competitors include both national and regional
practice management systems vendors. Currently, the practice management systems
industry in the United States is characterized by a large number of relatively
small, regionally focused companies, comprising a highly fragmented industry
with only a few national vendors. Until recently, larger, national vendors have
targeted primarily large healthcare providers. The Company believes that the
larger, national vendors may broaden their markets to include both small and
large healthcare providers. In addition, VitalWorks competes with national and
regional providers of computerized billing, insurance processing and record
management services to healthcare practices. As the market for the Company's
products and services expands, additional competitors are likely to enter this
market. The Company believes that the primary competitive factors in its markets
are:

     - product features and functionality;

     - customer service, support and satisfaction;

     - price;

     - ongoing product enhancements; and

     - the reputation and stability of the vendor.

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

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

                                        8
<PAGE>

PRIVACY ISSUES

     Because VitalWorks' applications and services are utilized to transmit and
manage highly sensitive and confidential health information, the Company must
address the security and confidentiality concerns of its customers and their
patients. To enable the use of its applications and services for the
transmission of sensitive and confidential medical information, the Company
utilizes advanced technology designed to ensure a high degree of security. This
technology generally includes:

     - security that requires both user IDs and passwords to access the
       Company's 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 the Company's ASP applications transmitted
       over the Internet;

     - use of a mechanism for preventing outsiders from improperly accessing
       private data resources on the Company's internal network and its ASP
       applications, commonly referred to as a "firewall."

     The level of data encryption utilized by VitalWorks' products is in
compliance with the encryption guidelines set forth in the proposed rule
regarding security and electronic signature standards in connection with HIPAA.
VitalWorks also encourages each of its customers to implement their own firewall
and security procedures to protect the confidentiality of information being
transferred into and out of their computer network.

     Internally, the Company works to ensure the safe handling of confidential
data by employees in its electronic services department by:

     - using individual user names and passwords for each employee handling
       electronic data; and

     - requiring each employee to sign an agreement to comply with all Company
       policies, including its policy regarding handling of confidential
       information.

     VitalWorks monitors proposed regulations that might affect its applications
and services to ensure that the Company is in compliance with such regulations
when and if they are effected.

HEALTHCARE REGULATION

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

     The relevant healthcare laws are:

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

     - electronic transactions involving healthcare information,

     - privacy of individually identifiable health information, and

     - security of healthcare information and electronic signatures.

     The regulations governing the electronic exchange of information establish
a standard format for the most common healthcare transactions, including health
claims, enrollment, payment and eligibility. The regulations
                                        9
<PAGE>

require compliance by October 16, 2002 unless a covered entity submits a
compliance plan by such date requesting an extension for compliance until
October 16, 2003. The Company intends to ensure its compliance with the
regulations, as applicable. Many of the Company's customers are subject to the
transaction standards and the standards will affect the Company's processing of
healthcare transactions among physicians, payors, patients and other healthcare
industry participants.

     The regulations promulgated pursuant to HIPAA establish national privacy
standards for the protection of individually identifiable health information by
certain healthcare organizations. Most healthcare entities covered by the rule
must comply by April 14, 2003. A substantial part of the Company's activities
involves the receipt or delivery of confidential health information concerning
patients of its customers in connection with the processing of healthcare
transactions and the provision of technical services to participants in the
healthcare industry. The regulations may restrict the manner in which the
Company transmits and uses certain information.

     The proposed security regulations enacted pursuant to HIPAA establishing
security and electronic HIPAA signature standards have not been finalized yet.
When effective, the security regulations will require certain healthcare
organizations to implement administrative safeguards, physical safeguards,
technical security services and technical security mechanisms with respect to
information that is electronically maintained or transmitted in order to protect
the confidentiality, integrity and availability of individually identifiable
health information. The security standards may require the Company to enter into
agreements with certain of its customers and business partners restricting the
dissemination of health information and requiring implementation of specified
security measures.

     Overall, HIPAA may require substantial changes to many of the Company's
applications, services, policies and procedures that could require the Company
to make significant financial investments, may require the Company to charge
higher prices to its customers and may also affect the Company's customers'
purchasing practices.

     See further discussion regarding HIPAA below in "Forward-Looking Statements
and Risk Factors."

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

     FDA.  The Food and Drug Administration ("FDA") is responsible for assuring
the safety and effectiveness of medical devices under the 1976 Medical Device
Amendments to the Food, Drug and Cosmetic Act. Computer applications and
software are generally subject to regulation as medical devices requiring
registration with the FDA, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing when
such products are intended to be used in the diagnosis, cure, mitigation,
treatment or prevention of disease. If the FDA decided that the Company's
products and services should be subject to FDA regulation or if in the future,
the Company expanded its application and service offerings into areas that may
subject the Company to FDA regulation, the costs of complying with FDA
requirements could be substantial. Application of the approval or clearance
requirements could create delays in marketing, and the FDA could require
supplemental filings or object to certain of these products. The Company's
compliance efforts could prove to be time consuming, burdensome and expensive on
the basis of the novel application of the FDA to us, and this could have a
material adverse effect on the Company's ability to introduce new applications
or services in a timely manner and may require the Company to charge higher
prices.

     The Federal Anti-Kickback Law.  The federal Anti-Kickback Law includes a
prohibition against the direct or indirect payment or receipt of any
remuneration in order to induce the referral of business or patients
reimbursable under Medicare, Medicaid and certain other federal healthcare
programs. Violations of the federal Anti-Kickback Law may result in criminal
liability, a felony conviction punishable by a maximum fine

                                        10
<PAGE>

of $125,000, imprisonment up to five years, or both, exclusion from the
government programs, and civil monetary sanctions. Many states also have similar
anti-kickback laws that are not limited to items or services for which payment
is made by a federal or state healthcare program, such as Medicare and Medicaid.
The Federal Anti-Kickback Law has been in existence since 1977 and applies
broadly to all kinds of providers and suppliers. If the activities of a customer
of the Company or other entity with which the Company has a business
relationship were found to constitute a violation of the Federal Anti-Kickback
Law or other similar anti-kickback or anti-referral laws, and the Company, as a
result of the provision of products or services to such customer or entity, were
found to have knowingly and willfully participated in such activities, the
Company could be subject to sanction or liability under such laws.

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

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

EMPLOYEES

     As of December 31, 2001, the Company employed 662 persons, including 64 in
sales and marketing, 357 in customer support and services, 138 in research and
development and 103 in administration, human resources, information technology,
finance and management. None of the Company's employees is subject to a
collective bargaining arrangement. The Company considers its relations with its
employees to be satisfactory.

     The executive officers of the Company are as follows:

  Joseph M. Walsh

     Joseph M. Walsh, age 42, has served as President and Chief Executive
Officer and as a director of VitalWorks since March 2001 and Chairman since June
2001. From April 2000 until March 2001, Mr. Walsh served as president of the
Company's medical software division. From 1987 until April 2000, Mr. Walsh
served as president and chief executive officer of Micro-Designs Software
Corporation, a healthcare practice management company specializing in oral and
maxillofacial, and plastic surgery practices. VitalWorks acquired Micro-Designs
in 1998.

  Stephen N. Kahane

     Stephen N. Kahane, M.D., M.S., age 44, has served as Vice Chairman and
Chief Strategy Officer and as a director of VitalWorks since March 2001. From
November 1999 until March 2001, Dr. Kahane served as President of E-Health and
then as Chief Strategy Officer, of the Company's medical software division. From
October 1996 until November 1999, he served as president and chief executive
officer of Datamedic Holding Corp., a practice management and clinical software
company specializing in ophthalmology and general medical practices. Datamedic
was acquired by VitalWorks in 1999. Prior to joining Datamedic, Dr. Kahane

                                        11
<PAGE>

was a co-founder and senior executive at a clinical software company, Clinical
Information Advantages, Inc. Dr. Kahane also trained and served on the faculty
at The Johns Hopkins Medical Center.

  Michael A. Manto

     Michael A. Manto, age 43, has served as Executive Vice President and as a
director of VitalWorks since March 2001 and as Chief Financial Officer since
April 2001. From July 2000 until March 2001, he served as Executive Vice
President of the Company's medical software division. From 1991 until 2000, Mr.
Manto was with Hyperion Solutions Corporation, a multinational business software
company, where he served as vice president and corporate controller. Mr. Manto
also served as interim chief financial officer of Hyperion Software Corporation.
Prior to joining Hyperion, Mr. Manto, a certified public accountant, was with
Ernst & Young.

  Kevin M. Silk

     Kevin M. Silk, age 38, has served as Vice President of Finance and Business
Development of VitalWorks since March 2001, and was Vice President of Finance of
the Company's medical software division between October 2000 and March 2001.
From 1995 to 2000, Mr. Silk was with Hyperion Solutions Corporation, a
multinational business software company, where he served in the capacities of
Director of Business Development and Senior Director of Financial Planning and
Analysis. Prior to joining Hyperion, Mr. Silk, a certified public accountant,
was with Seavex LTD and Ernst & Young.

  C. Daren McCormick

     C. Daren McCormick, age 40, has served as Chief Operations Officer of
VitalWorks since March 2001. He was Chief Operations Officer of the Company's
medical software division between April 2000 and March 2001. From July 1999
until April 2000, he served as Vice President of Systems Engineering and from
October 1998 until July 1999, he served as Vice President of Business
Development. From 1995 until October 1998, he served as Senior Manager of
Research and Development of the Healthcare Systems Division of Reynolds and
Reynolds, a healthcare practice management company. The Company acquired the
Healthcare Systems Division of Reynolds and Reynolds in October 1998.

  Stephen Hicks

     Stephen Hicks, age 43, has served as Vice President and General Counsel of
VitalWorks since March 2001. He was Vice President of the Company's medical
software division between August 2000 and March 2001. Prior to joining
VitalWorks, he was First Deputy Commissioner at the New York State Division of
Housing from January 1999, and worked from February 1995 to December 1998 on the
executive staff of Dennis C. Vacco, the New York State Attorney General. From
1983 until 1995, Mr. Hicks worked for McCullough, Goldberger and Staudt, a New
York law firm.

THE DISTRIBUTION

     On March 5, 2001 (the "Distribution Date"), VitalWorks completed the
distribution of the common stock of its PracticeWorks, Inc. subsidiary
("PracticeWorks" or "Division"), a provider of practice management software for
dental and oral surgery practices, to the Company's stockholders in a tax-free
distribution. The spin-off of PracticeWorks was affected by way of a pro rata
dividend (the "Distribution" or "Spin-Off") of all of the issued and outstanding
shares of PracticeWorks common stock to VitalWorks' stockholders of record as of
February 21, 2001 (the "Record Date") resulting in PracticeWorks becoming an
independent, publicly traded company. Immediately prior to the Distribution,
VitalWorks effectively transferred to PracticeWorks the Division's assets and
liabilities and, thereby, distributed $28.9 million of net assets, as adjusted,
in connection with the Spin-Off. VitalWorks' stockholders received one share of
PracticeWorks common stock for every four shares of VitalWorks common stock
owned as of the Record Date. No proceeds were received by VitalWorks in
connection with the Distribution.

                                        12
<PAGE>

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

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

Distribution Agreement

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

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

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

Transition Services Agreement

     The Company and PracticeWorks entered into the Transition Services
Agreement on the Distribution Date. Pursuant to this agreement, in exchange for
specified fees, the Company provided to PracticeWorks services including
insurance-related services and employee benefit services, and PracticeWorks
provided to the Company services including the preparation of tax returns,
maintenance of the general ledger, preparation of financial statements,
corporate record-keeping and payroll for a fee of $.4 million in 2001. The fees
paid

                                        13
<PAGE>

pursuant to the Transition Services Agreement were agreed upon between the
parties. This agreement terminated on December 31, 2001. Management believes
that the terms and conditions were as favorable to the Company as those
available from unrelated parties for a comparable arrangement.

Tax Disaffiliation Agreement

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

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

Employee Benefits and Compensation Allocation Agreement

     VitalWorks and PracticeWorks entered into the Employee Benefits and
Compensation Allocation Agreement on the Distribution Date, which contains
provisions relating to employee compensation, benefits and labor matters and the
treatment of options to purchase VitalWorks common stock held by VitalWorks
employees who became PracticeWorks employees. This agreement provides that
VitalWorks options held by VitalWorks employees who became PracticeWorks
employees immediately following the Distribution may be replaced by
PracticeWorks options. PracticeWorks employees whose VitalWorks options were
fully vested as of the Distribution Date had the right to surrender their vested
VitalWorks options for options to purchase PracticeWorks common stock for a
period of 30 days following the Distribution Date, or April 4, 2001. Any
VitalWorks employees who became PracticeWorks employees who chose not to
surrender their vested VitalWorks options during this time period continued to
hold VitalWorks options which expired generally within 30 to 90 days from the
Distribution Date (June 3, 2001). PracticeWorks employees who were not fully
vested in VitalWorks options as of the Distribution Date had their VitalWorks
options exchanged for PracticeWorks options as of the Distribution Date (see
Note J of the accompanying financial statements for further discussion).

FORWARD-LOOKING STATEMENTS AND RISKS FACTORS

     Except for the historical information contained in this Annual Report on
Form 10-K, the matters discussed herein contain "forward-looking statements"
within the meaning of the federal securities laws. Statements regarding future
events and developments and the Company's future performance, as well as
management's expectations, beliefs, intentions, plans, estimates or projections
relating to the future, are forward-looking statements within the meaning of
these laws. These forward-looking statements are subject to a number of risks
and uncertainties, and thus actual results may vary materially from those
described herein. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are
that generally, the Company operates with a minimal amount of software
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<PAGE>

licensing and system sales backlog. Therefore, quarterly revenues and operating
results are highly dependent on the volume and timing of the signing of
licensing agreements and product deliveries during the quarter, which are
difficult to forecast. The Company's future operating results may fluctuate due
to these and other factors, such as customer buying patterns, the availability
of specified hardware systems for resale, the deferral and/or realization of
deferred software license and system revenues according to contract terms, the
timing of new product introductions and product upgrade releases, the Company's
ability or inability to attract and retain qualified personnel, the scheduling
of sales and marketing programs, new product development by the Company or its
competitors, risks inherent in operating VitalWorks and PracticeWorks (spun-off
in March 2001) as independent public companies, uncertainties concerning
VitalWorks' future capital needs and the ability to obtain capital, changes of
accounting estimates used to prepare the prior period's financial statements,
and changing economic, political and regulatory influences generally, and
specifically, on the healthcare industry. A significant portion of the Company's
quarterly sales of software product licenses and computer hardware is concluded
in the last month of the fiscal quarter, generally with a concentration of such
revenues earned in the final ten business days of that month. In any case, due
to the relatively fixed nature of certain costs, including personnel and
facilities expenses, a decline or shortfall in quarterly and/or annual revenues
typically results in losses or in lower profitability. Management believes that
these forward-looking statements are reasonable and that the projections
contained in this report are based on reasonable assumptions and forecasts;
however, you should not place undue reliance on such statements that speak only
as of the date hereof.

     The following are some of the factors that could cause VitalWorks' actual
results to differ materially from the expected results described in its
forward-looking statements.

VitalWorks' quarterly operating results may vary because of the timing of sales
and expenses. In addition, the Company has experienced losses in the past.

     VitalWorks' operating results may vary significantly from quarter to
quarter. In addition, VitalWorks has experienced historical losses. VitalWorks'
operating results may be influenced by such factors as:

     - Release of new products and services and the rate of adoption of these
       products and services by new and existing customers;

     - Timing of and costs related to development of its new products;

     - Length of sales and delivery cycles;

     - Size and timing of orders for the Company's products;

     - Changes in customer purchasing patterns;

     - Competition, including product offerings, price, and service;

     - Timing of and charges associated with completed acquisitions or other
       events; and

     - Levels of advertising and promotional expenditures.

     In addition, the Company tends to operate with a minimal amount of software
licensing and system sales backlog, and a significant portion of its quarterly
sales of software product licenses and computer hardware is concluded in the
last month of the fiscal quarter, generally with a concentration of such
revenues earned in the final ten business days of that month. Due to these and
other factors, the Company's revenues will be difficult to forecast. A major
portion of the Company's expenses, such as personnel and facilities, are of a
fixed nature, and a shortfall or decline in quarterly revenues would typically
result in lower profitability or losses. As a result, comparison of the
Company's quarter-to-quarter financial performance is not necessarily meaningful
and should not be relied upon as an indicator of future performance. Due to the
many variables in forecasting the operating results of the Company, it is likely
at some point in the future that the Company's results will not meet the
expectations of public market analysts or investors. A deviation from such
expectations would likely have an adverse effect upon the price of the Company's
stock.

                                        15
<PAGE>

VitalWorks' growth could be limited if it is unable to attract and retain
qualified personnel.

     VitalWorks believes its success depends largely on its ability to attract
and retain highly skilled technical, managerial and marketing personnel to
develop its products and services. Individuals with the information technology
skills VitalWorks needs to further develop its products and services are in
short supply and competition for qualified personnel is particularly intense.
VitalWorks may not be able to hire the necessary personnel to implement its
business strategy, or it may need to pay higher compensation for employees than
it currently expects. There can be no assurance that the Company will succeed in
attracting and retaining the personnel it needs to continue to grow and to
implement its business strategy. In addition, VitalWorks depends on the
performance of its executive officers and other key employees. The loss of any
member of VitalWorks' senior management team could negatively impact its ability
to execute its corporate strategy.

If VitalWorks fails to protect its intellectual property rights from third party
challenges, it may significantly impair VitalWorks' competitive position.

     VitalWorks relies on a combination of copyright, trademark and trade secret
laws and restrictions on disclosure to protect the intellectual property rights
related to VitalWorks' software applications. VitalWorks' software technology is
not patented and existing copyright laws offer only limited practical
protection. In addition, in the past VitalWorks had not generally entered into
confidentiality agreements with its employees. Although current practices
require all new employees to sign confidentiality agreements, not all existing
employees have signed agreements. VitalWorks cannot guarantee that the legal
protections that it relies on will be adequate to prevent misappropriation of
its technology.

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

Intellectual property infringement claims against VitalWorks could be costly to
defend and could divert management's attention away from VitalWorks' business.

     As the number of software products in VitalWorks' target markets increases
and as the functionality of these products overlaps, VitalWorks may become
increasingly subject to the threat of infringement claims. VitalWorks cannot
guarantee that third parties will not assert infringement claims against it in
the future. Any infringement claims alleged against VitalWorks, even if without
merit, can be time-consuming and expensive to defend. Any infringement claims
may divert management's attention and resources and could also cause delays in
the delivery of VitalWorks' applications to its customers. Settlement of any
infringement claims could require VitalWorks to enter into costly royalty or
licensing agreements. If a claim of product infringement against VitalWorks were
successful and VitalWorks were unable to license the infringing or similar
technology, its business, financial condition and results of operations could be
harmed.

