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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------



FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM  TO



Commission file number 0-26816



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IDX SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Vermont                                                        |  | 03-0222230                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



40 IDX Drive

South Burlington, VT 05403

(Address of Principal Executive Offices)



Registrants Telephone Number, Including Area Code: (802-862-1022)



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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 whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No ̈



The number
of shares outstanding of the registrants common stock as of May 4, 2004 was 30,132,748.



The following trademarks used herein are owned by IDX: Flowcast, Groupcast, Carecast, Imagecast, IDX, LastWord, IDXtend and Web Framework. All other trademarks referenced in this Quarterly Report on Form 10-Q are the
property of their respective owners.



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##### Table of Contents

IDX SYSTEMS CORPORATION

FORM 10-Q

For the Period Ended March 31, 2004



TABLE OF CONTENTS



|                              |  |         |  |                                                                                       |  |   
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | --
|                              |  | Page   
|PART I.
FINANCIAL INFORMATION |  |        
|                              |  |         | 
|                              |  | ITEM 1. |  | Financial Statements                                                                  |  | 3 
|                              |  |         |  | Condensed Consolidated Balance Sheets (unaudited)                                     |  | 3 
|                              |  |         |  | Condensed Consolidated Statements of Income (unaudited)                               |  | 4 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows (unaudited)                           |  | 5 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements (unaudited)                      |  | 6 
|                              |  | ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15
|                              |  | ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 34
|                              |  | ITEM 4. |  | Controls and Procedures                                                               |  | 35
|                              | 
|PART II.
OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | ITEM 1. |  | Legal Proceedings                                                                     |  | 36
|                              |  | ITEM 2. |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 37
|                              |  | ITEM 3. |  | Defaults Upon Senior Securities                                                       |  | 37
|                              |  | ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 37
|                              |  | ITEM 5. |  | Other Information                                                                     |  | 37
|                              |  | ITEM 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 37
|                              | 
|SIGNATURES                    |  | 38     
|EXHIBIT INDEX                 |  | 39     



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



IDX Systems Corporation

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)



|                                                         |  |                |         |                   |   |        
|-------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                                         |  | March 31, 2004 |         | December 31, 2003
|ASSETS                                                   |  |                |         |                   |   |        
|Cash and cash equivalents                                |  | $              | 18,820  |                   | $ | 25,536 
|Marketable securities                                    |  |                | 86,441  |                   |   | 79,068 
|Accounts receivable, net                                 |  |                | 109,687 |                   |   | 85,971 
|Unbilled receivables                                     |  |                | 7,781   |                   |   | 7,738  
|Refundable income taxes                                  |  |                | 8,264   |                   |   | 8,564  
|Prepaid and other current assets                         |  |                | 21,512  |                   |   | 11,446 
|Deferred tax asset                                       |  |                | 8,408   |                   |   | 5,899  
|                                                         |  |                |         |                   |   |        
|Total current assets                                     |  |                | 260,913 |                   |   | 224,222
|                                                         |  |               
|Property and equipment, net                              |  |                | 85,943  |                   |   | 86,216 
|Capitalized software costs, net                          |  |                | 4,985   |                   |   | 3,806  
|Goodwill, net                                            |  |                | 2,508   |                   |   | 2,508  
|Other assets                                             |  |                | 10,318  |                   |   | 10,357 
|Deferred tax asset                                       |  |                | 11,235  |                   |   | 11,404 
|                                                         |  |                |         |                   |   |        
|Total assets                                             |  | $              | 375,902 |                   | $ | 338,513
|                                                         |  |                |         |                   |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                     |  |                |         |                   |   |        
|Accounts payable, accrued expenses and other liabilities |  | $              | 60,213  |                   | $ | 54,843 
|Deferred revenue                                         |  |                | 44,906  |                   |   | 23,016 
|                                                         |  |                |         |                   |   |        
|Total current liabilities                                |  |                | 105,119 |                   |   | 77,859 
|                                                         |  |               
|Commitments and contingencies                            |  |                |        |                   |   |       
|                                                         |  |               
|Stockholders equity                                     |  |                | 270,783 |                   |   | 260,654
|                                                         |  |                |         |                   |   |        
|Total liabilities and stockholders equity               |  | $              | 375,902 |                   | $ | 338,513
|                                                         |  |                |         |                   |   |        



See Notes to the
Condensed Consolidated Financial Statements



3



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##### Table of Contents

IDX Systems Corporation

Condensed Consolidated Statements of Income

(in thousands, except for per share data)

(unaudited)



|                                                         |  |                              |         |   |      |   |        |  
|-------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                         |  | Three Months Ended March 31, |        
|                                                         |  | 2004                         |         |   | 2003 |  
|Revenues                                                 |  |                              |         |   |      |   |        |  
|System sales                                             |  | $                            | 35,974  |   |      | $ | 32,541 |  
|Maintenance and service fees                             |  |                              | 66,576  |   |      |   | 59,900 |  
|                                                         |  |                              |         |   |      |   |        |  
|Total revenues                                           |  |                              | 102,550 |   |      |   | 92,441 |  
|                                                         |  |                             
|Operating expenses                                       |  |                              |         |   |      |   |        |  
|Cost of system sales                                     |  |                              | 11,217  |   |      |   | 11,792 |  
|Cost of maintenance and services                         |  |                              | 46,591  |   |      |   | 41,661 |  
|Selling, general and administrative                      |  |                              | 28,427  |   |      |   | 20,454 |  
|Software development costs                               |  |                              | 13,887  |   |      |   | 13,350 |  
|                                                         |  |                              |         |   |      |   |        |  
|Total operating expenses                                 |  |                              | 100,122 |   |      |   | 87,257 |  
|                                                         |  |                              |         |   |      |   |        |  
|Operating income                                         |  |                              | 2,428   |   |      |   | 5,184  |  
|                                                         |  |                             
|Other income                                             |  |                              | 116     |   |      |   | 124    |  
|                                                         |  |                              |         |   |      |   |        |  
|Income before income taxes                               |  |                              | 2,544   |   |      |   | 5,308  |  
|                                                         |  |                             
|Income tax provision                                     |  |                              | (967    | ) |      |   | (1,592 | )
|                                                         |  |                              |         |   |      |   |        |  
|Income from continuing operations                        |  |                              | 1,577   |   |      |   | 3,716  |  
|                                                         |  |                             
|Discontinued operations                                  |  |                              |         |   |      |   |        |  
|Income from discontinued operations, net of income taxes |  |                              |        |   |      |   | 115    |  
|                                                         |  |                              |         |   |      |   |        |  
|Net income                                               |  | $                            | 1,577   |   |      | $ | 3,831  |  
|                                                         |  |                              |         |   |      |   |        |  
|Basic earnings per share                                 |  |                              |         |   |      |   |        |  
|Income from continuing operations                        |  | $                            | 0.05    |   |      | $ | 0.13   |  
|Income from discontinued operations                      |  | $                            |        |   |      | $ |       |  
|                                                         |  |                              |         |   |      |   |        |  
|Basic earnings per share                                 |  | $                            | 0.05    |   |      | $ | 0.13   |  
|                                                         |  |                              |         |   |      |   |        |  
|Basic weighted average shares outstanding                |  |                              | 29,880  |   |      |   | 29,172 |  
|                                                         |  |                              |         |   |      |   |        |  
|Diluted earnings per share                               |  |                              |         |   |      |   |        |  
|Income from continuing operations                        |  | $                            | 0.05    |   |      | $ | 0.13   |  
|Income from discontinued operations                      |  | $                            |        |   |      | $ |       |  
|                                                         |  |                              |         |   |      |   |        |  
|Diluted earnings per share                               |  | $                            | 0.05    |   |      | $ | 0.13   |  
|                                                         |  |                              |         |   |      |   |        |  
|Diluted weighted average shares outstanding              |  |                              | 31,434  |   |      |   | 29,415 |  
|                                                         |  |                              |         |   |      |   |        |  



See Notes to the
Condensed Consolidated Financial Statements



4



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IDX Systems Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                            |  |                              |         |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                            |  | Three Months Ended March 31, |        
|                                                                                            |  | 2004                         |         |   | 2003 |  
|Operating Activities:                                                                       |  |                              |         |   |      |   |         |  
|Net income                                                                                  |  | $                            | 1,577   |   |      | $ | 3,831   |  
|Less: Income from discontinued operations, net of income taxes                              |  |                              |        |   |      |   | 115     |  
|                                                                                            |  |                              |         |   |      |   |         |  
|Net income from continuing operations                                                       |  |                              | 1,577   |   |      |   | 3,716   |  
|                                                                                            |  |                             
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                              |         |   |      |   |         |  
|Depreciation                                                                                |  |                              | 4,031   |   |      |   | 3,145   |  
|Amortization                                                                                |  |                              | 406     |   |      |   | 580     |  
|Deferred taxes                                                                              |  |                              | (2,340  | ) |      |   | (727    | )
|Increase in allowance for doubtful accounts                                                 |  |                              | 544     |   |      |   | 294     |  
|Tax benefit related to exercise of non-qualified stock options                              |  |                              | 2,673   |   |      |   |        |  
|Foreign currency transaction (gains) losses, net                                            |  |                              | 189     |   |      |   |        |  
|Loss on disposition of equipment                                                            |  |                              | 29      |   |      |   |        |  
|Other                                                                                       |  |                              | 52      |   |      |   | 75      |  
|Changes in operating assets and liabilities:                                                |  |                              |         |   |      |   |         |  
|Accounts receivable                                                                         |  |                              | (24,454 | ) |      |   | 647     |  
|Prepaid expenses and other assets                                                           |  |                              | (10,091 | ) |      |   | (1,452  | )
|Accounts payable and accrued expenses                                                       |  |                              | 5,462   |   |      |   | (9,103  | )
|Federal and state income taxes                                                              |  |                              | 285     |   |      |   | 1,488   |  
|Deferred revenue                                                                            |  |                              | 21,890  |   |      |   | 989     |  
|                                                                                            |  |                              |         |   |      |   |         |  
|Net cash provided by (used in) operating activities from continuing operations              |  |                              | 253     |   |      |   | (348    | )
|                                                                                            |  |                             
|Investing Activities:                                                                       |  |                              |         |   |      |   |         |  
|Purchase of property and equipment, net                                                     |  |                              | (3,785  | ) |      |   | (8,415  | )
|Purchase of marketable securities                                                           |  |                              | (60,831 | ) |      |   | (24,320 | )
|Proceeds from sale of marketable securities                                                 |  |                              | 53,466  |   |      |   | 29,512  |  
|Other assets                                                                                |  |                              | (1,584  | ) |      |   | (211    | )
|                                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in investing activities from continuing operations                            |  |                              | (12,734 | ) |      |   | (3,434  | )
|                                                                                            |  |                             
|Financing Activities:                                                                       |  |                              |         |   |      |   |         |  
|Proceeds from sale of common stock                                                          |  |                              | 5,788   |   |      |   | 137     |  
|Proceeds from debt issuance                                                                 |  |                              |        |   |      |   | 23,727  |  
|Repayment of debt issuance                                                                  |  |                              |        |   |      |   | (18,727 | )
|                                                                                            |  |                              |         |   |      |   |         |  
|Net cash provided by financing activities from continuing operations                        |  |                              | 5,788   |   |      |   | 5,137   |  
|                                                                                            |  |                             
|Effect of exchange rate fluctuations on cash and cash equivalents                           |  |                              | (23     | ) |      |   |        |  
|                                                                                            |  |                              |         |   |      |   |         |  
|Net cash (used in) provided by continuing operations                                        |  |                              | (6,716  | ) |      |   | 1,355   |  
|Net cash provided by discontinued operations                                                |  |                              |        |   |      |   | 5,531   |  
|                                                                                            |  |                              |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                        |  |                              | (6,716  | ) |      |   | 6,886   |  
|Cash and cash equivalents at beginning of period                                            |  |                              | 25,536  |   |      |   | 40,135  |  
|                                                                                            |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                            | 18,820  |   |      | $ | 47,021  |  
|                                                                                            |  |                              |         |   |      |   |         |  



See Notes to
Condensed Consolidated Financial Statements



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Notes to Condensed Consolidated Financial Statements



Note 1  Nature of Business and Basis of Presentation



IDX Systems Corporation (IDX or the Company) provides healthcare information systems and services to large integrated healthcare delivery enterprises located in the United States, the United Kingdom and Canada.
Revenues are derived from the licensing of software, hardware sales, and providing maintenance and services related to system sales.



On June 18, 2003, the Company completed the sale of its wholly owned subsidiary EDiX Corporation (EDiX) to Spheris, formerly Total eMed, Inc.
(TEM), a medical transcription company based in Franklin, Tennessee. EDiX was accounted for as a discontinued operation, and therefore, EDiXs results of operations and cash flows have been removed from the Companys results of
continuing operations and cash flows for all periods presented in this Quarterly Report on Form 10-Q. See Note 3 for further information on the sale of EDiX.



The interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission and in accordance with accounting principles generally accepted in the United States. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed. In the
opinion of management, all necessary adjustments (consisting of normal recurring accruals) have been made to provide a fair presentation. The operating results for the three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes included in the Companys latest annual report on Form 10-K filed with the Securities and Exchange
Commission on March 15, 2004.



Certain reclassifications of prior period data
have been made to conform to the current reporting period.



Accounting for
Stock Based Compensation



The Company accounts for its stock-based
compensation plan under Accounting Principles Board (APB) Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation plans.
Accordingly, the Company records expense for employee stock compensation plans equal to the excess of the market price of the underlying IDX shares at the date of grant over the exercise price of the stock-related award, if any (known as the
intrinsic value). In general, all employee stock options are issued with the exercise price equal to the market price of the underlying shares at the grant date and therefore, no compensation expense is recorded. In addition, no compensation expense
is recorded for purchases under the 1995 Employee Stock Purchase Plan (the ESPP), as the plan is non-compensatory under the provisions of APB No. 25. The intrinsic value of restricted stock units and certain other stock-based
compensation issued to employees as of the date of grant is amortized to compensation expense over the vesting period.



