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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM 10-K

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

FOR THE YEAR ENDED DECEMBER 31, 1996                COMMISSION FILE NO. 0-26816

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

                            IDX SYSTEMS CORPORATION

            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

               VERMONT                                 03-0222230
   (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION                  IDENTIFICATION NO.)

      1400 SHELBURNE ROAD, P.O. BOX 1070, SOUTH BURLINGTON, VERMONT 05403
     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)

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

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (802) 862-1022

       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                              TITLE OF EACH CLASS
                         Common Stock, $.01 par value

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

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                               Yes  X     No

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

  The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant was $187,207,219 based on the last reported sale price of the
Common Stock on the Nasdaq consolidated transaction reporting system on
January 15, 1997.

  Number of shares outstanding of the registrant's class of Common Stock as of
January 15, 1997: 20,995,260.

  Documents incorporated by reference:
  Proxy Statement for the 1996 Annual Meeting of Stockholders--Part II and
  Part III

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                                    PART I

ITEM 1. BUSINESS

 Overview

  IDX Systems Corporation (the "Company" or "IDX") is a leading provider of
health care information systems to physician groups in the United States. The
Company's integrated patient registration, billing, scheduling, managed care
and other software products enable health care organizations to redesign
patient care and other workflow processes in order to improve efficiency and
quality. IDX's systems meet the multi-site, multi-function needs of ambulatory
providers such as physician groups and hospital outpatient departments, as
well as the multi-entity needs of integrated delivery networks ("IDNs"), which
are composed of physician groups, hospitals and managed care organizations.
The Company's systems are used by, or are under contract to be used by, more
than 76,000 physicians and are installed at approximately 1,000 client sites
including approximately 190 large physician group practices, those generally
with 75 or more physicians, approximately 675 physician practices which have
less than 75 physicians, over 100 hospitals and a growing number of IDNs.

  The Company was incorporated in Vermont on June 2, 1969. The Company's
executive offices are located at 1400 Shelburne Road, South Burlington,
Vermont 05403 and its telephone number is (802) 862-1022.

 Industry Background

  Health care costs in the United States have risen dramatically over the past
two decades relative to the overall rate of inflation. Broad pressures to
reduce costs without sacrificing the quality of care have caused significant
changes in the health care industry. While reimbursement for health care has
historically been based on a fee-for-service model of payment, managed care
organizations and other payors are increasingly utilizing alternative
reimbursement models, including fixed fee and capitation, that shift the
financial risk of delivering health care from payors to both physicians and
institutional providers. Pressures to control costs have also contributed to
the movement of care from more expensive inpatient settings, such as
hospitals, to ambulatory settings. Today, ambulatory care providers,
particularly physician groups, deliver the majority of health care services,
bear an increasing share of the financial risk and control a substantial
portion of total health care resources.

  In order to compete in the changing health care environment, individual
physicians, physician groups and other ambulatory care providers are
increasingly joining and affiliating with other physicians, managed care
organizations, hospitals and other enterprises to form larger health care
organizations such as IDNs. These organizations are designed to manage the
continuum of health care services for population groups across both inpatient
and ambulatory settings, while achieving improved quality and reduced costs
for patients and members. In the emerging managed care environment, IDNs are
increasingly entering into contracts which often define the terms under which
care is administered and may fix the amount of payment for each covered life.
To operate effectively, IDNs must organize their businesses to efficiently
manage patient care and other workflow processes which may extend across
multiple care locations and business entities.

  To compete under the constraints of managed care, while maintaining the
quality of care, health care organizations have placed increasing demands on
their information systems. Initially, these organizations required financially
oriented systems which focused on reducing costs by automating certain
financial and administrative functions. As it became necessary to manage
patient flow processes and not just individual tasks, the need arose to
exchange information stored in disparate systems through computer-to-computer
interfaces. However, due to the limitations of such interfaces and the
complexities of these larger organizations, IDNs and physician groups began to
require fully-integrated systems that seamlessly integrate their enterprise.
Such information systems must enable the implementation of enterprise-wide
patient flow processes that create a longitudinal record of administrative,
financial and clinical information from multiple entities, while focusing on
the physician as the primary care giver. In addition, large health care
organizations increasingly require

                                       2
<PAGE>

information systems that can deliver high-performance computing in
environments with thousands of concurrent computer users.

  Existing hospital-based systems, which are designed primarily for
administrators in single site locations, do not fully meet these needs, nor do
systems designed for individual physicians and small group practices, because
they can neither accommodate high-volume computing environments nor operate
across multiple locations and entities. As the health care industry continues
to evolve, physician groups and IDNs will also increasingly require systems
that compile structured clinical information from multiple sources and enable
measurement of outcomes and management of clinical processes. Such systems
must be integrated with financial and administrative information systems in
order to maintain patient flow, while achieving the goals of reducing costs
and improving quality of care.

  As a primary controller of resources, physician group practices will most
likely be early adopters of this new technology. The Company believes that
physician-based systems which have demonstrated the ability to meet the
growing requirements of a variety of large stand-alone and integrated health
care organizations are best positioned to succeed in this emerging
environment. The Company also believes that physicians, given their roles as
primary care providers, will become increasingly important in the selection
and design of health care information systems.

  The health care information systems market is highly fragmented, with over
1,300 vendors. It is estimated that the market, worth an estimated $8.7
billion in 1995 could grow by as much as 15% per year and could exceed $15.0
billion by the year 2000. Vendors who will survive in this competitive and
evolving environment are those that have the proven ability and the resources
to respond to the needs of the marketplace. Health care organizations will be
transitioning to new platforms and newer technologies in a migration over time
toward the implementation of enterprise-wide, patient-centered computing
systems leading to the computerized medical record. These organizations cannot
afford significant downtime or re-education, or the risk of choosing a system
which has not proven its ability to handle high volume transaction processing
with continuous dependability. The Company believes that successful vendors in
this market will have a large existing client base and offer the high quality,
fully integrated products and value-added services needed to expand and
support clients throughout this evolution process.

 Strategy

  IDX seeks to maximize value for its clients by delivering information
systems that are designed to improve the quality and reduce the cost of health
care delivery. The Company's strategy is to build on its success as a leading
ambulatory systems vendor and its experience with emerging IDNs to become a
leading provider of complete information systems solutions for health care
organizations.

    Key elements of the Company's strategy are to:

    INCREASE PENETRATION OF IDNS THROUGH LARGE PHYSICIAN GROUP
  RELATIONSHIPS. IDX believes that its existing client base of over 190 large
  group practices comprised of over 62,000 physicians will play a significant
  role in the formation and management of IDNs. As a result of these
  relationships and the ambulatory orientation and multi-site capability of
  its products, the Company anticipates that significant opportunities will
  exist to sell its products, particularly its enterprise products, to IDNs
  and their component organizations.

    CAPITALIZE ON GROWTH OF GROUP PRACTICE MARKET. The number of physicians
  practicing medicine in a group setting has increased significantly in
  recent years. The Company believes the number and size of such groups will
  continue to grow as economic pressures drive physicians to affiliate with
  or form new larger group practices. IDX believes its position as a leading
  provider of integrated information solutions to physician groups,
  particularly those with 75 or more physicians, and its proven ability to
  meet their needs will allow the Company to capitalize on the continued
  growth of the group practice market.

    CROSS-SELL PRODUCTS AND SERVICES INTO EXISTING CLIENT BASE. IDX believes
  significant opportunities exist to cross-sell current products and
  professional services as well as products under development to its

                                       3
<PAGE>

  existing client base of approximately 700 physician practices, consisting
  of approximately 76,000 physicians. In addition to selling to clients
  products that enhance currently installed ambulatory applications, IDX
  actively markets the IDXtendR(TM) Clinical Management System, and
  OutReach(TM). OutReach is a web-based companion module to the ambulatory
  and care management systems. It is targeted at current IDX customers with
  Intranet or Extranet connections as well as customers who want to provide
  current IDX products to new users at loosely affiliated sites. IDX actively
  markets professional and technical services to clients as they form IDNs

    DEVELOP PRODUCT SUITES THAT AUTOMATE PROCESSES AND ELIMINATE DEPARTMENTAL
  BOUNDARIES. The workflow automation tools are packaged to meet specific
  site requirements of group practices, MSOs, health plans, hospitals, and
  IDNs. The packaging is called IDXtendR @ the Site Series(TM) and includes
  IDXtendR @ the Group Practice (Series 2000); IDXtendR @ the MSO (Series
  3000); IDXtendR @ the Health Plan (Series 4000); IDXtendR @ the Hospital
  (Series 5000); and IDXtendR @ the IDN (Series 6000). The @ the Site Series
  includes core modules, optional modules, and complementary products. For
  both existing and new clients, these product packages enable an
  organization to purchase a pre-configured set of functions with a defined
  installation methodology.

    EXPAND PROFESSIONAL AND TECHNICAL SERVICE OFFERINGS. IDX possesses the
  healthcare information systems expertise desired by the growing number of
  larger and more sophisticated healthcare organizations as they reengineer
  healthcare delivery processes and implement information systems to support
  these processes. The Company has recently formed The Huntington Group, a
  unit of IDX devoted to providing information technology solutions to
  healthcare organizations. The Huntington Group will provide process
  redesign, organizational change management, outsourcing, and systems
  integration services to IDX customers. The Company also provides additional
  professional and technical services such as information systems planning,
  contract programming, and project management to assist these organizations.
  The Company's recently formed alliances with US Servis, for business office
  outsourcing, and Daou Systems, for network design and implementation,
  expand IDX's current professional and technical service offerings. The
  Company markets professional and technical services primarily to
  organizations that currently use information systems products of the
  Company.

    MIGRATE CLIENTS TO PROVEN TECHNOLOGIES. In order to reduce the risks
  associated with changing technologies, IDX adapts its products to technical
  platforms only when these platforms are proven to perform reliably in high
  volume environments. The Company's graphical user interface facilitates the
  transition of clients to new technologies by creating a consistent look and
  feel for the end user despite changes in the underlying business logic and
  data base layers. The Company anticipates that it will eventually migrate
  its clients to a three-tier client/server architecture utilizing the C++
  programming language, relational data bases and object oriented technology.
  The addition of the web-based OutReach software and thin client deployment
  strategy provides a significant cost-saving alternative for organizations
  interested in connecting remote users. The Company will continue to
  transition its clients gradually to newer technologies in order to protect
  their systems investments and minimize operational disruption.

    ESTABLISH PARTNERSHIPS TO SUPPLEMENT IDX OFFERINGS. The Company has been
  enhancing its product offerings through strategic alliances with vendors
  developing complementary products. The complementary products and services
  currently offered include integrated credit card transaction processing;
  point-of-service access to eligibility, referral, and enrollment data;
  integrated patient communication systems and billing office outsourcing. In
  addition to increasing the range of products and services available to IDX
  customers, these alliances provide recurring revenue opportunities for the
  Company.

 Products

  IDX's integrated software products enable the redesign of patient care and
other work flow processes by providing computer-based tools to capture, access
and manage information within health care organizations and throughout IDNs.
Recently, IDX introduced IDXtendR, a relational, scalable product line that
leverages advanced client server architecture and web-based technology to
facilitate the flow of patient data in healthcare settings. IDXtendR is built
on IDX's three proven product suites--the Ambulatory Suite focusing on the
needs

                                       4
<PAGE>

of physician offices and MSOs; the Care Management Suite, an object-oriented
system for physician-centered care management and clinical documentation; and
the Enterprise Suite for connecting hospitals and other provider sites
throughout the delivery network. IDXtendR adds relational reporting and
analysis capabilities as well as OutReach that provides web-browser access to
patient data residing in an IDX database. The IDXtendR product line is
packaged as the IDXtendR @ the Site Series to meet the specific site
requirements of group practices, MSOs, health plans, hospitals, and IDNs. The
following sets forth a description of the IDXtendR product line.

                                 IDX PRODUCTS

 Ambulatory Products

  IDXTENDR @ THE GROUP PRACTICE automates the patient encounter for group
practices of all sizes. IDXTENDR @ THE MSO supports multiple business entities
and multiple reimbursement arrangements for management service organizations.
Key functions of these products are described in the table below:

<TABLE>
<CAPTION>
             PRODUCT                               DESCRIPTION
             -------                               -----------
 <C>                              <S>
 Patient Registration             Tracks patient registration and insurance
  (REG)                           information and facilitates the printing of
                                  form letters and reports
 Billing and Accounts Receivable  Integrates billing and receivables management
  (BAR)                           with comprehensive analysis and reporting for
                                  single and multiple physician group practice
                                  entities
 Patient Scheduling               Schedules patients, providers and resources
  (SCHED)                         in an ambulatory setting and facilities
                                  reporting of statistical data
 Managed Care Applications        Automates capitation/risk management, claims
  (MCA)                           adjudication, enrollment, premium billing,
                                  referral tracking and utilization review
 Group Practice Management System A turnkey integrated financial and
  (GPMS)                          administrative system for midsize physician
                                  practices, management services organizations
                                  and physician hospital organizations

  IDXTENDR @ THE HEALTH PLAN provides a comprehensive managed care system for
a wide spectrum of managed care organizations and provider groups that are
managing risk. Its key functions are described in the table below:

<CAPTION>
             PRODUCT                               DESCRIPTION
             -------                               -----------
 <C>                              <S>
 Enrollment                       Maintains member registration, demographic,
                                  and financial data and automatically applies
                                  benefits as defined in the member's plan
 Utilization Management           Provides a comprehensive referrals system
                                  with authorization tracking, concurrent
                                  review, pre-certification, length-of-stay
                                  assignment, and provider selection
 Case Management                  Provides case identification, care plan
                                  tracking, cost simulation, form letters, and
                                  linking of service records
 Claims                           Adjudicates and processes claims and
                                  statistical encounters
 Premium Billing                  Provides billing for employer groups and
                                  self-pay members, and manages receivables
 Capitation and Risk Management   Provides flexible risk management (fund
                                  accounting), tracking, and reporting
 Customer Service                 Provides issue tracking, responsibility
                                  assignment, workflow management with
                                  automatic ticklers, and letter production
</TABLE>

                                       5
<PAGE>

 Enterprise Products

  IDXTENDR @ THE HOSPITAL automates the acute care episode with ADT, visit
management and patient accounting modules. Its key functions are described in
the table below:

<TABLE>
<CAPTION>
                PRODUCT                              DESCRIPTION
                -------                              -----------
 <C>                                   <S>
 Enrollment                            Maintains member registration,
                                       demographic, and financial data and
                                       automatically applies benefits as
                                       defined in the member's plan
 Admissions, Discharge, Transfer (ADT) Reports information related to patient
  and Visit Management                 registration, admission (both inpatient
                                       and outpatient), bed management and
                                       insurance management
 Hospital Patient Accounting (HPA)     Patient billing, collection and
                                       insurance management system that tracks
                                       a patient from initial registration
                                       through resolution of payment
</TABLE>