VitalWorks may undertake acquisitions, which can increase costs, divert
management resources from core business activities, or fail to realize
anticipated benefits of such acquisitions.

     VitalWorks may undertake acquisitions if it identifies companies with
complementary applications, services, businesses or technologies. VitalWorks may
not achieve any of the anticipated synergies and other benefits expected to be
realized from these acquisitions. In addition, software companies are very
dependent on their employees to maintain the quality of their software
offerings. If VitalWorks were unable to retain the acquired companies' personnel
or integrate them into the Company, the value of the acquired products and
technology could be compromised. VitalWorks' profitability may suffer because of
acquisition-related costs or amortization of intangible assets. Similarly, the
time and expense associated with finding suitable and compatible companies to
enhance VitalWorks' product offering could disrupt VitalWorks' ongoing business
and divert its management's focus.

                                        16
<PAGE>

Technology solutions may change faster than VitalWorks is able to update its
technology, which could cause a loss of customers.

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

     - develop new or enhanced existing applications, software and services to
       meet its customers' changing needs in a timely and cost-effective way;
       and

     - respond effectively to technological changes and new product offerings of
       its competitors.

     VitalWorks cannot be sure it will be able to accomplish these goals. Many
of VitalWorks' competitors may develop products or technologies that are better
or more attractive than VitalWorks' or that may render VitalWorks' technology or
applications obsolete. If VitalWorks does not succeed in adapting its
technology, its business could be harmed.

VitalWorks is subject to government regulation and legal uncertainties, the
compliance with which could have a material adverse effect on its business.

     HIPAA.  As outlined above in "-- Healthcare Regulation", Federal
regulations have been adopted, and others proposed, that will impact the manner
in which VitalWorks conducts its business. HIPAA regulations may require
VitalWorks to expend significant resources to comply with applicable
requirements. Because these regulations are new, there is uncertainty as to how
they will be interpreted and enforced. In addition, the delay in adopting final
security regulations creates uncertainties as to what security requirements
ultimately will be imposed, to what extent it will be required to comply with
those requirements, and what the deadline for compliance will be.

     Although VitalWorks will make a good faith effort to ensure that it
complies with, and that its products enable compliance with, applicable HIPAA
requirements, it may not be able to conform its operations and products to such
requirements in a timely manner, or at all. The failure to do so could subject
VitalWorks to civil liability when it is the business associate of a covered
entity, and could subject it to civil liability and criminal sanctions to the
extent it is regulated directly as a covered entity. In addition, delay in
developing or failure to develop products that would enable HIPAA compliance for
its current and prospective customers could put VitalWorks at a significant
disadvantage in the marketplace. Accordingly, the sale of its products and its
business could be harmed by the implementation of HIPAA regulations.

     Other E-Commerce Regulation.  VitalWorks may be subject to additional
federal and state statutes and regulations in connection with offering Internet
services and products. On an increasingly frequent basis, federal and state
legislators are proposing laws and regulations that apply to Internet commerce
and communications. Areas being affected by this regulation include user
privacy, pricing, content, taxation, copyright protection, distribution, and
quality of products and services. To the extent that VitalWorks' products and
services are subject to these laws and regulations, the sale of its products and
services could be harmed.

Changes in state and federal laws relating to confidentiality of patient medical
records could limit VitalWorks' customers' ability to use its services.

     There can be no assurance that changes to state or federal laws will not
materially affect or restrict the ability of healthcare providers to submit
information from patient records using its products and services. Any such
restrictions would inevitably decrease the value of its applications to its
customers, which could materially harm VitalWorks' business. The confidentiality
of patient records and the circumstances under which records may be released are
already subject to substantial regulation by state governments. Although
compliance with these laws and regulations is principally the responsibility of
the healthcare provider under these current laws, statutes and regulations
governing patient confidentiality rights are evolving rapidly. In addition to
the obligations being imposed at a state level, legislation governing the
dissemination of medical information is being passed at the federal level. The
legislation may require holders of this information to
                                        17
<PAGE>

implement security measures, which could entail substantial expenditures on the
part of VitalWorks. Consequently, the sale of its products and its business
could be harmed.

Changes in the regulatory and economic environment in the healthcare industry
could cause the Company to lose revenue and incur substantial costs to comply
with new regulations.

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

Larger competitors and consolidation of competitors could cause the Company to
lower its prices or to lose customers.

     VitalWorks' principal competitors include both national and regional
practice management systems vendors. Currently, the practice management systems
industry in the United States is characterized by a large number of relatively
small, regionally focused companies, comprising a highly fragmented industry
with only a few national vendors. Until recently, larger, national vendors have
targeted primarily large healthcare providers. The Company believes that the
larger, national vendors may broaden their markets to include both small and
large healthcare providers. In addition, VitalWorks competes with national and
regional providers of computerized billing, insurance processing and record
management services to healthcare practices. As the market for the Company's
products and services expands, additional competitors are likely to enter this
market. The Company believes that the primary competitive factors in its markets
are:

     - product features and functionality;

     - customer service, support and satisfaction;

     - price;

     - ongoing product enhancements; and

     - the reputation and stability of the vendor.

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

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<PAGE>

VitalWorks is dependent on partners/suppliers for delivery of EDI and hardware
maintenance services; any inability of these suppliers to perform these services
could negatively impact customer satisfaction and revenue.

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

VitalWorks' systems may be vulnerable to security breaches and viruses.

     The success of VitalWorks' strategy to offer its EDI services and Internet
solutions depends on the confidence of its customers in VitalWorks' ability to
securely transmit confidential information. VitalWorks' EDI services and
Internet solutions rely on encryption, authentication and other security
technology licensed from third parties to achieve secure transmission of
confidential information. VitalWorks may not be able to stop unauthorized
attempts to gain access to or disrupt the transmission of communications by
VitalWorks' customers. Anyone who is able to circumvent VitalWorks' security
measures could misappropriate confidential user information or interrupt
VitalWorks', or VitalWorks' customers', operations. In addition, VitalWorks' EDI
and Internet services may be vulnerable to viruses, physical or electronic
break-ins, and similar disruptions. Any failure to provide secure electronic
communication services could result in a lack of trust by its customers causing
them to seek out other vendors, and/or, damage the Company's reputation in the
market making it difficult to obtain new customers.

If the marketplace demands subscription pricing and/or ASP-delivered offerings,
VitalWorks' revenues may be adversely impacted.

     Even though VitalWorks is positioned to deliver its products and services
under the subscription pricing model and ASP-delivered offerings, it currently
derives substantially all of its revenues from traditional software license,
maintenance and service fees, as well as the resale of hardware. Under this
system, customers pay an initial license fee for the use of its products, in
addition to a periodic maintenance fee. If the marketplace demands subscription
pricing and/or ASP-delivered offerings, VitalWorks may be forced to adjust its
strategy accordingly, by offering a higher percentage of its products and
services through these means. Shifting to subscription pricing and/or
ASP-delivered offerings could adversely impact VitalWorks' quarterly and annual
results of operations, as its revenues would initially decrease substantially.
VitalWorks cannot assure you that the marketplace will not embrace subscription
pricing and/or ASP offerings.

ITEM 2.  PROPERTIES

     VitalWorks currently occupies and leases eight facilities and owns one
facility. These facilities are located in: Atlanta, Georgia; Beaverton, Oregon;
Birmingham, Alabama; Minneapolis and Rochester, Minnesota; Daytona Beach,
Florida; Carlsbad, California; Ridgefield, Connecticut; and Fairfield, Ohio.
VitalWorks believes that its existing facilities are adequate for its current
needs; however, if additional space is needed in the future, VitalWorks believes
that suitable additional or alternative space will be available on commercially
reasonable terms as needed.

     VitalWorks purchased one building in August 1999 and another building in
January 2000. Prior to March 2001, the office buildings, located in Atlanta,
Georgia, served as the Company's headquarters. One building was sold in January
2002 and the other is expected to be sold by December 2002. The Company's
long-term debt with Foothill Capital Corporation, a wholly-owned subsidiary of
Wells Fargo & Company, is collateralized by substantially all of the Company's
assets and intellectual property rights.

                                        19
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

     In March 2002, the Company settled the following shareholder lawsuits filed
during the period June 2000 through January 2001 against InfoCure Corporation,
several of its former officers and directors, and the law firm of Morris,
Manning and Martin: Weiner, et al. v. InfoCure Corporation; Habermeier v.
InfoCure Corporation; Runde v. InfoCure Corporation; Weintraub v. InfoCure
Corporation; Memminger v. InfoCure Corporation; and Hafner v. InfoCure
Corporation. These lawsuits, which were disclosed in previous filings with the
Securities and Exchange Commission, related to matters alleged to have occurred
in 1999 and early 2000 in connection with the sale of the plaintiffs' companies
to InfoCure Corporation, now known as VitalWorks Inc. Under the terms of the
settlement, which includes a settlement bar order signed by the Honorable Thomas
Thrash, Federal District Court judge in the United States District Court for the
Northern District of Georgia, all claims against VitalWorks and the individual
defendants have been dismissed with prejudice and without admission of liability
or wrongdoing. In addition, as part of the settlement, VitalWorks assigned
certain claims it may have against third parties to plaintiffs, and VitalWorks
is entitled to a portion of any recovery plaintiffs obtain from the third
parties. This may result in a future reimbursement to the Company of a portion
of the settlement amount/legal fees paid. The settlement costs, including legal
fees, have been primarily borne by the Company's insurance carriers. The portion
of the settlement amount, including legal fees, being paid by VitalWorks was
accrued for in 2001 and is included in selling, general and administrative
expenses of the accompanying statement of operations included in Item 8.
Financial Statements and Supplementary Data.

     On March 8, 2001, the Company filed a lawsuit in the Superior Court of the
County of Fulton in the State of Georgia against WebMD Corporation, ("WebMD")
and its subsidiary, Envoy Corporation ("Envoy"), alleging breach of contract,
tortious interference with business relations, and related commercial claims,
arising from WebMD's alleged failure and refusal to pay the Company rebates owed
under the parties' agreement for certain electronic data interchange, or EDI,
transactions performed by Envoy; the alleged improper solicitation by WebMD's
sales representatives of practice management software customers of the Company;
and allegedly false and damaging statements made by WebMD representatives about
the Company, among other alleged wrongful conduct. On July 19, 2001, the Company
settled the litigation pending with WebMD and Envoy and entered into a new
three-year agreement that will allow the Company to continue offering WebMD's
transaction processing services to the physicians who utilize the Company's
practice management solutions. Under this new agreement, the Company may
continue to offer to its customers WebMD's transaction processing services, as
well as WebMD's ExpressBill patient statement services. The litigation, which
the companies resolved without admission of liability by either party, included
claims relating to prior contractual arrangements between the parties. Pursuant
to the settlement agreement, WebMD paid $2.6 million to the Company in July
2001, which settles all claims and amounts due under the parties' prior
agreements, and the Company delivered to WebMD the stock certificate evidencing
the 1,929,012 shares of the Company common stock that was issued by the Company
in 2001 under the prior agreements.

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

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation, et al., was filed in Boone County Superior Court in Indiana. The
Company removed the case to the United States District Court for the Southern
District of Indiana, where it is now pending. The complaint alleges state
securities law violations, breach of contract, and fraud claims against the
Company and certain former directors and officers. The complaint does not
specify the amount of damages sought by plaintiffs, but seeks rescission of a
transaction plaintiffs valued at $5 million, as well as punitive damages and
reimbursement for the plaintiffs' attorney's fees and associated costs and
expenses of the lawsuit. In a decision from the Court dated October 15, 2001,
the plaintiffs request for a preliminary injunction to preserve their remedy of
rescission was denied, the Company's request to transfer the case to the
Northern District Court of Georgia was granted, and the Company's motion to
dismiss plaintiffs' complaint in its entirety was granted in part. On October
26, 2001,

                                        20
<PAGE>

the plaintiffs filed a notice of appeal with the Seventh Circuit Court of
Appeals, which appeal has not yet been decided.

     The Company has been named as a defendant as successor to CDL Healthcare
Systems, Inc. ("CDL"), a company acquired by VitalWorks in December 1999, in a
complaint filed in the Circuit Court of the Eleventh Judicial Circuit in Dade
County, Florida on February 27, 2001 by Sonia Abutog, individually, Angelo
Abutog, individually, and Sonia and Angelo Abutog, as parents and next best
friends to Aaron Abutog, a minor. Gary Weiner, former President of CDL, and his
daughter, Elisha Weiner, are also named as defendants. Plaintiffs allege that
they were injured at a time, prior to the merger between the Company and CDL,
when a motor vehicle operated by Elisha Weiner collided with Plaintiff Sonia
Abutog, a pedestrian. Title to the vehicle and lease rights is being determined.
The plaintiff contends that she and her unborn child suffered severe personal
injuries as a result of the accident and seeks to recover damages in an
unspecified amount in excess of $15,000, plus interest and costs. The Company is
exploring the issue of liability, and the existence and limits of insurance
coverage that may be available to indemnify against any judgment.

     While management believes that the Company has meritorious defenses in each
of the foregoing matters and the Company intends to pursue its positions
vigorously, litigation is inherently subject to many uncertainties. Thus the
outcome of these matters is uncertain and could be adverse to the Company.
However, even if the outcome of these cases is adverse, management does not
believe that the outcome of these cases, individually or in the aggregate, will
have a material adverse effect on the financial position of the Company.
However, depending on the amount and timing of an unfavorable resolution(s) of
the contingencies, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular reporting
period(s).

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

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

                                        21
<PAGE>

                                    PART II

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

     On March 6, 2001, the Company changed its trading symbol on the Nasdaq
National Market to "VWKS." From January 29, 1999 until March 5, 2001, the
Company's common stock was traded on the Nasdaq National Market under the
trading symbol "INCX." From July 10, 1997 until January 29, 1999, the Company's
common stock was traded on the American Stock Exchange under the symbol "INC."
On March 25, 2002, the last reported sale price of the Company's common stock on
the Nasdaq National Market was $5.60, and there were 1,535 record holders of the
Company's common stock. The following table sets forth the high and low sales
price per share of the Company's common stock for the periods indicated, as
reported on the Nasdaq National Market.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
YEAR ENDED DECEMBER 31, 2000
First Quarter...............................................  $37.38   $14.75
Second Quarter..............................................   18.38     4.00
Third Quarter...............................................    6.44     3.50
Fourth Quarter..............................................    6.75     3.69
</Table>

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
YEAR ENDED DECEMBER 31, 2001
First Quarter...............................................  $ 4.88   $  .94
Second Quarter..............................................    2.50     1.10
Third Quarter...............................................    3.40     2.00
Fourth Quarter..............................................    5.97     2.20
</Table>

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
2002
First quarter (through March 25)............................  $ 5.80   $ 4.25
</Table>

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

     Sales of Unregistered Shares.  At various times during the year, the
Company issued 2,440,824 unregistered shares of its common stock, including
1,929,012 to WebMD Corporation in connection with preferred stock conversion
rights. The Company also issued warrants to a lender and institutional investors
to purchase 715,000 shares of the Company's common stock at exercise prices
ranging from $4.80 to $6.90 per share. The unregistered shares and warrants were
issued in reliance upon the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended.

                                        22
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<Table>
<Caption>
                                                                                       ELEVEN
                                                                                       MONTHS
                                              FOR THE YEAR ENDED DECEMBER 31,          ENDED
                                          ---------------------------------------   DECEMBER 31,
                                            2001       2000      1999      1998         1997
                                          --------   --------   -------   -------   ------------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>       <C>       <C>
STATEMENTS OF OPERATIONS DATA
REVENUES
  Maintenance and services..............  $ 83,961   $ 78,871   $87,127   $46,575     $ 30,704
  Software licenses and system sales....    22,425     22,186    61,916    39,783       23,041
                                          --------   --------   -------   -------     --------
Total revenues..........................   106,386    101,057   149,043    86,358       53,745
                                          --------   --------   -------   -------     --------
COSTS AND EXPENSES
Cost of revenues                                                           19,255       15,533
  Maintenance and services..............    18,734     19,252    16,799
  Software licenses and system sales....     6,267      8,886    23,160
Selling, general and administrative.....    54,371     70,688    76,104    42,586       38,161
Research and development................    10,871     13,833    11,470    13,861       10,652
Depreciation and amortization...........    26,207     27,966    11,206     4,110        3,850
Loss on headquarters building held for
  sale..................................     1,375
Impairment charges and other
  nonrecurring costs....................     8,252      6,632     4,743
Restructuring costs (credits)...........      (425)     9,338     4,124       843        6,589
Merger costs............................                          3,105        54
Purchased research and development......                                    9,000
Compensatory stock awards...............                          1,003                     64
                                          --------   --------   -------   -------     --------
                                           125,652    156,595   151,714    89,709       74,849
                                          --------   --------   -------   -------     --------
OPERATING LOSS..........................   (19,266)   (55,538)   (2,671)   (3,351)     (21,104)
Interest expense, net...................    (3,170)    (2,978)   (2,178)   (2,863)        (375)
                                          --------   --------   -------   -------     --------
LOSS FROM CONTINUING OPERATIONS, BEFORE
  INCOME TAXES AND EXTRAORDINARY ITEM...   (22,436)   (58,516)   (4,849)   (6,214)     (21,479)
Income tax benefit......................               (9,843)   (1,610)   (1,910)      (7,033)
                                          --------   --------   -------   -------     --------
LOSS FROM CONTINUING OPERATIONS.........   (22,436)   (48,673)   (3,239)   (4,304)     (14,446)
(Loss) income from discontinued
  operations, net of income tax
  (benefit) provision...................    (5,384)   (29,440)    2,308    (2,495)      (4,263)
Extraordinary item, net of income taxes
  income taxes..........................                         (2,863)
                                          --------   --------   -------   -------     --------
NET LOSS................................  $(27,820)  $(78,113)  $(3,794)  $(6,799)    $(18,709)
                                          ========   ========   =======   =======     ========
EARNINGS (LOSS) PER SHARE -- BASIC AND
  DILUTED
  Continuing operations, before
     extraordinary item.................  $  (0.60)  $  (1.45)  $ (0.12)  $ (0.22)    $  (0.93)
  Discontinued operations...............     (0.14)     (0.88)     0.08     (0.13)       (0.28)
  Extraordinary item....................                          (0.10)
                                          --------   --------   -------   -------     --------
  NET LOSS..............................  $  (0.74)  $  (2.33)  $ (0.14)  $ (0.35)    $  (1.21)
                                          ========   ========   =======   =======     ========
CASH PROVIDED BY (USED IN) OPERATING
  ACTIVITIES............................  $ 18,230   $ 12,756   $ 3,421   $ 5,101     $ (4,514)
</Table>

                                        23
<PAGE>

<Table>
<Caption>
                                                              DECEMBER 31,
                                           ---------------------------------------------------
                                           2001        2000       1999       1998       1997
                                           ----      --------   --------   --------   --------
                                                             (IN THOUSANDS)
<S>                                        <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA
Cash and cash equivalents................  $12,988   $  5,969   $ 14,309   $  8,669   $  6,054
Working capital (deficit)................     (914)   (11,144)    25,993     (2,564)    (3,138)
Total assets.............................   92,949    145,994    196,271    196,940    133,834
Total long-term debt.....................   30,553     37,784     32,142     69,961     10,745
Convertible, redeemable preferred stock
  issuable...............................              10,000                 8,501
Stockholders' equity.....................   26,060     58,450    135,339     22,772     11,615
</Table>

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

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

     Except for the historical information contained in this Annual Report on
Form 10-K, the matters discussed herein are "forward-looking statements" within
the meaning of the federal securities laws. Statements regarding future events
and developments and the Company's future performance, as well as management's
expectations, beliefs, intentions, plans, estimates or projections relating to
the future, are forward-looking statements within the meaning of these laws.
These forward-looking statements are subject to a number of risks and
uncertainties, and thus actual results may vary materially from those described
herein. Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements are that
generally, the Company operates with a minimal amount of software licensing and
system sales backlog. Therefore, quarterly revenues and operating results are
highly dependent on the volume and timing of the signing of licensing agreements
and product deliveries during the quarter, which are difficult to forecast. The
Company's future operating results may fluctuate due to these and other factors,
such as customer buying patterns, the availability of specified hardware systems
for resale, the deferral and/or realization of deferred software license and
system revenues according to contract terms, the timing of new product
introductions and product upgrade releases, the Company's ability or inability
to attract and retain qualified personnel, the scheduling of sales and marketing
programs, new product development by the Company or its competitors, risks
inherent in operating VitalWorks and PracticeWorks (spun-off in March 2001) as
independent public companies, uncertainties concerning VitalWorks' future
capital needs and the ability to obtain capital, changes of accounting estimates
used to prepare the prior period's financial statements, and changing economic,
political and regulatory influences generally, and specifically, on the
healthcare industry. A significant portion of the Company's quarterly sales of
software product licenses and computer hardware is concluded in the last month
of the fiscal quarter, generally with a concentration of such revenues earned in
the final ten business days of that month. In any case, due to the relatively
fixed nature of certain costs, including personnel and facilities expenses, a
decline or shortfall in quarterly and/or annual revenues typically results in
losses or in lower profitability. Management believes that these forward-looking
statements are reasonable and that the projections contained in this report are
based on reasonable assumptions and forecasts; however, you should not place
undue reliance on such statements that speak only as of the date hereof. Any
forward-looking statements should be considered in light of these factors, as
well as other risks as outlined above in Item 1. Business -- Forward-Looking
Statements and Risks Factors.