Statement of Financial Accounting Standards (SFAS) No. 123 establishes the fair value based method of accounting for stock-based compensation plans. The
Company has adopted the disclosure-only alternative for stock options



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granted to employees and directors and for employee stock purchases under the ESPP under SFAS No. 123. The table below
summarizes the pro forma operating results of the Company had compensation cost been determined in accordance with the fair value based method prescribed by SFAS No. 123.



|                                                                                                      |  |                              |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                      |  | Three Months Ended March 31, |       
|(in thousands, except for per share data)                                                             |  | 2004                         |        |   | 2003 |  
|Net income as reported                                                                                |  | $                            | 1,577  |   |      | $ | 3,831  |  
|Add:                                                                                                  |  |                              |        |   |      |   |        |  
|Stock-based employee compensation expense included in reported net income, net of related tax effects |  |                              | 32     |   |      |   | 53     |  
|Deduct:                                                                                               |  |                              |        |   |      |   |        |  
|Total stock-based compensation under fair value based methods, net of related tax effects             |  |                              | (1,621 | ) |      |   | (1,242 | )
|                                                                                                      |  |                              |        |   |      |   |        |  
|Pro forma net (loss) income  SFAS No. 123                                                            |  | $                            | (12    | ) |      | $ | 2,642  |  
|                                                                                                      |  |                              |        |   |      |   |        |  
|Basic and diluted earnings per share:                                                                 |  |                              |        |   |      |   |        |  
|As reported                                                                                           |  | $                            | 0.05   |   |      | $ | 0.13   |  
|Pro forma  SFAS No. 123                                                                              |  | $                            |       |   |      | $ | 0.09   |  



Note 2  New Accounting
Standards



In January 2003, the FASB issued FIN 46, Consolidation of
Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to FIN 46, a company
generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined in FIN 46, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the variable interest entitys activities or is entitled to receive a majority of the entitys residual returns or both. FIN 46 also requires disclosure about
variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. On October 8, 2003, the Financial Accounting Standards Board deferred the effective date of FIN 46 for variable interest
entities created before February 1, 2003 to periods ending after December 15, 2003. A public entity need not apply the provisions of FIN 46 to an interest held in a variable interest entity (VIE) until the end of the first interim or
annual period ending after December 15, 2003, if both of the following apply:



| |  | the VIE was created before February 1, 2003, and
| | - | ------------------------------------------------



| |  | the public entity has not issued financial statements reporting interests in VIEs in accordance with FIN 46, other than certain required disclosures.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



Certain of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46 had no impact on the Companys financial position, results of operations or cash flows.



Note 3  Business Combinations and Divestitures



On June 18, 2003, the Company sold its wholly owned subsidiary, EDiX, to TEM resulting in a
net gain on the sale of discontinued operations of $26.5 million. The Company received approximately $64.0 million in cash from TEM in exchange for all the capital stock of EDiX. The Company transferred approximately $8.2 million of cash to TEM as
part of the sale of EDiX, resulting in a net cash inflow related to the EDiX sale of $53.6 million, net of transaction costs. EDiX represented the Companys medical transcription services segment (See Note 6).



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Summarized selected financial information for the discontinued operations for the three months ended March 31, 2003 is as
follows (in thousands):



|                                                |  |                                   |        |  
|----------------------------------------------- |  | --------------------------------- | ------ | -
|                                                |  | Three Months Ended March 31, 2003 |       
|Revenues                                        |  | $                                 | 28,635 |  
|                                                |  |                                   |        |  
|Pre-tax income from discontinued operations     |  |                                   | 165    |  
|Provision for income taxes                      |  |                                   | (50    | )
|                                                |  |                                   |        |  
|Income from discontinued operations, net of tax |  | $                                 | 115    |  
|                                                |  |                                   |        |  



Note 4  Investments in
Affiliates, at Equity



On January 8, 2001, the Company sold certain of the
net assets and operations of its majority owned subsidiary, ChannelHealth Incorporated (ChannelHealth), to Allscripts Healthcare Solutions, Inc. (Allscripts), a public company providing point-of-care e-prescribing and
productivity solutions for physicians. In addition to the sale, the Company entered into a ten-year strategic alliance (the Alliance Agreement) whereby Allscripts is the exclusive provider of point-of-care clinical applications sold by
IDX to physician practices.



At March 31, 2004, the Company owned approximately
19.0% of the outstanding shares of common stock of Allscripts and accounts for its investment in Allscripts under the equity method of accounting. Under the equity method of accounting, the Company recognized its pro-rata share of Allscripts losses
during the 2001 fiscal year resulting in the elimination of the carrying value of this investment. In accordance with the equity method of accounting, the Company has not recorded its share of losses since then, which share amounts to $68.5 million
through December 31, 2003. At March 31, 2004, the estimated market value of the Companys investment in Allscripts is approximately $72.6 million, based on the last reported sales price per share of Allscripts common stock on the NASDAQ
National Market on that date. The fair market value of this stock would be affected by the Companys contractual restriction that it is allowed to sell only 25% of its initial Allscripts shares in any one year.



Through March 31, 2004, the Company has sold approximately 14,000 shares of Allscripts common
stock, which sale has not materially changed its ownership interest in Allscripts.



Note 5  Restructuring costs and other charges



Restructuring costs



On September 28, 2001, the Company
announced its plan to restructure and realign its large physician group practice businesses. The Company implemented a workforce reduction and restructuring program affecting approximately four percent of the Companys employees. The
restructuring program resulted in a charge to earnings of approximately $19.5 million during the fourth quarter of 2001, in connection with costs associated with employee severance arrangements of approximately $5.5 million, lease payment costs of
approximately $5.2 million, equipment and leasehold improvement write-offs related to the leased facilities of $8.6 million and other restructuring costs, primarily related to professional and consulting fees related to the restructuring. Workforce
related accruals, consisting principally of employee severance costs, were based on specific identification of employees to be terminated, along with their job classification and functions, and their location. Approximately 200 employees were
terminated primarily in the Flowcast operating unit and certain corporate services functions. Substantially all workforce related actions were completed during the fourth quarter of 2001, with the exception of a minimal number of staff assigned to
transition teams. Of the $1.3 million accrual remaining at March 31, 2004, approximately $500,000 will be paid during the remainder of 2004 and approximately $800,000 thereafter. The table below sets forth the activity in the workforce reduction and
restructuring program (in thousands):



|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |     |   |  |   |      
|----------- |  | ----------------------- | ----- | -------------- | - | ------------ |  | - | ----------------------- | - | -------------- | - | ------------ |  | - | -------------------- |  | - | --- | - |  | - | -----
|            |  | BalanceDecember 31,2002 |       | Non-CashCharge |   | CashPayments |  |   | BalanceDecember 31,2003 |   | Non-CashCharge |   | CashPayments |  |   | BalanceMarch 31,2004
|Lease costs |  | $                       | 2,869 |                | $ |             |  | $ | (1,458                  | ) |                | $ | 1,411        |  | $ |                     |  | $ | (68 | ) |  | $ | 1,343
|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |     |   |  |   |      
|Total       |  | $                       | 2,869 |                | $ |             |  | $ | (1,458                  | ) |                | $ | 1,411        |  | $ |                     |  | $ | (68 | ) |  | $ | 1,343
|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |     |   |  |   |      



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Lease abandonment charges



In 1999, the Company entered into a lease commitment for new office space in Seattle under a lease that commenced in 2003. The Company
continued to utilize its existing space and an active search for a sublessor was initiated and has been ongoing. In 2002, the Company made the decision to consolidate its Seattle operations into the new office space. Due to the depressed Seattle
real estate market and the inability to obtain a sublessor, the Company recorded a lease abandonment charge of $9.2 million in the fourth quarter of 2002. The lease abandonment charge is related to lease payments of approximately $7.9 million
through the end of the lease term in 2005 and non-cash write-offs of certain leasehold improvements of approximately $1.3 million. Of the $4.4 million accrual remaining at March 31, 2004, approximately $1.8 million will be paid during the remainder
of 2004 and approximately $2.6 million thereafter. In the event that the Company is able to secure a sub-tenant to assume its prior lease in a future reporting period or is able to negotiate lease terminations with the landlord, the present value of
the savings generated from the future sub-lease income or lease terminations would be recorded as a reduction in lease abandonment expense in the period in which the sub-lease or termination agreements are signed. The table below sets forth the
activity in the lease abandonment charge (in thousands):



|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |      |   |  |   |      
|----------- |  | ----------------------- | ----- | -------------- | - | ------------ |  | - | ----------------------- | - | -------------- | - | ------------ |  | - | -------------------- |  | - | ---- | - |  | - | -----
|            |  | BalanceDecember 31,2002 |       | Non-CashCharge |   | CashPayments |  |   | BalanceDecember 31,2003 |   | Non-CashCharge |   | CashPayments |  |   | BalanceMarch 31,2004
|Lease costs |  | $                       | 7,868 |                | $ |             |  | $ | (2,770                  | ) |                | $ | 5,098        |  | $ |                     |  | $ | (681 | ) |  | $ | 4,417
|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |      |   |  |   |      
|Total       |  | $                       | 7,868 |                | $ |             |  | $ | (2,770                  | ) |                | $ | 5,098        |  | $ |                     |  | $ | (681 | ) |  | $ | 4,417
|            |  |                         |       |                |   |              |  |   |                         |   |                |   |              |  |   |                      |  |   |      |   |  |   |      



Note 6  Segment and
Geographic Information



Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), establishes standards for reporting information about operating segments. SFAS 131 also establishes standards for related disclosures
about major customers, products and services, and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision
maker, or decision-making group, in making decisions how to allocate resources and assess performance. The Company internally identifies operating segments by the type of products produced and markets served, and in accordance with SFAS 131, the
Company has aggregated similar operating segments into one segment: Information Systems and Services.



Information Systems and Services consist of IDXs healthcare information solutions that include software, hardware and related services. IDX solutions are designed to enable healthcare organizations to redesign
patient care and other workflow processes in order to improve efficiency and quality. The principal markets for this segment include physician groups, management service organizations, hospitals and integrated delivery networks primarily located in
the United States, United Kingdom and Canada.



Through the first quarter of
2003, the Company had an additional segment, Medical Transcription Services (EDiX), which provided medical transcription outsourcing services for hospitals and large physician group practices primarily located in the United States. This segment was
discontinued effective as of the second quarter of 2003 with the sale of EDiX to TEM and is reflected in discontinued operations (see Note 3). Accordingly, because the Company currently operates under one business segment, segment information is no
longer being disclosed separately. Operating results for the discontinued Medical Transcription Services segment have been reclassified to exclude general corporate overhead previously allocated to the segment and interest charged on certain
inter-company loans, net of income taxes.



9



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Note 7  Accounts Payable, Accrued Expenses and Other Liabilities



Accounts payable, accrued expenses and other liabilities consist of the following (in
thousands):



|                                      |  |                |        |                   |   |       
|------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                      |  | March 31, 2004 |        | December 31, 2003
|Accounts payable                      |  | $              | 23,269 |                   | $ | 13,688
|Employee compensation and benefits    |  |                | 10,000 |                   |   | 11,380
|Accrued expenses                      |  |                | 6,951  |                   |   | 10,098
|Reserve for lease abandonment charges |  |                | 4,417  |                   |   | 5,099 
|Restructuring costs                   |  |                | 1,343  |                   |   | 1,411 
|Income taxes                          |  |                | 7,778  |                   |   | 7,717 
|Other                                 |  |                | 6,455  |                   |   | 5,450 
|                                      |  |                |        |                   |   |       
|                                      |  | $              | 60,213 |                   | $ | 54,843
|                                      |  |                |        |                   |   |       



Note 8  Income Taxes



The Companys 2004 and 2003 effective tax rate for continuing
operations was 38.0% and 30.0%, respectively, which is lower than the Companys statutory rate of 40.0% due to the utilization of research and experimentation credits. The Company currently expects to realize net recorded deferred tax assets as
of March 31, 2004 of approximately $19.6 million. Managements conclusion that such assets will be recovered is based upon its expectation that future earnings of the Company combined with tax planning strategies available to the Company will
provide sufficient taxable income to realize recorded tax assets. Such tax strategies include estimates and involve judgment relating to unrealized gains on the Companys investment in publicly traded common stock of an equity investee. While
the realization of the Companys net recorded deferred tax assets cannot be assured, to the extent that future taxable income against which these tax assets may be applied is not sufficient, some or all of the Companys net recorded
deferred tax assets would not be realizable.



Note 9 
Stockholders Equity



Earnings Per Share:





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



|                                                    |  |                              |        |      |   |       
|--------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                                    |  | Three Months Ended March 31,
|                                                    |  | 2004                         |        | 2003
|Numerator for basic and diluted earnings per share: |  |                              |        |      |   |       
|Continuing operations                               |  | $                            | 1,577  |      | $ | 3,716 
|Discontinued operations                             |  |                              |       |      |   | 115   
|                                                    |  |                              |        |      |   |       
|Total                                               |  | $                            | 1,577  |      | $ | 3,831 
|                                                    |  |                              |        |      |   |       
|Denominator:                                        |  |                              |        |      |   |       
|Basic weighted average shares outstanding           |  |                              | 29,880 |      |   | 29,172
|Effect of employee stock options                    |  |                              | 1,554  |      |   | 243   
|                                                    |  |                              |        |      |   |       
|Denominator for diluted earnings per share          |  |                              | 31,434 |      |   | 29,415
|                                                    |  |                              |        |      |   |       
|Basic earnings per share                            |  |                              |        |      |   |       
|Continuing operations                               |  | $                            | 0.05   |      | $ | 0.13  
|Discontinued operations                             |  |                              |       |      |   |      
|                                                    |  |                              |        |      |   |       
|Total                                               |  | $                            | 0.05   |      | $ | 0.13  
|                                                    |  |                              |        |      |   |       
|Diluted earnings per share                          |  |                              |        |      |   |       
|Continuing operations                               |  | $                            | 0.05   |      | $ | 0.13  
|Discontinued operations                             |  |                              |       |      |   |      
|                                                    |  |                              |        |      |   |       
|Total                                               |  | $                            | 0.05   |      | $ | 0.13  
|                                                    |  |                              |        |      |   |       



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Options to acquire 177,009 and 4,529,862 shares for the three months ended March 31, 2004 and 2003, respectively, were
excluded from the calculation of diluted earnings per share, as the effect would not have been dilutive.