  IDXTENDR @ THE IDN extends the functions of the Company's group practice,
MSO, health plan and hospital products to the enterprise. Its key functions
are described in the table below:

<TABLE>
<CAPTION>
               PRODUCT                               DESCRIPTION
               -------                               -----------
 <C>                                  <S>
 Enterprise-Wide Patient              An enterprise-wide repository and master
  Management System (EPMS)            patient index to track patient and member
                                      registration information and visit
                                      histories across multiple locations
 Enterprise-Wide Scheduling System    Under development; designed to provide
  (EWS)                               enterprise-wide patient, provider and
                                      resource scheduling
 Enterprise-Wide Managed Care         Under development; designed to manage
  (EMC)                               enrollment, eligibility and capitated and
                                      packaged pricing contracts across the
                                      enterprise
 Enterprise-Wide Financial Management Under development; designed to provide
  (EFM)                               financial inquiry, copay collection and
                                      single-statement billing for the entire
                                      delivery network

 Care Management Products

  IDXTENDR CLINICAL MANAGEMENT SYSTEM (CMS) provides access to clinical data
and medical knowledge at the point of care and automates routine physician
tasks principally for large physician groups. The CMS product may be purchased
to work in conjunction with the IDXtendR @ the Group Practice, IDXtendR @ the
MSO, and IDXtendR @ the Health Plan. Key functions of the Care Management
Products are described in the table below:

<CAPTION>
               PRODUCT                               DESCRIPTION
               -------                               -----------
 <C>                                  <S>
 Clinical Management System           Designed to empower the clinician to
  (CMS)                               manage the care process and document the
                                      clinical encounter by providing a patient
                                      record, access to a structured medical
                                      knowledge database that supports
                                      protocols and outcomes management.
</TABLE>

                                       6
<PAGE>

  The radiology and imaging systems products include IDXRAD, IDXVIEW and the
ENTERPRISE MEDICAL IMAGE MANAGEMENT SYSTEM (EMIMS). These products automate
the clinical and administrative functions of the radiology department and
facilitate the distribution of images throughout the enterprise. Key functions
of the Company's radiology and imaging systems products are described in the
table below:

<TABLE>
<CAPTION>
          PRODUCT                              DESCRIPTION
          -------                              -----------
 <C>                       <S>
 IDXrad                    Maintains a radiology department's clinical,
                           demographic, administrative, billing, scheduling
                           and film information
 IDXview                   Provides image and information tools by displaying
                           images and corresponding reports on one workstation
 EMIMS                     Extends the availability of images and diagnostic
                           reports from departmental systems to points
                           throughout the enterprise
</TABLE>

 Extension Architecture

  THE EXTENSION ARCHITECTURE provides the technical framework for designing
and implementing IDX Systems. Its key functions are described in the table
below:

<TABLE>
<CAPTION>
           PRODUCT                               DESCRIPTION
           -------                               -----------
 <C>                         <S>
 Data Base Management System Data dictionary, screen generator and SQL report
  (DBMS)                     writer for most IDX applications
 Electronic Data Interchange Automates the computer-to-computer exchange of
  (EDI)                      claims submittals and remittances
 Data Warehouse              Designed to provide a data repository, enterprise-
                             wide information analysis, utilization and HEDIS
                             reporting using a relational data base
 Relate R                    Under development; a multi-dimensional tool OLAP
                             decision support tool to support relational report
                             writing and data analysis
 Health Data Model           Provides a comprehensive object model of the
                             entire healthcare industry designed around
                             organizations and people and the roles they play
</TABLE>

 Ambulatory Products

  IDXTENDR @ THE GROUP PRACTICE and IDXTENDR @ THE MSO provide back office
automation of business operations as well as "front desk" and "checkout"
functionality that facilitates the patient flow process in an efficient and
cost effective manner. The tight integration of products such as Billing and
Accounts Receivable, Patient Scheduling and Managed Care Applications allows
physician group practices, health maintenance organizations ("HMOs"),
management services organizations ("MSOs") and physician-hospital
organizations ("PHOs") to redesign patient care and other workflow processes
by empowering single users to perform multiple functions. For example, a
patient "checking out" of the physician's office could be rescheduled for a
future visit, authorized for a referral, informed of a required co-payment
and/or be admitted to the hospital all at one sitting by a single user of an
IDX system. Since products within the Company's software suites are tailored
to meet client specifications, pricing is addressed on a contract-by-contract
basis. The factors which influence pricing are the number and type of products
ordered and the number of users of the software. Base software license fees
(excluding installation and user add-ons) for individual products within the
Ambulatory suite range from $100,000 to $300,000. For customers that purchase
the entire Ambulatory suite of products, license fees range from $450,000 to
$1,800,000.

  IDXTENDR @ THE GROUP PRACTICE--MODEL 2010 (formerly known as Group Practice
Management System) is a medical office management system installed in over 650
physician offices that enables midsize group practices, MSOs and PHOs to
manage billing, accounts receivable, report generation, appointment
scheduling, chart tracking and clinical functions such as storage and
retrieval of physician transcription, referral information

                                       7
<PAGE>

and basic clinical data. The base software license fees can vary significantly
based primarily on number of users or physicians, and given the applicability
of the product to physician groups of many sizes, software license fees can
range from $40,000 to $600,000.

 Care Management Products

  The IDXTENDR CLINICAL MANAGEMENT SYSTEM, targeted at midsize and large
physician groups and IDNs, which is designed to automate the patient record
and document the clinical encounter, thereby enabling IDX's clients to support
clinical processes involved in the delivery, measurement and improvement of
care, including practice protocols, rules and reminders, and medical records
imaging. Since CMS is designed to be used as part of the patient care process,
it is expected to save physician time and improve the quality of patient care.
CMS is designed to provide a computerized patient record with physician notes,
medical history, problem lists and other essential information to create a
lifetime record of patient information within an IDN. In addition, CMS will
create a research data base to provide treatment data to health care
organizations that will assist them in negotiating managed care contracts and
improving outcomes. CMS will be integrated with IDX's and other vendor's
systems so that access to patient demographics, scheduling and managed care
information will become an intrinsic part of the physician's clinical tools.
The base software license fees for CMS range from $150,000 to $1,250,000.

  In 1996, IDX introduced and implemented the web-based OUTREACH software .
Using a web-browser with an Internet or Intranet connection to the OutReach
server, patient data residing in IDXtendR is accessible via the web. This is
an optional module to the IDXtendR @ the Site Series and the IDXtendR Clinical
Management System and is targeted to IDX customer sites that want to extend
IDX functions to affiliated provider sites. OutReach is available to IDX sites
with Billing, Scheduling, Managed Care or the IDXtendR Clinical Management
System. The base software fees for OutReach range from 135,000 to several
million. Pricing for OutReach is $135,000 to $400,000 for 0 to 100 users.

  IDXRAD maintains and manages a radiology department's clinical, demographic,
administrative, billing, scheduling and film management information. IDXrad
locates films, processes diagnostic reports, and generates patient
correspondence for follow-up purposes. IDXrad automates departmental
processes, including appointment and resource scheduling, charge capture,
patient tracking and equipment maintenance. The base software license fees for
IDXrad range from $100,000 to $400,000.

  IDXVIEW is a medical imaging system codeveloped by the Company and Brigham
and Women's Hospital in Boston, Massachusetts. The IDXview solution provides
multiple-site, simultaneous access to images, virtually eliminating lost films
and delayed reporting to physicians. IDXview is distinguished in the
marketplace by its integration with IDXrad, a comprehensive radiology
information system. The integration automatically links digital images to
patient demographics as well as exam histories, previous studies, and
diagnostic reporting. The Company recently received 510(k) clearance from the
Food and Drug Administration that allows the Company to market and sell the
product as a medical device. The base software license fees for IDXview range
from $150,000 to $500,000.

  The ENTERPRISE MEDICAL IMAGE MANAGEMENT SYSTEM (EMIMS) extends the
availability of images and diagnostic reports from departmental systems to
points throughout the enterprise. EMIMS combines the capabilities of IDXview
and IDXrad with EPMS, IDX's master patient index to aggregate studies across
the delivery system. Core functions of EMIMS are available today with IDXview
and the Bi-Directional Modality Link that automatically downloads demographic
data and exam information to modalities such as CT, ultrasound, and MRI
scanners and retains study status information to IDXrad. Pricing for EMIMS
varies according to the configuration of IDX products and modalities that are
packaged together for the site.

 Enterprise Products

  The Company's ADMISSIONS, DISCHARGE, TRANSFER AND VISIT MANAGEMENT product
provides the ability to manage patient and bed utilization from the time of
hospital admission until discharge. It provides census reports

                                       8
<PAGE>

and benefit coverage management and can be seamlessly integrated with the
Company's Enterprise-Wide Patient Management System so that a record of each
admission is available throughout the IDN. HOSPITAL PATIENT ACCOUNTING
provides inpatient billing, claims submissions, accounts receivables,
insurance management, and statistical and revenue reporting. When HPA is
integrated with the Company's Billing and Accounts Receivable product within
an IDN, it provides enterprise-wide patient accounting, thereby simplifying
the billing process for patients and improving collectability for the IDN. The
Company only markets ADT and HPA to hospitals which are part of IDN's that use
IDX's group practice systems so that enterprise-wide integration can be
achieved. The base software license fee for ADT is $100,000 and for HPA is
$350,000.

  The Company's ENTERPRISE-WIDE PATIENT MANAGEMENT SYSTEM supports the
operations of IDNs by providing a universal repository for patient and member
registration information and visit histories. By collecting data from other
IDX products and from other vendors' information systems into a master patient
index, EPMS creates a common patient data base, regardless of where patients
and members enter an IDN or whether or not there are multiple record numbers.
The base software license fee for EPMS ranges from $200,000 to $650,000.

  IDX is currently in the process of developing ENTERPRISE-WIDE SCHEDULING.
This system is an extension of the Company's ambulatory-based patient
scheduling which will enable scheduling of patient appointments and resources
throughout an IDN by entering into dialogues with diverse scheduling systems
through Health Level Seven ("HL7") standard messaging and by creating a
central data base for all patient appointments. The base software license fee
for EWS ranges from $200,000 to $650,000.

  IDX is currently testing its ENTERPRISE-WIDE MANAGED CARE (EMC) and
ENTERPRISE-WIDE FINANCIAL MANAGEMENT SYSTEM (EFM). EMC is designed to enable
IDNs to manage capitated contracts as well as packaged pricing contracts
throughout the IDN. EFM provides financial inquiry, copay collection, and
single statement billing for the entire IDN. Pricing guidelines for EMC and
EFM have not yet been determined.

 Extension Architecture

  The Company's DATA BASE MANAGEMENT SYSTEM is generally integrated into
certain of the Company's other products and contains data dictionary, screen
generator and a structured query language ("SQL") report writer for IDX
applications. The base software license fees for DBMS range from $65,000 to
$195,000.

  The Company's ELECTRONIC DATA INTERCHANGE product enables the health care
organization to electronically exchange data in standard formats, rather than
using traditional paper methods, thus reducing costs of paper, tapes and data
entry. Specifically, EDI automates the computer-to-computer exchange of data
such as claims submittals and remittances, in standard ANSI X12 format between
health care organizations and trading partners. The Company is developing the
capability to automate eligibility checks, referrals and other transactions in
standard ANSI X12 format. The base software license fee for EDI is $50,000.

  In 1996, IDX introduced a DATA WAREHOUSE product designed to provide a data
repository, enterprise-wide information analysis, utilization reporting and
reporting pursuant to the Health Employer Data Information Set ("HEDIS")
guidelines. The Data Warehouse is based on a relational data base technology
using Microsoft Corporation's ("Microsoft") SQL Server. Pricing guidelines for
Data Warehouse have not yet been determined.

  In 1997, IDX expects to introduce RELATER(TM) that provides views of IDX
transactional systems data. This module is designed to provide relational
reporting and analysis using Microsoft SQL Server and an online analytical
processing (OLAP) tool for multi-dimensional analysis in a graphical user
environment.

  IDX is enhancing its Data Warehouse product to incorporate enterprise data
model technology recently acquired from Medaphis Healthcare Information
Technology Company, a wholly-owned subsidiary of Medaphis Corporation. The
Company's health data model technology ("HDM") expands the Company's existing
enterprise warehousing and enhances decision support capabilities to the
Company's product offerings. HDM serves as the blueprint for developing
enterprise healthcare data warehouses. Based on a comprehensive object

                                       9
<PAGE>

model of the health delivery system, HDM consists of more than 1,200 tables
and 11,000 data elements. HDM is designed to support transaction level and
summary level data using data marts.

 Services

  IDX maintains a client services organization to install, support and provide
professional, technical and other services to its client base. IDX possesses
the health care information systems expertise desired by the growing number of
larger and more sophisticated health care enterprises as they reengineer
health care delivery processes and implement information systems to support
these processes. This group is experienced at installing and supporting
systems in very large organizations with thousands of computer users across
multiple departments.

INSTALLATION SERVICES

  IDX's installation representatives work with clients to tailor and optimize
IDX products to meet specific business needs. Services include project
management, train- the- trainer programs, best practices comparison to other
IDX clients and systems conversion and implementation assistance.

MAINTENANCE SERVICES

  IDX provides ongoing software support to all of its large clients and
substantially all of its other clients under contracts that are typically for
a term of one year. These contracts are renewable automatically unless
terminated at the option of either the client or IDX. Software maintenance
services consist of providing the client with certain new software releases
and general support, including error corrections and telephone consultation.
For all products, maintenance services are available either on a 24 hour a day
basis or during normal business hours.

PROFESSIONAL AND TECHNICAL SERVICES

  IDX offers professional and technical services to assist clients in building
an information infrastructure to operate in a complex and changing health care
environment. The work performed by the Company includes information systems
planning, process redesign, project management, contract programming, network
design, education and training. These value-added services, combined with the
Company's systems expertise, enable the Company to support its clients'
efforts to develop consistent enterprise-wide systems and processes. Through
these services, IDX believes it strengthens its relationship with clients,
builds a knowledge base of best practices in use of the Company's systems and
gains information regarding future client needs. IDX has expanded the services
provided by this group with the formation of The Huntington Group, a
professional services organization devoted to providing information technology
solutions to those organizations that use IDX's information systems products.

 Technical Platforms and Hardware

  IDX designs its software to operate on a variety of technical platforms. The
Company's product suites operate on UNIX-compatible computers from Digital
Equipment Corporation ("DEC"), IBM and Hewlett Packard Company ("HP") as well
as on DEC's VMS platform. GPMS operates on International Business Machines
Corporation's ("IBM") RS/6000 computers. IDXrad operates on computers from DEC
and was released to operate on all UNIX-compatible computers in September
1996. All client software in client/server configurations will operate on
personal computers using Microsoft's Windows operating system.