OVERVIEW

     VitalWorks Inc. is a leading, nationwide provider of information management
technology and services targeted to healthcare practices and organizations. The
Company provides IT-based solutions for general medical practices and has
specialty-specific products and services for practices such as radiology,
anesthesiology, ophthalmology, emergency medicine, plastic surgery, and
dermatology. VitalWorks also offers enterprise-level systems designed for large
physician groups and networks. The Company's range of software solutions, which
include workflow features related to patient encounters, automate the
administrative, financial, and clinical information management functions for
physicians and other healthcare providers. VitalWorks provides

                                        24
<PAGE>

its clients with ongoing software support, training, electronic data interchange
("EDI") services for patient billing and claims processing, and a variety of
Web-based services.

     Software license fees and system revenues are derived from the sale of
software product licenses and computer hardware. Maintenance and services
revenues come from providing ongoing product support, training and transaction
processing services. Approximately 70% of the Company's total revenues are of a
recurring nature.

     The Company markets its products and services to three types of physician
practices: hospital-based practices, including radiology and anesthesiology;
large general and emergency medicine practices, such as physician networks,
clinics and management service organizations that include ten or more doctors;
and small group practices of fewer than ten doctors that serve a local
community, including ophthalmology, dermatology and general medicine practices.
Approximately an equal amount of revenues was derived from each of these three
markets in 2001, with revenues from the small group market skewed more towards
maintenance and services.

RESULTS OF OPERATIONS

  REVENUES

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------
                                                  2001      CHANGE    2000     CHANGE    1999
                                                  ----      ------   -------   ------   -------
                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>       <C>      <C>       <C>      <C>
Maintenance and services........................  $83,961    6.5%    $78,871    (9.5)%  $87,127
Percentage of total revenues....................     78.9%              78.0%              58.5%
                                                  -------    ---     -------   -----    -------
Software licenses and system sales..............  $22,425    1.1%    $22,186   (64.2)%  $61,916
Percentage of total revenues....................     21.1%              22.0%              41.5%
                                                  -------    ---     -------   -----    -------
</Table>

     Software license revenues (initial fees) and system (computer hardware)
sales are recognized upon execution of the sales contract and delivery of the
software and/or hardware. In all cases, however, collection of any related
receivable must be probable, and no significant post-contract obligations of the
Company shall be remaining. Otherwise, the sale is deferred until all of the
requirements for revenue recognition have been satisfied. Maintenance fees for
routine support and product updates are recognized ratably over the term of the
license agreement, which is typically three years. Training, consulting and EDI
service revenues are recognized as the services are performed. Allowances for
estimated future returns and discounts, as well as bad debts, are provided upon
recognition of revenues.

     If the Company were to adopt new, or change its current, licensing
practices in response to a preference from the market or otherwise, then the
Company's revenue recognition practices may be subject to significant change to
comply with the requisite accounting principles.

     The increase in maintenance and services revenues in 2001 is mainly
attributable to (i) EDI transaction revenues of $1.6 million recognized in July
2001 in connection with the settlement agreement with WebMD Corporation
("WebMD") (see Item 3. Legal Proceedings above), (ii) an increase in maintenance
fees of approximately $.7 million resulting from price increases that took
effect primarily in the second half of the year, and (iii) additional EDI
revenues of approximately $1.4 million that arose primarily in the fourth
quarter from the conversion of a number of customer accounts to direct billing
from VitalWorks for printing services performed by certain third parties that in
prior periods had been billed directly by the printing vendor. Agreements with
these printers, as revised, now call for the Company to bill its physician
practices directly for printing services and, in turn, remit a specified dollar
amount per page to the printer. Accordingly, based on the amended agreements,
the Company recognizes 100% of its direct billings as revenue versus an amount
that was net of the printer's fees.

     In 2000, maintenance and services revenues declined due to a reduced
selling initiative, which resulted in a decrease in the overall number of newly
installed systems in 2000. As a result, less maintenance and services revenue
was realized. This decrease was partially offset by an increase in revenue of
$2.7 million associated

                                        25
<PAGE>

with new third-party marketing and e-commerce agreements that were entered into
in 2000, and to a lesser extent, an increase of approximately $.5 million in EDI
revenue from an increase in the number of practices using this service.

     Software license and system revenues rose slightly in 2001 primarily as a
result of an increase in the number of licenses and systems sold (unit volume
versus, for example, price increases). The increase in unit volume was realized
in the last three quarters of the year. In the first quarter, the Company
experienced a decline in the number of licenses and systems sold, which was the
near-term result of management's reorganization and redeployment of the sales
force and redirection of the Company's marketing focus that was initiated in
fiscal 2000.

     The decrease in software license and system revenues for 2000 was
principally due to (i) lower unit sales in 2000 due to the Company's change in
product strategy and its reorganization initiatives, (ii) the result of customer
purchases made in 1999 to prepare for potential Year 2000 computer issues, and
(iii) to a lesser extent, the addition of subscription based pricing.

COST OF REVENUES

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------
                                                  2001      CHANGE    2000     CHANGE    1999
                                                  ----      ------   -------   ------   -------
                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>       <C>      <C>       <C>      <C>
Maintenance and services........................  $18,734    (2.7)%  $19,252    14.6%   $16,799
Percentage of maintenance and services
  revenues......................................     22.3%              24.4%              19.3%
                                                  -------   -----    -------   -----    -------
Software licenses and system sales..............  $ 6,267   (29.5)%  $ 8,886   (61.6)%  $23,160
Percentage of software licenses and system
  sales.........................................     27.9%              40.1%              37.4%
                                                  -------   -----    -------   -----    -------
</Table>

     Cost of maintenance and services revenues consists primarily of the cost of
EDI claims processing, outsourced hardware maintenance and billing and statement
printing services, and postage. The decrease in the cost of maintenance and
services revenues in 2001 principally reflects the recovery of EDI processing
costs of $.6 million in 2001 in connection with the WebMD settlement referred to
above, a decline in hardware maintenance costs of approximately $.6 million, and
reductions in the (per transaction) cost of providing patient statement,
invoicing and claims processing services. The decreases were partially offset by
additional costs of EDI services of approximately $.9 million incurred primarily
in the fourth quarter in connection with the conversion of a number of customers
to direct billing from the Company for printing services, as discussed above
regarding EDI revenues.

     The increase in cost of maintenance and services revenues for 2000 is
mainly attributed to an increase in the total number of customers utilizing EDI
services and an increase in hardware maintenance costs.

     Cost of software license and system revenues consists primarily of costs
incurred to purchase computer hardware, third-party software and other items for
resale in connection with sales of new systems and software. In 2001, the
decrease in the cost of software licenses and system revenues principally
reflects a decline in the number of hardware systems sold which generally yield
lower margins compared to software sales. The decrease in the cost of software
licenses and system revenues in 2000 is due to the significant reduction in
corresponding sales.

                                        26
<PAGE>

OPERATING EXPENSES

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------
                                                   2001     CHANGE    2000     CHANGE    1999
                                                   ----     ------   -------   ------   -------
                                                             (DOLLARS IN THOUSANDS)
<S>                                               <C>       <C>      <C>       <C>      <C>
Selling, general and administrative.............  $54,371   (23.1)%  $70,688    (7.1)%  $76,104
Percentage of total revenues....................     51.1%              69.9%              51.1%
                                                  -------   -----    -------   -----    -------
Research and development........................  $10,871   (21.4)%  $13,833    20.6%   $11,470
Percentage of total revenues....................     10.2%              13.7%               7.7%
                                                  -------   -----    -------   -----    -------
Depreciation and amortization...................  $26,207    (6.3)%  $27,966   149.6%   $11,206
Percentage of total revenues....................     24.6%              27.7%               7.5%
                                                  -------   -----    -------   -----    -------
</Table>

     Selling, general and administrative expenses include salaries and benefits,
product maintenance and support, variable commissions and bonuses, marketing,
travel, communications, facilities, insurance and other administrative expenses.
The decrease in both 2001 and 2000 is principally related to the savings that
resulted from a major restructuring plan that the Company initiated in August
2000. The Company closed 14 offices, and its employee-base average was reduced
to 671 for 2001, from 882 for 2000 and from approximately 1,000 for 1999.

     The decrease in research and development expenses in 2001 reflects the
reduction in staff that commenced in August 2000 as part of the restructuring
plan. In 2001, the Company capitalized $4.6 million of third-party software
developer fees in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." The amounts capitalized relate to the Company's ongoing
development of Web-based applications, including a radiology information system,
and represented 29.7% of total research and development expenditures.
Capitalized software development costs will be amortized over the estimated
economic life of the products; generally, depending on the product, such
deferred costs are expected to be amortized over a three to five-year period.
Amortization shall commence when the products are commercially available, which
is projected to be in the second half of 2002. The increase in research and
development expenses in 2000 is primarily due to a decrease in software
development costs that qualify for capitalization and an increase in the number
of products offered, primarily from the Company's acquisitions.

     Depreciation and amortization expense consists primarily of goodwill
amortization, which amounted to $23.1 million for 2001. The decrease in
depreciation and amortization expense in 2001 pertains to the closing of office
facilities in connection with the restructuring plan. In July 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets." Statement 142
provides that, upon adoption, the Company shall no longer amortize its goodwill
assets. Rather, it will have to test its goodwill for impairment of value on at
least an annual basis. Pursuant to Statement 142, the Company discontinued
amortizing goodwill on January 1, 2002, and based on the Company's initial test
for impairment of value, the Company does not at this time expect the adoption
of Statement 142 to have a negative impact on its financial statements. The
increase in depreciation and amortization expense in 2000 is due to a change in
the accounting estimate made in the fourth quarter of 1999 regarding the
remaining economic life of the Company's goodwill assets. Prior to the fourth
quarter of 1999, goodwill was amortized over a 15-year estimated economic life,
which was reflective of management's analysis that goodwill is derived from the
historical and estimated future lives of its customer relationships, the
longevity and continuing use of its core products and the relatively minor
impact of technological obsolescence on these core products. In the fourth
quarter of 1999, management reassessed the economic life of goodwill in view of
competitive developments, the rapid pace of change engendered by the
encroachment of Internet companies into the marketplace and the Company's
response to these external factors which resulted in a change in product
strategy to focus on development of ASP-delivered products and Internet
solutions and the offering of subscription-based pricing. While in management's
opinion, there was no impairment in the carrying value of this long-lived
intangible asset (based on an analysis of undiscounted future cash flows),
management determined that the economic life of goodwill should be shortened
substantially to be more reflective of the current rate of technological change
and competitive conditions. Accordingly, management changed the

                                        27
<PAGE>

estimated economic life of goodwill from an original life of 15 years to three
years, which change was applied prospectively from the fourth quarter of 1999.

     Loss on headquarters building held for sale.  In 2001, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," issued in
August 2001 and, accordingly, recorded an impairment charge of $1.4 million
relating to its former headquarters building in Atlanta that it expected to sell
to an outside shareholder of the Company in the first quarter of 2002. However,
in February, the shareholder terminated the contract to purchase the building.
Accordingly, the building is again listed for sale and is now projected to be
sold by December 2002.

     Impairment charges and other nonrecurring costs.  In 2001, the Company
recognized impairment charges and incurred other nonrecurring costs of $8.3
million. These costs and expenses included a $6.0 million provision for loan
losses, $.9 million for unused equity financing, $.8 million of executive
severance for separation benefits paid to the Company's former chairman pursuant
to the terms of a mutual separation agreement and a pre-existing employment
agreement, and retention bonuses of $.2 million for terminated employees. In
June 2000, three inside directors (now former directors) of the Company borrowed
$12.2 million in the form of six separate unsecured promissory notes, three due
December 31, 2000 and three due on June 30, 2002 (collectively, the "Notes").
Interest is due and payable quarterly, except as noted below, at the rate of
prime plus .5%. The December Notes represent cash loans and the June Notes
represent loans issued to acquire common stock of the Company. On March 5, 2001,
the December Notes were extended to December 31, 2001 and as of December 31,
2001, one of the Notes for $.7 million had been repaid. As of March 31, 2001,
management determined that collection was doubtful with respect to approximately
$6 million of the outstanding balance of the Notes and, accordingly, the Company
recorded a valuation allowance and ceased accruing interest on the Notes.
Interest payments of $.5 million received subsequent to March 31, 2001 were
applied against outstanding principal balances. On June 6, 2001, regarding one
set of Notes for one of the former directors totaling $5.8 million, the Company
received payment of interest through March 31, 2001 and was granted first lien
security interests in (i) 1,000,000 shares of Company common stock owned by the
director and (ii) the director's option rights to acquire common stock of the
Company; in exchange, the Company agreed to extend the maturity date of these
notes, and the due date for interest accruing after March 31, 2001, to December
31, 2002. At December 31, 2001, the December Notes and the June Notes, as
amended, totaled $4.4 million and $6.2 million, including accrued interest
through December 31, 2000, respectively, or together $4.6 million, net of the
valuation allowance. Management will continue to monitor the collectibility of
the four Notes that remain outstanding today. The amount of the allowance
against the Notes may be increased or decreased in future periods based on
management's determinations.

     In 2000, concurrent with the 2000 restructuring plan, the Company
recognized impairment charges and incurred other nonrecurring costs of $6.6
million consisting of (a) $3.5 million relating to fixed assets that were
abandoned due to the closing of facilities; (b) $1.1 million to write-down
computer hardware held for resale to its estimated net realizable value based on
a planned bulk lot disposal as a result of the Company's decision to discontinue
selling hardware and hardware support in certain of its business lines; (c) $1.3
million for compensation and other termination benefits; (d) $.4 million for
other asset write-downs; and (e) $.3 million for professional services and other
related costs. In connection with the change in product strategy, management
also re-evaluated the carrying value of capitalized software. As a result, the
Company recorded an impairment charge in 1999 of approximately $4.7 million for
the write-down of capitalized software.

     Restructuring costs (credits).  On August 1, 2000, VitalWorks announced its
plans to restructure its operations through a plan of employee reductions and
consolidation of office facilities. In the third and fourth quarters of 2000,
the Company closed 14 facilities and terminated approximately 400 employees. The
offices that were closed are subject to operating leases that expire at various
dates through 2006. The Company authorized a smaller scale restructuring plan in
the fourth quarter of 1999. Accordingly, in 2000 and 1999, the Company incurred
restructuring charges of $9.3 million and $4.1 million, respectively, primarily
associated with employee severance and other termination benefits, and facility
closure costs. In 2001, the Company recorded $.4 million of credits for changes
of estimates relating to facility closure and employee severance costs incurred
in 2000.

                                        28
<PAGE>

     Merger costs.  The Company incurred costs of approximately $3.1 million in
completing six business mergers in 1999. These merger costs consisted
principally of professional fees and related transaction costs.

     Compensatory Stock Awards.  In 1999, the Company recognized $1.0 million in
noncash charges related to the accelerated vesting of a restricted stock award
for 190,000 shares granted to three (now former) executives of the Company in
1998.

INTEREST EXPENSE, NET

     Interest expense, net consists primarily of interest costs incurred in
connection with the Company's outstanding term and real estate mortgage loans.
The increase in net interest expense in 2001 is due primarily to the
amortization of deferred finance costs that was accelerated in anticipation of
the refinancing of the Company's long-term debt, which was completed in March
2002. The increase in 2000 relates to the increase in the amount of the
outstanding principal balance under the Company's credit agreements.

INCOME TAXES

     For 2001, the Company did not record an income tax provision or benefit.
Management has assessed the realizable value of the Company's deferred tax
assets of $52.0 million and determined that a valuation allowance of $23.0
million was necessary as of December 31, 2001 to, along with deferred tax
liabilities of $2.2 million, reduce the net deferred tax asset to $26.7 million,
an amount which management believes is more likely than not to be realized. In
reaching this conclusion, management noted a number of factors, including the
following:

     - The loss generated in 2001 was not indicative of the Company's ability to
       generate future earnings because the results were significantly impacted
       by the recognition of nonrecurring charges and nondeductible goodwill
       amortization.

     - Management's projections indicate that the Company will generate
       sufficient taxable income to realize the net deferred tax asset within
       three to four years.