Comprehensive Income:



Components of other comprehensive income consisted of unrealized gains (losses) on marketable securities and foreign currency translation adjustments as follows (in thousands):



|                                                   |  |                              |       |      |   |       |  
|-------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ----- | -
|                                                   |  | Three months ended March 31, |      
|                                                   |  | 2004                         |       | 2003 |  
|Net income                                         |  | $                            | 1,577 |      | $ | 3,831 |  
|Other comprehensive income, net of tax:            |  |                              |       |      |   |       |  
|Unrealized gains (losses) on marketable securities |  |                              | 5     |      |   | (2    | )
|Foreign currency translation adjustments           |  |                              | 32    |      |   |      |  
|                                                   |  |                              |       |      |   |       |  
|Comprehensive income                               |  | $                            | 1,614 |      | $ | 3,829 |  
|                                                   |  |                              |       |      |   |       |  



Note 10  Financing
Arrangements



The Company has a revolving line of credit agreement (the
Line) allowing the Company to borrow up to $40.0 million subject to certain restrictions. The Line is secured by deposit accounts, accounts receivable and other assets and bears interest at the banks base rate plus .25%, resulting
in a rate of 4.25% as of March 31, 2004. The Line expires on June 27, 2005. At December 31 2003 and March 31, 2004, no amounts were outstanding under the Line.



Note 11  Commitments and Contingencies



Leases:



At March 31, 2004, minimum lease payments, net of sublease proceeds, for certain facilities and equipment under noncancelable leases are as follows (in thousands):



|               |  |       |        
|-------------- |  | ----- | -------
|Year           |  | Total
|2004 remaining |  | $     | 10,765 
|2005           |  |       | 15,635 
|2006           |  |       | 13,838 
|2007           |  |       | 13,829 
|2008           |  |       | 14,162 
|Thereafter     |  |       | 79,469 
|               |  |       |        
|               |  | $     | 147,698
|               |  |       |        



Of the $147.7 million in
non-cancelable operating lease obligations, approximately $5.8 million is included in accrued expenses at March 31, 2004 relating to a lease abandonment charge and restructuring costs. See Notes 5 and 7.



Richard E. Tarrant, Chairman of the Companys Board of Directors, is the President and a
director of LBJ Real Estate Inc., a Vermont corporation (LBJ Real Estate). Certain executive officers of LBJ Real Estate are also directors or executive officers of the Company, including Robert H. Hoehl, a director of the Company, and
John A. Kane, the Companys Chief Financial Officer, who also serves as a director of LBJ Real Estate. The stockholders of LBJ Real Estate include Messrs. Tarrant and Hoehl and an independent individual. LBJ Real Estate holds a 1% general
partnership interest in LBJ Ltd. Partnership, a Vermont limited partnership and an affiliate of the Company (LBJ), and Messrs. Hoehl, Tarrant, and Kane and Mr. Robert F. Galin, the Companys Senior Vice President of Sales, and two
other employees of the Company hold in the aggregate a 72.95% limited partnership interest. Through September 30, 2003, the Company leased an office building from LBJ. On September 30, 2003, LBJ sold the real estate leased by the Company to an
unrelated third party. The Company is continuing to lease the real estate from the new owners under a new lease agreement, which has been approved by certain independent members of the Board of Directors of the Company who have no financial interest
in the transaction.



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Total rent expense from continuing operations amounted to $3.8 million and $2.9 million during the three months ended
March 31, 2004 and 2003, respectively. Total rent paid to LBJ was approximately $138,000 during the three months ended March 31, 2003.



The Company leases office space to Allscripts in Burlington, Vermont. Total rent received from Allscripts was approximately $51,000 and $71,000 for the three months ended
March 31, 2004 and 2003, respectively.



Contingencies:



Federal regulations issued in accordance with the Health Insurance Portability and
Accountability Act of 1996, (HIPAA), impose national health data standards on health care providers that conduct electronic health transactions, health care clearinghouses that convert health data between HIPAA-compliant and
non-compliant formats, and health plans. Collectively, these groups, including most of IDXs customers and IDXs eCommerce Services clearinghouse business, are known as covered entities. These HIPAA standards include:



| |  | transaction and code set standards (the TCS Standards) that prescribe specific transaction formats and data code sets for certain electronic health care transactions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | privacy standards (the Privacy Standards) that protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | data security standards (the Security Standards) that require covered entities to implement administrative, physical and technological safeguards to ensure the
confidentiality, integrity, availability and security of individually identifiable health information in electronic form.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All covered entities were required to comply with the TCS Standards by October 16, 2003. The Privacy Standards imposed by HIPAA have been in effect for most covered
entities since April 14, 2003, while the compliance deadline for the Security Standards is April 21, 2005.



Many covered entities, including some of IDXs customers, IDXs eCommerce Services clearinghouse business, and trading partners of IDXs clearinghouse business, were not fully compliant with the TCS
Standards as of October 16, 2003. However, IDX has deployed contingency plans to accept non-standard transactions. Because the entire healthcare system, including IDXs eCommerce Services clearinghouse business and customers who use our
information systems to generate claims data, has not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system
implementation delays and cash flow reduction, with the attendant risk of liability and claims against IDX.



The Privacy Standards place on covered entities specific limitations on the use and disclosure of individually identifiable health information. IDX has made certain changes in products and services to comply with the
Privacy Standards. The effect of the Privacy Standards on IDXs business is difficult to predict and there can be no assurances that IDX will adequately address the risks created by the Privacy Standards and their implementation or that IDX
will be able to take advantage of any resulting opportunities.



Failure to
comply with these standards under HIPAA may subject IDX to civil monetary penalties and, in certain circumstances, criminal penalties. Under HIPAA, covered entities may be subject to civil monetary penalties in the amount of $100 per violation,
capped at a maximum of $25,000 per year for violation of any particular standard. Also, the U.S. Department of Justice, or DOJ, may seek to impose criminal penalties for certain violations of HIPAA. Criminal penalties under the statute vary
depending upon the nature of the violation but could include fines of not more than $250,000 and/or imprisonment.



The effect of HIPAA on IDXs business is difficult to predict and there can be no assurances that IDX will adequately address the business risks created by HIPAA and
its implementation, or that IDX will be able to take advantage of any resulting business opportunities. Furthermore, IDX is unable to predict what changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in the future or how
those changes could affect IDXs business or the costs of compliance with HIPAA.



Indemnifications:



IDX includes indemnification provisions in
software license agreements with its customers. These indemnification provisions include provisions indemnifying the customer against losses, expenses, and liabilities from damages that could be awarded against the customer in the event that
IDXs software is found to infringe upon a patent or copyright of a third party. The scope of remedies available under these indemnification obligations is limited by the software license agreements. IDX believes that its internal business
practices and policies and the ownership of information, works and rights agreements signed by all employees, limits IDXs risk in paying out any claims under these indemnification provisions. To date IDX has not been subject to any litigation
and has not had to reimburse any customers for any losses associated with these indemnification provisions.



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Note 12  Legal Proceedings



In late 2001, the Company finalized a Cooperative Agreement with a non-regulatory federal agency within the U.S. Commerce
Departments Technology Administration, NIST, whereby the Company agreed to lead a $9.2 million, multi-year project awarded by NIST to a joint venture composed of the Company and four other joint venture partners. The project entails research
and development to be conducted by the Company and its partners in the grant. Subsequently, an employee of the Company made allegations that the Company had illegally submitted claims for labor expenses and license fees to NIST and that the Company
never had a serious interest in researching the technological solutions described in the proposal to NIST.



The Company believes the employee has likely filed an action under the Federal False Claims Act under seal in the Federal District Court for the Western District of Washington with respect to his claims, sometimes
referred to as a qui tam complaint. The Company has no information regarding the specific allegations in the qui tam complaint. Further, the Company has no information concerning the actual amount of money at issue in the qui tam
complaint or in any action the employee has brought claiming damages for alleged retaliatory actions by the Company. The Company has not yet been served with legal process detailing the allegations. Prompted by the employees allegations, the
Civil Division of the U.S. Attorneys office in Seattle, Washington is investigating whether the Company made false statements in connection with the application for the project award from NIST. The Company is cooperating in the U.S.
Attorneys ongoing investigation.



In April 2003, the Company filed a
complaint against the employee with the United States District Court for the Western District of Washington, entitledIDX Systems Corporation v. Mauricio Leon (case no. C03-972R). The Companys lawsuit asks the Court to grant a
declaratory judgment stating that, should the Company terminate the employees employment, such action would not constitute retaliation for alleged whistle-blowing activities in violation of the Federal False Claims Act or the Sarbanes-Oxley
Act and would not constitute a violation of the employees rights under other laws.



In May 2003, the employee filed a complaint against the Company with the Federal District Court for the Western District of Washington, entitled Mauricio A. Leon, M.D. v. IDX Systems Corporation (case no.
CV03-1158P) asserting that the Company had knowledge that the employee engaged in protected activity and retaliated against the employee in violation of the False Claims Act. In addition, the employee alleges that the Company violated
the Americans with Disabilities Act and its Washington State counterpart in part through retaliation against the employee for exercising the employees rights under the federal and state discrimination laws. The employee also asserts other
causes of action including wrongful termination in violation of public policy, fraudulent inducement to enter into an employment contract with the Company, and negligent and intentional infliction of emotional distress. The employee requests relief
including, but not limited to, an injunction against the Company enjoining and restraining the Company from the alleged harassment and discrimination, wages, damages, attorneys fees, interest and costs. In addition, the employees
complaint alleges that the Company falsified unspecified documents submitted to the Government and made unspecified false statements to the Government.



Following a hearing on October 21, 2003, the Court on October 22, 2003, issued a series of orders regarding alignment of the IDX v. Leon and Leon v. IDX
cases. Pursuant to the orders, the claims asserted by the parties will proceed under the case of Leon v. IDX, case number CV03-1158. IDX realigned its declaratory judgment claims as affirmative defenses and/or counterclaims in that case. The
employee filed a motion for an injunction to reinstate his pay and benefits pending conclusion of the action. The motion was denied on December 12, 2003. Trial of the consolidated cases is presently scheduled for November 2004. The Company intends
to vigorously defend itself and to vigorously pursue relief through prosecution of its own claims in the consolidated lawsuits. Although the Company believes that these actions are without merit, the Company currently cannot predict the outcome or
the impact these matters may have upon the Companys operations.



In May
2003, the employee filed a complaint against the Company with the U.S. Department of Labor, pursuant to Section 1514A of the Sarbanes-Oxley Act of 2002. The employees complaint asserts that, notwithstanding alleged notice to the Company of the
employees allegations, Company management conspired to continue to defraud the government by allowing fraudulent activities to continue uncorrected and by concealing and avoiding its obligations to report any and all fraudulent activities to
the proper authorities. In addition, the employees complaint alleges that the Company acted to retaliate, harass and intimidate the employee in contravention of the Sarbanes-Oxley Acts whistleblower provisions. The employees
complaint requests relief including, but not limited to, reinstatement, back-pay, with interest, and compensation for any damages sustained by the employee as a result of the alleged discrimination. The Department of Occupational Health and Safety
is investigating the employees complaint on



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behalf of the U.S. Department of Labor, and the Company intends to cooperate in the investigation. The Company intends to
vigorously defend against the employees claims, however, the outcome or the impact these claims may have on the Companys operations cannot currently be predicted.



There are additional claims made by the employee against the Company, including a charge with the U.S. Equal Employment Opportunity
Commission, claiming that the employee was discriminated against in violation of the Americans with Disabilities Act, the processing of which the EEOC has subsequently terminated through a Notice of Right to Sue. The Company intends to vigorously
defend against the employees claims, however, the outcome or the impact these claims may have on the Companys operations cannot currently be predicted.



From time to time, the Company is a party to or may be threatened with other litigation in the ordinary course of its business. The Company
regularly analyzes current information, including, as applicable, the Companys defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The
ultimate outcome of these matters is not expected to materially affect the Companys business, financial condition or results of operations.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report
on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ
materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under Forward-Looking Information and Factors Affecting Future Performance
commencing on page 27, as well as those otherwise discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise specified or the context requires otherwise, the terms we, us, our
and the Company refer to IDX Systems Corporation and its subsidiaries.



INTRODUCTION



Founded in 1969, IDX Systems Corporation
provides information technology (software and services) solutions designed to maximize value in the delivery of healthcare by improving the quality of patient service and reducing the costs of care. We offer business performance and clinical
software solutions. Healthcare providers purchase IDX systems to improve their patients experience through simpler access, safer care delivery and more streamlined accounting.



We generate revenues from system sales and from maintenance and service fees for the implementation and support of system sales. Our system
sales are comprised of a combination of IDX software licensed under the IDX®Flowcast, IDX®Groupcast, IDX®Carecast System, and
IDX®Imagecast brands to primarily end-user customers, as well as bundled third party hardware and software. IDX patient access,
financial and business intelligence products for hospitals, integrated delivery networks and group practices are packaged under Flowcast and Groupcast. Clinical solutions are generally packaged as the CarecastSystem, which
require more configuration and have a longer install period than our business performance solutions. Specialty care products, which include IDXs radiology and imaging products, are marketed under Imagecast. Our IDX eCommerce Services
business offers web-based electronic data interchange (EDI) claims, remittance and statement services and is designed to improve data quality and streamline business processes by linking physician practices to sophisticated mailing
services and other businesses. Our maintenance and service fees consist of software maintenance fees, installation fees, professional and technical service fees, consulting fees and other miscellaneous fees. Costs relating to system sales consist
primarily of external costs for bundled third party hardware and software purchases. Costs relating to maintenance and service fees consist primarily of employee costs and related infrastructure costs incurred in providing installation services,
post-installation support and training and consulting services.



Our revenue
growth is driven by demand for new healthcare information technology systems and services as well as installation, maintenance and service to our existing customers. Our ability to increase earnings is driven primarily by IDX software sales, which
yield significantly higher gross profit margins than our hardware and services revenue components. Our ability to maintain or increase our services revenue in the future depends primarily on our ability to increase our installed customer base, to
resubscribe existing customers to maintenance agreements and to maintain or increase current levels of our professional services business.