  The Company utilizes the M computer programming language in the development
of certain of its products. All new significant functionality written in M
will be released with a graphical user interface based on Microsoft's Windows
95 and Visual Basic V4.0. IDX is migrating its product development efforts
toward object orientation, written using the C++ programming language, and
relational data base technology using Sybase's or

                                      10
<PAGE>

Microsoft's SQL Server. By utilizing three-tier client/server architecture,
the business logic can be constructed using a combination of M and C++
programming languages and accessed from a single graphical user interface.
This architecture will enable the Company's clients to incrementally migrate
from one technology to another. The Company's graphical user interface will
facilitate the transition by clients to new technologies by creating a
consistent look and feel for the end user as the underlying business logic and
database layers change.

  Object oriented technology is a software design methodology that utilizes
concepts and actions by describing their attributes in a programming language.
Once a concept or action has been described, that description and its
accompanying software code can be reused broadly as the building blocks for
different applications. This software design approach leads to faster
development processes and allows IDX to "plug" components together in tailored
configurations providing greater congruence with client needs and
expectations. The Company believes its current strategy of making solutions
available on both character cell and PC platforms best supports the majority
of clients who cannot yet afford to outfit large organizations with new
hardware such as personal computers and networks.

  As a service to its clients, IDX sells third-party computers, terminals,
printers, storage devices and other peripheral devices. The Company also
provides value-added services to configure client systems. Hardware is
purchased from DEC, IBM and HP under renewable one-year reseller agreements.
IDX does not maintain an inventory of hardware, but relies on suppliers'
inventories to meet client delivery requirements. The Company believes that
its relationships with vendors are good.

 Sales and Marketing

  IDX sells its products exclusively through its direct sales force. The
majority of the Company's sales calls are in response to requests for
proposals. The Company generates these requests and other sales primarily
through referrals from clients and consultants. IDX also seeks to enhance
market recognition through participation in industry seminars and trade shows,
direct mail campaigns, telemarketing and advertisements in trade journals.

  The Company's direct sales force is organized into two divisions: Enterprise
Systems ("ES"), which sells the ambulatory, care management, and enterprise
products and the Radiology Information Systems Division ("RISD"), which sells
IDXrad and ES products typically have a three to 18 month sales cycle for new
client sales. RISD products typically have six to 18 month sales cycles for
new client sales.

  No single client accounted for more than 5% of the Company's annual revenues
in fiscal 1994, 1995 or 1996.

  At December 31, 1996, IDX had total backlog of $124.9 million. Of this
amount, the Company expects that $10.0 million will not be filled in the
current fiscal year. The Company's total backlog was $100.3 million at
December 31, 1995.

 Product Development

  To ensure that its products continue to meet the evolving needs of the
health care industry, IDX allocates a significant portion of annual revenues
to research and development. The Company's research and development expenses
for the fiscal years 1994, 1995 and 1996 were $17.6 million, $19.6 million and
$24.0 million, respectively.

  The Company's product development activities include enhancement of existing
products and the development of new products, as well as the implementation of
new technologies. IDX is devoting significant resources to enhancing its
Managed Care Applications product, developing its Clinical Management System
product and expanding its Enterprise suite product line. The Company is also
currently migrating its products to client/server platforms with graphical
user interfaces and relational data bases. Recently, the Company's

                                      11
<PAGE>

development process has become increasingly focused on building components for
its integrated product suites rather than on stand-alone products. These
components can be integrated and configured to address specific client needs.
The Company utilizes client focus groups, user groups and industry experts,
including physicians, nurses, health care administrators and consultants, for
advice in developing and enhancing its products.

 Competition

  The market for health care information systems is highly competitive. IDX
believes that the principal competitive factors in this market are the ability
to effectively market, install, support and integrate systems, the resources
to support ongoing research and development, financial stability and price.
The Company believes it competes favorably with respect to these factors.
Competitors vary in size, and in the scope and breadth of the products and
services offered. The Company experiences competition from companies with
strengths in various segments of the health care information systems market,
such as physician group practice systems, hospital information systems,
clinical information systems, ancillary departmental systems and systems
integration. In addition, other entities not currently offering products and
services similar to those offered by the Company, including claims processing
organizations, hospitals, third-party administrators, insurers, health care
organizations and others, may enter certain markets in which the Company
competes.

  While IDX believes no vendor dominates the market for health care
information systems, certain of the Company's competitors have greater
financial, development, technical, marketing and sales resources than the
Company and have a greater penetration into segments of the market in which
the Company competes. In addition, as the markets for the Company's products
and services develop, additional competitors may enter those markets and
competition may intensify.

 Proprietary Rights and Licenses

  IDX depends upon a combination of trade secret, copyright and trademark
laws, license agreements, nondisclosure and other contractual provisions and
technical measures to protect its proprietary rights in its products. The
Company distributes its products under software license agreements which grant
clients a nonexclusive, nontransferable license to use the Company's products
and contain terms and conditions prohibiting the unauthorized reproduction or
transfer of the Company's products. In addition, the Company attempts to
protect its trade secrets and other proprietary information through agreements
with employees and consultants. All current employees of the Company have
signed a nondisclosure agreement, and all current employees involved in
product development have signed an assignment of inventions agreement. There
can be no assurance that the legal protections afforded to the Company or the
precautions taken by the Company will be adequate to prevent misappropriation
of the Company's technology. In addition, these protections do not prevent
independent third-party development of functionally equivalent or superior
technologies, products or services. Any infringement or misappropriation of
the Company's proprietary software would disadvantage the Company in its
efforts to retain and attract new clients in a highly competitive market and
could cause the Company to lose revenues or incur substantial litigation
expense. The Company believes that, due to the rapid pace of innovation within
the software industry, factors such as the technological and creative skills
of its personnel and ongoing reliable product maintenance and support are more
important in establishing and maintaining a leadership position within the
industry than are the various legal protections afforded to its technology.

  Although IDX believes that its products, trademarks and other proprietary
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that third parties will not assert infringement claims against
the Company in the future and that such claims will not have a material
adverse effect on the Company's results of operations, financial condition or
business.

 Government Regulation

  The U.S. Food and Drug Administration (the "FDA") has promulgated a draft
policy for the regulation of certain computer software products as medical
devices under the 1976 Medical Device Amendments to the

                                      12
<PAGE>

Federal Food, Drug and Cosmetic Act (the "FDC Act") and has recently indicated
it may modify such draft policy or create a new policy. To the extent that
computer software is a medical device under the policy, the manufacturers of
such products could be required, depending on the product, to (i) register and
list their products with FDA, (ii) notify the FDA and demonstrate substantial
equivalence to other products on the market before marketing such products, or
(iii) obtain FDA approval by demonstrating safety and effectiveness before
marketing a product. In addition, such products would be subject to the FDC
Act's general controls, including those relating to good manufacturing
practices and adverse experience reporting. Although it is not possible to
anticipate the final form of the FDA's policy with regard to computer
software, the Company expects that, whether or not the draft is finalized or
changed, the FDA is likely to become increasingly active in regulating
computer software that is intended for use in health care settings. The FDA
can impose extensive requirements governing pre- and post-market conditions
such as device investigation, approval, labeling and manufacturing. In
addition, the FDA can impose extensive requirements governing development
controls and quality assurance processes. There can be no assurance that
actions taken by the FDA to regulate computer software products will not have
a material adverse effect on the Company's results of operations; financial
condition or business.

 Employees

  At December 31, 1996, the Company employed 1,224 full-time and 24 part-time
employees. As of December 31, 1996, the Company's sales force was composed of
37 representatives. As of December 31, 1996, the Company's client services
group consisted of 571 employees and the Company had 273 employees engaged
primarily in program development, new technology adaption and quality
assurance. No employees are covered by any collective bargaining agreements.
The Company believes that its relationships with its employees are good.

ITEM 2. PROPERTIES

  The Company's principal corporate offices are located at 1400 Shelburne
Road, South Burlington, Vermont 05403. The Company's research and support
facilities are located in South Burlington, Vermont and Boston, Massachusetts.
The Company also maintains sales and regional support offices in the greater
metropolitan areas of Chicago, Illinois; Dallas, Texas; San Francisco,
California; and Atlanta, Georgia. The Company leases all of its facilities
which, in the aggregate, constitute approximately 328,049 rentable square feet
of office space, under leases expiring between December 31, 1996 and April 12,
2014. The Company believes that its facilities are adequate for its current
needs and that suitable additional space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

  None.

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

  No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1996.

                                      13
<PAGE>

                     EXECUTIVE OFFICERS OF THE REGISTRANT

  The following sets forth: (i) the name and age of each present executive
officer of the Company, (ii) the position(s) currently held by each named
person, and (iii) the principal occupations held by each person named for at
least the past five years.

<TABLE>
<CAPTION>
        EXECUTIVE OFFICER        AGE                  POSITION
        -----------------        ---                  --------
 <C>                             <C> <S>
 Richard E. Tarrant.............  54 President, Chief Executive Officer and
                                     Director
 Robert H. Hoehl................  55 Chairman of the Board of Directors
 Henry M. Tufo, M.D. ...........  57 Executive Vice President, Chief Operating
                                     Officer, Chief Medical Officer and
                                     Director
 Robert W. Baker, Jr., Esq. ....  48 Vice President, General Counsel and
                                     Secretary
 Jeffrey M. Blanchard...........  40 Vice President, Client Services
 James H. Crook, Jr. ...........  40 Vice President
 Robert F. Galin................  52 Vice President, Sales
 John A. Kane...................  44 Vice President, Finance and
                                     Administration, Chief Financial Officer
                                     and Treasurer
 Pamela J. Pure.................  35 Vice President, Marketing
 Jeffrey V. Sutherland, Ph.D. ..  55 Senior Vice President, Engineering and
                                     Product Development
</TABLE>
--------
  Mr. Tarrant co-founded the Company in 1969 and has served as the President
and Chief Executive Officer of the Company and as a Director since that time.
Mr. Tarrant served as a member of the Board of Trustees for the University
Health Center (Vermont), an academic medical center, from July 1988 to
December 1994 and as Chairman of the University Health Center (Vermont) from
1992 to 1994.

  Mr. Hoehl co-founded the Company in June 1969 and served as Executive Vice
President from that time until October 1, 1996 when he resigned as an officer
of the Company. Mr. Hoehl has served as Chairman of the Board of Directors of
the Company since founding the Company in 1969.

  Dr. Tufo has been Executive Vice President and Chief Medical Officer of the
Company since September 1995. Dr. Tufo served as Vice President and Chief
Medical Officer of the Company from August 1995 to September 1995. Dr. Tufo
has served as Chief Operating Officer of the Company since September 1996.
Dr. Tufo served as a consultant to the Company from February 1995 to August
1995. Dr. Tufo was the President and Chief Executive Officer of University
Health Center (Vermont) from July 1989 to December 1994. Dr. Tufo is the
Chairman of Vermont Managed Care, a managed care organization which is wholly
owned by Fletcher Allen Healthcare, an integrated delivery network. Dr. Tufo
is Professor of Medicine at the University of Vermont College of Medicine. Dr.
Tufo has served as a Director of the Company since November 1995.

  Mr. Baker, who joined the Company in July 1989, has served as Vice President
of the Company since April 1996. Mr. Baker has served as General Counsel and
Secretary of the Company since July 1989.

  Mr. Blanchard, who joined the Company in August 1987, has served as Vice
President, Client Services of the Company since March 1995. Prior to that
time, Mr. Blanchard served the Company in various capacities, including most
recently as General Manager of a division of the Company from January 1990 to
November 1992 and as Director, Customer Support from November 1992 to March
1995.

  Mr. Crook, who joined the Company in April 1981, has served as Vice
President of the Company since June 1984. He served as a Director of the
Company from July 1984 to June 1995.

  Mr. Galin joined the Company in April 1982 as Director of Sales and has
served as Vice President, Sales since August 1992.

                                      14
<PAGE>

  Mr. Kane is a C.P.A. and has served as the Vice President, Finance and
Administration, Chief Financial Officer and Treasurer of the Company since
joining the Company in October 1984.

  Ms. Pure joined the Company in March 1995 as Director of Best Practices and
has served as Vice President, Marketing since November 1995. Prior to joining
the Company, Ms. Pure was employed by Shared Medical Systems Corporation, a
medical software company, from May 1983 until March 1995, most recently as
Manager of Product Marketing and Communications.

  Dr. Sutherland, has served as Senior Vice President, Engineering and Product
Development since joining the Company in September, 1996. Prior to joining the
Company, he was Vice President, Engineering of Individual Inc., an Internet
content provider company, from May to September 1996; Vice President, Object
Technology of Vmark Software, a software development tools company, from June,
1995 to May, 1996; Vice President, Object Technology for Easel Corporation, a
software development tools company, from July 1993 to June, 1995; and
President and founder of Object Databases (now known as Matisse Software) from
October, 1989 to June, 1993.

  Each officer serves at the discretion of the Company's Board of Directors.
There are no family relationship among the named officers.

  The portion of the response to this item relating to arrangements and
understandings pursuant to which named executive officers were or are to be
elected as officers of the Company is contained in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders to be held on May 6,
1996 (the "1996 Proxy Statement") under the caption "Employment Agreements"
and is incorporated herein by reference.

                                    PART II

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

COMMON STOCK INFORMATION

  The Common Stock of IDX Systems Corporation has been traded on the Nasdaq
Market under the symbol "IDXC" since November 17, 1995. Prior to November 17,
1995, the Company's Common Stock was not publicly traded. The following table
sets forth for the periods indicated the high and low sales prices per share
of the Common Stock as reported by the Nasdaq National Market.

<TABLE>
<CAPTION>
                            QUARTER/YEAR                          HIGH    LOW
                            ------------                         ------- ------
                                                                      1995
     <S>                                                         <C>     <C>
     Fourth Quarter 1995........................................ $ 34.75 $23.25
     (November 17, 1995 through December 31, 1995)
<CAPTION>
                                                                      1996
     <S>                                                         <C>     <C>
     First Quarter 1996......................................... $36.625 $27.25
     (January 1, 1996 through March 31, 1996)
     Second Quarter 1996........................................ $ 44.25 $28.25
     (April 1, 1996 through June 30, 1996)
     Third Quarter 1996......................................... $ 40.50 $24.75
     (July 1, 1996 through September 30, 1996)
     Fourth Quarter 1996........................................ $ 35.75 $22.50
     (October 1, 1996 through December 31, 1996)
</TABLE>

  On March 18, 1997, the Company had approximately 150 stockholders of record.
(This number does not include stockholders for whom shares are held in a
"nominee" or "street" name.) On March 18, 1997, the closing price of the
Company's Common Stock on the Nasdaq National Market was $29.00.