     The income tax benefit was $9.8 million and $1.6 million for 2000 and 1999,
respectively. The increase in the 2000 benefit is due to the significant loss
generated in 2000. The effective income tax rate was 16.8% and 33.2% for 2000
and 1999, respectively. The change in the effective rate is due to accelerated
amortization of nondeductible goodwill resulting from the change in the
estimated economic life of goodwill from 15 to three years and the recognition
of a valuation allowance to reduce net deferred tax assets to an amount which
management believes is more likely than not to be realized.

LOSS FROM DISCONTINUED OPERATIONS

     Discontinued operations represent the results of PracticeWorks, Inc., a
provider of practice management software for dental and oral surgery practices,
through March 5th (the "Distribution Date") for 2001 and for the twelve months
of 2000 and 1999, respectively. Through the Distribution Date and for the years
ended December 31, 2000 and 1999, the Company's net (loss) income from
discontinued operations was $(5.4) million, $(29.4) million, and $2.3 million,
respectively. For further details regarding the distribution of shares of
PracticeWorks to Company stockholders, see Note C of the accompanying financial
statements.

EXTRAORDINARY ITEM

     The Company's outstanding debt as of December 31, 1998 was repaid in April
1999 with proceeds from the sale of Company common stock. In connection with
this early retirement of debt, the Company recognized an extraordinary item for
the unamortized portion of the loan costs and prepayment fees which totaled
approximately $4.8 million and, net of estimated tax effect, approximately $2.9
million, or $0.10 per share.

                                        29
<PAGE>

NET LOSS

     As a result of the above factors, the net loss for 2001 decreased to $27.8
million, or by 64.4%, from a net loss of $78.1 million in 2000, which was a
significant increase from the net loss of $3.8 million in 1999.

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

LIQUIDITY AND CAPITAL RESOURCES

     To date, the Company has financed its businesses through positive cash
flows from operations, the issuance of common stock and proceeds from long-term
borrowings. For 2001, 2000 and 1999, the Company generated positive cash flow
from operations of $18.2 million, $12.8 million and $3.4 million, respectively.
In October 2001, the Company expanded its August 2000 agreement with National
Data Corporation ("NDC") for outsourcing much of the Company's patient statement
and invoice printing work. The Company will continue, for a fee, to provide
printing services for its physicians under the subcontracting arrangement with
NDC. The amended arrangement, which extends for a period of up to seven and a
half years, provides for, among other things, the attainment of certain
quarterly transaction processing volume levels during the term. In exchange, the
Company received $7.9 million in cash (in connection with the August agreement,
the Company received $8.8 million in 2000), which represent unearned discounts
that are recognized as an offset to cost of maintenance and services revenues as
the minimum volume commitments are fulfilled.

     Days sales outstanding (calculated as accounts receivable, net of
allowances, divided by total revenues multiplied by 365 days) for 2001 was 44
days, down from 53 days for 2000. Looking forward, as license and systems sales
increase, the Company expects its days sales outstanding to range from 50 to 60
days.

     Cash used in investing activities amounted to $5.1 million for 2001. This
amount includes $4.6 million used for software development costs, $1.2 million
used primarily for purchases of computer equipment and software, and $.3 million
used to fund discontinued operations through March 5, 2001, offset partially by
proceeds of $.8 million from the sale of an office building.

     Financing activities for 2001 resulted in a use of cash of $6.1 million,
consisting primarily of $9.2 million of principal payments of long-term debt,
partly offset by $1.8 million of payments received in connection with the
exercise of stock options and warrants (for a total of 974,645 common shares),
and loan payments received from former directors of the Company of $1.2 million.

     As of December 31, 2001, the Company had cash and cash equivalents of $13.0
million and $30.6 million of total long-term debt. Cash equivalents are
comprised primarily of investment-grade commercial paper, time deposits, and
U.S. federal, state and political subdivision obligations with varying terms of
three months or less. The Company repaid $28.7 million of its total long-term
debt as of March 11, 2002 in connection with a new four-year credit agreement
entered into by the Company with Foothill Capital Corporation, a wholly-owned
subsidiary of Wells Fargo & Company. The new agreement includes a term loan of
$22 million at an interest rate of prime plus 2% and a mortgage loan of $5.5
million with respect to the Atlanta property that is held for sale, at an
interest rate of prime plus 1.5%. Subject to the Company's achieving certain
specified earnings targets, the percent by which the Company's interest rate on
the term loan exceeds prime may be reduced by as much as 1.1% over the life of
the loan. Interest is payable monthly in arrears. Principal is payable over the
life of the agreement, including a balloon payment at the end of year four.
Should the Company decide to prepay the term loan in full prior to year four, it
would incur a prepayment fee equal to 3% in year one, 2% in year two, and 1% in
year three of the then outstanding principal balance of the term loan. The
prepayment fee may be reduced should the loan be prepaid in connection with a
change of control of the Company. The loans, which are collateralized by
substantially all of the Company's assets and intellectual property rights,
subject the Company to certain restrictive covenants, including (i) the required
maintenance

                                        30
<PAGE>

of minimum levels of recurring revenues and earnings, as defined, (ii) an annual
limit on the amount of capital expenditures and (iii) the payment of dividends
to shareholders.

     The following table summarizes the general timing of future payments under
the Company's outstanding loan agreement, and under lease agreements that
include noncancellable terms. Maturities of long-term debt in the table reflect
the terms of the new March 2002 credit agreement, the repayment of the mortgage
loan of $1.4 million in connection with the sale of one of the Atlanta
properties as discussed in the following paragraph, and management's expectation
to repay the remaining mortgage loan ($5.5 million, which otherwise matures in
2006) relating to the other building held for sale.

<Table>
<Caption>
                                                             PAYMENTS DUE BY PERIOD
                                               --------------------------------------------------
CONTRACTUAL                                                        2003 TO
OBLIGATIONS                                    TOTALS     2002      2005      2006     THEREAFTER
-----------                                    -------   -------   -------   -------   ----------
                                                                 (IN THOUSANDS)
<S>                                            <C>       <C>       <C>       <C>       <C>
Long-term debt...............................  $27,450   $ 7,950   $ 7,500   $12,000
Capital leases...............................    1,790       730     1,060
Operating leases.............................   11,780     3,326     6,214     1,263   $      977
Other long-term obligations..................      108                 108
                                               -------   -------   -------   -------   ----------
                                               $41,128   $12,006   $14,882   $13,263   $      977
                                               =======   =======   =======   =======   ==========
</Table>

     On January 14, 2002, the Company completed the sale of a former
headquarters building in Atlanta for $1.4 million, after closing costs. The
Company also had expected to complete the sale of its other Atlanta property in
March to an outside shareholder of the Company. However, in February, the
shareholder terminated the contract to purchase the building. Accordingly, the
building is again listed for sale and is now projected to be sold by December
2002.

     The Company anticipates capital expenditures of approximately $8 million
for 2002, including software development costs of approximately $5 million.

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

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation, et al., was filed in Boone County Superior Court in Indiana. The
Company removed the case to the United States District Court for the Southern
District of Indiana, where it is now pending. The complaint alleges state
securities law violations, breach of contract, and fraud claims against the
Company and certain former directors and officers. The complaint does not
specify the amount of damages sought by plaintiffs, but seeks rescission of a
transaction plaintiffs valued at $5 million, as well as punitive damages and
reimbursement for the plaintiffs' attorney's fees and associated costs and
expenses of the lawsuit. In a decision from the Court dated October 15, 2001,
the plaintiffs request for a preliminary injunction to preserve their remedy of
rescission was denied, the Company's request to transfer the case to the
Northern District Court of Georgia was granted, and the Company's motion to
dismiss plaintiffs' complaint in its entirety was granted in part. On October
26, 2001, the plaintiffs filed a notice of appeal with the 7th Circuit Court of
Appeals, which appeal has not yet been decided.

     The Company has been named as a defendant as successor to CDL Healthcare
Systems, Inc. ("CDL"), a company acquired by VitalWorks in December 1999, in a
complaint filed in the Circuit Court of the Eleventh Judicial Circuit in Dade
County, Florida on February 27, 2001 by Sonia Abutog, individually, Angelo
Abutog, individually, and Sonia and Angelo Abutog, as parents and next best
friends to Aaron Abutog, a minor. Gary Weiner, former President of CDL, and his
daughter, Elisha Weiner, are also named as defendants. Plaintiffs allege that
they were injured at a time, prior to the merger between the Company and CDL,
when a motor vehicle operated by Elisha Weiner collided with Plaintiff Sonia
Abutog, a pedestrian. Title to the vehicle and lease rights is being determined.
The plaintiff contends that she and her unborn child suffered severe personal
injuries as a result of the accident and seeks to recover damages in an
unspecified

                                        31
<PAGE>

amount in excess of $15,000, plus interest and costs. The Company is exploring
the issue of liability, and the existence and limits of insurance coverage that
may be available to indemnify against any judgment.

     While management believes that the Company has meritorious defenses in each
of the foregoing matters and the Company intends to pursue its positions
vigorously, litigation is inherently subject to many uncertainties. Thus the
outcome of these matters is uncertain and could be adverse to the Company.
However, even if the outcome of these cases is adverse, management does not
believe that the outcome of these cases, individually or in the aggregate, will
have a material adverse effect on the financial position of the Company.
However, depending on the amount and timing of an unfavorable resolution(s) of
the contingencies, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular reporting
period(s).

     The Company believes that its current cash and cash equivalent balances,
together with the funds it expects to generate from its operations, will be
sufficient to finance the Company's business for the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." Statement 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. Statement 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. Statement 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires that, upon
adoption of Statement 142, "Goodwill and Other Intangible Assets" (discussed in
the operating expenses section above), the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in Statement
141.

     The Company's previous business combinations were accounted for using both
the pooling-of-interests and purchase methods. The pooling-of-interests method
does not result in the recognition of acquired goodwill or other intangible
assets. As a result, the adoption of Statements 141 and 142 will not affect the
results of past transactions accounted for under the pooling-of-interests
method. However, all future business combinations would be accounted for under
the purchase method, which may result in the recognition of goodwill and other
intangible assets, some of which would be recognized through operations, either
by amortization or impairment charges, in the future.

     In 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", issued in August 2001, in connection with the anticipated
sales of its former headquarters buildings (discussed in the operating expenses
section above).

     Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, establishes
accounting and reporting standards for derivative instruments, such as foreign
currency and interest rate swaps, options, forwards, futures, collars, and
warrants, and for hedging activities. The Company does not hold derivative
securities and has not entered into contracts embedded with derivative
instruments either to hedge existing risks or for speculative purposes.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's primary market risk is fluctuations in the "prime rate" of
interest announced from time to time by Wells Fargo Bank N.A. Approximately
$27.5 million of outstanding debt at March 11, 2002 related to long-term
indebtedness under the Company's March 2002 credit agreement with Foothill
Capital Corporation, a wholly-owned subsidiary of Wells Fargo & Company. The
Company expects interest on the outstanding balance of its loans from Foothill
to be charged based on a variable rate related to the prime rate. Thus, interest
expense is subject to market risk in the form of fluctuations in the prime rate
of interest. The effect of a hypothetical one percentage point increase across
all maturities of variable rate debt would result in

                                        32
<PAGE>

an increase of approximately $.3 million in pre-tax results assuming no further
changes in the amount of borrowings subject to variable rate interest from
amounts outstanding at March 11, 2002. The Company does not hold derivative
securities and has not entered into contracts embedded with derivative
instruments, such as foreign currency and interest rate swaps, options,
forwards, futures, collars, and warrants, either to hedge existing risks or for
speculative purposes.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements listed on page 37 of this report are filed as part
of this report on the pages indicated.

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

     Not applicable

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     See the sections entitled "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," which are incorporated
herein by reference to VitalWorks' definitive proxy statement to be filed with
respect to the 2002 Annual Meeting of Stockholders expected to be held on June
12, 2002 (the "Proxy Statement"). See also the section entitled "Employees"
appearing in Part I, Item 1 hereof.

ITEM 11.  EXECUTIVE COMPENSATION

     See the sections entitled "Compensation of Directors," "Executive
Compensation and Related Information," "Option Grants in Last Fiscal Year,"
"Aggregate Option Exercises in Last Fiscal Year and Year-End Option Values" and
"Employment Contracts and Change of Control Agreements," which are incorporated
herein by reference to the Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     See the section entitled "Stock Ownership of Certain Beneficial Owners and
Management" which is incorporated herein by reference to the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See the sections entitled "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation" which are incorporated herein by
reference to the Proxy Statement.

                                    PART IV

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

     (a)(1) Financial Statements.  The financial statements listed on page 37 of
this report are filed as part of this report on the pages indicated.

     (a)(2) Financial Statement Schedules.  The applicable financial statement
schedules required under Regulation S-X have been included beginning on page 65
of this report, as follows:

<Table>
<S>                                                           <C>
Report of Independent Certified Public Accountants on
  Financial Statement Schedule..............................   65
Schedule II -- Valuation and Qualifying Accounts............   66
</Table>

                                        33
<PAGE>

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

<Table>
<Caption>
EXHIBIT
  NO.                                 DESCRIPTION
-------                               -----------
<C>      <S>  <C>
  2.1    --   Agreement and Plan of Merger by and among Datamedic Holding
              Corp., Certain Principal Shareholders of Datamedic Holding
              Corp., InfoCure Corporation and InfoCure Systems, Inc. dated
              September 3, 1999 (incorporated by reference to Appendix A
              to InfoCure's Registration Statement on Form S-4
              (Registration No. 333-87867) filed on September 27, 1999).
  2.2    --   Agreement and Plan of Distribution, dated as of February 21,
              2001, by and between InfoCure Corporation and PracticeWorks,
              Inc. (incorporated by reference to Exhibit 2.1 to the
              Registrant's Current Report on Form 8-K, filed with the
              Commission on March 20, 2001).
  3.1    --   Certificate of Incorporation of InfoCure Corporation with
              all amendments (incorporated by reference to Exhibit 3.1 to
              the Registrant's Annual Report on Form 10-K for the year
              ended December 31, 1999).
  3.2    --   Second Amended and Restated Bylaws of InfoCure (incorporated
              by reference to Exhibit 3.2 to the Registrant's Annual
              Report on Form 10-K for the year ended December 31, 1999).
  4.1    --   See Exhibits 3.1 and 3.2 for provisions of the Certificate
              of Incorporation, as amended, and Bylaws of InfoCure
              defining rights of the holders of common stock of InfoCure.
  4.2    --   Specimen Certificate for shares of common stock
              (incorporated by reference to Exhibit 4.2 to InfoCure's
              Registration Statement on Form SB-2) (Registration No.
              333-18923).
 10.1    --   InfoCure Corporation 1996 Stock Option Plan (incorporated by
              reference to Exhibit 10.1 filed with InfoCure's Registration
              Statement on Form SB-2) (Registration No. 333-18923).
 10.2    --   Form of Incentive Stock Option Agreement of InfoCure
              Corporation (incorporated by reference to Exhibit 10.2 filed
              with InfoCure's Registration Statement on Form SB-2)
              (Registration No. 333-18923).
 10.3    --   InfoCure Corporation 1997 Directors' Stock Option Plan
              (incorporated by reference to Exhibit 10.48 filed with
              InfoCure's Annual Report on Form 10-KSB on April 1, 1998).
 10.4    --   InfoCure Corporation Length-of-Service Nonqualified Stock
              Option Plan (incorporated by reference to Exhibit 10.49
              filed with InfoCure's Annual Report on Form 10-KSB on April
              1, 1998).
 10.5    --   Amendment to InfoCure Corporation 1996 Stock Option Plan
              (incorporated by reference to Exhibit 10.15 to the
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1999).
 10.6    --   Amendment to InfoCure Corporation Length-of-Service
              Nonqualified Stock Option Plan (incorporated by reference to
              Exhibit 10.16 to the Registrant's Annual Report on Form 10-K
              for the year ended December 31, 1999).
 10.7    --   Amendment to InfoCure Corporation Employee Stock Purchase
              Plan (incorporated by reference to Exhibit 10.17 to the
              Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1999).
 10.8    --   InfoCure Corporation Employee Stock Purchase Plan
              (incorporated by reference to Exhibit 10.50 filed with
              InfoCure's Annual Report on Form 10-KSB on April 1, 1998).
 10.9    --   Form of Stock Option Grant Certificate and schedule of
              recipients of such options (incorporated by reference to
              Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
              for the year ended December 31, 1999).
 10.10   --   Form of Stock Option Grant Certificate and schedule of
              recipients of such options (incorporated by reference to
              Exhibit 10.23 to the Registrant's Annual Report on Form 10-K
              for the year ended December 31, 1999).
</Table>

                                        34
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                                 DESCRIPTION
-------                               -----------
<C>      <S>  <C>
 10.11   --   Common Stock Purchase Agreement, dated August 1, 2000,
              between InfoCure Corporation and Acqua Wellington North
              American Equities Fund, Ltd. (incorporated by reference to
              Exhibit 10.2 to the Registrant's Quarterly Report on Form
              10-Q, for the quarter ended June 30, 2000).
 10.12   --   Form of Officer Promissory Note with schedule of makers and
              principal amount of notes (incorporated by reference to
              Exhibit 10.3 to the Registrant's Quarterly Report on Form
              10-Q, for the quarter ended June 30, 2000).
 10.13   --   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).
 10.14   --   Transition Services Agreement, dated as of March 5, 2001, by
              and between InfoCure Corporation and PracticeWorks, Inc.
              (incorporated by reference to Exhibit 10.2 to the
              Registrant's Current Report on Form 8-K, filed with the
              Commission on March 20, 2001).
 10.15   --   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).
 10.16   --   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).
 10.17   --   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).
 10.18   --   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).
 10.19   --   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).
 10.20   --   Employment Agreement, dated July 24, 2000, by and between
              InfoCure Corporation and Joseph M. Walsh (incorporated by
              reference to Exhibit 10.6(a) to the Registrant's Current
              Report on Form 8-K, filed with the Commission on March 20,
              2001).
 10.21   --   Employment Agreement, dated November 10, 2000, by and
              between InfoCure Corporation and Frederick L. Fine
              (incorporated by reference to Exhibit 10.6(b) to the
              Registrant's Current Report on Form 8-K, filed with the
              Commission on March 20, 2001).
 10.22   --   Employment Agreement, dated July 24, 2000, by and between
              InfoCure Corporation and Steven N. Kahane (incorporated by
              reference to Exhibit 10.6(c) to the Registrant's Current
              Report on Form 8-K, filed with the Commission on March 20,
              2001).
 10.23   --   Employment Agreement, dated July 24, 2000, by and between
              InfoCure Corporation and Michael A. Manto (incorporated by
              reference to Exhibit 10.6(d) to the Registrant's Current
              Report on Form 8-K, filed with the Commission on March 20,
              2001).
 10.24   --   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).
 10.25   --   Amended and Restated Warrant, originally issued to FINOVA
              Capital Corporation on October 23, 1998, as amended and
              restated on March 5, 2001 (incorporated by reference to
              Exhibit 10.42 to the Registrant's Annual Report on Form
              10-K, filed with the Commission on April 2, 2001).
</Table>

                                        35
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                                 DESCRIPTION
-------                               -----------
<C>      <S>  <C>
 10.26   --   Amended and Restated Warrant, originally issued to FINOVA
              Capital Corporation on January 21, 1999, as amended and
              restated on March 5, 2001 (incorporated by reference to
              Exhibit 10.43 to the Registrant's Annual Report on Form
              10-K, filed with the Commission on April 2, 2001).
 10.27   --   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).
 10.28   --   Lease Agreement, dated March 6, 2001, by and between
              InfoCure Corporation and PracticeWorks Systems, LLC
              (incorporated by reference to Exhibit 10.1 to the
              Registrant's Quarterly Report on Form 10-Q, filed with the
              Commission on May 16, 2001).
 10.29   --   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).
 10.30   --   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).
 10.31   --   Separation Agreement by and between InfoCure Corporation,
              and Frederick L. Fine, dated June 6, 2001 (incorporated by
              reference to Exhibit 10.1 to the Registrant's Current Report
              on Form 8-K, filed with the Commission on June 6, 2001).
*10.32   --   Loan and Security Agreement by and among VitalWorks Inc. as
              Borrower, and Foothill Capital Corporation as Lender, dated
              March 8, 2002.
*21.1    --   List of Subsidiaries.
*23.1    --   Consent of BDO Seidman, LLP, independent certified public
              accountants.
 24.1    --   Powers of Attorney (included on signature page).
</Table>

* Filed herewith

     (b) Reports on Form 8-K.  There were no reports on Form 8-K filed in the
quarter ended December 31, 2001.

