##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number 000-25311


AMICAS, INC.


(Exact name of registrant as specified in its charter)


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

20 Guest Street, Suite 200, Boston, Massachusetts
02135


(Address of principal executive offices, including zip
code)


Registrants telephone number, including area code:


(617) 779-7878


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


None


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


Common Stock, par value $0.001


Rights to purchase Series B Preferred Stock


o þ


o þ


þ o


S-K 10-K 10-K. o


12b-2


o þ o


12b-12  o þ






Documents Incorporated by Reference












---



##### 

















AMICAS, INC.


Form 10-K


Table of Contents


|                                                      |  |                                                                                                                             |    |      |    |  |  | 
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|                                                      |  |                                                                                                                             |    | Page |   
|                                                      |  |                                                                                                                             |    |      |   
|PART I                                               
|Item 1.                                               |  | Business                                                                                                                    |    |      | 2  | 
|Item 1A.                                              |  | Risk Factors                                                                                                                |    |      | 13 | 
|Item 1B.                                              |  | Unresolved Staff Comments                                                                                                   |    |      | 22 | 
|Item 2.                                               |  | Properties                                                                                                                  |    |      | 22 | 
|Item 3.                                               |  | Legal Proceedings                                                                                                           |    |      | 23 | 
|Item 4.                                               |  | Submission of Matters to a Vote of Security
    Holders                                                                     |    |      | 24 | 
|PART II                                              
|Item 5.                                               |  | Market for the Registrants Common
    Equity and Related Stockholder Matters and Issuer Purchases of
    Equity Securities |    |      | 24 | 
|Item 6.                                               |  | Selected Consolidated Financial Data                                                                                        |    |      | 25 | 
|Item 7.                                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                   |    |      | 26 | 
|Item 7A.                                              |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                              |    |      | 39 | 
|Item 8.                                               |  | Financial Statements and Supplementary
    Data                                                                             |    |      | 39 | 
|Item 9.                                               |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                    |    |      | 39 | 
|Item 9A.                                              |  | Controls and Procedures                                                                                                     |    |      | 39 | 
|Item 9B.                                              |  | Other Information                                                                                                           |    |      | 42 | 
|PART III                                             
|Item 10.                                              |  | Directors and Executive Officers of the
    Registrant                                                                      |    |      | 42 | 
|Item 11.                                              |  | Executive Compensation                                                                                                      |    |      | 42 | 
|Item 12.                                              |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                          |    |      | 42 | 
|Item 13.                                              |  | Certain Relationships and Related
    Transactions                                                                          |    |      | 42 | 
|Item 14.                                              |  | Principal Accountant Fees and Services                                                                                      |    |      | 42 | 
|PART IV                                              
|Item 15.                                              |  | Exhibits and Financial Statement
    Schedules                                                                              |    |      | 42 | 
|Signatures                                            |  |                                                                                                                             | 77 |     
|Ex-10.34 401(k) Retirement Savings Plan              
|Ex-23.1 Consent of BDO Seidman, LLP                  
|Ex-31.1 Section 302 Certification of C.E.O.          
|Ex-31.2 Section 302 Certification of C.F.O.          
|Ex-.32.1 Section 906 Certification of C.E.O. & C.F.O.



AMICAS, Vision Series, Office Solutions and AMICAS Insight
Services are trademarks, service marks or is a registered
trademark of AMICAS, Inc. All other trademark and company names
mentioned are the property of their respective owners.


1



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##### Table of Contents






PART I







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

General


tm end-to sm












2



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Industry Background


hard-to direct-to






3



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

Hospital and Imaging Center PACS Penetration 2000 to 2010






Business Strategy








end-to




4



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Products and Services






Vision Series Products


Vision Series RIS.


Vision Series PACS.


Vision Series Document Management.


5



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Vision Series Financials. follow-up


EDI Services.






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

Computed Radiography.


Professional Services: AMICAS Insight Services




Insight Technical Support


Software Support.


Hardware Support. on-site




6



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Future Products






| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | Extended functionality for referring physicians and for
    referring physician communications;
|
| |  | Cardiology PACS;                                                                               
|
| |  | Integrated 3D visualization;                                                                   
|
| |  | Primary interpretation of full field digital mammography (FFDM);                               
|
| |  | Paperless operations; and                                                                      
|
| |  | Portable, handheld and kiosk device access.                                                    

Research and Development






Sales and Marketing








Intellectual Property




7



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Competition






| |   |                                             
| | - | --------------------------------------------
| |  | Product features and functionality;         
|
| |  | Ongoing product enhancements;               
|
| |  | Customer service, support, and satisfaction;
|
| |  | Distribution coverage and quality;          
|
| |  | Vendor reputation and stability; and        
|
| |  | Price.                                      





8



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Privacy Issues






| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security that requires both user IDs and passwords to access our
    systems locally or remotely, with the potential of requiring
    digital certificates for remote, Internet-based access, should
    such measures be required;
|
| |  | Encryption of data transmitted over the Internet; and                                                                                                                                                                              
|
| |  | Use of a mechanism for preventing unauthorized access to private
    data resources on our internal network, commonly referred to as
    a firewall.                                                                             

Health Insurance Portability and
Accountability Act






| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Using individual network user IDs and passwords for each
    employee handling electronic data within our internal
    network; and                               
|
| |  | Requiring each employee to sign an agreement to comply with all
    Company policies, including our policy regarding the handling of
    confidential information.



Healthcare Regulation






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


9



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











Other Privacy Requirements.


FDA.


10



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The Federal Anti-Kickback Law.


Stark Law.


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


Access to Our Filings with the Securities and Exchange
Commission


www.amicas.com. 10-K. 10-K, 10-Q, 8-K,




11



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Employees








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

E-Health




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





| |                
| | ---------------
| | Peter McClennen





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



12



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Medical Division Sale















|         |             
|-------- | ------------
|Item 1A. | Risk Factors

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


10-K




10-Q 8-K.


13



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







| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | release of new products, product upgrades and services, and the
    rate of adoption of these products and services by new and
    existing customers;                                                                                                                                                      
|
| |  | timing, cost and success or failure of our new product and
    service introductions and upgrade releases;                                                                                                                                                                                                  
|
| |  | length of sales and delivery cycles;                                                                                                                                                                                                                                                                        
|
| |  | size and timing of orders for our products and services;                                                                                                                                                                                                                                                    
|
| |  | changes in the mix of products and/or services sold;                                                                                                                                                                                                                                                        
|
| |  | availability of specified computer hardware for resale;                                                                                                                                                                                                                                                     
|
| |  | deferral and/or realization of deferred software license and
    system revenues according to contract terms;                                                                                                                                                                                               
|
| |  | interpretations of accounting regulations, principles or
    concepts that are or may be considered relevant to our business
    arrangements and practices;                                                                                                                                                
|
| |  | changes in customer purchasing patterns;                                                                                                                                                                                                                                                                    
|
| |  | changing economic, political and regulatory conditions,
    particularly with respect to the IT-spending environment;                                                                                                                                                                                       
|
| |  | competition, including alternative product and service
    offerings, and price pressure;                                                                                                                                                                                                                   
|
| |  | customer attrition;                                                                                                                                                                                                                                                                                         
|
| |  | timing of, and charges or costs associated with, mergers,
    acquisitions or other strategic events or transactions,
    completed or not completed;                                                                                                                                                       
|
| |  | timing, cost and level of advertising and promotional programs;                                                                                                                                                                                                                                             
|
| |  | changes of accounting estimates and assumptions used to prepare
    the prior periods financial statements and accompanying
    notes, and managements discussion and analysis of
    financial condition and results of operations (e.g., our
    valuation of assets and estimation of liabilities); and
|
| |  | uncertainties concerning threatened, pending and new litigation
    against us, including related professional services fees.                                                                                                                                                                               



14



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period-to




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





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





| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to retain Amicas PACS key personnel. In particular,
    the loss of these employees would compromise the value of the
    Amicas PACS client base and/or its software products and
    technologies;                                               
|
| |  | our ability to integrate the RIS and PACS products as may be,
    and/or to the extent, required by the marketplace, including our
    ability to deliver the related professional services; the
    integrity of the intellectual property of Amicas PACS; and
|
| |  | continued compliance with all government laws, rules and
    regulations for all applicable products.                                                                                                                                                          



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our new products, including product upgrades, and
    services do not achieve sufficient market acceptance, our
    business, financial condition, cash flows, revenues, and
    operating results will suffer.





| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | new products and services including AMICAS Office
    Solutions; and                               
|
| |  | enhancements to our existing products, support and services
    including Vision Series Financials.







15



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| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business could suffer if our products and services
    contain errors, experience failures, result in loss of our
    customers data or do not meet customer
    expectations.





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











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



16



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| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may undertake additional acquisitions, which may
    involve significant uncertainties and may increase costs and
    divert management resources from our core business activities,
    or we may fail to realize anticipated benefits of such
    acquisitions.





| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to cross-sell products and services to customers
    with which we have established relationships and those with
    which the acquired business had established relationships;
|
| |  | diversion of our managements attention from our existing
    business;                                                                                                                    
|
| |  | potential conflicts in customer and supplier relationships;                                                                                                                                
|
| |  | our ability to coordinate organizations that are geographically
    diverse and may have different business cultures;                                                                      
|
| |  | dilution to existing stockholders if we issue equity securities
    in connection with acquisitions;                                                                                       
|
| |  | assumption of liabilities or other obligations in connection
    with the acquisition; and                                                                                                 
|
| |  | compliance with regulatory requirements.                                                                                                                                                   





| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Technology solutions may change faster than we are able to
    update our technologies, which could cause a loss of customers
    and have a negative impact on our revenues.





| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop new or enhance existing products and services to meet
    the changing needs of our customers and the marketplace in a
    timely and cost-effective way; and
|
| |  | respond effectively to technological changes, new product
    offerings, product enhancements and new services of our
    competitors.                               



17



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| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our inability to renew, or make material modifications to,
    agreements with our third party product and service providers
    could lead to a loss of customers and have a negative impact on
    our revenues.





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







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





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



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





18



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





| |    
| | ---
| | FDA





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | State and federal laws relating to confidentiality of
    patient medical records could limit our customers ability
    to use our services and expose us to liability.



19



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







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





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



20



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on partners/suppliers for delivery of electronic
    data interchange (e.g., insurance claims processing and invoice
    printing services), commonly referred to as EDI, hardware
    maintenance services, third-party software or software or
    hardware components of our offerings, and sales lead generation.
    Any failure, inability or unwillingness of these suppliers to
    perform these services or provide their products could
    negatively impact customer satisfaction and revenues.

on-site




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





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





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



21



---



##### Table of Contents







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





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





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








|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








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



|                      |  |                |        |      |              |   |        |                  |  |  |              | 
|--------------------- |  | -------------- | ------ | ---- | ------------ | - | ------ | ---------------- |  |  | ------------ | 
|                      |  |                |        | 2006 |              |   |       
|Location              |  | Square Footage |        |      | Monthly Cost |   |        | Lease Expiration | 
|                      |  |                |        |      |              |   |        |                  | 
|Boston, Massachusetts |  |                | 26,763 |      |              | $ | 51,768 |                  |  |  | January 2008 | 
|Daytona, Florida      |  |                | 35,253 |      |              | $ | 46,626 |                  |  |  | July 2008    | 

22



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







23



---



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






PART II







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



|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|2004           |  | High |      |  | Low |  
|               |  |      |      |  |     |  
|First Quarter  |  | $    | 5.16 |  |     | $ | 3.40 | 
|Second Quarter |  | $    | 4.45 |  |     | $ | 3.20 | 
|Third Quarter  |  | $    | 3.94 |  |     | $ | 2.91 | 
|Fourth Quarter |  | $    | 4.50 |  |     | $ | 3.36 | 

|               |  |   |      |  |  |   |      | 
|-------------- |  | - | ---- |  |  | - | ---- | 
|2005           |  |   |      | 
|               |  |   |      | 
|First Quarter  |  | $ | 4.60 |  |  | $ | 3.65 | 
|Second Quarter |  | $ | 4.78 |  |  | $ | 2.85 | 
|Third Quarter  |  | $ | 5.69 |  |  | $ | 4.25 | 
|Fourth Quarter |  | $ | 5.43 |  |  | $ | 4.17 | 



Dividend Policies.