                                      15
<PAGE>

  From July 1, 1987 to November 1, 1995, the Company was treated for federal
income tax purposes as an S corporation under the Internal Revenue Code of
1986, as amended (the "Code"). As a result, the Company's stockholders, rather
than the Company, have during this period, been required to pay federal and
certain state income taxes based on the Company's earnings through October 31,
1995 ("S Corporation Earnings") whether or not such amounts have been
distributed to the stockholders. In connection with a December 22, 1986
agreement among the Company and its existing stockholders at that time (the
"Stockholders Agreement"), the Company has made periodic distributions to its
stockholders in amounts approximately equal to the stockholders' corresponding
tax liabilities associated with the Company's S Corporation Earnings. The
Stockholders Agreement terminated on November 1, 1995, the effective date of
the termination of the Company's S Corporation election.

  In 1994, the Company made distributions to existing stockholders of
approximately $1.3 million pursuant to the Stockholders Agreement in
connection with their 1994 income tax liabilities. In addition, the Company
made a special distribution of $11.4 million to its stockholders during 1994.
In 1995, the Company made distributions to existing stockholders of
approximately $2.0 million of which approximately $0.3 million was distributed
in connection with their 1995 income tax liabilities and $1.7 million was
distributed in connection with Internal Revenue Service ("IRS") and state
income tax audits through the June 1993 tax period. In addition, in 1995, the
Company made a distribution of $36.7 million, which amount represented the
Company's previously undistributed earnings as an S Corporation from July 1,
1987 through October 31, 1995 (the "S Corporation Distribution"). The S
Corporation Distribution was paid in two parts: $35.1 million on November 24,
1995 and $1.6 million on December 20, 1995. The S Corporation Distribution was
paid from the proceeds of the Company's initial public offering of Common
Stock which was consummated on November 22, 1995.

  The Company anticipates that all future earnings will be retained for
development of its business and will not be distributed to stockholders as
dividends. Restrictions or limitations on the payment of dividends may be
imposed in the future under the terms of credit agreements or under other
contractual provisions. In the absence of such restrictions or limitations,
the payment of any dividends will be at the discretion of the Company's Board
of Directors.

ITEM 6. SELECTED FINANCIAL DATA

                             FINANCIAL HIGHLIGHTS

                    SUMMARY OF CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                    ------------------------------------------
                                     1992    1993     1994     1995     1996
                                    ------- ------- -------- -------- --------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>     <C>     <C>      <C>      <C>
STATEMENTS OF INCOME DATA:
Revenues........................... $88,739 $95,543 $104,706 $128,120 $157,579
Operating Income...................  13,271   7,272    6,928   14,302   20,638
Net Income.........................  12,545   7,007    4,692   16,365   14,882
Pro Forma Net Income...............                    2,317    9,607
Pro Forma Net Income Per Share.....                 $   0.13 $   0.55 $   0.70
Pro Forma Weighted Average Shares
 Outstanding.......................                   17,465   17,544   21,403
BALANCE SHEET DATA:
Cash and Investments............... $21,184 $24,307 $ 12,516 $ 79,776 $ 94,554
Working Capital....................  33,186  35,202   20,675   89,515  112,361
Total Assets.......................  66,007  71,527   66,843  128,411  158,575
Long-term Debt, less current
 portion...........................   8,357   7,687    6,500    2,907    2,600
Total Stockholders' Equity......... $49,762 $51,518 $ 43,952 $102,432 $127,390
</TABLE>


                                      16
<PAGE>

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

GENERAL

  Revenues of $157.6 million in 1996 grew 23% over 1995 revenues of $128.1
million. Software revenue grew 29.7% in 1996, maintenance and service fees
grew 17.5% and hardware revenue increased 26.2%.

  Operating income grew from $14.3 million in 1995 to $20.6 million in 1996,
an increase of $6.3 million or 44.3%. Net income grew from pro forma net
income of $9.6 million in 1995 to $14.9 million in 1996, an increase of $5.3
million or 54.9%.

  This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties including those discussed below that could cause actual results
to differ materially from historical results or those anticipated. The Company
has identified by italics, or all capital letters, various sentences within
this Annual Report which contain such forward-looking statements, and words
such as "believes," "may," "plans," "anticipates," "expects," "intends," and
similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. In addition, the
disclosures on
page 20 under the caption "Factors Affecting Future Results," which is not
italicized or capitalized for improved readability, consists principally of a
discussion of risks which may affect future results and, are thus, in their
entirety forward-looking in nature. Readers are urged to carefully review and
consider the various disclosures made by the Company in this report and in the
Company's other reports filed with the Securities and Exchange Commission that
attempt to advise interested parties of the risks and factors that may affect
the Company's business.

YEAR ENDED DECEMBER 31, 1996 AND 1995

  Revenues. The Company's total revenues increased to $157.6 million in 1996
from $128.1 million in 1995, an increase of $29.5 million or 23.0%. Revenues
from software license fees increased to $52.5 million in 1996 (33.3% of total
revenues) from $40.4 million (31.6% of total revenues) in 1995, an increase of
$12.1 million or 29.7%. The increase was primarily due to an increase in
installations of certain of the Company's software products from its
Ambulatory suite. Revenues from maintenance and service fees increased to
$74.2 million in 1996 (47.1% of total revenues) from $63.2 million (49.3% of
total revenues) in 1995, an increase of $11.0 million or 17.5%. Approximately
$8.2 million of the increase was due to additional maintenance revenue
resulting from the continued growth in the Company's installed client base.
Professional and technical services revenues increased approximately $2.8
million in 1996 over 1995 as a result of the Company's increased marketing
efforts in that area. Hardware revenues increased to $30.9 million in 1996
(19.6% of total revenues) from $24.5 million (19.1% of total revenues) in
1995, an increase of $6.4 million or 26.2%. The increase in hardware revenues
was principally due to shipments for new customer contracts and customers
upgrading their hardware systems.

  Cost of License, Maintenance and Service Fees. The cost of license,
maintenance and service fees increased to $55.5 million in 1996 from $50.0
million in 1995, an increase of $5.5 million or 11.0%. The gross profit margin
on license, maintenance and service fees increased to 56.2% in 1996 from 51.7%
in 1995. The increase in gross profit was due primarily to the increase in
software license fees as a percentage to total revenue and the continued
growth in maintenance and installation revenue without a corresponding
increase in associated service expenses, and less utilization of outside
consultants to install the Company's systems.

  Cost of Hardware Sales. The cost of hardware sales increased to $24.1
million in 1996 from $18.7 million in 1995, an increase of $5.4 million or
28.4%. The gross profit margin on hardware sales decreased to 22.1% of
hardware revenues in the year ended December 31, 1996 from 23.4% in 1995. The
decrease was principally due to pricing pressure on hardware in the
marketplace.


                                      17
<PAGE>

  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $33.4 million in 1996 from $25.5 million
in 1995, an increase of $7.9 million or 30.9%. As a percentage of total
revenues, selling, general and administrative expenses increased to 21.2% in
1996 from 19.9% in 1995. The additional expenses incurred in 1996 were
primarily due to the increase in the Company's sales and marketing staff over
the same period in 1995.

  Research and Development. Research and development expenses increased to
$24.0 million in 1996 from $19.6 million in 1995, an increase of $4.4 million
or 22.8%. The increase was due to the hiring of additional staff to support
the development of additional products for the Company. As a percentage of
total revenues, research and development expenses remained constant at 15.2%
in 1996 and 1995. As described in Note 1 to the consolidated financial
statements, software development costs incurred subsequent to the
establishment of technological feasibility, defined as completion of a working
model approved for beta-site testing, until general release of the related
products have not been material to date. This has been largely attributable to
the limited time and effort required to complete beta-site testing for the
Company's product introductions during the last several years. As the Company
develops products to operate using client/server technologies as well as more
comprehensive clinical systems, the time and effort required to complete beta-
site testing may be significantly more extensive than experienced to date.
Consequently, capitalized software development costs may become material in
future reporting periods. As of December 31, 1996, these costs have been
immaterial and expensed as incurred.

YEAR ENDED DECEMBER 31, 1995 AND 1994.

  Revenues. The Company's total revenues increased to $128.1 million in 1995
from $104.7 million in 1994, an increase of $23.4 million or 22.3%. Revenues
from software license fees increased to $40.4 million in 1995 (31.5% of total
revenues) from $26.9 million (25.7% of total revenues) in 1994, an increase of
$13.5 million or 50.6%. The increase was primarily due to an increase in
installations of certain of the Company's software products from its
Ambulatory suite and Group Practice Management software. Revenues from
maintenance and service fees increased to $63.2 million in 1995 (49.3% of
total revenues) from $51.6 million (49.3% of total revenues) in 1994, an
increase of $11.6 million or 22.4%. Approximately $6.8 million of the increase
was due to additional maintenance revenue resulting from the continued growth
in the Company's installed client base. Professional and technical services
revenues increased approximately $1.9 million in 1995 over 1994 as a result of
the Company's increased marketing efforts in that area. Hardware revenues
declined to $24.5 million in 1995 (19.1% of total revenues) from $26.2 million
(25.0% of total revenues) in 1994, a decrease of $1.7 million or 6.5%. The
decline in hardware revenues was due to the combination of declining hardware
prices and the fact that the Company's clients sometimes buy their computer
hardware from other sources.

  Cost of License, Maintenance and Service Fees. The cost of license,
maintenance and service fees increased to $50.0 million in 1995 from $37.2
million in 1994, an increase of $12.8 million or 34.4%. The gross profit
margin on license, maintenance and service fees declined to 51.7% in 1995 from
52.6% in 1994. The decline was due primarily to the Company's decision to hire
additional support staff in order to be more responsive to client needs.

  Cost of Hardware Sales. The cost of hardware sales decreased to $18.7
million in 1995 from $21.1 million in 1994, a decrease of $2.4 million or
11.4%. The gross profit margin on hardware sales increased to 23.4% of
hardware revenues in the year ending December 31, 1995, from 19.5% in 1994.
The increase was due to a change in the sales mix to favor higher margin
components.

  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $25.5 million in 1995 from $21.9 million
in 1994, an increase of $3.6 million or 16.4%. As a percentage of total
revenues, selling, general and administrative expenses decreased to 19.9% in
1995 from 20.9% in 1994. Approximately $1.5 million of those expenses of 1995
were due to the introduction of the Company's employee bonus programs, which
are based on the attainment of certain financial performance and client
satisfaction goals.

                                      18
<PAGE>

In addition, the Company incurred additional facilities costs in 1995
associated with the consolidation of its Boston, Massachusetts, facilities.

  Research and Development. Research and Development expenses increased to
$19.6 million in 1995 from $17.6 million in 1994, an increase of $2.0 million
or 10.8%. The increase was due to the hiring of additional staff to support
the development of additional products for the Company's Care Management and
Enterprise suites. As a percentage of total revenues, research and development
expenses decreased to 15.2% in 1995 from 16.8% in 1994.

LIQUIDITY AND CAPITAL RESOURCES

  Since its inception in 1969, the Company has funded its operations, working
capital needs and capital expenditures primarily from operations, except for
real estate owned by certain partnerships and trusts financed through
industrial development bonds.

  Cash flows from operations are principally comprised of net income and
depreciation and are primarily affected by the net effect of the change in
accounts payable and accrued expenses. Due to the seasonality of the Company's
business, accounts receivable, deferred revenue and accounts payable fluctuate
considerably but almost completely due to the volume of business and timing of
the recognition of revenue. Accounts receivable from customers have been
collected consistently within 90 days.

  Cash flows related to investing activities have principally been related to
the purchase of computer and office equipment, leasehold improvements, and the
purchase and sale of investment grade marketable securities. MANAGEMENT
EXPECTS THESE ACTIVITIES TO CONTINUE. The volume of purchases and sales of
investment grade marketable securities increased in 1995 due to the $76.2
million proceeds of the Company's initial public offering. INVESTING
ACTIVITIES MAY ALSO INCLUDE ACQUISITIONS OF COMPLEMENTARY PRODUCTS,
TECHNOLOGIES AND BUSINESSES.

  Cash and cash equivalents at December 31, 1996 were $12.3 million, a
decrease of $21.0 million from December 31, 1995. The majority of the decrease
was due to the purchase of investment grade marketable securities during 1996.
The Company has a revolving line of credit with a bank allowing the Company to
borrow up to $2.0 million bearing interest at the prime rate. There were no
borrowings as of December 31, 1996 or 1995.

  THE COMPANY EXPECTS THAT ITS REQUIREMENTS FOR OFFICE FACILITIES AND OTHER
OFFICE EQUIPMENT WILL GROW AS STAFFING REQUIREMENTS DICTATE. The Company's
operating lease commitments consist primarily of office leasing for the
Company's operating facilities. THE COMPANY PLANS TO CONTINUE INCREASING THE
NUMBER OF ITS PROFESSIONAL STAFF DURING 1997 TO MEET ANTICIPATED SALES VOLUME
AND TO SUPPORT RESEARCH AND DEVELOPMENT EFFORTS. TO THE EXTENT NECESSARY TO
SUPPORT INCREASES IN STAFFING, IDX INTENDS TO OBTAIN ADDITIONAL OFFICE SPACE.

  THE COMPANY BELIEVES THAT CURRENT OPERATING FUNDS WILL BE SUFFICIENT TO
FINANCE ITS OPERATING REQUIREMENTS AT LEAST THROUGH DECEMBER 1997. To date,
inflation has not had a material impact on the Company's revenues or income.

INCOME TAXES

  From July 12, 1987 to November 1, 1995, the Company was treated for federal
and certain state income tax purposes as an S Corporation under the Internal
Revenue Code of 1986, as amended (the "Code"). As a result, the Company's
stockholders, rather than the Company, were required to pay federal and
certain state income taxes based upon the Company's earnings whether or not
the earnings were distributed to such stockholders. On November 1, 1995, the
Company terminated its S Corporation status and, accordingly, has become
subject to federal and state income taxes.


                                      19
<PAGE>

  For purposes of financial statement presentations, the Company's financial
statements reflect comparative pro forma financial information for 1995 and
1994 as if the Company had been fully taxed. For the foreseeable future, the
Company anticipates an expected tax rate of approximately 40% of pre-tax
income.

NEW ACCOUNTING STANDARDS

  Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for Impairment of the Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123
"Accounting for Stock-Based Compensation." Based upon conditions and
circumstances in 1996, the adoption of SFAS No. 121 has had no effect on the
Company's financial statements. Based upon the Company's election, as allowed
under the provisions of SFAS No. 123 to continue to account for stock
compensation arrangements under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," the adoption of SFAS No. 123 has
not had an effect on the Company's operating results.