                                        36
<PAGE>

                                VITALWORKS INC.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
FINANCIAL STATEMENTS:
  Report of Independent Certified Public Accountants........   38
  Consolidated Balance Sheets as of December 31, 2001 and
     2000...................................................   39
  Consolidated Statements of Operations for the years ended
     December 31, 2001, 2000 and 1999.......................   40
  Consolidated Statements of Stockholders' Equity for the
     years ended December 31, 2001, 2000 and 1999...........   41
  Consolidated Statements of Cash Flows for the years ended
     December 31, 2001, 2000, and 1999......................   42
  Notes to Consolidated Financial Statements................   43
</Table>

                                        37
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
VitalWorks Inc.

     We have audited the accompanying consolidated balance sheets of VitalWorks
Inc. and Subsidiaries (formerly known as InfoCure Corporation) as of December
31, 2001 and 2000 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VitalWorks
Inc. and Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

BDO Seidman, LLP
New York, New York

January 23, 2002, and
  March 11, 2002 for Note H

                                        38
<PAGE>

                                VITALWORKS INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                2001        2000
                                                              ---------   --------
<S>                                                           <C>         <C>
                                      ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  12,988   $  5,969
  Accounts receivable, net of allowances of $1,800 and
     $1,936.................................................     12,693     14,560
  Computer hardware held for resale.........................        323        639
  Deferred income taxes, net................................      3,376      3,859
  Prepaid expenses and other current assets.................        946        769
  Headquarters buildings held for sale, at fair value.......      7,184
                                                              ---------   --------
          Total current assets..............................     37,510     25,796
Property and equipment, at cost, less accumulated
  depreciation and amortization of $6,294 and $9,175........      6,435     19,291
Goodwill, less accumulated amortization of $55,898 and
  $32,763...................................................     20,256     43,390
Product development and deferred finance costs, less
  accumulated amortization of $905 and $267.................      4,739        711
Deferred income taxes, net..................................     23,358     23,056
Other assets................................................        651        749
Net noncurrent assets of discontinued operations............                33,001
                                                              ---------   --------
Total assets................................................  $  92,949   $145,994
                                                              =========   ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and accrued expenses.....................  $  10,503   $ 10,682
  Accrued employee compensation and benefits................      2,862      4,652
  Accrued restructuring costs...............................      2,900      6,834
  Deferred revenue, including unearned discounts of $1,701
     and $1,460.............................................      8,096      8,873
  Current portion of long-term debt.........................     14,063      2,727
  Net current liabilities of discontinued operations........                 3,172
                                                              ---------   --------
          Total current liabilities.........................     38,424     36,940
Long-term debt..............................................     16,490     35,057
Other liabilities, primarily unearned discounts re:
  outsourced printing services..............................     11,975      5,547
Convertible, redeemable preferred stock issuable............                10,000
Commitments and contingencies -- Notes C and I
Stockholders' equity:
  Common stock $.001 par value, 200,000,000 shares
     authorized, 39,126,771 and 34,361,235 shares issued....         39         34
  Additional paid-in capital................................    191,585    203,959
  Notes receivable from former directors, net of allowance
     of $6,000 in 2001......................................     (4,632)   (12,431)
  Accumulated deficit.......................................   (160,463)  (132,643)
  Treasury stock, at cost, 125,000 shares...................       (469)      (469)
                                                              ---------   --------
          Total stockholders' equity........................     26,060     58,450
                                                              ---------   --------
          Total liabilities and stockholders' equity........  $  92,949   $145,994
                                                              =========   ========
</Table>

                            See accompanying notes.

                                        39
<PAGE>

                                VITALWORKS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                                2001       2000      1999
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>
Revenues
  Maintenance and services..................................  $ 83,961   $ 78,871   $87,127
  Software licenses and system sales........................    22,425     22,186    61,916
                                                              --------   --------   -------
          Total revenues....................................   106,386    101,057   149,043
                                                              --------   --------   -------
Costs and expenses
Cost of revenues:
  Maintenance and services..................................    18,734     19,252    16,799
  Software licenses and system sales........................     6,267      8,886    23,160
Selling, general and administrative.........................    54,371     70,688    76,104
Research and development....................................    10,871     13,833    11,470
Depreciation and amortization, primarily amortization of
  goodwill..................................................    26,207     27,966    11,206
Loss on headquarters building held for sale.................     1,375
Impairment charges and other nonrecurring costs.............     8,252      6,632     4,743
Restructuring costs (credits)...............................      (425)     9,338     4,124
Merger costs................................................                          3,105
Compensatory stock awards...................................                          1,003
                                                              --------   --------   -------
                                                               125,652    156,595   151,714
                                                              --------   --------   -------
Operating loss..............................................   (19,266)   (55,538)   (2,671)
Interest expense, net.......................................    (3,170)    (2,978)   (2,178)
                                                              --------   --------   -------
Loss from continuing operations, before income taxes and
  extraordinary item........................................   (22,436)   (58,516)   (4,849)
Income tax benefit..........................................               (9,843)   (1,610)
                                                              --------   --------   -------
Loss from continuing operations.............................   (22,436)   (48,673)   (3,239)
(Loss) income from discontinued operations, net of income
  tax (benefit) provision of $(4,399) in 2000 and $2,186 in
  1999......................................................    (5,384)   (29,440)    2,308
                                                              --------   --------   -------
Loss before extraordinary item..............................   (27,820)   (78,113)     (931)
Extraordinary item -- debt extinguishment cost, net of
  income taxes..............................................                         (2,863)
                                                              --------   --------   -------
Net loss....................................................  $(27,820)  $(78,113)  $(3,794)
                                                              ========   ========   =======
Earnings (loss) per share -- basic and diluted
  Continuing operations, before extraordinary item..........  $  (0.60)  $  (1.45)  $ (0.12)
  Discontinued operations...................................     (0.14)     (0.88)     0.08
                                                              --------   --------   -------
  Loss before extraordinary item............................     (0.74)     (2.33)    (0.04)
  Extraordinary item........................................                          (0.10)
                                                              --------   --------   -------
  Net loss..................................................  $  (0.74)  $  (2.33)  $ (0.14)
                                                              ========   ========   =======
Average number of shares outstanding
  Basic and diluted.........................................    37,477     33,537    27,994
                                                              ========   ========   =======
</Table>

                            See accompanying notes.

                                        40
<PAGE>

                                VITALWORKS INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
                                                  SHARES                                                 NOTES
                                           ---------------------             COMMON                   RECEIVABLE-   ADDITIONAL
                                             COMMON     TREASURY   COMMON    STOCK       DEFERRED       FORMER       PAID-IN
                                             STOCK       STOCK     STOCK    ISSUABLE   COMPENSATION    DIRECTORS     CAPITAL
                                           ----------   --------   ------   --------   ------------   -----------   ----------
<S>                                        <C>          <C>        <C>      <C>        <C>            <C>           <C>
Balance at December 31, 1998.............  20,068,654    (80,886)   $20     $ 1,975      $(1,083)                    $ 72,070
Issuance of common stock, net of related
 expenses................................  11,904,718                11      (1,975)                                  116,185
Tax benefit from the exercise of
 options.................................                                                                               1,765
Amortize deferred compensation...........                                                  1,083
Compensatory stock awards................                                                                                 348
Treasury shares retired..................     (80,886)    80,886                                                         (222)
Net loss.................................
Pooled Companies' losses included in both
 1999 and 1998...........................
Option exercises and other equity
 issuance of Pooled Companies............     487,966                 1                                                   643
Purchase and cancellation of shares of
 Pooled Companies........................     (53,353)                                                                   (952)
Distributions by Pooled Companies........
                                           ----------   --------    ---     -------      -------       --------      --------
Balance at December 31, 1999.............  32,327,099                32                                               189,837
Issuance of common stock, net of related
 expense for:
 2000 acquisition attributed to
   PracticeWorks.........................     127,660                                                                   2,386
 Earnout commitments.....................      35,384                                                                   1,100
 Payment of obligations..................      68,563                                                                     418
 Exercise of stock options and
   warrants..............................   1,723,911                 2                                                 1,588
 Matching contribution 401(k) plan.......      97,508                                                                   1,469
Tax benefit from the exercise of
 options.................................                                                                               1,413
1999 acquisition escrow closure..........     (18,890)                                                                   (390)
Treasury stock received in exchange for
 sale of license agreement...............               (125,000)
Purchase price protection of previous
 share issuance..........................                                                                                (500)
Receipt of note from former directors for
 exercise of stock options plus accrued
 interest................................                                                              $ (6,974)        6,564
Issuance of promissory note from former
 directors plus accrued interest, net of
 repayment...............................                                                                (5,457)
Other....................................                                                                                  74
Net loss.................................
                                           ----------   --------    ---     -------      -------       --------      --------
Balance at December 31, 2000.............  34,361,235   (125,000)    34                                 (12,431)      203,959
Issuance of common stock, net of related
 expense for:
 1998 acquisition of unit of Reynolds &
   Reynolds..............................     500,000                 1                                                   127
 Matching contribution 401(k) plan.......     462,352                                                                   1,965
 Conversion of rights to preferred stock
   of subsidiary.........................   1,929,012                 2                                                 9,998
 Exercise of stock options and
   warrants..............................     974,645                 1                                                 1,882
 1999 acquisition attributed to
   PracticeWorks.........................     887,715                 1                                                 2,327
 Other...................................      11,812                                                                     254
Dividend of subsidiary, PracticeWorks....                                                                             (28,927)
Allowance for loan losses................                                                                 6,000
Loan payments............................                                                                 1,799
Net loss.................................
                                           ----------   --------    ---     -------      -------       --------      --------
Balance at December 31, 2001.............  39,126,771   (125,000)   $39     $    --      $    --       $ (4,632)     $191,585
                                           ==========   ========    ===     =======      =======       ========      ========

<Caption>

                                           ACCUMULATED   TREASURY
                                             DEFICIT      STOCK      TOTAL
                                           -----------   --------   --------
<S>                                        <C>           <C>        <C>
Balance at December 31, 1998.............   $ (49,988)    $(222)    $ 22,772
Issuance of common stock, net of related
 expenses................................                            114,221
Tax benefit from the exercise of
 options.................................                              1,765
Amortize deferred compensation...........                              1,083
Compensatory stock awards................                                348
Treasury shares retired..................                   222
Net loss.................................      (3,794)                (3,794)
Pooled Companies' losses included in both
 1999 and 1998...........................         534                    534
Option exercises and other equity
 issuance of Pooled Companies............                                644
Purchase and cancellation of shares of
 Pooled Companies........................                               (952)
Distributions by Pooled Companies........      (1,282)                (1,282)
                                            ---------     -----     --------
Balance at December 31, 1999.............     (54,530)               135,339
Issuance of common stock, net of related
 expense for:
 2000 acquisition attributed to
   PracticeWorks.........................                              2,386
 Earnout commitments.....................                              1,100
 Payment of obligations..................                                418
 Exercise of stock options and
   warrants..............................                              1,590
 Matching contribution 401(k) plan.......                              1,469
Tax benefit from the exercise of
 options.................................                              1,413
1999 acquisition escrow closure..........                               (390)
Treasury stock received in exchange for
 sale of license agreement...............                  (469)        (469)
Purchase price protection of previous
 share issuance..........................                               (500)
Receipt of note from former directors for
 exercise of stock options plus accrued
 interest................................                               (410)
Issuance of promissory note from former
 directors plus accrued interest, net of
 repayment...............................                             (5,457)
Other....................................                                 74
Net loss.................................     (78,113)               (78,113)
                                            ---------     -----     --------
Balance at December 31, 2000.............    (132,643)     (469)      58,450
Issuance of common stock, net of related
 expense for:
 1998 acquisition of unit of Reynolds &
   Reynolds..............................                                128
 Matching contribution 401(k) plan.......                              1,965
 Conversion of rights to preferred stock
   of subsidiary.........................                             10,000
 Exercise of stock options and
   warrants..............................                              1,883
 1999 acquisition attributed to
   PracticeWorks.........................                              2,328
 Other...................................                                254
Dividend of subsidiary, PracticeWorks....                            (28,927)
Allowance for loan losses................                              6,000
Loan payments............................                              1,799
Net loss.................................     (27,820)               (27,820)
                                            ---------     -----     --------
Balance at December 31, 2001.............   $(160,463)    $(469)    $ 26,060
                                            =========     =====     ========
</Table>

                            See accompanying notes.

                                        41
<PAGE>

                                VITALWORKS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                                2001       2000      1999
                                                              --------   --------   -------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Loss from continuing operations, including extraordinary
  charge net of income taxes in 1999........................  $(22,436)  $(48,673)  $(6,102)
Adjustments to reconcile loss from continuing operations to
  cash provided by operating activities:
  Extraordinary item--debt extinguishment cost..............                          4,782
  Loss on headquarters building held for sale...............     1,375
  Restructuring and other nonrecurring costs and impairment
    charges.................................................     6,903      5,447     5,062
  Depreciation and amortization, primarily goodwill.........    26,207     27,966    11,206
  Accounts receivable allowance provisions..................     3,196      1,883     2,972
  Compensatory stock awards.................................                          1,003
  Tax benefit from the exercise of options..................                1,413     1,765
  Gain on release of pension liability......................                 (550)
  Amortization of deferred finance costs, charged to
    interest expense........................................       638        217        50
  Deferred income taxes.....................................              (11,886)   (1,538)
  Other.....................................................                  255       598
  Changes in operating assets and liabilities, net of effect
    of acquisitions:
    Accounts receivable.....................................    (2,031)    13,580    (9,750)
    Computer hardware held for resale, prepaid expenses and
     other..................................................       218      1,074       648
    Accounts payable, accrued costs and expenses............    (1,982)     9,208     2,525
    Income taxes payable....................................                3,256    (3,256)
    Deferred revenue........................................      (971)     1,961    (6,544)
    Unearned discounts re: outsourced printing services.....     6,503      8,215
Interest payments (income) on notes receivable from former
  directors.................................................       610       (610)
                                                              --------   --------   -------
         Cash provided by operating activities..............    18,230     12,756     3,421
                                                              --------   --------   -------
INVESTING ACTIVITIES
  Product development costs.................................    (4,601)
  Proceeds from sale of office building.....................       800
  Proceeds from sale of equipment...........................       220        146
  Purchases of property and equipment.......................    (1,203)    (4,770)   (5,334)
  Net cash paid for business acquisitions...................                        (11,753)
  Purchase of intangible assets, net........................                        (12,082)
  Net cash advances to PracticeWorks (discontinued
    operations).............................................      (344)   (24,658)  (13,370)
  Other.....................................................       (17)       738      (790)
                                                              --------   --------   -------
         Cash used in investing activities..................    (5,145)   (28,544)  (43,329)
                                                              --------   --------   -------
FINANCING ACTIVITIES
  Long-term debt:
    (Payments)..............................................    (9,154)    (6,442)  (62,189)
    Proceeds................................................       194      8,038    21,283
  Exercise of stock options and warrants....................     1,804      1,590     1,879
  Proceeds from convertible, redeemable preferred stock
    issuable................................................               10,000
  Loan payments from (loans to) former directors............     1,215     (5,238)
  Cash paid for price protection of shares issued re: a 1998
    business acquisition....................................                 (500)
  Proceeds from the issuance of common stock................                         86,165
  Other.....................................................      (125)              (1,590)
                                                              --------   --------   -------
         Cash (used in) provided by financing activities....    (6,066)     7,448    45,548
                                                              --------   --------   -------
Increase (decrease) in cash and cash equivalents............     7,019     (8,340)    5,640
Cash and cash equivalents at beginning of year..............     5,969     14,309     8,669
                                                              --------   --------   -------
Cash and cash equivalents at end of year....................  $ 12,988   $  5,969   $14,309
                                                              ========   ========   =======
</Table>

                            See accompanying notes.

                                        42
<PAGE>

                                VITALWORKS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. BUSINESS

     VitalWorks Inc., formerly known as InfoCure Corporation ("VitalWorks" or
the "Company"), is a leading, nationwide provider of information management
technology and services targeted to healthcare practices and organizations. The
Company provides IT-based solutions for general medical practices and has
specialty-specific products and services for practices such as radiology,
anesthesiology, ophthalmology, emergency medicine, plastic surgery, and
dermatology. VitalWorks also offers enterprise-level systems designed for large
physician groups and networks. The Company's range of software solutions, which
include workflow features related to patient encounters, automate the
administrative, financial, and clinical information management functions for
physicians and other healthcare providers. VitalWorks provides its clients with
ongoing software support, training, electronic data interchange ("EDI") services
for patient billing and claims processing, and a variety of Web-based services.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company,
and its subsidiaries, all of which were wholly-owned and merged into VitalWorks
Inc. during 2001. All significant intercompany accounts and transactions have
been eliminated.

RECLASSIFICATION OF FINANCIAL STATEMENT BALANCES

     Certain amounts in the accompanying financial statements for 1999 and 2000
have been reclassified to conform to the 2001 presentation.