24



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

10-K.


|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | - | ---- | ------ | ------ |  | - | ------- | ------ | -
|                                                                            |                                                                                                                                                        | For the Year Ended December 31,       |       
|                                                                            |                                                                                                                                                        |                                       |       
|                                                                            |                                                                                                                                                        | 2005                                  |        |        | 2004 |   |         | 2003   |   |   | 2002    |        |   | 2001 |       
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|                                                                            |                                                                                                                                                        | (In thousands, except per share data) |       
|Consolidated Statements of Operations Data(a)(b)                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|Revenues                                                                    |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|                                                                            | Maintenance and services                                                                                                                               |                                       | $      | 36,813 |      |   | $       | 29,543 |   |   | $       | 24,534 |   |      | $      | 25,005 |  |   | $       | 26,309 |  
|                                                                            | Software licenses and system sales                                                                                                                     |                                       |        | 15,998 |      |   |         | 12,776 |   |   |         | 9,677  |   |      |        | 13,046 |  |   |         | 9,052  |  
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|Total revenues                                                              |                                                                                                                                                        |                                       | 52,811 |        |      |   | 42,319  |        |   |   | 34,211  |        |   |      | 38,051 |        |  |   | 35,361  |       
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|Costs and expenses                                                          |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|Cost of revenues:                                                           |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|                                                                            | Maintenance and services                                                                                                                               |                                       |        | 14,163 |      |   |         | 13,060 |   |   |         | 13,999 |   |      |        | 11,247 |  |   |         | 10,904 |  
|                                                                            | Software licenses and system sales, includes amortization of
    software costs of $1,966 in 2005, $3,178 in 2004, $1,873 in 2003
    and $911 in 2002 |                                       |        | 6,413  |      |   |         | 6,154  |   |   |         | 5,147  |   |      |        | 4,518  |  |   |         | 3,330  |  
|                                                                            | Impairment of capitalized software                                                                                                                     |                                       |        |       |      |   |         | 3,229  |   |   |         | 490    |   |      |        |       |  |   |         |       |  
|Selling, general and administrative                                         |                                                                                                                                                        |                                       | 20,701 |        |      |   | 25,824  |        |   |   | 14,577  |        |   |      | 16,707 |        |  |   | 22,553  |       
|Research and development                                                    |                                                                                                                                                        |                                       | 9,047  |        |      |   | 9,488   |        |   |   | 7,565   |        |   |      | 6,041  |        |  |   | 3,658   |       
|Depreciation and amortization                                               |                                                                                                                                                        |                                       | 1,777  |        |      |   | 1,968   |        |   |   | 1,331   |        |   |      | 1,439  |        |  |   | 6,717   |       
|Settlements, severance and impairment charges                               |                                                                                                                                                        |                                       | 5,677  |        |      |   | 5,730   |        |   |   |        |        |   |      | (6,000 | )      |  |   | 9,627   |       
|Acquired in-process technology                                              |                                                                                                                                                        |                                       |       |        |      |   |        |        |   |   | 750     |        |   |      |       |        |  |   |        |       
|Restructuring credits                                                       |                                                                                                                                                        |                                       |       |        |      |   | (155    | )      |   |   |        |        |   |      | (501   | )      |  |   | (425    | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|                                                                            |                                                                                                                                                        |                                       | 57,778 |        |      |   | 65,298  |        |   |   | 43,859  |        |   |      | 33,451 |        |  |   | 56,364  |       
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|Operating (loss) income                                                     |                                                                                                                                                        |                                       | (4,967 | )      |      |   | (22,979 | )      |   |   | (9,648  | )      |   |      | 4,600  |        |  |   | (21,003 | )     
|Interest income (expense), net                                              |                                                                                                                                                        |                                       | 1,765  |        |      |   | (1,336  | )      |   |   | (876    | )      |   |      | (447   | )      |  |   | (3,170  | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|(Loss) income from continuing operations, before income
    taxes           |                                                                                                                                                        |                                       | (3,202 | )      |      |   | (24,315 | )      |   |   | (10,524 | )      |   |      | 4,153  |        |  |   | (24,173 | )     
|(Benefit) provision for income taxes                                        |                                                                                                                                                        |                                       | (1,197 | )      |      |   | 2,200   |        |   |   | 200     |        |   |      | 162    |        |  |   |        |       
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|(Loss) income from continuing operations                                    |                                                                                                                                                        |                                       | (2,005 | )      |      |   | (26,515 | )      |   |   | (10,724 | )      |   |      | 3,991  |        |  |   | (24,173 | )     
|Gain on Sale of discontinued operations, net of income taxes of
    $33,906 |                                                                                                                                                        |                                       | 46,277 |        |      |   |        |        |   |   |        |        |   |      |       |        |  |   |        |       
|(Loss) income from discontinued operations, net of income taxes             |                                                                                                                                                        |                                       | (57    | )      |      |   | 14,058  |        |   |   | 18,687  |        |   |      | 20,159 |        |  |   | (3,647  | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|Net (loss) income                                                           |                                                                                                                                                        |                                       | 44,215 |        |      |   | (12,457 | )      |   |   | 7,963   |        |   |      | 24,150 |        |  |   | (27,820 | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|(Loss) Earnings per share  basic                                           |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|                                                                            | Continuing operations                                                                                                                                  |                                       | $      | (0.04  | )    |   | $       | (0.61  | ) |   | $       | (0.25  | ) |      | $      | 0.10   |  |   | $       | (0.65  | )
|                                                                            | Discontinued operations                                                                                                                                |                                       |        | 1.00   |      |   |         | 0.32   |   |   |         | 0.43   |   |      |        | 0.48   |  |   |         | (0.10  | )
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|                                                                            |                                                                                                                                                        | $                                     | 0.96   |        |      | $ | (0.29   | )      |   | $ | 0.18    |        |   | $    | 0.58   |        |  | $ | (0.74   | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|(Loss) Earnings per share  diluted                                         |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |        |        |  |   |         |       
|                                                                            | Continuing operations                                                                                                                                  |                                       | $      | (0.04  | )    |   | $       | (0.61  | ) |   | $       | (0.25  | ) |      | $      | 0.08   |  |   | $       | (0.65  | )
|                                                                            | Discontinued operations                                                                                                                                |                                       |        | 1.00   |      |   |         | 0.32   |   |   |         | 0.43   |   |      |        | 0.41   |  |   |         | (0.10  | )
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|                                                                            |                                                                                                                                                        | $                                     | 0.96   |        |      | $ | (0.29   | )      |   | $ | 0.18    |        |   | $    | 0.49   |        |  | $ | (0.74   | )     
|                                                                            |                                                                                                                                                        |                                       |        |        |      |   |         |        |   |   |         |        |   |      |       
|Cash (used in) provided by operating activities(c)                          |                                                                                                                                                        | $                                     | (7,689 | )      |      | $ | 4,735   |        |   | $ | 2,180   |        |   | $    | 20,758 |        |  | $ | 18,230  |       






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

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|    |  |                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | The consolidated statement of operations for the year ended
    December 31, 2004 has been prepared and historical
    consolidated statements of operations have been reclassified to
    present the results of the Medical Division as discontinued
    operations.
|   
|(c) |  | Includes operating activities of the Medical Division through
    the sale of the Medical Division on January 3, 2005.                                                                                                                                                

|                                |  |                |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |        |  
|------------------------------- |  | -------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------ | -
|                                |  | December 31,   |        
|                                |  |                |        
|                                |  | 2005           |         |  | 2004 |   |         | 2003 |  |   | 2002    |  |  | 2001 |        
|                                |  |                |         |  |      |   |         |      |  |   |         |  |  |      |        
|                                |  | (In thousands) |        
|Consolidated Balance Sheet Data |  |                |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |        |  
|Cash and cash equivalents       |  | $              | 82,214  |  |      | $ | 12,634  |      |  | $ | 20,128  |  |  | $    | 39,474  |  |  | $ | 12,988 |  
|Working capital (deficit)       |  |                | 79,036  |  |      |   | 19,968  |      |  |   | 9,548   |  |  |      | 27,220  |  |  |   | (914   | )
|Total assets                    |  |                | 140,285 |  |      |   | 133,886 |      |  |   | 132,576 |  |  |      | 117,131 |  |  |   | 92,949 |  
|Total long-term debt            |  |                |        |  |      |   | 28,674  |      |  |   | 29,757  |  |  |      | 18,941  |  |  |   | 30,553 |  
|Stockholders equity            |  |                | 119,913 |  |      |   | 64,655  |      |  |   | 70,662  |  |  |      | 60,433  |  |  |   | 26,060 |  






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

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






10-Q 8-K.


Overview


end-to




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RESULTS OF OPERATIONS




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

|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |      |   |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ------ |  | ---- | ---- |  | - | ------ | - |  | ---- | ---- | - |  | - | ------ | -
|                                   |  | Year Ended December 31, |       
|                                   |  |                         |       
|                                   |  | 2005                    |        |   | Change |  |      | 2004 |  |   | Change |   |  | 2003 |     
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |     
|                                   |  | (Dollars in thousands)  |       
|Maintenance and services           |  | $                       | 36,813 |   |        |  | 24.6 | %    |  | $ | 29,543 |   |  |      | 20.4 | % |  | $ | 24,534 |  
|Percentage of total revenues       |  |                         | 69.7   | % |        |  |      |      |  |   | 69.8   | % |  |      |      |   |  |   | 71.7   | %
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |     
|Software licenses and system sales |  | $                       | 15,998 |   |        |  | 25.2 | %    |  | $ | 12,776 |   |  |      | 32.0 | % |  | $ | 9,677  |  
|Percentage of total revenues       |  |                         | 30.3   | % |        |  |      |      |  |   | 30.2   | % |  |      |      |   |  |   | 28.3   | %
|                                   |  |                         |        |   |        |  |      |      |  |   |        |   |  |      |     











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

|                                                 |  |                         |        |   |        |  |     |      |  |   |        |   |  |      |      |    |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------ | - | ------ |  | --- | ---- |  | - | ------ | - |  | ---- | ---- | -- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |       
|                                                 |  |                         |       
|                                                 |  | 2005                    |        |   | Change |  |     | 2004 |  |   | Change |   |  | 2003 |     
|                                                 |  |                         |        |   |        |  |     |      |  |   |        |   |  |      |     
|                                                 |  | (Dollars in thousands)  |       
|Maintenance and services                         |  | $                       | 14,163 |   |        |  | 8.4 | %    |  | $ | 13,060 |   |  |      | (6.7 | )% |  | $ | 13,999 |  
|Percentage of maintenance and services revenues  |  |                         | 38.5   | % |        |  |     |      |  |   | 44.2   | % |  |      |      |    |  |   | 57.1   | %
|                                                 |  |                         |        |   |        |  |     |      |  |   |        |   |  |      |     
|Software licenses and system sales               |  | $                       | 6,413  |   |        |  | 4.2 | %    |  | $ | 6,154  |   |  |      | 19.6 | %  |  | $ | 5,147  |  
|Percentage of software licenses and system sales |  |                         | 40.1   | % |        |  |     |      |  |   | 48.2   | % |  |      |      |    |  |   | 53.2   | %
|                                                 |  |                         |        |   |        |  |     |      |  |   |        |   |  |      |     









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

|                                    |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |      |   |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ---- | - |  | - | ------ | -
|                                    |  | Year Ended December 31, |       
|                                    |  |                         |       
|                                    |  | 2005                    |        |   | Change |  |       | 2004 |  |   | Change |   |  | 2003 |     
|                                    |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |     
|                                    |  | (Dollars in thousands)  |       
|Selling, general and administrative |  | $                       | 20,701 |   |        |  | (19.8 | )%   |  | $ | 25,824 |   |  |      | 77.2 | % |  | $ | 14,577 |  
|Percentage of total revenues        |  |                         | 39.2   | % |        |  |       |      |  |   | 61.0   | % |  |      |      |   |  |   | 42.6   | %
|                                    |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |     
|Research and development            |  | $                       | 9,047  |   |        |  | (4.6  | )%   |  | $ | 9,488  |   |  |      | 25.4 | % |  | $ | 7,565  |  
|Percentage of total revenues        |  |                         | 17.1   | % |        |  |       |      |  |   | 22.4   | % |  |      |      |   |  |   | 22.1   | %
|                                    |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |     
|Depreciation and amortization       |  | $                       | 1,777  |   |        |  | (9.7  | )%   |  | $ | 1,968  |   |  |      | 47.9 | % |  | $ | 1,331  |  
|Percentage of total revenues        |  |                         | 3.4    | % |        |  |       |      |  |   | 4.7    | % |  |      |      |   |  |   | 3.9    | %
|                                    |  |                         |        |   |        |  |       |      |  |   |        |   |  |      |     



| |                                    
| | -----------------------------------
| | Selling, General and Administrative









| |                         
| | ------------------------
| | Research and Development





| |                                      
| | -------------------------------------
| | Depreciation and amortization expense





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Settlements, Severance and
Impairment Charges






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Settlement of earn-out. In connection with the
    termination of the $4.3 million earn-out consideration
    obligations relating to the acquisition of Amicas PACS, we
    recognized $1.9 million of expense for amounts paid to
    certain Amicas PACS employees under the Amicas PACS bonus plan.
    Included in the $1.9 million was $1.1 million for the
    acceleration of earn-out bonus, pursuant to agreements with
    former Amicas PACS executives, whose employment was terminated
    by mutual agreement.                                                                                                                                                                                                                                                                                                                                   
|
| |  | Settlement of litigation. On October 14, 2005, the
    Company announced that David and Susan Jones
    (Plaintiffs) and InfoCure Corporation (now known as
    AMICAS, Inc.), Richard Perlman and James Price agreed to settle
    and to resolve and terminate, fully and finally, the issues
    between them in the lawsuit styled David and Susan Jones v.
    Infocure Corporation, et al. filed in 2001 concerning a
    1999. As part of the settlement, the Company agreed to pay
    $3.25 million to the Plaintiffs. The Company recorded a
    $2.75 million charge related to the settlement of this
    litigation in 2005. The $2.75 million charge is net of the
    reimbursement received of $325,000 from the co-defendants, who
    are two former executive officers of the Company, and
    $0.5 million for previously accrued amounts.
|
| |  | Restructuring charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Plan. On October 15, 2004, the Company
    notified 57 of its employees that, in connection with the
    relocation of the Companys corporate headquarters from
    Ridgefield, Connecticut to Boston, Massachusetts, their
    employment would be terminated under a plan of termination. The
    employees were terminated in the fourth quarter of 2004 and the
    first quarter of 2005. Pursuant to their termination agreements,
    the Company had agreed to pay their salary and provide certain
    benefits, during their severance period. In 2005, the Company
    recorded a $0.5 million charge for costs associated with
    employees terminated during the first quarter of 2005 and
    $0.2 million non-cash stock compensation expense for
    certain modified stock awards.
|
| | The 2005 Plan. In May 2005, the Company notified 13 of
    its employees that their employment would be terminated in the
    second quarter of 2005 and, pursuant to their termination
    agreements, the Company agreed to pay their salary during their
    severance period. In 2005, the Company recorded a
    $0.2 million charge for costs associated with their
    termination.                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Office Closure. In June 2005, the Company vacated its
    former Ridgefield, Connecticut headquarters and determined it
    had no future use for this leased space. In 2005, the Company
    recorded a restructuring charge for the remaining contractual
    lease payments under the lease agreement of approximately
    $0.1 million, which was paid in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Executive Termination Costs. On March 31, 2005, the
    Company entered into a separation agreement with two former
    executives of the Company, who were also former executives of
    Amicas PACS. Pursuant to their agreements, the Company agreed to
    pay the executives two months of salary and other compensation
    obligations. In 2005, the Company recorded approximately
    $0.1 million in costs related to the termination of
    employment of these executives. As of December 31, 2005,
    all amounts have been paid.                                                                                                                                                                                                                                                               





| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Settlement of earn-out. In connection with the
    termination of the earn-out consideration obligations relating
    to the acquisition of Amicas PACS, in 2004 we recognized
    $2.4 million of expense for amounts paid to certain Amicas
    PACS employees under the Amicas PACS bonus plan.                          
|
| |  | Severance re: corporate headquarters relocation. We
    recorded severance-related costs of $1.3 million, including
    executive-related severance costs of $0.4 million. In
    December 2004, we relocated our corporate headquarters from
    Ridgefield, Connecticut to Boston, Massachusetts. On
    October 15, 2004,