  During 1997, the American Institute of Certified Public Accountants is
expected to issue a Standard Operating Procedure ("SOP") revising certain
aspects of SOP 91-1. BASED UPON THE CURRENT VERSION OF THE PROPOSED SOP, THE
COMPANY DOES NOT EXPECT ADOPTION WILL MATERIALLY AFFECT ITS REVENUE
RECOGNITION POLICIES WITH RESPECT TO SOFTWARE LICENSE FEES WHICH ARE
PRINCIPALLY RECOGNIZED IN CONNECTION WITH THE FULFILLMENT OF CONTRACTUAL
OBLIGATIONS BASED UPON ACHIEVEMENTS OF MILESTONES. THE EXPECTED ISSUE DATE IS
CURRENTLY NOT KNOWN.

BACKLOG

  At December 31, 1996, the Company had total backlog of $124.9 million,
including $40.4 million attributable to software licenses, $77.8 million
attributable to services and $6.7 million attributable to hardware. Software
licenses backlog consists of fees due under signed contracts which have not
yet been recognized as revenues. Service backlog represents contracted
software maintenance services, installation fees, and remote computing
services fees for a period of 12 months. Hardware backlog represents hardware
orders and hardware installation services under signed contracts which have
not yet been recognized as revenues. At December 31, 1995, the Company had
total backlog of $100.3 million including $32.1 million attributable to
software licenses, $64.7 million attributable to services and $3.5 million
attributable to hardware. Of the total backlog of $124.9 million, the Company
expects that $10.0 million will not be fulfilled in the current fiscal year.

SUBSEQUENT EVENTS

  On February 26, 1997, the Company acquired certain data model technology
from Medaphis Healthcare Information Technology Company for a cash price
between $2.5 and $3.5 million. The acquisition will be accounted for under the
purchase method. A substantial portion of the purchase price is expected to be
expensed as in-process research and development in connection with the
Company's development of a healthcare data model.

  On March 25, 1997, the Company entered into an Agreement and Plan of Merger
("Agreement") with PHAMIS, Inc. ("PHAMIS"), a provider of acute care clinical
and hospital-based information solutions. The merger, which has been approved
by the Boards of Directors of each company, is subject to regulatory and
shareholder approval. The Agreement provides for the stockholders of PHAMIS to
receive .73 shares of the Company's Common Stock for each share of PHAMIS
Common Stock, subject to adjustment within a range of .68 to .80 shares of IDX
Common Stock, based on an average market price per share of IDX. Approximately
6.1 million shares of Common Stock of PHAMIS are outstanding and subject to
the exchange. Management expects that the merger, if consummated, will be
accounted for under the pooling of interests method.

FACTORS AFFECTING FUTURE RESULTS

  The Company's revenues and operating results can vary significantly from
quarter to quarter as a result of a number of factors, including the volume
and timing of systems sales and installations, and length of sales cycles and
installation efforts. The timing of revenues from systems sales is difficult
to forecast because the Company's

                                      20
<PAGE>

sales cycle can vary depending upon factors such as the size of the
transaction, the changing business plans of the customer, the effectiveness of
customer's management, and general economic conditions. In addition, because
revenue is recognized at various points during the installation process, the
timing of revenue recognition varies considerably based on a number of
factors, including availability of personnel, availability of the customer's
resources and complexity of the needs of the customer's organization. The
Company's initial contact with a potential customer depends in significant
part on the customer's decision to replace, expand or substantially modify its
existing information systems, or modify or add business processes or lines of
business. How and when to implement, replace, expand or substantially modify
an information system, or modify or add business processes or lines of
business, are major decisions for health care organizations. Accordingly, the
sales cycle for the Company's systems is typically three to 18 months or more
from initial contact to contract execution, and the installation cycle is
typically three to 18 months or more from contract execution to completion of
installation. During the sales cycle and the installation cycle, the Company
expends substantial time, effort and funds preparing contract proposals,
negotiating the contract and implementing the system. Because a significant
percentage of the Company's expenses are relatively fixed, a variation in the
timing of systems sales and installations can cause significant variations in
operating results from quarter to quarter. The Company's future operating
results may fluctuate as a result of these and other factors, such as customer
purchasing patterns, and the timing of new product and service introductions
and product upgrade releases.


  The Company's revenues have historically followed seasonal patterns with a
lower level of sales and installations occurring in the fiscal quarter ending
September 30 and a greater level of sales and installations occurring in the
fiscal quarter ending June 30 (formerly the fiscal year end of the Company).
The Company believes that such seasonal fluctuation is attributable to a
number of factors, including the vacation schedules of its clients. The
Company is not able to predict what impact, if any, the change will have on
the seasonality of the Company's business. The Company believes that quarterly
results of operations will continue to be subject to significant fluctuations
and that its results of operations for any particular quarter or fiscal year
may not be indicative of results of operations for future periods. There can
be no assurance that future seasonal and quarterly fluctuations will continue
and will not have a material adverse effect on the Company's results of
operations, financial condition or business.

  The stock market has, from time to time, experienced extreme price and
volume fluctuations, particularly in the high technology and health care
information technology sectors, which have often been unrelated to the
operating performance of particular companies. The Company experiences
fluctuations in its stock price related to these general market swings as well
as announcements of technological innovations, new product introductions by
the Company or its competitors, market conditions in the computer software or
hardware industries and healthcare reform measures. These fluctuations could
have a significant impact on the future market price of the Company's Common
Stock.

  As a developer of information systems, the Company must anticipate and adapt
to evolving industry standards and new technological developments. The market
for the Company's products is characterized by continued and rapid
technological advances in both hardware and software development, requiring
ongoing expenditures for research and development and the timely introduction
of new products and enhancements to existing products. The establishment of
standards is largely a function of user acceptance. Therefore, such standards
are subject to change. The Company's future success will depend in part upon
its ability to enhance its existing products, to respond effectively to
technology changes, to migrate its clients to new technologies, to sell
additional products to its existing client base and to introduce new products
and technologies to meet the evolving needs of its clients in the health care
information systems market. The Company is currently devoting significant
resources toward the development of enhancements to its existing products and
the migration of existing products to new hardware and software platforms.
There can be no assurance that the Company will successfully complete the
development of these products or this migration in a timely fashion or that
the Company's current or future products will satisfy the needs of the health
care information systems market. Further, there can be no assurance that
products or technologies developed by others will not adversely affect the
Company's competitive position or render its products or technologies
noncompetitive or obsolete.


                                      21
<PAGE>

  The Company currently derives a significant percentage of its revenues from
sales of financial and administrative information systems and related
services. As a result, any factor adversely affecting sales of these products
and services could have a material adverse effect on the Company's results of
operations, financial condition or business. Although the Company has
experienced increasing annual sales, revenues associated with existing
products may decline as a result of several factors, including price
competition. There can be no assurance that the Company will continue to be
successful in marketing its current products or any new or enhanced products
or maintaining the current pricing for its existing products.

  Certain of the Company's products provide applications that relate to
patient medical histories and treatment plans. Any failure by the Company's
products to provide accurate, secure and timely information could result in
product liability claims against the Company by its clients or their
affiliates or patients. The Company maintains insurance that it believes is
adequate to protect against claims associated with the use of its products,
but there can be no assurance that its insurance coverage would adequately
cover any claim asserted against the Company. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's results of operations, financial condition or
business. Even unsuccessful claims could result in the expenditure of funds in
litigation, as well as diversion of management time and resources. There can
be no assurance that the Company will not be subject to product liability
claims, that such claims will not result in liability in excess of its
insurance coverage or that the Company's insurance will cover such claims or
that appropriate insurance will continue to be available to the Company in the
future at commercially reasonable rates.

  The success of the Company is dependent to a significant degree on its key
management, sales and marketing, and technical personnel. The Company believes
that its continued future success will also depend upon its ability to
attract, motivate and retain highly skilled, managerial, sales and marketing,
and technical personnel, including software programmers and systems architects
skilled in the computer languages in which the Company's products operate.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on the
Company's results of operations, financial condition or business. Although the
Company has been successful to date in attracting and retaining skilled
personnel, there can be no assurance that the Company will continue to be
successful in attracting and retaining the personnel it requires to
successfully develop new and enhanced products and to continue to grow and
operate profitably.

  The health care industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of health care organizations. The Company's products
are designed to function within the structure of the health care financing and
reimbursement system currently being used in the United States. During the
past several years, the health care industry has been subject to increasing
levels of governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. From time to time, certain proposals to
reform the health care system have been considered by Congress. These
proposals, if enacted, may increase government involvement in health care,
lower reimbursement rates and otherwise change the operating environment for
the Company's clients. Health care organizations may react to these proposals
and the uncertainty surrounding such proposals by curtailing or deferring
investments, including those for the Company's products and services. The
Company cannot predict with any certainty what impact, if any, such proposals
or health care reforms might have on its results of operations, financial
condition or business.

  The U.S. Food and Drug Administration (the "FDA") has promulgated a draft
policy for the regulation of certain computer software products as medical
devices under the 1976 Medical Device Amendments to the Federal Food, Drug and
Cosmetic Act (the "FDC Act") and has recently indicated it may modify such
draft policy or create a new policy. To the extent that computer software is a
medical device under the policy, the manufacturers of such products could be
required, depending on the product, to (i) register and list their products
with FDA, (ii) notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products, or (iii) obtain FDA
approval by demonstrating safety and effectiveness before marketing a product.
In addition, such products would be subject to the FDC Acts general controls,
including

                                      22
<PAGE>

those relating to good manufacturing practices and adverse experience
reporting. Although it is not possible to anticipate the final form of the
FDA's policy with regard to computer software, the Company expects that,
whether or not the draft is finalized or changed, the FDA is likely to become
increasingly active in regulating computer software that is intended for use
in health care settings. The FDA can impose extensive requirements governing
pre- and post-market conditions such as device investigation, approval,
labeling and manufacturing. In addition, the FDA can impose extensive
requirements governing development controls and quality assurance processes.
There can be no assurance that actions taken by the FDA to regulate computer
software products will not have a material adverse effect on the Company's
results of operations, financial condition or business.

  The Company intends to continue to grow in part through acquisitions of
complementary products, technologies and businesses or alliances with
complementary businesses. The Company's ability to expand successfully through
acquisitions or alliances depends on many factors, including the successful
identification and acquisition of products, technologies or businesses and
management's ability to effectively integrate and operate the acquired or
aligned products, technologies or businesses. There is significant competition
for acquisition and alliance opportunities in the health care information
systems industry, which may intensify due to consolidation in the industry,
thereby increasing the costs of capitalizing on such opportunities. The
Company competes for acquisition and alliance opportunities with other
companies that have significantly greater financial and management resources.
There can be no assurance that the Company will be successful in acquiring or
aligning with any complementary products, technologies or businesses; or, if
acquired or aligned with, that the Company will be able to successfully
integrate any such products, technologies or businesses into its current
business and operations. The failure to successfully integrate any significant
products, technologies or businesses could have a material adverse effect on
the Company's results of operations, financial condition or business.

  Because of these and other factors, past financial performance should not be
considered an indicator of future performance. Investors should not use
historical trends to anticipate future results.


                                      23
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)

<TABLE>
<CAPTION>
                                                               DECEMBER 31
                                                            ------------------
                                                              1996      1995
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $ 12,327  $ 33,262
  Securities available-for-sale............................   82,227    46,514
  Accounts receivable, less allowance of $685 in 1996 and
   $525 in 1995 for doubtful accounts......................   39,092    28,013
  Prepaid expenses.........................................    1,203       928
  Other current assets.....................................    1,785     1,153
  Deferred tax asset.......................................    2,233     1,535
                                                            --------  --------
    Total current assets...................................  138,867   111,405
Property and equipment:
  Equipment and leasehold improvements, net of accumulated
   depreciation and amortization...........................   13,033    12,026
  Real estate, net of accumulated depreciation.............    4,155     4,195
                                                            --------  --------
                                                              17,188    16,221
Other:
  Other assets.............................................      285       284
  Deferred tax asset.......................................    2,235       501
                                                            --------  --------
                                                               2,520       785
                                                            --------  --------
    Total assets........................................... $158,575  $128,411
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable......................................... $  8,789  $  5,421
  Accrued expenses.........................................    7,831     7,233
  Federal and state taxes payable..........................      735     1,267
  Deferred revenue.........................................    8,951     7,766
  Current portion of long-term debt........................      200       203
                                                            --------  --------
    Total current liabilities..............................   26,506    21,890
Long-term debt related to real estate, less current
 portion...................................................    2,600     2,907
Minority interest..........................................    2,079     1,182
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000
 shares authorized, none issued............................
Common stock, par value $0.01 per share authorized
 50,000,000 shares; issued and outstanding 20,988,595 and
 20,337,196 in 1996 and 1995, respectively.................      210       203
Additional paid-in capital.................................   91,505    81,364
Retained earnings..........................................   35,698    20,816
                                                            --------  --------
                                                             127,413   102,383
Less cumulative unrealized gains (losses) on securities
 available-for-sale........................................      (23)       49
                                                            --------  --------
    Total stockholders' equity.............................  127,390   102,432
                                                            --------  --------
    Total liabilities and stockholders' equity............. $158,575  $128,411
                                                            ========  ========
</TABLE>

                            See accompanying notes.

                                       24
<PAGE>

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31
                                                   ----------------------------
                                                     1996      1995      1994
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Revenues:
  Software license fees........................... $ 52,464  $ 40,445  $ 26,857
  Maintenance and service fees....................   74,232    63,194    51,621
  Hardware sales..................................   30,883    24,481    26,228
                                                   --------  --------  --------
    Total revenues................................  157,579   128,120   104,706
Operating expenses:
  Cost of license, maintenance and service fees...   55,485    50,007    37,178
  Cost of hardware sales..........................   24,060    18,743    21,125
  Selling, general and administrative.............   33,422    25,539    21,859
  Research and development........................   23,974    19,529    17,616
                                                   --------  --------  --------
                                                    136,941   113,818    97,778
                                                   --------  --------  --------
Operating income..................................   20,638    14,302     6,928
Other (income) expense:
  Interest income.................................   (4,752)   (2,401)     (964)
  Interest expense................................      157       227       442
  Minority interest...............................      430       369       933
  Loss on impairment of investment................                        1,500
                                                   --------  --------  --------
                                                     (4,165)   (1,805)    1,911
                                                   --------  --------  --------
Income before income taxes........................   24,803    16,107     5,017
Income tax provision (benefit):
  Current year operations.........................    9,921     1,778       325
  Change in tax status............................             (2,036)
                                                   --------  --------  --------
                                                      9,921      (258)      325
                                                   --------  --------  --------
Net income........................................ $ 14,882  $ 16,365  $  4,692
                                                   ========  ========  ========
Net income per share.............................. $   0.70
                                                   ========
Weighted average shares outstanding...............   21,403
                                                   ========
Pro forma information (unaudited):
  Historical income before income taxes...........           $ 16,107  $  5,017
  Pro forma income taxes..........................              6,500     2,700
                                                             --------  --------
  Pro forma net income............................           $  9,607  $  2,317
                                                             ========  ========
  Pro forma net income per share..................           $   0.55  $   0.13
                                                             ========  ========
  Pro forma weighted average shares outstanding...             17,544    17,465
                                                             ========  ========
</TABLE>

                            See accompanying notes.