Matters Affecting Analysis



In June 2003, we completed the disposition of our wholly owned subsidiary, EDiX, to TEM, a medical transcription company based in Franklin, Tennessee. With the sale of
EDiX, we no longer provide medical transcription outsourcing services. Our condensed consolidated financial statements have been reclassified to reflect EDiX as a discontinued operation for all periods presented in this Quarterly Report on Form
10-Q. As a result, we no longer discuss EDiX as a separate segment. For purposes of this Quarterly Report on Form 10-Q, the discussion will relate to our only segment, Information Systems and Services, which is discussed under the Results from
Continuing Operations section below. The results of EDiX are discussed under the Results of Discontinued Operationssection below.



Overview



During the first quarter of 2004, we finalized our subcontract agreement with British Telecommunications PLC (BT) to provide our clinical information technology systems to BT. BT is the local service
provider for the London region contract awarded by the United Kingdom National Health Service (NHS). In December 2003, we reached a binding agreement in principle with Fujitsu Services, which is the local service provider for the
Southern region contract awarded by the NHS. We continue to work on finalizing our subcontract to provide our clinical information technology systems to Fujitsu Services.



15



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On March 31, 2004, we released Flowcast 3.0. Flowcast3.0 represents a next-generation, revenue cycle
management solution for hospitals, integrated delivery networks and large physician organizations and was the culmination of a two-year development effort.



Total revenues increased 10.9% to $102.6 million during the three months ended March 31, 2004 from $92.4 million for the same period in 2003. System sales and maintenance
and service fees increased by 10.5% and 11.1%, respectively, which we currently believe reflects our ability to generate new sales as well as sales to our existing customers. We did not recognize any revenues during the three months ended March 31,
2004 under our subcontract arrangements with BT and Fujitsu. Total operating expenses increased 14.7% resulting in operating income of $2.4 million or operating margin of 2.4% for the three months ended March 31, 2004 as compared to an operating
margin of 5.6% for the same period in 2003. This decrease in operating margin was largely attributed to start-up costs for our UK operations. For the three months ended March 31, 2004, we reported income from continuing operations of $1.6 million,
or $0.05 diluted earnings per share, and at March 31, 2004, cash and marketable securities totaled $105.3 million.



A more detailed discussion of our results is presented in the Results from Continuing Operations section below.



CRITICAL ACCOUNTING POLICIES



The discussion and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on our experience, our current knowledge, including terms
of existing contracts, and our beliefs of what could occur in the future, based on our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



The following critical
accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements and could potentially create materially different results under different assumptions and conditions.



| |  | revenue recognition,
| | - | --------------------



| |  | allowance for doubtful accounts and credits,
| | - | --------------------------------------------



| |  | capitalization of software development costs,
| | - | ---------------------------------------------



| |  | income taxes, and
| | - | -----------------



| |  | accounting for contingencies.
| | - | -----------------------------



This is not a comprehensive list of all of IDXs accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1
of Notes to Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



Revenue Recognition  We enter into contracts to license software and sell hardware and related ancillary products to customers through our direct sales
force. The majority of our system sales attributable to software license revenue are earned from software that does not require significant customization or modification. We recognize revenue for the licensing of software in accordance with American
Institute of Certified Public Accountants Statement of Position (SOP) 97-2 and, accordingly, we recognize revenue from software licenses, hardware, and related ancillary products when:



| |  | persuasive evidence of an arrangement exists, which is typically when a customer has signed a non-cancelable sales and software license agreement;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically), hardware and related ancillary products;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the customers fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; and
| | - | --------------------------------------------------------------------------------------------------------------------



| |  | collectibility is probable.
| | - | ---------------------------



We must exercise our judgment when we assess the probability of collection and the current creditworthiness of each customer. If the financial condition of our customers were to deteriorate, it may affect the timing
and the



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amount of revenue we recognize on a contract to the extent of cash collected. In addition, in certain instances judgment
is required in assessing if there are uncertainties in determining the fee. If there are significant uncertainties, the revenue is not recognized until the fee is determinable.



We use the residual method to recognize revenue when a contract includes one or more elements to be delivered at a future date and vendor
specific objective evidence (VSOE) of the fair value of all undelivered elements (typically maintenance and professional services) exists. Under the residual method, we defer revenue recognition of the fair value of the undelivered
elements and we allocate the remaining portion of the arrangement fee to the delivered elements and recognize it as revenue, assuming all other conditions for revenue recognition have been satisfied. We recognize substantially all of our product
revenue in this manner. If we cannot determine the fair value of any undelivered element included in an arrangement, we will defer revenue recognition until all elements are delivered, services are performed or until fair value can be objectively
determined.



As part of an arrangement, we typically sell maintenance contracts
as well as professional services to customers. Maintenance services include telephone and web-based support as well as rights to unspecified upgrades and enhancements, when and if we make them generally available. Professional services are deemed to
be non-essential and typically are for implementation planning, loading of software, installation of hardware, training, building simple interfaces, running test data, assisting in the development and documentation of process rules, and best
practices consulting.



We recognize revenues from maintenance services ratably
over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically the contracts renewal rate. Maintenance services
are typically stated separately in an arrangement. We classify the allocated fair value of revenues pertaining to contractual maintenance obligations as a current liability, since they are typically for the twelve-month period subsequent to the
balance sheet date.



We recognize revenues from professional services based on
VSOE of fair value when: (1) a non-cancelable agreement for the services has been signed or a customers purchase order has been received; and (2) the professional services have been delivered. VSOE of fair value is based upon the price charged
when professional services are sold separately and is typically based on an hourly rate for professional services.



Our arrangements with customers generally include acceptance provisions. However, these acceptance provisions are typically based on our standard acceptance provision,
which provides the customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. This right generally expires 30 days after installation. The product is deemed accepted unless the
customer notifies the Company otherwise. Generally, we determine that these acceptance provisions are not substantive and historically have not been exercised, and therefore should be accounted for as a warranty in accordance with Statement of
Financial Accounting Standards No. 5. In addition, for our Carecast system, our specifications include a 99.9% uptime guarantee and subsecond response time. The length of the guarantee typically ranges from one to three years with an annual
renewal option. Historically, we have not incurred substantial costs relating to this guarantee and we currently accrue for such costs as they are incurred. We review these costs on a regular basis as actual experience and other information becomes
available; and should they become more substantial, we would accrue an estimated exposure.



At the time we enter into an arrangement, we assess the probability of collection of the fee and the terms granted to the customer. Our typical payment terms include a deposit and subsequent payments based on specific
milestone events and dates. If we consider the payment terms for the arrangement to be extended or if the arrangement includes a substantive acceptance provision, we defer revenue not meeting the criterion for recognition under SOP 97-2 and classify
this revenue as deferred revenue, including deferred product revenue. Our payment terms are generally fewer than 90 days and payments from customers are typically due within 30 days of invoice date. If payment terms for an arrangement are considered
extended or if the arrangement contains a substantive acceptance provision, we defer the recognition of revenue not meeting the criterion under SOP 97-2, including product revenue. We recognize this revenue, assuming all other conditions for revenue
recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee.



Additionally, we enter into certain arrangements for the sale of software that require
significant customization. In these instances, we account for the contract in accordance with Accounting Research Bulletin No. 45, Long-term Construction-Type Contractsand SOP 81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. In those situations, we generally recognize revenue on a percentage of completion basis using labor input measures, which involves the use of estimates. Labor input measures are used because they reasonably
measure the stage of completion of the contract. Revisions to cost estimates are recorded to income in the period in which the facts that give rise to the revision become known. We recognize losses, if any, on fixed price



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contracts when the loss is determined. We record revenue in excess of billings on long-term service contracts as unbilled
receivables. We record billings in excess of revenue recognized on service contracts as deferred income until revenue recognition criteria are met.



Allowance for Doubtful Accounts and Credits  IDX maintains an allowance for doubtful accounts to reflect estimated losses resulting from the inability of
customers to make required payments. We record an allowance for receivables based on a percentage of revenues. Additionally, we review individual overdue accounts and record an additional allowance when we determine it necessary to state the
specific receivable at realizable value. We base our allowance on estimates after consideration of factors such as the composition of the accounts receivable aging, bad debt experience and our evaluation of the financial condition of the customers.
If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances and bad debt expense may be required. We typically do not require collateral. Historically, our
estimates have been adequate to cover accounts receivable exposures.



We also
record a provision for estimated credits on product and service related sales in the same period the related revenues are recorded. These estimates are based on an analysis of historical credits issued and other known factors. If the historical data
we use to calculate these estimates does not properly reflect the future credits, then a change in the credit reserve would be made in the period in which such a determination is made and revenues in that period would be affected.



Capitalization of Software Development Costs  We expense all costs incurred in
the research, design and development of software for sale to others until technological feasibility is established. Technological feasibility is established when planning, designing, coding and testing activities have been completed so that the
working model is consistent with the product design as confirmed by testing. Thereafter, we capitalize and amortize software development costs to software development expense on a straight-line basis over the lesser of 18 months or the estimated
lives of the respective products, beginning when the products are offered for sale. We capitalize software acquired if the related software under development has reached technological feasibility or if there are alternative future uses for the
software. We evaluate the recoverability of capitalized software based on estimated future gross revenues reduced by the estimated cost of completing the products and of performing maintenance and customer support. If our gross revenues were to be
significantly less than our estimates, the net realizable value of our capitalized software intended for sale would be impaired.



While we believe that our current estimates and the underlying assumptions regarding capitalized software development costs are appropriate, future events could
necessitate adjustments to these estimates, resulting in additional software development expense in the period of adjustment.



We expense costs incurred in the development of software for internal use until we have completed the conceptual formulation, design, and testing of possible project
alternatives, including the process of vendor selection for purchased software, if any. We capitalize and amortize certain costs; principally external direct costs and payroll and payroll related costs directly associated with the internal-use
computer software project, incurred subsequent to the preliminary project stage, to operating expense on a straight-line basis over the lesser of seven years or the estimated economic life of the software.



Income Taxes  We account for income taxes under the liability method. We
determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities, measured using the enacted tax rates that will be in effect when these differences are expected to reverse.
We have typically had net deferred tax assets at our reporting dates. In assessing the realization of our net deferred tax assets, we evaluated certain relevant criteria, including future taxable income, and tax planning strategies designed to
generate future taxable income. Given our cumulative pre-tax income from continuing operations for the three year period ended December 31, 2003 along with our current tax planning strategies, we currently believe that future earnings will be
sufficient to recover substantially all of our net recorded deferred tax assets. These strategies include estimates and involve judgments relating to certain unrealized gains in our investment in common stock of an equity investee. To the extent
that facts and circumstances change  for example, if there is a decline in the fair value of the equity method investment  this tax-planning strategy may no longer be sufficient to support certain deferred tax assets and we may be
required to increase the valuation allowance. Furthermore, to the extent that future taxable income against which these tax assets may be applied is not sufficient, some portion or all of our recorded deferred tax assets would not be realizable.



Accounting for Contingencies  We are currently involved in
certain legal proceedings, which, if unfavorably determined, could have a material adverse effect on our operating results and financial condition. In connection with our assessment of these legal proceedings, we must determine if an unfavorable
outcome is probable and evaluate the costs for resolution of these matters, if reasonably estimable. We have developed these determinations and



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related estimates in consultation with outside counsel handling our defense in these matters, and through an analysis of
potential results assuming a combination of litigation and defense strategies. See Part II, Item 1, Legal Proceedings and Note 12 of Notes to Consolidated Financial Statements included in this Quarterly Report on 10-Q.



The above listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application. There are also areas in which
managements judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2003 which contain accounting policies and other disclosures required by generally accepted accounting principles.



NEW ACCOUNTING STANDARDS



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses
when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the
entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest
entitys activities or is entitled to receive a majority of the entitys residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a
significant variable interest. On October 8, 2003, the Financial Accounting Standards Board deferred the effective date of FIN 46 for variable interest entities created before February 1, 2003 to periods ending after December 15, 2003. A public
entity need not apply the provisions of FIN 46 to an interest held in a variable interest entity (VIE) until the end of the first interim or annual period ending after December 15, 2003, if both of the following apply:



| |  | the VIE was created before February 1, 2003, and
| | - | ------------------------------------------------



| |  | the public entity has not issued financial statements reporting interests in VIEs in accordance with FIN 46, other than certain required disclosures.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



Certain of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46 had no impact on our financial position, results of operations or cash flows.