REVENUE RECOGNITION

     Software license revenues (initial fees) and system (computer hardware)
sales are recognized upon execution of the sales contract and delivery of the
software and/or hardware. In all cases, however, collection of any related
receivable must be probable and no significant post-contract obligations of the
Company shall be remaining. Otherwise, the sale is deferred until all of the
requirements for revenue recognition have been satisfied. Maintenance fees for
routine support and product updates are recognized ratably over the term of the
license agreement, which is typically three years. Training, consulting and EDI
service revenues are recognized as the services are performed. Allowances for
estimated future returns and discounts, as well as bad debts, are provided upon
recognition of revenues.

     Should the Company adopt new or change its current licensing practices in
response to a preference from the market or otherwise, then the Company's
revenue recognition practices may be subject to significant change to comply
with the requisite accounting principles.

CURRENT ASSETS AND LIABILITIES

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

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

                                        43
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPUTER HARDWARE HELD FOR RESALE

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

GOODWILL ASSETS

     Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and accounted for as purchase transactions. Prior to the
fourth quarter of 1999, goodwill was amortized over a 15-year estimated economic
life, which was reflective of management's analysis that goodwill is derived
from the historical and estimated future lives of its customer relationships,
the longevity and continuing use of its core products and the relatively minor
impact of technological obsolescence on these core products. In the fourth
quarter of 1999, management reassessed the economic life of goodwill in view of
competitive developments, the rapid pace of change engendered by the
encroachment of Internet companies into the marketplace and the Company's
response to these external factors resulting in a change in product strategy to
focus on development of ASP-delivered products and Internet solutions and the
offering of subscription-based pricing. While in management's opinion, there was
no impairment in the carrying value of this long-lived intangible asset (based
on an analysis of undiscounted future cash flows), management determined that
the economic life of goodwill should be shortened substantially to be more
reflective of the current rate of technological change and competitive
conditions. Accordingly, management changed the estimated economic life of
goodwill from an original life of 15 years to three years, which change was
applied prospectively from the fourth quarter of 1999. This change in accounting
estimate increased amortization expense by approximately $18.5 million, $19.4
million and $2.7 million in 2001, 2000 and 1999, respectively.

     In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement 142, "Goodwill and Other Intangible Assets." Statement 142 provides
that, upon adoption, the Company shall no longer amortize its goodwill assets.
Rather, it will have to test its goodwill for impairment of value on at least an
annual basis. Goodwill amortization expense amounted to $23.1 million for 2001.
Pursuant to Statement 142, the Company discontinued amortizing goodwill on
January 1, 2002 and based on the Company's initial test for impairment of value
the Company does not, at this time, expect the adoption of Statement 142 to have
a negative impact on its financial statements.

PRODUCT DEVELOPMENT AND DEFERRED FINANCE COSTS

     The Company begins capitalizing product development costs, principally
third-party software developer fees, only after establishing commercial and
technical viability. Annual amortization of these costs represents the greater
of the amount computed using (i) the ratio that current gross revenues for the
product(s) bear to the total current and anticipated future gross revenues of
the product(s), or (ii) the straight-line method over the remaining estimated
economic life of the product(s); generally, depending on the product, such
deferred costs are amortized over a three to five-year period. Amortization
commences when the product is available for general release to customers. None
of the products under development in 2001 were available for commercial release
as of December 31, 2001.

     Deferred finance costs, which include charges, fees and expenses directly
associated with loan origination and underwriting, are recognized as interest
expense over the expected life of the respective loan at an amortization rate
per annum that approximates the interest method.

DEPRECIATION/AMORTIZATION

     Depreciation and amortization are computed principally using the
straight-line method over the estimated economic or useful lives of the
applicable assets.

                                        44
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EQUITY BASED COMPENSATION

     The Company accounts for stock option grants and stock awards in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company prices its stock options at
fair market value on the date of grant, and therefore, under Opinion 25, no
compensation expense is recognized for stock options granted (see Note J for pro
forma disclosures).

INCOME TAXES

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

USE OF ESTIMATES

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

EARNINGS PER SHARE

     The average number of basic and diluted shares outstanding for years 2001,
2000 and 1999 include only the weighted average number of common shares
outstanding for each year. Because their effect would be antidilutive, stock
option and warrant rights (for up to 16.0 million common shares) were excluded
from the diluted earnings (loss) per share calculation for 2001. For the same
reason, options and warrants were also excluded from the diluted calculation for
years 2000 and 1999.

COMPREHENSIVE INCOME

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

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

C. DISTRIBUTION OF PRACTICEWORKS COMMON STOCK

     On March 5, 2001 (the "Distribution Date"), VitalWorks completed the
distribution of the common stock of its PracticeWorks, Inc. subsidiary
("PracticeWorks" or "Division"), a provider of practice management software for
dental and oral surgery practices, to the Company's stockholders in a tax-free
distribution. The spin-off of PracticeWorks was affected by way of a pro rata
dividend (the "Distribution" or "Spin-Off") of all of the issued and outstanding
shares of PracticeWorks common stock to VitalWorks' stockholders of record as of
February 21, 2001 (the "Record Date") resulting in PracticeWorks becoming an
independent, publicly traded company.

     Immediately prior to the Distribution, VitalWorks effectively transferred
to PracticeWorks the Division's assets and liabilities and, thereby, distributed
$28.9 million of net assets, as adjusted, in connection with the Spin-Off.
VitalWorks' stockholders received one share of PracticeWorks common stock for
every four shares

                                        45
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of VitalWorks common stock owned as of the Record Date. No proceeds were
received by VitalWorks in connection with the Distribution.

     Accordingly, the accompanying consolidated financial statements reflect the
assets, liabilities, net equity and results of operations of PracticeWorks as
discontinued operations. For years 2001, 2000 and 1999, revenues included in the
loss from discontinued operations were $6.6 million (i.e., through the
Distribution Date), $40.0 million and $54.6 million, respectively. The
components of net assets of discontinued operations included in the accompanying
balance sheet as of December 31, 2000 are as follows (in thousands):

<Table>
<S>                                                           <C>
Cash and cash equivalents...................................  $  3,979
Accounts receivable, net....................................     8,097
Computer hardware held for resale...........................       845
Prepaid expenses and other current assets...................     1,214
Deferred income taxes, net..................................     1,147
Accounts payable, accrued expenses and employee costs.......    (5,807)
Accrued restructuring costs.................................    (1,839)
Deferred revenue............................................    (9,753)
Current portion of long-term debt...........................    (1,055)
                                                              --------
          Net current liabilities of discontinued
           operations.......................................    (3,172)
                                                              --------

Property and equipment, net.................................     4,120
Goodwill, net...............................................    33,571
Acquired technology, product development, and deferred
  finance costs, net........................................     9,213
Deferred income taxes, net..................................     4,029
Other assets................................................     2,307
Long-term debt..............................................   (20,239)
                                                              --------
          Net noncurrent assets of discontinued
           operations.......................................    33,001
                                                              --------
          Net assets of discontinued operations.............  $ 29,829
                                                              ========
</Table>

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

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

                                        46
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the other entered into on or prior to the Distribution Date. A brief description
of certain of the material agreements follows:

DISTRIBUTION AGREEMENT

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

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

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

TRANSITION SERVICES AGREEMENT

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

TAX DISAFFILIATION AGREEMENT

     The Company and PracticeWorks entered into the Tax Disaffiliation Agreement
on the Distribution Date which identifies each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state, local or
foreign taxes for periods before and after the Distribution and related matters
such as the filing of tax returns and the handling of Internal Revenue Service
matters and other audits. Under the Tax Disaffiliation Agreement, PracticeWorks
will indemnify the Company for any tax liability attributable to PracticeWorks
or its affiliates for any period. PracticeWorks will also indemnify the Company
for all taxes and liabilities incurred solely because (i) PracticeWorks breaches
a representation or covenant given to the law firm King & Spalding in connection
with rendering its tax opinion in the Distribution, which breach contributes to
an Internal Revenue Service determination that the Distribution was not tax-free
or (ii) a post-Distribution action or omission by PracticeWorks or any affiliate
of PracticeWorks contributes to an Internal Revenue Service determination that
the Distribution was not tax-free. The Company will indemnify PracticeWorks for
all taxes and liabilities incurred solely because (i) the Company breaches a
representation or covenant given to King & Spalding in connection with rendering
its tax opinion in the Distribution, which breach contributes to an Internal
Revenue Service determination that the Distribution was not tax-free, or
                                        47
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(ii) a post-Distribution action or omission by the Company or any affiliate
contributes to an Internal Revenue Service determination that the Distribution
was not tax-free. If the Internal Revenue Service determines that the
Distribution was not tax-free for any other reason, the Company and
PracticeWorks will indemnify each other against 50% of all taxes and
liabilities.

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

EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT

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

D. BUSINESS COMBINATIONS

     In June 1999, VitalWorks acquired substantially all of the assets, subject
to the assumption of certain liabilities, of Strategicare, Inc. and its
wholly-owned subsidiary, DISC Computer Systems, Inc. ("DISC"), a developer and
marketer of practice management software for general medical practices.
Aggregate consideration was approximately $11.8 million in cash. The following
table summarizes the fair values of the assets acquired and liabilities assumed
in connection with the DISC acquisition, which was accounted for as a purchase
transaction (in thousands):

<Table>
<S>                                                           <C>
Accounts receivable.........................................  $ 1,949
Computer hardware held for resale...........................      127
Prepaid expenses............................................       73
Property and equipment......................................      799
Goodwill....................................................   11,194
Technology..................................................       73
Other assets................................................      118
Deferred revenue............................................     (297)
Accounts payable and accrued expenses.......................   (2,181)
Other liabilities...........................................     (102)
                                                              -------
          Net assets acquired...............................  $11,753
                                                              =======
</Table>

     The following unaudited 1999 pro forma information presents the
consolidated results of operations of the Company as if the DISC acquisition had
occurred on January 1, 1999. The pro forma information is not necessarily
indicative of what would have occurred had the DISC acquisition been made on
January 1, 1999, nor is it indicative of future results of operations. The pro
forma amounts give effect to appropriate adjustments for the fair value of the
net assets acquired, reductions in personnel costs and other operating

                                        48
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expenses not assumed as part of the DISC acquisition, amortization of
intangibles, interest expense and income taxes (in thousands, except per share
data):

<Table>
<S>                                                           <C>
Revenues....................................................  $154,919
Loss from continuing operations.............................    (5,772)
Loss from continuing operations per share -- after
  extraordinary item:
  Basic and diluted.........................................  $  (0.21)
</Table>

     Also, in 1999, VitalWorks completed pooling of interests mergers (the "1999
Mergers") with six medical software businesses (the "1999 Pooled Companies")
providing for the exchange of substantially all of the outstanding equity
interest of each entity for shares of VitalWorks common stock as indicated in
the table below:

<Table>
<Caption>
                                                         SHARES OF
                                                         VITALWORKS
                                                           ISSUED       CLOSING DATE
                                                         ----------   -----------------
<S>                                                      <C>          <C>
Macon Systems Management, LLC, the parent of Medical
  Software Management, Inc. ("MSM")....................    166,464    February 12, 1999
Medfax Corporation ("Medfax")..........................    696,333    August 30, 1999
Scientific Data Management, Inc. ("SDM")...............    280,243    August 31, 1999
Datamedic Holding Corp. ("Datamedic")..................  1,088,674    November 9, 1999
Prism Data Systems, Inc. ("Prism").....................    208,544    December 29, 1999
CDL Healthcare Systems, Inc. ("CDL")...................    109,658    December 30, 1999
</Table>

     The accompanying consolidated financial statements give retroactive effect
to these mergers in accordance with the pooling of interests method of
accounting. Accordingly, the financial statements are presented as if the merged
companies had been consolidated, and as if the additional common stock issued in
connection with these mergers had been issued, as of January 1, 1999.

     Certain of the 1999 Pooled Companies had fiscal years that differed from
VitalWorks. As of and for the year ended December 31, 1999, all of the 1999
Pooled Companies' balance sheets and results of operations have been restated to
coincide with VitalWorks' year-end.

                                        49
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following table presents a reconciliation of revenues and income (loss)
from continuing operations previously reported by the Company to those presented
in the accompanying consolidated financial statements for 1999 (in thousands):

<Table>
<S>                                                           <C>
Revenues:
  VitalWorks................................................  $107,912
  MSM.......................................................     3,734
  Medfax....................................................     7,676
  SDM.......................................................     4,955
  Datamedic.................................................    17,022
  Prism.....................................................     3,499
  CDL.......................................................     4,245
                                                              --------
                                                              $149,043
                                                              ========
Income (loss) from continuing operations:
  VitalWorks................................................  $    566
  MSM.......................................................      (106)
  Medfax....................................................       643
  SDM.......................................................       314
  Datamedic.................................................    (4,599)
  Prism.....................................................      (636)
  CDL.......................................................       579
                                                              --------
                                                              $ (3,239)
                                                              ========
</Table>

     The Company incurred costs of approximately $3.1 million in completing the
1999 Mergers. These merger costs consisted principally of professional fees and
related transaction costs.

     In July 2001, the FASB issued Statement 141, "Business Combinations."
Statement 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. Statement 141 also requires that the
Company recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. Statement 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires that, upon
adoption of Statement 142 (discussed in Note B, Goodwill Assets, above), the
Company reclassify the carrying amounts of intangible assets and goodwill based
on the criteria in Statement 141.

     The Company's previous business combinations were accounted for using both
the pooling-of-interests and purchase methods. The pooling-of-interests method
does not result in the recognition of acquired goodwill or other intangible
assets. As a result, the adoption of Statements 141 and 142 will not affect the
results of past transactions accounted for under the pooling-of-interests
method. However, all future business combinations would be accounted for under
the purchase method, which may result in the recognition of goodwill and other
intangible assets, some of which would be recognized through operations, either
by amortization or impairment charges, in the future.

E RESTRUCTURING, IMPAIRMENT CHARGES AND OTHER NONRECURRING COSTS

RESTRUCTURING COSTS

     The 2000 Plan.  On August 1, 2000, VitalWorks announced its plans to
restructure its operations through a plan of employee reductions and
consolidation of office facilities. In the third and fourth quarters of 2000,
the Company closed 14 facilities and terminated approximately 400 employees. The
offices that were closed are subject to operating leases that expire at various
dates through 2006.

                                        50
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The 1999 Plan.  In the fourth quarter of 1999, VitalWorks decided to change
its product strategy to begin development of ASP applications and Internet
solutions, and begin a transition to subscription based-pricing and completed
three acquisitions. Concurrently, management committed to a plan of
restructuring and reorganization related to acquisitions completed in 1999,
which was completed in the second quarter of 2000, to consolidate certain
facilities and eliminate staffing redundancies involving approximately 50
employees.

     A description of the nature and amount of restructuring costs and other
charges incurred with respect to the 2000 and 1999 Plans are as follows (in
thousands):
<Table>
<Caption>
                                                     COSTS                                      COSTS
                                      ADDITIONS     APPLIED                                    APPLIED
                                    TO ACCRUAL IN   AGAINST      BALANCE AT       ADDITIONS    AGAINST      BALANCE AT
                                        1999        ACCRUAL   DECEMBER 31, 1999   TO ACCRUAL   ACCRUAL   DECEMBER 31, 2000
                                    -------------   -------   -----------------   ----------   -------   -----------------
<S>                                 <C>             <C>       <C>                 <C>          <C>       <C>
2000 PLAN
Facility closure and
 consolidation....................                                                  $4,785     $  (182)       $4,603
Employee severance and other
 termination benefits.............                                                   3,345      (1,114)        2,231
Other asset write-downs and
 costs............................                                                     408        (408)           --
                                                                                    ------     -------        ------
2000 Plan Total...................                                                   8,538      (1,704)        6,834
                                                                                    ======     =======        ======
1999 PLAN
Facility closure and
 consolidation....................     $1,705       $  (366)       $1,339                       (1,339)           --
Employee severance and other
 termination benefits.............      1,419          (904)          515              800      (1,315)           --
Incremental costs for completion
 of discontinued customer
 contracts........................        681          (446)          235                         (235)           --
Other asset write-downs and
 costs............................        319          (319)           --
                                       ------       -------        ------           ------     -------        ------
1999 Plan Total...................      4,124        (2,035)        2,089              800      (2,889)           --
                                       ------       -------        ------           ------     -------        ------
                                       $4,124       $(2,035)       $2,089           $9,338     $(4,593)       $6,834
                                       ======       =======        ======           ======     =======        ======

<Caption>
                                                   COSTS
                                                  APPLIED
                                    ADJUSTMENTS   AGAINST      BALANCE AT
                                    TO ACCRUAL    ACCRUAL   DECEMBER 31, 2001
                                    -----------   -------   -----------------
<S>                                 <C>           <C>       <C>
2000 PLAN
Facility closure and
 consolidation....................     $(205)     $(1,612)       $2,786
Employee severance and other
 termination benefits.............      (220)      (1,897)          114
Other asset write-downs and
 costs............................
                                       -----      -------        ------
2000 Plan Total...................     $(425)     $(3,509)       $2,900
                                       =====      =======        ======
1999 PLAN
Facility closure and
 consolidation....................
Employee severance and other
 termination benefits.............
Incremental costs for completion
 of discontinued customer
 contracts........................
Other asset write-downs and
 costs............................
1999 Plan Total...................
</Table>

IMPAIRMENT CHARGES AND OTHER NONRECURRING COSTS

     In 2001, the Company recognized impairment charges and incurred other
nonrecurring costs of $8.3 million. These costs and expenses included a $6.0
million provision for loan losses (see Note J), $.9 million for unused equity
financing, $.8 million of executive severance for separation benefits paid to
the Company's former chairman pursuant to the terms of a mutual separation
agreement and a pre-existing employment agreement, and retention bonuses of $.2
million for terminated employees. Included in accrued expenses at December 31,
2001 are unpaid costs of $.9 million relating to the retention bonuses and
unused equity financing.

     In 2000, concurrent with the 2000 Plan, the Company recorded impairment
charges and other nonrecurring costs of $6.6 million consisting of (a) $3.5
million relating to fixed assets that were abandoned due to the closing of
facilities; (b) $1.1 million to write-down computer hardware held for resale to
its estimated net realizable value based on a planned bulk lot disposal as a
result of the Company's decision to discontinue selling hardware and hardware
support in certain of its business lines; (c) $1.3 million for compensation and
other termination benefits; (d) $.4 million for other asset write-downs; and (e)
$.3 million for professional services and other related costs.

     In connection with the change in product strategy, management also
re-evaluated the carrying value of capitalized software. As a result, the
Company recorded an impairment charge in 1999 of approximately $4.7 million for
the write-down of capitalized software.

     In 1999, the Company recognized $1.0 million in noncash charges related to
the accelerated vesting of a restricted stock award for 190,000 shares granted
to three (now former) executives of the Company in 1998.