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | we notified 57 of our employees that, in connection with the
    relocation of our corporate headquarters, their employment would
    be terminated under a plan of termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Impairment charge. We recorded an impairment charge of
    $1.2 million to write-down our enterprise resource planning
    software, or ERP, relating to our decision to cease using a
    portion of our ERP. This decision was due to the downsizing of
    our business as a result of the Medical Division sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Settlement of litigation. We recorded costs of
    $0.8 million relating to the settlement of litigation. In
    August 2003, we were served with a summons and complaint as part
    of a bankruptcy proceeding relating to a former business
    associate of ours. The complaint alleged that in 2001, we
    received a preference payment from the business associate and
    sought to avoid and recover the $0.8 million payment made
    to us. We agreed to settle this matter in March 2004 and paid
    $0.3 million to the former business associate through its
    committee of unsecured creditors. Also, in September 2004, a
    lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and
    Amicas, Inc. was filed in the United States District Court for
    the Southern District of California. The complaint alleged that
    VitalWorks and Amicas infringed the plaintiffs patent
    through the manufacture, use, importation, sale and/or offer for
    sale of automated medical imaging and archival systems. The
    plaintiff sought monetary damages, treble damages and a
    permanent injunction. On November 3, 2004, we served our
    answer. On January 26, 2005, the parties entered into a
    Settlement, Release and License agreement, and on
    February 4, 2005, a stipulation of dismissal, dismissing
    the lawsuit with prejudice, was entered. In connection with this
    agreement, we paid the plaintiff $0.5 million in 2005. This
    amount was accrued at December 31, 2004 and paid as of
    December 31, 2005.

Acquired In-Process
Technology




Restructuring Credits






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

|                 |  |                         |       |   |        |  |         |      |  |   |        |   |  |      |       |    |  |   |        |  
|---------------- |  | ----------------------- | ----- | - | ------ |  | ------- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                 |  | Year Ended December 31, |      
|                 |  |                         |      
|                 |  | 2005                    |       |   | Change |  |         | 2004 |  |   | Change |   |  | 2003 |      
|                 |  |                         |       |   |        |  |         |      |  |   |        |   |  |      |      
|                 |  | (Dollars in thousands)  |      
|Interest income  |  | $                       | 2,516 |   |        |  | 1,443.6 | %    |  | $ | 163    |   |  |      | (40.3 | )% |  | $ | 273    |  
|Interest expense |  |                         | (751  | ) |        |  | (49.9   | )%   |  |   | (1,499 | ) |  |      | 30.5  | %  |  |   | (1,149 | )
|                 |  |                         |       |   |        |  |         |      |  |   |        |   |  |      |      









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









| |                                            
| | -------------------------------------------
| | Gain on the Sale of Discontinued Operations









| |                                           
| | ------------------------------------------
| | (Loss) Income from Discontinued Operations





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LIQUIDITY AND CAPITAL RESOURCES




















| |                        
| | -----------------------
| | Contractual Obligations



|                     |       |                |       |        |      |   |       |       |  |   |       |       |  |            |       |       |  |   |     |     | 
|-------------------- | ----- | -------------- | ----- | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- |  | ---------- | ----- | ----- |  | - | --- | --- | 
|                     |       | Years          |      
|                     |       |                |      
|                     |       | Totals         |       |        | 2006 |   |       | 2007  |  |   | 2008  |       |  | Thereafter |      
|                     |       |                |       |        |      |   |       |       |  |   |       |       |  |            |      
|                     |       | (In thousands) |      
|Operating leases(a)  |       | $              | 2,834 |        |      | $ | 1,214 |       |  | $ | 1,262 |       |  | $          | 358   |       |  |   |    |    
|Other commitments(b) |       |                | 9,981 |        |      |   | 3,827 |       |  |   | 3,034 |       |  |            | 2,496 |       |  | $ | 624 |    
|                     |       |                |       |        |      |   |       |       |  |   |       |       |  |            |      
|                     | Total |                | $     | 12,815 |      |   | $     | 5,041 |  |   | $     | 4,296 |  |            | $     | 2,854 |  |   | $   | 624 | 
|                     |       |                |       |        |      |   |       |       |  |   |       |       |  |            |      






|    |                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------
|(a) | In March 2005, we entered into subleases for additional space at
    our Boston, Massachusetts corporate headquarters.



|    |  |                                                 
|--- |  | ------------------------------------------------
|(b) |  | Included in other commitments are the following:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In connection with the Purchase Agreement with Cerner, the
    Company assigned its agreement with a third-party provider of
    EDI services for patient claims processing to Cerner. The annual
    processing services fee will range from $0.2 million to
    $0.3 million based on the Companys and Cerners

34



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | combined volume usage in the last month of the preceding year.
    The Company also assigned its patient statement agreement with
    National Data Corp. (NDC) to Cerner. The Company is
    committed to minimum quarterly volumes and is required to pay a
    minimum quarterly fee of $0.6 million to Cerner through
    March 2006. Thereafter, the minimum quarterly volume commitments
    will be reduced by 1.25% per quarter until April 2009. The
    Company is also committed to paying Cerner approximately
    $0.2 million per year through April 2007 for certain EDI
    services.
|
| |  | In January 2005, in connection with the sale of the Medical
    Division to Cerner, the Company assigned certain operating lease
    agreements relating to the Medical Division to Cerner, which are
    not included in the lease commitment table above.                                                                                                                                                                                                                                                                                                                                            
|
| |  | In connection with our employee savings plans, we have
    committed, for the 2006 plan year, to contribute to the plans.
    Our matching contribution for 2006 is estimated to be
    approximately $0.5 million in cash, in which
    $0.4 million will be paid in 2006 and $0.1 million in
    2007. Our matching contribution for 2005 was approximately
    $0.5 million. Approximately $0.4 million was paid in
    2005, of which 75% was paid in cash and 25% in shares of our
    common stock. In 2006, we paid the balance of approximately
    $0.1 million in cash.                      

10b5-1










35



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##### Table of Contents













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





Revenue Recognition. 97-2


36



---



##### Table of Contents



01-14, Out-of (off-the




Accounts Receivable.


Long-lived Assets.


Goodwill and Business Combinations.




37



---



##### Table of Contents



Software Development Costs.




Income Taxes.


Loss Contingencies.




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





38



---



##### Table of Contents










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










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








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








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





| |   |                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have appointed a new controller as of January 3rd 2006
    and continue to train and hire more qualified and experienced
    accounting personnel to perform the month-end review and closing
    processes as well as provide additional oversight and
    supervision within the accounting department.

39



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are in the process of establishing written policies and
    procedures to ensure that account reconciliations and amounts
    recorded, as well as the review of these areas, are
    substantiated by detailed and contemporaneous documentary
    support and that reconciling items are investigated, resolved
    and recorded in a timely manner.
|
| |  | We have initiated programs providing ongoing training and
    professional education and development plans for the accounting
    department and improving internal communications procedures
    throughout the company.                                                                                                                                







MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING






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





Internal Control-Integrated
Framework


40



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##### Table of Contents





Deferred Revenue Review Process




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company concluded that the controls over the review of
    deferred revenue were not operating effectively during the year
    and as of December 31, 2005. As a result errors were
    identified in the recorded values of deferred maintenance,
    services and license revenue. In addition these controls were
    not sufficient to detect potentially contingent amounts
    regarding former customers that were resolved subsequent to year
    end. The adjustments made as a result of this material weakness
    totaled approximately $650,000 in additional deferred revenue,
    $160,000 in accrued expenses and an increase of $850,000 in
    accounts receivable, net. Based on the definition of materiality
    for our internal controls assessment and the application of the
    evaluation processes for deficiencies as defined by the PCAOB
    and other authorities, management has determined that these
    errors constitute a material weakness in their control
    environment. However, these adjustments had an immaterial effect
    on revenue, net income and working capital of approximately
    $40,000 each, all of which have been reflected in the financial
    statements appearing in this Form 10-K filing. Management
    believes these errors were a direct result of the review process
    operating inadequately at the end of the two prior fiscal
    quarters combined with the turnover of the financial controller
    at year end. We also believe the loss of knowledge as a result
    of the change in the Companys controller and the time
    needed to train the new controller were contributing factors.

Internal Controls  Integrated
Framework






| |                                                     
| | ----------------------------------------------------
| | Changes in Internal Control Over Financial Reporting





| |   |                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have appointed a new controller as of January 3rd 2006
    and continue to train and hire more qualified and experienced
    accounting personnel to perform the month-end review and closing
    processes as well as provide additional oversight and
    supervision within the accounting department.                                             
|
| |  | We are in the process of establishing written policies and
    procedures to ensure that account reconciliations and amounts
    recorded, as well as the review of these areas, are
    substantiated by detailed and contemporaneous documentary
    support and that reconciling items are investigated, resolved
    and recorded in a timely manner.
|
| |  | We have initiated programs providing ongoing training and
    professional education and development plans for the accounting
    department and improving internal communications procedures
    throughout the company.                                                                                                                                



41



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##### Table of Contents








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






PART III


10-K 10-K,







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










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








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








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








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






PART IV







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

Financial Statements.


42



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##### Table of Contents



Exhibits. S-K


|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | --- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|        | 2  | .1  |  |            |  | Agreement and Plan of Distribution, dated as of
    February 21, 2001, by and between InfoCure Corporation and
    PracticeWorks, Inc. (incorporated by reference to
    Exhibit 2.1 to the Registrants Current Report on
    Form 8-K, filed with the Commission on March 20, 2001).                                                                                                                                                                             
|       
|        | 2  | .2  |  |            |  | Agreement and Plan of Merger, dated as of November 25,
    2003, by and among VitalWorks Inc., PACS Acquisition Corp.,
    Amicas, Inc., and the Stockholders Representative
    (incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on December 10, 2003).                                                                                                                               
|       
|        | 2  | .3  |  |            |  | First Amendment to Agreement and Plan of Merger dated as of
    December 9, 2004 by and among VitalWorks Inc., Amicas,
    Inc., and Seth Rudnick, Hamid Tabatabaie and Alexander Spiro
    solely in their representative capacity as Committee
    Members constituting the Stockholders Representative
    (incorporated by reference to Exhibit 2.1 to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on December 10, 2004).
|       
|        | 3  | .1  |  |            |  | Certificate of Incorporation of InfoCure Corporation with all
    amendments (incorporated by reference to Exhibit 3.1 to the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1999).                                                                                                                                                                                                                                               
|       
|        | 3  | .2  |  |            |  | Second Amended and Restated Bylaws of InfoCure (incorporated by
    reference to Exhibit 3.2 to the Registrants Annual
    Report on Form 10-K for the year ended December 31,
    1999).                                                                                                                                                                                                                                                                         
|       
|        | 4  | .1  |  |            |  | See Exhibits 3.1 and 3.2 for provisions of the Certificate
    of Incorporation, as amended, and Bylaws of InfoCure defining
    rights of the holders of common stock of InfoCure.                                                                                                                                                                                                                                                                                
|       
|        | 4  | .2  |  |            |  | Specimen Certificate for shares of common stock (incorporated by
    reference to Exhibit 4.2 to our Annual Report on
    Form 10-K, filed March 30, 2005).                                                                                                                                                                                                                                                                                                        
|       
|        | 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).                                                                                                                                                                                                                                    