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RESULTS OF CONTINUING OPERATIONS



THREE MONTHS ENDED MARCH 31, 2004 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2003



The following table indicates the percentage of total revenues and the dollar and percentage
of period over period change represented by line items in our condensed consolidated statements of income from continuing operations:



|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|----------------------------------------------------- |  | -------------------------------------------------------- | ------- | - | ------------------------------------------------------------------------ | ----- | -- | --------------------------------- | - | ------ | ------- |  | ----- | ------------------------- |  | - | ------ | - |  | ----- | -
|                                                      |  | Three Months Ended March 31, 2004                        |         |   | % Sales                                                                  |       |    | Three Months Ended March 31, 2003 |   |        | % Sales |  |       | Change Period Over Period | 
|                                                      |  |                                                          |         |   | Three Months Ended March 31, 2004 Over Three Months Ended March
31, 2003 |      
|                                                      |  |                                                          |         |   | $ Variance                                                               |       |    | % Variance                        |  
|                                                      |  | (in thousands, except percentages and per share amounts) |        
|System sales                                          |  | $                                                        | 35,974  |   |                                                                          | 35.1  | %  |                                   | $ | 32,541 |         |  | 35.2  | %                         |  | $ | 3,433  |   |  | 10.5  | %
|Maintenance and service fees                          |  |                                                          | 66,576  |   |                                                                          | 64.9  | %  |                                   |   | 59,900 |         |  | 64.8  | %                         |  |   | 6,676  |   |  | 11.1  | %
|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|Total revenues                                        |  |                                                          | 102,550 |   |                                                                          | 100.0 | %  |                                   |   | 92,441 |         |  | 100.0 | %                         |  |   | 10,109 |   |  | 10.9  | %
|                                                      |  |                                                          |         |   |                                                                          |      
|Cost of system sales                                  |  |                                                          | 11,217  |   |                                                                          | 10.9  | %  |                                   |   | 11,792 |         |  | 12.8  | %                         |  |   | (575   | ) |  | -4.9  | %
|Cost of maintenance and services                      |  |                                                          | 46,591  |   |                                                                          | 45.4  | %  |                                   |   | 41,661 |         |  | 45.1  | %                         |  |   | 4,930  |   |  | 11.8  | %
|Selling, general and administrative                   |  |                                                          | 28,427  |   |                                                                          | 27.7  | %  |                                   |   | 20,454 |         |  | 22.1  | %                         |  |   | 7,973  |   |  | 39.0  | %
|Software development costs                            |  |                                                          | 13,887  |   |                                                                          | 13.5  | %  |                                   |   | 13,350 |         |  | 14.4  | %                         |  |   | 537    |   |  | 4.0   | %
|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|Total operating expenses                              |  |                                                          | 100,122 |   |                                                                          | 97.6  | %+ |                                   |   | 87,257 |         |  | 94.4  | %                         |  |   | 12,865 |   |  | 14.7  | %
|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|Operating income                                      |  |                                                          | 2,428   |   |                                                                          | 2.4   | %  |                                   |   | 5,184  |         |  | 5.6   | %                         |  |   | (2,756 | ) |  | -53.2 | %
|                                                      |  |                                                          |         |   |                                                                          |      
|Other income                                          |  |                                                          | 116     |   |                                                                          | 0.1   | %  |                                   |   | 124    |         |  | 0.1   | %                         |  |   | (8     | ) |  | -6.5  | %
|Income tax provision                                  |  |                                                          | (967    | ) |                                                                          | -0.9  | %  |                                   |   | (1,592 | )       |  | -1.7  | %                         |  |   | 625    |   |  | -39.3 | %
|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|Income from continuing operations                     |  | $                                                        | 1,577   |   |                                                                          | 1.5   | %+ |                                   |   | 3,716  |         |  | 4.0   | %                         |  |   | (2,139 | ) |  | -57.6 | %
|                                                      |  |                                                          |         |   |                                                                          |       |    |                                   |   |        |         |  |       |                           |  |   |        |   |  |       |  
|Diluted earnings per share from continuing operations |  | $                                                        | 0.05    |   |                                                                          |       |    |                                   | $ | 0.13   |         |  |       |                           |  | $ | (0.08  | ) |  | -61.5 | %

---

|+ | Does not total due to rounding.
|- | -------------------------------



Total Revenues



Total revenues consist of system sales and maintenance and service fees. Our system sales consist of our software licensed to primarily end-user customers, which includes our eCommerce services business, along with
bundled third party hardware and software. Maintenance and service fees represent services to implement and support our system sales. More specifically, our maintenance and service fees consist of software maintenance fees, installation fees,
professional and technical service fees, training fees, and other miscellaneous fees.



System Sales



Software license and subscription
revenues increased $3.5 million and eCommerce Services revenues increased $2.0 million during the three months ended March 31, 2004 as compared to the same period in 2003. The increase in software license revenues was primarily attributable to
system sales of approximately $3.3 million from several ImagecastPACS contracts that were in backlog at the end of 2003. Our eCommerce Services are designed to enable customer HIPAA compliance with EDI formats for eligibility, referrals,
claims, remittances and claims status. HIPAA regulations resulted in an increase in demand for our eCommerce Services primarily from our medical and physician group practice customers.



Revenues from third party software sales decreased by $1.9 million during the three months ended March 31, 2004 as compared to the same
period in 2003 due to the timing of certain of our clinical solutions contracts. Our clinical solutions contracts typically represent large contracts, include bundled third party software and have a longer installation period with revenue recognized
over a longer period in time. As such, third party software sales are dependant on the timing of the contract sales.



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Maintenance and Service Fees



The following table indicates the percentage of total revenues and the dollar and percentage of period over period change by line items
comprising maintenance and service fees as represented in our condensed consolidated statements of income from continuing operations:



|                                        |  |                                    |        |         |                                                                          |    |                                   |            |         |  |      |                           |  |   |       |   |  |      |  
|--------------------------------------- |  | ---------------------------------- | ------ | ------- | ------------------------------------------------------------------------ | -- | --------------------------------- | ---------- | ------- |  | ---- | ------------------------- |  | - | ----- | - |  | ---- | -
|                                        |  | Three Months Ended March 31, 2004  |        | % Sales |                                                                          |    | Three Months Ended March 31, 2003 |            | % Sales |  |      | Change Period Over Period | 
|                                        |  |                                    |        |         | Three Months Ended March 31, 2004 Over Three Months Ended March 31,
2003 |   
|                                        |  |                                    |        |         | $ Variance                                                               |    |                                   | % Variance |        
|                                        |  | (in thousands, except percentages) |       
|Maintenance fees                        |  | $                                  | 36,192 |         | 35.3                                                                     | %  |                                   | $          | 33,060  |  | 35.8 | %                         |  | $ | 3,132 |   |  | 9.5  | %
|Installation fees                       |  |                                    | 15,359 |         | 15.0                                                                     | %  |                                   |            | 11,740  |  | 12.7 | %                         |  |   | 3,619 |   |  | 30.8 | %
|Consulting, professional and other fees |  |                                    | 15,025 |         | 14.7                                                                     | %  |                                   |            | 15,100  |  | 16.3 | %                         |  |   | (75   | ) |  | -0.5 | %
|                                        |  |                                    |        |         |                                                                          |    |                                   |            |         |  |      |                           |  |   |       |   |  |      |  
|Total maintenance and service fees      |  | $                                  | 66,576 |         | 64.9                                                                     | %+ |                                   | $          | 59,900  |  | 64.8 | %                         |  | $ | 6,676 |   |  | 11.1 | %

---

|+ | Does not total due to rounding.
|- | -------------------------------



The increase in maintenance fees for software and hardware support was primarily due to an increase in our installed base of $1.9 million combined with annual maintenance
price increases of approximately $1.2 million. Installation fees increased 30.8% during the three months ended March 31, 2004 and represented 15.0% of total revenues as compared to 12.7% of total revenues for the same period in 2003. This growth was
primarily driven from our clinical solutions packaged under Carecast, which represented approximately $4.2 million of the increase in installation fees. We currently expect our installation fees to increase in future periods as we commence
installation work related to our subcontract arrangements with BT and Fujitsu to provide our clinical solutions in the UK.



Cost of Sales



The following table indicates total cost of system sales and maintenance and service fees as a percentage of total revenues and the cost of system sales and the cost of maintenance and service fees as a percentage of
their respective revenues (in thousands, except percentages):



|                                                                                              |  |                              |         |   |      |   |        |  
|--------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                              |  | Three Months Ended March 31, |        
|                                                                                              |  | 2004                         |         |   | 2003 |  
|Total revenues                                                                                |  | $                            | 102,550 |   |      | $ | 92,441 |  
|Total cost of system sales and maintenance and service fees                                   |  |                              | 57,808  |   |      |   | 53,453 |  
|Total cost of system sales and maintenance and service fees as a percentage of total revenues |  |                              | 56.4    | % |      |   | 57.8   | %
|                                                                                              |  |                             
|System sales:                                                                                 |  |                              |         |   |      |   |        |  
|System sales                                                                                  |  | $                            | 35,974  |   |      | $ | 32,541 |  
|Cost of system sales                                                                          |  |                              | 11,217  |   |      |   | 11,792 |  
|Cost of system sales as a percentage of system sales                                          |  |                              | 31.2    | % |      |   | 36.2   | %
|                                                                                              |  |                             
|Maintenance and service fees:                                                                 |  |                              |         |   |      |   |        |  
|Maintenance and service fees                                                                  |  | $                            | 66,576  |   |      | $ | 59,900 |  
|Cost of maintenance and service fees                                                          |  |                              | 46,591  |   |      |   | 41,661 |  
|Cost of maintenance and service fees as a percentage of maintenance and service fees          |  |                              | 70.0    | % |      |   | 69.6   | %



The cost components of our total
revenues vary based on the type of products and services we provide, namely system sales and maintenance and service fees. Our cost of system sales consists primarily of external costs relating to third party hardware and software purchases, while
cost of maintenance and service fees are employee-driven and



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consist primarily of employee and related infrastructure costs incurred in providing maintenance and installation
services, post-installation support and training and consulting services. These costs as a percentage of total revenues typically have varied as the mix of revenue (software, bundled third party software and hardware, maintenance and service fees)
components carry different margin rates from period to period. In addition, fluctuations in our cost of system sales typically result from the revenue mix of our software license revenue, which has a lower cost percentage and higher margins, and
third party hardware and software sales, which have a higher cost percentage and lower margins.



Cost of System Sales



The
decrease in the cost of system sales as a percentage of system sales resulted principally from the change in the product mix between our software license revenue and third party hardware and software sales. IDX software sales, which carry a lower
cost of revenue percentage, represented a larger portion of system sales during the three months ended March 31, 2004 as compared to the same period in 2003.



Cost of Maintenance and Service Fees



The cost of maintenance and service fees increased $4.9 million to support the growth in our installed base of software applications. The increase was primarily
attributable to increases of $3.1 million in subcontractor consulting services, $1.4 million in consulting and $600,000 in employee compensation and benefit costs, offset by a decrease in third party royalty expense of $600,000. Subcontractor
consulting services and consulting costs typically have a higher cost of revenue percentage as opposed to internal labor, which resulted in the increase in the cost of maintenance and service fees as a percentage of maintenance and service fees for
the three months ended March 31, 2004 as compared to the same period in 2003. We re-negotiated certain of our royalty arrangements, which accounted for the decrease in third party royalty expense.



As the demand for services from new and existing customers for installation, maintenance and
consulting services increases in future periods, we anticipate that our cost of services will also increase. In addition, we expect the cost of maintenance and service fees to increase in future periods, primarily due to classification of
development costs related to services provided in the UK as cost of maintenance and service fees. We expect that the use of specialized professional outside services will increase as well, further increasing cost of services, which may reduce our
overall margin.



Selling, General and Administrative Expenses



The increase of $8.0 million in selling, general and administrative
expenses was principally due to increases of $4.0 million in employee compensation and benefit costs, $1.8 million in outside professional fees, $900,000 in occupancy expenses and $900,000 in depreciation charges.



The increase in employee compensation and benefit costs was primarily due to the start-up
efforts of our UK operations. Professional fees increased principally due to litigation matters as described in Note 12 of Notes to Condensed Consolidated Financial Statements, audit and accounting fees incurred in conjunction with the enhanced
testing and analysis surrounding our 2003 year-end audit and consulting fees incurred in conjunction with the Sarbanes-Oxley Act of 2002. Our occupancy expense increase was primarily related to our Seattle location. In April 2003, we consolidated
our Seattle operations into new expanded facilities increasing our space by approximately 50%, resulting in an increase in our occupancy costs. The increase in depreciation charges was primarily attributable to the enterprise resource planning
(ERP) system.



We expect our selling, general and administrative
expenses to increase in future periods as we increase our administrative and accounting staff to support our growth. In addition, our occupancy expenses will include approximately $895,000 per year due to our new sublease of office facilities for
our UK operations, which commenced in April 2004. In addition, we anticipate that we will continue to incur higher professional fees in 2004 in conjunction with current litigation matters and increased use of outside professional accounting and
consulting firms and outside legal counsel to assist us in our continued compliance efforts with the requirements of the Sarbanes-Oxley Act of 2002.



Software Development Costs



Software development costs consist primarily of costs primarily related to our software developers and the associated infrastructure costs required to fund product
development initiatives. As described in Note 1 to the Notes



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to Consolidated Financial Statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2003, which contain accounting policies and other disclosures required by generally accepted accounting principles, software development costs incurred subsequent to the establishment of technological feasibility until general release
of the related products are capitalized. Technological feasibility is established upon the completion of a working model. Historically, costs incurred after establishment of technological feasibility have not been significant; however, as we develop
products that use more complex technologies as well as more comprehensive clinical systems, the time and effort required to complete testing after technological feasibility has been established may become significantly more extensive. Consequently,
we anticipate that as we continue to focus our development efforts on enhancing functionality and developing new applications for our current product suites, capitalized software development costs may become more significant in future reporting
periods. Approximately $1.6 million and $114,000 of software development costs were capitalized during the three months ended March 31, 2004 and 2003, respectively. Amortization of software development costs was approximately $406,000 and $580,000
during the three months ended March 31, 2004 and 2003, respectively.



The
following table indicates software development costs as a percentage of system sales (in thousands, except percentages):



|                                                           |  |                              |        |   |      |   |        |  
|---------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | Three Months Ended March 31, |       
|                                                           |  | 2004                         |        |   | 2003 |  
|Software development costs:                                |  |                              |        |   |      |   |        |  
|System sales                                               |  | $                            | 35,974 |   |      | $ | 32,541 |  
|Software development costs                                 |  |                              | 13,887 |   |      |   | 13,350 |  
|Software development costs as a percentage of system sales |  |                              | 38.6   | % |      |   | 41.0   | %



The $500,000 increase in software
development costs was due to increases in personnel costs and outside consulting fees of approximately $1.1 million and associated infrastructure costs of approximately $900,000, offset with an increase in capitalized software development costs, net
of amortization, of $1.6 million. Associated infrastructure costs increased primarily due to the increase in our occupancy expenses associated with our Seattle facilities, which also supports software development efforts. The increase in capitalized
software development costs was primarily related to costs capitalized relating to Flowcast3.0.



Total Other Income, Net



The following
table sets forth the components of total other income, net (in thousands):



|                                                 |  |                              |      |   |      |   |      |  
|------------------------------------------------ |  | ---------------------------- | ---- | - | ---- | - | ---- | -
|                                                 |  | Three Months Ended March 31, |     
|                                                 |  | 2004                         |      |   | 2003 |  
|Other income (expense)                           |  |                              |      |   |      |   |      |  
|Interest income                                  |  | $                            | 456  |   |      | $ | 246  |  
|Interest expense                                 |  |                              | (151 | ) |      |   | (122 | )
|Foreign currency transaction gains (losses), net |  |                              | (189 | ) |      |   |     |  
|                                                 |  |                              |      |   |      |   |      |  
|Total other income, net                          |  | $                            | 116  |   |      | $ | 124  |  
|                                                 |  |                              |      |   |      |   |      |  



Interest Income



The increase in interest income for the three months ended March 31,
2004 as compared to the same period in 2003 was due to higher average invested balances due to the proceeds received from the sale of EDiX.