                                        51
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F. PROPERTY AND EQUIPMENT, AND BUILDINGS HELD FOR SALE

     Major classes of property and equipment consists of the following:

<Table>
<Caption>
                                                         DEPRECIATION/     DECEMBER 31,
                                                         AMORTIZATION    -----------------
                                                            PERIOD        2001      2000
                                                         -------------   -------   -------
                                                            (YEARS)       (IN THOUSANDS)
<S>                                                      <C>             <C>       <C>
Land...................................................                            $ 1,300
Former headquarters buildings, held for sale (including
  land) in 2001........................................       40                     8,125
Furniture, equipment and software......................      3-7         $ 7,701    14,415
Equipment under capital lease obligations..............      3-5           2,718     2,879
Leasehold improvements.................................  lease term*       2,310     1,747
                                                                         -------   -------
                                                                          12,729    28,466
Less accumulated depreciation and amortization.........                    6,294     9,175
                                                                         -------   -------
                                                                         $ 6,435   $19,291
                                                                         =======   =======
</Table>

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

     * Leasehold improvements are amortized over the lesser of the remaining
       life of the lease or the useful life of the improvements.

     Depreciation and amortization expense of these assets totaled $2.9 million,
$3.7 million, and $3.1 million for 2001, 2000 and 1999, respectively.

     In 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", issued in August 2001 and, accordingly, recorded an
impairment charge of $1.4 million relating to its former headquarters building
in Atlanta that it expected to sell to an outside shareholder of the Company in
the first quarter of 2002. However, in February 2002, the shareholder terminated
the contract to purchase the building. Accordingly, the building is again listed
for sale and is now projected to be sold by December 2002.

     On January 14, 2002, the Company completed the sale of its other office
building in Atlanta for $1.4 million, after closing costs.

G. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consists of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Legal, including settlement costs, and other professional
  services fees.............................................  $ 2,253   $   905
Cost of providing EDI services..............................    2,208       870
Trade accounts payable......................................      872     4,532
Other accrued expenses......................................    5,170     4,375
                                                              -------   -------
                                                              $10,503   $10,682
                                                              =======   =======
</Table>

                                        52
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

H. LONG-TERM DEBT

     Long-term debt consists of the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2000
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Finova Capital Corporation ("Finova"):
  Term loan.................................................  $21,882   $27,215
  Real estate mortgage loans................................    6,850     7,144
Capital leases (see Note I).................................    1,713     2,436
Other.......................................................      108       989
                                                              -------   -------
                                                               30,553    37,784
Less current portion........................................   14,063     2,727
                                                              -------   -------
                                                              $16,490   $35,057
                                                              =======   =======
</Table>

     Under the term loan agreement with Finova, $47.9 million was outstanding as
of December 31, 2000, including $20.7 million attributable to PracticeWorks. The
$20.7 million amount was repaid in March 2001 in connection with the
Distribution from proceeds of PracticeWorks' own credit agreement with Finova
(see Note C). The Finova loans were collateralized by substantially all of the
Company's assets and cash flows. Interest was payable quarterly and at February
28, 2002, the term loan rate was prime plus 2.25% (prime plus 1.75% at December
31, 2001) and the mortgage loan rate was prime plus 1.25%, unchanged from
December 31, 2001. The agreement provided for mandatory prepayments based upon
achieving certain defined levels of cash flows and contained certain restrictive
covenants. There were no prepayment penalties, fees or charges associated with
the Finova loans.

     All loan amounts outstanding with Finova were repaid on March 11, 2002 in
connection with a new four-year credit agreement entered into by the Company
with Foothill Capital Corporation, a wholly-owned subsidiary of Wells Fargo &
Company. The new agreement includes a term loan of $22 million at an interest
rate of prime plus 2% and a mortgage loan of $5.5 million with respect to the
Atlanta property that is held for sale, at an interest rate of prime plus 1.5%.
Subject to the Company achieving certain specified earnings targets, the percent
by which the Company's interest rate on the term loan exceeds prime may be
reduced by as much as 1.1% over the life of the loan. Interest is payable
monthly in arrears. Principal is payable over the life of the agreement,
including a balloon payment at the end of year four. Should the Company decide
to prepay the term loan in full prior to year four, it would incur a prepayment
fee equal to 3% in year one, 2% in year two, and 1% in year three of the then
outstanding principal balance of the term loan. The prepayment fee may be
reduced should the loan be prepaid in connection with a change of control of the
Company. The loans, which are collateralized by substantially all of the
Company's assets and intellectual property rights, subject the Company to
certain restrictive covenants including (i) the required maintenance of minimum
levels of recurring revenues and earnings, as defined, (ii) an annual limit on
the amount of capital expenditures, and (iii) the payment of dividends to
shareholders.

     Maturities of long-term debt, reflecting the March 2002 credit agreement,
are as follows: $14.1 million in 2002, $5.5 million in 2003, $3.1 million in
2004, and $12.0 million in 2006. The $14.1 million, classified as the current
portion of long-term debt as of December 31, 2001, includes the mortgage loans
($5.5 million of which otherwise matures in 2006) relating to the Atlanta
properties held for sale. The Company repaid $5.4 million in January 2002. In
connection with the new credit agreement, the Company repaid the remaining
balance of the term loan, $17.9 million, and the mortgage loans, $5.5 million,
and effectively realized additional long-term debt proceeds of $4.1 million.

     The Company's loans outstanding as of December 31, 1998 were repaid in
April 1999 with proceeds from the sale of Company common stock. In connection
with this early retirement of debt, the Company recognized

                                        53
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

an extraordinary item for the unamortized portion of the loan costs and
prepayment fees which totaled approximately $4.8 million and, net of estimated
tax effect, approximately $2.9 million, or $0.10 per share.

I.  COMMITMENTS AND CONTINGENCIES

     The Company leases office and research facilities, and certain computer and
other equipment under various operating and capital lease agreements. The leases
expire at various dates through 2008.

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

<Table>
<Caption>
YEAR                                                          CAPITAL   OPERATING
----                                                          -------   ---------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
2002........................................................  $  730     $3,326
2003........................................................     536      2,624
2004........................................................     509      2,050
2005........................................................      15      1,540
2006........................................................              1,263
Thereafter..................................................                977
                                                              ------     ------
                                                               1,790     11,780
Less amounts included in accrued restructuring costs........              2,786
                                                              ------     ------
                                                               1,790     $8,994
                                                                         ======
Less amounts representing interest..........................      77
                                                              ------
Present value of net minimum lease payments.................   1,713
Less current portion........................................     679
                                                              ------
Long-term obligations under capital leases..................  $1,034
                                                              ======
</Table>

     In addition, certain of the office leases provide for contingent payments
based on building operating expenses. Rental expenses for years 2001, 2000 and
1999 under all lease agreements totaled $2.5 million, $4.4 million and $3.4
million, respectively.

     In October 2001, the Company expanded its August 2000 agreement with
National Data Corporation ("NDC") for outsourcing much of the Company's patient
statement and invoice printing work. The Company will continue, for a fee, to
provide printing services for its physicians under the subcontracting
arrangement with NDC. The amended arrangement, which extends for a period of up
to seven and a half years, provides for, among other things, the attainment of
certain quarterly transaction processing volume levels during the term. In
exchange, the Company received $7.9 million in cash (in connection with the
August agreement, the Company received $8.8 million in 2000), which represent
unearned discounts that are recognized as an offset to cost of maintenance and
services revenues as the minimum volume commitments are fulfilled.

     In March 2002, the Company settled the following shareholder lawsuits filed
during the period June 2000 through January 2001 against InfoCure Corporation,
several of its former officers and directors, and the law firm of Morris,
Manning and Martin: Weiner, et al. v. InfoCure Corporation; Habermeier v.
InfoCure Corporation; Runde v. InfoCure Corporation; Weintraub v. InfoCure
Corporation; Memminger v. InfoCure Corporation; and Hafner v. InfoCure
Corporation. These lawsuits, which were disclosed in previous filings with the
Securities and Exchange Commission, related to matters alleged to have occurred
in 1999 and early 2000 in connection with the sale of the plaintiffs' companies
to InfoCure Corporation, now known as VitalWorks Inc. Under the terms of the
settlement, which includes a settlement bar order signed by the Honorable Thomas
Thrash, Federal District Court judge in the United States District Court for the
Northern District of Georgia, all claims against VitalWorks and the individual
defendants have been dismissed with

                                        54
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prejudice and without admission of liability or wrongdoing. In addition, as part
of the settlement, VitalWorks assigned certain claims it may have against third
parties to plaintiffs, and VitalWorks is entitled to a portion of any recovery
plaintiffs obtain from the third parties. This may result in a future
reimbursement to the Company of a portion of the settlement amount/legal fees
paid. The settlement costs, including legal fees, were primarily borne by the
Company's insurance carriers. The portion of the settlement amount, including
legal fees, being paid by VitalWorks was accrued for in 2001 and is included in
selling, general and administrative expenses of the accompanying statement of
operations.

     On March 8, 2001, the Company filed a lawsuit in the Superior Court of the
County of Fulton in the State of Georgia against WebMD Corporation, ("WebMD")
and its subsidiary, Envoy Corporation ("Envoy"), alleging breach of contract,
tortious interference with business relations, and related commercial claims,
arising from WebMD's alleged failure and refusal to pay the Company rebates owed
under the parties' agreement for certain electronic data interchange, or EDI,
transactions performed by Envoy; the alleged improper solicitation by WebMD's
sales representatives of practice management software customers of the Company;
and allegedly false and damaging statements made by WebMD representatives about
the Company, among other alleged wrongful conduct. On July 19, 2001, the Company
settled the litigation pending with WebMD and Envoy and entered into a new
three-year agreement that will allow the Company to continue offering WebMD's
transaction processing services to the physicians who utilize the Company's
practice management solutions. Under this new agreement, the Company may
continue to offer to its customers WebMD's transaction processing services, as
well as WebMD's ExpressBill patient statement services. The litigation, which
the companies resolved without admission of liability by either party, included
claims relating to prior contractual arrangements between the parties. Pursuant
to the settlement agreement, WebMD paid $2.6 million to the Company in July
2001, which settles all claims and amounts due under the parties' prior
agreements, and the Company delivered to WebMD the stock certificate evidencing
the 1,929,012 shares of the Company common stock that was issued by the Company
in 2001 under the prior agreements (see Note J).

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

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure
Corporation, et al., was filed in Boone County Superior Court in Indiana. The
Company removed the case to the United States District Court for the Southern
District of Indiana, where it is now pending. The complaint alleges state
securities law violations, breach of contract, and fraud claims against the
Company and certain former directors and officers. The complaint does not
specify the amount of damages sought by plaintiffs, but seeks rescission of a
transaction plaintiffs valued at $5 million, as well as punitive damages and
reimbursement for the plaintiffs' attorney's fees and associated costs and
expenses of the lawsuit. In a decision from the Court dated October 15, 2001,
the plaintiffs request for a preliminary injunction to preserve their remedy of
rescission was denied, the Company's request to transfer the case to the
Northern District Court of Georgia was granted, and the Company's motion to
dismiss plaintiffs' complaint in its entirety was granted in part. On October
26, 2001, the plaintiffs filed a notice of appeal with the 7th Circuit Court of
Appeals, which appeal has not yet been decided.

     The Company has been named as a defendant as successor to CDL Healthcare
Systems, Inc. ("CDL"), a company acquired by VitalWorks in December 1999, in a
complaint filed in the Circuit Court of the Eleventh Judicial Circuit in Dade
County, Florida on February 27, 2001 by Sonia Abutog, individually, Angelo
Abutog, individually, and Sonia and Angelo Abutog, as parents and next best
friends to Aaron Abutog, a minor. Gary Weiner, former President of CDL, and his
daughter, Elisha Weiner, are also named as defendants. Plaintiffs allege that
they were injured at a time, prior to the merger between the Company and CDL,
when a motor vehicle operated by Elisha Weiner collided with Plaintiff Sonia
Abutog, a pedestrian.

                                        55
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Title to the vehicle and lease rights is being determined. The plaintiff
contends that she and her unborn child suffered severe personal injuries as a
result of the accident and seeks to recover damages in an unspecified amount in
excess of $15,000, plus interest and costs. The Company is exploring the issue
of liability, and the existence and limits of insurance coverage that may be
available to indemnify against any judgment.

     While management believes that the Company has meritorious defenses in each
of the foregoing matters and the Company intends to pursue its positions
vigorously, litigation is inherently subject to many uncertainties. Thus the
outcome of these matters is uncertain and could be adverse to the Company.
However, even if the outcome of these cases is adverse, management does not
believe that the outcome of these cases, individually or in the aggregate, will
have a material adverse effect on the financial position of the Company.
However, depending on the amount and timing of an unfavorable resolution(s) of
the contingencies, it is possible that the Company's future results of
operations or cash flows could be materially affected in a particular reporting
period(s).

J. STOCKHOLDERS' EQUITY

CONVERTIBLE, REDEEMABLE PREFERRED STOCK ISSUABLE

     In November 2000, pursuant to a February 2000 agreement with the Company,
WebMD Corporation exercised its rights to preferred stock of a wholly-owned
subsidiary of the Company into 1,929,012 shares of VitalWorks common stock. The
shares of common stock were issued on March 2, 2001.

NOTES RECEIVABLE FROM FORMER DIRECTORS

     In June 2000, three inside directors (now former directors) of the Company
borrowed $12.2 million in the form of six separate unsecured promissory notes,
three due December 31, 2000 and three due on June 30, 2002 (the "Notes").
Interest is due and payable quarterly, except as noted below, at the rate of
prime plus .5%. The December Notes represent cash loans and the June Notes
represent loans issued to acquire common stock of the Company. On March 5, 2001,
the December Notes were extended to December 31, 2001 and as of December 31,
2001, one of the Notes for $.7 million had been repaid. As of March 31, 2001,
management determined that collection was doubtful with respect to approximately
$6 million of the outstanding balance of the Notes and, accordingly, the Company
recorded a valuation allowance and ceased accruing interest on the Notes.
Interest payments of $.5 million received subsequent to March 31, 2001 were
applied against outstanding principal balances. On June 6, 2001, regarding one
set of Notes for one of the former directors totaling $5.8 million, the Company
received payment of interest through March 31, 2001 and was granted first lien
security interests in (i) 1,000,000 shares of Company common stock owned by the
director and (ii) the director's option rights to acquire common stock of the
Company; in exchange, the Company agreed to extend the maturity date of these
notes, and the due date for interest accruing after March 31, 2001, to December
31, 2002. At December 31, 2001, the December Notes and the June Notes, as
amended, totaled $4.4 million and $6.2 million, including accrued interest
through December 31, 2000, respectively, or together $4.6 million, net of the
valuation allowance. Management will continue to monitor the collectibility of
the four Notes that remain outstanding today. The amount of the allowance
against the Notes may be increased or decreased in future periods based on
management's determinations.

EQUITY FINANCING AGREEMENT

     On August 1, 2000, the Company entered into an agreement with Acqua
Wellington North American Equities Fund, Ltd. whereby the Company has the right
to make periodic sales to an institutional investor (the "Equity Investor") of
up to an aggregate of $60.0 million of its common stock through December 1,
2002. The sale of common stock under the terms of the agreement is at the
Company's sole discretion, although the Company is required to pay a fee of $.8
million (paid in 2002) and grant 125,000 warrants to the Equity Investor to
purchase shares of the Company's common stock if the Company has not sold to the
Equity

                                        56
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investor a stated minimum amount ($15.0 million) of its common stock pursuant to
the agreement on or before October 1, 2001. The dollar amount that the Company
may "Put" to the Equity Investor at one time will be determined in accordance
with the terms of the agreement based on the Company's current stock price at
the time of the sale. At the Threshold Price (minimum price) of $3.00 per share,
$2.5 million may be drawn. For every $2.00 per share increase above the
Threshold Price, an additional $1.5 million may be drawn, not to exceed $28.0
million. The purchase price of the shares of stock will represent a discount of
4.0% to 6.0% from the current stock price at the time of the sale. Although the
Equity Investor may resell the stock purchased pursuant to an effective
registration statement which the Company will file with the Securities and
Exchange Commission, the agreement also requires the Equity Investor to limit
certain selling activities. As of December 31, 2001, the Company has not sold
any shares under this agreement.

ACQUISITION ATTRIBUTED TO PRACTICEWORKS

     On August 8, 2001, the Company issued 887,715 shares of its common stock to
the shareholders of Medical Dynamics, Inc. as partial consideration for the
acquisition of Medical Dynamics. The agreement to acquire Medical Dynamics, a
dental practice management software company, was entered into in 1999 and was
entirely attributed to PracticeWorks. The remainder of the purchase price was
borne by PracticeWorks. The issuance of VitalWorks shares was recorded as an
additional equity distribution to PracticeWorks representing the substance of
the transaction as originally contemplated (see Note C).

EMPLOYEE SAVINGS PLAN

     The Company maintains an employee savings plan that qualifies as a cash or
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the plan, participating employees may defer up to 15% of their pre-tax
compensation, but not more than $11,000 per calendar year. The Company may make
matching profit-sharing contributions to the plan at its sole discretion.
Employees become fully vested with respect to Company contributions after five
years of service. In 2001, 2000 and 1999, the Company authorized contributions
of $1.1 million, $1.3 million and $.7 million, respectively, to the plan. The
contributions were made in VitalWorks common stock in the following year.

EMPLOYEE STOCK PURCHASE PLAN

     The Company's Employee Stock Purchase Plan (the "ESPP"), as amended in July
2001, permits eligible employees to purchase VitalWorks common stock through
periodic payroll deductions of up to 15% of their cash compensation. Each
offering period will have a maximum duration of six months and shares of common
stock will be purchased for each participant at the conclusion of each offering
period. The price at which the common stock is purchased under the ESPP is equal
to 85% of the lower of (i) the fair market value of the common stock on the
first day of the offering period or (ii) the fair market value on the purchase
date. Under the ESPP, .3 million shares of common stock of the Company have been
reserved for issuance. In 2001, 2000 and 1999, a total of 62,948, 107,725 and
36,311 shares, respectively, were issued under the ESPP.

STOCK OPTION PLANS

     The Company has stock option plans that provide for the grant of incentive
and nonqualified options to purchase the Company's common stock to selected
officers, other key employees, directors and consultants. These plans include
the VitalWorks Inc. 2000 Broad Based Stock Plan, the VitalWorks Inc. 1996 Stock
Option Plan, the VitalWorks Inc. Length-of-Service Nonqualified Stock Option
Plan and the VitalWorks Inc. Directors Stock Option Plan. The Company has also
assumed the stock options of the 1999 Pooled Companies. Such options were
converted at the applicable rates used to issue the Company's common stock in
the mergers. The shares reserved under the Company's stock option plans were
adjusted in connection with

                                        57
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Distribution (see Note C), using a conversion ratio of 2.11667, in
accordance with the terms of the respective plans.