43



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##### Table of Contents



|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | --- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|       
|        | 10 | .11 |  |            |  | Tax Disaffiliation Agreement, dated as of March 5, 2001, by
    and between InfoCure Corporation and PracticeWorks, Inc.
    (incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on March 20, 2001).                                                                                                          
|       
|        | 10 | .12 |  |            |  | Employee Benefits and Compensation Allocation Agreement, dated
    as of March 5, 2001, by and between InfoCure Corporation
    and PracticeWorks, Inc. (incorporated by reference to
    Exhibit 10.4 to the Registrants Current Report on
    Form 8-K, filed with the Commission on March 20, 2001).                                                                               
|       
|        | 10 | .13 |  |            |  | Intellectual Property License Agreement, dated as of
    March 5, 2001, by and between InfoCure Corporation and
    PracticeWorks Systems, LLC (incorporated by reference to
    Exhibit 10.5(a) to the Registrants Current Report on
    Form 8-K, filed with the Commission on March 20, 2001).                                                                                     
|       
|        | 10 | .14 |  |            |  | Intellectual Property License Agreement, dated as of
    March 5, 2001, by and between InfoCure Corporation and
    PracticeWorks Systems, LLC (incorporated by reference to
    Exhibit 10.5(b) to the Registrants Current Report on
    Form 8-K, filed with the Commission on March 20, 2001).                                                                                     
|       
|        | 10 | .15 |  |            |  | Assignment of Copyrights, dated as of March 5, 2001, by and
    between InfoCure Corporation and PracticeWorks Systems, LLC
    (incorporated by reference to Exhibit 10.5(c) to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on March 20, 2001).                                                                                                    
|       
|        | 10 | .16 |  |            |  | Assignment of Trademarks, dated as of March 5, 2001, by and
    between InfoCure Corporation and PracticeWorks Systems, LLC
    (incorporated by reference to Exhibit 10.5(d) to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on March 20, 2001).                                                                                                    
|       
|        | 10 | .17 |  |            |  | InfoCure Corporation 2000 Broad-Based Stock Plan (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000).                                                                                                                                                                                   
|       
|        | 10 | .18 |  |            |  | Amended and Restated Warrant, originally issued to Crescent
    International Ltd. on September 28, 1998, as amended and
    restated on March 6, 2001 (incorporated by reference to
    Exhibit 10.44 to the Registrants Annual Report on
    Form 10-K, filed with the Commission on April 2, 2001).                                                                                
|       
|        | 10 | .19 |  |            |  | 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 | .20 |  |            |  | VitalWorks Inc. 401(k) Profit Sharing Plan (incorporated by
    reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q, filed with the Commission on
    August 13, 2002).                                                                                                                                                                                    
|       
|        | 10 | .21 |  |            |  | VitalWorks Inc. 2002 Employee Stock Purchase Plan (incorporated
    by reference to Exhibit 10.2 to the Registrants
    Quarterly Report on Form 10-Q, filed with the Commission on
    August 13, 2002).                                                                                                                                                                             
|       
|        | 10 | .22 |  |            |  | Rights Agreement, dated as of December 5, 2002 (the
    Rights Agreement), between VitalWorks Inc. and
    StockTrans, Inc., as Rights Agent, including as Exhibit B,
    the form of Rights Certificate and Election to Exercise
    (incorporated by reference to Exhibit 4 to the
    Registrants Current Report on Form 8-K, filed with
    the Commission on December 9, 2002).
|       
|        | 10 | .23 |  |            |  | Form of Letter to Stockholders (incorporated by reference to
    Exhibit 20 to the Registrants Current Report on
    Form 8-K, filed with the Commission on December 9,
    2002).                                                                                                                                                                                                    
|       
|        | 10 | .24 |  |            |  | Form of Certificate of Designations of Series B Preferred
    Stock, included in Exhibit C to the Rights Agreement
    (incorporated by reference to Exhibit 3 to the
    Registrants Report on Form 8-A12B, filed with the
    Commission on January 3, 2003).                                                                                                                       
|       
|        | 10 | .25 |  |            |  | Form of Employment Agreement, dated April 26, 2004, by and
    between VitalWorks Inc. and our Named Executive Officers
    (incorporated by reference to Exhibit 10 to the
    Registrants Quarterly Report on Form 10-Q, filed with
    the Commission on May 10, 2004).                                                                                                            
|       
|        | 10 | .26 |  |            |  | Amended Employment Agreement, dated July 26, 2004, by and
    between VitalWorks Inc. and Stephen N. Kahane (incorporated by
    reference to Exhibit 10.1 to the Registrants
    Quarterly Report on Form 10-Q, filed with the Commission on
    November 9, 2004).                                                                                                                  
|       
|        | 10 | .27 |  |            |  | Form of Amended Employment Agreement, dated July 26, 2004,
    by and between VitalWorks Inc. and Joseph M. Walsh, Michael A.
    Manto and Stephen Hicks (incorporated by reference to
    Exhibit 10.2 to the Registrants Quarterly Report on
    Form 10-Q, filed with the Commission on November 9,
    2004).                                                                    

44



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##### Table of Contents



|        |     |     |  |             |  |                                                                                                                                                                                                                                                                           
|------- | --- | --- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     |  |            
|No.     |     |     |  | Description
|        |     |     |  |            
|       
|        | 10  | .28 |  |            |  | Employment Agreement, dated October 1, 2004, by and between
    VitalWorks Inc. and Joseph D. Hill (incorporated by reference to
    Exhibit 10.3 to the Registrants Quarterly Report on
    Form 10-Q, filed with the Commission on November 9,
    2004).              
|       
|        | 10  | .29 |  |            |  | Asset Purchase Agreement, dated as of November 15, 2004, by
    and between VitalWorks Inc. and Cerner Corporation (incorporated
    by reference to Exhibit 10.1 to the Registrants
    Current Report on Form 8-K, filed with the Commission on
    November 18, 2004).
|       
|        | 10  | .30 |  |            |  | Agreement of Sublease, dated February 15, 2005, by and
    among AMICAS, Inc. and Patientkeeper, Inc. (incorporated by
    reference to 10.1 to our Quarterly Report on Form 10-Q,
    filed with the Commission on May 10, 2005).                                        
|       
|        | 10  | .31 |  |            |  | Amended and Restated Sublease, dated March 8, 2005, by and
    among AMICAS, Inc. and Chordiant Software, Inc. (incorporated by
    reference to 10.2 to our Quarterly Report on Form 10-Q,
    filed with the Commission on May 10, 2005).                               
|       
|        | 10  | .32 |  |            |  | Employment Agreement, dated March 28, 2005, by and between
    AMICAS inc. and Peter McClennen (incorporated by reference to
    Exhibit 2.1 to the Registrants Current report on
    Form 8-K, filed with the Commission on March 31, 2005).                            
|       
|        | 10  | .33 |  |            |  | Separation Agreement, dated March 31, 2005, by and between
    AMICAS inc. and Hamid Tabatabaie (incorporated by reference to
    Exhibit 2.1 to the Registrants Current report on
    Form 8-K, filed with the Commission on April 6, 2005).                            
|       
|        | *10 | .34 |  |            |  | AMICAS, Inc. 401(k) Retirement Savings Plan effective
    December 1, 2005.                                                                                                                                                                                               
|       
|        | 21  | .1  |  |            |  | Subsidiaries of the Company. Filed as Exhibit 21.1 to the
    Companys Annual Report on Form 10-K filed with the
    Commission on March 30, 2005.                                                                                                                       
|       
|        | *23 | .1  |  |            |  | Consent of BDO Seidman, LLP, independent registered public
    accounting firm.                                                                                                                                                                                           
|       
|        | 24  | .1  |  |            |  | Powers of Attorney (included on signature page).                                                                                                                                                                                                                          
|       
|        | *31 | .1  |  |            |  | Certification of Chief Executive Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   
|       
|        | *31 | .2  |  |            |  | Certification of Chief Financial Officer Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                   
|        | *32 | .1  |  |            |  | Certification of Chief Executive Officer and Chief Financial
    Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, 18 U.S.C. Section 1350.                                                                                                           






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

45



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##### Table of Contents



AMICAS, INC.




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

|                                                                                                             |  |      |    | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                             |  | Page |   
|                                                                                                             |  |      |   
|Financial Statements:                                                                                        |  |      |    | 
|Reports of Independent Registered Public
    Accounting Firm                                                 |  |      | 47 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                             |  |      | 50 | 
|Consolidated Statements of Operations for
    the years ended December 31, 2005, 2004 and 2003               |  |      | 51 | 
|Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2005, 2004 and 2003 |  |      | 52 | 
|Consolidated Statements of Cash Flows for
    the years ended December 31, 2005, 2004, and 2003              |  |      | 53 | 
|Notes to Consolidated Financial
    Statements                                                               |  |      | 54 | 

46



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






















47



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON


INTERNAL CONTROL OVER FINANCIAL REPORTING








Internal Control-Integrated Framework










48



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##### Table of Contents



Internal Control-Integrated Framework Internal Control-Integrated Framework








49



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##### Table of Contents



AMICAS, INC. and Subsidiary





CONSOLIDATED BALANCE SHEETS


|                                                                                                |                                                                                                          |                       |         |         |      |   |         |          |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | --------------------- | ------- | ------- | ---- | - | ------- | -------- | -
|                                                                                                |                                                                                                          | December 31,          |        
|                                                                                                |                                                                                                          |                       |        
|                                                                                                |                                                                                                          | 2005                  |         |         | 2004 |  
|                                                                                                |                                                                                                          |                       |         |         |      |  
|                                                                                                |                                                                                                          | (In thousands, except |        
|                                                                                                |                                                                                                          | share data)           |        
|ASSETS                                                                                         
|Current assets:                                                                                 |                                                                                                          |                       |         |         |      |   |         |         
|                                                                                                | Cash and cash equivalents                                                                                |                       | $       | 82,214  |      |   | $       | 12,634   |  
|                                                                                                | Accounts receivable, net of allowances of $767 and $2,200                                                |                       |         | 15,316  |      |   |         | 11,423   |  
|                                                                                                | Computer hardware held for resale                                                                        |                       |         | 127     |      |   |         | 279      |  
|                                                                                                | Deferred income taxes, net                                                                               |                       |         |        |      |   |         | 28,200   |  
|                                                                                                | Prepaid expenses and other current assets                                                                |                       |         | 1,025   |      |   |         | 3,053    |  
|                                                                                                | Current assets of discontinued operations                                                                |                       |         |        |      |   |         | 10,551   |  
|                                                                                                |                                                                                                          |                       |         |         |      |  
|Total current assets                                                                            |                                                                                                          |                       | 98,682  |         |      |   | 66,140  |         
|Property and equipment, less accumulated depreciation and
    amortization of $5,347 and $4,182 |                                                                                                          |                       | 1,259   |         |      |   | 1,988   |         
|Goodwill                                                                                        |                                                                                                          |                       | 27,313  |         |      |   | 27,313  |         
|Acquired/developed software, less accumulated amortization of
    $4,077 and $2,120             |                                                                                                          |                       | 9,623   |         |      |   | 11,580  |         
|Other intangible assets, less accumulated amortization of $889
    and $462                     |                                                                                                          |                       | 2,511   |         |      |   | 2,938   |         
|Other assets                                                                                    |                                                                                                          |                       | 897     |         |      |   | 1,447   |         
|Non-current assets of discontinued operations                                                   |                                                                                                          |                       |        |         |      |   | 22,480  |         
|                                                                                                |                                                                                                          |                       |         |         |      |  
|Total assets                                                                                    |                                                                                                          | $                     | 140,285 |         |      | $ | 133,886 |         
|                                                                                                |                                                                                                          |                       |         |         |      |  
|                                                                                               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                           
|Current liabilities:                                                                            |                                                                                                          |                       |         |         |      |   |         |         
|                                                                                                | Accounts payable and accrued expenses                                                                    |                       | $       | 9,085   |      |   | $       | 8,412    |  
|                                                                                                | Accrued employee compensation and benefits                                                               |                       |         | 2,050   |      |   |         | 3,507    |  
|                                                                                                | Accrued restructuring costs                                                                              |                       |         | 16      |      |   |         | 126      |  
|                                                                                                | Deferred revenue, including unearned discounts of $360 and $360                                          |                       |         | 8,495   |      |   |         | 10,474   |  
|                                                                                                | Current portion of long-term debt                                                                        |                       |         |        |      |   |         | 9,657    |  
|                                                                                                | Current liabilities of discontinued operations                                                           |                       |         |        |      |   |         | 13,996   |  
|                                                                                                |                                                                                                          |                       |         |         |      |  
|Total current liabilities                                                                       |                                                                                                          |                       | 19,646  |         |      |   | 46,172  |         
|Long-term debt, net of current portion                                                          |                                                                                                          |                       |        |         |      |   | 19,017  |         
|Other liabilities, primarily unearned discounts re: outsourced
    printing services            |                                                                                                          |                       | 726     |         |      |   | 1,229   |         
|Non-current liabilities of discontinued operations                                              |                                                                                                          |                       |        |         |      |   | 2,813   |         
|Commitments and contingencies                                                                   |                                                                                                          |                       |         |         |      |   |         |         
|Stockholders equity:                                                                           |                                                                                                          |                       |         |         |      |   |         |         
|                                                                                                | Preferred stock $.001 par value; 2,000,000 shares
    authorized; none issued                            |                       |         |        |      |   |         |         |  
|                                                                                                | Common stock $.001 par value, 200,000,000 shares
    authorized, 50,355,684 and 46,338,568 shares issued |                       |         | 50      |      |   |         | 46       |  
|                                                                                                | Additional paid-in capital                                                                               |                       |         | 222,927 |      |   |         | 211,888  |  
|                                                                                                | Accumulated deficit                                                                                      |                       |         | (96,592 | )    |   |         | (140,807 | )
|                                                                                                | Treasury stock, at cost, 1,985,502 shares                                                                |                       |         | (6,472  | )    |   |         | (6,472   | )
|                                                                                                |                                                                                                          |                       |         |         |      |  
|Total stockholders equity                                                                      |                                                                                                          |                       | 119,913 |         |      |   | 64,655  |         
|                                                                                                |                                                                                                          |                       |         |         |      |  
|Total liabilities and stockholders equity                                                      |                                                                                                          | $                     | 140,285 |         |      | $ | 133,886 |         
|                                                                                                |                                                                                                          |                       |         |         |      |  