Foreign Currency Transaction Gains (Losses), net



Our revenues generated from UK customers are primarily denominated in the local foreign currency, pounds sterling. We are exposed to foreign exchange rate fluctuations
from these transactions and from certain inter-company transactions with our UK subsidiary, which are denominated in British pounds sterling. For the three months ended March 31, 2004, we incurred a net foreign currency transaction loss of $189,000,
primarily due to the re-measurement of our foreign currency denominated accounts receivable at March 31, 2004 into US dollars.



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Income Tax Provision



Our effective income tax rate was 38.0% for the three months ended March 31, 2004 and 30.0% for the three months ended March 31, 2003 resulting in an income tax provision
of $967,000 and $1.6 million for the three months ended March 31, 2004 and 2003, respectively. Our effective income tax rates for 2004 and 2003 are lower than our historical tax rate of 40.0% primarily due to our use of research and development
credits to offset income taxes.



RESULTS OF DISCONTINUED OPERATIONS



The following is a summary of the results of discontinued operations for
the three months ended March 31, 2003 (in thousands):



|                                                |  |                                   |        |  
|----------------------------------------------- |  | --------------------------------- | ------ | -
|                                                |  | Three Months Ended March 31, 2003 |       
|Revenues                                        |  | $                                 | 28,635 |  
|                                                |  |                                   |        |  
|Pre-tax income from discontinued operations     |  |                                   | 165    |  
|Provision for income taxes                      |  |                                   | (50    | )
|                                                |  |                                   |        |  
|Income from discontinued operations, net of tax |  | $                                 | 115    |  
|                                                |  |                                   |        |  



EDiXs effective tax rate for the
three months ended March 31, 2003 of 30.0% was lower than its historical tax rate of 40.0% primarily due to its use of previously reserved net operating losses to offset income taxes.



LIQUIDITY AND CAPITAL RESOURCES



We primarily generate cash from the sale of our software, maintenance fees, which are typically paid on a monthly basis, implementation services and providing
professional and consulting services. We primarily use cash to pay employees salaries, commissions, and benefits, pay rent for office facilities, procure insurance, pay taxes and pay vendors for services and supplies. We also use cash to
procure capital assets to support our business. We principally have funded our operations, working capital needs and capital expenditures from operations and short-term borrowings under revolving secured bank lines of credit. At March 31, 2004, we
had no debt, $18.8 million in cash and cash equivalents and $86.4 million in short-term investments, consisting principally of investments in interest-bearing demand deposit accounts, money market funds and highly liquid debt securities of
corporations and municipalities, and $155.8 million of working capital.



Net
cash provided by or used in continuing operations is principally comprised of net income or loss and is primarily affected by the net change in accounts and unbilled receivables, prepaid cost of sales, accounts payable, accrued expenses and non-cash
items relating to depreciation and amortization, deferred taxes, and certain components of lease abandonment and restructuring charges. Due to the nature of our business, accounts and unbilled receivables, prepaid cost of sales, deferred revenue,
and accounts payable can fluctuate considerably due to, among other things, the length of installation efforts, which is dependent upon the size of the transaction, the changing business plans of the customer, the effectiveness of customers
management and general economic conditions. Accounts receivable, including unbilled receivables, increased $24.5 million during the three months ended March 31, 2004. This increase was primarily due to pre-billings under certain of our UK contracts
at quarter end. Correspondingly, deferred revenue increased $21.9 million due to the deferral of billings in excess of revenue recognized on these contracts, which are deferred until revenue recognition criteria are met. This resulted in an increase
in our Days Sales Outstanding (DSO), which represents the average number of days sales in accounts receivable. DSO increased to 104 days during the three months ended March 31, 2004 from 83 days during the same period in 2003 and from 86
days for the year ended December 31, 2003. Management continues to focus efforts on reducing the average time to collect payment on sales and currently expects DSO to return to approximate historical levels once we begin routine billing and
recognition of our UK generated revenues. The increase in accounts payable and accrued expenses of $5.5 million was attributable to costs associated with the start-up of our UK operations, which was offset by an increase in prepaid expenses relating
to prepayment of cost of maintenance and service fees incurred on revenues that have been deferred.



Cash flows related to investing activities have historically been related to the purchase of computer and office equipment, leasehold improvements and the purchase and sale of investment grade marketable securities.
We invested approximately $20.1 million through December 31, 2003 on the acquisition and implementation of an enterprise resource planning system and have invested an additional $1.2 million in the ERP system during the three months ended March 31,
2004. We anticipate investing an additional $6.6 million in 2004 and an additional



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$5.2 million in 2005 related to this system implementation. Of the $6.6 million we anticipate investing in the ERP system
in 2004, approximately $4.1 million relates to systems implementation for our UK operations. In April 2004, we entered into a new operating sublease for office space in the UK for a period of ten years and currently plan to invest approximately $1.8
million in 2004 for leasehold improvements.



In addition, investing activities
may also include purchases of, interests in, loans to and acquisitions of businesses for access to complementary products and technologies. We expect these activities to continue, but there can be no assurance that we will be able to successfully
complete any such purchases or acquisitions in the future.



In April 2002, we
acquired a minority interest in Stentor, Inc. (Stentor), one of our strategic partners, by exercising a warrant to purchase 562,069 shares of preferred stock of Stentor for $7.5 million. Each preferred share is convertible, at any time
at our option, into one share of common stock of Stentor, subject to certain adjustments. In addition, the preferred shares are not entitled to dividends but are entitled to a liquidation preference equal to the amount we paid to purchase such
shares.



Cash flows from financing activities historically relate to the
issuance of shares of our common stock through the exercise of employee stock options and in connection with the employee stock purchase plan and to the proceeds from line of credit. We currently have a revolving line of credit agreement allowing us
to borrow up to $40.0 million based on certain restrictions. This line of credit is secured by deposit accounts, accounts and unbilled receivables and other assets and bears interest at the banks base rate plus .25%, which was approximately
4.25% as of March 31, 2004. This line of credit is subject to certain terms and conditions and will expire on June 27, 2005. At March 31, 2004 no amounts were outstanding under the line of credit.



In addition to existing financing arrangements, we own, through a wholly owned subsidiary,
approximately 7.5 million shares of common stock of Allscripts Healthcare Solutions, Inc., a public company listed on the NASDAQ National Market under the symbol MDRX. This investment had a quoted market value of approximately $72.6 million as of
March 31, 2004, and is subject to certain sale restrictions that may significantly impact the market value. See Note 4 of Notes to Condensed Consolidated Financial Statements.



We expect that our requirements for office facilities and other office equipment will grow as staffing requirements dictate. Our operating
lease commitments consist primarily of office leases for our operating facilities. We plan to increase our professional staff during 2004 as needed to meet anticipated sales volume and support research and development efforts for certain products.
We also plan to hire additional accounting personnel in our finance department. To the extent necessary to support increases in staffing, we may obtain additional office space. We do not have any present intention to pay cash dividends on our
capital stock.



Contractual Obligations



The following table summarizes our contractual obligations at March 31, 2004, and the effect
such obligations are expected to have on our liquidity and cash in the future periods:



|                                |  |       |         |                  |   |           |  |           |        |       |   |        |  |   |       
|------------------------------- |  | ----- | ------- | ---------------- | - | --------- |  | --------- | ------ | ----- | - | ------ |  | - | ------
|(in thousands)                  |  | Total |         | Remainderof 2004 |   | 2005-2006 |  | 2007-2008 |        | 2009+
|Non-cancelable operating leases |  | $     | 147,698 |                  | $ | 10,765    |  | $         | 29,473 |       | $ | 27,991 |  | $ | 79,469
|                                |  |       |         |                  |   |           |  |           |        |       |   |        |  |   |       
|Total                           |  | $     | 147,698 |                  | $ | 10,765    |  | $         | 29,473 |       | $ | 27,991 |  | $ | 79,469
|                                |  |       |         |                  |   |           |  |           |        |       |   |        |  |   |       



Of the $147.7 million in
non-cancelable operating lease obligations, approximately $5.8 million is included in accrued expenses at March 31, 2004 relating to a lease abandonment charge and restructuring costs. See Notes 5 and 7 of the Notes to the Condensed Consolidated
Financial Statements.



We believe that the level of our cash and investment
balances, anticipated cash flow from operations and our $40 million revolving line of credit will be sufficient to satisfy our cash requirements for at least the next twelve to eighteen months. To date, inflation has not had a material impact on our
revenues or income.



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OFF-BALANCE SHEET ARRANGEMENTS



During the three months ended March 31, 2004 and 2003, we did not engage in:



| |  | Material off-balance sheet activities, including the use of structured finance or special purpose entities;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | Trading activities in non-exchange traded contracts; or
| | - | -------------------------------------------------------



| |  | Transactions with persons or entities that benefit from their non-independent relationship with IDX, other than as described below.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



Mr. Richard E. Tarrant, the Chairman of our Board of Directors, is the President and a
director of LBJ Real Estate Inc., a Vermont corporation (LBJ Real Estate). Certain executive officers of LBJ Real Estate are also members of our Board of Directors or executive officers of the Company, including Mr. Robert H. Hoehl, a
member of our Board of Directors, and John A. Kane, our Chief Financial Officer, who also serves as a director of LBJ Real Estate. The stockholders of LBJ Real Estate include Messrs. Tarrant and Hoehl. LBJ Real Estate holds a 1% general partnership
interest in 4901 LBJ Limited Partnership, a Vermont limited partnership (LBJ), and Messrs. Hoehl, Tarrant, and Kane and Mr. Robert F. Galin, our Senior Vice President of Sales, and two other employees hold in the aggregate a 72.95%
limited partnership interest.



Through September 30, 2003, we leased an office
building from LBJ, a real estate partnership owned by certain stockholders and key employees of the Company. On September 30, 2003, LBJ sold the real estate leased by the Company to an unrelated third party. We continue to lease the real estate from
the new owners under a new lease agreement. Lease agreements are based on fair market value rents and are reviewed and approved by independent members of our Board of Directors. Total rent paid to LBJ was approximately $138,000 for the three months
ended March 31, 2003.



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FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE



This Quarterly Report on Form 10-Q contains forward-looking statements as
defined in Section 21E of the Securities Exchange Act of 1934. For this purpose, any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as
believes, anticipates, plans, expects, will and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause results to
differ materially from those indicated by these forward-looking statements, including among others, statements regarding the health care industry, statements regarding our products, product development and information technology, statements
regarding future revenue or other financial trends, statements regarding future acquisitions, strategic alliances, or other agreements, and statements regarding our intellectual property. If any risk or uncertainty identified in the following
factors actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline.



We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated
events or changes in future operating results, financial condition or business over time.



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.



The following important factors affect our business and operations:



QUARTERLY OPERATING RESULTS MAY VARY.Our quarterly operating results have varied in
the past and may vary in the future. We expect our quarterly results of operations to continue to fluctuate. Because a significant percentage of our expenses are relatively fixed, the following factors could cause these fluctuations:



| |  | delays in customers purchasing decisions due to a variety of factors such as consideration and management changes;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | long sales cycles;
| | - | ------------------



| |  | long installation and implementation cycles for the larger, more complex and costlier systems;
| | - | ----------------------------------------------------------------------------------------------



| |  | recognizing revenue at various points during the installation process, typically based on milestones; and
| | - | ---------------------------------------------------------------------------------------------------------



| |  | timing of new product and service introductions and product upgrade releases.
| | - | -----------------------------------------------------------------------------



In light of the above, we believe that our results of operations for any particular quarter or fiscal year are not necessarily meaningful or reliable indicators of
future performance.



RISKS ASSOCIATED WITH OPERATIONS IN THE UNITED KINGDOM.We have been awarded contracts to perform services in the UK, which require the expansion of our operations in the UK. Significant management attention and financial resources are needed to develop our UK operations. International operations are
subject to inherent risks, and our future results could be adversely affected by a variety of changing factors. These include:



| |  | significant start-up costs, resulting in initial lower operating margins for our UK operations;
| | - | -----------------------------------------------------------------------------------------------



| |  | unanticipated difficulties with respect to the conversion of our products to UK standards, including UK regulatory standards;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | difficulties and costs staffing and managing foreign operations;
| | - | ----------------------------------------------------------------



| |  | foreign currency exchange risk;
| | - | -------------------------------



| |  | unexpected changes in U.K. regulatory requirements;
| | - | ---------------------------------------------------



| |  | changes in the relationship between our prime contractors, BT and Fujitsu Services, and the NHS, including any changes relating to the timeliness or willingness to pay BT and
Fujitsu Services for goods and services;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in our relationships with our prime contractors or our sub-contractors, including difficulties in finalizing the documentation of our subcontract arrangements; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | difficulties in the development of new products contemplated by our subcontract arrangements.
| | - | ---------------------------------------------------------------------------------------------



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INTERNAL CONTROLS.Our management has reviewed our internal controls and procedures and we continue to monitor
controls for any weaknesses or deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within IDX to disclose material information otherwise required to be reported. The
effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments in decision-making. In addition, if we continue to expand globally, the challenges involved in implementing appropriate internal controls will
increase and will require that we continue to improve our internal controls.



VOLATILITY OF STOCK PRICE.We have experienced, and expect to continue to experience, fluctuations in our stock price due to a variety of factors, including:



| |  | actual or anticipated quarterly variations in operating results;
| | - | ----------------------------------------------------------------



| |  | changes in expectations of future financial performance;
| | - | --------------------------------------------------------



| |  | changes in estimates of securities analysts;
| | - | --------------------------------------------



| |  | market conditions, particularly in the computer software and Internet industries;
| | - | ---------------------------------------------------------------------------------



| |  | announcements of technological innovations, including Internet delivery of information, clinical information systems advances and use of application service provider technology;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | new product introductions by us or our competitors;
| | - | ---------------------------------------------------



| |  | delay in customers purchasing decisions due to a variety of factors;
| | - | ---------------------------------------------------------------------



| |  | market prices of competitors; and
| | - | ---------------------------------



| |  | healthcare reform measures and healthcare regulation.
| | - | -----------------------------------------------------



These fluctuations have had a significant impact on the market price of our common stock, and may have a significant impact on the future market price of our common
stock.