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

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

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

     Under the VitalWorks Inc. Directors Stock Option Plan, .4 million shares of
common stock of the Company have been reserved for issuance as nonqualified
stock options to non-employee directors of the Company. Upon appointment to the
Board of Directors, a director receives an option grant of 20,000 shares and an
additional option grant of 2,500 shares on each anniversary date. A director may
also receive an additional option grant of 5,000 shares on each anniversary
date. One half of the options granted pursuant to this plan vest after one year
of service following the grant date and the other half vests after two years of
service following the grant date.

                                        58
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<Table>
<Caption>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                              OPTIONS   EXERCISE PRICE
                                                              -------   --------------
<S>                                                           <C>       <C>
Outstanding at December 31, 1998............................    5,695       $4.83
  Granted...................................................    3,126       19.81
  Exercised.................................................     (831)       3.95
  Forfeited or canceled.....................................       (1)       5.00
                                                              -------
Outstanding at December 31, 1999............................    7,989       10.78
  Granted...................................................   11,920        4.95
  Exercised.................................................   (1,627)       4.72
  Forfeited or canceled.....................................   (2,388)       9.28
                                                              -------
Outstanding at December 31, 2000............................   15,894        6.66
  Granted...................................................      761        2.77
  Exercised.................................................     (871)       2.14
  Forfeited or canceled.....................................  (10,217)       7.31(A)
  Conversion in order to preserve intrinsic value...........    9,271            (A)
                                                              -------
Outstanding at December 31, 2001............................   14,838       $2.49
                                                              =======
Options exercisable at December 31, 1999....................    2,255       $4.33
Options exercisable at December 31, 2000....................    1,882       $8.27
Options exercisable at December 31, 2001....................    6,997       $2.24
</Table>

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

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

     The following table summarizes information about the Company's outstanding
stock options at December 31, 2001 (shares in thousands):

<Table>
<Caption>
                           OPTIONS OUTSTANDING
                   ------------------------------------    OPTIONS EXERCISABLE
                                  WEIGHTED                ----------------------
                                   AVERAGE     WEIGHTED                 WEIGHTED
     RANGE OF                     REMAINING    AVERAGE                  AVERAGE
     EXERCISE        NUMBER      CONTRACTUAL   EXERCISE     NUMBER      EXERCISE
      PRICES       OUTSTANDING      LIFE        PRICE     EXERCISABLE    PRICE
     --------      -----------   -----------   --------   -----------   --------
                                   (YEARS)
  <S>              <C>           <C>           <C>        <C>           <C>
  $0.36 -  1.25       1,002          4.7        $0.97        1,002       $0.97
   1.26 -  2.50      11,711          7.4         2.07        5,281        2.09
   2.51 -  5.00       1,031          6.9         3.20          392        3.14
   5.01 -  7.50         626          7.8         6.76          238        6.95
   7.51 - 17.31         468          6.4         9.10           84        8.86
                     ------                                  -----
  $0.36 - 17.31      14,838          7.2        $2.49        6,997       $2.24
                     ======                                  =====
</Table>

                                        59
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRO FORMA DISCLOSURE

     Statement 123, "Accounting for Stock-Based Compensation," issued by the
Financial Accounting Standards Board, defines a "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. If a company elects to use the intrinsic value method,
presentation of pro forma disclosures of earnings and earnings per share is
required as if the fair value method of accounting was applied.

     The Company has elected to account for its stock options under the
intrinsic value method as outlined in Opinion 25. The fair value method requires
use of option valuation models, such as the Black-Scholes option valuation
model, to value employee stock options, upon which compensation expense is
based. The Black-Scholes option valuation model was not developed for use in
valuing employee stock options. Instead, this model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable, which differ significantly from the Company's stock
option awards. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Under the
intrinsic value method, compensation expense is only recognized if the exercise
price of the employee stock option is less than the market price of the
underlying stock on the date of grant. The weighted-average estimated grant date
fair value, as defined by Statement 123, of options granted in 2001, 2000 and
1999 was $1.61, $2.97 and $15.53, respectively, as calculated using the
Black-Scholes option valuation model.

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

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              2001     2000      1999
                                                              -----    -----    ------
<S>                                                           <C>      <C>      <C>
Risk-free interest rate.....................................   4.0%     5.2%      6.2%
Expected dividend yield.....................................   0.0      0.0       0.0
Expected stock price volatility.............................  75.4     76.7     119.0
Weighted average expected life (in years)...................     4        4         4
</Table>

PRO FORMA LOSS FROM CONTINUING OPERATIONS AND PER SHARE DATA

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31,
                                                      -------------------------------------
                                                         2001          2000         1999
                                                      ----------    ----------    ---------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>           <C>           <C>
Loss from continuing operations:
  As reported.......................................   $(22,436)     $(48,673)     $(3,239)
  Pro forma.........................................    (32,239)      (55,088)      (7,442)
Loss from continuing operations per share:
  As reported.......................................   $  (0.60)     $  (1.45)     $ (0.12)
  Pro forma.........................................      (0.86)        (1.64)       (0.27)
</Table>

                                        60
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTS

     The following table summarizes information about the Company's outstanding
and exercisable warrants at December 31, 2001 (shares in thousands):

<Table>
<Caption>
                                WEIGHTED
                                 AVERAGE     WEIGHTED
   RANGE OF                     REMAINING    AVERAGE
   EXERCISE       NUMBER OF    CONTRACTUAL   EXERCISE
    PRICES        WARRANTS        LIFE        PRICE
   --------      -----------   -----------   --------
                                 (YEARS)
<S>              <C>           <C>           <C>
$0.79 -  4.00..        53          1.2        $ 2.89
4.01 -  5.00..        740          6.5          4.69
5.01 -  7.00..        325          2.9          6.46
7.01 - 17.84..          3          4.9         17.84
                    -----
$0.79 - 17.84..     1,121          5.2        $ 5.15
                    =====
</Table>

     There was no significant impact on the Company's financial statements
related to warrants in 2001 and 2000. In 1999, approximately $1.5 million was
expensed as an extraordinary item upon extinguishment of debt related to a
warrant granted in 1998 in connection with an increase in the Company's credit
facility.

K. INCOME TAXES

     For 2001, the Company did not record an income tax provision or benefit due
to its operating losses and the change in the valuation allowance for deferred
tax assets. For 2000 and 1999, the Company did not record a current income tax
provision or benefit as a result of its operating losses; however, the income
tax benefit for 2000 and 1999 consisted of the following deferred benefits:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------    ---------
                                                                  (IN THOUSANDS)
<S>                                                           <C>           <C>
Deferred:
  Federal...................................................   $(12,248)     $(1,156)
  State.....................................................     (1,994)        (184)
                                                               --------      -------
                                                               $(14,242)     $(1,340)
                                                               ========      =======
</Table>

     The income tax provision (benefit) included in the accompanying financial
statements for 2000 and 1999 is as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------    ---------
                                                                  (IN THOUSANDS)
<S>                                                           <C>           <C>
Continuing operations.......................................   $ (9,843)     $(1,610)
Discontinued operations.....................................     (4,399)       2,186
Extraordinary item..........................................                  (1,916)
                                                               --------      -------
                                                               $(14,242)     $(1,340)
                                                               ========      =======
</Table>

                                        61
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The deferred income tax benefit attributable to income from continuing
operations for 2000 and 1999 consists of:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                2000           1999
                                                              ---------      ---------
                                                                   (IN THOUSANDS)
<S>                                                           <C>            <C>
Federal.....................................................   $(8,465)       $(1,389)
State.......................................................    (1,378)          (221)
                                                               -------        -------
                                                               $(9,843)       $(1,610)
                                                               =======        =======
</Table>

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

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               2001       2000
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred income tax assets:
  Allowance for doubtful accounts...........................  $ 1,390    $   755
  Goodwill amortization.....................................   10,041      6,192
  Accrued expenses..........................................    1,426      3,104
  Unearned discounts re: outsourced printing services.......    5,095      2,844
  Net operating loss and credit carryforwards...............   31,303     30,515
  Notes receivable from former directors....................    2,517
  Other.....................................................      194
                                                              -------    -------
                                                               51,966     43,410
     Less valuation allowance...............................   23,001     16,495
                                                              -------    -------
                                                              $28,965    $26,915
                                                              =======    =======
Deferred income tax liabilities:
  Product development costs.................................  $ 1,777
  Other.....................................................      454
                                                              -------    -------
                                                                2,231         --
                                                              -------    -------
Net deferred income tax asset...............................  $26,734    $26,915
                                                              =======    =======
</Table>

     Income tax provision (benefit) attributed to continuing operations differed
from the amounts computed by applying the statutory U.S. federal income tax rate
as follows:

<Table>
<Caption>
                                                            2001       2000      1999
                                                           -------   --------   -------
                                                                  (IN THOUSANDS)
<S>                                                        <C>       <C>        <C>
Expected taxes at federal statutory rate.................  $(7,628)  $(19,895)  $(1,642)
State income taxes, net of federal benefit...............     (773)    (2,692)     (146)
Nondeductible goodwill amortization......................    3,091      3,223       575
Retained net operating losses from discontinued
  operations.............................................   (1,034)    (7,362)
Other, net...............................................     (162)       388      (397)
Change in valuation allowance............................    6,506     16,495
                                                           -------   --------   -------
  Income tax benefit -- continuing operations............  $    --   $ (9,843)  $(1,610)
                                                           =======   ========   =======
</Table>

     As of December 31, 2001, the Company has net operating loss carryforwards
for income tax purposes of approximately $76.9 million, which expire at various
dates through 2020. Included in the $76.9 million is approximately $19.0 million
resulting from preacquisition tax attributes of subsidiaries, utilization of
which is subject to substantial limitations attributable to the change in
ownership provisions of the Internal Revenue Code and similar state authority.

                                        62
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Management has assessed the realizable value of the Company's deferred tax
assets of $52.0 million and determined that a valuation allowance of $23.0
million was necessary as of December 31, 2001 to reduce the net deferred income
tax asset to $26.7 million, an amount which management believes is more likely
than not to be realized. In reaching this conclusion, management noted a number
of factors, including the following:

     - The loss generated in 2001 was not indicative of the Company's ability to
       generate future earnings because the results were significantly impacted
       by the recognition of nonrecurring charges and nondeductible goodwill
       amortization.

     - Management's projections indicate that the Company will generate
       sufficient taxable income to realize the net deferred tax asset within
       three to four years.

L. SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH ACTIVITIES

     Cash payments for interest amounted to $2.1 million, $.6 million and $4.9
million for 2001, 2000, and 1999, respectively. The Company received net tax
refunds of $.1 million and $3.3 million in 2001 and 2000, respectively. The
Company made cash payments for income taxes of $3.3 million in 1999.

     In 2001, the Company distributed $28.9 million of net assets, as adjusted,
in connection with the Spin-Off of PracticeWorks (see Note C).

     In 2001, 2000 and 1999, the Company acquired certain property and equipment
with an aggregate value of $.2 million, $1.1 million and $8.6 million,
respectively, in exchange for indebtedness including mortgage and capital lease
obligations.

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

     In 2001, 2000 and 1999, the Company authorized contributions of $1.1
million, $1.3 million and $.7 million, respectively, to the employee savings
plan. The contributions were made in VitalWorks common stock in the following
year.

     In 2000, pursuant to a February 2000 agreement with the Company, WebMD
Corporation exercised its rights to preferred stock of a wholly-owned subsidiary
of the Company into 1,929,012 shares of VitalWorks common stock. The shares of
common stock were issued on March 2, 2001.

     In 2000, the Company received notes receivable of approximately $6.6
million from certain then-directors of the Company related to the exercise of
stock options. In addition, the Company received 125,000 shares of its common
stock into treasury in exchange for the grant of a license agreement for one of
the Company's products.

M. SEGMENT INFORMATION

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

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

     The accompanying statements of operations and related notes disclose the
financial information of the Company's reportable segments for the three years
ended December 31, 2001.

                                        63
<PAGE>
                                VITALWORKS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

N. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

     The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31, 2001:

<Table>
<Caption>
                                                 THREE MONTHS ENDED
                                 ---------------------------------------------------    YEAR ENDED
                                 MARCH 31    JUNE 30     SEPTEMBER 30    DECEMBER 31    DECEMBER 31
                                 --------    --------    ------------    -----------    -----------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                              <C>         <C>         <C>             <C>            <C>
2001
  Total revenues...............  $ 25,418    $ 25,850      $ 27,090(B)    $ 28,028       $106,386
  Gross profit.................    19,213      19,464        21,753(B)      20,955         81,385
  Loss from continuing
     operations................   (13,672)(A)   (4,877)      (1,668)(B)     (2,219)(C)    (22,436)
  Loss from discontinued
     operations................    (5,384)                                                 (5,384)
                                 --------    --------      --------       --------       --------
          Net loss.............  $(19,056)   $ (4,877)     $ (1,668)      $ (2,219)      $(27,820)
                                 ========    ========      ========       ========       ========
  Average number of shares
     outstanding
     Basic and diluted.........    35,406      37,202        38,327         38,907         37,477
  Earnings (loss) per
     share -- basic and diluted
     Continuing operations.....  $  (0.39)   $  (0.13)     $  (0.04)      $  (0.06)      $  (0.60)
     Discontinued operations...     (0.15)                                                  (0.14)
                                 --------    --------      --------       --------       --------
                                 $  (0.54)   $  (0.13)     $  (0.04)      $  (0.06)      $  (0.74)
                                 ========    ========      ========       ========       ========
2000
  Total revenue................  $ 25,899    $ 24,008      $ 25,099       $ 26,051       $101,057
  Gross profit.................    19,272      16,590        17,907         19,150         72,919
  Loss from continuing
     operations................    (8,223)     (8,708)      (18,096)(d)    (13,646)(e)    (48,673)
  Loss from discontinued
     operations................    (2,958)     (5,708)       (8,014)       (12,760)       (29,440)
                                 --------    --------      --------       --------       --------
          Net loss.............  $(11,181)   $(14,416)     $(26,110)      $(26,406)      $(78,113)
                                 ========    ========      ========       ========       ========
  Average number of shares
     outstanding
     Basic and diluted.........    32,773      33,267        34,174         34,279         33,537
  Earnings (loss) per
     share -- basic and diluted
     Continuing operations.....  $  (0.25)   $  (0.26)     $  (0.53)      $  (0.40)      $  (1.45)
     Discontinued operations...     (0.09)      (0.17)        (0.23)         (0.37)         (0.88)
                                 --------    --------      --------       --------       --------
                                 $  (0.34)   $  (0.43)     $  (0.76)      $  (0.77)      $  (2.33)
                                 ========    ========      ========       ========       ========
</Table>

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

(a) In the quarter, the Company recognized impairment charges and incurred other
    nonrecurring costs of $7.7 million consisting primarily of a $6.0 million
    provision for loan losses (see Note J), $.9 million for unused equity
    financing, and retention bonuses of $.4 million for terminated employees.
(b) In the quarter, the Company recognized $1.6 million of EDI transaction
    revenues, and recovered EDI processing costs and legal fees of $1.0 million
    in connection with the settlement agreement with WebMD Corporation (see Note
    I).
(c) In the quarter, the Company incurred and accrued settlement costs, including
    legal fees, of $1.4 million in connection with a legal proceeding (see Note
    I).
(d) The Company recorded restructuring, impairment charges and other
    nonrecurring costs of approximately $16.8 million in the third quarter of
    2000 (see Note E).
(e) The Company recorded a valuation allowance on its net operating loss
    carryforwards of $16.5 million in the fourth quarter of 2000 (see Note K).

                                        64
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE

Board of Directors and Stockholders
VitalWorks Inc.

     The audits referred to in our report dated January 23, 2002, March 11, 2002
for Note H, relating to the consolidated financial statements of VitalWorks
Inc., and Subsidiaries, which is contained in Item 8 of this Form 10-K, included
the audits of the schedule listed under Item 14(a)(2). This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

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

BDO Seidman, LLP

New York, New York
January 23, 2002

                                        65
<PAGE>

ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULE

                                VITALWORKS INC.

                                 SCHEDULE II --
                       VALUATION AND QUALIFYING ACCOUNTS

<Table>
<Caption>
                                                               ADDITIONS
                                                         ---------------------
                                            BALANCE AT   CHARGED TO   CHARGED                 BALANCE AT
                                            BEGINNING    COSTS AND    TO OTHER                  END OF
DESCRIPTION                                 OF PERIOD     EXPENSES    ACCOUNTS   DEDUCTIONS     PERIOD
-----------                                 ----------   ----------   --------   ----------   ----------
                                                                   (IN THOUSANDS)
<S>                                         <C>          <C>          <C>        <C>          <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS
  AND DISCOUNTS
  Year ended December 31, 2001............   $ 1,936        2,296       900(a)     (3,332)(b)  $ 1,800
  Year ended December 31, 2000............     3,183        1,883                  (3,130)(b)    1,936
  Year ended December 31, 1999............     1,187        2,972                    (976)(b)    3,183

DEFERRED TAX ASSET VALUATION ALLOWANCE
  Year ended December 31, 2001............   $16,495        6,506(c)                           $23,001
  Year ended December 31, 2000............                 16,495(c)                            16,495
  Year ended December 31, 1999............

ALLOWANCE FOR NOTES RECEIVABLES FROM
  FORMER DIRECTORS
  Year ended December 31, 2001............                $ 6,000                              $ 6,000
  Year ended December 31, 2000............
  Year ended December 31, 1999............
</Table>

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

(a) Charged to revenues.
(b) Write-offs, returns and discounts, net of recoveries.
(c) Valuation allowance on net operating loss carryforwards.

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

                                        66
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 26th day of
March, 2002.

                                          VitalWorks Inc.

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

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

                               POWER OF ATTORNEY

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

<Table>
<Caption>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<C>                                                    <S>                              <C>

                 /s/ JOSEPH M. WALSH                   President, Chief Executive       March 26, 2002
-----------------------------------------------------    Officer and Chairman of the
                   Joseph M. Walsh                       Board of Directors (Principal
                                                         Executive Officer)

                /s/ MICHAEL A. MANTO                   Executive Vice President, Chief  March 26, 2002
-----------------------------------------------------    Financial Officer and
                  Michael A. Manto                       Director (Principal Financial
                                                         and Accounting Officer)

          /s/ STEPHEN N. KAHANE M.D., M.S.             Chief Strategy Officer, Vice     March 26, 2002
-----------------------------------------------------    Chairman and Director
            Stephen N. Kahane M.D., M.S.

                /s/ KENNETH R. ADAMS                   Director                         March 24, 2002
-----------------------------------------------------
                  Kenneth R. Adams

               /s/ STEPHEN J. DENELSKY                 Director                         March 25, 2002
-----------------------------------------------------
                 Stephen J. DeNelsky

                /s/ DAVID B. SHEPHERD                  Director                         March 26, 2002
-----------------------------------------------------
                  David B. Shepherd
</Table>

                                        67