50



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##### Table of Contents



AMICAS, INC. and Subsidiary





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |        |       |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ----- | - | ------- | ------ | ----- | - | ------- | ------ | ----- | -
|                                                              |                                                                                                                                          | Year Ended December 31,               |       
|                                                              |                                                                                                                                          |                                       |       
|                                                              |                                                                                                                                          | 2005                                  |        |        | 2004  |   |         | 2003   |      
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|                                                              |                                                                                                                                          | (In thousands, except per share data) |       
|Revenues                                                      |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |       
|                                                              | Maintenance and services                                                                                                                 |                                       | $      | 36,813 |       |   | $       | 29,543 |       |   | $       | 24,534 |      
|                                                              | Software licenses and system sales                                                                                                       |                                       |        | 15,998 |       |   |         | 12,776 |       |   |         | 9,677  |      
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Total revenues                                                |                                                                                                                                          | $                                     | 52,811 |        |       | $ | 42,319  |        |       | $ | 34,211  |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Costs and expenses                                            |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |       
|Cost of revenues:                                             |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |       
|                                                              | Maintenance and services                                                                                                                 |                                       | $      | 14,163 |       |   | $       | 13,060 |       |   | $       | 13,999 |      
|                                                              | Software licenses and system sales, includes amortization of
    software costs of $1,965 in 2005, $3,178 in 2004 and $1,873 in
    2003 |                                       |        | 6,413  |       |   |         | 6,154  |       |   |         | 5,147  |      
|                                                              | Impairment of capitalized software                                                                                                       |                                       |        |       |       |   |         | 3,229  |       |   |         | 490    |      
|Selling, general and administrative                           |                                                                                                                                          |                                       | 20,701 |        |       |   | 25,824  |        |       |   | 14,577  |       
|Research and development                                      |                                                                                                                                          |                                       | 9,047  |        |       |   | 9,488   |        |       |   | 7,565   |       
|Depreciation and amortization                                 |                                                                                                                                          |                                       | 1,777  |        |       |   | 1,968   |        |       |   | 1,331   |       
|Settlement, severance and impairment charges                  |                                                                                                                                          |                                       | 5,677  |        |       |   | 5,730   |        |       |   |        |       
|Acquired in-process technology                                |                                                                                                                                          |                                       |       |        |       |   |        |        |       |   | 750     |       
|Restructuring credits                                         |                                                                                                                                          |                                       |       |        |       |   | (155    | )      |       |   |        |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|                                                              |                                                                                                                                          |                                       | 57,778 |        |       |   | 65,298  |        |       |   | 43,859  |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Operating loss                                                |                                                                                                                                          |                                       | (4,967 | )      |       |   | (22,979 | )      |       |   | (9,648  | )     
|Interest income                                               |                                                                                                                                          |                                       | 2,516  |        |       |   | 163     |        |       |   | 273     |       
|Interest expense                                              |                                                                                                                                          |                                       | (751   | )      |       |   | (1,499  | )      |       |   | (1,149  | )     
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Loss from continuing operations, before income taxes          |                                                                                                                                          |                                       | (3,202 | )      |       |   | (24,315 | )      |       |   | (10,524 | )     
|(Benefit) Provision for income taxes                          |                                                                                                                                          |                                       | (1,197 | )      |       |   | 2,200   |        |       |   | 200     |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Loss from continuing operations                               |                                                                                                                                          |                                       | (2,005 | )      |       |   | (26,515 | )      |       |   | (10,724 | )     
|Gain on sale of discontinued operations, net of taxes $33,906 |                                                                                                                                          |                                       | 46,277 |        |       |   |        |        |       |   |        |       
|(Loss) income from discontinued operations                    |                                                                                                                                          |                                       | (57    | )      |       |   | 14,058  |        |       |   | 18,687  |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Net income (loss)                                             |                                                                                                                                          | $                                     | 44,215 |        |       | $ | (12,457 | )      |       | $ | 7,963   |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Earnings (loss) per share                                     |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |       
|                                                              | Basic:                                                                                                                                   |                                       |        |        |       |   |         |        |       |   |         |        |      
|                                                              |                                                                                                                                          | Continuing operations                 |        | $      | (0.04 | ) |         | $      | (0.61 | ) |         | $      | (0.25 | )
|                                                              |                                                                                                                                          | Discontinued operations               |        |        | 1.00  |   |         |        | 0.32  |   |         |        | 0.43  |  
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|                                                              |                                                                                                                                          | $                                     | 0.96   |        |       | $ | (0.29   | )      |       | $ | 0.18    |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|                                                              | Diluted:                                                                                                                                 |                                       |        |        |       |   |         |        |       |   |         |        |      
|                                                              |                                                                                                                                          | Continuing operations                 |        | $      | (0.04 | ) |         | $      | (0.61 | ) |         | $      | (0.25 | )
|                                                              |                                                                                                                                          | Discontinued operations               |        |        | 1.00  |   |         |        | 0.32  |   |         |        | 0.43  |  
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|                                                              |                                                                                                                                          | $                                     | 0.96   |        |       | $ | (0.29   | )      |       | $ | 0.18    |       
|                                                              |                                                                                                                                          |                                       |        |        |       |   |         |        |      
|Weighted average number of shares outstanding                 |                                                                                                                                          |                                       |        |        |       |   |         |        |       |   |         |       
|                                                              | Basic                                                                                                                                    |                                       |        | 46,285 |       |   |         | 43,563 |       |   |         | 43,052 |      
|                                                              | Diluted                                                                                                                                  |                                       |        | 46,285 |       |   |         | 43,563 |       |   |         | 43,052 |      



51



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AMICAS, INC. and Subsidiary





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       |  |   |        |   |  |   |         |       | 
|-------------------------------------------------------- | -------------------------------------- | --------------------------------- | ---------- | --------- | -------- |  | ---------- | ------ |  | - | ------- | - |  | ----------- | ------- | ----- | -------- | - | -------- | ----- |  | - | ------ | - |  | - | ------- | ----- | 
|                                                         |                                        | Shares                            |            |           |          |  |            |        |  |   |         |   | 
|                                                         |                                        |                                   |            |           |          |  | Additional |        |  |   |         |   |  |            
|                                                         |                                        | Common                            |            |           | Treasury |  |            | Common |  |   | Paid-In |   |  | Accumulated |         |       | Treasury |   |          |      
|                                                         |                                        | Stock                             |            |           | Stock    |  |            | Stock  |  |   | Capital |   |  | Deficit     |         |       | Stock    |   |          | Total | 
|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       | 
|                                                         |                                        | (In thousands, except share data) |           
|Balance at December 31, 2002                             |                                        |                                   | 44,605,944 |           |          |  | (1,985,502 | )      |  | $ | 45      |   |  | $           | 203,173 |       |          | $ | (136,313 | )     |  | $ | (6,472 | ) |  | $ | 60,433  |      
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       |  |   |        |   |  |   |         |      
|                                                         | Matching contribution 401(k) plan      |                                   |            | 276,933   |          |  |            |        |  |   |         |   |  |             |         | 1,132 |          |   |          |       |  |   |        |   |  |   |         | 1,132 | 
|                                                         | Exercise of stock options              |                                   |            | 395,939   |          |  |            |        |  |   |         |   |  |             |         | 1,134 |          |   |          |       |  |   |        |   |  |   |         | 1,134 | 
|Net income                                               |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   | 7,963    |       |  |   |        |   |  |   | 7,963   |      
|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       | 
|Balance at December 31, 2003                             |                                        |                                   | 45,278,816 |           |          |  | (1,985,502 | )      |  | $ | 45      |   |  | $           | 205,439 |       |          | $ | (128,350 | )     |  | $ | (6,472 | ) |  | $ | 70,662  |      
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       |  |   |        |   |  |   |         |      
|                                                         | Matching contribution 401(k) plan      |                                   |            | 64,269    |          |  |            |        |  |   |         |   |  |             |         | 252   |          |   |          |       |  |   |        |   |  |   |         | 252   | 
|                                                         | Exercise of stock options and warrants |                                   |            | 995,483   |          |  |            |        |  |   |         | 1 |  |             |         | 2,320 |          |   |          |       |  |   |        |   |  |   |         | 2,321 | 
|Tax benefit from change in valuation allowance and other |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             | 3,877   |       |          |   |          |       |  |   |        |   |  |   | 3,877   |      
|Net loss                                                 |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   | (12,457  | )     |  |   |        |   |  |   | (12,457 | )    
|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       | 
|Balance at December 31, 2004                             |                                        |                                   | 46,338,568 |           |          |  | (1,985,502 | )      |  | $ | 46      |   |  | $           | 211,888 |       |          | $ | (140,807 | )     |  | $ | (6,472 | ) |  | $ | 64,655  |      
|Issuance of common stock, net of related expense for:    |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       |  |   |        |   |  |   |         |      
|                                                         | Matching contribution 401(k) plan      |                                   |            | 32,099    |          |  |            |        |  |   |         |   |  |             |         | 161   |          |   |          |       |  |   |        |   |  |   |         | 161   | 
|                                                         | Exercise of stock options              |                                   |            | 3,985,017 |          |  |            |        |  |   |         | 4 |  |             |         | 8,989 |          |   |          |       |  |   |        |   |  |   |         | 8,993 | 
|Modification of stock option agreements                  |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             | 1,211   |       |          |   |          |       |  |   |        |   |  |   | 1,211   |      
|Tax benefit from change in valuation allowance and other |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             | 678     |       |          |   |          |       |  |   |        |   |  |   | 678     |      
|Net income (loss)                                        |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   | 44,215   |       |  |   |        |   |  |   | 44,215  |      
|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       | 
|Balance at December 31, 2005                             |                                        |                                   | 50,355,684 |           |          |  | (1,985,502 | )      |  | $ | 50      |   |  | $           | 222,927 |       |          | $ | (96,592  | )     |  | $ | (6,472 | ) |  | $ | 119,913 |      
|                                                         |                                        |                                   |            |           |          |  |            |        |  |   |         |   |  |             |         |       |          |   |          |       | 



52



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AMICAS, INC. and Subsidiary





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |        |   |         |         |         |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------- | ------ | ------- | ------- | - | ------- | ------ | ------ | - | ------- | ------- | ------- | -
|                                                                                                   |                                                                             | Year Ended December 31,                                       |       
|                                                                                                   |                                                                             |                                                               |       
|                                                                                                   |                                                                             | 2005                                                          |        |         | 2004    |   |         | 2003   |       
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|                                                                                                   |                                                                             | (In thousands)                                                |       
|Operating activities                                                                               |                                                                             |                                                               |        |         |         |   |         |        |        |   |         |        
|Loss from continuing operations                                                                    |                                                                             | $                                                             | (2,005 | )       |         | $ | (26,515 | )      |        | $ | (10,724 | )      
|Income from discontinued operations                                                                |                                                                             |                                                               | 46,220 |         |         |   | 14,058  |        |        |   | 18,687  |        
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|Net income (loss)                                                                                  |                                                                             |                                                               | 44,215 |         |         |   | (12,457 | )      |        |   | 7,963   |        
|Adjustments to reconcile net income (loss) to cash (used in)
    provided by operating activities: |                                                                             |                                                               |        |         |         |   |         |        |        |   |         |        
|                                                                                                   | Gain from the sale of discontinued operations                               |                                                               |        | (81,143 | )       |   |         |       |        |   |         |        |        
|                                                                                                   | Impairment of capitalized software                                          |                                                               |        |        |         |   |         | 3,229  |        |   |         | 490     |        
|                                                                                                   | Other impairment charges                                                    |                                                               |        |        |         |   |         | 1,351  |        |   |         |        |        
|                                                                                                   | Restructuring and severance charges                                         |                                                               |        |        |         |   |         | 1,093  |        |   |         | 332     |        
|                                                                                                   | Depreciation and amortization                                               |                                                               |        | 1,777   |         |   |         | 3,047  |        |   |         | 2,460   |        
|                                                                                                   | Acquired in-process technology                                              |                                                               |        |        |         |   |         |       |        |   |         | 750     |        
|                                                                                                   | Provisions for bad debts, returns and discounts                             |                                                               |        | (1,432  | )       |   |         | 2,424  |        |   |         | 1,973   |        
|                                                                                                   | Gain on sale of fixed assets                                                |                                                               |        | (41     | )       |   |         |       |        |   |         |        |        
|                                                                                                   | Amortization of deferred finance costs                                      |                                                               |        |        |         |   |         | 226    |        |   |         | 173     |        
|                                                                                                   | Write-off of deferred financing costs                                       |                                                               |        | 661     |         |   |         |       |        |   |         |        |        
|                                                                                                   | Amortization of software development costs                                  |                                                               |        | 1,965   |         |   |         | 3,178  |        |   |         | 1,873   |        
|                                                                                                   | Deferred income taxes                                                       |                                                               |        | 28,200  |         |   |         | 1,950  |        |   |         |        |        
|                                                                                                   | Non-cash stock compensation expense                                         |                                                               |        | 1,211   |         |   |         |       |        |   |         |        |        
|                                                                                                   | Changes in operating assets and liabilities:                                |                                                               |        |         |         |   |         |        |        |   |         |         |        
|                                                                                                   |                                                                             | Accounts receivable                                           |        |         | (2,460  | ) |         |        | (7,356 | ) |         |         | (2,342  | )
|                                                                                                   |                                                                             | Computer hardware held for resale, prepaid expenses and other |        |         | 2,070   |   |         |        | (134   | ) |         |         | (1,748  | )
|                                                                                                   |                                                                             | Accounts payable and accrued expenses                         |        |         | (908    | ) |         |        | 3,870  |   |         |         | (3,726  | )
|                                                                                                   |                                                                             | Deferred revenue including unearned discount                  |        |         | (2,339  | ) |         |        | 5,514  |   |         |         | (417    | )
|                                                                                                   |                                                                             | Other liabilities                                             |        |         | (143    | ) |         |        | (1,200 | ) |         |         | (5,601  | )
|                                                                                                   |                                                                             | Tax benefit from change in valuation allow and other          |        |         | 678     |   |         |        |       |   |         |         |        |  
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|                                                                                                   |                                                                             | Cash (used in) provided by operating activities               |        |         | (7,689  | ) |         |        | 4,735  |   |         |         | 2,180   |  
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|Investing activities                                                                               |                                                                             |                                                               |        |         |         |   |         |        |        |   |         |        
|                                                                                                   | Business acquisition, net of cash acquired                                  |                                                               |        |        |         |   |         | (3,675 | )      |   |         | (29,143 | )      
|                                                                                                   | Software product development costs                                          |                                                               |        |        |         |   |         | (1,638 | )      |   |         | (2,017  | )      
|                                                                                                   | Proceeds from sale of discontinued operations                               |                                                               |        | 98,408  |         |   |         |       |        |   |         |        |        
|                                                                                                   | Payment of transaction costs related to sale of discontinued
    operations |                                                               |        | (1,043  | )       |   |         |       |        |   |         |        |        
|                                                                                                   | Proceeds from sale of assets                                                |                                                               |        | 268     |         |   |         |       |        |   |         | 360     |        
|                                                                                                   | Purchases of property and equipment                                         |                                                               |        | (684    | )       |   |         | (2,227 | )      |   |         | (1,954  | )      
|                                                                                                   | Security deposit                                                            |                                                               |        |        |         |   |         |       |        |   |         | (308    | )      
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|                                                                                                   |                                                                             | Cash provided by (used in) investing activities               |        |         | 96,949  |   |         |        | (7,540 | ) |         |         | (33,062 | )
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|Financing activities                                                                               |                                                                             |                                                               |        |         |         |   |         |        |        |   |         |        
|                                                                                                   | Principal repayments on long-term debt                                      |                                                               |        | (28,673 | )       |   |         | (6,827 | )      |   |         | (4,273  | )      
|                                                                                                   | Proceeds from the issuance of long-term debt                                |                                                               |        |        |         |   |         |       |        |   |         | 15,000  |        
|                                                                                                   | Exercise of stock options and warrants                                      |                                                               |        | 8,993   |         |   |         | 2,305  |        |   |         | 1,076   |        
|                                                                                                   | Deferred finance costs and other                                            |                                                               |        |        |         |   |         | (167   | )      |   |         | (267    | )      
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|                                                                                                   |                                                                             | Cash (used in) provided by financing activities               |        |         | (19,680 | ) |         |        | (4,689 | ) |         |         | 11,536  |  
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|(Decrease) increase in cash and cash equivalents                                                   |                                                                             |                                                               | 69,580 |         |         |   | (7,494  | )      |        |   | (19,346 | )      
|Cash and cash equivalents at beginning of year                                                     |                                                                             |                                                               | 12,634 |         |         |   | 20,128  |        |        |   | 39,474  |        
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       
|Cash and cash equivalents at end of year                                                           |                                                                             | $                                                             | 82,214 |         |         | $ | 12,634  |        |        | $ | 20,128  |        
|                                                                                                   |                                                                             |                                                               |        |         |         |   |         |        |       