These fluctuations may affect our operating results by affecting:



| |  | our ability to transact stock acquisitions; and
| | - | -----------------------------------------------



| |  | our ability to retain and incent key employees.
| | - | -----------------------------------------------



GOVERNMENT REGULATION IN THE UNITED STATES.Virtually all of our customers and the other entities with which we have a business relationship operate in the
healthcare industry and, as a result, are subject to governmental regulation. Because our products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United
States, and because we are pursuing a strategy of developing and marketing products and services that support our customers regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.



Anti-Kickback Law



The federal Anti-Kickback Law, among other things, prohibits the direct or indirect payment
or receipt of any remuneration for Medicare, Medicaid and certain other federal or state healthcare program patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal health care
programs. If the activities of one of our customers or other entities with which we have a business relationship were found to constitute a violation of the federal Anti-Kickback Law and, as a result of the provision of products or services to the
customer or entity which engaged in these activities, we were found to have knowingly participated in such activities, we could be subject to sanction or liability, including exclusion from government health programs. As a result of exclusion from
government health programs, our customers would not be permitted to make any payments to us.



HIPAA and Related Regulations



Federal
regulations issued in accordance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) impose national health data standards on health care providers that conduct electronic health



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transactions, health care clearinghouses that convert health data between HIPAA-compliant and non-compliant formats, and
health plans. Collectively, these groups, including most of our customers and our e-Commerce Services clearinghouse business, are known as covered entities. These HIPAA standards include:



| |  | transaction and code set standards, which we refer to as TCS Standards, that prescribe specific transaction formats and data code sets for certain electronic health care
transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Privacy Standards that protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | data security standards, which we refer to as Security Standards, that require covered entities to implement administrative, physical and technological safeguards to ensure the
confidentiality, integrity, availability and security of individually identifiable health information in electronic form.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Failure to comply with these standards under HIPAA, may subject us to civil monetary penalties and, in certain circumstances, criminal penalties. Under HIPAA, covered
entities may be subject to civil monetary penalties in the amount of $100 per violation, capped at a maximum of $25,000 per year for violation of any particular standard. Also, the U.S. Department of Justice, or DOJ, may seek to impose criminal
penalties for certain violations of HIPAA. Criminal penalties under the statute vary depending upon the nature of the violation but could include fines of not more than $250,000 and/or imprisonment.



The effect of HIPAA on our business is difficult to predict, and there can be no assurances
that we will adequately address the business risks created by HIPAA and its implementation, or that we will be able to take advantage of any resulting business opportunities. Furthermore, we are unable to predict what changes to HIPAA, or the
regulations issued pursuant to HIPAA, might be made in the future or how those changes could affect our business or the costs of compliance with HIPAA.



HIPAA  Transaction and Code Set Standards



Many covered entities, including some of our customers, our eCommerce Services clearinghouse business, and trading partners of our clearinghouse business, were not fully
compliant with the TCS Standards as of October 16, 2003. However, we have deployed contingency plans to accept non-standard transactions, as contemplated in the Guidance on Compliance with HIPAA Transactions and Code Sets after the October 16,
2003 Implementation Deadline (which we refer to as the CMS Guidance) issued by the Centers for Medicare & Medicaid Services, or CMS, on July 24, 2003.



Although the CMS Guidance indicates that CMS will follow a complaint-driven approach, we cannot provide any assurances regarding how CMS would apply the CMS Guidance
in general or to our e-Commerce Services clearinghouse business in particular. In the event of enforcement action by CMS against us, there can be no assurances that we will be able to establish good faith efforts sufficient to protect us from
liability for the civil monetary penalties described above. There can be no assurances that CMS would be willing to extend the 30-day time period for us to remedy our non-compliance, or that we would be able to remedy our non-compliance within the
30-day time period or any extended period granted by CMS. There can also be no assurances that the DOJ will not seek the criminal penalties described above for our failure to comply with the TCS Standards.



Because the entire healthcare system, including customers who use our information systems to
generate claims data, has not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system implementation delays and cash
flow reduction, with the attendant risk of liability and claims against us.



The CMS Guidance also indicates that in connection with its enforcement activities, CMS might require non-compliant covered entities to submit and implement corrective action plans to achieve compliance in a time and manner acceptable to
CMS. In the event that we were required to submit and implement a corrective action plan, we could be required to take steps and incur costs to achieve compliance in a different manner or shorter timeframe than we would otherwise choose, which could
have an adverse impact on our business operations.



HIPAA  Privacy
Standards



The Privacy Standards place on covered entities specific
limitations on the use and disclosure of individually identifiable health information. We made certain changes in our products and services to comply with the Privacy Standards. The effect of the Privacy Standards on our business is difficult to
predict and there can be no assurances that we will adequately address the risks created by the Privacy Standards and their implementation or that we will be able to take advantage of any resulting opportunities.



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HIPAA  Security Standards



The Security Standards establish detailed requirements for safeguarding patient information that is electronically transmitted or
electronically stored. Most participants in the healthcare industry must be in compliance with the Security Standards by April 21, 2005.



Some of the Security Standards are technical in nature, while others may be addressed through policies and procedures for using information systems. The Security
Standards may require us to incur significant costs in evaluating our products and in ensuring that our systems meet all of the implementation specifications. We are unable to predict what changes might be made to the Security Standards prior to the
2005 implementation deadline or how those changes might impact our business. The effect of the Security Standards on our business is difficult to predict and there can be no assurances that we will adequately address the risks created by the
Security Standards and their implementation or that we will be able to take advantage of any resulting opportunities.



Medical Device Regulations



We expect that the United States Food and Drug Administration, or FDA, is likely to become increasingly active in regulating computer software intended for use in
healthcare settings. The FDA has increasingly focused on the regulation of computer products and computerassisted products as medical devices under the Food, Drug, and Cosmetic Act,, or the FDC Act. If computer software is considered medical
device under the FDC Act, as a manufacturer of such products, we could be required, depending on the product, to:



| |  | register and list our products with the FDA;
| | - | --------------------------------------------



| |  | notify the FDA and demonstrate substantial equivalence to other products on the market before marketing our products; or
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | obtain FDA approval by demonstrating safety and effectiveness before marketing a product.
| | - | -----------------------------------------------------------------------------------------



LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY.Our success and competitiveness are dependent to a significant degree on the protection
of our proprietary technology. We rely primarily on a combination of copyrights, trade secret laws, patent laws and restrictions on disclosure to protect our proprietary technology. Despite these precautions, others may be able to copy or reverse
engineer aspects of our products, to obtain and use information that we regard as proprietary or to independently develop similar technology. Litigation may continue to be necessary to enforce or defend our proprietary technology or to determine the
validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management and technical resources.



FINANCIAL TRENDS. Since 1999 our revenue and results from operations have been
volatile. During 2000 and continuing into 2001, some of our customers delayed making purchasing decisions with respect to some of our software systems, resulting in longer sales cycles for such systems. We believe these delays were due to a number
of factors, including customer organization changes, government approvals, pressure to reduce expenses, product complexity, competition and terrorist attacks on the United States. While we believe these factors were temporary, they may continue to
cause reductions or delays in spending for new systems and services in the future. If these delays reoccur, they may cause unanticipated revenue volatility, decreased revenue visibility and affect our future financial performance.



NEW PRODUCT DEVELOPMENT AND RAPIDLY CHANGING TECHNOLOGY.To be successful, we must
continuously enhance our existing products, respond effectively to technology changes, and help our customers adopt new technologies. In addition, we must introduce new products and technologies to meet the evolving needs of our customers in the
healthcare information systems market. We may have difficulty in accomplishing these tasks because of:



| |  | the continuing evolution of industry standards, such as standards pursuant to HIPAA; and
| | - | ----------------------------------------------------------------------------------------



| |  | the creation of new technological developments, such as Internet and application service provider technologies.
| | - | ---------------------------------------------------------------------------------------------------------------



We devote significant resources toward the development of enhancements to our existing
products. However, we may not successfully complete these product developments or their adaptation in a timely fashion, and our current or future products may not satisfy the needs of the healthcare information systems market. Any of these
developments may adversely affect our competitive position or render our products or technologies noncompetitive or obsolete.



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CHANGES AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY.We currently derive substantially all of our revenues from
sales of financial, administrative and clinical healthcare information systems, and other related services within the healthcare industry. As a result, our success is dependent in part on the political and economic conditions in the healthcare
industry.



Virtually all of our customers and the other entities with which we
have a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation, including Medicare and Medicaid regulation. Accordingly, our customers and the other entities with which we have a business
relationship are affected by changes in such regulations and limitations in governmental spending for Medicare and Medicaid programs. Recent actions by Congress have limited governmental spending for the Medicare and Medicaid programs, limited
payments to hospitals and other providers under Medicare and Medicaid programs, and increased emphasis on competition and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a
business relationship. In addition, federal and state legislatures have considered proposals to reform the U.S. healthcare system at both the federal and state level. If enacted, these proposals could increase government involvement in healthcare,
lower reimbursement rates and otherwise change the business environment of our customers and the other entities with which we have a business relationship. Our customers and the other entities with which we have a business relationship could react
to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services.



In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for our products and services. If we are forced to reduce our prices, our operating margins would likely decrease. As the healthcare industry consolidates, competition for customers will become more intense
and the importance of acquiring each customer will increase.



COMPETITION
FOR HEALTHCARE INFORMATION SYSTEMS.The market for healthcare information systems is intensely competitive, rapidly evolving and subject to rapid technological change. We believe that the principal competitive factors in this market include the
breadth and quality of system and product offerings, the features and capabilities of the systems, the price of the system and product offerings, the ongoing support for the systems, the potential for enhancements and future compatible products.



Some of our competitors have greater financial, technical, product
development, marketing and other resources than we do, and some of our competitors offer products that we do not offer. Our principal existing competitors include Eclipsys Corporation, McKesson Corporation, Siemens AG, Epic Systems Corporation, GE
Medical and Cerner Corporation. Each of these competitors offers a suite of products that competes with many of our products. There are other competitors that offer a more limited number of competing products. We may be unable to compete
successfully against these organizations. In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others
specializing in the healthcare industry may offer competitive products or services.



PRODUCT LIABILITY CLAIMS.Any failure by our products that provide applications relating to patient treatment could expose us to product liability claims for personal injury and wrongful death. These potential claims may exceed our
current insurance coverage. Unsuccessful claims could be costly to defend and divert our managements time and resources. In addition, we cannot make assurances that we will continue to have appropriate insurance available to us in the future
at commercially reasonable rates.



PRODUCT MALFUNCTION FINANCIAL CLAIMS.
Any failure by our eCommerce electronic claims submission service, or by elements of our systems that provide administrative and financial management applications could expose us to liability claims for incorrect billing and electronic claims. These
potential claims may exceed our current insurance coverage. Unsuccessful claims could be costly to defend and divert management time and resources. In addition, we cannot make assurances that we will continue to have appropriate insurance available
to us in the future at commercially reasonable rates.



KEY PERSONNEL.Our success is dependent to a significant degree on our key management, sales, marketing, and technical personnel. To be successful we must attract, motivate, and retain highly skilled managerial, sales, marketing, consulting and technical
personnel, including programmers, consultants and systems architects skilled in the technical environments in which our products operate. Competition for such personnel in the software and information services industries is intense. We do not
maintain key man life insurance policies on any of our executives. Not all of our personnel have executed noncompetition agreements. Noncompetition agreements, even if executed, are difficult and expensive to enforce, and enforcement
efforts could result in substantial costs and diversion of our management and technical resources.



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SYSTEM ERRORS, SECURITY BREACHES AND WARRANTIES.Our healthcare information systems are very complex. As with all
complex information systems, our healthcare information systems may contain errors, especially when first introduced. Our healthcare information systems are intended to provide information to healthcare providers for use in the diagnosis and
treatment of patients. Therefore, users of our products may have a greater sensitivity to system errors than the market for software products generally. Failure of a customers system to perform in accordance with its documentation could
constitute a breach of warranty and require us to incur additional expenses in order to make the system comply with the documentation. If such failure is not timely remedied, it could constitute a material breach under a contract allowing our
customer to cancel the contract and subject us to liability.



A security breach
could damage our reputation or result in liability. We retain and transmit confidential information, including patient health information, in our processing centers and other facilities. It is critical that these facilities and infrastructure remain
secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by breaches. Despite the implementation of
security measures, this infrastructure or other systems that we interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming
errors, attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or systems with which they interface, could reduce demand for our services and products.



Customer satisfaction and our business could be harmed if our business experiences delays,
failures or loss of data in its systems. The occurrence of a major catastrophic event or other system failure at any of our facilities or at any third-party facility, including telecommunications provider facilities, could interrupt data processing
or result in the loss of stored data, which could harm our business.



POTENTIAL INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS.If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue offering
our products without substantial re-engineering. Any efforts to reengineer our products or obtain licenses from third parties may not be successful, in which case we may be forced to stop selling the infringing product or remove the infringing
functionality or feature. We may also become subject to damage awards as a result of infringing the proprietary rights of others, which could cause us to incur additional losses and have an adverse impact on our financial position. We do not conduct
comprehensive patent searches to determine whether the technologies used in our products infringe patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.



RISKS ASSOCIATED WITH ACQUISITION STRATEGY.We may decide to meet business objectives in part through either acquisitions of complementary products, technologies
and businesses or alliances with complementary businesses. We may not be successful in these acquisitions or alliances, or in integrating any such acquired or aligned products, technologies or businesses into our current business and operations.
Factors which may affect our ability to expand successfully include:



| |  | the generation of sufficient financing to fund potential acquisitions and alliances;
| | - | ------------------------------------------------------------------------------------



| |  | the successful identification and acquisition of products, technologies or businesses;
| | - | --------------------------------------------------------------------------------------



| |  | effective integration and operation of the acquired or aligned products, technologies or businesses despite technical difficulties, geographic limitations and personnel issues; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to overcome significant competition for acquisition and alliance opportunities from companies that have significantly greater financial and management resources.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



STRATEGIC ALLIANCE WITH ALLSCRIPTS HEALTHCARE SOLUTIONS.In 2001, we entered into a ten-year strategic alliance with Allscripts to cooperatively develop, market and sell integrated clinical and practice management products.