                                       25
<PAGE>

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                          COMMON STOCK                      TREASURY STOCK
                          ------------                      ----------------
                                                                                UNREALIZED
                                                                              GAIN (LOSS) ON
                                       ADDITIONAL                               SECURITIES       TOTAL
                                  PAR   PAID-IN   RETAINED                      AVAILABLE    STOCKHOLDERS'
                          SHARES VALUE  CAPITAL   EARNINGS  SHARES    COST       FOR SALE       EQUITY
                          ------ ----- ---------- --------  -------- -------  -------------- -------------
<S>                       <C>    <C>   <C>        <C>       <C>      <C>      <C>            <C>
Balances at December 31,
 1993...................  13,200 $132   $   454   $51,325       615  $  (393)                  $ 51,518
  S Corporation
   distribution.........                          (12,774)                                      (12,774)
  Capital contribution..                     65                                                      65
  Stock issued upon
   exercise of
   nonqualified stock
   options..............   1,318   13       462                                                     475
  Tax benefit related to
   exercise of
   nonqualified stock
   options..............                    240                                                     240
  Change in unrealized
   gain (loss) on
   securities available-
   for-sale                                                                       $(264)           (264)
  Net income............                            4,692                                         4,692
                          ------ ----   -------   -------    ------  -------      -----        --------
Balances at December 31,
 1994...................  14,518  145     1,221    43,243       615     (393)      (264)         43,952
  S Corporation
   distribution.........                          (38,792)                                      (38,792)
  Stock issued upon
   exercise of
   nonqualified stock
   options..............   1,021   10     2,963                (615)     393                      3,366
  Tax benefit related to
   exercise of
   nonqualified stock
   options..............                    187                                                     187
  Stock issued upon
   exercise of incentive
   stock options........     193    2       875                                                     877
  Stock issued upon
   initial public
   offering, net of
   offering costs of
   $6,717...............   4,605   46    76,118                                                  76,164
  Change in unrealized
   gain (loss) on
   securities available-
   for-sale                                                                         313             313
  Net income............                           16,365                                        16,365
                          ------ ----   -------   -------    ------  -------      -----        --------
Balances at December 31,
 1995...................  20,337  203    81,364    20,816                            49         102,432
  Stock issued upon
   exercise of
   nonqualified stock
   options..............       8             56                                                      56
  Tax benefit related to
   exercise of
   nonqualified stock
   options..............                  4,648                                                   4,648
  Stock issued upon
   exercise of incentive
   stock options........     483    5     2,529                                                   2,534
  Stock issued in
   connection with
   employee stock
   purchase plan........     160    2     2,908                                                   2,910
  Change in unrealized
   gain (loss) on
   securities available-
   for-sale                                                                         (72)            (72)
  Net income............                           14,882                                        14,882
                          ------ ----   -------   -------    ------  -------      -----        --------
Balances at December 31,
 1996...................  20,988 $210   $91,505   $35,698                         $ (23)       $127,390
                          ====== ====   =======   =======    ======  =======      =====        ========
</TABLE>

                            See accompanying notes.

                                       26
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31
                                                  ---------------------------
                                                    1996      1995     1994
                                                  --------  --------  -------
<S>                                               <C>       <C>       <C>
OPERATING ACTIVITIES
Net income....................................... $ 14,882  $ 16,365  $ 4,692
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Depreciation and amortization..................    4,687     3,920    3,696
  Deferred tax benefit...........................   (2,432)   (2,036)
  Increase in allowance for doubtful accounts....      298       387      161
  Minority interest..............................      430       369      933
  Loss on impairment of investment...............                       1,500
  Changes in operating assets and liabilities:
    Accounts receivable..........................  (11,377)  (10,137)   1,132
    Prepaid expenses and other assets............     (908)      919      275
    Accounts payable.............................    3,368     1,809    2,330
    Accrued expenses.............................      598     3,180    2,182
    Federal and state taxes payable..............     (532)    1,264
    Deferred revenue.............................    1,185     1,577   (1,334)
                                                  --------  --------  -------
Net cash provided by operating activities........   10,199    17,617   15,567
INVESTING ACTIVITIES
Purchase of property and equipment, net..........   (5,654)   (5,322)  (3,303)
Investment in preferred stock....................                      (1,000)
Purchase of securities available-for-sale........ (128,597)  (41,474)  (1,931)
Proceeds from sale of securities available-for-
 sale, net.......................................   92,812       959    7,030
                                                  --------  --------  -------
Net cash provided by (used in) investing
 activities......................................  (41,439)  (45,837)     796
FINANCING ACTIVITIES
Proceeds from sale of common stock...............    5,500     4,243      475
Tax benefit related to exercise of non qualified
 stock options...................................    4,648
Proceeds from initial public offering, net.......             76,164
S Corporation distribution.......................            (38,792) (12,774)
Contributions to (distributions from)
 Affiliates......................................      467      (225)    (320)
Capital contribution.............................                          65
Repayment (issuance) of notes receivable from
 related parties.................................             12,477   (7,210)
Proceeds from (advances to) related party........              1,161   (2,361)
Payments on long-term debt related to real
 estate..........................................     (310)     (376)    (666)
                                                  --------  --------  -------
Net cash provided by (used in) financing
 activities......................................   10,305    54,652  (22,791)
                                                  --------  --------  -------
Increase (decrease) in cash and cash
 equivalents.....................................  (20,935)   26,432   (6,428)
Cash and cash equivalents at beginning of year...   33,262     6,830   13,258
                                                  --------  --------  -------
Cash and cash equivalents at end of year......... $ 12,327  $ 33,262  $ 6,830
                                                  ========  ========  =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................... $    127  $    218  $   453
                                                  ========  ========  =======
Cash paid for income taxes....................... $  8,237  $    259  $   101
                                                  ========  ========  =======
</TABLE>

                            See accompanying notes.


                                       27
<PAGE>

                            IDX SYSTEMS CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

  IDX Systems Corporation (the "Company") operates in one principal industry
segment providing health care information systems and services throughout the
United States. Revenues are derived from the licensing of software,
maintenance and installation of software systems, and sale of computer
hardware.

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

  The Company leases a substantial portion of its space, including its
corporate headquarters and certain sales and support offices, from real estate
partnerships and trusts owned by stockholders and certain key employees of the
Company. These real estate partnerships and trusts include 116 Huntington
Avenue Limited Partnership ("HLP"), BDP Realty Associates ("BDP") and other
real estate partnerships and trusts ("REPs"). Under generally accepted
accounting principles and rules and regulations of the Securities and Exchange
Commission (the "Commission"), the Company's consolidated financial statements
are required to include the accounts of the Company and those real estate
partnership and trusts ("Affiliates") whose real estate is leased exclusively
by the Company and for which the Company is subject to substantially all the
risks of ownership. Accordingly, for the year ended December 31, 1994, the
accompanying consolidated statements of income include the operations of the
Company, BDP and the REPs. Real estate owned by HLP is leased to the Company
under an operating lease. As a result of the termination of leases for
substantially all the space leased from the REPs in 1995, the accompanying
consolidated financial statements at December 31, 1996 and 1995 and for the
years then ended, include only the accounts of the Company and BDP. All
transactions between the Company and Affiliates are eliminated. Minority
interest represents net income and equity of the Affiliates.

RECLASSIFICATION

  Certain amounts in 1995 and 1994 have been reclassified to permit
comparison.

REVENUE RECOGNITION

 Software License Fees

  The Company recognizes revenue in accordance with the provisions of AICPA
Statement of Position No. 91-1 "Software Revenue Recognition" (SOP 91-1).
Software license fees represent revenues derived from the license of the
Company's proprietary systems software. License revenue is deferred and
recognized upon fulfillment of contractual obligations based upon achievement
of specified milestones including delivery, installation, live processing of
customer transactions and final acceptance. During 1997, the AICPA is expected
to issue an SOP revising certain aspects of SOP 91-1. Based upon the current
version of the proposed SOP, the Company does not expect adoption will
materially affect its revenue recognition policies with respect to software
license fees which are principally recognized in connection with the
fulfillment of contractual obligations based upon achievements of milestones.
The expected issue date is currently not known.

 Hardware Sales

  Sale of computer equipment is recognized upon shipment, provided post-sale
vendor obligations are insignificant. If significant, revenue is deferred
until the obligations are fulfilled.


                                      28
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

 Maintenance and Services

  Installation service revenue related to systems sales is recognized upon
fulfillment of contractual obligations based upon achievement of specified
milestones. Professional service revenue is recognized as the services are
performed. Maintenance is recognized ratably over the term of the agreement.

RESEARCH AND DEVELOPMENT COSTS

  Research and development costs are expensed as incurred. Software
development costs incurred after the establishment of technological
feasibility and until the product is available for general release are
capitalized, provided recoverability is reasonably assured. Technological
feasibility is established upon the completion of a working model which has
been approved for beta site testing. Software development costs, when
material, are amortized over the expected life of the product which, due to
the frequency of product revision releases, generally does not exceed two
years. In 1996, 1995 and 1994, software development costs eligible for
capitalization were not material and have been expensed.

CASH EQUIVALENTS

  The Company considers highly liquid investments generally with a maturity of
three months or less when purchased, to be cash equivalents. Cash equivalents
are stated at cost, which approximates market value.

RISKS AND UNCERTAINTIES

 Concentration of Credit Risk

  Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents,
securities available-for-sale, and trade receivables.

  The Company invests excess cash primarily in money market mutual funds with
high credit ratings, equity securities with highly rated issuers and treasury
notes and bonds issued by the United States Government and the State of
Vermont.

  The Company sells its systems and services to health care providers
throughout the United States. To reduce credit risk, the Company performs
ongoing credit evaluations of the financial condition of its customers.
Although the Company is directly affected by the overall financial condition
of the health care industry, management does not believe significant credit
risk exists at December 31, 1996. The Company's losses, which have
consistently been within management's expectations, related to collection of
trade accounts receivable were approximately $138,000, $242,000 and $181,000,
in 1996, 1995 and 1994, respectively.

 Significant Estimates and Assumptions

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates and assumptions by
management affect the Company's allowance for doubtful accounts, revenue
recognition and certain accrued expenses. Actual results could differ from
those estimates.

INVESTMENT SECURITIES

  The Company accounts for investment securities based on Statement of
Financial Accounting Standards No.115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS No. 115"). SFAS

                                      29
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

No. 115 provides the accounting and reporting requirements for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. All of the Company's investments have been
classified as available-for-sale securities at December 31, 1996 and 1995.
Available-for-sale securities are carried at fair value with unrealized gains
and losses reported as a component of stockholders' equity.

PROPERTY AND EQUIPMENT

  Real estate, which includes land, buildings and related improvements owned
by an Affiliate, is stated at cost. Buildings and related improvements are
depreciated using the straight-line method over their estimated useful lives
of 30 to 40 years.

  Equipment is stated at cost and is depreciated over its estimated useful
life by using the straight-line method. Depreciation is generally computed
based on useful lives of three to five years for computer equipment and
software and five to ten years for furniture and fixtures. Leasehold
improvements are amortized using the straight-line method over the lesser of
the term of the respective lease or the estimated useful life of the asset.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

  Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which requires impairment losses to be recognized for long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. The adoption of SFAS No. 121 did not have any
effect on the carrying value of long-lived assets.

INCOME TAXES

  On November 1, 1995, the Company terminated its status as an "S Corporation"
under Section 1362 of the Internal Revenue Code, and thereafter has become
subject to federal and state corporate income taxes. Prior to November 1,
1995, the Company was not liable for federal income taxes as income was taxed
directly to the Company's stockholders. The Company had provided for income
taxes in states in which it operated that did not recognize "S Corporation"
status. This change in tax status resulted in the Company recording a
$2,036,000 tax benefit in 1995.

  The Company accounts for income taxes using the liability method as required
by SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred
income taxes are recognized for the future tax consequences of differences
between the tax and financial accounting of assets and liabilities at each
year end. Deferred income taxes are based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. A valuation allowance is established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income tax
expense is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.

STOCK OPTION PLANS

  The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
the grant. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because

                                      30
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.

NET INCOME PER SHARE

  Net income per share is computed using the weighted average number of shares
of common stock and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the incremental common shares
issuable upon the exercise of stock options using the treasury stock method.
Primary and fully diluted net income per share amounts were the same in 1996.

PRO FORMA INFORMATION (UNAUDITED)

 Pro Forma Consolidated Statement of Income

  On November 1, 1995, the Company terminated its status as an S Corporation
and thereafter became subject to federal and state corporate income taxes.
Accordingly, for informational purposes, the accompanying consolidated
statements of income for the years ended December 31, 1995 and 1994 includes
an unaudited pro forma adjustment for income taxes, based on the tax laws in
effect at the time, which would have been recorded if the Company had not been
an S Corporation.

  Total pro forma income tax expense is different from the amount which would
be provided by applying the statutory federal rate to income before income
taxes principally due to the effect of state income taxes, non-deductible
permanent items and capital losses for which a valuation allowance has been
provided due to the uncertainty of realization during the carryforward period.

 Pro Forma Net Income Per Share

  Pro forma net income per share is computed using pro forma net income and
the weighted average number of common and dilutive common stock equivalent
shares. Common Stock equivalents are attributable to stock options using the
treasury stock method and, for the nine-month period ended September 30, 1995
and the year ended December 31, 1994, include the weighted average estimated
number of shares which was necessary to fund the payment of undistributed S
Corporation earnings in excess of the previous twelve months net income.
Common Stock and Common Stock equivalent shares issued during the twelve-month
period prior to the effective date of the initial public offering have been
included in the calculation as if they were outstanding for the nine-month
period ended September 30, 1995 and the year ended December 31, 1994 using the
treasury stock method. The initial public offering price was used in the
determination of Common Stock equivalents for all periods presented up to the
effective date of the initial public offering. After that date, the market
prices of Common Stock were used for computing Common Stock equivalents.
Primary and fully diluted pro forma net income per share are the same for each
period presented.