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AMICAS, INC. and Subsidiary





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

end-to sm








|   |                  
|-- | -----------------
|B. | Segment Reporting





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



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





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



54



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##### Table of Contents



AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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

97-2 01-14, Out-of (off-the






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





| |                      
| | ---------------------
| | Concentration of Risk



55



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##### Table of Contents



AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|                                        |  |      |        |   |      |   |        |      |  |   |        |    
|--------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | ---
|                                        |  | 2005 |        |   | 2004 |   |        | 2003 | 
|                                        |  |      |        |   |      |   |        |      | 
|Balance at beginning of period          |  | $    | 2,200  |   |      | $ | 2,800  |      |  | $ | 1,900  |    
|Additions charged to costs and expenses |  |      | 140    |   |      |   | 350    |      |  |   | 145    |    
|Additions charged to other accounts(a)  |  |      | 229    |   |      |   | 1,811  |      |  |   | 1,828  |    
|Reductions(b)                           |  |      | (1,802 | ) |      |   | (2,761 | )    |  |   | (1,273 | )  
|                                        |  |      |        |   |      |   |        |      | 
|Balance at end of period                |  | $    | 767    |   |      | $ | 2,200  |      |  | $ | 2,800  | (c)






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



|    |  |                                                                                                                                                                                     
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | Write-offs, returns and discounts, net of recoveries and, in
    2004, reclassification of the Medical Division allowance of
    $1,200 to current assets of discontinued operations
|   
|(c) |  | Includes $200 from a business acquisition                                                                                                                                           



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





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

first-in




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



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##### Table of Contents



AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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







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





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





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



57



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

(in
thousands, except per share data):


|                           |                                                                            |                         |        |        |      |   |         |         |   |   |       |         |  
|-------------------------- | -------------------------------------------------------------------------- | ----------------------- | ------ | ------ | ---- | - | ------- | ------- | - | - | ----- | ------- | -
|                           |                                                                            | Year Ended December 31, |       
|                           |                                                                            |                         |       
|                           |                                                                            | 2005                    |        |        | 2004 |   |         | 2003    |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|Numerator  income (loss): |                                                                            |                         |        |        |      |   |         |         |   |   |       |        
|                           | Continuing operations                                                      |                         | $      | (2,005 | )    |   | $       | (26,515 | ) |   | $     | (10,724 | )
|                           | Discontinued operations                                                    |                         |        | 46,220 |      |   |         | 14,058  |   |   |       | 18,687  |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|                           |                                                                            | $                       | 44,215 |        |      | $ | (12,457 | )       |   | $ | 7,963 |        
|                           |                                                                            |                         |        |        |      |   |         |         |  
|Denominator:               |                                                                            |                         |        |        |      |   |         |         |   |   |       |        
|                           | Basic EPS  weighted-average shares                                        |                         |        | 46,285 |      |   |         | 43,563  |   |   |       | 43,052  |  
|                           | Effect of dilutive securities, stock option and warrant rights             |                         |        |       |      |   |         |        |   |   |       |        |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|                           | Diluted EPS  adjusted weighted-average shares and
    assumed conversions |                         |        | 46,285 |      |   |         | 43,563  |   |   |       | 43,052  |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|Basic EPS:                 |                                                                            |                         |        |        |      |   |         |         |   |   |       |        
|                           | Continuing operations                                                      |                         | $      | (0.04  | )    |   | $       | (0.61   | ) |   | $     | (0.25   | )
|                           | Discontinued operations                                                    |                         |        | 1.00   |      |   |         | 0.32    |   |   |       | 0.43    |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|                           |                                                                            | $                       | 0.96   |        |      | $ | (0.29   | )       |   | $ | 0.18  |        
|                           |                                                                            |                         |        |        |      |   |         |         |  
|Diluted EPS:               |                                                                            |                         |        |        |      |   |         |         |   |   |       |        
|                           | Continuing operations                                                      |                         | $      | (0.04  | )    |   | $       | (0.61   | ) |   | $     | (0.25   | )
|                           | Discontinued operations                                                    |                         |        | 1.00   |      |   |         | 0.32    |   |   |       | 0.43    |  
|                           |                                                                            |                         |        |        |      |   |         |         |  
|                           |                                                                            | $                       | 0.96   |        |      | $ | (0.29   | )       |   | $ | 0.18  |        
|                           |                                                                            |                         |        |        |      |   |         |         |  





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





| |                  
| | -----------------
| | Reclassifications





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



58



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




(in thousands,
except per share data)


|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                  |                                 | Year Ended December 31, |       
|                                                                                                                                                  |                                 |                         |       
|                                                                                                                                                  |                                 | 2005                    |        |       | 2004 |   |         | 2003  |  
|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |  
|Loss from continuing operations, as reported                                                                                                      |                                 | $                       | (2,005 | )     |      | $ | (26,515 | )     |   | $ | (10,724 | )    
|Less: total stock-based employee compensation expense determined
    under fair value based method for all awards, net of related tax
    effects |                                 |                         | (2,934 | )     |      |   | (1,425  | )     |   |   | (4,131  | )    
|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |  
|Pro forma loss from continuing operations                                                                                                         |                                 | $                       | (4,939 | )     |      | $ | (27,940 | )     |   | $ | (14,855 | )    
|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |  
|Loss per share from continuing operations:                                                                                                        |                                 |                         |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                                  | Basic and diluted  as reported |                         | $      | (0.04 | )    |   | $       | (0.61 | ) |   | $       | (0.25 | )
|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |  
|                                                                                                                                                  | Basic and diluted  pro forma   |                         | $      | (0.11 | )    |   | $       | (0.64 | ) |   | $       | (0.35 | )
|                                                                                                                                                  |                                 |                         |        |       |      |   |         |       |  



|                                          |  |              |      |   |      |  |      |      |  |  |      |  
|----------------------------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                          |  | Year Ended   |     
|                                          |  | December 31, |     
|                                          |  |              |     
|                                          |  | 2005         |      |   | 2004 |  |      | 2003 | 
|                                          |  |              |      |   |      |  |      |      | 
|Risk-free interest rate                   |  |              | 4.1  | % |      |  | 3.0  | %    |  |  | 2.5  | %
|Expected dividend yield                   |  |              | 0.0  |   |      |  | 0.0  |      |  |  | 0.0  |  
|Expected stock price volatility           |  |              | 63.1 | % |      |  | 72.1 | %    |  |  | 76.0 | %
|Weighted average expected life (in years) |  |              | 4.8  |   |      |  | 4.8  |      |  |  | 4.0  |  





|   |                                 
|-- | --------------------------------
|D. | Recent Accounting Pronouncements



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##### Table of Contents



AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Accounting Changes and Error Correction  a
replacement of APB Opinion No. 20 and FASB
No. 3 Accounting Changes Reporting Accounting Changes in Interim Financial
Statements




|   |                        
|-- | -----------------------
|E. | Discontinued Operations









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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


03-13,




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







|                                           |  |                         |     |   |      |   |        |      |  |   |        | 
|------------------------------------------ |  | ----------------------- | --- | - | ---- | - | ------ | ---- |  | - | ------ | 
|                                           |  | Year Ended December 31, |    
|                                           |  |                         |    
|                                           |  | 2005                    |     |   | 2004 |   |        | 2003 | 
|                                           |  |                         |     |   |      |   |        |      | 
|Revenues                                   |  |                         |    |   |      | $ | 71,093 |      |  | $ | 77,308 | 
|Gross profit                               |  |                         |    |   |      |   | 52,360 |      |  |   | 56,337 | 
|Operating income (loss)                    |  | $                       | (57 | ) |      |   | 14,060 |      |  |   | 18,693 | 
|Income (loss) from discontinued operations |  |                         | (57 | ) |      |   | 14,058 |      |  |   | 18,687 | 

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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                     
|-- | --------------------
|F. | Business Combination













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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(in thousands):


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






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



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

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



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





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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|   |                                              
|-- | ---------------------------------------------
|G. | Settlements, Severance and Impairment Charges







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Settlement of earn-out. In connection with the
    termination of the earn-out consideration obligations relating
    to the acquisition of Amicas PACS, the Company recognized
    $1.9 million of expense for amounts paid to certain Amicas
    PACS employees under the Amicas PACS bonus plan. Included in the
    $1.9 million was $1.1 million for the acceleration of
    earn-out bonus, pursuant to agreements with former Amicas PACS
    executives, whose employment was terminated by mutual agreement.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Settlement of litigation. On October 14, 2005, the
    Company announced that David and Susan Jones
    (Plaintiffs) and InfoCure Corporation (now known as
    AMICAS, Inc.), Richard Perlman and James Price agreed to settle
    and to resolve and terminate, fully and finally, the issues
    between them in the lawsuit styled David and Susan Jones v.
    Infocure Corporation, et al. filed in 2001 concerning a
    1999 transaction. As part of the settlement, the Company agreed
    to pay $3.25 million to the Plaintiffs. The Company
    recorded a $2.75 million charge related to the settlement
    of this litigation in 2005. The $2.75 million charge is net
    of the reimbursement received of $0.325 million from the
    co-defendants, who are
    two former executive officers of the Company, and
    $0.5 million for previously accrued amounts.