During the term of the alliance, we are prohibited from cooperating with direct competitors of Allscripts to develop or provide any products
similar to or in competition with Allscripts products in the practice management systems market. If the strategic alliance is not successful, or the restrictions placed on us during the term of the strategic alliance prohibit us from successfully
marketing and selling certain products and services, our operating results may suffer. Additionally, if either Allscripts or we breach the strategic alliance, we may be left without critical clinical components for our information systems offerings
in the physician group practice markets.



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ANTI-TAKEOVER DEFENSES.Our Second Amended and Restated Articles of Incorporation and Second Amended and Restated
Bylaws contain certain anti-takeover provisions, which could deter an unsolicited offer to acquire our company. For example, our board of directors is divided into three classes, only one of which will be elected at each annual meeting. These
provisions may delay or prevent a change in control of our company.



LITIGATION. We are involved in several litigation matters which are described in greater detail in Part II, Item 1, Legal Proceedings. An unfavorable resolution of pending litigation could have a material adverse effect on our
financial condition. Litigation may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. There can be no assurance that we will be able to achieve a favorable settlement of
pending litigation or obtain a favorable resolution of litigation if it is not settled. In addition, current litigation could lead to increased costs or interruptions of our normal business operations.



No charges of wrongdoing have been brought against us in connection with the U.S.
Attorneys investigation, described in greater detail in Part II, Item 1, Legal Proceedings, and we do not believe that we have engaged in any wrongdoing in connection with this matter. However, because this investigation is or may still be
underway and investigations of this type customarily are conducted in whole or in part in secret, we lack sufficient information to determine with certainty its ultimate scope and whether the government authorities will assert claims resulting from
this investigation that could implicate or reflect adversely upon us. Because our reputation for integrity is an important factor in our business dealings with NIST and other governmental agencies, if a government authority were to make an
allegation, or if there were to be a finding, of improper conduct on the part of or attributable to us in any matter, including in respect of the U.S. Attorneys investigation, such an allegation or finding could have a material adverse effect
on our business, including our ability to retain existing contracts and to obtain new or renewal contracts. In addition, continuing adverse publicity resulting from this investigation and related matters could have such a material adverse effect.



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



We do not currently use derivative financial instruments. We generally place our marketable securities in high credit quality instruments: primarily U.S. Government and federal agency obligations, tax-exempt municipal
obligations and corporate obligations with contractual maturities of a year or less. We do not expect any material loss from our marketable security investments.



Internationally, we currently operate in Canada and the United Kingdom. Our international business is subject to risks, including, but not
limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by
changes in these or other factors.



We invoice Canadian customers in United
States dollars. United Kingdom customers are invoiced in British pounds sterling, and to a lesser extent in US dollars. Our revenues generated from UK customers are denominated in British pounds sterling along with certain expenses incurred relating
to these revenues. Our exposures to foreign exchange rate fluctuations arise from these transactions and from certain inter-company transactions between us and our UK subsidiary. Inter-company transactions are denominated in the functional currency
of our UK subsidiary in order to centralize foreign exchange risk in the parent company in the United States. We are also exposed to foreign exchange rate fluctuations as the financial results of our UK subsidiary are translated into U.S. dollars
during consolidation. As such our operating results will be affected by changes in foreign currency exchange rates. A hypothetical 10 percent increase in the foreign currency exchange rate from its level at March 31, 2004 with all other variables
held constant would result in an increase of $1.7 million in our foreign currency denominated net asset position as of March 31, 2004. Conversely, a hypothetical 10 percent decrease in the foreign currency exchange rate from its level at March 31,
2004 with all other variables held constant would result in a decrease of $1.7 million in our foreign currency denominated net asset position as of March 31, 2004. Net foreign exchange transaction losses included in other income, net was $189,000
for the three months ended March 31, 2004. We did not enter into any foreign currency hedge transactions.



We are currently evaluating a foreign currency exchange rate hedging program principally designed to mitigate foreign currency transaction gains and losses due to changes in foreign currency exchange rates. We may
utilize derivative financial instruments, such as forward exchange rate contracts, to reduce foreign currency exchange rate fluctuations on financial results. We will not use derivatives for trading or speculative purposes.



Investments in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these
factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that may experience a decline in market value due to changes in interest rates. A
hypothetical 10% increase or decrease in interest rates, however, would not have a material adverse effect on our financial condition.



Interest rates on short-term borrowings with floating rates carry a degree of interest rate risk. Our future interest expense may increase if interest rates fluctuate. A
hypothetical 10% increase or decrease in interest rates, however, would not have a material adverse effect on our financial condition. Interest expense was immaterial during the first three months of 2004 and 2003.



Interest income on our investments is included in Other Income. We account for
cash equivalents and marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents are short-term highly liquid
investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. Our marketable securities are classified as available-for-sale and are recorded at fair value with any
unrealized gain or loss recorded as an element of stockholders equity.



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Item 4. Controls and Procedures.



Evaluation of
disclosure controls and procedures



The Companys management, with
the participation of the Companys chief executive officer and chief financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of March 31, 2004. Based on this evaluation, the Companys chief executive officer and chief financial officer concluded that, as of March 31, 2004, the Companys disclosure controls
and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Companys chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.



Changes in internal controls



During 2002, the Company began implementation of an enterprise resource planning (ERP) system, designed to align and integrate the Companys employees,
processes and technology through software applications. The ERP system includes enterprise financial reporting applications, of which the Company implemented the core applications for general ledger, accounts receivable, billing, accounts payable
and fixed assets during the fourth quarter of 2002. During the fourth quarter of 2003, the Company implemented additional applications principally including payroll and benefits, contract management, order management, project management, resource
management, and time and expense reporting. The applications implemented during the fourth quarter of 2003 represent a culmination of over a year of preparation, including five months of testing and three months of training. Management believes that
the ongoing implementation of the ERP system will ultimately enhance our internal controls over financial reporting. However, the Companys financial controls in the fourth quarter of 2003 were adversely impacted by this conversion to the ERP
system and the assignment of Company personnel responsible for overseeing such controls to additional special projects. At that time, the Companys independent auditors, Ernst & Young, determined that the Company had significant
deficiencies in the design or operation of the Companys internal control which, if not addressed, could adversely affect the assertions of management in the financial statements as to particular accounts. The Company addressed these conditions
with enhanced testing and analysis, and it believes these procedures were adequate to permit us to report appropriate results in our Annual Report on Form 10-K for 2003.



In 2004, the Company has taken steps to improve its internal controls and believes that these steps have adequately addressed the
significant deficiencies identified during the fourth quarter of 2003. These steps included the re-assignment of Company personnel responsible for overseeing such controls, increased scrutiny of account reconciliations related to revenue recognition
issues and closer monitoring of financial results. We are also in the process of further enhancing our internal finance staff. The Company believes the measures it has taken and additional measures it continues to implement will enhance our internal
controls over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



In late 2001, the
Company finalized a Cooperative Agreement with a non-regulatory federal agency within the U.S. Commerce Departments Technology Administration, NIST, whereby the Company agreed to lead a $9.2 million, multi-year project awarded by
NIST to a joint venture composed of the Company and four other joint venture partners. The project entails research and development to be conducted by the Company and its partners in the grant. Subsequently, an employee of the Company made
allegations that the Company had illegally submitted claims for labor expenses and license fees to NIST and that the Company never had a serious interest in researching the technological solutions described in the proposal to NIST.



The Company believes the employee has likely filed an action under the Federal False Claims
Act under seal in the Federal District Court for the Western District of Washington with respect to his claims, sometimes referred to as a qui tam complaint. The Company has no information regarding the specific allegations in the qui
tam complaint. Further, the Company has no information concerning the actual amount of money at issue in the qui tam complaint or in any action the employee has brought claiming damages for alleged retaliatory actions by the Company. The Company has
not yet been served with legal process detailing the allegations. Prompted by the employees allegations, the Civil Division of the U.S. Attorneys office in Seattle, Washington is investigating whether the Company made false statements in
connection with the application for the project award from NIST. The Company is cooperating in the U.S. Attorneys ongoing investigation.



In April 2003, the Company filed a complaint against the employee with the United States District Court for the Western District of Washington, entitledIDX Systems
Corporation v. Mauricio Leon (case no. C03-972R). The Companys lawsuit asks the Court to grant a declaratory judgment stating that, should the Company terminate the employees employment, such action would not constitute retaliation
for alleged whistle-blowing activities in violation of the Federal False Claims Act or the Sarbanes-Oxley Act and would not constitute a violation of the employees rights under other laws.



In May 2003, the employee filed a complaint against the Company with the Federal District
Court for the Western District of Washington, entitled Mauricio A. Leon, M.D. v. IDX Systems Corporation (case no. CV03-1158P) asserting that the Company had knowledge that the employee engaged in protected activity and retaliated
against the employee in violation of the False Claims Act. In addition, the employee alleges that the Company violated the Americans with Disabilities Act and its Washington State counterpart in part through retaliation against the employee for
exercising the employees rights under the federal and state discrimination laws. The employee also asserts other causes of action including wrongful termination in violation of public policy, fraudulent inducement to enter into an employment
contract with the Company, and negligent and intentional infliction of emotional distress. The employee requests relief including, but not limited to, an injunction against the Company enjoining and restraining the Company from the alleged
harassment and discrimination, wages, damages, attorneys fees, interest and costs. In addition, the employees complaint alleges that the Company falsified unspecified documents submitted to the Government and made unspecified false
statements to the Government.



Following a hearing on October 21, 2003, the
Court on October 22, 2003, issued a series of orders regarding alignment of the IDX v. Leon and Leon v. IDX cases. Pursuant to the orders, the claims asserted by the parties will proceed under the case of Leon v. IDX, case
number CV03-1158. IDX realigned its declaratory judgment claims as affirmative defenses and/or counterclaims in that case. The employee filed a motion for an injunction to reinstate his pay and benefits pending conclusion of the action. The motion
was denied on December 12, 2003. Trial of the consolidated cases is presently scheduled for November 2004. The Company intends to vigorously defend itself and to vigorously pursue relief through prosecution of its own claims in the consolidated
lawsuits. Although the Company believes that these actions are without merit, the Company currently cannot predict the outcome or the impact these matters may have on the Companys operations.



In May 2003, the employee filed a complaint against the Company with the U.S. Department of
Labor, pursuant to Section 1514A of the Sarbanes-Oxley Act of 2002. The employees complaint asserts that, notwithstanding alleged notice to the Company of the employees allegations, Company management conspired to continue to defraud the
government by allowing fraudulent activities to continue uncorrected and by concealing and avoiding its obligations to report any and all fraudulent activities to the proper authorities. In addition, the employees complaint alleges that the
Company acted to retaliate, harass and intimidate the employee in contravention of the Sarbanes-Oxley Acts whistleblower provisions. The employees complaint requests relief including, but not limited to, reinstatement, back-pay, with
interest, and compensation for any damages sustained by the employee as a result of the alleged discrimination. The Department of Occupational Health and Safety is investigating the employees complaint on behalf of the U.S. Department of
Labor, and the Company intends to cooperate in the investigation. The Company intends to vigorously defend against the employees claims, however, the outcome or the impact these claims may have on the Companys operations cannot currently
be predicted.



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There are additional claims made by the employee against the Company, including a charge with the U.S. Equal Employment
Opportunity Commission, claiming that the employee was discriminated against in violation of the Americans with Disabilities Act, the processing of which the EEOC has subsequently terminated through a Notice of Right to Sue. The Company intends to
vigorously defend against the employees claims, however, the outcome or the impact these claims may have on the Companys operations cannot currently be predicted.



Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities



None.



Item 3. Defaults Upon Senior Securities



Not
applicable.



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



None.



Item 5. Other Information



None.



Item 6. Exhibits and Reports on Form 8-K



|(a) | The exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | On February 12, 2004, the registrant furnished a report on Item 12 of Form 8-K, dated February 12, 2004, containing a copy of its earnings release for the quarter and year ended
December 31, 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 15, 2004, the
registrant furnished a report on Item 12 of Form 8-K, dated March 15, 2004, containing a copy of its press release announcing corrected financial results for the quarter and year ended December 31, 2003.



On March 31, 2004, the registrant filed a report on Item 5 of Form 8-K,
dated March 30, 2004, announcing that it had finalized a subcontract with BT on March 30, 2004.



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SIGNATURES



Pursuant to the requirements 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.



|                  |  |                         |  |                                                      
|----------------- |  | ----------------------- |  | -----------------------------------------------------
|                  |  | IDX SYSTEMS CORPORATION
|                  |  |                        
|Date: May 6, 2004 |  | By:                     |  | /s/ JOHN A. KANE                                     
|                  |  |                         |  | John A. Kane,                                        
|                  |  |                         |  | Sr. Vice President, Finance and                      
|                  |  |                         |  | Administration, Chief Financial Officer and Treasurer
|                  |  |                         |  | (Principal Financial and Accounting Officer)         



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EXHIBIT INDEX



The following exhibits are
filed as part of this Quarterly Report on Form 10-Q:



|            |  |                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                  
|            | 
|10.1+       |  | ICRS LSP Project Agreement Subcontract Agreement, dated as of March 30, 2004 between the Company and British Telecommunications PLC                                                                                          
|            | 
|10.2        |  | Amendment No. 2, dated April 29, 2004, to Loan and Security Agreement dated as of June 27, 2002 by and among the Company, IDX Information Systems Corporation, IDX Investment Corporation and
Heller Healthcare Finance, Inc.
|            | 
|31.1        |  | Certification of the CEO of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                        
|            | 
|31.2        |  | Certification of the CFO of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                        
|            | 
|32.1        |  | Certification of CEO and CFO of the Company pursuant to 18 U.S.C. Section 1350                                                                                                                                               

---

|+ | Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------



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