                                      31
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. SECURITIES AVAILABLE-FOR-SALE

  The following is a summary of securities available-for-sale at December 31,
1996 and 1995:

<TABLE>
<CAPTION>
                                                   GROSS      GROSS    ESTIMATED
                                                 UNREALIZED UNREALIZED   FAIR
                                          COST     GAINS      LOSSES     VALUE
                                         ------- ---------- ---------- ---------
                                                     (IN THOUSANDS)
   <S>                                   <C>     <C>        <C>        <C>
   DECEMBER 31, 1996
   U.S. government securities........... $38,065    $43        $(56)    $38,052
   Other debt securities................   1,563      1         (11)      1,553
                                         -------    ---        ----     -------
     Total debt securities..............  39,628     44         (67)     39,605
   Equity securities....................   8,500                          8,500
   Tax-free investment fund.............  34,122                         34,122
                                         -------    ---        ----     -------
                                         $82,250    $44        $(67)    $82,227
                                         =======    ===        ====     =======
   DECEMBER 31, 1995
   U.S. government securities........... $ 3,178    $50        $(16)    $ 3,212
   Other debt securities................     500                 (4)        496
                                         -------    ---        ----     -------
     Total debt securities..............   3,678     50         (20)      3,708
   Equity securities....................   2,242     19                   2,261
   Tax-free investment fund.............  40,545                         40,545
                                         -------    ---        ----     -------
                                         $46,465    $69        $(20)    $46,514
                                         =======    ===        ====     =======
</TABLE>

  The net unrealized gain (loss) on securities available-for-sale included as
a separate component of stockholders' equity totaled ($23,000) and $49,000 at
December 31, 1996 and 1995, respectively.

  Marketable equity securities and the amortized cost and estimated fair value
of debt securities at December 31, 1996, by contractual maturity, are shown
below.

<TABLE>
<CAPTION>
                                                                  ESTIMATED FAIR
                                                           COST       VALUE
                                                          ------- --------------
                                                              (IN THOUSANDS)
   <S>                                                    <C>     <C>
   Due in one year or less............................... $32,054    $32,029
   Due after one year through three years................   5,939      5,940
   Due after three years.................................   1,635      1,636
                                                          -------    -------
                                                           39,628     39,605
   Equity securities.....................................   8,500      8,500
   Tax-free investment fund..............................  34,122     34,122
                                                          -------    -------
                                                          $82,250    $82,227
                                                          =======    =======
</TABLE>

3. ADVANCES TO RELATED PARTIES

  During 1995 and 1994, the Company advanced $309,000 and $2,361,000,
respectively, to HLP which was used in connection with the construction of
leasehold improvements to be owned by the Company. At December 31, 1995,
leasehold improvements of $1,509,000 were capitalized by the Company and the
balance of the advance of $1,161,000 was remitted to the Company.


                                      32
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

  Equipment and leasehold improvements consists of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ---------------
                                                                 1996    1995
                                                                ------- -------
                                                                (IN THOUSANDS)
   <S>                                                          <C>     <C>
   Computer equipment and software............................. $19,288 $17,480
   Furniture and fixtures......................................   3,951   3,071
   Leasehold improvements......................................   6,810   4,940
                                                                ------- -------
                                                                 30,049  25,491
   Less accumulated depreciation and amortization..............  17,016  13,465
                                                                ------- -------
                                                                $13,033 $12,026
                                                                ======= =======
</TABLE>

5. INVESTMENT IN PREFERRED STOCK

  In December 1993, the Company entered into a Preferred Stock Purchase
Agreement ("Stock Agreement") with a development stage company ("Investee")
engaged in the development and sale of software systems for clinical care
applications. The Stock Agreement provided that the Investee issue 15,000
shares of $100 par value preferred stock in exchange for $1,500,000 payable in
installments from December 1993 to November 1994. During 1994 the Investee
incurred a substantial operating loss and deficiency in revenues compared to
the Investee's business plan upon which the Company had placed significant
reliance at the date of its investment. Based on this information, the Company
believes that its investment has been substantially impaired on an other than
temporary basis and, as of December 31, 1994, recognized a loss of $1,500,000.

6. ACCRUED EXPENSES

  Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                  -------------
                                                                   1996   1995
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)
   <S>                                                            <C>    <C>
   Employee compensation and benefits............................ $5,777 $4,217
   Other.........................................................  2,054  3,016
                                                                  ------ ------
                                                                  $7,831 $7,233
                                                                  ====== ======
</TABLE>

7. CREDIT ARRANGEMENTS

  Under a line of credit arrangement with a bank, the Company may borrow up to
$2,000,000 on a demand basis subject to terms and conditions upon which the
Company and the bank may mutually agree. The line of credit arrangement
expires on May 31, 1997. At December 31, 1996 and for each of the three years
in the period then ended, there were no borrowings under this arrangement.

8. REAL ESTATE

OWNED BY AFFILIATES

  Real estate as of December 31, 1996 and 1995 includes land and buildings
owned by BDP whose real estate was leased almost exclusively by the Company
and for which the Company is subject to substantially all the risks of
ownership. BDP is owned and controlled by stockholders and certain key
employees of the Company

                                      33
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

and is required to be consolidated under generally accepted accounting
principles and rules and regulations of the Commission. At December 31, 1996
and 1995, this real estate consisted of the following:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                  -------------
                                                                   1996   1995
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)
   <S>                                                            <C>    <C>
   Corporate headquarters........................................ $5,438 $5,351
   Accumulated depreciation......................................  1,283  1,156
                                                                  ------ ------
                                                                  $4,155 $4,195
                                                                  ====== ======
</TABLE>

  Long-term debt related to certain of the real estate described above is as
follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                  -------------
                                                                   1996   1995
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)
   <S>                                                            <C>    <C>
   Obligation under industrial revenue bond, principal
    installments of $200 in 1997 and $2,600 in 2009, interest at
    a floating variable rate (4.6% at December 31, 1996), secured
    by real estate owned by BDP.................................. $2,800 $3,000
   Other.........................................................           110
                                                                  ------ ------
                                                                   2,800  3,110
   Less current portion..........................................    200    203
                                                                  ------ ------
   Long-term debt................................................ $2,600 $2,907
                                                                  ====== ======
</TABLE>

  The industrial revenue bond and related mortgage notes payable are
collateralized by land and buildings consisting of the Company's corporate
headquarters and certain sales and support offices. These obligations require
the Affiliates and the Company to maintain certain financial ratios and comply
with certain covenants. Interest expense related to this debt amounted to
$155,000, $204,000 and $279,000 in 1996, 1995, and 1994, respectively.

OPERATING LEASES

  During 1994, the Company entered into a long-term lease agreement for
approximately 40% of the office space in a commercial office building in
Boston owned by HLP (see Note 3). HLP is owned and controlled by stockholders
and certain key employees of the Company. In connection with entering into
this lease, the Company terminated existing leases for substantially all the
space at the sales and support offices owned by the REP's. At December 31,
1996, future obligations due under the operating lease with HLP, REP's and
unrelated parties for sales and support offices are as follows:

<TABLE>
<CAPTION>
                                          HLP    REPS  SUB TOTAL OTHERS   TOTAL
                                        ------- ------ --------- ------- -------
                                                     (IN THOUSANDS)
   <S>                                  <C>     <C>    <C>       <C>     <C>
   Year ending December 31:
     1997.............................. $ 2,106 $  309  $ 2,415  $ 1,366 $ 3,781
     1998..............................   2,106    265    2,371    1,260   3,631
     1999..............................   2,106    221    2,327    1,080   3,407
     2000..............................   2,317    221    2,538      642   3,180
     2001..............................   2,317    221    2,538      362   2,900
     Thereafter........................  35,382    110   35,492      181  35,673
                                        ------- ------  -------  ------- -------
                                        $46,334 $1,347  $47,681  $ 4,891 $52,572
                                        ======= ======  =======  ======= =======
</TABLE>

                                      34
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)


  Total rent expense amounted to $4,146,000, $4,302,000 and $1,608,000, during
1996, 1995 and 1994, respectively. Total rent expense includes $2,621,000,
$2,571,000 and $975,000 in 1996, 1995 and 1994, respectively, related to the
lease with HLP. Total rent expense includes $381,000 and $915,000 in 1996 and
1995, respectively, related to the leases with the REPs.

9. INCOME TAXES

  The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                          1996     1995    1994
                                                         -------  -------  ----
                                                            (IN THOUSANDS)
   <S>                                                   <C>      <C>      <C>
   Currently payable:
     Federal............................................ $10,142  $ 1,556
     State..............................................   2,211      222  $325
                                                         -------  -------  ----
                                                          12,353    1,778   325
   Deferred, principally Federal........................  (2,432)  (2,036)
                                                         -------  -------  ----
                                                         $ 9,921  $  (258) $325
                                                         =======  =======  ====
</TABLE>

  A reconciliation of the federal statutory rate to the effective income tax
rate during 1996 is as follows:

<TABLE>
   <S>                                                                     <C>
   Tax at federal statutory rate.......................................... 34.0%
   State taxes, net of federal benefit....................................  5.5
   Other, net.............................................................   .5
                                                                           ----
                                                                           40.0%
                                                                           ====
</TABLE>

  Significant components of the Company's deferred tax asset are as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                  -------------
                                                                   1996   1995
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)
   <S>                                                            <C>    <C>
   Deferred revenue.............................................. $  937 $  646
   Depreciation..................................................  2,235    501
   Allowances and accruals.......................................  1,296    889
   Capital loss carryforward.....................................    600    600
                                                                  ------ ------
                                                                   5,068  2,636
   Less valuation allowance......................................    600    600
                                                                  ------ ------
                                                                  $4,468 $2,036
                                                                  ====== ======
</TABLE>

10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

  In September 1995, the Company's Board of Directors and stockholders
approved a four-for-one stock split of its Common Stock, effective September
27, 1995. All shares and option information in the accompanying consolidated
financial statements have been retroactively adjusted to reflect the stock
split.

  In September 1995, the Company's Board of Directors and stockholders
approved an amendment to its charter to authorize 5,000,000 shares of
undesignated preferred stock, and increase the number of authorized shares of
Common Stock to 50,000,000. These amendments became effective on November 17,
1995.


                                      35
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  In November 1995, the Company completed its initial public offering in which
4,604,500 shares of Common Stock were sold at a per share price of $18. Net
proceeds, after deduction of $6,717,000 for underwriters' fees and other
offering costs, amounted to $76,164,000.

11. BENEFIT PLANS

PROFIT SHARING RETIREMENT PLAN

  The Company maintains a profit sharing retirement plan for all employees
meeting age and service requirements. The contributions to the plan are
discretionary, as determined by the Board of Directors. The Company expects to
continue the plan indefinitely; however, the Company has reserved the right to
modify, amend or terminate the plan. For the years ended December 31, 1996,
1995 and 1994, the Company has expensed $2,840,000, $2,400,000 and $2,046,000,
respectively.

STOCK PURCHASE PLAN

  In September 1995, the Company's Board of Directors and stockholders
approved the 1995 Employee Stock Purchase Plan (the "ESPP") under which
eligible employees may purchase Common Stock at a price per share equal to 85%
of the lower of the fair market value of the Common Stock at the beginning or
end of each offering period. Participation in the offering is limited to 10%
of an employee's compensation (not to exceed amounts allowed under Section 423
of the Internal Revenue Code), may be terminated at any time by the employee
and automatically ends on termination of employment with the Company. A total
of 500,000 shares of Common Stock have been reserved for issuance under this
plan. During the year ended December 31, 1996, approximately 160,000 shares
were purchased under this plan. At December 31, 1995, $351,000 had been
withheld from employees' salaries for 1996 purchases under the plan and were
included in accrued expenses.

NONQUALIFIED STOCK OPTIONS

  Nonqualified stock options are granted at a minimum of the fair market value
at the date of grant, and generally vest over five years or immediately in the
event of a public stock offering or the merger of the Company when the Company
is not the surviving entity. The options have no expiration date. As of
December 31, 1996, nonqualified options to acquire 3,516,596 shares of Common
Stock have been granted at exercise prices ranging from $.31 to $31.88 per
share. During 1996, 1995 and 1994, options to acquire 8,000, 1,636,020 and
1,318,000 shares, respectively, were exercised at prices ranging from $.31 to
$7.82 per share.

  In September 1995, the Company's Board of Directors approved the 1995
Director Stock Option Plan (the "Director Plan"), which provides that each
non-employee director of the Company be granted an option to acquire 2,000
shares of Common Stock on the date that person becomes a director but, in any
event, not earlier than the effective date of the Director Plan. Options are
granted at a price equal to the fair market value on the date of grant. The
option becomes exercisable on the first anniversary of the date of grant, and
the term of the option is ten years from the date of grant. The Company has
reserved 30,000 shares of Common Stock for issuance under the Director Plan.
As of December 31, 1996, options to acquire 12,000 shares of Common Stock have
been granted under the Director Plan at exercise prices ranging from $18.00 to
$36.75 per share, 6,000 of which are exercisable.

INCENTIVE STOCK OPTION PLANS

  During 1985 and 1994, the Company established incentive stock option plans
providing for the grant of options for the issuance of 959,640 and 696,460
shares, respectively, of Common Stock. Options are granted at fair market
value at the time of grant and became immediately exercisable at the time of
the initial public

                                      36
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

offering. The 1994 Plan also provides for the grant of stock appreciation
rights ("SAR's"). The options expire on the tenth anniversary of the date of
the grant or upon termination of employment. No SAR's have been granted under
the 1994 Plan which terminated upon the completion of the initial public
offering. The 1985 Plan was terminated in March 1995.

  In September 1995, the Company's stockholders approved the 1995 Stock Option
Plan (the "1995 Option Plan"). The 1995 Option Plan provides for the grant of
stock options to employees, officers and directors of, and consultants and
advisors to, the Company. Under the 1995 Option Plan, the Company may grant
options that are intended to qualify as incentive stock options under
provisions of the Internal Revenue Code or options not intended to qualify as
incentive stock options. The option grants, exercise price, vesting and
expiration will be authorized by a compensation committee comprised of the
Company's nonmanagement directors. A total of 1,470,000 shares of Common Stock
may be issued upon the exercise of options granted under the 1995 Option Plan.

  In 1994, the Board of Directors voted to distribute $424,000 to certain key
employees who are not stockholders. These distributions, which were charged to
selling, general and administrative expense in the year distributed, were made
to compensate key employees in connection with the expiration of certain
incentive stock options. These distributions were discretionary and the Board
is not obligated to approve similar distributions in future years.