64



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##### Table of Contents



AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                       
| | - | ----------------------
| |  | Restructuring charges:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 2004 Plan. On October 15, 2004, the Company
    notified 57 of its employees that, in connection with the
    relocation of the Companys corporate headquarters from
    Ridgefield, Connecticut to Boston, Massachusetts, their
    employment would be terminated under a plan of termination. The
    employees were terminated in the fourth quarter of 2004 and the
    first quarter of 2005. Pursuant to their termination agreements,
    the Company had agreed to pay their salary and provide certain
    benefits, during their severance period. In 2005, the Company
    recorded a $0.7 million charge for costs associated with
    employees terminated during the first quarter of 2005 and
    $0.2 million non-cash stock compensation expense for
    certain modified stock awards.
|
| | The 2005 Plan. In May 2005, the Company notified 13 of
    its employees that their employment would be terminated in the
    second quarter of 2005 and, pursuant to their termination
    agreements, the Company agreed to pay their salary during their
    severance period. In 2005, the Company recorded a
    $0.2 million charge for costs associated with their
    termination.                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Office Closure. In June 2005, the Company vacated its
    former Ridgefield, Connecticut headquarters and determined it
    had no future use for this leased space. In 2005, the Company
    recorded a restructuring charge for the remaining contractual
    lease payments under the lease agreement of approximately
    $0.1 million, which was paid in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Executive Termination Costs. On March 31, 2005, the
    Company entered into a separation agreement with two former
    executives of the Company, who were also former executives of
    Amicas PACS. Pursuant to their agreements, the Company has
    agreed to pay the executives two months of salary and other
    compensation obligations. In 2005, the Company recorded
    approximately $0.1 million in costs related to the
    termination of employment of these executives. Additionally,
    under the separation agreements, in the first and second quarter
    of 2005, the Company accelerated the payment of certain earn-out
    bonuses in the amount of $1.1 million. As of
    December 31, 2005, all amounts have been paid.                                                        





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Settlement of earn-out. In connection with the
    termination of the earn-out consideration obligations relating
    to the acquisition of Amicas PACS, the Company recognized
    $2.4 million of expense for amounts paid, or to be paid, to
    certain Amicas PACS employees under the Amicas PACS bonus plan.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The 2004 Plan. The Company recorded $1.3 million of
    severance-related costs including executive-related severance
    costs of $0.4 million. In December 2004, the Company
    relocated its corporate headquarters from Ridgefield,
    Connecticut to Boston, Massachusetts. On October 15, 2004,
    the Company notified 57 of its employees that, in connection
    with the relocation of the Companys corporate
    headquarters, their employment would be terminated under a plan
    of termination.                                                                                                                                                                                                                                            
|
| |  | Impairment charges. The Company recorded an impairment
    charge of $1.2 million to write-down its enterprise
    resource planning software (ERP) relating to the
    Companys decision to cease using a portion of its ERP.
    This decision was due to the downsizing of the Company as a
    result of the Medical Division sale.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Settlement of litigation. The Company recorded costs of
    $0.8 million relating to the settlement of litigation. In
    August 2003, the Company was served with a summons and complaint
    as part of a bankruptcy proceeding relating to a former business
    associate. The complaint alleged that in 2001, the Company
    received a preference payment from the business associate and
    sought to avoid and recover the $0.8 million payment made
    to AMICAS. The matter was settled in March 2004 and the Company
    paid $0.3 million to the former business associate through
    its committee of unsecured creditors. Also, in September 2004, a
    lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and
    Amicas, Inc. was filed in

65



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the United States District Court for the Southern District of
    California. The complaint alleged that VitalWorks and Amicas
    infringed the plaintiffs patent through the manufacture,
    use, importation, sale and/or offer for sale of automated
    medical imaging and archival systems. The plaintiff sought
    monetary damages, treble damages and a permanent injunction. On
    November 3, 2004, the Company served its answer. On
    January 26, 2005, the parties entered into a Settlement,
    Release and License agreement, and on February 4, 2005, a
    stipulation of dismissal, dismissing the lawsuit with prejudice,
    was entered. In connection with this agreement, the Company paid
    the plaintiff $0.5 million in 2005. This amount was accrued
    at December 31, 2004.



|   |                       
|-- | ----------------------
|H. | Property and Equipment



|                                               |  |               |     |                |              |   |       |      |  |   |       | 
|---------------------------------------------- |  | ------------- | --- | -------------- | ------------ | - | ----- | ---- |  | - | ----- | 
|                                               |  | Depreciation/ |     |                | December 31, |  
|                                               |  | Amortization  |     |                |              |  
|                                               |  | Period        |     |                | 2005         |   |       | 2004 | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  | (Years)       |     |                |             
|                                               |  |               |     | (In thousands) |             
|Equipment, primarily computers, and software   |  |               | 3-5 |                |              | $ | 3,446 |      |  | $ | 3,333 | 
|Equipment under capital lease obligations      |  |               | 3-5 |                |              |   | 2,630 |      |  |   | 2,608 | 
|Furniture and other                            |  |               | 3-7 |                |              |   | 530   |      |  |   | 229   | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  |               |     |                |              |   | 6,606 |      |  |   | 6,170 | 
|Less accumulated depreciation and amortization |  |               |     |                |              |   | 5,347 |      |  |   | 4,182 | 
|                                               |  |               |     |                |              |   |       |      | 
|                                               |  |               |     |                |              | $ | 1,259 |      |  | $ | 1,988 | 
|                                               |  |               |     |                |              |   |       |      | 





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



|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          |  |   |        |   |  |   |        | 
|--------------------- |  | --------- | -- | -------------- | -------- | - | ------ | ------------ |  | --- | -------- | - | ----- | -------- | ------ |  | ------------ | --- | ------ | -------- |  | - | ------ | - |  | - | ------ | 
|                      |  |           |    | December 31,   |         
|                      |  |           |    |                |         
|                      |  |           |    | 2005           |          |   | 2004   |             
|                      |  |           |    |                |          |   |        |             
|                      |  | Estimated |    |                | Gross    |   |        |              |  | Net |          |   | Gross |          |        |  |              | Net |       
|                      |  | Economic  |    |                | Carrying |   |        | Accumulated  |  |     | Carrying |   |       | Carrying |        |  | Accumulated  |     |        | Carrying | 
|                      |  | Life      |    |                | Amount   |   |        | Amortization |  |     | Value    |   |       | Amount   |        |  | Amortization |     |        | Value    | 
|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|                      |  | (Years)   |    |                |         
|                      |  |           |    | (In thousands) |         
|Goodwill              |  |           |    |                |          | $ | 27,313 |              |  |     |         |   |       | $        | 27,313 |  |              | $   | 27,313 |          |  |   |       |   |  | $ | 27,313 | 
|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|Acquired software     |  |           | 7  |                |          | $ | 13,700 |              |  | $   | (4,077   | ) |       | $        | 9,623  |  |              | $   | 13,700 |          |  | $ | (2,120 | ) |  | $ | 11,580 | 
|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|Trademarks            |  |           | 15 |                |          | $ | 1,900  |              |  | $   | (264     | ) |       | $        | 1,636  |  |              | $   | 1,900  |          |  | $ | (137   | ) |  | $ | 1,763  | 
|Noncompete agreements |  |           | 5  |                |          |   | 1,500  |              |  |     | (625     | ) |       |          | 875    |  |              |     | 1,500  |          |  |   | (325   | ) |  |   | 1,175  | 
|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 
|                      |  |           |    |                |          | $ | 3,400  |              |  | $   | (889     | ) |       | $        | 2,511  |  |              | $   | 3,400  |          |  | $ | (462   | ) |  | $ | 2,938  | 
|                      |  |           |    |                |          |   |        |              |  |     |          |   |       |          |        |  |              |     |        |          | 





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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




(in thousands):


|                       |       |       |       |        |      |   |       |       |  |   |       |       |  |      |       |       |      |   |       |            |  |   |       |       |  |   |       |       | 
|---------------------- | ----- | ----- | ----- | ------ | ---- | - | ----- | ----- |  | - | ----- | ----- |  | ---- | ----- | ----- | ---- | - | ----- | ---------- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                       |       | Total |       |        | 2006 |   |       | 2007  |  |   | 2008  |       |  | 2009 |       |       | 2010 |   |       | Thereafter | 
|                       |       |       |       |        |      |   |       |       |  |   |       |       |  |      |       |       |      |   |       |            | 
|Acquired software      |       | $     | 9,623 |        |      | $ | 1,957 |       |  | $ | 1,957 |       |  | $    | 1,957 |       |      | $ | 1,957 |            |  | $ | 1,795 |       |  |   |      |      
|Trademarks             |       |       | 1,636 |        |      |   | 127   |       |  |   | 127   |       |  |      | 127   |       |      |   | 127   |            |  |   | 127   |       |  | $ | 1,001 |      
|Non-compete agreements |       |       | 875   |        |      |   | 300   |       |  |   | 300   |       |  |      | 275   |       |      |   |      |            |  |   |      |       |  |   |      |      
|                       |       |       |       |        |      |   |       |       |  |   |       |       |  |      |       |       |      |   |       |            | 
|                       | Total |       | $     | 12,134 |      |   | $     | 2,384 |  |   | $     | 2,384 |  |      | $     | 2,359 |      |   | $     | 2,084      |  |   | $     | 1,922 |  |   | $     | 1,001 | 
|                       |       |       |       |        |      |   |       |       |  |   |       |       |  |      |       |       |      |   |       |            | 



|   |               
|-- | --------------
|J. | Long-Term Debt



|                                    |                          |                |   |   |      |   |        |        | 
|----------------------------------- | ------------------------ | -------------- | - | - | ---- | - | ------ | ------ | 
|                                    |                          | December 31,   |  
|                                    |                          |                |  
|                                    |                          | 2005           |   |   | 2004 |  
|                                    |                          |                |   |   |      |  
|                                    |                          | (In thousands) |  
|Wells Fargo Foothill, Inc.          |                          |                |   |   |      |   |        |       
|                                    | Acquisition line advance |                |   |  |      |   | $      | 11,000 | 
|                                    | Term loan                |                |   |  |      |   |        | 12,000 | 
|Note payable re earn-out settlement |                          |                |  |   |      |   | 5,588  |       
|Capital leases                      |                          |                |  |   |      |   | 86     |       
|                                    |                          |                |   |   |      |  
|                                    |                          |                |  |   |      |   | 28,674 |       
|Less current portion                |                          |                |  |   |      |   | 9,657  |       
|                                    |                          |                |   |   |      |  
|                                    |                          |                |  |   |      | $ | 19,017 |       
|                                    |                          |                |   |   |      |  







|   |                              
|-- | -----------------------------
|K. | Commitments and Contingencies



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|     |       |                |       |       | 
|---- | ----- | -------------- | ----- | ----- | 
|Year |       | Operating(a)   |      
|     |       |                |      
|     |       | (In thousands) |      
|2006 |       | $              | 1,214 |      
|2007 |       |                | 1,262 |      
|2008 |       |                | 358   |      
|     |       |                |      
|     | Total |                | $     | 2,834 | 
|     |       |                |      






|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In 2005, certain operating leases were assigned to Cerner in
    connection with the sale of the Medical Division. Also, in 2005,
    the Company entered into subleases for additional office space
    at its Boston, Massachusetts corporate headquarters.













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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                  
| | -----------------
| | Legal Proceedings







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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                     
|-- | --------------------
|L. | Stockholders Equity



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















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



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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

Length-of






Length-of


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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






shares in
thousands)


|                                         |           |        |        |          |                |   |      |      | 
|---------------------------------------- | --------- | ------ | ------ | -------- | -------------- | - | ---- | ---- | 
|                                         |           |        |        | Weighted |               
|                                         |           |        |        | Average  |               
|                                         |           | Shares |        |          | Exercise Price |  
|                                         |           |        |        |          |                |  
|Outstanding at December 31, 2002         |           |        | 9,528  |          |                | $ | 2.79 |     
|                                         | Granted   |        |        | 83       |                |   |      | 4.22 | 
|                                         | Exercised |        |        | (314     | )              |   |      | 2.62 | 
|                                         | Forfeited |        |        | (165     | )              |   |      | 4.41 | 
|                                         |           |        |        |          |                |  
|Outstanding at December 31, 2003         |           |        | 9,132  |          |                |   | 2.77 |     
|                                         | Granted   |        |        | 2,999    |                |   |      | 3.57 | 
|                                         | Exercised |        |        | (851     | )              |   |      | 2.22 | 
|                                         | Forfeited |        |        | (391     | )              |   |      | 4.18 | 
|                                         |           |        |        |          |                |  
|Outstanding at December 31, 2004         |           |        | 10,889 |          |                |   | 2.98 |     
|                                         | Granted   |        |        | 1,187    |                |   |      | 4.03 | 
|                                         | Exercised |        |        | (3,842   | )              |   |      | 2.23 | 
|                                         | Forfeited |        |        | (1,562   | )              |   |      | 4.55 | 
|                                         |           |        |        |          |                |  
|Outstanding at December 31, 2005         |           |        | 6,672  |          |                | $ | 3.23 |     
|                                         |           |        |        |          |                |  
|Options exercisable at December 31, 2003 |           |        | 8,026  |          |                | $ | 2.75 |     
|Options exercisable at December 31, 2004 |           |        | 7,882  |          |                | $ | 2.75 |     
|Options exercisable at December 31, 2005 |           |        | 4,148  |          |                | $ | 2.95 |     

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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(shares in thousands)


|                         |  |                     |       |           |                     |  |          |          |  |   |           |          |  |          |       |  |  |   |      | 
|------------------------ |  | ------------------- | ----- | --------- | ------------------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | ----- |  |  | - | ---- | 
|                         |  | Options Outstanding |       |           |                    
|                         |  |                     |       |           | Options Exercisable | 
|                         |  |                     |       | Weighted  |                     |  |          |          |  |  
|                         |  |                     |       | Average   |                     |  | Weighted |          |  |   |           | Weighted | 
|                         |  |                     |       | Remaining |                     |  | Average  |          |  |   |           | Average  | 
|                         |  | Number              |       |           | Contractual         |  |          | Exercise |  |   | Number    |          |  | Exercise |      
|Range of Exercise Prices |  | of Shares           |       |           | Life                |  |          | Price    |  |   | of Shares |          |  | Price    |      
|                         |  |                     |       |           |                     |  |          |          |  |   |           |          |  |          |      
|                         |  | (Years)             |       |           |                     |  |         
|$0.79 -  2.50            |  |                     | 3,013 |           |                     |  | 4.3      |          |  | $ | 2.02      |          |  |          | 3,013 |  |  | $ | 2.02 | 
|2.51 -  5.00             |  |                     | 2,924 |           |                     |  | 8.2      |          |  |   | 3.57      |          |  |          | 534   |  |  |   | 3.36 | 
|5.01 -  7.50             |  |                     | 645   |           |                     |  | 5.1      |          |  |   | 6.52      |          |  |          | 514   |  |  |   | 6.87 | 
|7.51 - 17.50             |  |                     | 90    |           |                     |  | 3.2      |          |  |   | 9.17      |          |  |          | 87    |  |  |   | 9.21 | 
|                         |  |                     |       |           |                     |  |          |          |  |   |           |          |  |          |      
|$0.79 - 17.50            |  |                     | 6,672 |           |                     |  | 6.1      |          |  | $ | 3.23      |          |  |          | 4,148 |  |  | $ | 2.95 | 
|                         |  |                     |       |           |                     |  |          |          |  |   |           |          |  |          |      