STOCK BASED COMPENSATION

  Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and shares issued pursuant to the
ESPP under the fair value method of that Statement. The fair value for these
options and shares issued pursuant to the ESPP were estimated at the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                                          OPTIONS      ESPP
                                                         ----------  ----------
                                                         1996  1995  1996  1995
                                                         ----  ----  ----  ----
   <S>                                                   <C>   <C>   <C>   <C>
   Expected life (years)................................  6.9   3.1   .57   --
   Interest rate........................................  6.5%  5.9%  6.4%  --
   Volatility........................................... 39.0% 24.0% 39.0%  --
   Dividend yield.......................................  0.0%  0.0%  0.0%  --
</TABLE>

  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for earnings per
share information):

<TABLE>
<CAPTION>
                                                                  1996    1995
                                                                 ------- ------
   <S>                                                           <C>     <C>
   Pro forma net income......................................... $13,372 $9,523
   Pro forma net income per share............................... $   .63 $  .55
</TABLE>


                                      37
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  The effects on 1996 and 1995 pro forma net income and net income per share
of expensing the estimated fair value of stock options and shares issued
pursuant to the ESPP are not necessarily representative of the effects on
reporting the results of operations for future years as the periods presented
include only one and two years of option grants under the Company's plans.

  A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:

<TABLE>
<CAPTION>
                                                               WEIGHTED-AVERAGE
                                                    OPTIONS     EXERCISE PRICE
                                                   ----------  ----------------
   <S>                                             <C>         <C>
   Outstanding at December 31, 1993..............   3,429,764       $ 1.98
     Granted.....................................     446,996       $ 4.58
     Exercised...................................  (1,322,000)      $  .36
                                                   ----------
   Outstanding at December 31, 1994..............   2,554,760       $ 3.26
     Granted.....................................     533,752       $12.26
     Exercised...................................  (1,829,416)      $ 2.32
                                                   ----------
   Outstanding at December 31, 1995..............   1,259,096       $ 8.45
     Granted.....................................     712,576       $30.48
     Exercised...................................    (493,720)      $ 5.30
     Forfeited...................................     (34,386)      $23.65
                                                   ----------
   Outstanding at December 31, 1996..............   1,443,566       $20.04
                                                   ==========
   Exercisable at December 31, 1996..............     537,562       $ 7.30
                                                   ==========
   Available for Future Grants...................     512,058
                                                   ==========
   Weighted-average fair value of options granted
    during 1996..................................                   $16.03
</TABLE>

  The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                            ------------------------------------- --------------------------
                                                         WEIGHTED
    RANGE OF                            WEIGHTED AVERAGE AVERAGE                 WEIGHTED
    EXERCISE                  NUMBER       REMAINING     EXERCISE   NUMBER       AVERAGE
     PRICES                 OUTSTANDING CONTRACTUAL LIFE  PRICE   EXERCISABLE EXERCISE PRICE
    --------                ----------- ---------------- -------- ----------- --------------
   <S>                      <C>         <C>              <C>      <C>         <C>
   $ 2.95-$ 5.14...........    225,600     6.99 years     $ 4.62    225,600       $ 4.62
   $ 5.18-$ 7.82...........    239,024     4.43 years       6.56    239,024         6.56
   $18.00..................    281,752     8.87 years      18.00     72,938        18.00
   $24.25-$30.00...........    124,492     9.32 years      28.73          0           --
   $30.63-$36.75...........    572,698     9.69 years      30.86          0           --
                             ---------                              -------
                             1,443,566                              537,562
                             =========                              =======
</TABLE>


                                      38
<PAGE>

                            IDX SYSTEMS CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. QUARTERLY INFORMATION (UNAUDITED)

  A summary of operating results and pro forma net income per share for the
quarterly periods in the two years ended December 31, 1996 is set forth below:

<TABLE>
<CAPTION>
                                                QUARTER ENDED
                              --------------------------------------------------
                              MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31  TOTAL
                              -------- ------- ------------ ----------- --------
                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                           <C>      <C>     <C>          <C>         <C>
Year ended December 31, 1996
  Total revenues............  $37,345  $39,082   $38,588      $42,564   $157,579
  Gross profit..............   17,954   19,732    19,238       21,110     78,034
  Net income................    3,353    3,856     3,429        4,244     14,882
  Net income per share......  $  0.16  $  0.18   $  0.16      $  0.20   $   0.70
Year ended December 31, 1995
  Total revenues............  $29,245  $33,444   $32,104      $33,327   $128,120
  Gross profit..............   12,749   16,070    14,490       16,061     59,370
  Net income................    3,419    4,128     3,347        5,471     16,365
  Pro forma net income......    2,167    2,616     2,116        2,708      9,607
  Pro forma net income per
   share....................  $  0.13  $  0.15   $  0.12      $  0.15   $   0.55
</TABLE>

13. SUBSEQUENT EVENTS

  On February 26, 1997, the Company acquired certain data model technology
from Medaphis Healthcare Information Technology Company for a cash price
between $2.5 and $3.5 million. The acquisition will be accounted for under the
purchase method. A substantial portion of the purchase price is expected to be
expensed as in-process research and development in connection with the
Company's development of a healthcare data model.

  On March 25, 1997, the Company entered into an Agreement and Plan of Merger
("Agreement") with PHAMIS, Inc. ("PHAMIS"), a provider of acute care clinical
and hospital-based information solutions. The merger, which has been approved
by the Boards of Directors of each company, is subject to regulatory and
shareholder approval. The Agreement provides for the stockholders of PHAMIS to
receive .73 shares of the Company's Common Stock for each share of PHAMIS
Common Stock, subject to adjustment within a range of .68 to .80 shares of IDX
Common Stock, based on an average market price per share of IDX. Approximately
6.1 million shares of Common Stock of PHAMIS are outstanding and subject to
the exchange. Management expects that the merger, if consummated, will be
accounted for under the pooling of interests method.

                                      39
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

Board of Directors
IDX Systems Corporation

  We have audited the accompanying consolidated balance sheets of IDX Systems
Corporation and Affiliates as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IDX Systems
Corporation and Affiliates at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.

                                          Ernst & Young LLP

Boston, Massachusetts
February 5, 1997, except for
Note 13, as to which
the date is March 25, 1997

                                      40
<PAGE>

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

  There have been no disagreements on accounting and financial disclosure
matters.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I hereof, and the remainder is contained
in the Company's 1997 Proxy Statement under the caption "Election of
Directors" and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

  The response to this item is contained in this Company's 1997 Proxy
Statement under the captions "Board of Directors Compensation" and
"Compensation of Executive Officers" and is incorporated herein by reference.
Information relating to delinquent filings of Forms 3, 4 and 5 of the Company
is contained in the Company's 1997 Proxy Statement under the caption
"Compliance with Section 16 Reporting Requirements."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The response to this item is contained in the Company's 1997 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The response to this item is contained in the Company's 1997 Proxy Statement
under the captions "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" and is
incorporated herein by reference.

                                    PART IV

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

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
(a) The following consolidated financial statements of IDX Systems
    Corporation are included in Item 8.
1. Consolidated Balance Sheets at December 31, 1996 and 1995.............   24
   Consolidated Statements of Income for the Years Ended December 31,
    1996, 1995 and 1994...................................................  25
   Consolidated Statements of Stockholders' Equity for the Years Ended
    December 31, 1996, 1995 and 1994......................................  26
   Consolidated Statements of Cash Flows for the Years Ended December 31,
    1996, 1995 and 1994...................................................  27
   Notes to the Consolidated Financial Statements.........................  28
   Report of Independent Auditors on Financial Statements.................  40
2. All schedules are omitted as the information required is inapplicable
   or the information is presented in the consolidated financial
   statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the
   Exhibits are filed as a part of this Annual Report on Form 10-K.
</TABLE>

(b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.

                                      41
<PAGE>

                                  SIGNATURES

  PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THE 25TH DAY OF
MARCH, 1997.

                                          IDX Systems Corporation

                                                  /s/ Richard E. Tarrant
                                          By: _________________________________
                                             RICHARD E. TARRANT, PRESIDENT AND
                                                  CHIEF EXECUTIVE OFFICER

  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

              SIGNATURE                        TITLE                 DATE

       /s/ Richard E. Tarrant          President, Chief         March 19, 1997
-------------------------------------   Executive Officer
         RICHARD E. TARRANT             and Director
                                        (Principal
                                        Executive Officer)

          /s/ John A. Kane             Vice President,          March 25, 1997
-------------------------------------   Finance and
            JOHN A. KANE                Administration,
                                        Chief Financial
                                        Officer and
                                        Treasurer
                                        (Principal
                                        Financial and
                                        Accounting Officer)

         /s/ Paul L. Egerman           Director                 March 19, 1997
-------------------------------------
           PAUL L. EGERMAN

                                                                March 19, 1997
       /s/ Henry M. Tufo, M.D.         Director
-------------------------------------
         HENRY M. TUFO, M.D.

         /s/ Robert H. Hoehl           Director                 March 19, 1997
-------------------------------------
           ROBERT H. HOEHL

     /s/ Stuart H. Altman, Ph.D.       Director                 March 19, 1997
-------------------------------------
       STUART H. ALTMAN, PH.D.

        /s/ Larry D. Grandia           Director                 March 25, 1997
-------------------------------------
          LARRY D. GRANDIA

         /s/ Steven M. Lash            Director                 March 25, 1997
-------------------------------------
           STEVEN M. LASH

                                      42
<PAGE>

                                 EXHIBIT INDEX

  The following exhibits are filed as part of this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
 EXHIBIT NO.                         DESCRIPTION                           PAGE
 -----------                         -----------                           ----
 <C>         <S>                                                           <C>
  3.1*       Second Amended and Restated Articles of Incorporation.
  3.2*       Second Amended and Restated bylaws.
  4.1*       Specimen Certificate for shares of Common Stock, $.01 par
              value, of the Registrant.
 10.1#*      1985 Incentive Stock Option Plan.
 10.2#*      1994 Incentive Stock Option Plan.
 10.3#*      1995 Stock Option Plan.
 10.4#*      1995 Director Stock Option Plan.
 10.5#*      1995 Employee Stock Purchase Plan.
 10.6#*      Description of Registrant's Executive Bonus Plan.
 10.7#*      Employment Agreement between the Registrant and Paul L.
              Egerman dated as of June 24, 1994.
 10.8*       Agreement between Richard E. Tarrant, Robert H. Hoehl and
              Paul L. Egerman dated as of June 24, 1994.
 10.9*       Agreement between the Registrant, Richard E. Tarrant,
              Robert H. Hoehl and Paul L. Egerman dated as of September
              18, 1995.
 10.10#*     Amended and Restated Consulting/Employment Agreement
              between the Registrant and Henry M. Tufo, dated as of
              March 7, 1995, and related Letter Agreement between
              Mr. Tufo and the Registrant dated August 11, 1995.
 10.11*      Employment, Noncompetition and Nondisclosure Agreement
              between the Registrant and Richard E. Tarrant.
 10.12*      Employment, Noncompetition and Nondisclosure Agreement
              between the Registrant and Robert H. Hoehl.
 10.13*      Employment, Nondisclosure and Noncompetition Agreement
              between the Registrant and Jeffrey M. Blanchard dated in
              1987.
 10.14*      Employment, Noncompetition and Nondisclosure Agreement
              between the Registrant and James H. Crook, Jr. dated
              September 19, 1995.
 10.15*      Agreement between the Registrant and Robert F. Galin dated
              April 5, 1982.
 10.16*      Employment Agreement between the Registrant and John A.
              Kane dated October 15, 1984.
 10.17*      Redemption Agreement between the Registrant, Richard E.
              Tarrant and Robert H. Hoehl dated as of April 1, 1993.
 10.18*      First Amendment to Redemption Agreement between the
              Registrant, Richard E. Tarrant and Robert H. Hoehl.
 10.19*      Amended and Restated Certificate and Agreement of Limited
              Partnership of 4901 LBJ Limited Partnership between the
              Registrant and Richard E. Tarrant, Robert H. Hoehl, Paul
              L. Egerman, John A. Kane, Robert F. Galin and certain of
              the Registrant's employees dated as of April 1, 1992, as
              amended on July 1, 1993.
 10.20*      Lease Agreement between the Registrant and 4901 LBJ Limited
              Partnership dated as of April 7, 1992.
</TABLE>


                                       43
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT NO.                         DESCRIPTION                           PAGE
 -----------                         -----------                           ----
 <C>         <S>                                                           <C>
 10.21*      Indenture of Lease between the Registrant and IDS Realty
              Trust dated as of December 1, 1981, as amended on June 29,
              1995.
 10.22*      Lease Agreement between the Registrant and BDP Realty
              Associates relating to 1500 Shelburne Road dated July 6,
              1979.
 10.23*      Extension of Lease Agreement between the Registrant and BDP
              Realty Associates relating to 1500 Shelburne Road dated as
              of August 16, 1995.
 10.24*      Lease Agreement between the Registrant and BDP Realty
              Associates relating to 1400 Shelburne Road dated March 1,
              1989.
 10.25*      Guaranty Modification Agreement relating to 1400 Shelburne
              Road dated as of September 15, 1995.
 10.26*      Reimbursement Agreement among the Registrant, BDP Realty
              Associates and State Street Bank and Trust Company dated
              as of January 25, 1993.
 10.27*      Agreement of Lease between the Registrant and Huntington
              Avenue Limited Partnership dated as of April 13, 1994, as
              amended through January 1, 1995.
 10.28*      Guaranty Release Agreement relating to 116 Huntington
              Avenue.
 10.29*      Option Agreement between the Registrant and BDP Realty
              Associates.
 10.30*      Tax Indemnification Agreement between the Registrant and
              the stockholders listed on Schedule A thereto.
 10.31*      Employment, Noncompetition and Nondisclosure Agreement
              between the Registrant and Pamela J. Pure effective April
              3, 1995.
 10.32#*     Letter Agreement between the Registrant and Pamela J. Pure
              dated March 7, 1995.
 10.33#*     Letter Agreement between the Registrant and Pamela J. Pure
              dated October 23, 1995.
 10.34#*     Nonqualified Stock Option Agreement dated as of September
              1, 1991 between the Registrant and John A. Kane.
 10.35#*     Nonqualified Stock Option Agreement dated as of September
              1, 1992 between the Registrant and John A. Kane.
 10.36#      Letter Agreement between the Registrant and Jeffrey V.         45
              Sutherland, Ph.D. dated
              August 16, 1996
 10.37       Employment, Noncompetition and Nondisclosure Agreement         47
              between the Registrant and Jeffrey V. Sutherland, Ph.D.
              dated September  , 1996.
 11          Statement regarding computation of earnings per share.         55
 23          Consent of Ernst & Young LLP                                   56
 27          Financial Data Schedule                                        57
</TABLE>
--------
# Management contract or compensatory plan or arrangement filed as an exhibit
  to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
* Incorporated herein by reference to the Company's Registration Statement on
  Form S-1, as amended (File No. 33-97104).

                                      44