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

(shares in thousands


|                         |  |           |     |           |             |  |          |          |  |   |      | 
|------------------------ |  | --------- | --- | --------- | ----------- |  | -------- | -------- |  | - | ---- | 
|                         |  |           |     | Weighted  |             |  |         
|                         |  |           |     | Average   |             |  | Weighted |         
|                         |  |           |     | Remaining |             |  | Average  |         
|                         |  | Number of |     |           | Contractual |  |          | Exercise | 
|Range of Exercise Prices |  | Warrants  |     |           | Life        |  |          | Price    | 
|                         |  |           |     |           |             |  |          |          | 
|                         |  |           |     | (Years)   |             |  |         
|$0.75 -  5.00            |  |           | 352 |           |             |  | 2.1      |          |  | $ | 4.55 | 
|5.01 - 17.90             |  |           | 203 |           |             |  | 0.2      |          |  |   | 7.05 | 
|                         |  |           |     |           |             |  |          |          | 
|$0.75 - 17.90            |  |           | 555 |           |             |  | 1.4      |          |  | $ | 5.47 | 
|                         |  |           |     |           |             |  |          |          | 





|   |             
|-- | ------------
|M. | Income Taxes







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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                 |                                                     |                          |        |        |        |   |        |        |        | 
|-------------------------------- | --------------------------------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                 |                                                     | December 31,             |       
|                                 |                                                     |                          |       
|                                 |                                                     | 2005                     |        |        | 2004   |  
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     | (In thousands)           |       
|Deferred income tax assets:      |                                                     |                          |        |        |        |   |        |       
|                                 | Allowance for doubtful accounts                     |                          | $      | 414    |        |   | $      | 1,326  |       
|                                 | Goodwill amortization                               |                          |        | 1,829  |        |   |        | 6,218  |       
|                                 | Accrued expenses                                    |                          |        | 1,952  |        |   |        | 1,449  |       
|                                 | Unearned discounts re: outsourced printing services |                          |        | 436    |        |   |        | 1,989  |       
|                                 | Net operating loss and credit carryforwards         |                          |        | 27,883 |        |   |        | 51,751 |       
|                                 | Change in Amicas PACS tax accounting method         |                          |        | 365    |        |   |        | 709    |       
|                                 | Property and equipment                              |                          |        | 279    |        |   |        |       |       
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     |                          | 33,158 |        |        |   | 63,442 |       
|                                 |                                                     | Less valuation allowance |        |        | 28,287 |   |        |        | 27,226 | 
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     | $                        | 4,871  |        |        | $ | 36,216 |       
|                                 |                                                     |                          |        |        |        |  
|Deferred income tax liabilities: |                                                     |                          |        |        |        |   |        |       
|                                 | Acquired/developed software                         |                          | $      | 3,863  |        |   | $      | 6,571  |       
|                                 | Other intangible assets                             |                          |        | 1,008  |        |   |        | 1,146  |       
|                                 | Property and equipment                              |                          |        |       |        |   |        | 299    |       
|                                 |                                                     |                          |        |        |        |  
|                                 |                                                     |                          | 4,871  |        |        |   | 8,016  |       
|                                 |                                                     |                          |        |        |        |  
|Net deferred income tax asset    |                                                     | $                        |       |        |        | $ | 28,200 |       
|                                 |                                                     |                          |        |        |        |  



|                                                                |                  |              |        |      |  
|--------------------------------------------------------------- | ---------------- | ------------ | ------ | ---- | -
|                                                                |                  | December 31, |       
|                                                                |                  | 2005         |       
|                                                                |                  |              |       
|Income tax (benefit) provision from continuing operations       |                  |              |        |     
|Continuing operations                                           |                  |              |        |     
|                                                                | Current Federal  |              | $      | (245 | )
|                                                                | Current State    |              |        | (111 | )
|                                                                |                  |              |       
|Total current (benefit) provision                               |                  |              | (356   | )   
|                                                                | Deferred Federal |              |        | (578 | )
|                                                                | Deferred State   |              |        | (263 | )
|                                                                |                  |              |       
|Total deferred (benefit) provision                              |                  |              | (841   | )   
|                                                                |                  |              |       
|Total income tax (benefit) provision from continuing operations |                  | $            | (1,197 | )   



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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |      |        |        |   |      |        |        |  
|---------------------------- | --------------------------------------------- | ------------------------------------- | ---- | ------ | ---------- | - | ----- | ------------ | ------ | - | ----------- | ------ | ------ | ----------- | ---- | ------ | ------ | - | ---- | ------ | ------ | -
|                             |                                               | Three Months Ended                    |      |        |           
|                             |                                               |                                       |      |        | Year Ended |  
|                             |                                               | March 31                              |      |        | June 30    |   |       | September 30 |        |   | December 31 |        |        | December 31 |     
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             |                                               | (In thousands, except per share data) |     
|YEAR ENDED DECEMBER 31, 2005 |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |      |        |        |   |      |       
|                             | Total revenues                                |                                       | $    | 12,083 |            |   | $     | 12,796       |        |   | $           | 13,612 |        |             | $    | 14,320 |        |   | $    | 52,811 |       
|                             | Gross profit                                  |                                       |      | 7,426  |            |   |       | 7,918        |        |   |             | 8,576  |        |             |      | 8,315  |        |   |      | 32,235 |       
|                             | Loss from continuing operations               |                                       |      | (2,252 | )          |   |       | (31          | )      |   |             | (540   | )      |             |      | 818    |        |   |      | (2,005 | )     
|                             | Income from discontinued operations           |                                       |      | (3     | )          |   |       |             |        |   |             | (25    | )      |             |      | (29    | )      |   |      | (57    | )     
|                             | Gain on Sale of Medical                       |                                       |      | 46,073 |            |   |       |             |        |   |             |       |        |             |      | 204    |        |   |      | 46,277 |       
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             |                                               | Net income (loss)                     |      | $      | 43,818     |   |       | $            | (31    | ) |             | $      | (565   | )           |      | $      | 993    |   |      | $      | 44,215 |  
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             | Weighted average number of shares outstanding |                                       |      |        |            |   |       |              |        |   |             |        |        |             |      |        |        |   |      |        |       
|                             |                                               | Basic                                 |      |        | 44,530     |   |       |              | 45,169 |   |             |        | 47,208 |             |      |        | 48,064 |   |      |        | 46,285 |  
|                             |                                               | Diluted                               |      |        | 44,530     |   |       |              | 45,169 |   |             |        | 47,208 |             |      |        | 50,894 |   |      |        | 46,285 |  
|                             | Earnings (loss) per share  basic             |                                       |      |        |            |   |       |              |        |   |             |        |        |             |      |        |        |   |      |        |       
|                             |                                               | Continuing operations                 |      | $      | (0.05      | ) |       | $            | (0.00  | ) |             | $      | (0.01  | )           |      | $      | 0.02   |   |      | $      | (0.04  | )
|                             |                                               | Discontinued operations               |      |        | 1.03       |   |       |              | 0.00   |   |             |        | 0.00   |             |      |        | 0.00   |   |      |        | 1.00   |  
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             |                                               | $                                     | 0.98 |        |            | $ | (0.00 | )            |        | $ | (0.01       | )      |        | $           | 0.02 |        |        | $ | 0.96 |       
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             | Earnings (loss) per share  diluted           |                                       |      |        |            |   |       |              |        |   |             |        |        |             |      |        |        |   |      |        |       
|                             |                                               | Continuing operations                 |      | $      | (0.05      | ) |       | $            | (0.00  | ) |             | $      | (0.01  | )           |      | $      | 0.02   |   |      | $      | (0.04  | )
|                             |                                               | Discontinued operations               |      |        | 1.03       |   |       |              | 0.00   |   |             |        | 0.00   |             |      |        | (0.00  | ) |      |        | 1.00   |  
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     
|                             |                                               | $                                     | 0.98 |        |            | $ | (0.00 | )            |        | $ | (0.01       | )      |        | $           | 0.02 |        |        | $ | 0.96 |       
|                             |                                               |                                       |      |        |            |   |       |              |        |   |             |        |        |             |     

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AMICAS, INC. and Subsidiary


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |         |  
|---------------------------- | --------------------------------------------- | ------------------------------------- | ----- | ------ | ---------- | - | ---- | ------------ | ------ | - | ----------- | ------ | ------ | ----------- | ----- | ------- | ------ | ---- | ----- | ------- | ------- | -
|                             |                                               | Three Months Ended                    |       |        |           
|                             |                                               |                                       |       |        | Year Ended |  
|                             |                                               | March 31                              |       |        | June 30    |   |      | September 30 |        |   | December 31 |        |        | December 31 |      
|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|                             |                                               | (In thousands, except per share data) |      
|YEAR ENDED DECEMBER 31, 2004 |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |        
|                             | Total revenues                                |                                       | $     | 9,465  |            |   | $    | 9,992        |        |   | $           | 10,750 |        |             | $     | 12,112  | (a)    |      | $     | 42,319  |        
|                             | Gross profit                                  |                                       |       | 4,525  |            |   |      | 5,484        |        |   |             | 6,029  |        |             |       | 3,839   | (b)    |      |       | 19,877  |        
|                             | Loss from continuing operations               |                                       |       | (5,475 | )          |   |      | (3,861       | )      |   |             | (3,930 | )      |             |       | (13,249 | )(c)   |      |       | (26,515 | )      
|                             | Income from discontinued operations           |                                       |       | 3,291  |            |   |      | 3,870        |        |   |             | 3,559  |        |             |       | 3,338   |        |      |       | 14,058  |        
|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|                             |                                               | Net income (loss)                     |       | $      | (2,184     | ) |      | $            | 9      |   |             | $      | (371   | )           |       | $       | (9,911 | )(c) |       | $       | (12,457 | )
|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|                             | Weighted average number of shares outstanding |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|                             |                                               | Basic and diluted                     |       |        | 43,371     |   |      |              | 43,438 |   |             |        | 43,552 |             |       |         | 43,887 |      |       |         | 43,563  |  
|                             | Earnings (loss) per share  basic and diluted |                                       |       |        |            |   |      |              |        |   |             |        |        |             |       |         |        |      |       |         |        
|                             |                                               | Continuing operations                 |       | $      | (0.13      | ) |      | $            | (0.09  | ) |             | $      | (0.09  | )           |       | $       | (0.30  | )    |       | $       | (0.61   | )
|                             |                                               | Discontinued operations               |       |        | 0.08       |   |      |              | 0.09   |   |             |        | 0.08   |             |       |         | 0.08   |      |       |         | 0.32    |  
|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      
|                             |                                               | $                                     | (0.05 | )      |            | $ | 0.00 |              |        | $ | (0.01       | )      |        | $           | (0.23 | )       |        | $    | (0.29 | )      
|                             |                                               |                                       |       |        |            |   |      |              |        |   |             |        |        |             |      






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes $0.8 million of term-license arrangements that
    were converted to perpetual licenses during the quarter ended
    December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(b) |  | In the quarter ended December 31, 2004, the Company
    recognized a charge of $3.2 million relating to the
    impairment of capitalized software costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(c) |  | In the quarter, the Company recognized additional settlement,
    severance and impairment charges and incurred other costs of
    $5.0 million consisting of $1.2 million for asset
    impairment, $2.4 million for additional earn-out
    consideration due under the provisions of the Amicas PACS merger
    agreement, $0.9 million for executive office relocation
    severance-related costs and $0.5 million for a legal
    settlement. The Company also recorded a provision for income
    taxes of $2.0 million which consisted primarily of an
    increase in the net valuation allowance for deferred tax assets.



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







76



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##### Table of Contents






SIGNATURES






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



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

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



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

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

POWER OF ATTORNEY


attorneys-in 10-K, attorneys-in attorneys-in


|                                                                 |  |                                                                                                    |  |                |  | 
|---------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                        |  | Title                                                                                              |  | Date          
|                                                                 |  |                                                                                                    |  |               
|                                                                
|/s/ STEPHEN N. KAHANE
    M.D., M.S.Stephen N. Kahane M.D., M.S. |  | Chairman of the Board and Chief
    Executive Officer (Principal
    Executive Officer)            |  | March 29, 2006
|                                                                
|/s/ JOSEPH D. HILLJoseph D. Hill                                 |  | Senior Vice President and Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | March 29, 2006
|                                                                
|/s/ KENNETH R. ADAMSKenneth R. Adams                             |  | Director                                                                                           |  | March 29, 2006
|                                                                
|/s/ PHILLIP M. BERMANPhillip M. Berman                           |  | Director                                                                                           |  | March 29, 2006

77



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##### Table of Contents



|                                           |  |          |  |                |  | 
|------------------------------------------ |  | -------- |  | -------------- |  | 
|Signature                                  |  | Title    |  | Date          
|                                           |  |          |  |               
|                                          
|/s/ STEPHEN J. DENELSKYStephen J. DeNelsky |  | Director |  | March 29, 2006
|                                          
|/s/ DAVID B. SHEPHERDDavid B. Shepherd     |  | Director |  | March 29, 2006
|                                          
|/s/ LISA W. ZAPPALALisa W. Zappala         |  | Director |  | March 29, 2006

78